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Ecolab 10-Q 2009

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 March 31, 2009

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   o   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

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

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 April 30, 2009.

 

236,486,254 shares of common stock, par value $1.00 per share.

 

 

 



 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions, except per share)

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net sales

 

$

1,348.2

 

$

1,457.9

 

 

 

 

 

 

 

Cost of sales (including special charges of $8.0 in 2009)

 

707.9

 

738.3

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

516.3

 

557.0

 

 

 

 

 

 

 

Special gains and charges

 

26.5

 

1.9

 

 

 

 

 

 

 

Operating income

 

97.5

 

160.7

 

 

 

 

 

 

 

Interest expense, net

 

15.8

 

14.8

 

 

 

 

 

 

 

Income before income taxes

 

81.7

 

145.9

 

 

 

 

 

 

 

Provision for income taxes

 

24.0

 

42.8

 

 

 

 

 

 

 

Net income

 

57.7

 

103.1

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

0.3

 

0.2

 

 

 

 

 

 

 

Net income attributable to shareholders

 

$

57.4

 

$

102.9

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic

 

$

0.24

 

$

0.42

 

Diluted

 

$

0.24

 

$

0.41

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.14

 

$

0.13

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

236.1

 

247.0

 

Diluted

 

238.1

 

251.5

 

 

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

 

2



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET

 

 

 

March 31

 

December 31

 

(millions)

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

79.5

 

$

66.7

 

 

 

 

 

 

 

Accounts receivable (net of allowance of $46.4 at March 31, 2009 and $43.8 at December 31, 2008)

 

913.3

 

971.0

 

 

 

 

 

 

 

Inventories

 

467.6

 

467.2

 

 

 

 

 

 

 

Deferred income taxes

 

92.6

 

94.7

 

 

 

 

 

 

 

Other current assets

 

130.1

 

91.5

 

 

 

 

 

 

 

Total current assets

 

1,683.1

 

1,691.1

 

 

 

 

 

 

 

Property, plant and equipment, net

 

1,114.0

 

1,135.2

 

 

 

 

 

 

 

Goodwill

 

1,260.8

 

1,267.7

 

 

 

 

 

 

 

Other intangible assets, net

 

317.6

 

326.7

 

 

 

 

 

 

 

Other assets

 

328.3

 

336.2

 

 

 

 

 

 

 

Total assets

 

$

4,703.8

 

$

4,756.9

 

 

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

 

(Continued)

 

3



 

ECOLAB INC.

CONSOLIDATED BALANCE SHEET (Continued)

 

 

 

March 31

 

December 31

 

(millions, except per share)

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

$

420.6

 

$

338.9

 

 

 

 

 

 

 

Accounts payable

 

308.9

 

359.6

 

 

 

 

 

 

 

Compensation and benefits

 

213.9

 

261.1

 

 

 

 

 

 

 

Income taxes

 

32.3

 

46.3

 

 

 

 

 

 

 

Other current liabilities

 

445.7

 

436.0

 

 

 

 

 

 

 

Total current liabilities

 

1,421.4

 

1,441.9

 

 

 

 

 

 

 

Long-term debt

 

797.8

 

799.3

 

 

 

 

 

 

 

Postretirement health care and pension benefits

 

636.3

 

680.2

 

 

 

 

 

 

 

Other liabilities

 

256.2

 

256.5

 

 

 

 

 

 

 

Equity (a)

 

 

 

 

 

Common stock

 

328.0

 

328.0

 

Additional paid-in capital

 

1,100.4

 

1,090.5

 

Retained earnings

 

2,641.4

 

2,617.0

 

Accumulated other comprehensive income

 

(379.9

)

(359.1

)

Treasury stock

 

(2,105.0

)

(2,104.8

)

Total shareholders’ equity

 

1,584.9

 

1,571.6

 

Noncontrolling interest

 

7.2

 

7.4

 

Total equity

 

1,592.1

 

1,579.0

 

 

 

 

 

 

 

Total liabilities and equity

 

$

4,703.8

 

$

4,756.9

 

 


(a)  Common stock, 400 million shares authorized, $1.00 par value per share, 236.3 million shares outstanding at March 31, 2009, 236.2 million shares outstanding at December 31, 2008.

