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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)

 

 

ý

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

 

 

For the quarterly period ended June 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 ý    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 ý      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 ý

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 31, 2006.

 

251,626,948 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

 

 

 

Condensed Notes to Consolidated Financial Statements

 

 

 

 

1.

Consolidated Financial Information

 

 

 

 

2.

Share-Based Compensation

 

 

 

 

3.

Selected Balance Sheet Information

 

 

 

 

4.

Financial Instruments

 

 

 

 

5.

Comprehensive Income

 

 

 

 

6.

Business Acquisitions and Investments

 

 

 

 

7.

Net Income Per Common Share

 

 

 

 

8.

Pension and Postretirement Plans

 

 

 

 

9.

Operating Segments

 

 

 

 

10.

Goodwill and Other Intangible Assets

 

 

 

 

11.

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

 

 

 

Financial Position and Liquidity

 

 

 

 

 

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

Item 4.  Controls and Procedures

 

 

 

 

 

Forward-Looking Statements

 

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

Item 1.  Legal Proceedings

 

 

 

 

 

Item 1A.  Risk Factors

 

 

 

 

 

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

 

 

 

 

 

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

 

 

 

 

 

Item 6.  Exhibits

 

 



 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

 

 

 

Second Quarter Ended
June 30

 

(amounts in thousands, except per share)

 

2006

 

2005

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

1,225,884

 

$

1,158,664

 

 

 

 

 

 

 

Cost of sales

 

608,003

 

571,066

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

464,754

 

449,346

 

 

 

 

 

 

 

Operating income

 

153,127

 

138,252

 

 

 

 

 

 

 

Interest expense, net

 

11,014

 

12,184

 

 

 

 

 

 

 

Income before income taxes

 

142,113

 

126,068

 

 

 

 

 

 

 

Provision for income taxes

 

48,934

 

44,667

 

 

 

 

 

 

 

Net income

 

$

93,179

 

$

81,401

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic

 

$

0.37

 

$

0.32

 

Diluted

 

$

0.36

 

$

0.31

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.1000

 

$

0.0875

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

252,152

 

255,474

 

Diluted

 

256,692

 

259,594

 

 

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

 

2



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

 

 

 

Six Months Ended
June 30

 

(amounts in thousands, except per share)

 

2006

 

2005

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

2,345,959

 

$

2,228,544

 

 

 

 

 

 

 

Cost of sales

 

1,160,494

 

1,098,041

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

900,881

 

874,264

 

 

 

 

 

 

 

Operating income

 

284,584

 

256,239

 

 

 

 

 

 

 

Interest expense, net

 

21,342

 

23,374

 

 

 

 

 

 

 

Income before income taxes

 

263,242

 

232,865

 

 

 

 

 

 

 

Provision for income taxes

 

92,177

 

82,038

 

 

 

 

 

 

 

Net income

 

$

171,065

 

$

150,827

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic

 

$

0.68

 

$

0.59

 

Diluted

 

$

0.66

 

$

0.58

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.2000

 

$

0.1750

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

252,846

 

255,873

 

Diluted

 

257,389

 

260,122

 

 

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

 

3



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

 

(amounts in thousands)

 

June 30
2006

 

December 31
2005

 

 

 

(unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

105,885

 

$

104,378

 

 

 

 

 

 

 

Short-term investments

 

 

125,063

 

 

 

 

 

 

 

Accounts receivable (net of allowance of $38,910 at June 30, 2006 and $38,851 at December 31, 2005)

 

831,762

 

743,520

 

 

 

 

 

 

 

Inventories

 

348,117

 

325,574

 

 

 

 

 

 

 

Deferred income taxes

 

62,722

 

65,880

 

 

 

 

 

 

 

Other current assets

 

69,883

 

57,251

 

 

 

 

 

 

 

Total current assets

 

1,418,369

 

1,421,666

 

 

 

 

 

 

 

Property, plant and equipment, net

 

864,894

 

835,503

 

 

 

 

 

 

 

Goodwill

 

977,384

 

937,019

 

 

 

 

 

 

 

Other intangible assets, net

 

200,401

 

202,936

 

 

 

 

 

 

 

Other assets, net

 

