FINANCIAL DISCUSSION
The following discussion and analysis provides information that management
believes is useful in understanding the company's operating results, cash flows
and financial condition. The discussion should be read in conjunction with the
consolidated financial statements and related notes.
The financial discussion and other portions of this Annual Report to
Shareholders contain various "Forward-Looking Statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements, which
represent Ecolab's expectations or beliefs concerning various future events, are
based on current expectations that involve a number of risks and uncertainties
which could cause actual results to differ materially from those of such
Forward-Looking Statements. We refer readers to the company's statement entitled
"Forward-Looking Statements and Risk Factors" which is contained under Part I of
the company's Annual Report on Form 10-K for the year ended December 31, 1998.
Additional risk factors may be described from time to time in Ecolab's filings
with the Securities and Exchange Commission.
1998 OVERVIEW
During 1998, Ecolab achieved its seventh consecutive year of record financial
results and the company's stock outperformed the Standard & Poor's 500 index for
the fourth year in a row. The company's more significant accomplishments for
1998 included:
- - Ecolab's stock price rose 31 percent during 1998 and, including dividends,
yielded a return of nearly 32 percent to shareholders.
[GRAPH]
- - For the third year in a row, the company exceeded all three of its
long-term financial objectives of 15 percent growth in income per common
share, 20 percent return on beginning shareholders' equity and an investment
grade balance sheet.
- - Income from continuing operations rose 15 percent to a record $155 million,
or $1.15 per diluted share.
[GRAPH]
- - Return on beginning shareholders' equity reached a record 28 percent and
the company recorded its seventh consecutive year of exceeding its long-term
financial objective of a 20 percent return on beginning shareholders' equity.
- - Cash provided by continuing operations increased 17 percent and also
reached an all-time high. Strong cash flow and moderate debt levels allowed the
company to maintain its long-term financial objective of an investment grade
balance sheet for the sixth consecutive year, and the company's debt continued
to be rated within the "A" categories by the major rating agencies.
- - Net sales increased 15 percent and reached a record level of $1.9 billion.
- - Operating income was a record $262 million for 1998 and increased 20
percent over the prior year. As a percent of net sales, operating income also
reached an all-time high of 13.9 percent.
- - The company's equity in earnings of the Henkel-Ecolab joint venture rose 19
percent for 1998 to a record level.
- - The company increased its annual dividend rate for the seventh consecutive
year. The annual dividend rate was increased 11 percent to an annual rate of
$0.42 per common share. The company has paid dividends on its common stock for
62 consecutive years.
- - The company continued to make strategic business acquisitions in order to
broaden its product and service offerings in line with its Circle the
Customer -- Circle the Globe strategy. The integration of the Gibson business,
which was acquired at the end of 1997, was completed and the business exceeded
the company's expectations for 1998. Also during 1998, the company added
commercial kitchen equipment repair services to its operations through the
acquisition of GCS Service, Inc., and products and services were added to the
U.S. Institutional and Food & Beverage businesses and in Japan through business
acquisitions.
24
All of these acquisitions have been accounted for as purchases and,
accordingly, the results of their operations have been included in the company's
financial statements from the dates of acquisition. Additional information
related to these acquisitions is included in Note 6 of the notes to consolidated
financial statements.
OPERATING RESULTS
CONSOLIDATED
(thousands, except per share) 1998 1997 1996
- -----------------------------------------------------------------------------
Net sales $ 1,888,226 $ 1,640,352 $ 1,490,009
Operating income $ 261,980 $ 218,504 $ 185,317
Income
Continuing operations $ 154,506 $ 133,955 $ 113,185
Discontinued operations 38,000
--------------------------------------------
Net income $ 192,506 $ 133,955 $ 113,185
- -----------------------------------------------------------------------------
Diluted income per common share
Continuing operations $ 1.15 $ 1.00 $ 0.85
Discontinued operations 0.28
Net income $ 1.44 $ 1.00 $ 0.85
Consolidated net sales were nearly $1.9 billion for 1998, an increase of
15 percent over net sales of $1.6 billion in 1997. Both the company's United
States and International operations reported double-digit sales growth and
contributed to the consolidated sales improvement. Business acquisitions in
1998 and the annualized effect of businesses acquired in 1997 were
significant to the company's growth accounting for approximately one-half of
the overall sales growth for 1998. Changes in currency translation had a
negative effect on sales growth and decreased the consolidated growth rate by
three percentage points. The growth in sales also reflected the benefits of
new products, new customers, competitive gains, investments in the growth and
training of the sales-and-service force and a continuation of generally good
conditions in the hospitality and lodging industries, particularly in the
United States.
Consolidated operating income reached $262 million for 1998, an increase
of 20 percent over operating income of $219 million in 1997. Business
acquisitions contributed to the growth in operating income and accounted for
approximately one-fifth of the increase. The consolidated operating income
margin rose to 13.9 percent for 1998 and surpassed 1997's operating income
margin of 13.3 percent to reach a new all-time high. A continuation of
particularly strong growth in the U.S. Institutional and Food & Beverage
operations and solid performances by the U.S. Pest Elimination and Kay
businesses were the major contributors to the company's overall profit
improvement. Operating income margin growth reflected lower selling, general
and administrative expenses as a percentage of net sales, partially offset by
a decrease in the gross profit margin from last year's all-time high.
Selling, general and administrative expenses were 41.0 percent of net sales
in 1998, a decease from 42.7 percent of net sales in 1997. Selling, general
and administrative expense margins were down for both the company's United
States and International operations with a significant decrease in the Asia
Pacific region. The improvement in the selling, general and administrative
expense margin reflected the benefits of tight cost controls, synergies from
the integration of businesses acquired, improved sales productivity and
strong sales growth. These benefits were partially offset by continued
investments in the training and growth of the sales-and-service force. The
gross profit margin was 54.9 percent of net sales for 1998, down slightly
from last year's record gross profit margin of 56.0 percent. The decrease in
gross profit margin reflected a comparison against an exceptionally strong
period last year, the effects of business acquisitions and lower margins in
the Asia Pacific region which was affected by economic and monetary problems.
These negative effects on the gross profit margin were partially offset by
the effects of sales of new products and good sales volume growth. Selling
price increases continued to be constrained due to competitive pricing
conditions in several of the markets in which the company does business.
Income from continuing operations for 1998 rose 15 percent to $155 million,
or $1.15 per diluted share from $134 million, or $1.00 per diluted share in
1997. This improvement reflected double-digit growth in operating income and an
increase in the company's equity in earnings of the Henkel-Ecolab joint venture.
Earnings were negatively affected by increased net interest and income tax
expenses compared with last year. Income from continuing operations was 8.2
percent of net sales in both 1998 and 1997.
25
In addition to ongoing operations, a tax issue related to the disposal of a
business in 1992 was resolved during 1998, resulting in a one-time gain from
discontinued operations of $38 million, or $0.28 per diluted share. As a result
of tax losses on the disposition of this business, the company's U.S. federal
income tax payments were reduced in 1992 through 1995 by approximately $58
million. However, pending final acceptance of the company's treatment of the
losses, no income tax benefit was recognized for financial reporting purposes.
During 1998, an agreement was reached with the Internal Revenue Service on the
final tax treatment for the losses. This agreement resulted in the payment of
approximately $39 million of income taxes and interest, and the recognition of
the gain from discontinued operations.
Net income for 1998 totaled $193 million, or $1.44 per diluted share,
compared with $134 million, or $1.00 per diluted share in 1997.
1997 COMPARED WITH 1996
Consolidated net sales for 1997 were over $1.6 billion, an increase of 10
percent compared to net sales of nearly $1.5 billion in 1996. Both the company's
U.S. and International operations contributed to this sales growth. Business
acquisitions accounted for approximately one-fourth of the growth in sales for
1997. New product introductions, a larger sales-and-service force, new customers
and competitive gains also added to the 1997 sales improvement.
Consolidated operating income increased 18 percent for 1997 and reached
$219 million compared to consolidated operating income of $185 million in 1996.
This growth included the benefits of business acquisitions, which accounted for
approximately 20 percent of the increase. The consolidated operating income
margin was 13.3 percent in 1997, a substantial improvement over the 1996
consolidated operating income margin of 12.4 percent. Most of the company's
businesses contributed to these income improvements; however, strong
performances by the core U.S. Institutional and Food & Beverage businesses
during 1997 were the major contributors to the company's overall profit
improvement. An improved and record level gross profit margin, reflecting good
sales volume growth and a more stable raw material cost environment, more than
offset a modestly higher selling, general and administrative expense margin and
limited selling price increases.
Net income for 1997 reached $134 million, or $1.00 per share on a diluted
basis, and increased 18 percent over last year's net income of $113 million, or
$0.85 per share. Net income improved to 8.2 percent of net sales, compared to
7.6 percent in 1996. The increase in net income reflected the benefits of strong
operating income performance, lower net interest expense and modestly higher
equity in earnings of the Henkel-Ecolab joint venture, which were partially
offset by increased income taxes.
OPERATING SEGMENT PERFORMANCE
(thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Net sales
United States
Cleaning & Sanitizing $1,296,797 $1,156,625 $1,040,823
Other Services 160,063 119,203 107,955
------------------------------------------
Total 1,456,860 1,275,828 1,148,778
International Cleaning
& Sanitizing 440,668 335,337 305,938
------------------------------------------
Total 1,897,528 1,611,165 1,454,716
Effect of foreign
currency translation (9,302) 29,187 35,293
------------------------------------------
Consolidated $1,888,226 $1,640,352 $1,490,009
- -----------------------------------------------------------------------------
Operating income
United States
Cleaning & Sanitizing $ 218,500 $ 180,975 $ 152,979
Other Services 19,084 14,655 11,907
------------------------------------------
Total 237,584 195,630 164,886
International Cleaning
& Sanitizing 29,787 22,519 19,151
------------------------------------------
Total 267,371 218,149 184,037
Corporate (4,347) (4,088) (3,440)
Effect of foreign
currency translation (1,044) 4,443 4,720
------------------------------------------
Consolidated $ 261,980 $ 218,504 $ 185,317
- -----------------------------------------------------------------------------
Operating income as a percent of
sales
United States
Cleaning & Sanitizing 16.8% 15.6% 14.7%
Other Services 11.9 12.3 11.0
Total 16.3 15.3 14.4
International Cleaning
& Sanitizing 6.8% 6.7% 6.3%
26
During 1998, the company adopted Statement of Financial Accounting
Standards No. 131. As a result, the company defined its reportable segments and
changed the information it reports about its operating segments. Operating
segment information for prior years has been restated to conform to the 1998
presentation.
[GRAPH]
The company's operating segments have generally similar products and
services and, generally, the company is organized to manage its operations
geographically. Pursuant to the new standard, the company's operating segments
have been aggregated into three reportable segments: United States Cleaning and
Sanitizing operations, United States Other Services, and International Cleaning
and Sanitizing operations. The company evaluates the performance of its
International operations based on fixed management rates of currency exchange.
Therefore, International sales and operating income totals shown above, as well
as the International financial information included in this financial
discussion, are based on translation into U.S. dollars at the fixed currency
exchange rates used by management for 1998. All other accounting policies of the
reportable segments are consistent with generally accepted accounting principles
and the accounting policies of the company described in Note 2 of the notes to
consolidated financial statements. Additional information about the company's
reportable segments is included in Note 15 of the notes to consolidated
financial statements.