 

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

 

4



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

57.7

 

$

103.1

 

 

 

 

 

 

 

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

 

 

 

 

 

Depreciation and amortization

 

80.4

 

84.9

 

Deferred income taxes

 

5.8

 

(5.5

)

Share-based compensation expense

 

7.9

 

7.7

 

Excess tax benefits from share-based payment arrangements

 

(0.2

)

(3.6

)

Pension and postretirement plan contributions

 

(56.1

)

(6.2

)

Pension and postretirement plan expense

 

20.2

 

18.0

 

Special charges-restructuring

 

24.7

 

 

Other, net

 

2.3

 

1.6

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

45.0

 

(29.9

)

Inventories

 

(5.8

)

(15.4

)

Other assets

 

(20.9

)

(39.8

)

Accounts payable

 

(48.2

)

27.1

 

Other liabilities

 

(85.4

)

(5.0

)

 

 

 

 

 

 

Cash provided by operating activities

 

$

27.4

 

$

137.0

 

 

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

 

(Continued)

 

5



 

ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(51.2

)

$

(75.5

)

Capitalized software expenditures

 

(8.0

)

(16.7

)

Property sold

 

0.7

 

0.7

 

Businesses acquired and investments in affiliates, net of cash acquired

 

(4.5

)

(199.3

)

Sale of businesses

 

 

2.2

 

Deposit into indemnification escrow

 

 

(21.0

)

 

 

 

 

 

 

Cash used for investing activities

 

(63.0

)

(309.6

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net issuances of commercial paper and notes payable

 

81.8

 

36.8

 

Long-term debt borrowings

 

 

248.0

 

Long-term debt repayments

 

(2.0

)

(0.7

)

Reacquired shares

 

(0.1

)

(18.6

)

Cash dividends on common stock

 

(33.0

)

(32.0

)

Exercise of employee stock options

 

1.8

 

15.8

 

Excess tax benefits from share-based payment arrangements

 

0.2

 

3.6

 

Other, net

 

 

(0.4

)

 

 

 

 

 

 

Cash provided by financing activities

 

48.7

 

252.5

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(0.3

)

2.2

 

 

 

 

 

 

 

INCREASE IN CASH AND CASH EQUIVALENTS

 

12.8

 

82.1

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

66.7

 

137.4

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

79.5

 

$

219.5

 

 

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

 

6



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.       Consolidated Financial Information

 

The unaudited consolidated financial information for the first quarters ended March 31, 2009 and 2008, reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of Ecolab Inc. (“the company”) for the interim periods presented. The financial results for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet data as of December 31, 2008 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, 2008.

 

With respect to the unaudited financial information of the company for the first quarters ended March 31, 2009 and 2008 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. Therefore, their separate report dated April 28, 2009 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

 

Special gains and charges reported on the Consolidated Statement of Income include the following:

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2009

 

2008

 

 

 

(unaudited)

 

Cost of sales

 

 

 

 

 

Restructuring charges

 

$

8.0

 

$

 

 

 

 

 

 

 

Special gains and charges

 

 

 

 

 

Restructuring charges

 

24.7

 

 

Business structure and optimization

 

1.0

 

1.8

 

Gain on sale of business

 

 

(1.7

)

Other non-recurring items

 

0.8

 

1.8

 

Total

 

26.5

 

1.9

 

 

 

 

 

 

 

Total special charges

 

$

34.5

 

$

1.9

 

 

7



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.       Special Gains and Charges (Continued)

 

In the first quarter of 2009, the company announced plans to undertake restructuring and other cost-saving actions during 2009 in order to streamline operations and improve efficiency and effectiveness. The restructuring plan includes a reduction of the company’s global workforce by approximately 1,000 positions or 4% and the reduction of plant and distribution center locations. A portion of these actions were completed during the first quarter, and as a result, the company recorded restructuring charges of $32.7 million ($20.9 million after tax) or $0.09 per diluted share.

 

The restructuring charge described above and subsequent reductions to the related liability accounts include the following:

 

 

 

Employee

 

 

 

 

 

 

 

 

 

Termination

 

Asset

 

 

 

 

 

(millions)

 

Costs

 

Disposals

 

Other

 

Total

 

Recorded expense and accrual

 

$

31.2

 

$

0.6

 

$

0.9

 

$

32.7

 

Cash payments

 

(8.0

)

 

 

 

 

(8.0

)

Non-cash charges

 

 

 

(0.6

)

(0.9

)

(1.5

)

Restructuring liability, March 31, 2009

 

$

23.2

 

$

 

$

 

$

23.2

 

 

Restructuring charges on the Consolidated Statement of Income have been included both as a component of special gains and charges and as a component of cost of sales. Amounts included as a component of cost of sales include asset write-downs and manufacturing related severance. Restructuring liabilities have been classified as a component of other current liabilities on the Consolidated Balance Sheet.