450,235

 

399,504

 

 

 

 

 

 

 

Total assets

 

$

3,911,283

 

$

3,796,628

 

 

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

 

 (Continued)

 

4



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET (Continued)

 

(amounts in thousands, except per share)

 

June 30
2006

 

December 31
2005

 

 

 

(unaudited)

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

262,605

 

$

226,927

 

 

 

 

 

 

 

Accounts payable

 

274,803

 

277,635

 

 

 

 

 

 

 

Compensation and benefits

 

189,976

 

214,131

 

 

 

 

 

 

 

Income taxes

 

28,828

 

39,583

 

 

 

 

 

 

 

Other current liabilities

 

384,947

 

361,081

 

 

 

 

 

 

 

Total current liabilities

 

1,141,159

 

1,119,357

 

 

 

 

 

 

 

Long-term debt

 

544,846

 

519,374

 

 

 

 

 

 

 

Postretirement health care and pension benefits

 

328,186

 

302,048

 

 

 

 

 

 

 

Other liabilities

 

199,106

 

206,639

 

 

 

 

 

 

 

Shareholders’ equity (common stock, par value $1.00 per share; shares outstanding: June 30, 2006 - 251,544; December 31, 2005 - 254,143)

 

1,697,986

 

1,649,210

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

3,911,283

 

$

3,796,628

 

 

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

 

5



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

Six Months Ended
June 30

 

(amounts in thousands)

 

2006

 

2005

 

 

 

(unaudited)

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

171,065

 

$

150,827

 

 

 

 

 

 

 

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

 

 

 

 

 

Depreciation

 

117,187

 

112,525

 

Amortization

 

16,140

 

17,613

 

Deferred income taxes

 

2,632

 

(3,876

)

Share-based compensation expense

 

16,527

 

16,694

 

Excess tax benefits from share-based payment arrangements

 

(9,837

)

(6,840

)

Other, net

 

(7

)

525

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(58,570

)

(54,248

)

Inventories

 

(10,850

)

(5,360

)

Other assets

 

(43,558

)

635

 

Accounts payable

 

(3,591

)

(12,817

)

Other liabilities

 

(21,003

)

10,804

 

 

 

 

 

 

 

Cash provided by operating activities

 

$

176,135

 

$

226,482

 

 

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

 

(Continued)

 

6



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

 

 

 

Six Months Ended
June 30

 

(amounts in thousands)

 

2006

 

2005

 

 

 

(unaudited)

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(140,279

)

$

(129,154

)

Property disposals

 

16,115

 

3,343

 

Capitalized software expenditures

 

(9,923

)

(4,386

)

Businesses acquired and investments in affiliates, net of cash acquired

 

(6,808

)

(27,903

)

Sale of businesses and assets

 

1,802

 

800

 

Proceeds from sales and maturities of short-term investments

 

125,063

 

 

 

 

 

 

 

 

Cash used for investing activities

 

(14,030

)

(157,300

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net issuances of notes payable

 

106,498

 

100,342

 

Long-term debt borrowings

 

 

1,968

 

Long-term debt repayments

 

(82,529

)

(2,599

)

Reacquired shares

 

(190,230

)

(119,007

)

Cash dividends on common stock

 

(50,878

)

(45,030

)

Exercise of employee stock options

 

45,773

 

28,282

 

Excess tax benefits from share-based payment arrangements

 

9,837

 

6,840

 

Other, net

 

(295

)

 

 

 

 

 

 

 

Cash used for financing activities

 

(161,824

)

(29,204

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

1,226

 

(1,186

)

 

 

 

 

 

 

INCREASE IN CASH AND CASH EQUIVALENTS

 

1,507

 

38,792

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

104,378

 

71,231

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

105,885

 

$

110,023

 

 

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 second quarter and six-month periods ended June 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 second quarters and six months ended June 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 July 25, 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 $8.5 million ($5.4 million net of tax benefit) and $8.2 million ($5.2 million net of tax benefit) for the second quarters ended June 30, 2006 and 2005, respectively. Total compensation expense related to share-based compensation plans was $16.5 million ($10.5 million net of tax benefit) and $16.7 million ($10.5 million net of tax benefit) for the six months ended June 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 periods, net income would have been increased by $0.7 million and $0.6 million for the quarters ended June 30, 2006 and 2005, respectively, and $1.4 million and $0.9 million during the six months ended June 30, 2006 and 2005, respectively. During the second quarter and six months ended June 30, 2006, approximately 0.8 million and 2.2 million shares, respectively, were issued for stock option exercises.