Sales of the company's United States Cleaning and Sanitizing operations
were nearly $1.3 billion for 1998 and increased 12 percent over sales
approaching $1.2 billion in 1997. This sales increase reflected benefits from
business acquisitions, a continuation of particularly strong performances by the
company's core Institutional and Food & Beverage operations and double-digit
growth in sales reported by Kay. Business acquisitions accounted for
approximately 30 percent of the growth in sales of the United States Cleaning
and Sanitizing operations. Sales in 1998 also benefited from new product
introductions, new customers, competitive gains, a larger and better trained
sales-and-service force and favorable trends in the hospitality and lodging
industries. Selling price increases continued to be constrained due to
competitive pricing conditions in several of the markets in which the company
does business. Sales of the company's Institutional operations increased 11
percent for 1998. Institutional reported strong double-digit growth in its
Ecotemp, laundry, specialty and housekeeping programs and solid growth in sales
to warewashing markets. Institutional benefited from new customers, competitive
gains, high customer retention and the addition of the Grace-Lee vehicle wash
business, which added approximately 2 percentage points to the Institutional
sales growth rate. Kay's U.S. operations reported sales growth of 10 percent for
1998 reflecting new business, continued growth in its food retail services
business and retention of key customers. Textile Care sales increased 1 percent
for 1998. Textile Care has a number of new product offerings, but continues to
experience pressures from consolidations in the commercial laundry market and a
difficult pricing environment. The company expects the U.S. Textile Care
business to continue to experience challenging market conditions over the near
term. Professional Products sales were up 6 percent, with double-digit growth in
its specialty and brand name program and infection prevention products, and
modest growth in its core janitorial business. Sales of the company's Water Care
operations increased 6 percent for 1998, reflecting double-digit growth in its
pool and spa and cruise ship businesses, partially offset by lower distributor
sales to municipal markets. Food & Beverage reported sales growth of 15 percent
for 1998. Food & Beverage sales growth included the benefits of businesses
acquired in 1998 and the annualized effect of last year's acquisition of
Chemidyne. Excluding the effect of these business acquisitions, Food & Beverage
sales increased 8 percent and included strong growth in sales to the beverage
and food processing markets and good growth in sales to the dairy markets,
despite challenging consolidation and pricing conditions.
For 1998, sales of the company's United States Other Services operations
increased 34 percent to $160 million, compared with $119 million last year.
Sales for 1998 included the mid-year acquisition of GCS Service Inc. (GCS), a
nationwide provider of commercial kitchen equipment repair services. Other
27
Services sales grew 14 percent excluding the GCS business acquisition. Pest
Elimination reported sales growth of 14 percent for 1998 with strong sales
across all of its business lines, including its core contract services business,
its flying insect defense program and ancillary services. Pest Elimination had
very good new contract growth during 1998, continued its high customer retention
and benefited from weather conditions that contributed to greater pest
elimination needs during 1998. Sales of the Jackson equipment business increased
18 percent for 1998, reflecting good sales to the quickservice or fast-food
market.
[GRAPH]
Management rate sales of the company's International Cleaning and
Sanitizing operations were $441 million for 1998, up 31 percent over sales of
$335 million in 1997. Sales in 1998 benefited from the acquisition of Gibson at
the end of 1997 and from the addition of a business in Japan during 1998. These
business acquisitions accounted for approximately two-thirds of International's
sales growth for 1998. The Asia Pacific region, International's largest area of
operation, reported sales growth of 56 percent. Excluding business acquisitions,
Asia Pacific sales increased approximately 10 percent and reflected double-digit
growth in Japan and Southeast Asia, modest growth in Australia and a decrease in
sales in New Zealand. Sales to the Asia Pacific food and beverage markets were
up significantly and the region recorded modest growth in sales to institutional
markets. Latin America sales for 1998 increased 8 percent over the prior year.
The region continued to be led by significant double-digit growth in Mexico.
Sales were also up at double-digit rates in Venezuela and in Central America,
while sales growth in Brazil was modest. Latin America recorded good growth in
sales to both the institutional and food and beverage markets. Sales in Canada
increased 9 percent for 1998 and included high single-digit growth in sales to
both the institutional and food and beverage markets. Sales for the company's
operations in Africa decreased 6 percent for 1998 as the company focused on
integrating the various businesses acquired over the last couple of years.
Operating income of the company's United States Cleaning and Sanitizing
operations was $219 million in 1998, an increase of 21 percent over operating
income of $181 million in 1997. Business acquisitions accounted for
approximately 10 percent of the growth in operating income for 1998. Operating
income growth in the core Institutional and Food & Beverage businesses remained
very strong and operating income in the Kay and Professional Products businesses
was also up at double-digit rates. Textile Care and Water Care reported a
decrease in operating income for 1998. The operating income margin for the U.S.
Cleaning and Sanitizing operations improved to 16.8 percent of net sales,
compared with 15.6 percent in 1997. The increased operating income margin
reflected strong sales growth, including a continuation of strong performance in
the core operations and in sales of new products, modest increases in raw
material costs and the benefits of tight cost controls. The company continued to
invest in its sales-and-service force during 1998 and added 255 associates to
its U.S. Cleaning and Sanitizing operations.
United States Other Services reported an increase of 30 percent in
operating income, to $19 million in 1998 from $15 million in the prior year.
Excluding the GCS acquisition, operating income was up 27 percent. The operating
income margin was down slightly, to 11.9 percent of net sales in 1998 from 12.3
percent last year, due in part to the addition of GCS. The increase in operating
income for 1998 was driven by sales growth, productivity improvements and tight
cost controls. 365 sales-and-service associates were added to the U.S. Other
Services operations in 1998, including GCS associates.
International Cleaning and Sanitizing operations reported operating
income of $30 million for 1998, an increase of 32 percent over 1997 operating
income of $23 million. Business acquisitions accounted for approximately 90
percent of the growth in operating income for 1998. Operating income margins
for the International Cleaning and Sanitizing operations were 6.8 percent of
net sales in 1998 compared with 6.7 percent in the prior year. Operating
income reflected significant double-digit growth in Latin America, good
growth in Canada and a decrease in operating income in Africa and in the Asia
Pacific region when the Gibson acquisition is excluded. The company continues
to be cautious about near-term growth in Asia Pacific due to the lingering
uncertain economic conditions in the region. The recent currency devaluation
in Brazil is also expected to slow growth in Latin America during 1999. The
company added 300 sales-and-service associates to its International Cleaning
and Sanitizing operations during 1998, including associates of businesses
acquired.
28
[GRAPH]
Operating income margins of the company's International operations are
substantially less than the operating income margins realized for the company's
U.S. operations. The lower International margins are due to the difference in
scale of International operations, where operating locations are smaller in
size, and to the additional costs of operating in numerous and diverse foreign
jurisdictions. Proportionately larger investments in sales, technical support
and administrative personnel are also necessary in order to facilitate growth of
International operations.
1997 COMPARED WITH 1996
Sales of the company's United States Cleaning and Sanitizing operations
approached $1.2 billion in 1997 and increased 11 percent over sales of $1.0
billion in 1996. Sales reflected strong growth in the core Institutional and
Food & Beverage operations and included benefits from business acquisitions
and significant new product introductions. Business acquisitions accounted
for approximately 25 percent of the sales growth for 1997. Sales of the U.S.
Institutional division increased 10 percent for 1997. Institutional's growth
reflected strong sales in all of its business units, significant new customer
business and competitive gains, continued strong growth in its Ecotemp
program and the successful rollout of its new Keystone product line sold
through partnership with a distributor. Sales of Kay's U.S. operations
increased 6 percent for 1997. Kay was unfavorably affected by a more
competitive quickservice market; however, Kay added another major
quickservice chain customer in 1997 and had good growth in sales to the food
retail market, which it entered in 1996. Sales of Textile Care decreased 3
percent for 1997. Continued plant consolidations, particularly in laundries
serving the healthcare market, increased competitive activity and comparison
against periods that benefited significantly from new product introductions
unfavorably affected Textile Care's sales growth. Professional Products
reported sales growth of 12 percent for 1997. This sales improvement
reflected the annualized effect of the 1996 acquisition of Huntington
Laboratories, good growth in sales to corporate accounts, and the addition of
new products to its commercial mass distribution line. Water Care sales were
down 2 percent for 1997 and reflected the elimination of low margin business,
consolidation of business acquisitions made over the past three years,
integration of disparate product lines, and the refining of sales efforts.
Food & Beverage reported a sales increase of 24 percent for 1997. Food &
Beverage sales growth included the benefits ofChemidyne, a provider of
cleaning and sanitizing products and equipment to the meat, poultry and
processed food markets, which was acquired in August of 1997, and the
annualized effect of the acquisition of Monarch in August of 1996. Excluding
these business acquisitions, Food & Beverage sales growth was 9 percent for
1997 and included growth in sales to all of its markets with double-digit
growth in sales to the food processing and beverage markets.
Sales of the United States Other Services operations were $119 million for
1997, up 10 percent over sales of $108 million in 1996. Pest Elimination
reported 10 percent sales growth for 1997, despite increased competitive
activity. Pest Elimination continued to develop new programs to leverage its
alliances with Ecolab's other operations. Sales of the Jackson business
increased 18 percent for 1997.
International Cleaning and Sanitizing sales were $335 million for 1997 and
increased 10 percent over sales of $306 million in 1996. Sales growth included
the benefits of business acquisitions and significant new product introductions.
Businesses acquired in Canada and Africa in 1997 and the annualization of 1996
Canadian business acquisitions accounted for approximately 50 percent of
International's sales growth for 1997. Asia Pacific had sales growth of 9
percent for 1997 with double-digit growth in Japan, modest growth in New Zealand
and flat results in Australia. Latin America reported sales growth of 9 percent
for 1997. Growth in the Latin America region was led by significant double-digit
growth in Mexico and included good growth in Brazil. Canada had sales growth of
16 percent for 1997, with approximately 70 percent of its growth due to business
acquisitions. International sales results also benefited from businesses
acquired in Central Africa during 1997. Sales in South Africa decreased during
1997, principally due to the elimination of low margin business.
Operating income of the United States Cleaning and Sanitizing operations
reached $181 million in 1997, an increase of 18 percent over operating income of
$153 million in 1996. Business acquisitions accounted for approximately 20
percent of operating income growth for 1997. With the exception of Textile Care,
all of the company's U.S. Cleaning and Sanitizing operations
29
reported increased operating income, with particularly strong growth in the
core Institutional and Food & Beverage operations. The U.S. Cleaning and
Sanitizing operating income margin improved to 15.6 percent of net sales from
14.7 percent in 1996. The improved operating income margin reflected the
benefits of strong core business sales, sales of new products, stable raw
material costs, sales productivity improvements and tight cost controls,
which were partially offset by investments in the sales-and-service force.
United States Other Services operating income was $15 million for 1997, up
23 percent over operating income of $12 million in 1996. The operating income
margin improved from 11.0 percent of net sales in 1996 to 12.3 percent of net
sales in 1997. The improvement in operating income reflected strong sales,
productivity improvements and tight cost controls.
