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Ecolab 10-Q 2006

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)

x

 

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

 

 

 

For the quarterly period ended September 30, 2006

 

 

 

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

 

(I.R.S. Employer

incorporation or organization)

 

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  x

 

No  o

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large Accelerated Filer  x

 

Accelerated Filer  o

Non-Accelerated Filer  o

 

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

Yes  o

 

No  x

 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of September 30, 2006.

251,153,056 shares of common stock, par value $1.00 per share.

 




PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

 

 

Third Quarter Ended

 

 

 

September 30

 

(amounts in thousands, except per share)

 

2006

 

2005

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

1,278,855

 

$

1,164,773

 

 

 

 

 

 

 

Cost of sales

 

625,554

 

572,862

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

471,937

 

429,464

 

 

 

 

 

 

 

Operating income

 

181,364

 

162,447

 

 

 

 

 

 

 

Interest expense, net

 

11,219

 

11,529

 

 

 

 

 

 

 

Income before income taxes

 

170,145

 

150,918

 

 

 

 

 

 

 

Provision for income taxes

 

59,786

 

52,960

 

 

 

 

 

 

 

Net income

 

$

110,359

 

$

97,958

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic

 

$

0.44

 

$

0.38

 

Diluted

 

$

0.43

 

$

0.38

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.1000

 

$

0.0875

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

251,573

 

255,817

 

Diluted

 

256,657

 

259,911

 

 

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

2




ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

 

 

Nine Months Ended

 

 

 

September 30

 

(amounts in thousands, except per share)

 

2006

 

2005

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

3,624,814

 

$

3,393,317

 

 

 

 

 

 

 

Cost of sales

 

1,786,048

 

1,670,903

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

1,372,818

 

1,303,728

 

 

 

 

 

 

 

Operating income

 

465,948

 

418,686

 

 

 

 

 

 

 

Interest expense, net

 

32,561

 

34,903

 

 

 

 

 

 

 

Income before income taxes

 

433,387

 

383,783

 

 

 

 

 

 

 

Provision for income taxes

 

151,963

 

134,998

 

 

 

 

 

 

 

Net income

 

$

281,424

 

$

248,785

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic

 

$

1.11

 

$

0.97

 

Diluted

 

$

1.09

 

$

0.96

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.3000

 

$

0.2625

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

252,422

 

255,854

 

Diluted

 

257,183

 

260,099

 

 

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

3




ECOLAB INC.

CONSOLIDATED BALANCE SHEET

 

 

September 30

 

December 31

 

(amounts in thousands)

 

2006

 

2005

 

 

 

(unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

54,192

 

$

104,378

 

 

 

 

 

 

 

Short-term investments

 

 

125,063

 

 

 

 

 

 

 

Accounts receivable (net of allowance of $37,751 at September 30, 2006 and $38,851 at December 31, 2005)

 

866,214

 

743,520

 

 

 

 

 

 

 

Inventories

 

354,225

 

325,574

 

 

 

 

 

 

 

Deferred income taxes

 

65,097

 

65,880

 

 

 

 

 

 

 

Other current assets

 

66,563

 

57,251

 

 

 

 

 

 

 

Total current assets

 

1,406,291

 

1,421,666

 

 

 

 

 

 

 

Property, plant and equipment, net

 

874,793

 

835,503

 

 

 

 

 

 

 

Goodwill

 

1,022,119

 

937,019

 

 

 

 

 

 

 

Other intangible assets, net

 

222,749

 

202,936

 

 

 

 

 

 

 

Other assets, net

 

480,924

 

399,504

 

 

 

 

 

 

 

Total assets

 

$

4,006,876

 

$

3,796,628

 

 

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

(Continued)

4




ECOLAB INC.

CONSOLIDATED BALANCE SHEET (Continued)

 

 

September 30

 

December 31

 

(amounts in thousands, except per share)

 

2006

 

2005

 

 

 

(unaudited)

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

190,008

 

$

226,927

 

 

 

 

 

 

 

Accounts payable

 

310,597

 

277,635

 

 

 

 

 

 

 

Compensation and benefits

 

213,490

 

214,131

 

 

 

 

 

 

 

Income taxes

 

29,178

 

39,583

 

 

 

 

 

 

 

Other current liabilities

 

402,698

 

361,081

 

 

 

 

 

 

 

Total current liabilities

 

1,145,971

 

1,119,357

 

 

 

 

 

 

 

Long-term debt

 

542,948

 

519,374

 

 

 

 

 

 

 

Postretirement health care and pension benefits

 

342,079

 

302,048

 

 

 

 

 

 

 

Other liabilities

 