 

3.               Selected Balance Sheet Information

 

 

 

June 30

 

December 31

 

(amounts in thousands)

 

2006

 

2005

 

 

 

(unaudited)

 

Inventories

 

 

 

 

 

Finished goods

 

$

187,071

 

$

177,574

 

Raw materials and parts

 

175,406

 

161,488

 

Excess of fifo cost over lifo cost

 

(14,360

)

(13,488

)

Total

 

$

348,117

 

$

325,574

 

 

 

 

 

 

 

Other intangible assets, gross

 

 

 

 

 

Customer relationships

 

$

188,361

 

$

176,778

 

Intellectual property

 

42,062

 

41,887

 

Trademarks

 

64,588

 

63,933

 

Other intangibles

 

7,742

 

7,459

 

 

 

302,753

 

290,057

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

 

 

Customer relationships

 

(67,508

)

(55,328

)

Intellectual property

 

(10,467

)

(9,901

)

Trademarks

 

(18,660

)

(16,523

)

Other intangibles

 

(5,717

)

(5,369

)

 

 

 

 

 

 

Other intangible assets, net

 

$

200,401

 

$

202,936

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Common stock

 

$

320,831

 

$

318,603

 

Additional paid-in capital

 

797,982

 

727,428

 

Retained earnings

 

1,839,768

 

1,719,201

 

Accumulated other comprehensive income

 

47,167

 

9,764

 

Treasury stock

 

(1,307,762

)

(1,125,786

)

Total

 

$

1,697,986

 

$

1,649,210

 

 

Accumulated other comprehensive income as of June 30, 2006 consists of $2.6 million of net unrealized losses on financial instruments and $29.4 million of additional minimum pension liabilities as well as $79.2 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

 

9



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.               Selected Balance Sheet Information (continued)

 

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 $190 million (5 million shares) of the company’s stock during the first six months of 2006.

 

Interest expense was $12.5 million for the second quarter of 2006 and $24.6 million for the six months ended June 30, 2006. Interest expense was $13.2 million for the second quarter of 2005 and $25.2 million for the six months ended June 30, 2005. Interest income was $1.5 million for the second quarter of 2006 and $3.3 million for the six months ended June 30, 2006. Interest income was $1.0 million for the second quarter of 2005 and $1.8 million for the six months ended June 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 $26.8 million and gains of $28.2 million for the second quarter of 2006 and 2005, respectively, and losses of $31.2 million and gains of $30.0 million for the first six months of 2006 and 2005, respectively.

 

10



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.               Comprehensive Income

 

Comprehensive income was as follows:

 

 

 

Second Quarter Ended
June 30

 

Six Months Ended
June 30

 

(amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

93,179

 

$

81,401

 

$

171,065

 

$

150,827

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

25,826

 

(51,564

)

42,638

 

(48,332

)

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

(4,501

)

2,560

 

(5,235

)

3,146

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

114,504

 

$

32,397

 

$

208,468

 

$

105,641

 

 

6.               Business Acquisitions and Investments

 

The total cash paid related to acquisition and investment activity was $6.0 million and $6.9 million during the second quarter of 2006 and 2005, respectively. The total cash paid related to acquisition and investment activity was $6.8 million and $27.9 million during the first six 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.

 

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

 

(unaudited)

 

Second Quarter Ended
June 30

 

Six Months Ended
June 30

 

(amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Net tangible assets acquired

 

$

2,501

 

$

(490

)

$

2,622

 

$

2,631

 

 

 

 

 

 

 

 

 

 

 

Identifiable intangible assets

 

 

1,470

 

144

 

8,537

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

3,504

 

5,943

 

4,042

 

16,735

 

 

 

 

 

 

 

 

 

 

 

Purchase price

 

$

6,005

 

$

6,923

 

$

6,808

 

$

27,903

 

 

11



 

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 six months ended June 30, 2006 were as follows:

 

 

 

United States

 

 

 

 

 

(unaudited)
(thousands)

 

Cleaning &
Sanitizing

 

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

 

In June 2006, subsequent to the company’s fiscal quarter end for International operations, 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 will become part of the company’s International operations beginning in the third quarter of 2006.