Operating income of the company's International Cleaning and Sanitizing
operations totaled $23 million in 1997, an increase of 18 percent over operating
income of $19 million in 1996. Operating income margins improved to 6.7 percent
of net sales in 1997 compared with 6.3 percent in 1996. Double-digit operating
income growth in Asia Pacific and Canada more than offset a decrease in
operating income in the Latin America region which was principally due to
investments in Brazil and Argentina.
HENKEL-ECOLAB JOINT VENTURE
The company operates cleaning and sanitizing businesses in Europe through a 50
percent economic interest in the Henkel-Ecolab joint venture. The company
includes the operations of Henkel-Ecolab in its financial statements using the
equity method of accounting. The company's equity in earnings of Henkel-Ecolab,
including royalty income and after deduction of intangible amortization, was $16
million in 1998, a 19 percent increase over 1997. When measured in Deutsche
marks, net income of Henkel-Ecolab increased 18 percent for 1998. This
improvement reflected increased sales, the benefits of cost controls and a lower
overall effective income tax rate.
[GRAPH]
Henkel-Ecolab sales, although not consolidated in Ecolab's financial
statements, increased 10 percent when measured in Deutsche marks. Excluding
businesses acquired in the United Kingdom and Germany, sales increased 5 percent
for 1998 with good growth across most divisions and regions. Sales in Germany
continued to be weak due in part to government and private spending cutbacks.
When measured in U.S. dollars, Henkel-Ecolab sales were up 7 percent for 1998.
1997 COMPARED WITH 1996
The company's equity in earnings of Henkel-Ecolab was $13 million for 1997, a 3
percent increase over 1996. Results were negatively affected by the stronger
U.S. dollar. When measured in Deutsche marks, Henkel-Ecolab's net income
increased 11 percent and reflected increased sales, improved gross margins and
lower interest expense. Henkel-Ecolab sales increased 7 percent when measured in
Deutsche marks. When measured in U.S. dollars, sales were negatively affected by
the strengthening U.S. dollar and decreased 7 percent.
CORPORATE
Corporate operating expense was $4 million in 1998 and 1997 and $3 million in
1996. Corporate operating expense includes overhead costs directly related to
the joint venture.
INTEREST AND INCOME TAXES
Net interest expense for 1998 was $22 million, an increase of 72 percent over
net interest expense of $13 million in 1997. This increase was due to debt
incurred at the end of 1997 for the Gibson business acquisition and for
additional borrowings related to other business acquisitions, income tax
payments to settle an outstanding tax issue and share repurchases during 1998.
Net interest expense decreased 12 percent to less than $13 million in 1997,
compared to net interest expense of over $14 million in 1996. This decrease was
principally due to a scheduled debt repayment on the company's 9.68 percent
senior notes and to increased interest income earned on higher average levels of
cash and cash equivalents held during 1997.
The company's effective income tax rate was 42.4 percent for 1998, and
increased from an effective income tax rate of 41.5 percent in 1997. This
increase was principally due to a higher overall effective rate on earnings of
International operations and to the effects of business acquisitions.
International's effective
30
income tax rate varies from year to year with the pre-tax income mix of the
various countries in which the company operates.
The company's effective income tax rate was 41.5 percent for 1997, a modest
increase from the 1996 effective income tax rate of 41.4 percent. This increase
was due to a slightly higher overall effective rate on earnings of International
operations.
YEAR 2000 CONVERSION
The company has completed an assessment of Year 2000 compliance for its critical
operating and application systems located at its St. Paul-based headquarters.
These include customer-oriented systems such as sales and order processing,
billing and collections and associated infrastructure. As a result, the company
has remediated or is replacing portions of its software and hardware. The
company has tested these systems by simulating the occurrence of the Year 2000
in an orchestrated manner. Approximately 95 percent of the systems proved
compliant and the goal is to complete the remaining renovation and testing by
July 1999. The costs related to complete this activity are not expected to
exceed $7.0 million, in both capital and expense, of which approximately $5.5
million has been incurred to date. The company does not consider these costs to
be material to results of operations, financial position, or liquidity.
Each business unit not on the St. Paul system is responsible for developing
and implementing a Year 2000 compliance plan for its critical operating and
application systems (including assessment, remediation, validation and
implementation) subject to the oversight and coordination of a special
corporate-wide Year 2000 management team. The goal was for these business units
to complete all compliance activities by December 31, 1998. The business units
have reported approximately 90 percent achievement of Year 2000 compliance.
Where compliance has not been achieved, appropriate remedial plans have been
adopted. The Year 2000 management team is currently auditing the plans as
presented by the business units to ensure corporate-wide consistency in these
efforts and, to the extent determined necessary, will participate in tests based
on the simulation of Year 2000. The goal is to achieve full compliance by July
1999.
The company has completed an assessment of its dispensing and cleaning
systems which are at customer locations, for date/time sensitivity. The
installed base of such cleaning and dispensing systems which has not been
determined to be Year 2000 compliant is estimated at less than 0.5 percent of
all systems in place at customer sites. The company believes that Year 2000
compliant alternatives have been designed and identified and that the systems
can be retrofitted by July 1999.
The company has completed the assessment stage of analyzing its
manufacturing and building maintenance operations for date/time sensitivity
relative to Year 2000. While some issues have been identified, the company
believes that it can modify its processes or retrofit equipment to become Year
2000 compliant and is in the process of doing so with the intention of
completing the process by July 1999.
The company does not have final estimates for the costs of full Year 2000
remediation other than for St. Paul-based operating and application systems but
it believes the costs, when aggregated with costs for the St. Paul-based
systems, will not be material to the company's results of operations, financial
position, or liquidity. The costs will be funded by operating cash flows.
The company intends to complete its Year 2000 remediation efforts primarily
with in-house resources, but has and will continue to use consultants for
specific tasks.
Failures caused by the Year 2000 of key suppliers and vendors could cause
supply interruptions. Therefore, the company has contacted key suppliers and
vendors in order to determine the status of their Year 2000 remediation plans.
In the company's experience, its key suppliers and vendors are aware of the Year
2000 issue and represent that they have plans for being compliant on a timely
basis. The company intends to continue to monitor progress and may take further
actions to verify the accuracy of vendor and supplier representations.
The company is dependent upon its customers for sales and cash flow and
customers' Year 2000 failures could result in reduced sales, increased inventory
or receivable levels and cash flow reductions. While these events are possible,
the company's customer base is wide and diverse and the company does not, at
this point, believe that customers' Year 2000 failures will have a material
effect on the company. The company will continue to monitor this issue and will
consider further actions as may be warranted in the circumstances.
The company recognizes the need for Year 2000 contingency plans and will be
developing such plans during 1999.
The Henkel-Ecolab joint venture is conducting its own Year 2000 compliance
program.
The company recognizes that issues related to Year 2000 constitute a
material known uncertainty. The company also recognizes the importance of
ensuring its operations will not be adversely affected by Year 2000 issues. It
believes that the processes described above will be effective to manage the
risks
31
associated with Year 2000 compliance. However, there can be no assurance that
the process can be completed on the timetable described above, that it will
be 100 percent effective in identifying all Year 2000 issues, or that the
remediation processes for its own operations will be completely effective.
The issues related to vendors or suppliers are more difficult because their
Year 2000 compliance programs are not within the company's direct control.
These uncertainties relating to Year 2000, however, are ones which the
company believes it shares with companies in similar businesses. Additional
information is found under the company's statement entitled "Forward-Looking
Statements and Risk Factors" which is contained under Part I of the company's
Annual Report on Form 10-K for the year ended December 31, 1998.
The failure to identify and remediate Year 2000 problems or, the failure of
key third parties who do business with the company or governmental/regulatory
agencies to timely remediate their Year 2000 issues could cause system failures
or errors, business interruptions and in a worst case scenario, the inability to
engage in normal business practices for an unknown length of time. Litigation
could also ensue. The effect on the company's results of operations, financial
position, or liquidity could be materially adverse.
EURO CURRENCY CONVERSION
The company's principal activities in Europe are not conducted directly. Rather,
such activities are conducted through its Henkel-Ecolab joint venture.
On January 1, 1999, 11 of the 15 member countries of the European Monetary
Union established fixed conversion rates between their existing currencies and a
new currency, the Euro. During a transition period from January 1, 1999 through
January 1, 2002, the Euro will replace the national currencies that exist in the
participating countries.
The transition to the Euro creates a number of sales, marketing, finance
and accounting issues. These issues are being addressed by the management of the
Henkel-Ecolab joint venture.
While the company will continue to evaluate the impact of the Euro
introduction over time, based on currently available information and the nature
of the company's exposures, the company does not, at this time, believe that the
transition to the Euro will have a material adverse impact on the company's
results of operations, financial position, or liquidity.
FINANCIAL POSITION, CASH FLOWS AND LIQUIDITY
FINANCIAL POSITION
The company has maintained its long-term financial objective of an investment
grade balance sheet since 1993. The company's debt was rated within the "A"
categories by the major rating agencies throughout 1998. Significant changes to
the company's balance sheet during 1998 included the following:
- - The company has added assets and liabilities to its balance sheet during
the last two years through business acquisitions. Other noncurrent assets
reflect significant additions for the GCS business and a cleaning and sanitizing
business acquired in Japan during 1998, and the acquisitions of Gibson and
Chemidyne in 1997. Significant levels of accounts receivable, inventories,
property, plant and equipment and other current liabilities were also added
during 1998 and 1997 as a result of these business acquisitions. During 1998,
net assets (principally accounts receivable, inventories and property, plant and
equipment) related to certain Gibson businesses and duplicate facilities were
reclassified to other current assets and the majority of these net assets were
sold.
[GRAPH]
- - Total debt was $295 million at December 31, 1998, compared with total
debt of $308 million at year-end 1997 and $176 million at year-end 1996. The
increase in total debt during 1997 included $116 million of borrowings
incurred under the company's Multicurrency Credit Agreement to finance the
purchase of the outstanding common shares of Gibson, and $22 million of debt
which was included on Gibson's balance sheet at the time of acquisition.
During 1998, the company replaced long-term debt under its Multicurrency
Credit Agreement with approximately $60 million of
Australian-dollar-denominated debt under a medium-term note agreement and
approximately $30 million of Australian-dollar-denominated commercial paper.
At December 31, 1998, the company had $44 million of U.S.-dollar-denominated
debt outstanding
32
under its Multicurrency Credit Agreement related primarily to business
acquisitions, funding for income tax payments to settle an outstanding tax
issue and share repurchases. As of December 31, 1998, the ratio of total debt
to capitalization was 30 percent compared to 36 percent at year-end 1997 and
25 percent at year-end 1996. The improvement in the total debt to
capitalization ratio for 1998 was principally due to increased shareholders'
equity, which resulted from strong earnings performance and the 1998 gain
from discontinued operations.
- - Working capital levels have remained fairly constant over the last three
year ends. Working capital was $104 million at year-end 1998, compared with
working capital levels of $105 million and $108 million at year-end 1997 and
1996, respectively.
- - Other noncurrent liabilities decreased to $68 million at December 31, 1998
from $125 million at year-end 1997 and $138 million at year-end 1996. During
1998, the company resolved a tax issue related to the disposal of a business in
1992. As a result, the company reduced its noncurrent liabilities through the
payment of income taxes of approximately $39 million and the recognition of a
gain from discontinued operations of $38 million.