212,759

 

206,639

 

 

 

 

 

 

 

Shareholders’ equity (common stock, par value $1.00 per share; shares outstanding:
September 30, 2006 – 251,153; December 31, 2005 – 254,143)

 

1,763,119

 

1,649,210

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

4,006,876

 

$

3,796,628

 

 

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

5




ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

Nine Months Ended

 

 

 

September 30

 

(amounts in thousands)

 

2006

 

2005

 

 

 

(unaudited)

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

281,424

 

$

248,785

 

 

 

 

 

 

 

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

 

 

 

 

 

Depreciation

 

177,329

 

168,863

 

Amortization

 

24,551

 

25,766

 

Deferred income taxes

 

505

 

(1,799

)

Share-based compensation expense

 

23,717

 

25,920

 

Excess tax benefits from share-based payment arrangements

 

(15,116

)

(9,197

)

Other, net

 

399

 

902

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(81,214

)

(86,802

)

Inventories

 

(14,820

)

(5,153

)

Other assets

 

(68,355

)

(4,554

)

Accounts payable

 

27,998

 

1,076

 

Other liabilities

 

47,759

 

57,866

 

 

 

 

 

 

 

Cash provided by operating activities

 

$

404,177

 

$

421,673

 

 

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

(Continued)

6




ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

 

 

Nine Months Ended

 

 

 

September 30

 

(amounts in thousands)

 

2006

 

2005

 

 

 

(unaudited)

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

$

(209,173

)

$

(193,484

)

Property disposals

 

19,353

 

7,378

 

Capitalized software expenditures

 

(25,599

)

(5,432

)

Businesses acquired and investments in affiliates, net of cash acquired

 

(64,429

)

(28,106

)

Sale of businesses and assets

 

1,802

 

1,441

 

Proceeds from sales and maturities of short-term investments

 

125,063

 

 

 

 

 

 

 

 

Cash used for investing activities

 

(152,983

)

(218,203

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Net issuances of notes payable

 

25,410

 

38,811

 

Long-term debt borrowings

 

 

3,200

 

Long-term debt repayments

 

(84,273

)

(3,494

)

Reacquired shares

 

(250,812

)

(126,633

)

Cash dividends on common stock

 

(76,026

)

(67,411

)

Exercise of employee stock options

 

68,669

 

38,217

 

Excess tax benefits from share-based payment arrangements

 

15,116

 

9,197

 

Other, net

 

(651

)

 

 

 

 

 

 

 

Cash used for financing activities

 

(302,567

)

(108,113

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

1,187

 

(1,280

)

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(50,186

)

94,077

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

104,378

 

71,231

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

54,192

 

$

165,308

 

 

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

7




ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       Consolidated Financial Information

The unaudited consolidated financial information for the third quarter and nine-month periods ended September 30, 2006 and 2005, reflect, in the opinion of management, all adjustments necessary for a fair statement 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, 2005 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, 2005.

With respect to the unaudited financial information of the company for the third quarters and nine months ended September 30, 2006 and 2005 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 October 20, 2006 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, as amended (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.       Share-Based Compensation

Effective October 1, 2005, the company early-adopted Statement of Financial Accounting Standards No.123 (Revised 2004) Share-Based Payment, (SFAS No.123R) under the modified retrospective application method. SFAS No.123R requires the company to measure compensation expense for share-based awards at fair value at the date of grant and recognize compensation expense over the service period for awards expected to vest. As part of the transition to the new standard, all prior period financial statements were restated to recognize share-based compensation expense historically reported in the notes to the consolidated financial statements.

Total compensation expense related to share-based compensation plans was $7.2 million ($4.6 million net of tax benefit) and $9.2 million ($5.8 million net of tax benefit) for the third quarters ended September 30, 2006 and 2005, respectively. Total compensation expense related to share-based compensation plans was $23.7 million ($15.1 million net of tax benefit) and $25.9 million ($16.3 million net of tax benefit) for the nine months ended September 30, 2006 and 2005, respectively.

8




ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.       Share-Based Compensation  (continued)

Effective with the company’s adoption of SFAS No.123R, new stock option grants to retirement eligible recipients are attributed to expense using the non-substantive vesting method and are fully expensed by the time recipients attain at least age 55 with at least 5 years of service. If the company had used the non-substantive vesting method during all prior periods, net income would have been increased by $0.6 million and $1.0 million for the quarters ended September 30, 2006 and 2005, respectively, and $2.0 million and $1.9 million during the nine months ended September 30, 2006 and 2005, respectively. During the third quarter and nine months ended September 30, 2006, approximately 1.1 million and 3.3 million shares, respectively, were issued for stock option exercises.