 

Employee termination costs in the first quarter include approximately 700 personnel reductions, and related costs for severance, benefits and outplacement services. Asset disposals include inventory and intangible asset write-downs related to the discontinuance of product lines which are not consistent with the company’s long-term strategies. Other charges include a one-time curtailment charge related to the company’s U.S. postretirement health care benefits plan.

 

The restructuring plan is expected to be finalized and actions completed during 2009.  The company anticipates additional restructuring expenses during the remainder of 2009, which are expected to result in total pretax charges of $65 million to $75 million ($42 million to $49 million after tax) for the full year 2009. The company anticipates that approximately $55 million to $65 million of the total restructuring charges represent cash expenditures, of which $8 million has been paid as of March 31, 2009 and the majority of the remainder is expected to be paid during 2009.

 

8



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.       Special Gains and Charges (Continued)

 

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

 

3.       Selected Balance Sheet Information

 

 

 

March 31

 

December 31

 

(millions)

 

2009

 

2008

 

 

 

(unaudited)

 

Inventories

 

 

 

 

 

Finished goods

 

$

277.1

 

$

263.8

 

Raw materials and parts

 

219.3

 

232.8

 

Inventories at FIFO cost

 

496.4

 

496.6

 

Excess of FIFO cost over LIFO cost

 

(28.8

)

(29.4

)

Total

 

$

467.6

 

$

467.2

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

 

 

 

Land

 

$

26.3

 

$

26.5

 

Buildings and leaseholds

 

329.6

 

330.6

 

Machinery and equipment

 

674.7

 

673.5

 

Merchandising equipment

 

1,329.3

 

1,333.3

 

Capitalized software

 

200.7

 

162.9

 

Construction in progress

 

91.4

 

125.5

 

 

 

2,652.0

 

2,652.3

 

Accumulated depreciation

 

(1,538.0

)

(1,517.1

)

Total

 

$

1,114.0

 

$

1,135.2

 

 

 

 

 

 

 

Other intangible assets, gross

 

 

 

 

 

Customer relationships

 

$

265.4

 

$

266.9

 

Intellectual property

 

79.4

 

78.3

 

Trademarks

 

112.1

 

111.9

 

Other intangibles

 

53.8

 

54.0

 

 

 

510.7

 

511.1

 

Accumulated amortization

 

 

 

 

 

Customer relationships

 

(124.5

)

(120.3

)

Intellectual property

 

(24.4

)

(22.8

)

Trademarks

 

(32.8

)

(31.1

)

Other intangibles

 

(11.4

)

(10.2

)

Other intangible assets, net

 

$

317.6

 

$

326.7

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

Deferred income taxes

 

$

155.7

 

$

157.9

 

Pension

 

11.2

 

12.1

 

Other

 

161.4

 

166.2

 

Total

 

$

328.3

 

$

336.2

 

 

9



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3.     Selected Balance Sheet Information (Continued)

 

 

 

March 31

 

December 31

 

(millions)

 

2009

 

2008

 

 

 

(unaudited)

 

Other current liabilities

 

 

 

 

 

Discounts and rebates

 

$

202.9

 

$

211.5

 

Dividends payable

 

33.1

 

33.1

 

Interest payable

 

7.9

 

8.4

 

Restructuring liability

 

23.2

 

 

Other

 

178.6

 

183.0

 

Total

 

$

445.7

 

$

436.0

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

Deferred income taxes

 

$

73.0

 

$

74.2

 

Income taxes payable - non-current

 

72.2

 

65.4

 

Other

 

111.0

 

116.9

 

Total

 

$

256.2

 

$

256.5

 

 

 

 

 

 

 

Accumulated other comprehensive income

 

 

 

 

 

Unrealized gain on financial instruments

 

$

8.7

 

$

8.0

 

Unrecognized pension and postretirement benefit expense

 

(361.9

)

(364.7

)

Cumulative translation

 

(26.7

)

(2.4

)

Total

 

$

(379.9

)

$

(359.1

)

 

4.     Interest

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2009

 

2008

 

 

 

(unaudited)

 

Interest expense

 

$

17.8

 

$

17.3

 

Interest income

 

(2.0

)

(2.5

)

Interest expense, net

 

$

15.8

 

$

14.8

 

 

10



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.       Financial Instruments and Hedging Transactions

 

The carrying amount and the estimated fair value of other financial instruments held by the company were:

 

 

 

March 31,

 

December 31,

 

(millions)

 

2009

 

2008

 

Carrying amount

 

 

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

79.5

 

$

66.7

 

Accounts receivable, net

 

913.3

 

971.0

 

Foreign exchange contracts

 

19.1

 

22.0

 

Liabilities

 

 

 

 

