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Ecolab 10-Q 2008

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 June 30, 2008

 

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)

 

1-800-232-6522

(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, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o  (Do not check if a smaller reporting company)

 

Smaller reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o   No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of June 30, 2008.

 

247,266,546 shares of common stock, par value $1.00 per share.

 

 

 



 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

 

 

 

Second Quarter Ended

 

 

 

June 30

 

(millions, except per share)

 

2008

 

2007

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

1,570.0

 

$

1,362.4

 

 

 

 

 

 

 

Cost of sales

 

798.8

 

669.5

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

580.0

 

519.9

 

 

 

 

 

 

 

Special (gains) and charges

 

(19.3

)

 

 

 

 

 

 

 

Operating income

 

210.5

 

173.0

 

 

 

 

 

 

 

Interest expense, net

 

15.3

 

13.4

 

 

 

 

 

 

 

Income before income taxes

 

195.2

 

159.6

 

 

 

 

 

 

 

Provision for income taxes

 

56.2

 

49.3

 

 

 

 

 

 

 

Net income

 

$

139.0

 

$

110.3

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic

 

$

0.56

 

$

0.45

 

Diluted

 

$

0.55

 

$

0.44

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.1300

 

$

0.1150

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

247.1

 

246.0

 

Diluted

 

251.4

 

250.7

 

 

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

 

2



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

 

 

 

Six Months Ended

 

 

 

June 30

 

(millions, except per share)

 

2008

 

2007

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

3,027.9

 

$

2,616.6

 

 

 

 

 

 

 

Cost of sales

 

1,537.1

 

1,285.2

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

1,137.2

 

1,010.0

 

 

 

 

 

 

 

Special (gains) and charges

 

(17.4

)

 

 

 

 

 

 

 

Operating income

 

371.0

 

321.4

 

 

 

 

 

 

 

Interest expense, net

 

30.1

 

25.1

 

 

 

 

 

 

 

Income before income taxes

 

340.9

 

296.3

 

 

 

 

 

 

 

Provision for income taxes

 

99.0

 

96.5

 

 

 

 

 

 

 

Net income

 

$

241.9

 

$

199.8

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic

 

$

0.98

 

$

0.81

 

Diluted

 

$

0.96

 

$

0.79

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.2600

 

$

0.2300

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

247.1

 

247.8

 

Diluted

 

251.5

 

252.6

 

 

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

 

3



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

 

 

 

June 30

 

December 31

 

(millions)

 

2008

 

2007

 

 

 

(unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

222.0

 

$

137.4

 

 

 

 

 

 

 

Accounts receivable (net of allowance of $43.9 at June 30, 2008 and $42.7
at December 31, 2007)

 

1,082.1

 

974.0

 

 

 

 

 

 

 

Inventories

 

499.1

 

450.8

 

 

 

 

 

 

 

Deferred income taxes

 

96.2

 

89.4

 

 

 

 

 

 

 

Other current assets

 

93.1

 

65.7

 

 

 

 

 

 

 

Total current assets

 

1,992.5

 

1,717.3

 

 

 

 

 

 

 

Property, plant and equipment, net

 

1,157.3

 

1,083.4

 

 

 

 

 

 

 

Goodwill

 

1,439.6

 

1,279.2

 

 

 

 

 

 

 

Other intangible assets, net

 

374.8

 

328.9

 

 

 

 

 

 

 

Other assets

 

391.3

 

314.0

 

 

 

 

 

 

 

Total assets

 

$

5,355.5

 

$

4,722.8

 

 

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

 

(Continued)

 

4



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET (Continued)

 

 

 

June 30

 

December 31

 

(millions, except per share)

 

2008

 

2007

 

 

 

(unaudited)

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

376.1

 

$

403.5

 

 

 

 

 

 

 

Accounts payable

 

399.1

 

343.7

 

 

 

 

 

 

 

Compensation and benefits

 

237.3

 

280.2

 

 

 

 

 

 

 

Income taxes

 

31.2

 

27.7

 

 

 