3.       Selected Balance Sheet and Statement of Income Information

 

 

September 30

 

December 31

 

(amounts in thousands)

 

2006

 

2005

 

 

 

(unaudited)

 

Inventories

 

 

 

 

 

Finished goods

 

$

191,491

 

$

177,574

 

Raw materials and parts

 

177,271

 

161,488

 

Excess of fifo cost over lifo cost

 

(14,537

)

(13,488

)

Total

 

$

354,225

 

$

325,574

 

 

 

 

 

 

 

Other intangible assets, gross

 

 

 

 

 

Customer relationships

 

$

207,660

 

$

176,778

 

Intellectual property

 

46,809

 

41,887

 

Trademarks

 

72,451

 

63,933

 

Other intangibles

 

12,323

 

7,459

 

 

 

339,243

 

290,057

 

Accumulated amortization

 

 

 

 

 

Customer relationships

 

(73,265

)

(55,328

)

Intellectual property

 

(12,903

)

(9,901

)

Trademarks

 

(22,213

)

(16,523

)

Other intangibles

 

(8,113

)

(5,369

)

 

 

 

 

 

 

Other intangible assets, net

 

$

222,749

 

$

202,936

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Common stock

 

$

321,860

 

$

318,603

 

Additional paid-in capital

 

833,588

 

727,428

 

Retained earnings

 

1,924,982

 

1,719,201

 

Accumulated other comprehensive income

 

50,512

 

9,764

 

Treasury stock

 

(1,367,823

)

(1,125,786

)

Total

 

$

1,763,119

 

$

1,649,210

 

 

9




ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3.       Selected Balance Sheet and Statement of Income Information (continued)

Accumulated other comprehensive income as of September 30, 2006 consists of $2.5 million of net unrealized losses on financial instruments and $29.5 million of additional minimum pension liabilities as well as $82.5 million of cumulative translation income.  Accumulated other comprehensive income as of December 31, 2005 consists of $0.3 million of net unrealized gains on financial instruments and $27.1 million of additional minimum pension liabilities as well as $36.6 million of cumulative translation income.  The increase in cumulative translation income since December 31, 2005 is due to the weakening of the U.S. dollar against foreign currencies, primarily the euro.  The increase in treasury stock is primarily due to the repurchase of approximately $251 million (6.3 million shares) of the company’s stock during the first nine months of 2006.

Interest expense was $12.8 million for the third quarter of 2006 and $37.5 million for the nine months ended September 30, 2006. Interest expense was $12.9 million for the third quarter of 2005 and $38.2 million for the nine months ended September 30, 2005. Interest income was $1.6 million for the third quarter of 2006 and $4.9 million for the nine months ended September 30, 2006. Interest income was $1.4 million for the third quarter of 2005 and $3.3 million for the nine months ended September 30, 2005.

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 euronotes which 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 losses of $0.1 million and $1.6 million for the third quarter of 2006 and 2005, respectively, and losses of $31.3 million and gains of $28.4 million for the first nine months of 2006 and 2005, respectively.

10




ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.       Comprehensive Income

Comprehensive income was as follows:

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

110,359

 

$

97,958

 

$

281,424

 

$

248,785

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

943

 

4,441

 

43,581

 

(43,891

)

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

2,402

 

(241

)

(2,833

)

2,905

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

113,704

 

$

102,158

 

$

322,172

 

$

207,799

 

 

6.       Business Acquisitions and Investments

In June 2006, the company acquired Shield Medicare Ltd., a Farnham, United Kingdom-based developer, manufacturer and marketer of contamination control products used in pharmaceutical, medical device and hospital clean rooms. Shield Medicare Ltd. has annual sales of approximately $19 million and became part of the company’s International operations beginning in the third quarter of 2006.

In September 2006, the company acquired DuChem Industries, Inc., based in Newnan, Georgia. DuChem manufactures and markets cleaning and sanitizing products for the food and beverage processing market. Duchem’s focus is on the protein (meat and poultry) segment of the food and beverage market. It has annual sales of approximately $10 million and became part of the company’s United States Cleaning & Sanitizing operations.

The total cash paid related to acquisition and investment activity was $57.6 million and $0.2 million during the third quarter of 2006 and 2005, respectively. The total cash paid related to acquisition and investment activity was $64.4 million and $28.1 million during the first nine months of 2006 and 2005, respectively.  The aggregate purchase price of acquisitions and investments in affiliates has been reduced for any cash or cash equivalents acquired with the acquisitions.  Acquisitions in 2006 and 2005 are not material to the company’s consolidated financial statements, therefore pro forma financial information is not presented.