 

Foreign exchange contracts

 

5.3

 

7.6

 

Notes payable

 

58.7

 

17.8

 

Commercial paper

 

356.1

 

316.0

 

Long-term debt (including current maturities)

 

803.6

 

804.4

 

Fair value

 

 

 

 

 

Long-term debt (including current maturities)

 

$

750.5

 

$

713.8

 

 

The carrying amounts of cash equivalents, accounts receivable, notes payable and commercial paper approximate fair value because of their short maturities. The carrying amount of foreign exchange contracts is at fair value, which is determined based on foreign currency exchange rates as of the balance sheet date (level 2 - significant other observable inputs). The fair value of long-term debt is based on quoted market prices for the same or similar debt instruments. The company has concluded that it does not have any amounts of financial assets and liabilities measured using the company’s own assumptions of fair market value (level 3 - unobservable inputs).

 

DERIVATIVE INSTRUMENTS AND HEDGING

 

The company uses foreign currency forward contracts, interest rate swaps and foreign currency debt to manage risks generally associated with foreign currency exchange rates, interest rates and net investments in foreign operations. The company records all derivatives as assets and liabilities on the balance sheet at fair value. Changes in fair value are recognized immediately in earnings unless the derivative qualifies and is designated as a hedge. The effective portion of changes in fair value of hedges are initially recognized in accumulated other comprehensive income (“AOCI”) on the Consolidated Balance Sheet. Amounts recorded in AOCI are reclassified into earnings in the same period or periods during which the hedged transactions affect earnings. The company evaluates hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is recorded in earnings.

 

11



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.       Financial Instruments and Hedging Transactions (Continued)

 

The company does not hold derivative financial instruments of a speculative nature. The company is exposed to credit loss in the event of nonperformance of counterparties for foreign currency forward exchange contracts and interest rate swap agreements. The company monitors its exposure to credit risk by using credit approvals and credit limits and by selecting major international banks and financial institutions as counterparties. The company does not anticipate nonperformance by any of these counterparties.

 

DERIVITIVES DESIGNATED AS CASH FLOW HEDGES

 

Foreign currency forward contracts: The company utilizes foreign currency forward contracts to hedge the effect of foreign currency exchange rate fluctuations on forecasted intercompany transactions, including royalty payments, management fees and inventory purchases. These forward contracts are designated as cash flow hedges. The effective portions of the changes in fair value of these contracts are recorded in AOCI until the hedged items affect earnings, at which time the gain or loss is reclassified into the same line item in the Consolidated Statement of Income as the underlying exposure being hedged. All forecasted transactions will occur within the next twelve months.

 

Interest rate swap contracts: The company occasionally enters into interest rate swap contracts to manage interest rate exposures. In 2006 the company closed two swap contracts related to the issuance of its senior notes. The settlement payment was recorded in AOCI and is recognized in earnings as part of interest expense over the remaining life of the senior notes as the forecasted interest transactions occur.

 

DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS

 

The company also uses foreign currency forward contracts to offset its exposure to the change in value of certain foreign currency denominated intercompany receivables and payables.  Although the contracts are effective economic hedges, they are not designated as accounting hedges. Therefore, changes in the value of these derivatives are recognized immediately in earnings, thereby offsetting the current earnings effect of the related foreign currency denominated intercompany receivables and payables.

 

12



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.       Financial Instruments and Hedging Transactions (Continued)

 

The following table summarizes the fair value of the company’s outstanding derivatives as of March 31, 2009:

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance

 

 

 

Balance

 

 

 

 

 

Sheet

 

Fair

 

Sheet

 

Fair

 

(millions)

 

Location

 

Value

 

Location

 

Value

 

DERIVATIVES DESIGNATED AS HEDGING INSTRUMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Other current assets

 

$

 13.4

 

Other current liabilities

 

$

 3.6

 

 

 

 

 

 

 

 

 

 

 

DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Other current assets

 

5.7

 

Other current liabilities

 

1.7

 

Total Derivatives

 

 

 

$

 19.1

 

 

 

$

 5.3

 

 

The company had foreign currency forward exchange contracts with notional values that totaled approximately $389 million at March 31, 2009, and $486 million at December 31, 2008.