 

12



 

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:

 

(amounts in thousands,

 

Second Quarter Ended
June 30

 

Six Months Ended
June 30

 

except per share)

 

2006

 

2005

 

2006

 

2005

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

93,179

 

$

81,401

 

$

171,065

 

$

150,827

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

252,152

 

255,474

 

252,846

 

255,873

 

Effect of dilutive stock options and awards

 

4,540

 

4,120

 

4,543

 

4,249

 

Diluted

 

256,692

 

259,594

 

$

257,389

 

$

260,122

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.37

 

$

0.32

 

$

0.68

 

$

0.59

 

Diluted

 

$

0.36

 

$

0.31

 

$

0.66

 

$

0.58

 

 

Stock options to purchase approximately 3.4 million and 6.7 million shares for the second quarter and six months ended June 30, 2006, respectively, and 4.4 million and 4.4 million shares for the second quarter and six months ended June 30, 2005, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted common shares outstanding.

 

Restricted stock awards of 13,957 shares and 17,904 shares for the second quarter and six months ended June 30, 2006, respectively, and 20,603 shares and 34,818 shares for the second quarter and six months ended June 30, 2005, respectively, were excluded from the computation of basic weighted-average shares outstanding because such shares were not yet vested at these dates.

 

13



 

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 second quarter are as follows:

 

(unaudited)

 

U.S. Pension Benefits

 

International
Pension Benefits

 

U.S.
Postretirement
Health Care Benefits

 

(amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

Service cost

 

$

9,505

 

$

9,737

 

$

4,510

 

$

3,178

 

$

778

 

$

771

 

Interest cost on benefit obligation

 

10,144

 

9,466

 

4,769

 

4,555

 

2,248

 

2,215

 

Expected return on plan assets

 

(15,527

)

(13,278

)

(3,289

)

(2,861

)

(614

)

(442

)

Amortization of prior service cost (benefit)

 

385

 

384

 

45

 

(8

)

(1,609

)

(1,415

)

Amortization of unrecognized transition (asset)/obligation

 

 

(175

)

5

 

87

 

 

 

Recognition of net actuarial loss

 

3,697

 

2,506

 

814

 

472

 

2,070

 

1,433

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expense

 

$

8,204

 

$

8,640

 

$

6,854

 

$

5,423

 

$

2,873

 

$

2,562

 

 

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

 

(unaudited)

 

U.S. Pension Benefits

 

International
Pension Benefits

 

U.S.
Postretirement
Health Care Benefits

 

(amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

Service cost

 

$

19,010

 

$

19,474

 

$

8,883

 

$

6,557

 

$

1,556

 

$

1,542

 

Interest cost on benefit obligation

 

20,288

 

18,933

 

9,377

 

9,340

 

4,496

 

4,430

 

Expected return on plan assets

 

(31,054

)

(26,557

)

(6,474

)

(5,873

)

(1,228

)

(885

)

Amortization of prior service cost (benefit)

 

770

 

769

 

90

 

(10

)

(3,218

)

(2,830

)

Amortization of unrecognized transition (asset)/obligation

 

 

(351

)

10

 

175

 

 

 

Recognition of net actuarial loss

 

7,394

 

5,013

 

1,602

 

914

 

4,140

 

2,867

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expense

 

$

16,408

 

$

17,281

 

$

13,488

 

$

11,103

 

$

5,746

 

$

5,124

 

 

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

 

14



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.               Pension and Postretirement Plans (continued)

 

the plan during the second quarter of 2006. The maximum tax deductible contribution for 2006 is estimated to be approximately $40 to $50 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 approximately $4.4 million and $8.8 million to its international pension benefit plans during the second quarter and six months ended June 30, 2006, respectively. The company currently estimates that it will contribute approximately $5 to $10 million to the international pension benefit plans during the remainder of 2006.