11




ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.     Business Acquisitions and Investments (continued)

Based upon purchase price allocations the components of the aggregate purchase prices of the acquisitions and investments in affiliates made during the third quarter and nine months ended September 30, 2006 and 2005, were as follows:

 

 

Third Quarter Ended

 

Nine Months Ended

 

(unaudited)

 

September 30

 

September 30

 

(amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Net tangible assets (liabilities) acquired

 

$

(9,419

)

$

(2,796

)

$

(6,797

)

$

(165

)

 

 

 

 

 

 

 

 

 

 

Identifiable intangible assets

 

24,582

 

 

24,726

 

8,537

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

42,458

 

2,999

 

46,500

 

19,734

 

 

 

 

 

 

 

 

 

 

 

Purchase price

 

$

57,621

 

$

203

 

$

64,429

 

$

28,106

 

 

In September 2006, subsequent to the company’s fiscal quarter end for International operations, the company acquired Powles Hunt & Sons International Ltd’s U.K. commercial laundry business from Quill International Group. Powles Hunt is a leading supplier of professional laundry products in the United Kingdom with annual sales of approximately $5 million and will become part of the company’s International operations beginning in the fourth quarter of 2006.  The purchase price was not material to the company’s consolidated financial statements.

12




ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.     Business Acquisitions and Investments (continued)

The changes in the carrying amount of goodwill for each of the company’s reportable segments for the quarter and nine months ended September 30, 2006 were as follows:

 

United States

 

 

 

 

 

(unaudited)

 

Cleaning &

 

Other

 

 

 

 

 

 

 

(thousands)

 

Sanitizing

 

Services

 

Total

 

International

 

Consolidated

 

Balance as of December 31, 2005

 

$

190,317

 

$

48,929

 

$

239,246

 

$

697,773

 

$

937,019

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill acquired during quarter

 

5

 

 

5

 

533

 

538

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

7,245

 

7,245

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2006

 

190,322

 

48,929

 

239,251

 

705,551

 

944,802

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill acquired during quarter

 

2,514

 

990

 

3,504

 

 

3,504

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill allocated to business dispositions

 

 

 

 

(423

)

(423

)

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

29,501

 

29,501

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2006

 

192,836

 

49,919

 

242,755

 

734,629

 

977,384

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill acquired during quarter

 

7,030

 

 

7,030

 

35,428

 

42,458

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

2,277

 

2,277

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2006

 

$

199,866

 

$

49,919

 

$

249,785

 

$

772,334

 

$

1,022,119

 

 

Goodwill acquired in 2006 includes adjustments to prior year acquisitions, including earnout payments. Goodwill disposed of in 2006 relates to the sale of a small business in Europe.

13




ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.       Net Income Per Common Share

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

 

 

Third Quarter Ended

 

Nine Months Ended

 

(amounts in thousands,

 

September 30

 

September 30

 

except per share)

 

2006

 

2005

 

2006

 

2005

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

110,359

 

$

97,958

 

$

281,424

 

$

248,785

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

 Basic

 

251,573

 

255,817

 

252,422

 

255,854

 

 Effect of dilutive stock options and awards

 

5,084

 

4,094

 

4,761

 

4,245

 

 Diluted

 

256,657

 

259,911

 

257,183

 

260,099

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

 Basic

 

$

0.44

 

$

0.38

 

$

1.11

 

$

0.97

 

 Diluted

 

$

0.43

 

$

0.38

 

$

1.09

 

$

0.96

 

 

Stock options to purchase approximately 0.1 million and 3.4 million shares for the third quarter and nine months ended September 30, 2006, respectively, and 4.5 million and 4.5 million shares for the third quarter and nine months ended September 30, 2005, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted common shares outstanding.

Restricted stock awards of 13,340 shares and 16,383 shares for the third quarter and nine months ended September 30, 2006, respectively, and 24,621 shares and 31,419 shares for the third quarter and nine months ended September 30, 2005, respectively, were excluded from the computation of basic weighted-average shares outstanding because such shares were not yet vested at these dates.