CASH FLOWS
For 1998, cash flows from continuing operating activities reached a record $275
million, compared to $235 million in 1997 and $254 million in 1996. Operating
cash flows for 1998 included strong earnings performance and the additional cash
flows from businesses acquired. Operating cash flows for 1997 were unfavorably
affected by a cash outflow due to an $18 million income tax deposit against
outstanding federal income tax issues that had been accrued for in other
noncurrent liabilities, and the reversal of favorable timing of payments which
affected the fourth quarter of 1996. Operating cash flows for 1997 also included
higher dividends from the Henkel-Ecolab joint venture.
Cash used for discontinued operating activities in 1998 reflects income
taxes paid related to a business which was discontinued in 1992.
CASH USED FOR DISCONTINUED OPERATING ACTIVITIES IN 1998 REFLECTS
[GRAPH]
Cash flows used for investing activities included capital expenditures of
$148 million in 1998, $122 million in 1997 and $112 million in 1996. Worldwide
additions of merchandising equipment, primarily cleaning and sanitizing product
dispensers, accounted for approximately 70 percent of each year's capital
expenditures. The company has also expanded its manufacturing facilities over
the last few years through construction and business acquisitions in order to
meet sales requirements more efficiently. The majority of cash flows used in
1998 for businesses acquired were related to the year-end 1997 Gibson
acquisition and a cleaning and sanitizing business acquired in Japan in early
1998. Cash flows used for businesses acquired included Gibson in 1997 and
Huntington and Monarch in 1996. Investing activities cash flows for 1998 also
included the proceeds from the sale of certain Gibson businesses and duplicate
facilities which the company chose not to retain.
Cash used for financing activities included cash flows used for reacquired
shares, cash dividends and net cash used of $9 million to reduce short-term and
long-term debt during 1998.
In 1998, the company increased its annual dividend rate for the seventh
consecutive year. The company has paid dividends on its common stock for 62
consecutive years. Cash dividends declared per share of common stock, by
quarter, for each of the last three years were as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------
1998 $0.095 $0.095 $0.095 $0.105 $0.39
1997 0.08 0.08 0.08 0.095 0.335
1996 0.07 0.07 0.07 0.08 0.29
LIQUIDITY
The company maintains a committed line of credit under the Multicurrency Credit
Agreement for general corporate financing needs. The agreement includes a
competitive bid feature to minimize the cost of the company's borrowings. The
company also has a $200 million shelf registration as an additional source of
liquidity. The company believes its existing cash balances, cash generated by
operating activities, including cash flows from the Henkel-Ecolab joint venture,
available credit, and additional credit available based on a strong financial
position, are more than adequate to fund all of its 1999 requirements for
growth, possible acquisitions, new program investments, scheduled debt
repayments and dividend payments.
33
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31 (thousands,
except per share) 1998 1997 1996
- ------------------------------------------------------------------------------------------
Net Sales $ 1,888,226 $ 1,640,352 $1,490,009
Cost of Sales 851,173 722,084 674,953
Selling, General and Administrative Expenses 775,073 699,764 629,739
------------------------------------------
Operating Income 261,980 218,504 185,317
Interest Expense, Net 21,742 12,637 14,372
------------------------------------------
Income From Continuing Operations Before
Income Taxes and Equity in Earnings
of Henkel-Ecolab 240,238 205,867 170,945
Provision for Income Taxes 101,782 85,345 70,771
Equity in Earnings of Henkel-Ecolab Joint
Venture 16,050 13,433 13,011
------------------------------------------
Income From Continuing Operations 154,506 133,955 113,185
Gain From Discontinued Operations 38,000
------------------------------------------
Net Income $ 192,506 $ 133,955 $ 113,185
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Basic Income Per Common Share
Income From Continuing Operations $ 1.20 $ 1.03 $ 0.88
Gain From Discontinued Operations 0.29
Net Income $ 1.49 $ 1.03 $ 0.88
Diluted Income Per Common Share
Income From Continuing Operations $ 1.15 $ 1.00 $ 0.85
Gain From Discontinued Operations 0.28
Net Income $ 1.44 $ 1.00 $ 0.85
Weighted-Average Common Shares Outstanding
Basic 129,157 129,446 128,991
Diluted 134,047 133,822 132,817
See notes to consolidated financial statements.
34 Ecolab 1998 Annual Report
CONSOLIDATED BALANCE SHEET
December 31 (thousands, except per share) 1998 1997 1996
- ------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 28,425 $ 61,169 $ 69,275
Accounts receivable, net 246,695 246,041 205,026
Inventories 165,627 154,831 122,248
Deferred income taxes 36,256 34,978 29,344
Other current assets 26,511 12,482 9,614
------------------------------------------
Current Assets 503,514 509,501 435,507
Property, Plant and Equipment, Net 420,205 395,562 332,314
Investment in Henkel-Ecolab Joint Venture 253,646 239,879 285,237
Other Assets 293,630 271,357 155,351
------------------------------------------
Total Assets $ 1,470,995 $ 1,416,299 $1,208,409
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt $ 67,991 $ 48,884 $ 27,609
Accounts payable 124,646 130,682 103,803
Compensation and benefits 79,431 74,317 71,533
Income taxes 244 13,506 26,977
Other current liabilities 127,479 137,075 97,849
------------------------------------------
Current Liabilities 399,791 404,464 327,771
Long-Term Debt 227,041 259,384 148,683
Postretirement Health Care and Pension Benefits 85,793 76,109 73,577
Other Liabilities 67,829 124,641 138,415
Shareholders' Equity (common stock, par
value $1.00 per share;
shares outstanding:
1998 - 129,479; 1997 - 129,127;
1996 - 129,600) 690,541 551,701 519,963
------------------------------------------
Total Liabilities and Shareholders' Equity $ 1,470,995 $ 1,416,299 $1,208,409
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
Ecolab 1998 Annual Report 35
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31 (thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 192,506 $ 133,955 $ 113,185
Less: gain from discontinued operations 38,000
------------------------------------------
Income from continuing operations 154,506 133,955 113,185
Adjustments to reconcile income from
continuing operations to cash
provided by continuing operations:
Depreciation 99,276 84,415 75,185
Amortization 22,695 16,464 14,338
Deferred income taxes (2,012) (2,074) (6,878)
Equity in earnings of joint venture (16,050) (13,433) (13,011)
Joint venture royalties and dividends 10,451 25,367 15,769
Other, net 1,526 4,630 1,023
Changes in operating assets and
liabilities:
Accounts receivable 1,352 (21,231) 2,809
Inventories (11,667) (14,395) (6,852)
Other assets (7,631) (10,993) (5,255)
Accounts payable (7,794) 20,876 16,397
Other liabilities 29,877 11,517 47,559
------------------------------------------
Cash provided by continuing operations 274,529 235,098 254,269
Cash used for discontinued operations (38,887)
------------------------------------------
Cash provided by operating activities 235,642 235,098 254,269
------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (147,631) (121,667) (111,518)
Property disposals 7,060 3,424 3,284
Businesses acquired (40,206) (157,234) (54,911)
Sale of Gibson businesses and assets 14,226
Other, net 4,766 (1,240) (1,449)
------------------------------------------
Cash used for investing activities (161,785) (276,717) (164,594)
------------------------------------------
FINANCING ACTIVITIES
Notes payable 24,820 9,280 (42,045)
Long-term debt borrowings 117,740 117,000 75,000
Long-term debt repayments (151,143) (15,210) (35,690)
Reacquired shares (52,984) (60,795) (22,790)
Cash dividends on common stock (49,000) (41,456) (36,096)
Other, net 5,679 26,278 17,088
------------------------------------------
Cash provided by (used for) financing
activities (104,888) 35,097 (44,533)
------------------------------------------
Effect of exchange rate changes on cash (1,713) (1,584) (585)
------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (32,744) (8,106) 44,557
Cash and cash equivalents, beginning of year 61,169 69,275 24,718
------------------------------------------
Cash and cash equivalents, end of year $ 28,425 $ 61,169 $ 69,275
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Bracketed amounts indicate a use of cash.
See notes to consolidated financial statements.
36 Ecolab 1998 Annual Report
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME AND SHAREHOLDERS' EQUITY
Accumulated
Other
Additional Comprehensive
Common Paid-in Retained Deferred Income: Treasury
(thousands) Stock Capital Earnings Compensation Translation Stock Total
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 $ 70,078 $171,765 $325,674 $ (6,484) $ 16,272 $(120,647) $456,658
Net income 113,185 113,185
Foreign currency translation (9,485) (9,485)
--------
Comprehensive income 103,700
Cash dividends on common stock (37,409) (37,409)
Stock options 673 14,824 15,497
Stock awards 522 2,912 (3,638) 1,779 1,575
Reacquired shares (22,790) (22,790)
Amortization 2,732 2,732
--------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 70,751 187,111 404,362 (7,390) 6,787 (141,658) 519,963
Net income 133,955 133,955
Foreign currency translation (35,730) (35,730)
--------
Comprehensive income 98,225
Cash dividends on common stock (43,367) (43,367)
Stock options 648 15,877 16,525
Stock awards 5,093 (5,200) 1,427 1,320
Business acquisitions 12,454 3,946 16,400
Reacquired shares (60,795) (60,795)
Amortization 3,430 3,430
Stock dividend 71,398 (71,398)
--------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 142,797 149,137 494,950 (9,160) (28,943) (197,080) 551,701
Net income 192,506 192,506
Foreign currency translation (937) (937)
--------
Comprehensive income 191,569
Cash dividends on common stock (50,309) (50,309)
Stock options 1,059 16,047 17,106
Stock awards 6,833 (6,163) 1,198 1,868
Business acquisitions 850 26,195 220 27,265
Reacquired shares (52,984) (52,984)
Amortization 4,325 4,325
--------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 $144,706 $198,212 $637,147 $(10,998) $ (29,880) $(248,646) $690,541
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
COMMON STOCK ACTIVITY
1998 1997 1996
---------------------------------------------------------------------------------
Common Treasury Common Treasury Common Treasury
Year ended December 31 (shares) Stock Stock Stock Stock Stock Stock
- -----------------------------------------------------------------------------------------------------------------------
Shares, beginning of year 142,796,652 (13,669,624) 70,750,741 (5,950,518) 70,078,398 (5,376,917)
Stock options 1,058,686 648,085 672,343
Stock awards 206,366 124,440 150,010
Business acquisitions 850,445 33,083 308,343
Reacquired shares (1,796,868) (1,317,077) (723,611)
Stock dividend 71,397,826 (6,834,812)
---------------------------------------------------------------------------------
Shares, end of year 144,705,783 (15,227,043) 142,796,652 (13,669,624) 70,750,741 (5,950,518)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
See notes to consolidated financial statements.
Ecolab 1998 Annual Report 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ONE: NATURE OF BUSINESS
The company is the leading global developer and marketer of premium cleaning
and sanitizing products and services for the hospitality, institutional and
industrial markets. Customers include hotels and restaurants; foodservice,
healthcare and educational facilities; quickservice (fast-food) units;
commercial laundries; light industry; dairy plants and farms; and food and
beverage processors around the world.