 

9.               Operating Segments

 

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

 

 

 

Second Quarter Ended
June 30

 

Six Months Ended
June 30

 

(amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

United States

 

 

 

 

 

 

 

 

 

Cleaning & Sanitizing

 

$

544,477

 

$

496,808

 

$

1,057,924

 

$

963,987

 

Other Services

 

104,902

 

96,328

 

198,135

 

182,138

 

Total

 

649,379

 

593,136

 

1,256,059

 

1,146,125

 

International

 

561,800

 

536,454

 

1,071,888

 

1,020,451

 

Effect of foreign currency translation

 

14,705

 

29,074

 

18,012

 

61,968

 

Consolidated

 

$

1,225,884

 

$

1,158,664

 

$

2,345,959

 

$

2,228,544

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

 

 

 

 

 

 

United States

 

 

 

 

 

 

 

 

 

Cleaning & Sanitizing

 

$

86,118

 

$

72,660

 

$

165,643

 

$

144,265

 

Other Services

 

10,625

 

10,287

 

18,634

 

17,821

 

Total

 

96,743

 

82,947

 

184,277

 

162,086

 

International

 

55,145

 

52,431

 

98,383

 

88,934

 

Effect of foreign currency translation

 

1,239

 

2,874

 

1,924

 

5,219

 

Consolidated

 

$

153,127

 

$

138,252

 

$

284,584

 

$

256,239

 

 

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

 

15



 

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 performs 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. As of June 30, 2006, the company has completed its annual test for goodwill impairment. Based on this testing, no adjustment to the carrying value of goodwill is necessary.

 

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 and 13 years as of June 30, 2006 and 2005, 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 second quarter ended June 30, 2006 and 2005 was approximately $5.8 million and $6.0 million, respectively. Total amortization expense related to other intangible assets during the six months ended June 30, 2006 and 2005 was approximately $11.1 million and $12.0 million, respectively. As of June 30, 2006, future estimated amortization expense related to amortizable other identifiable intangible assets will be:

 

(unaudited)

 

 

 

(amounts in thousands)

 

 

 

2006 (Remainder: six-month period)

 

$

12,209

 

2007

 

24,131

 

2008

 

23,538

 

2009

 

22,566

 

2010

 

21,644

 

 

16



 

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 FIN 48 on the financial statements.

 

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.

 

17



 

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. and its subsidiaries as of June 30, 2006, and the related consolidated statement of income for each of the three and six-month periods ended June 30, 2006 and 2005 and the consolidated statement of cash flows for the six-month periods ended June 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 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

July 25, 2006

 

18



 

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 June 30, 2006

 

The second quarter of 2006 provided another quarter of strong growth as diluted net income per share rose 16 percent to $0.36 per share. Consolidated net sales reached a record $1.2 billion, led by continued strong sales growth in North America, Latin America and Asia Pacific.

 

Sales Performance

 

                  Sales of our United States Cleaning & Sanitizing operations rose 10 percent to $544 million in the second quarter of 2006, led by double-digit sales growth by Institutional, Kay and Vehicle Care. Food & Beverage also continued to show good sales growth over last year.

                  Sales of our United States Other Services operations increased 9 percent to $105 million, with 13 percent sales growth by Pest Elimination.

                  Sales of our International operations rose 5 percent to $562 million in the second quarter when measured in fixed currency rates. Latin America and Canada showed double-digit sales gains in the second quarter, while Asia Pacific reported good sales growth. Europe recorded a moderate sales gain. Foreign currency translation had an unfavorable impact on sales. When measured at public currency rates, International sales increased 2 percent.

 

19



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Financial Performance

 

                  Diluted net income per share was $0.36 for the second quarter of 2006, up 16 percent from $0.31 in the second quarter of 2005.

                  Currency translation continued to have a negative impact on our net income, decreasing net income by approximately $1 million for the second quarter and $2 million for the first six months of 2006.

                  Our income tax rate was 35.0 percent in the first six months of 2006 compared to 35.2 percent in 2005. Excluding one-time benefits, the estimated effective income tax rate was 35.7 percent for both 2006 and 2005.

                  We repurchased 2.9 million shares of our common stock during the second quarter under our share repurchase program.