 

 

 

 

Other current liabilities

 

518.0

 

463.2

 

 

 

 

 

 

 

Total current liabilities

 

1,561.7

 

1,518.3

 

 

 

 

 

 

 

Long-term debt

 

876.0

 

599.9

 

 

 

 

 

 

 

Postretirement health care and pension benefits

 

443.8

 

418.5

 

 

 

 

 

 

 

Other liabilities

 

275.3

 

250.4

 

 

 

 

 

 

 

Shareholders’ equity (a)

 

 

 

 

 

Common stock

 

327.4

 

326.5

 

Additional paid-in capital

 

1,055.9

 

1,015.2

 

Retained earnings

 

2,476.1

 

2,298.4

 

Accumulated other comprehensive income

 

126.9

 

63.1

 

Treasury stock

 

(1,787.6

)

(1,767.5

)

Total shareholders’ equity

 

2,198.7

 

1,935.7

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

5,355.5

 

$

4,722.8

 

 


(a) Common stock, 400 million shares authorized, $1.00 par value per share, 247.3 million shares outstanding at June 30, 2008, 246.8 million shares outstanding at December 31, 2007.

 

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

 

(millions)

 

2008

 

2007

 

 

 

(unaudited)

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

241.9

 

$

199.8

 

 

 

 

 

 

 

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

 

 

 

 

 

Depreciation and amortization

 

170.0

 

142.5

 

Deferred income taxes

 

(4.8

)

(3.8

)

Share-based compensation expense

 

15.4

 

17.2

 

Excess tax benefits from share-based payment arrangements

 

(4.9

)

(8.6

)

Gain on sale of plant

 

(24.5

)

 

Other, net

 

6.8

 

(0.6

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(73.3

)

(54.1

)

Inventories

 

(30.8

)

(24.1

)

Other assets

 

(38.5

)

6.3

 

Accounts payable

 

35.2

 

(3.4

)

Other liabilities

 

18.2

 

36.1

 

 

 

 

 

 

 

Cash provided by operating activities

 

$

310.7

 

$

307.3

 

 

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

 

(millions)

 

2008

 

2007

 

 

 

(unaudited)

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(164.5

)

$

(126.0

)

Capitalized software expenditures

 

(35.7

)

(23.0

)

Property sold

 

34.5

 

5.6

 

Businesses acquired and investments in affiliates, net of cash acquired

 

(202.5

)

(24.7

)

Sale of businesses and assets

 

2.2

 

1.1

 

Deposit into indemnification escrow

 

(21.0

)

 

 

 

 

 

 

 

Cash used for investing activities

 

(387.0

)

(167.0

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net issuances (repayment) of notes payable

 

(32.3

)

182.8

 

Long-term debt borrowings

 

248.0

 

 

Long-term debt repayments

 

(2.8

)

(392.7

)

Reacquired shares

 

(20.2

)

(336.3

)

Cash dividends on common stock

 

(64.2

)

(57.6

)

Exercise of employee stock options

 

21.8

 

42.3

 

Excess tax benefits from share-based payment arrangements

 

4.9

 

8.6

 

Other, net

 

(0.8

)

 

 

 

 

 

 

 

Cash provided by (used for) financing activities

 

154.4

 

(552.9

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

6.5

 

0.8

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

84.6

 

(411.8

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

137.4

 

484.0

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

222.0

 

$

72.2

 

 

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 months ended June 30, 2008 and 2007, 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, 2007 was derived from the audited consolidated financial statements, but does 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, 2007.

 

With respect to the unaudited financial information of the company for the three and six-month periods ended June 30, 2008 and 2007 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 24, 2008 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.   Special Gains and Charges

 

The company reported a net pre-tax gain in special gains and charges of $19.3 million and $17.4 million for the second quarter and six months ended June 30, 2008, respectively.  The reported amounts include a gain of $24.0 million recorded in the second quarter on the previously announced sale of a plant in Denmark and a $1.7 million additional gain recorded in the first quarter of 2008 related to the sale of a business in the U.K.  These gains were partially offset by costs to optimize the company’s business structure including the establishment of a European headquarters in Zurich, Switzerland.