14




ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.       Pension and Postretirement Plans

The components of net periodic pension and postretirement health care benefit costs for the third quarter are as follows:

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

 

 

 

 

 

International

 

Postretirement

 

(unaudited)

 

U.S. Pension Benefits

 

Pension Benefits

 

Health Care Benefits

 

(amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

Service cost

 

$

9,505

 

$

9,737

 

$

4,579

 

$

3,677

 

$

778

 

$

772

 

Interest cost on benefit obligation

 

10,144

 

9,467

 

4,851

 

4,764

 

2,248

 

2,215

 

Expected return on plan assets

 

(15,527

)

(13,279

)

(3,341

)

(3,147

)

(614

)

(443

)

Amortization of prior service cost (benefit)

 

385

 

385

 

44

 

42

 

(1,609

)

(1,415

)

Amortization of unrecognized transition (asset)/obligation

 

 

(176

)

4

 

79

 

 

 

Recognition of net actuarial loss

 

3,697

 

2,507

 

828

 

411

 

2,070

 

1,434

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expense

 

$

8,204

 

$

8,641

 

$

6,965

 

$

5,826

 

$

2,873

 

$

2,563

 

 

The components of net periodic pension and postretirement health care benefit costs for the nine months ended September 30 are as follows:

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

 

 

 

 

 

International

 

Postretirement

 

(unaudited)

 

U.S. Pension Benefits

 

Pension Benefits

 

Health Care Benefits

 

(amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

Service cost

 

$

28,515

 

$

29,211

 

$

13,462

 

$

10,234

 

$

2,334

 

$

2,314

 

Interest cost on benefit obligation

 

30,432

 

28,400

 

14,228

 

14,104

 

6,744

 

6,645

 

Expected return on plan assets

 

(46,581

)

(39,836

)

(9,815

)

(9,020

)

(1,842

)

(1,328

)

Amortization of prior service cost (benefit)

 

1,155

 

1,154

 

134

 

32

 

(4,827

)

(4,245

)

Amortization of unrecognized transition (asset)/obligation

 

 

(527

)

14

 

254

 

 

 

Recognition of net actuarial loss

 

11,091

 

7,520

 

2,430

 

1,325

 

6,210

 

4,301

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expense

 

$

24,612

 

$

25,922

 

$

20,453

 

$

16,929

 

$

8,619

 

$

7,687

 

 

15




ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.   Pension and Postretirement Plans (continued)

The company is not required to make any contributions to its U.S. pension plan and postretirement health care benefits plans for 2006.  However, in the first quarter of 2006 the company made a $45 million voluntary contribution to the U.S. pension plan. The company made no contributions to the plan during the second or third quarter of 2006.

Certain international pension benefit plans are required to be funded in accordance with local government requirements.  The company contributed approximately $4.6 million and $13.4 million to its international pension benefit plans during the third quarter and nine months ended September 30, 2006, respectively. The company currently estimates that it will contribute approximately $2 million to $6 million to the international pension benefit plans during the remainder of 2006.

16




ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9.     Operating Segments

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

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

 

 

(unaudited)

 

(unaudited)

 

Net Sales

 

 

 

 

 

 

 

 

 

United States

 

 

 

 

 

 

 

 

 

Cleaning & Sanitizing

 

$

561,707

 

$

510,476

 

$

1,619,631

 

$

1,474,463

 

Other Services

 

108,297

 

98,315

 

306,432

 

280,453

 

Total

 

670,004

 

608,791

 

1,926,063

 

1,754,916

 

International

 

584,273

 

550,197

 

1,656,161

 

1,570,648

 

Effect of foreign currency translation

 

24,578

 

5,785

 

42,590

 

67,753

 

Consolidated

 

$

1,278,855

 

$

1,164,773

 

$

3,624,814

 

$

3,393,317

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

 

 

 

 

 

 

United States

 

 

 

 

 

 

 

 

 

Cleaning & Sanitizing

 

$

98,976

 

$

85,933

 

$

264,619

 

$

230,198

 

Other Services

 

12,466

 

11,124

 

31,100

 

28,945

 

Total

 

111,442

 

97,057

 

295,719

 

259,143

 

International

 

66,221

 

64,212

 

164,604

 

153,146

 

Effect of foreign currency translation

 

3,701

 

1,178

 

5,625

 

6,397

 

Consolidated

 

$

181,364

 

$

162,447

 

$

465,948

 

$

418,686

 

 

The International amounts included above are based on translation into U.S. dollars at the fixed currency exchange rates used by management for 2006.

17




ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.   Goodwill and Other Intangible Assets

Under Statement of Financial Accounting Standards (SFAS) No. 142, goodwill must be tested annually for impairment.  The company completed its annual goodwill impairment test during the second quarter. If circumstances change significantly within a reporting unit, the company would test for impairment prior to the annual test for impairment. No adjustments to the carrying value of goodwill were necessary in 2006 as a result of this testing.

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 14 years as of September 30, 2006 and 2005.