TWO: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company and
all majority-owned subsidiaries. The company accounts for its investment in the
Henkel-Ecolab joint venture under the equity method of accounting. International
subsidiaries and the Henkel-Ecolab joint venture are included in the financial
statements on the basis of their November 30 fiscal year ends.
FOREIGN CURRENCY TRANSLATION
Financial position and results of operations of the company's international
subsidiaries and the Henkel-Ecolab joint venture generally are measured using
local currencies as the functional currency. Assets and liabilities of these
operations are translated at the exchange rates in effect at each fiscal year
end. Income statement accounts are translated at the average rates of exchange
prevailing during the year. Translation adjustments arising from the use of
differing exchange rates from period to period are included in accumulated other
comprehensive income in shareholders' equity.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments with a maturity of three
months or less when purchased.
INVENTORY VALUATIONS
Inventories are valued at the lower of cost or market. Domestic chemical
inventory costs are determined on a last-in, first-out (lifo) basis. Lifo
inventories represented 45 percent, 40 percent and 44 percent of consolidated
inventories at year-end 1998, 1997 and 1996, respectively. All other inventory
costs are determined on a first-in, first-out (fifo) basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Merchandising equipment
consists principally of various systems that dispense cleaning and sanitizing
products and low-temperature dishwashing machines. The dispensing systems are
accounted for on a mass asset basis, whereby equipment is capitalized and
depreciated as a group and written off when fully depreciated. Depreciation and
amortization are charged to operations using the straight-line method over the
assets' estimated useful lives.
INTANGIBLE ASSETS
Intangible assets arise principally from business acquisitions and are stated at
cost. The assets are amortized on a straight-line basis over their estimated
economic lives, generally not exceeding 30 years.
LONG-LIVED ASSETS
The company periodically assesses the recoverability of long-lived and
intangible assets based on anticipated future earnings and operating cash flows.
INCOME PER COMMON SHARE
The computations of the basic and diluted per share amounts for the company's
continuing operations were as follows:
(thousands, except per share) 1998 1997 1996
- -----------------------------------------------------------------------------
Income from continuing
operations $ 154,506 $ 133,955 $ 113,185
- -----------------------------------------------------------------------------
Weighted-average common
shares outstanding
Basic (actual shares
outstanding) 129,157 129,446 128,991
Effect of dilutive
stock options 4,890 4,376 3,826
--------------------------------------------
Diluted 134,047 133,822 132,817
- -----------------------------------------------------------------------------
Income from continuing operations
per common share
Basic $ 1.20 $ 1.03 $ 0.88
Diluted $ 1.15 $ 1.00 $ 0.85
Stock options granted in 1998 for approximately 2.2 million shares were not
dilutive and, therefore, were not included in the computation of diluted income
per common share amounts for 1998.
USE OF ESTIMATES
The preparation of the company's financial statements requires management to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from these estimates.
38
THREE: BALANCE SHEET INFORMATION
December 31 (thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
ACCOUNTS RECEIVABLE, NET
Accounts receivable $ 259,588 $ 256,919 $ 214,369
Allowance for doubtful accounts (12,893) (10,878) (9,343)
--------------------------------------------
Total $ 246,695 $ 246,041 $ 205,026
- -----------------------------------------------------------------------------
INVENTORIES
Finished goods $ 73,983 $ 67,823 $ 52,232
Raw materials and parts 93,862 89,716 73,060
Excess of fifo cost over lifo cost (2,218) (2,708) (3,044)
--------------------------------------------
Total $ 165,627 $ 154,831 $ 122,248
- -----------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET
Land $ 12,584 $ 18,184 $ 7,969
Buildings and leaseholds 157,302 145,021 129,781
Machinery and equipment 258,107 232,940 208,704
Merchandising equipment 435,998 379,531 330,277
Construction in progress 11,038 19,862 11,745
--------------------------------------------
875,029 795,538 688,476
Accumulated depreciation
and amortization (454,824) (399,976) (356,162)
--------------------------------------------
Total $ 420,205 $ 395,562 $ 332,314
- -----------------------------------------------------------------------------
OTHER ASSETS
Intangible assets, net $ 236,659 $ 217,120 $ 96,865
Investments in securities 5,000 5,000
Deferred income taxes 27,256 23,444 26,582
Other 29,715 25,793 26,904
--------------------------------------------
Total $ 293,630 $ 271,357 $ 155,351
- -----------------------------------------------------------------------------
SHORT-TERM DEBT
Notes payable $ 52,441 $ 33,440 $ 12,333
Long-term debt, current maturities 15,550 15,444 15,276
--------------------------------------------
Total $ 67,991 $ 48,884 $ 27,609
- -----------------------------------------------------------------------------
LONG-TERM DEBT
7.19% senior notes, due 2006 $ 75,000 $ 75,000 $ 75,000
9.68% senior notes, due
1995-2001 42,857 57,143 71,429
6.00% medium-term notes,
due 2001 62,761
Multicurrency Credit Agreement,
due 2002 44,000 116,450
Other 17,973 26,235 17,530
--------------------------------------------
242,591 274,828 163,959
Long-term debt,
current maturities (15,550) (15,444) (15,276)
--------------------------------------------
Total $ 227,041 $ 259,384 $ 148,683
- -----------------------------------------------------------------------------
The 9.68 percent senior notes include covenants regarding consolidated
shareholders' equity and amounts of certain long-term debt.
The company has a $275 million Multicurrency Credit Agreement with a
consortium of banks. The company may borrow varying amounts from time to time on
a revolving credit basis, with loans denominated in G-7 currencies, Australian
dollars or certain other currencies, if available. The company has the option of
borrowing based on various short-term interest rates. The agreement includes a
covenant regarding the ratio of total debt to capitalization. Amounts
outstanding under the agreement at year-end 1998 were denominated in U.S.
dollars and had an average annual interest rate of 6.7 percent and amounts
outstanding at year-end 1997 were denominated in Australian dollars and had an
average annual interest rate of 5.2 percent.
In August 1998, the company issued approximately $60 million of
Australian-dollar-denominated medium-term notes that mature in November 2001.
The company also issued approximately $30 million of
Australian-dollar-denominated commercial paper (notes payable). The proceeds
from these debt issuances were used to reduce debt under the company's
Multicurrency Credit Agreement.
In October 1996, the company filed a shelf registration with the
Securities and Exchange Commission for the issuance of up to $200 million of
debt securities. The filing is intended to enhance the company's future
financial flexibility in funding general business needs.
As of December 31, the weighted-average interest rate on notes payable was
7.4 percent for 1998, 5.4 percent for 1997 and 5.1 percent for 1996.
As of December 31, 1998, the aggregate annual maturities of long-term debt
for the next five years were: 1999 - $15,550,000; 2000 - $15,714,000; 2001 -
$77,799,000; 2002 - $45,820,000 and 2003 - $10,374,000.
Interest expense was $25,012,000 in 1998, $18,043,000 in 1997 and
$19,084,000 in 1996. Total interest paid was $25,198,000 in 1998, $18,168,000 in
1997 and $16,897,000 in 1996.
Other noncurrent liabilities included income taxes payable of $30 million
at December 31, 1998, $82 million at December 31, 1997 and $100 million at
December 31, 1996. During 1998, the company resolved a tax issue related to the
disposal of a business in 1992. The company paid approximately $39 million and
recognized a gain from discontinued operations of $38 million related to the
settlement of this issue.
39
FOUR: FINANCIAL INSTRUMENTS
FOREIGN CURRENCY AND INTEREST RATE INSTRUMENTS
The company uses hedging and derivative financial instruments to limit financial
risk related to foreign currency exchange rates, interest rates and other market
risks. The company does not hold hedging or derivative financial instruments of
a speculative nature.
The company enters into foreign currency forward and option contracts to
hedge specific foreign currency exposures related to intercompany debt,
Henkel-Ecolab and subsidiary royalties and other intercompany transactions.
These contracts generally expire within one year. Gains and losses on these
contracts are deferred and recognized as part of the specific transactions
hedged. The cash flows from these contracts are classified in the same
category as the transaction hedged in the Consolidated Statement of Cash
Flows.
The company had foreign currency forward exchange contracts with a face
amount denominated primarily in Deutsche marks and totaling approximately $71
million at December 31, 1998, $70 million at December 31, 1997 and $115 million
at December 31, 1996. The unrealized gains and losses on these contracts were
not significant.
At December 31, 1998, the company had entered into an interest rate swap
agreement which is effective November 2001 through November 2004. This agreement
provides for a fixed rate of interest on an amount equal to one-half of the debt
under the company's medium-term notes. The fair value of the company's interest
rate swap agreement was not significant as of December 31, 1998.
FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
The carrying amount and the estimated fair value of other financial instruments
held by the company were:
December 31 (thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Carrying amount
Cash and cash equivalents $ 28,425 $ 61,169 $ 69,275
Long-term investments
in securities 5,000 5,000
Short-term debt 67,991 48,884 27,609
Long-term debt 227,041 259,384 148,683
Fair Value
Long-term debt $ 235,131 $ 266,926 $ 155,558
The carrying amounts of cash equivalents and short-term debt approximate
fair value because of their short maturities.
The fair value of long-term debt is based on quoted market prices for the
same or similar issues.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, a new standard of accounting and
reporting for derivative instruments and hedging activities. The company is
required to adopt the new standard in the first quarter of 2000. Although a full
analysis of all of the requirements of the new standard has not been completed,
the company's use of derivative and hedging financial instruments is limited
and, therefore, the company does not anticipate that the impact of the new
standard will be significant.
FIVE: GAIN FROM DISCONTINUED OPERATIONS
During the third quarter of 1998, the company resolved a tax issue related to
the disposal of a business in 1992. As a result of tax losses on the disposition
of this business, the company's U.S. federal income tax payments were reduced in
1992 through 1995 by a total of approximately $58 million. However, pending
final acceptance of the company's treatment of the losses, no income tax benefit
was recognized for financial reporting purposes. During 1998, an agreement was
reached with the Internal Revenue Service on the final tax treatment for the
losses. This agreement resulted in the payment of approximately $39 million of
income taxes and interest, and the recognition of a gain from discontinued
operations of $38 million or $0.28 per diluted share for the year ended December
31, 1998.
SIX: BUSINESS ACQUISITIONS
GIBSON BUSINESS ACQUISITION
During 1997, the company completed a public tender offer for all of the
outstanding stock of Gibson Chemical Industries Limited (Gibson) located in
Melbourne, Australia. Gibson is a manufacturer and marketer of cleaning and
sanitizing products, primarily for the Australian and New Zealand institutional,
healthcare and industrial markets.
The acquisition was accounted for as a purchase. The purchase price of the
shares and the direct costs of the transaction totaled approximately $130
million and were initially financed through the company's Multicurrency Credit
Agreement. The excess of the purchase price over the net tangible assets
acquired was approximately $88 million and is being amortized on a straight-line
basis over useful lives averaging 25 years. The assets acquired and the
liabilities assumed in the transaction were included in the company's
Consolidated Balance Sheet as of the November 30, 1997 effective date.