 

Results of Operations - Second Quarter and Six Months Ended June 30, 2006

 

Consolidated net sales for the second quarter ended June 30, 2006 were $1.226 billion, an increase of 6 percent over net sales of $1.159 billion in the second quarter of last year. For the first six months of 2006, net sales increased by 5 percent to $2.346 billion. Sales volume and selling price increases were partially offset by unfavorable foreign currency translation which decreased sales growth by 1 percentage point for the second quarter and 2 percentage points for the six months ended June 30, 2006. Sales rose 7 percent for both the second quarter and six months ended June 30, 2006 when measured in fixed currency rates.

 

The gross profit margin (defined as the difference between net sales less cost of sales divided by net sales) was 50.4 percent and 50.7 percent for the second quarter of 2006 and 2005, respectively. For the six-month periods, the gross profit margins were 50.5 in 2006 and 50.7 in 2005. Selling price increases and our cost savings initiatives more than offset higher delivered product costs. However, new customer installations in the second quarter resulted in lower margins. We expect gross margins to show year over year improvement through the remainder of 2006. We expect raw material costs to increase through 2006 but we anticipate the year over year increase to be lower than we experienced in 2005.

 

Selling, general and administrative expenses were 37.9 percent of consolidated net sales for the second quarter of 2006, a decrease from 38.8 percent of net sales in the comparable quarter of last year. For the six-month period, selling, general and administrative expenses also decreased as a percentage of net sales to 38.4 in 2006 from 39.2 percent in 2005. Selling, general and administrative expenses as a percent of net sales improved primarily due to pricing, cost savings programs and sales leverage which more than offset investments made in the business.

 

20



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations - Second Quarter and Six Months Ended June 30, 2006 (continued)

 

Net income totaled $93 million for the second quarter of 2006 and $81 million for the comparable period of 2005. On a per share basis, diluted net income per common share increased 16 percent to $0.36 for the second quarter of 2006 compared to $0.31 in the second quarter of 2005. For the first six months of 2006, net income was $171 million as compared to net income of $151 in the comparable period of last year. Diluted net income per share increased 14 percent to $0.66 from $0.58 for the first six months of last year. Currency translation negatively impacted net income growth by approximately $1 million for the second quarter of 2006 and $2 million for the first six months of 2006. Net income for the second quarter and first six 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.

 

Sales for each of our reportable segments are as follows:

 

 

 

Second Quarter Ended
June 30

 

Six Months Ended
June 30

 

(amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

 

 

(unaudited)

 

(unaudited)

 

Net Sales

 

 

 

 

 

 

 

 

 

United States

 

 

 

 

 

 

 

 

 

Cleaning & Sanitizing

 

$

544,477

 

$

496,808

 

$

1,057,924

 

$

963,987

 

Other Services

 

104,902

 

96,328

 

198,135

 

182,138

 

Total

 

649,379

 

593,136

 

1,256,059

 

1,146,125

 

International

 

561,800

 

536,454

 

1,071,888

 

1,020,451

 

Effect of foreign currency translation

 

14,705

 

29,074

 

18,012

 

61,968

 

Consolidated

 

$

1,225,884

 

$

1,158,664

 

$

2,345,959

 

$

2,228,544

 

 

21



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations - Second Quarter and Six Months Ended June 30, 2006 (continued)

 

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

 

 

 

Percent Change

 

 

 

Second Quarter

 

Six Months

 

Net Sales

 

 

 

 

 

United States Cleaning & Sanitizing

 

 

 

 

 

Institutional

 

10

%

10

%

Kay

 

18

 

14

 

Textile Care

 

2

 

5

 

Professional Products

 

(3

)

(4

)

Healthcare

 

(1

)

2

 

Water Care Services

 

5

 

9

 

Vehicle Care

 

10

 

6

 

Food & Beverage

 

6

 

8

 

Total United States Cleaning & Sanitizing

 

10

%

10

%

United States Other Services

 

 

 

 

 

Pest Elimination

 

13

%

12

%

GCS Service

 

1

 

2

 

Total United States Other Services

 

9

%

9

%

Total United States

 

9

%

10

%

International (management rates)