 

For segment reporting purposes, special gains and charges have been included in the company’s corporate segment, which is consistent with the company’s internal management reporting.

 

8



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.   Share-Based Compensation

 

Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), Share-Based Payment, (“SFAS 123R”) requires the company to measure compensation expenses 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.  Total compensation expense related to share-based compensation plans was $7.7 million ($4.9 million net of tax benefit) and $9.6 million ($6.1 million net of tax benefit) for the second quarters ended June 30, 2008 and 2007, respectively.  Total compensation expense related to share-based compensation plans was $15.4 million ($9.9 million net of tax benefit) and $17.2 million ($10.9 million net of tax benefit) for the six months ended June 30, 2008 and 2007, respectively.

 

4.   Selected Balance Sheet Information

 

 

 

June 30

 

December 31

 

(millions)

 

2008

 

2007

 

 

 

(unaudited)

 

Inventories

 

 

 

 

 

Finished goods

 

$

267.0

 

$

241.9

 

Raw materials and parts

 

249.2

 

224.9

 

Excess of FIFO cost over LIFO cost

 

(17.1

)

(16.0

)

Total

 

$

499.1

 

$

450.8

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

 

 

 

Land

 

$

30.5

 

$

30.7

 

Buildings and leaseholds

 

342.9

 

331.9

 

Machinery and equipment

 

718.9

 

683.7

 

Merchandising equipment

 

1,427.9

 

1,330.1

 

Capitalized software

 

148.8

 

129.0

 

Construction in progress

 

136.3

 

113.0

 

 

 

2,805.3

 

2,618.4

 

Accumulated depreciation

 

(1,648.0

)

(1,535.0

)

Total

 

$

1,157.3

 

$

1,083.4

 

 

 

 

 

 

 

Other intangible assets, gross

 

 

 

 

 

Customer relationships

 

$

312.8

 

$

291.6

 

Intellectual property

 

78.8

 

52.2

 

Trademarks

 

115.7

 

102.5

 

Other intangibles

 

56.1

 

45.8

 

 

 

563.4

 

492.1

 

Accumulated amortization

 

 

 

 

 

Customer relationships

 

(130.0

)

(108.5

)

Intellectual property

 

(21.4

)

(20.0

)

Trademarks

 

(29.3

)

(29.1

)

Other intangibles

 

(7.9

)

(5.6

)

Other intangible assets, net

 

$

374.8

 

$

328.9

 

 

9



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4.   Selected Balance Sheet Information (continued)

 

 

 

June 30

 

December 31

 

(millions)

 

2008

 

2007

 

 

 

(unaudited)

 

Other assets

 

 

 

 

 

Deferred income taxes

 

$

139.7

 

$

137.6

 

Pension

 

22.4

 

23.2

 

Sole supply fees

 

56.7

 

56.3

 

Other

 

172.5

 

96.9

 

Total

 

$

391.3

 

$

314.0

 

 

 

 

 

 

 

Other current liabilities

 

 

 

 

 

Discounts and rebates

 

$

247.8

 

$

223.7

 

Dividends payable

 

32.2

 

32.1

 

Other

 

238.0

 

207.4

 

Total

 

$

518.0

 

$

463.2

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

Deferred income taxes

 

$

89.1

 

$

86.1

 

Income taxes payable – non-current

 

61.6

 

57.3

 

Other

 

124.6

 

107.0

 

Total

 

$

275.3

 

$

250.4

 

 

 

 

 

 

 

Accumulated other comprehensive income

 

 

 

 

 

Unrealized loss on financial instruments

 

$

(5.0

)

$

(5.4

)

Pension and postretirement benefits

 

(161.9

)

(162.7

)

Cumulative translation

 

293.8

 

231.2

 

Total

 

$

126.9

 

$

63.1

 

 

5.   Interest

 

 

 

Second Quarter Ended
June 30

 

Six Months Ended
June 30

 