The following unaudited pro forma financial information reflects the
combined results of the company and the retained Gibson businesses assuming the
acquisition had occurred at the beginning of 1997. Pro forma adjustments have
been included to
40
give effect to amortization of the excess of the purchase price over the net
tangible assets acquired, interest expense on debt incurred to finance the
acquisition and the related income tax effects. In accordance with the pro
forma adjustment guidelines, cost savings from efficiencies and synergies
have not been reflected in the information shown below.
(thousands, except per share) 1997
- -------------------------------------------------------------------------------
Net sales $ 1,741,006
Income from continuing operations 131,455
Diluted income from continuing operations
per common share $ 0.98
The pro forma results are presented for information purposes only and are
not necessarily indicative of the results of operations which actually would
have resulted had the combination occurred at the beginning of 1997 or of future
results of operations of the consolidated businesses.
OTHER BUSINESS ACQUISITIONS
In December 1997, the company acquired a cleaning and sanitizing business in
Japan from Henkel KGaA. Sales of the acquired business were approximately $10
million in 1997.
In June 1998, the company acquired certain assets of American Fluid
Technologies (AFT), which is based in Hopkins, Minnesota. AFT provides cleaning
and optimization products and services for membrane systems used to process
water for food, beverage, pharmaceutical and industrial applications. AFT has
become part of the company's Food & Beverage operations. AFT sales were
approximately $3 million in 1997.
Also in June 1998, the company acquired certain assets of Puremark
International, a Fairfield, New Jersey-based manufacturer of systems which help
purify and condition water used in foodservice soda fountain dispensers, ice
makers, coffee makers and similar items. The acquired business had sales of
approximately $2 million in 1997, and has become part of the company's
Institutional operations.
In July 1998, the company issued approximately 850,000 shares of common
stock to purchase GCS Service, Inc., a Danbury, Connecticut-based provider of
commercial kitchen equipment repair services. GCS Service, Inc. sales were $48
million in 1997.
In November 1998, the company acquired selected assets of Vulcan Chemical
Technologies, Inc. of Sacramento, California. This business supplies chlorine
dioxide generator technology for the food processing industry and has become
part of the company's Food & Beverage operations. Annual sales of the business
acquired were approximately $6 million in 1997.
These acquisitions have been accounted for as purchases and, accordingly,
the results of their operations have been included in the financial statements
of the company from the dates of acquisition. Net sales and operating income of
these businesses were not significant to the company's consolidated results of
operations, financial position and cash flows.
SEVEN: HENKEL-ECOLAB JOINT VENTURE
The company and Henkel KGaA, Dusseldorf, Germany, each own 50 percent of
Henkel-Ecolab, a joint venture of their respective European institutional and
industrial cleaning and sanitizing businesses. The joint venture's results of
operations and the company's equity in earnings of the joint venture
included:
(thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Joint venture
Net sales $ 904,217 $ 844,689 $ 905,402
Gross profit 500,107 470,698 497,909
Income before income taxes 65,946 63,640 65,091
Net income $ 38,540 $ 33,701 $ 34,808
Ecolab equity in earnings
Ecolab equity in net income $ 19,270 $ 16,851 $ 17,404
Ecolab royalty income from
joint venture, net of
income taxes 4,550 4,583 4,730
Amortization expense for the
excess of cost over the
underlying net assets
of the joint venture (7,770) (8,001) (9,123)
-------------------------------------------
Equity in earnings of
Henkel-Ecolab joint
venture $ 16,050 $ 13,433 $ 13,011
- ----------------------------------------------------------------------------
The company's investment in the Henkel-Ecolab joint venture includes the
unamortized excess of the company's investment over its equity in the joint
venture's net assets. This excess was $142 million at December 31, 1998, and is
being amortized on a straight-line basis over estimated economic useful lives of
up to 30 years.
Condensed balance sheet information for the Henkel-Ecolab joint venture
was:
December 31 (thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Current assets $ 368,604 $ 345,692 $ 425,225
Noncurrent assets 179,188 145,601 142,227
Current liabilities 242,630 224,155 309,599
Noncurrent liabilities $ 82,097 $ 77,303 $ 75,360
41
EIGHT: INCOME TAXES
Income from continuing operations before income taxes and equity in earnings of
Henkel-Ecolab consisted of:
(thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Domestic $ 213,781 $ 173,851 $ 144,888
Foreign 26,457 32,016 26,057
-------------------------------------------
Total $ 240,238 $ 205,867 $ 170,945
- ----------------------------------------------------------------------------
The provision for income taxes consisted of:
(thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Federal and state $ 92,094 $ 76,399 $ 66,868
Foreign 11,700 11,020 10,781
-------------------------------------------
Currently payable 103,794 87,419 77,649
-------------------------------------------
Federal and state (3,596) (3,675) (6,748)
Foreign 1,584 1,601 (130)
-------------------------------------------
Deferred (2,012) (2,074) (6,878)
-------------------------------------------
Provision for income taxes $ 101,782 $ 85,345 $ 70,771
- ----------------------------------------------------------------------------
The company's overall net deferred tax assets (current and noncurrent) were
comprised of the following:
December 31 (thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Deferred tax assets
Postretirement health care
and pension benefits $ 34,940 $ 30,991 $ 29,596
Other accrued liabilities 47,601 41,611 39,151
Loss carryforwards 3,999 3,541 4,780
Other, net 9,821 12,766 8,814
Valuation allowance (1,462) (1,462) (1,462)
-------------------------------------------
Total 94,899 87,447 80,879
-------------------------------------------
Deferred tax liabilities
Property, plant and
equipment basis
differences 26,605 27,606 23,496
Other, net 4,782 1,419 1,457
-------------------------------------------
Total 31,387 29,025 24,953
-------------------------------------------
Net deferred tax assets $ 63,512 $ 58,422 $ 55,926
- ----------------------------------------------------------------------------
A reconciliation of the statutory U.S. federal income tax rate to the
company's effective income tax rate was:
1998 1997 1996
- ----------------------------------------------------------------------------
Statutory U.S. rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 4.3 4.2 4.2
Foreign operations 1.4 0.6 0.5
Other, net 1.7 1.7 1.7
-------------------------------------------
Effective income tax rate 42.4% 41.5% 41.4%
- ----------------------------------------------------------------------------
Cash paid for income taxes was approximately $122 million in 1998, $100
million in 1997 and $72 million in 1996. In 1998, approximately $39 million of
payments resulted from the settlement of a tax issue related to the disposal of
a business in 1992.
As of December 31, 1998, undistributed earnings of international
subsidiaries and the Henkel-Ecolab joint venture of approximately $30 million
and $50 million, respectively, were considered to have been reinvested
indefinitely and, accordingly, the company has not provided U.S. income taxes on
such earnings. If those earnings were remitted to the company, applicable income
taxes would be offset substantially by available foreign tax credits.
NINE: STOCK INCENTIVE AND OPTION PLANS
The company's stock incentive and option plans provide for grants of stock
options and stock awards. Common shares available for grant as of December 31
were 1,835,714 for 1998, 5,274,652 for 1997 and 840,096 for 1996.
Options may be granted to purchase shares of the company's stock at not
less than fair market value at the date of grant. Options generally become
exercisable over periods of up to four years from date of grant and expire
within ten years from date of grant. A summary of stock option activity and
average exercise prices is as follows:
Shares 1998 1997 1996
- ----------------------------------------------------------------------------
Granted 3,342,555 1,031,760 1,266,680
Exercised (1,058,686) (1,295,170) (1,344,686)
Canceled (174,800) (63,416) (102,666)
-------------------------------------------
December 31:
Outstanding 10,989,491 8,880,422 9,207,248
- ----------------------------------------------------------------------------
Exercisable 6,134,840 5,922,150 5,859,968
Average exercise price per share 1998 1997 1996
- ----------------------------------------------------------------------------
Granted $ 43.33 $ 21.72 $ 15.26
Exercised 8.05 8.50 7.65
Canceled 37.47 14.07 12.16
December 31:
Outstanding 21.44 11.92 10.35
Exercisable $ 11.01 $ 9.66 $ 8.75
Information related to stock options outstanding and stock options
exercisable as of December 31, 1998 is as follows:
Options Outstanding
- -----------------------------------------------------------------------------
Weighted- Weighted-
Range of Average Average
Exercise Options Remaining Exercise
Prices Outstanding Contractual Life Price
- -----------------------------------------------------------------------------
$ 5.69-$ 9.31 1,846,329 2.6 years $ 7.23
$10.13-$11.59 2,850,450 5.4 years $11.10
$13.41-$18.91 2,119,525 7.1 years $14.65
$20.63-$33.31 1,938,187 9.1 years $26.68
$49.00 2,235,000 9.2 years $49.00
- -----------------------------------------------------------------------------
42
Options Exercisable
- -----------------------------------------------------------------------------
Weighted-
Range of Average
Exercise Options Exercise
Prices Exercisable Price
- -----------------------------------------------------------------------------
$ 5.69-$ 9.31 1,846,329 $ 7.23
$10.13-$11.59 2,741,250 $11.08
$13.41-$18.91 1,302,005 $14.42
$20.63-$33.31 245,256 $21.88
Stock awards are generally subject to restrictions, including forfeiture in
the event of termination of employment. The value of a stock award at date of
grant is charged to income over the periods during which the restrictions lapse.
The company measures compensation cost for its stock incentive and option
plans using the intrinsic value-based method of accounting.
Had the company used the fair value-based method of accounting to measure
compensation expense for its stock incentive and option plans beginning in 1995
and charged compensation cost against income, over the vesting periods, based on
the fair value of options at the date of grant, income from continuing
operations and the related diluted per common share amounts for 1998, 1997 and
1996 would have been reduced to the following pro forma amounts:
(thousands, except per share) 1998 1997 1996
- -----------------------------------------------------------------------------
Income from continuing operations
As reported $ 154,506 $ 133,955 $ 113,185
Pro forma 150,773 131,763 111,761
Diluted income from continuing
operations per common share
As reported 1.15 1.00 0.85
Pro forma $ 1.12 $ 0.98 $ 0.84
The weighted-average grant-date fair value of options granted in 1998, 1997
and 1996 and the significant assumptions used in determining the underlying fair
value of each option grant on the date of grant utilizing the Black-Scholes
option-pricing model were as follows:
1998 1997 1996
- -----------------------------------------------------------------------------
Weighted-average grant-date fair
value of options granted
Granted at market prices $ 7.65 $ 5.94 $ 4.15
Granted at prices
exceeding market $ 1.78
Assumptions
Risk-free interest rate 5.5% 6.2% 6.2%
Expected life 6 years 6 years 6 years
Expected volatility 17.8% 19.6% 20.9%
Expected dividend yield 1.5% 1.8% 1.9%
TEN: SHAREHOLDERS' EQUITY
During 1998, the company adopted Statement of Financial Accounting Standards No.
130, a new standard for reporting comprehensive income, which includes all
changes in shareholders' equity with the exception of additional investments by
shareholders or distributions to shareholders. The format of the Consolidated
Statement of Comprehensive Income and Shareholders' Equity has been changed to
present information about comprehensive income. For the company, comprehensive
income includes net income and foreign currency translation that is charged or
credited to shareholders' equity.
The company's common stock was split two for one in the form of a 100
percent stock dividend paid January 15, 1998 to shareholders of record on
December 26, 1997. All per share and number of share data have been
retroactively restated to reflect the stock split, except for the Consolidated
Statement of Comprehensive Income and Shareholders' Equity.