 

 

 

 

 

Europe

 

3

%

3

%

Asia Pacific

 

8

 

8

 

Latin America

 

11

 

11

 

Canada

 

10

 

8

 

Total International (management rates)

 

5

%

5

%

Consolidated (management rates)

 

7

%

7

%

Consolidated (public rates)

 

6

%

5

%

 

22



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations - Second Quarter and Six Months Ended June 30, 2006 (continued)

 

Sales of our United States Cleaning & Sanitizing operations increased 10 percent to $544 million in the second quarter of 2006 compared with sales of $497 million in the second quarter of 2005. United States Cleaning & Sanitizing sales for the first six months of 2006 were also up 10 percent to $1.058 billion over sales of $964 million in the comparable period of last year. Sales in the second quarter were led by double-digit growth in Institutional, Kay and Vehicle Care as well as good growth in Food & Beverage. The Institutional division’s growth reflects growth in all end market segments, new accounts, selling price increases and improved account penetration through continued expansion of new programs. Sales growth at Kay was driven by quickservice restaurants as Kay continues to see good ongoing demand from existing customers as well as new account gains. Kay’s second quarter results benefited from a favorable comparison to a soft second quarter of 2005. Textile Care had modest sales growth reflecting new accounts and selling price increases. Professional Products sales declined during the second quarter and first six months of 2006 as improved distributor sales and success with new floor care products were offset by weaker sales of non-floor care products. Our Healthcare division reported a slight sales decrease for the second quarter and a moderate increase for the first six months of 2006. Sales continued to be unfavorably impacted by large sales to distributors in the fourth quarter of 2005. End-user sales continue to do well, led by sales of instrument care solids, waterless skincare and antibacterial products. Water Care Services sales growth was driven primarily by growth in the food and beverage market as we continue to leverage cross-selling opportunities, which more than offset slow industrial markets. Vehicle Care had a 10 percent sales increase in the second quarter due to increased pricing and new product sales, which more than offset comparison against a strong second quarter of 2005. Our Food & Beverage division sales increased due to gains in the dairy, food and meat & poultry segments. Food & Beverage sales benefited from selling price increases, new accounts and better penetration of existing accounts with new products.

 

Sales of our United States Other Services operations totaled $105 million for the second quarter of 2006, an increase of 9 percent over net sales of $96 million in the second quarter of 2005. United States Other Services sales were $198 million for the first six months of 2006, an increase of 9 percent over sales of $182 million in the comparable period of last year. 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. Contract sales were driven by new accounts and selling price increases. Non-contract services increased due to one-shot services, product sales and fumigation work. GCS Service sales increased due to moderate growth in service and installed parts sales. Customer service satisfaction ratings and technician productivity, key operating measures for GCS, continue to show good results.

 

23



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations - Second Quarter and Six Months Ended June 30, 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 $562 million for the second quarter of 2006, an increase of 5 percent over sales of $536 million in the comparable quarter of last year. For the first six months of 2006, sales also increased 5 percent to $1.072 billion from $1.020 billion during the comparable period of last year. Sales in Europe grew modestly as sales gains in northern and eastern Europe were offset by lackluster economies in Germany, France and Italy. Sales benefited from new accounts as well as new products. Asia Pacific sales increased due to continued double-digit growth in mainland Asia and good growth in Australia. Latin America sales continue to increase double-digits. Sales were strong throughout the region due to new account gains, increased product penetration, as well as success with new products and programs. Sales in Canada increased 10 percent in the second quarter and 8 percent for the first six months of 2006. Sales were led by strong results for Institutional and positive results for all other divisions. Institutional results benefited from corporate account gains and new product sales.

 

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

 

 

 

Second Quarter Ended
June 30

 

Six Months Ended
June 30

 

(amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

 

 

(unaudited)

 

(unaudited)

 

Operating Income

 

 

 

 

 

 

 

 

 

United States Cleaning & Sanitizing

 

$

86,118

 

$

72,660

 

$

165,643

 

$

144,265

 

Other Services

 

10,625

 

10,287

 

18,634

 

17,821

 

Total

 

96,743

 

82,947

 

184,277

 

162,086

 

International

 

55,145