(millions)

 

2008

 

2007

 

2008

 

2007

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

17.8

 

$

14.3

 

$

35.1

 

$

29.5

 

Interest income

 

(2.5

)

(0.9

)

(5.0

)

(4.4

)

Interest expense, net

 

$

15.3

 

$

13.4

 

$

30.1

 

$

25.1

 

 

10



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6.   Financial Instruments

 

In December 2006, the company issued euro 300 million ($467 million as of June 30, 2008) aggregate principal amount of the company’s senior notes in two series: 4.355% Series A Senior Notes due 2013 in the aggregate principal amount of euro 125 million and 4.585% Series B Senior Notes due 2016 in the aggregate principal amount of euro 175 million. The company designated this debt and related accrued interest 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 all 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 losses related to the euronotes charged to shareholders’ equity were $6.9 million, net of tax, and $17.1 million, net of tax, in the second quarter and first six months of 2008, respectively.  Total transaction losses related to the euronotes charged to shareholders’ equity were $4.1 million, net of tax, and $3.7 million, net of tax, in the second quarter and first six months of 2007, respectively.

 

7.   Comprehensive Income

 

Comprehensive income was as follows:

 

 

 

Second Quarter Ended
June 30

 

Six Months Ended
June 30

 

(millions)

 

2008

 

2007

 

2008

 

2007

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

139.0

 

$

110.3

 

$

241.9

 

$

199.8

 

Foreign currency translation

 

17.5

 

29.4

 

60.4

 

25.9

 

Derivative instruments

 

0.1

 

(0.8

)

0.4

 

(0.3

)

Pension and postretirement benefits

 

1.5

 

1.6

 

3.0

 

12.3

 

Comprehensive income

 

$

158.1

 

$

140.5

 

$

305.7

 

$

237.7

 

 

11



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.   Business Acquisitions and Investments

 

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

 

In February 2008, the company acquired Ecovation, Inc., a Rochester, N.Y. area-based provider of renewable energy solutions and effluent management systems primarily for the food and beverage manufacturing industry in the U.S., including dairy, beverage, and meat and poultry producers.  2007 sales were approximately $50 million.  The total purchase price was approximately $210 million, of which $21 million remains payable and was placed in escrow for indemnification purposes.  Ecovation became part of the company’s U.S. Cleaning & Sanitizing operations during the first quarter of 2008.

 

Acquisitions in 2008 and 2007 are not material to the company’s consolidated financial statements; therefore pro forma financial information is not presented.  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 and subsequent adjustments thereto, the components of the aggregate purchase prices of the acquisitions and investments in affiliates made were as follows:

 

 

 

Second Quarter Ended
June 30

 

Six Months Ended
June 30

 

(millions)

 

2008

 

2007

 

2008

 

2007

 

 

 

(unaudited)

 

(unaudited)

 

Net tangible assets acquired (liabilities assumed)

 

$

5.9

 

$

(0.3

)

$

49.4

 

$

(4.5

)

 

 

 

 

 

 

 

 

 

 

Identifiable intangible assets

 

 

 

 

 

 

 

 

 

Customer relationships

 

(1.7

)

3.8

 

10.3

 

7.4

 

Intellectual property

 

(1.5

)

0.2

 

26.8

 

0.3

 

Trademarks

 

0.1

 

0.3

 

16.0

 

0.3

 

Other intangibles

 

 

 

9.6

 

8.3

 

Total

 

(3.1

)

4.3

 

62.7

 

16.3

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

0.4

 

10.1

 

111.4

 

12.9

 

Total aggregate purchase price

 

3.2

 

14.1

 

223.5

 

24.7

 

 

 

 

 

 

 

 

 

 

 

Liability for indemnification

 

 

 

(21.0

)

 

Net cash paid for acquisitions

 

$

3.2

 

$

14.1

 

$

202.5

 

$

24.7

 

 

Note:  Amounts in table above include immaterial purchase accounting adjustments to prior period acquisitions.