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 third quarter ended September 30, 2006 and 2005 was approximately $5.9 million and $5.8 million, respectively. Total amortization expense related to other intangible assets during the nine months ended September 30, 2006 and 2005 was approximately $17.0 million and $17.8 million, respectively.   As of September 30, 2006, future estimated amortization expense related to amortizable other identifiable intangible assets will be:

(unaudited)

 

 

 

(amounts in thousands)

 

 

 

2006 (Remainder: three-month period)

 

$

6,700

 

2007

 

26,400

 

2008

 

25,800

 

2009

 

24,600

 

2010

 

23,700

 

 

18




ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11.   New Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertain tax positions in accordance with FASB Statement No. 109, Accounting for Income Taxes. The company will be required to recognize, in its financial statements, the largest tax benefit of a tax position that is “more-likely-than-not” to be sustained on audit based solely on the technical merits of the position as of the reporting date. FIN 48 also provides guidance on new disclosure requirements, reporting and accrual of interest and penalties, accounting in interim periods, and transition. FIN 48 is effective for the company beginning January 1, 2007 with the cumulative effect of initially applying FIN 48 recognized as a change in accounting principle recorded as an adjustment to opening retained earnings. The company is currently evaluating the impact of adopting this standard.

In September 2006, the FASB issued SFAS 157 “Fair Value Measurement” (“SFAS 157”) which defines fair value, establishes a framework for measuring fair value and expanded disclosures about fair value measurement. Companies are required to adopt the new standard for fiscal periods beginning after November 15, 2007. The company is evaluating the impact of this standard and currently does not expect it to have a significant impact on its consolidated financial statements.

In September 2006, the FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB statements FAS 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158 requires the company to recognize on its balance sheet the funded status of the company’s defined benefit pension and post-retirement plans. SFAS 158 also requires that all benefit plans use the company’s fiscal year-end as its measurement date. The effect of initially adopting SFAS 158 will be reflected as a cumulative adjustment to Accumulated Other Comprehensive Income net of applicable taxes in the year of adoption. As required, the company will prospectively adopt SFAS 158 beginning with its 2006 year end. The company estimates the impact of adopting SFAS 158 to be approximately $200 million, assuming an estimated discount rate of 6 percent, reflected as a reduction in net assets on the company’s balance sheet, with no impact to the statement of income or cash flows. Because our pension assets and liabilities are dependent upon future events and circumstances, the impact at the time of adoption of SFAS 158 may differ from these amounts. Preliminary calculations indicate that a 25 basis point change in the year-end discount rate assumption could impact the company’s initial SFAS 158 net asset adjustment by approximately $50 million.

No other new accounting pronouncement issued or effective has had or is expected to have a material impact on the company’s consolidated financial statements.

19




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. and its subsidiaries as of September 30, 2006, and the related consolidated statement of income for each of the three and nine-month periods ended September 30, 2006 and 2005 and the consolidated statement of cash flows for the nine-month periods ended September 30, 2006 and 2005. These interim financial statements are the responsibility of the Company’s management.

We conducted our review 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 Accounting 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 review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements 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 Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2005, 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 effectiveness of the company’s internal control over financial reporting as of December 31, 2005 and the effectiveness of the company’s internal control over financial reporting as of December 31, 2005; and in our report dated February 24, 2006, we expressed unqualified opinions thereon (our opinion contained an explanatory paragraph stating the company changed the manner in which it accounts for share-based compensation as of October 1, 2005).  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, 2005, 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

October 20, 2006

 

20




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” located at the end of Part I of this report.

We early-adopted the provisions of Statement of Financial Accounting Standard No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123R), the new accounting standard for expensing stock options, in the fourth quarter of 2005. As part of the transition to the new standard, all prior period financial statements were restated to recognize share-based compensation expense historically reported in the notes to our consolidated financial statements. All financial results presented in this Form 10-Q include the impact of expensing stock options.

Overview for the Quarter Ended September 30, 2006

Double-digit sales and operating income growth from U.S. operations led results for the third quarter ended September 30, 2006. Consolidated net sales increased 10 percent to $1.279 billion. Diluted net income per share rose 13 percent to $0.43 per share.

Sales Performance

·                  Sales of our United States Cleaning & Sanitizing operations rose 10 percent to $562 million in the third quarter of 2006, led by double-digit Institutional sales growth. Textile Care, Professional Products, Healthcare and Food & Beverage also showed good sales growth over last year.

·                  Sales of our United States Other Services operations increased 10 percent to $108 million, led by 15 percent sales growth from Pest Elimination.

·                  Sales of our International operations rose 6 percent to $584 million in the third quarter when measured in fixed currency rates.  Latin America continued to show double-digit sales gains in the third quarter, while Canada and Asia Pacific reported strong sales growth.  Europe recorded a moderate sales gain.  Foreign currency translation had a favorable impact on sales. When measured at public currency rates, International sales increased 10 percent.