 

For the three months ended March 31, 2009, the impact on AOCI and earnings from derivative contracts that qualified as cash flow hedges was as follows:

 

(millions)

 

Location

 

Amount

 

UNREALIZED GAIN (LOSS) RECOGNIZED INTO AOCI (EFFECTIVE PORTION):

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

AOCI (equity)

 

$

 6.2

 

 

 

 

 

 

 

GAIN (LOSS) RECLASSIFIED FROM AOCI INTO INCOME (EFFECTIVE PORTION):

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Cost of sales

 

$

 1.0

 

 

 

Selling, general and administrative expenses

 

1.2

 

 

 

 

 

2.2

 

Interest rate swap contracts

 

Interest expense, net

 

(0.1

)

 

 

 

 

$

 2.1

 

GAIN (LOSS) RECOGNIZED IN INCOME ON DERIVATIVE (INEFFECTIVE PORTION):

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Interest expense, net

 

$

 (0.6

)

 

13



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.       Financial Instruments and Hedging Transactions (Continued)

 

For the three months ended March 31, 2009, the impact on earnings from derivative contracts that are not designated as hedging instruments was as follows:

 

(millions)

 

Location

 

Amount

 

 

 

 

 

 

 

GAIN (LOSS) RECOGNIZED IN INCOME

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Selling, general and administrative expenses

 

$

 6.1

 

 

 

Interest expense, net

 

(0.9

)

 

 

 

 

$

 5.2

 

 

The amounts recognized in earnings above offset the earnings impact of the related foreign currency denominated intercompany receivables and payables.

 

NET INVESTMENT HEDGE

 

In December 2006, the company issued euro 300 million ($380 million as of March 31, 2009) 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 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 adjustment account. Total transaction gains (losses) related to the euronotes charged to shareholders’ equity were $0.1 million and ($10.2) million in the first quarter of 2009 and 2008, respectively.

 

14



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6.       Comprehensive Income

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net income

 

$

 57.7

 

$

 103.1

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

Foreign currency translation

 

(24.3

)

42.9

 

Derivative instruments

 

0.7

 

0.3

 

Pension and postretirement benefits

 

2.8

 

1.5

 

Total

 

(20.8

)

44.7

 

 

 

 

 

 

 

Comprehensive income, including noncontrolling interest

 

36.9

 

147.8

 

 

 

 

 

 

 

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

 

 

 

 

Net income

 

0.3

 

0.2

 

Foreign currency translation

 

(0.2

)

0.3

 

Total

 

0.1

 

0.5

 

 

 

 

 

 

 

Comprehensive income attributable to shareholders

 

$

 36.8

 

$

 147.3

 

 

7.       Business Acquisitions and Investments

 

In February 2009, the company acquired assets of the Stackhouse business of CORPAK Medsystems, Inc.  Stackhouse is a leading developer, manufacturer and marketer of surgical helmets and smoke evacuators, primarily for use during orthopedic surgeries.  The business, which has annual sales of approximately $4 million, became part of the company’s U.S. Cleaning & Sanitizing operations during the first quarter of 2009.

 

Acquisitions in the first quarter of 2009 and 2008 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.

 

15



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7.       Business Acquisitions and Investments (Continued)

 

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:

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net tangible assets acquired

 

$

 2.3

 

$

 43.5

 

 

 

 

 

 

 

Identifiable intangible assets

 

 

 

 

 

Customer relationships

 

0.9

 

12.0

 

Intellectual property

 

1.0

 

28.3

 

Trademarks

 

 

15.9

 

Other intangibles

 

 

9.6

 

Total

 

1.9

 

65.8

 

 

 

 

 

 

 

Goodwill

 

0.3

 

111.0

 

Total aggregate purchase price

 

$

 4.5

 

$

 220.3

 

 

 

 

 

 

 

Liability for indemnification

 

 

(21.0

)

Net cash paid for acquisitions

 

$

 4.5

 

$

 199.3

 

 

The changes in the carrying amount of goodwill for each of the company’s reportable segments for the first quarter ended March 31, 2009 were as follows:

 

 

 

United States

 

 

 

 

 

(unaudited)

 

Cleaning &

 

Other

 

 

 

 

 

 

 

(millions)

 

Sanitizing

 

Services

 

Total

 

International

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2008

 

$

 443.6

 

$

 50.5

 

$

 494.1

 

$

 773.6

 

$

 1,267.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill acquired during quarter

 

0.3

 

 

0.3

 

 

0.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

(7.2

)

(7.2

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2009

 

$

 443.9

 

$

 50.5

 

$

 494.4

 

$

 766.4

 

$

 1,260.8

 

 

16



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.       Net Income Per Common Share

 

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

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions, except per share)

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net income attributable to shareholders

 

$

57.4

 

$

102.9

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

 

 

 

Basic

 

236.1

 

247.0

 

Effect of dilutive stock options and awards

 

2.0

 

4.5

 

Diluted

 

238.1

 

251.5

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic

 

$

0.24

 

$

0.42

 

Diluted

 

$

0.24

 

$

0.41

 

 

Stock options to purchase approximately 15.1 million shares and 5.3 million shares for the first quarter ended March 31, 2009 and 2008, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted common shares outstanding.