 

12



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.   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, 2008 were as follows:

 

 

 

United States

 

 

 

 

 

(unaudited)

 

Cleaning &

 

Other

 

 

 

 

 

 

 

(millions)

 

Sanitizing

 

Services

 

Total

 

International

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2007

 

$

318.7

 

$

50.5

 

$

369.2

 

$

910.0

 

$

1,279.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill acquired during quarter

 

111.0

 

 

111.0

 

 

111.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill allocated to business dispositions

 

 

 

 

(0.4

)

(0.4

)

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

32.6

 

32.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2008

 

429.7

 

50.5

 

480.2

 

942.2

 

1,422.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill acquired during quarter

 

(0.9

)

 

(0.9

)

1.3

 

0.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

16.8

 

16.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2008

 

$

428.8

 

$

50.5

 

$

479.3

 

$

960.3

 

$

1,439.6

 

 

Goodwill acquired in 2008 includes immaterial adjustments to prior period acquisitions.

 

13



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

9.   Net Income Per Common Share

 

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

 

 

 

Second Quarter Ended
June 30

 

Six Months Ended
June 30

 

(millions, except per share)

 

2008

 

2007

 

2008

 

2007

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

139.0

 

$

110.3

 

$

241.9

 

$

199.8

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

247.1

 

246.0

 

247.1

 

247.8

 

Effect of diluted stock options and awards

 

4.3

 

4.7

 

4.4

 

4.8

 

Diluted

 

251.4

 

250.7

 

251.5

 

252.6

 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.56

 

$

0.45

 

$

0.98

 

$

0.81

 

Diluted

 

$

0.55

 

$

0.44

 

$

0.96

 

$

0.79

 

 

Stock options to purchase approximately 5.4 million shares for the second quarter and six months ended June 30, 2008 and 2.8 million shares for the second quarter and six months ended June 30, 2007 were non-dilutive and, therefore, were not included in the computation of diluted common shares outstanding.

 

Restricted stock awards of 91,646 shares and 88,246 shares for the second quarter and six months ended June 30, 2008, respectively, and 39,987 shares and 34,340 shares for the second quarter and six months ended June 30, 2007, 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)

 

10.   Pension and Postretirement Plans

 

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

 

 

 

U.S. Pension Benefits

 

 

 

 

 

U.S.

 

 

 

(qualified and non-

 

International

 

Postretirement

 

(unaudited)

 

qualified plans)

 

Pension Benefits

 

Health Care Benefits

 

(millions)

 

2008

 

2007

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

11.2

 

$

10.8

 

$

5.2

 

$

5.2

 

$

0.6

 

$

0.7

 

Interest cost on benefit obligation

 

13.0

 

11.9

 

6.8

 

5.5

 

2.4

 

2.4

 

Expected return on plan assets

 

(17.6

)

(16.4

)

(4.9

)

(3.9

)

(0.6

)

(0.6

)

Amortization of prior service
cost (benefit)

 

0.3

 

0.5

 

0.1

 

 

(1.6

)

(1.6

)

Recognition of net actuarial loss

 

2.2

 

3.2

 

0.2

 

0.7

 

1.1

 

1.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expense

 

$

9.1

 

$

10.0

 

$

7.4

 

$

7.5

 

$

1.9

 

$

2.7

 

 

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

 

 

 

U.S. Pension Benefits

 

 

 

U.S.

 

 

 

(qualified and non-

 

International

 

Postretirement

 

(unaudited)

 

qualified plans)

 

Pension Benefits

 

Health Care Benefits

 

(millions)

 

2008

 

2007

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

22.4

 

$

21.6

 

$

10.1

 

$

10.2

 

$

1.2

 

$

1.4

 

Interest cost on benefit obligation

 

26.0

 

23.8

 

13.4

 

10.9

 

4.8

 

4.8

 

Expected return on plan assets

 

(35.2

)

(32.8

)

(9.7

)

(7.8

)

(1.2

)

(1.2

)

Amortization of prior service
cost (benefit)

 

0.6

 

1.0

 

0.1

 

 

(3.2

)