Authorized common stock, par value $1.00 per share, was 200 million shares
in 1998 and 1997 and 100 million shares in 1996. Treasury stock is stated at
cost. Dividends declared per share of common stock were $0.39 for 1998, $0.335
for 1997 and $0.29 for 1996.
The company has 15 million shares, without par value, of authorized but
unissued preferred stock.
Each share of outstanding common stock entitles the holder to one-half of a
preferred stock purchase right. A right entitles the holder, upon occurrence of
certain events, to buy one one-hundredth of a share of Series A Junior
Participating Preferred Stock at a purchase price of $115, subject to
adjustment. The rights, however, will not become exercisable unless and until,
among other things, any person or group acquires 15 percent or more of the
outstanding common stock of the company, or the company's board of directors
declares a holder of 10 percent or more of the outstanding common stock to be an
"adverse person" as defined in the rights plan. Upon the occurrence of either of
these events, the rights will become exercisable for common stock of the company
(or in certain cases common stock of an acquiring company) having a market value
of twice the exercise price of a right. The rights provide that the holdings by
Henkel KGaA or its affiliates, subject to compliance by Henkel with certain
conditions, will not cause the rights to become exercisable nor cause Henkel to
be an "adverse person." The rights are redeemable under certain circumstances at
one cent per right and, unless redeemed earlier, will expire on March 11, 2006.
43
TEN: SHAREHOLDERS' EQUITY (CONTINUED)
The company maintains a share repurchase program which is intended to
offset the dilutive effect of shares issued for employee benefit plans. The
company also reacquires shares for general corporate purposes under a
separate program established in 1995. As of December 31, 1998 there were
approximately 3.6 million shares remaining to be purchased under this
program. The company reacquired 1,626,900 shares of its common stock in 1998,
2,561,400 shares in 1997 and 1,260,400 shares in 1996 under these programs
through open and private market purchases. The company anticipates that it
will continue to periodically reacquire shares under its share repurchase
programs.
ELEVEN: RENTALS AND LEASES
The company leases sales and administrative office facilities, distribution
center facilities, automobiles and computers and other equipment under operating
leases. Rental expense under all operating leases was $42,076,000 in 1998,
$38,155,000 in 1997 and $35,071,000 in 1996. As of December 31, 1998, future
minimum payments under operating leases with noncancelable terms in excess of
one year were:
(thousands)
- --------------------------------------------------------------
1999 $ 13,032
2000 8,727
2001 5,932
2002 3,925
2003 2,827
Thereafter 15,420
--------------
Total $ 49,863
TWELVE: RESEARCH EXPENDITURES
Research expenditures that related to the development of new products and
processes, including significant improvements and refinements to existing
products, were $32,815,000 in 1998, $30,420,000 in 1997 and $28,676,000 in 1996.
THIRTEEN: ENVIRONMENTAL COMPLIANCE COSTS
The company and certain subsidiaries are party to various environmental actions
that have arisen in the ordinary course of business. These include 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. The effect of these
actions on the company's financial position, results of operations and cash
flows to date has not been significant. The company is currently participating
in environmental assessments and remediation at a number of locations and
environmental liabilities have been accrued reflecting management's best
estimate of future costs. Potential insurance reimbursements are not
anticipated. While the final resolution of these contingencies could result in
expenses different than current accruals, and therefore have an impact on the
company's consolidated financial results in a future reporting period,
management believes the ultimate outcome will not have a significant effect on
the company's consolidated results of operations, financial position or
liquidity.
FOURTEEN: RETIREMENT PLANS
The company has a noncontributory defined benefit pension plan covering
substantially all of its U.S. employees. Plan benefits are based on years of
service and highest average compensation for five consecutive years of
employment. Various international subsidiaries also have defined benefit pension
plans.
The company provides postretirement health care benefits to substantially
all U.S. employees. The plan is contributory based on years of service and
family status, with retiree contributions adjusted annually. Employees outside
the U.S. are generally covered under government-sponsored programs and the cost
for providing benefits under company plans was not significant.
44
A reconciliation of changes in the benefit obligations and fair value of
assets of its U.S. pension and postretirement health care benefits plans is as
follows:
Pension Benefits Postretirement Benefits
-------------------------------------------------------------------------------------------------
(thousands) 1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation,
beginning of year $ 287,027 $ 240,116 $ 217,008 $ 91,121 $ 71,549 $ 59,447
Service cost 16,336 13,330 12,615 5,668 4,325 3,298
Interest cost 20,563 18,371 16,084 6,382 5,711 4,398
Plan participants' contributions 741 767 578
Changes in assumptions 27,194 22,495 1,189 9,768 6,957 5,675
Actuarial loss (gain) 732 (1,402) (644) (4,431) 5,057 1,615
Benefits paid (8,027) (8,534) (6,136) (2,572) (3,245) (3,462)
Business acquisitions 2,651
-------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 343,825 $ 287,027 $ 240,116 $ 106,677 $ 91,121 $ 71,549
- ----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets,
beginning of year $ 237,304 $ 196,839 $ 167,231 $ 16,764 $ 11,885 $ 9,269
Actual return on plan assets 32,256 28,531 20,389 2,261 1,609 863
Company contributions 17,388 17,453 15,355 3,239 5,748 4,637
Plan participants' contributions 741 767 578
Benefits paid (8,027) (8,534) (6,136) (2,572) (3,245) (3,462)
Business acquisitions 3,015
-------------------------------------------------------------------------------------------------
Fair value of plan assets,
end of year $ 278,921 $ 237,304 $ 196,839 $ 20,433 $ 16,764 $ 11,885
- ----------------------------------------------------------------------------------------------------------------------------------
A reconciliation of the funded status and the actuarial assumptions for
the U.S. pension and postretirement health care benefits plans is as follows:
Pension Benefits Postretirement Benefits
-------------------------------------------------------------------------------------------------
(thousands) 1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Funded status $ (64,904) $ (49,723) $ (43,277) $ (86,244) $ (74,357) $ (59,664)
Unrecognized actuarial loss 59,647 46,028 37,763 21,468 17,280 5,984
Unrecognized prior service cost 16,175 18,056 20,325 (8,546) (9,097) (9,648)
Unrecognized net transition asset (9,120) (10,523) (11,926)
-------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit costs $ 1,798 $ 3,838 $ 2,885 $ (73,322) $ (66,174) $ (63,328)
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted-average actuarial
assumptions
Discount rate for service
and interest cost,
at beginning of year 7.25% 7.75% 7.50% 7.25% 7.75% 7.50%
Projected salary increases 5.1 5.1 5.1
Expected return on assets 9.0 9.0 9.0 9.0 9.0 9.0
Discount rate for year-end
benefit obligation 6.75% 7.25% 7.75% 6.75% 7.25% 7.75%
For postretirement benefit measurement purposes, 8.5 percent (for pre-age
65 retirees) and 6.9 percent (for post-age 65 retirees) annual rates of increase
in the per capita cost of covered health care were assumed for 1999. The rates
were assumed to decrease gradually to 6.5 percent and 5.5 percent, respectively,
at 2001 and remain at that level thereafter. Health care costs which are
eligible for subsidy by the company are limited to a 4 percent annual increase
beginning in 1996 for most employees.
45
FOURTEEN: RETIREMENT PLANS (CONTINUED)
Pension and postretirement health care benefits expense for the company's
U.S. and International operations was:
Pension Benefits Postretirement Benefits
-------------------------------------------------------------------------------------------------
(thousands) 1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Service cost -- employee
benefits earned
during the year $ 16,336 $ 13,330 $ 12,615 $ 5,668 $ 4,325 $ 3,298
Interest cost on benefit
obligation 20,563 18,371 16,084 6,382 5,711 4,398
Expected return on plan assets (20,128) (17,183) (14,983) (1,463) (1,016) (525)
Recognition of net actuarial loss 2,179 1,407 1,634 351 125
Amortization of prior service
cost (benefit) 1,881 1,905 1,905 (551) (551) (551)
Amortization of net transition asset (1,403) (1,403) (1,403)
-------------------------------------------------------------------------------------------------
Total U.S. expense 19,428 16,427 15,852 10,387 8,594 6,620
International expense 1,251 1,112 1,261
-------------------------------------------------------------------------------------------------
Total expense $ 20,679 $ 17,539 $ 17,113 $ 10,387 $ 8,594 $ 6,620
- ----------------------------------------------------------------------------------------------------------------------------------
The company also has noncontributory non-qualified defined benefit plans
which provide for benefits to employees in excess of limits permitted under
its U.S. pension plan. The recorded obligation for these plans was
approximately $12 million at December 31, 1998 and the annual expense for
these plans was approximately $3 million in 1998 and approximately $2 million
in 1997 and 1996.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the company's postretirement health care benefits plan.
A one-percentage point change in the assumed health care cost trend rates
would have the following effects:
1 Percentage Point
-----------------------------
(thousands) Increase Decrease
- -----------------------------------------------------------------------------
Effect on total of postretirement
service and interest cost components $ 440 $ (386)
Effect on postretirement benefit obligation 6,056 (5,350)
SAVINGS PLAN
The company provides a 401(k) savings plan for substantially all U.S. employees.
Employee contributions of up to 6 percent of eligible compensation are matched
50 percent by the company. The company's contributions are invested in Ecolab
common stock and amounted to $7,383,000 in 1998, $7,156,000 in 1997 and
$6,622,000 in 1996.
FIFTEEN: OPERATING SEGMENTS
During 1998, the company adopted Statement of Financial Accounting Standards No.
131. The new standard changes the information the company reports about its
operating segments. Operating segment information for prior years has been
restated to conform to the 1998 presentation.
The company's operating segments have generally similar products and
services and the company is organized to manage its operations geographically.
The company's operating segments have been aggregated into three reportable
segments.
The "United States Cleaning & Sanitizing" segment provides cleaning and
sanitizing products and services to United States markets through its
Institutional, Kay, Textile Care, Professional Products, Water Care and Food &
Beverage operations.
The "United States Other Services" segment includes all other U.S.
operations of the company. This segment provides pest elimination and commercial
dishwashing and equipment services through its Pest Elimination, GCS Service and
Jackson operations.
The company's "International Cleaning & Sanitizing" segment provides
cleaning and sanitizing product and service offerings to international markets
in Asia Pacific, Latin America, Africa, Canada and through its Export
operations.
Information on the customers, markets and products and services of each of
the company's operating segments is included on the inside front cover, in the
Business Overview section of this Annual Report.
The company evaluates the performance of its international operations based
on fixed management currency exchange rates. All other accounting policies of
the reportable segments are consistent with generally accepted accounting
principles and the accounting policies of the company described in Note 2 of
these notes to consolidated financial statements. The profitability of the
company's operating segments is evaluated by management based on operating
income. Intersegment sales and transfers were not significant.