 

Restricted stock awards of 85,127 shares and 84,845 shares for the first quarter ended March 31, 2009 and 2008, respectively, were excluded from the computation of basic weighted-average shares outstanding because such shares were not yet vested at these dates.

 

17



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

9.     Pension and Postretirement Plans

 

The components of net periodic pension and postretirement health care benefit costs for the first quarter ended March 31 are as follows:

 

 

 

U.S. Pension Benefits

 

 

 

 

 

U.S.

 

 

 

(qualified and non-

 

International

 

Postretirement

 

(unaudited)

 

qualified plans)

 

Pension Benefits

 

Health Care Benefits

 

(millions)

 

2009

 

2008

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

11.8

 

$

11.2

 

$

3.8

 

$

4.9

 

$

0.5

 

$

0.6

 

Interest cost on benefit obligation

 

14.8

 

13.0

 

5.9

 

6.6

 

2.4

 

2.4

 

Expected return on plan assets

 

(18.9

)

(17.6

)

(3.9

)

(4.8

)

(0.4

)

(0.6

)

Recognition of net actuarial loss

 

4.0

 

2.2

 

0.4

 

0.3

 

1.1

 

1.1

 

Amortization of prior service cost (benefit)

 

0.1

 

0.3

 

0.1

 

 

(1.5

)

(1.6

)

Curtailment loss

 

 

 

 

 

0.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expense

 

$

11.8

 

$

9.1

 

$

6.3

 

$

7.0

 

$

3.0

 

$

1.9

 

 

During the first quarter the company took actions under the restructuring program that reduced the number of active participants in both the U.S. pension and postretirement health care benefit plans. As a result of these actions, the company recognized a curtailment charge of $0.9 million related to the postretirement health care benefits plan that is included as a component of restructuring charges as discussed in Note 2. The actions were not significant to the U.S. pension plans; therefore, no curtailment was recognized.

 

The company is not required to make any contributions to its U.S. pension plan and postretirement health care benefits plans for 2009. However, in the first quarter of 2009, the company made a $50 million voluntary contribution to the U.S. pension plan.

 

Certain international pension benefit plans are required to be funded in accordance with local government requirements. The company contributed $6 million to its international pension benefit plans during the first quarter of 2009. The company currently estimates that it will contribute approximately $17 million to the international pension benefit plans during the remainder of 2009.

 

18



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

10.     Operating Segments

 

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

 

 

 

First Quarter Ended

 

 

 

March 31

 

(millions)

 

2009

 

2008

 

 

 

(unaudited)

 

Net Sales

 

 

 

 

 

United States

 

 

 

 

 

Cleaning & Sanitizing

 

$

622.9

 

$

653.4

 

Other Services

 

107.1

 

110.4

 

Total

 

730.0

 

763.8

 

International

 

625.0

 

609.0

 

Effect of foreign currency translation

 

(6.8

)

85.1

 

Consolidated

 

$

1,348.2

 

$

1,457.9

 

Operating Income

 

 

 

 

 

United States

 

 

 

 

 

Cleaning & Sanitizing

 

$

102.6

 

$

105.2

 

Other Services

 

13.2

 

7.0

 

Total

 

115.8

 

112.2

 

International

 

21.6

 

45.2

 

Effect of foreign currency translation

 

(0.8

)

10.1

 

Corporate

 

(39.1

)

(6.8

)

Consolidated

 

$

97.5

 

$

160.7

 

 

The International amounts included above are based on translation into U.S. dollars at the fixed currency exchange rates used by management for 2009.

 

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 $89.6 million and $90.4 million for the first quarter ended March 31, 2009 and 2008, respectively. Total service revenue for the International segment at public currency exchange rates was $38.4 million and $44.7 million for the first quarter ended March 31, 2009 and 2008, respectively.

 

19



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

11.     Goodwill and Other Intangible Assets

 

The company tests goodwill for impairment on an annual basis during the second quarter. If circumstances change significantly, the company would also test a reporting unit for impairment during interim periods between its annual tests. No adjustments to the carrying value of goodwill were necessary during the first quarter of 2009.

 

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, intellectual property, trademarks 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 March 31, 2009 and 2008.