(3.2

)

Recognition of net actuarial loss

 

4.4

 

6.4

 

0.5

 

1.5

 

2.2

 

3.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expense

 

$

18.2

 

$

20.0

 

$

14.4

 

$

14.8

 

$

3.8

 

$

5.4

 

 

The company is not required to make any contributions to its U.S. pension plan and postretirement health care benefits plans for 2008 based on plan asset values as of June 30, 2008.  Certain international pension benefit plans are required to be funded in accordance with local government requirements.  The company contributed approximately $13 million to its international pension benefit plans during the first six months of 2008. The company currently estimates that it will contribute approximately $13 million to the international pension benefit plans during the remainder of 2008.

 

15



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

11.   Operating Segments

 

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

 

 

 

Second Quarter Ended

 

Six Months Ended

 

 

 

June 30

 

June 30

 

(millions)

 

2008

 

2007

 

2008

 

2007

 

 

 

(unaudited)

 

(unaudited)

 

Net Sales

 

 

 

 

 

 

 

 

 

United States

 

 

 

 

 

 

 

 

 

Cleaning & Sanitizing

 

$

663.7

 

$

589.3

 

$

1,317.1

 

$

1,157.5

 

Other Services

 

120.9

 

113.7

 

231.3

 

215.8

 

Total

 

784.6

 

703.0

 

1,548.4

 

1,373.3

 

International

 

740.7

 

701.7

 

1,424.1

 

1,336.5

 

Effect of foreign currency translation

 

44.7

 

(42.3

)

55.4

 

(93.2

)

Consolidated

 

$

1,570.0

 

$

1,362.4

 

$

3,027.9

 

$

2,616.6

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

 

 

 

 

 

 

United States

 

 

 

 

 

 

 

 

 

Cleaning & Sanitizing

 

$

107.5

 

$

99.8

 

$

213.0

 

$

199.0

 

Other Services

 

13.0

 

11.0

 

20.0

 

20.3

 

Total

 

120.5

 

110.8

 

233.0

 

219.3

 

International

 

73.7

 

72.4

 

127.6

 

120.2

 

Corporate

 

9.9

 

(4.3

)

3.1

 

(6.5

)

Effect of foreign currency translation

 

6.4

 

(5.9

)

7.3

 

(11.6

)

Consolidated

 

$

210.5

 

$

173.0

 

$

371.0

 

$

321.4

 

 

The International amounts included above are based on translation into U.S. dollars at the fixed currency exchange rates used by management for 2008.

 

Consistent with the company’s internal management reporting, the corporate segment includes special gains and charges reported on the Consolidated Statement of Income.  The corporate segment also includes investments in the development of business systems and other corporate investments the company is making as part of ongoing efforts to improve efficiency and returns.

 

Total service revenue for the U.S. Other Services segment was $100.7 million and $191.1 million for the second quarter and six months ended June 30, 2008, respectively, and $94.3 million and $176.7 million for the second quarter and six months ended 2007, respectively.  Total service revenue for the International segment at public currency exchange rates was $48.2 million and $92.9 million for the second quarter and six months ended June 30, 2008, respectively, and $45.9 million and $88.6 million for the second quarter and six months ended June 30, 2007, respectively.

 

16



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12.   Goodwill and Other Intangible Assets

 

Under SFAS 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 also test a reporting unit for impairment prior to the annual test.  As of June 30, 2008, the company has completed its annual test for goodwill impairment. Based on this testing, no adjustment to the carrying value of goodwill was 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 13 years as of both June 30, 2008 and 2007.