21




ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Performance

·                  Diluted net income per share increased 13 percent to $0.43 for the third quarter of 2006 from $0.38 in the third quarter of 2005.

·                  Currency translation increased net income by approximately $1.5 million for the third quarter.

·                  Our income tax rate was 35.1 percent in the first nine months of 2006 compared to 35.2 percent in 2005. Excluding one-time benefits, the estimated effective income tax rate was 35.6 percent for both 2006 and 2005.

·                  We repurchased 1.4 million shares of our common stock during the third quarter under our share repurchase program.

Results of Operations - Third Quarter and Nine Months Ended September 30, 2006

Consolidated net sales for the third quarter ended September 30, 2006 were $1.279 billion, an increase of 10 percent over net sales in the third quarter of last year. Sales growth was driven by higher sales volume, pricing and foreign currency translation which increased sales growth by 2 percentage points. Sales rose 8 percent when measured in fixed currency rates. The impact of acquisitions and divestitures was not significant. For the first nine months of 2006, net sales increased by 7 percent to $3.625 billion. Year over year sales growth was driven by sales volume and pricing, offset partially by foreign currency translation which decreased sales growth by 1 percentage point. When measured in fixed currency rates, sales rose 8 percent for the nine months ended September 30, 2006.

The gross profit margin (defined as the difference between net sales less cost of sales divided by net sales) was 51.1 percent and 50.8 percent for the third quarter of 2006 and 2005, respectively. We continue to benefit from pricing and cost savings initiatives which more than offset higher delivered product costs. For the nine-month periods, the gross profit margin was 50.7 in 2006 and 50.8 in 2005. The year to date 2006 gross margin was negatively impacted by lower margins in the second quarter due to costs incurred related to new customer installations. We expect raw material costs to increase through the remainder of 2006 but we anticipate the year over year increase to be lower than we experienced in 2005.

Selling, general and administrative expenses were 36.9 percent of consolidated net sales for both the third quarter of 2006 and 2005. Pricing, cost savings initiatives and sales leverage were offset by investments we are making in the business, including investments in systems, business efficiency, sales and service force, R&D and information technology. For the nine-month period, selling, general and administrative expenses decreased as a percentage of net sales to 37.9 percent in 2006 from 38.4 percent in 2005. The decrease is primarily due to pricing, cost savings programs and sales leverage which more than offset investments made in the business.

22




ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations - Third Quarter and Nine Months Ended September 30, 2006 (continued)

Net income totaled $110 million for the third quarter of 2006, an increase of 13 percent over the comparable period of 2005. On a per share basis, diluted net income per common share also increased 13 percent to $0.43 for the third quarter of 2006 compared to $0.38 in the third quarter of 2005. For the first nine months of 2006, net income was $281 million as compared to net income of $249 million in the comparable period of last year. Diluted net income per share increased 14 percent to $1.09 from $0.96 for the first nine months of last year. Currency translation increased net income growth by approximately $1.5 million for the third quarter of 2006 and negatively impacted net income by approximately $0.5 million for the first nine months of 2006. Net income for the first nine months of 2006 included the benefit of a $1.8 million tax settlement for stewardship costs which was offset by a $2.8 million charge ($1.8 million net of tax benefit) in selling, general and administrative expense to recognize minimum royalties under a licensing agreement with no future benefit. Both items were recorded in the second quarter of 2006.

Sales for each of our reportable segments are as follows:

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

 

 

(unaudited)

 

(unaudited)

 

Net Sales

 

 

 

 

 

 

 

 

 

United States

 

 

 

 

 

 

 

 

 

Cleaning & Sanitizing

 

$

561,707

 

$

510,476

 

$

1,619,631

 

$

1,474,463

 

Other Services

 

108,297

 

98,315

 

306,432

 

280,453

 

Total

 

670,004

 

608,791

 

1,926,063

 

1,754,916

 

International

 

584,273

 

550,197

 

1,656,161

 

1,570,648

 

Effect of foreign currency translation

 

24,578

 

5,785

 

42,590

 

67,753

 

Consolidated

 

$

1,278,855

 

$

1,164,773

 

$

3,624,814

 

$

3,393,317

 

 

23




ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations - Third Quarter and Nine Months Ended September 30, 2006 (continued)

The following table shows the increase or growth in sales for the third quarter ended September 30, 2006 over the third quarter of 2005 and for the nine months ended September 30, 2006 over the nine months ended September 30, 2005 by operating segment:

 

 

Percent Change

 

 

 

Third Quarter

 

Nine Months

 