 

The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the company in each reporting period.  Total amortization expense related to other intangible assets during the first quarters ended March 31, 2009 and 2008 was $10.0 million and $14.8 million, respectively.  As of March 31, 2009, future estimated amortization expense related to amortizable other identifiable intangible assets will be:

 

(unaudited)

 

 

 

(millions)

 

 

 

2009 (Remainder: nine-month period)

 

$

32

 

2010

 

39

 

2011

 

38

 

2012

 

37

 

2013

 

35

 

 

20



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12.     New Accounting Pronouncements

 

In September 2006, the FASB issued SFAS 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and expanded disclosures about fair value measurement. In February 2008, the FASB announced the deferral 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 and 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 measured on a recurring basis and effective January 1, 2009 for non-financial assets and liabilities. The adoption did not have an impact on the company’s consolidated results of operations and financial position.

 

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.  The company adopted SFAS 141R effective January 1, 2009. The adoption did not have a material impact on the company’s consolidated results of operations and financial position.

 

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. The company adopted SFAS 160 effective January 1, 2009, and revised its 2008 financial statements in accordance with SFAS 160. The revision includes a reclassification of $0.2 million from selling, general and administrative expenses to net income attributable to noncontrolling interest on the Consolidated Statement of Income for the first quarter ended March 31, 2008 and a reclassification of $7.4 million from other liabilities to noncontrolling interest on the Consolidated Balance Sheet as of December 31, 2008. The adoption did not have a material impact on the company’s consolidated results of operations and financial position.

 

21



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12.     New Accounting Pronouncements (Continued)

 

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. The company adopted SFAS 161 in the first quarter of 2009 and has included the required disclosures in Note 5.

 

In December 2008, the FASB issued FASB Staff Position (“FSP”) 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets which amends SFAS 132(R) to require more detailed disclosures regarding employers’ plan assets, including their investment strategies, major categories of plan assets, concentration of risk, and valuation methods used to measure the fair value of plan assets. The FSP is effective for fiscal years ending after December 15, 2009. The company is currently evaluating the impact of adoption.

 

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. The FSP amends SFAS 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim and annual financial statements. The FSP also amends APB Opinion 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The company early adopted the FSP in the first quarter of 2009 and has included the required disclosures in Note 5.

 

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.

 

22



 

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

13.     Commitments and Contingencies

 

The company and certain subsidiaries are party to various lawsuits, claims and environmental actions that have arisen in the ordinary course of business. These include antitrust, patent infringement, product liability and wage hour lawsuits and possible obligations to investigate and mitigate the effects on the environment of the disposal or release of certain chemical substances at various sites, such as Superfund sites and other operating or closed facilities. Because litigation is inherently uncertain, and unfavorable rulings or developments could occur, there can be no certainty that the company may not ultimately incur charges in excess of presently recorded liabilities. A future adverse ruling, settlement or unfavorable development could result in future charges that could have a material adverse effect on the company’s results of operations or cash flows in the period in which they are recorded. The company currently believes that such future charge, if any, would not have a material adverse effect on the company’s consolidated financial position.

 

In accordance with SFAS 5, Accounting for Contingencies (“SFAS 5”) and related guidance, the company records liabilities where a contingent loss is probable and can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred.

 

As previously disclosed, an arbitration decision in conjunction with a settlement was rendered on September 24, 2007, concerning two California class-action lawsuits involving wage hour claims affecting former and current employees of the company’s Pest Elimination Division. If upheld, the company will pay approximately $27.4 million, plus post-award interest in settlement of the cases. The company has appealed the decision and thereby the settlement. The company has fully accrued for this award and the related interest as of March 31, 2009.

 

The company is a defendant in other wage hour lawsuits, one of which has been certified for class-action status. The company has completed an analysis and established an accrual for these claims in accordance with SFAS 5.

 

23



 

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 March 31, 2009 and the related consolidated statements of income for each of the three-month periods ended March 31, 2009 and 2008 and the consolidated statement of cash flows for the three-month periods ended March 31, 2009 and 2008. 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 previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2008, 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 27, 2009, 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, 2008, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

 

/s/PricewaterhouseCoopers LLP

PRICEWATERHOUSECOOPERS LLP

 

Minneapolis, Minnesota

April 28, 2009

 

24



 

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 both the unaudited consolidated financial information and related notes included in this Form 10-Q, and the Management’s Discussion and Analysis of Financial Condition and Result of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2008. 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 first quarter ended March 31, 2009

 

Our reported first quarter results were led by continued strong sales growth from our U.S. Kay and Healthcare businesses, as well as our Latin America and Canadian operations. Pricing and cost savings actions benefited results, but were more than offset by the effects of the global recession, higher delivered product costs, unfavorable foreign currency exchange, a change in our distributor incentive programs and restructuring charges during the first quarter of 2009.