 

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 quarters ended June 30, 2008 and 2007 was $11.1 million and $7.1 million, respectively. Total amortization expense related to other intangible assets during the six months ended June 30, 2008 and 2007 was $25.9 million and $14.1 million, respectively.  As of June 30, 2008, future estimated amortization expense related to amortizable other identifiable intangible assets will be:

 

(unaudited)

 

 

 

(millions)

 

 

 

2008 (Remainder: six-month period)

 

$

22

 

2009

 

43

 

2010

 

43

 

2011

 

42

 

2012

 

41

 

 

17



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

13.   New Accounting Pronouncements

 

In September 2006, the FASB issued SFAS 157, Fair Value Measurement (“SFAS 157”).  SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurement. Additionally, in February 2008, the FASB announced it will defer for one year the effective date of SFAS 157 for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The FASB also amended SFAS 157 to add a scope exception for leasing transactions subject to SFAS 13 Accounting for Leases from its application. The company adopted SFAS 157 effective January 1, 2008 for financial assets and liabilities.  The adoption did not have a material impact on the company’s consolidated results of operations and financial condition.  The company’s financial liabilities as of June 30, 2008 include foreign exchange contracts with fair market value of approximately $2 million, which are valued using foreign currency exchange rates as of the balance sheet date (level 2 - significant other observable inputs). In addition, the company has concluded that it does not have material amounts of assets and liabilities measured using the company’s own assumptions of fair market value (level 3 - unobservable inputs).

 

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115 (“SFAS 159”).  SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value, which can be elected on an instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The company adopted SFAS 159 effective January 1, 2008. The adoption did not have a material impact on the company’s consolidated results of operations and financial condition.

 

In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008, and will be adopted by the company in the first quarter of 2009. The company is currently evaluating the potential impact of the adoption of SFAS 141R on its consolidated results of operations and financial condition including the impact on future acquisitions.

 

18



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

13.   New Accounting Pronouncements (continued)

 

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements–an amendment of Accounting Research Bulletin No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008, and will be adopted by the company in the first quarter of 2009.  The company is currently evaluating the potential impact of the adoption of SFAS 160 on its consolidated results of operations and financial condition.

 

In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment to FASB Statement 133 (“SFAS 161”).  SFAS 161 requires companies to provide greater transparency through disclosures about how and why the company uses derivative instruments.  This includes how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, the level of derivative activity entered into by the company and how derivative instruments and related hedged items affect the company’s financial position, results of operations, and cash flows.  SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008.  The company is currently evaluating the impact of the adoption of SFAS 161 on its consolidated financial statement disclosures.

 

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



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

14.   Accounting for Uncertain Tax Positions

 

The company files income tax returns in the U.S. federal jurisdiction and various U.S. state and international jurisdictions. With few exceptions, the company is no longer subject to state and foreign income tax examinations by tax authorities for years before 2002The Internal Revenue Service (IRS) is currently examining the 2005 and 2006 tax years and is expected to complete its field examination in 2009.  The IRS has completed examinations of the company’s U.S. income tax returns for the years 1999 through 2004. It is reasonably possible for specific open positions within the 1999 through 2004 examinations to be settled in the next 12 months.  The company believes these settlements could result in a decrease in the company’s gross liability for unrecognized tax benefits of up to $43 million during the next 12 months. Decreases in the company’s gross liability could result in offsets to other balance sheet accounts, cash payments, and/or adjustments to the annual effective tax rate. The occurrence of these events and/or other events not included above within the next 12 months could change depending on a variety of factors and result in amounts different from above.

 

During the first quarter of 2008, the company recognized a discrete $5.2 million reduction in income tax expense resulting from a new tax treaty between the U.S. and Germany that went into effect after ratification by the U.S. Senate.  The treaty provides for binding arbitration in disputes on the treatment of transactions impacting the two countries.  As a result of the treaty ratification, the company has greater assurance of favorable resolution on potential disputes between these two countries.  The company did not recognize any discrete tax items during the second quarter of 2008.

 

As of June 30, 2008, the company’s gross liability for unrecognized tax benefits was $105 million compared to $99 million as of December 31, 2007. Included in the June 30, 2008 balance are $52 million of tax positions that would affect the annual effective tax rate if such benefits were recognized.