Net Sales

 

 

 

 

 

United States Cleaning & Sanitizing

 

 

 

 

 

Institutional

 

13

%

11

%

Kay

 

2

 

9

 

Textile Care

 

11

 

7

 

Professional Products

 

9

 

1

 

Healthcare

 

9

 

4

 

Water Care Services

 

4

 

7

 

Vehicle Care

 

2

 

5

 

Food & Beverage

 

8

 

8

 

Total United States Cleaning & Sanitizing

 

10

%

10

%

United States Other Services

 

 

 

 

 

Pest Elimination

 

15

%

13

%

GCS Service

 

1

 

1

 

Total United States Other Services

 

10

%

9

%

Total United States

 

10

%

10

%

International (management rates)

 

 

 

 

 

Europe

 

5

%

4

%

Asia Pacific

 

7

 

7

 

Latin America

 

13

 

12

 

Canada

 

9

 

8

 

Total International (management rates)

 

6

%

5

%

Consolidated (management rates)

 

8

%

8

%

Consolidated (public rates)

 

10

%

7

%

 

24




ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations - Third Quarter and Nine Months Ended September 30, 2006 (continued)

Sales of our United States Cleaning & Sanitizing operations increased 10 percent to $562 million in the third quarter of 2006. For the first nine months of 2006, sales also increased 10 percent to $1.620 billion over the comparable period of 2005. Sales in the third quarter were led by double-digit growth in Institutional as well as good growth in Textile Care, Professional Products, Healthcare and Food & Beverage.

Institutional sales grew 13 percent in the third quarter and 11 percent for the first nine months of 2006. Sales continue to be driven by strong growth in the travel and casual dining market segments, new accounts and pricing. Kay’s sales growth slowed in the third quarter as the division compared against a strong third quarter of 2005 and timing of distributor orders. Kay’s sales grew 9 percent for the first nine months of 2006. Sales were driven by quickservice restaurants as Kay continues to see good ongoing demand from existing customers as well as new account gains. Textile Care had double-digit sales growth in the third quarter reflecting the benefits of new accounts, pricing and new products. Professional Products had a strong third quarter due to increased distributor sales and continued success with new floor care products. Healthcare had 9 percent sales growth in the third quarter including increases in both end-user and direct distribution sales. Waterless skincare, instrument care solids, and antibacterial products continued to drive end-user sales. Water Care Services sales growth benefited from pricing and continued growth in the food and beverage market as we continue to leverage cross-selling opportunities, which more than offset weak industrial markets. Vehicle Care had moderate sales growth due to new product offerings and increased pricing, which more than offset comparison against a strong third quarter of 2005. Excluding acquisitions, Food & Beverage division sales increased 7 percent in the third quarter led by gains in the dairy plant and meat & poultry segments. Food & Beverage sales benefited from pricing, as well as new accounts and better penetration of existing accounts with new products.

Sales of our United States Other Services operations increased 10 percent to $108 million for the third quarter of 2006 over the third quarter of 2005. For the first nine months of 2006 sales increased 9 percent to $306 million. Pest Elimination continued to deliver double-digit sales increases in both contract and non-contract services as well as in its food safety audit business. GCS Service sales increased slightly due to service and installed parts sales led by corporate account growth. We continue to focus on systems and process infrastructure investments at GCS that we expect to drive competitive advantage in the future.

25




ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations - Third Quarter and Nine Months Ended September 30, 2006 (continued)

We evaluate the performance of our International operations based on fixed management rates of currency exchange. Management rate sales for our International operations were $584 million for the third quarter of 2006, an increase of 6 percent over the third quarter of last year. For the first nine months of 2006, sales increased 5 percent to $1.656 billion. Excluding acquisitions and divestitures, sales increased 5 percent for the third quarter and first nine months of 2006. Europe sales grew modestly as good sales gains in northern and eastern Europe were offset by weak economies in Germany, France and Italy. Sales benefited from new accounts as well as new products and programs. Excluding acquisitions and divestitures, Europe sales increased 4 percent and 3 percent for the third quarter and first nine months of 2006, respectively. Asia Pacific sales increased due to double-digit growth in China and Hong Kong and good growth in Australia. Latin America sales continue to increase by double-digits. Sales were strong throughout the region due to new account gains, increased product penetration, and success with new products and programs. Sales in Canada increased 9 percent in the third quarter and 8 percent for the first nine months of 2006. Sales growth was led by strong Institutional results which benefited from corporate account gains and new product sales.

Operating income for each of our reportable segments is as follows:

 

 

Third Quarter Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(amounts in thousands)

 

2006

 

2005

 

2006

 

2005