 

Significant items impacting the year over year comparison of our results for the first quarter included the following:

 

We recorded restructuring charges of approximately $33 million ($21 million net of tax) or $0.09 per share in the first quarter of 2009 which negatively impacted our reported operating results.

 

In the first quarter of 2009 we reduced our distributor incentive promotions in our U.S. Institutional division in order to create better efficiency in our distributor system. This change impacted the timing of sales to distributors and had a negative impact on our year over year sales comparison in the first quarter, and we estimate it negatively impacted first quarter 2009 earnings by approximately $0.03 per share. However, the unfavorable timing impact of this change on the first quarter is expected to be reversed later this year and be slightly positive to earnings.

 

25



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Sales Performance

 

·                  Consolidated net sales decreased 8% to $1.3 billion. Unfavorable foreign currency exchange negatively impacted sales during the quarter. When measured at fixed rates of exchange, sales decreased 1%. Adjusted for the distributor incentive program change, fixed rate sales were flat to last year.

·                  U.S. Cleaning & Sanitizing sales decreased 5% to $623 million. The change in the distributor incentive programs reduced sales by an estimated 3%.  Good sales gains by Kay and Healthcare were more than offset by sales declines by Institutional and Food & Beverage. Food & Beverage’s reported sales decline was due to an unfavorable comparison to the first quarter of 2008 which included a large Ecovation project sale.

·                  U.S. Other Services sales declined 3% to $107 million as modest growth by Pest Elimination was offset by decreased GCS sales.

·                  International sales, when measured in fixed currency rates, rose 3% to $625 million in the first quarter. Latin America and Canada enjoyed strong sales growth while Asia Pacific and Europe/Middle East/Africa (“EMEA”) recorded moderate sales growth. When measured at public currency rates, International sales declined 11%.

 

Financial Performance

 

·                  Operating income declined 39% to $98 million. Excluding the impact of special gains and charges, operating income decreased 19%.

·                  Net income attributable to shareholders declined 44% to $57 million. Excluding the impact of special gains and charges, and discrete tax items, net income attributable to shareholders decreased 20%.

·                  Diluted net income per share decreased 41% to $0.24 for the first quarter of 2009 compared to $0.41 in the first quarter of 2008. First quarter 2009 results were reduced by $0.09 per share of special gains and charges and discrete tax items, $0.03 per share negative impact of unfavorable foreign currency exchange, and were also negatively impacted by an estimated $0.03 per share for the change in distributor incentive programs. First quarter 2008 results were increased by $0.02 per share of special gains and charges, and discrete tax items.

·                  Our reported effective income tax rate was 29.4% for the first quarter of 2009 compared to 29.3% for the first quarter of 2008. Excluding the tax rate impact of special gains and charges, and discrete tax items, our adjusted effective income tax rate was 31.3% and 32.8% for the first quarter of 2009 and 2008, respectively.

 

26



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations – First Quarter Ended March 31, 2009

 

Consolidated net sales for the first quarter ended March 31, 2009 were $1.3 billion, a decrease of 8% compared to last year. When measured in fixed currency rates, sales declined 1% compared to last year. Adjusted for the distributor incentive program change, fixed rate sales were flat to last year. The components of the first quarter sales decline are shown below.

 

 

 

First Quarter Ended

 

(percent)

 

March 31, 2009

 

Volume

 

(5

)%

Price changes

 

4

 

Foreign currency exchange

 

(7

)

Acquisitions & divestitures

 

 

Total sales decrease

 

(8

)%

 

The gross profit margin (defined as the difference between net sales less cost of sales divided by net sales) was 47.5% and 49.4% for the first quarter of 2009 and 2008, respectively. The decrease in gross profit margin reflected restructuring special charges included in cost of sales during 2009 of $8.0 million which reduced our reported gross profit margin by 0.6 percentage points. Our gross profit margin decline for the first quarter was driven by higher delivered product costs, especially in Europe, and lower sales volume, which more than offset pricing and cost savings initiatives.

 

Selling, general and administrative expenses as a percentage of consolidated net sales were 38.3% and 38.2% for the first quarter of 2009 and 2008, respectively. Strong pricing leverage, savings from our recent restructuring activities, and spending controls nearly offset the sales volume decline and cost increases in the business. We remain focused on key business investments to drive innovation and efficiency, through R&D and information technology systems.

 

27



 

ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations – First Quarter Ended March 31, 2009 (Continued)

 

Special gains and charges reported on the Consolidated Statement of Income included the following items:

 

 

 

First Quarter Ended

 

 

 

March 31