 

20



 

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, 2008 and the related consolidated statements of income for each of the three and six-month periods ended June 30, 2008 and 2007 and the consolidated statement of cash flows for the six-month periods ended June 30, 2008 and 2007.  These interim financial statements are the responsibility of Ecolab’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 the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2007, and the related consolidated statements of income, of comprehensive income and changes in shareholders’ equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 22, 2008, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2007, 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 24, 2008

 

21



 

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 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.

 

Overview of the second quarter ended June 30, 2008

 

Steady gains from our U.S. business along with double-digit growth from our Latin America operations led results for the second quarter of 2008. We achieved a strong financial performance against increasingly challenging conditions including softening foodservice and hospitality end markets as well as rising raw material costs. The balance from our global businesses and market coverage, led by aggressive sales efforts, pricing actions and effective cost savings measures, all worked to deliver attractive results.

 

Sales Performance

 

·                  Consolidated net sales increased 15% to $1.6 billion including 3% growth due to acquisitions.

·                  U.S. Cleaning & Sanitizing sales increased 13% to $664 million. Excluding acquisitions, sales rose 5% with double-digit growth from Kay, good growth from Food & Beverage and Healthcare, and moderate growth from Institutional.

·                  U.S. Other Services sales increased 6% to $121 million, benefiting from good growth by Pest Elimination and GCS.

·                  International sales, when measured in fixed currency rates, rose 6% to $741 million.  Latin America reported double-digit sales growth and Asia Pacific and Canada reported good sales increases.  Europe/Middle East/Africa (“EMEA”) recorded moderate sales growth.  When measured at public currency rates, International sales increased 19%.

 

Financial Performance

 

·                  Operating income increased 22% in the second quarter of 2008 compared to the second quarter of 2007. Excluding special gains and charges, operating income increased 11%.

 

22



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Financial Performance (continued)

 

·                  Net income increased 26% to $139 million in the second quarter of 2008 compared to the second quarter of 2007. Special gains and charges and discrete tax benefits had a 13% favorable impact.

·                  Diluted net income per share increased 25% to $0.55 for the second quarter of 2008 compared to $0.44 in the second quarter of 2007. Second quarter 2008 results included $0.08 per share benefit from special gains and charges, primarily due to a previously announced $24 million gain on the sale of a plant in Denmark. Second quarter 2007 results included $0.02 per share of discrete tax benefits.

·                  Our income tax rate was 28.8% for the second quarter of 2008 compared to 30.9% for the second quarter of 2007. Net tax impacts from special gains and charges, primarily due to the tax-free gain on the plant sale, decreased our effective income tax rate by 4.0% in the second quarter of 2008.  Discrete tax benefits decreased our effective income tax rate by 3.4% in the second quarter of 2007.

 

Results of Operations - Second Quarter and Six Months Ended June 30, 2008

 

Consolidated net sales for the second quarter ended June 30, 2008 were $1.6 billion, an increase of 15% compared to last year. For the first six months of 2008, net sales increased 16% to $3.0 billion. When measured in fixed currency rates, sales rose 8% and 10% for the second quarter and first six months of 2008, respectively. The components of the quarter and year to date sales growth are shown below.

 

 

 

Second Quarter Ended

 

Six Months Ended

 

(percent)

 

June 30, 2008

 

June 30, 2008

 

 

 

 

 

 

 

 

 

Volume growth

 

3

%

 

4

%

 

Price changes

 

2

 

 

2

 

 

Foreign currency exchange

 

7

 

 

6

 

 

Acquisitions & divestitures

 

3

 

 

4

 

 

Total sales growth

 

15

%

 

16

%

 

 

The gross profit margin (defined as the difference between net sales less cost of sales divided by net sales) was 49.1% and 50.9% for the second quarter of 2008 and 2007, respectively. For the six month periods, the gross profit margin was 49.2% in 2008 and 50.9% in 2007. Our gross profit margin decline for the second quarter and year-to-date has been driven by the negative impact of the recent Microtek and Ecovation acquisitions which, by their business model, operate at lower gross profit margins than our historical business.  Our gross profit margin was also negatively impacted by higher delivered product costs, which more than offset sales leverage, pricing and cost savings initiatives from a margin perspective.

 

23