46
Financial information for each of the company's reportable segments is as
follows:
United States Other
---------------------------------------- ----------------------------
International Foreign
Cleaning & Other Total Cleaning & Currency
(thousands) Sanitizing Services United States Sanitizing Translation Corporate Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales
1998 $1,296,797 $160,063 $1,456,860 $440,668 $ (9,302) $1,888,226
1997 1,156,625 119,203 1,275,828 335,337 29,187 1,640,352
1996 1,040,823 107,955 1,148,778 305,938 35,293 1,490,009
Operating income
1998 218,500 19,084 237,584 29,787 (1,044) $ (4,347) 261,980
1997 180,975 14,655 195,630 22,519 4,443 (4,088) 218,504
1996 152,979 11,907 164,886 19,151 4,720 (3,440) 185,317
Depreciation & amortization
1998 87,456 3,145 90,601 25,638 143 5,589 121,971
1997 76,130 2,716 78,846 17,604 278 4,151 100,879
1996 67,793 2,167 69,960 15,968 207 3,388 89,523
Total assets
1998 701,341 77,491 778,832 334,606 6,749 350,808 1,470,995
1997 641,441 36,448 677,889 374,136 20,571 343,703 1,416,299
1996 564,735 31,762 596,497 182,293 20,190 409,429 1,208,409
Capital expenditures
1998 109,976 4,383 114,359 32,182 393 697 147,631
1997 90,914 3,539 94,453 24,821 1,528 865 121,667
1996 $ 86,582 $ 1,707 $ 88,289 $ 22,375 $ 290 $ 564 $ 111,518
Corporate operating expense includes overhead costs directly related to the
Henkel-Ecolab joint venture. Corporate assets are principally cash and cash
equivalents and the company's investment in the Henkel-Ecolab joint venture.
The company has two classes of products and services within its United
States and International Cleaning and Sanitizing operations which comprise 10
percent or more of consolidated net sales. Worldwide sales of warewashing
products were approximately 28 percent, 31 percent and 31 percent of
consolidated net sales in 1998, 1997 and 1996, respectively. Sales of laundry
products and services on a worldwide basis were approximately 13 percent, 14
percent and 14 percent of consolidated net sales in 1998, 1997 and 1996
respectively.
Long-lived assets of the company's United States and International
operations were as follows:
December 31 (thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
United States $ 332,072 $ 294,372 $ 269,065
International 81,046 99,069 53,783
Corporate 3,931 3,812 3,214
Effect of foreign currency
translation 3,156 (1,691) 6,252
----------------------------------------
Consolidated $ 420,205 $ 395,562 $ 332,314
- ----------------------------------------------------------------------------
47
SIXTEEN: QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
(thousands, except per share) Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------
1998
Net sales
United States
Cleaning & Sanitizing $ 303,435 $ 324,347 $ 343,771 $ 325,244 $ 1,296,797
Other Services 29,179 34,907 48,536 47,441 160,063
International Cleaning &
Sanitizing 102,963 109,696 113,560 114,449 440,668
Effect of foreign currency
translation 785 (490) (5,830) (3,767) (9,302)
--------------------------------------------------------------------------
Total 436,362 468,460 500,037 483,367 1,888,226
Cost of sales 195,909 210,116 224,365 220,783 851,173
Selling, general and
administrative expenses 186,733 194,604 196,501 197,235 775,073
--------------------------------------------------------------------------
Operating income
United States
Cleaning & Sanitizing 44,606 52,644 65,128 56,122 218,500
Other Services 2,930 4,725 6,905 4,524 19,084
International Cleaning &
Sanitizing 6,995 7,881 8,935 5,976 29,787
Corporate (910) (1,479) (1,149) (809) (4,347)
Effect of foreign currency
translation 99 (31) (648) (464) (1,044)
--------------------------------------------------------------------------
Total 53,720 63,740 79,171 65,349 261,980
Interest expense, net 5,406 5,400 5,069 5,867 21,742
--------------------------------------------------------------------------
Income from continuing operations
before income taxes and equity
in earnings of Henkel-Ecolab 48,314 58,340 74,102 59,482 240,238
Provision for income taxes 20,289 24,475 31,794 25,224 101,782
Equity in earnings of Henkel-Ecolab
joint venture 2,563 3,824 4,704 4,959 16,050
--------------------------------------------------------------------------
Income from continuing
operations 30,588 37,689 47,012 39,217 154,506
Gain from discontinued
operations 38,000 38,000
--------------------------------------------------------------------------
Net income $ 30,588 $ 37,689 $ 85,012 $ 39,217 $ 192,506
- -----------------------------------------------------------------------------------------------------------
Diluted income per common share
Income from continuing
operations $ 0.23 $ 0.28 $ 0.35 $ 0.29 $ 1.15
Gain from discontinued
operations 0.28 0.28
Net income $ 0.23 $ 0.28 $ 0.63 $ 0.29 $ 1.44
Weighted-average common shares
outstanding
Basic 128,958 128,667 129,573 129,431 129,157
Diluted 133,934 133,803 134,319 134,154 134,047
1997
Net sales
United States
Cleaning & Sanitizing $ 264,623 $ 289,974 $ 306,129 $ 295,899 $ 1,156,625
Other Services 26,080 29,659 32,635 30,829 119,203
International Cleaning &
Sanitizing 74,465 84,406 86,484 89,982 335,337
Effect of foreign currency
translation 8,592 7,771 7,625 5,199 29,187
--------------------------------------------------------------------------
Total 373,760 411,810 432,873 421,909 1,640,352
Cost of sales 165,726 183,322 188,178 184,858 722,084
Selling, general and administrative
expenses 164,604 175,685 177,899 181,576 699,764
--------------------------------------------------------------------------
Operating income
United States
Cleaning & Sanitizing 36,262 44,137 55,665 44,911 180,975
Other Services 2,179 3,047 5,073 4,356 14,655
International Cleaning &
Sanitizing 4,444 5,493 5,938 6,644 22,519
Corporate (881) (1,050) (1,044) (1,113) (4,088)
Effect of foreign currency
translation 1,426 1,176 1,164 677 4,443
--------------------------------------------------------------------------
Total 43,430 52,803 66,796 55,475 218,504
Interest expense, net 2,998 3,054 3,351 3,234 12,637
--------------------------------------------------------------------------
Income before income taxes
and equity in earnings of
Henkel-Ecolab 40,432 49,749 63,445 52,241 205,867
Provision for income taxes 16,577 20,397 26,613 21,758 85,345
Equity in earnings of
Henkel-Ecolab joint venture 2,349 3,542 3,657 3,885 13,433
--------------------------------------------------------------------------
Net income $ 26,204 $ 32,894 $ 40,489 $ 34,368 $ 133,955
- -----------------------------------------------------------------------------------------------------------
Diluted net income per common
share $ 0.20 $ 0.25 $ 0.30 $ 0.26 $ 1.00
Weighted-average common shares
outstanding
Basic 129,548 129,779 129,462 128,993 129,446
Diluted 133,520 133,963 133,930 133,740 133,822
- -----------------------------------------------------------------------------------------------------------
48
MANAGEMENTS AND ACCOUNTANTS' REPORTS
REPORT OF MANAGEMENT
Management is responsible for the integrity and objectivity of the consolidated
financial statements. The statements have been prepared in accordance with
generally accepted accounting principles and, accordingly, include certain
amounts based on management's best estimates and judgments.
To meet its responsibility, management has established and maintains a
system of internal controls that provides reasonable assurance regarding the
integrity and reliability of the financial statements and the protection of
assets from unauthorized use or disposition. These systems are supported by
qualified personnel, by an appropriate division of responsibilities and by an
internal audit function. There are limits inherent in any system of internal
controls since the cost of monitoring such systems should not exceed the desired
benefit. Management believes that the company's system of internal controls is
effective and provides an appropriate cost/benefit balance.
The Board of Directors, acting through its Audit Committee composed solely
of outside directors, is responsible for determining that management fulfills
its responsibilities in the preparation of financial statements and maintains
financial control of operations. The Audit Committee recommends to the Board of
Directors the appointment of the company's independent accountants, subject to
ratification by the shareholders. It meets regularly with management, the
internal auditors and the independent accountants.
The independent accountants provide an objective, independent review as to
management's discharge of its responsibilities insofar as they relate to the
fair presentation of the consolidated financial statements. Their report is
presented separately.
/s/Allan L. Schuman
- -------------------
Allan L. Schuman
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/Michael E. Shannon
- ---------------------
Michael E. Shannon
CHAIRMAN OF THE BOARD,
CHIEF FINANCIAL AND ADMINISTRATIVE OFFICER
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors
Ecolab Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, comprehensive income and shareholders' equity
and cash flows present fairly, in all material respects, the financial position
of Ecolab Inc. as of December 31, 1998, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of Ecolab Inc.'s management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
FEBRUARY 22, 1999
SAINT PAUL, MINNESOTA
SUMMARY OPERATING AND FINANCIAL DATA
December 31 (thousands, except per share) 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
>
OPERATIONS
Net sales
United States $ 1,456,860 $ 1,275,828 $ 1,148,778 $ 1,030,126
International (at average rates of currency
exchange during the year) 431,366 364,524 341,231 310,755
Europe (at average rates of currency
exchange during the year)
- -----------------------------------------------------------------------------------------------------------------------
Total 1,888,226 1,640,352 1,490,009 1,340,881
Cost of sales 851,173 722,084 674,953 603,167
Selling, general and administrative expenses 775,073 699,764 629,739 575,028
Merger costs and nonrecurring expenses
- -----------------------------------------------------------------------------------------------------------------------
Operating income 261,980 218,504 185,317 162,686
Interest expense, net 21,742 12,637 14,372 11,505
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income
taxes and equity in earnings of Henkel-Ecolab 240,238 205,867 170,945 151,181
Provision for income taxes 101,782 85,345 70,771 59,694
Equity in earnings of Henkel-Ecolab joint venture 16,050 13,433 13,011 7,702
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 154,506 133,955 113,185 99,189
Income (loss) from discontinued operations 38,000
Extraordinary loss and changes in accounting principles
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) 192,506 133,955 113,185 99,189
Preferred stock dividends
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) to common shareholders, as reported 192,506 133,955 113,185 99,189
Pro forma adjustments
- -----------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) to common shareholders $ 192,506 $ 133,955 $ 113,185 $ 99,189
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) per common share, as reported
Basic -- continuing operations $ 1.20 $ 1.03 $ 0.88 $ 0.75
Basic -- net income (loss) 1.49 1.03 0.88 0.75
Diluted -- continuing operations 1.15 1.00 0.85 0.73
Diluted -- net income (loss) 1.44 1.00 0.85 0.73
Pro forma income (loss) per common share
Basic -- continuing operations 1.20 1.03 0.88 0.75
Basic -- net income (loss) 1.49 1.03 0.88 0.75
Diluted -- continuing operations 1.15 1.00 0.85 0.73
Diluted -- net income (loss) $ 1.44 $ 1.00 $ 0.85 $ 0.73
Weighted-average common shares outstanding -- basic 129,157 129,446 128,991 132,193
Weighted-average common shares outstanding -- diluted 134,047 133,822 132,817 134,956
SELECTED INCOME STATEMENT RATIOS
Gross profit 54.9% 56.0% 54.7% 55.0%
Selling, general and administrative expenses 41.0 42.7 42.3 42.9
Operating income 13.9 13.3 12.4 12.1
Income from continuing operations before income taxes 12.7 12.6 11.5 11.3
Income from continuing operations 8.2 8.2 7.6 7.4
Effective income tax rate 42.4% 41.5% 41.4% 39.5%
FINANCIAL POSITION
Current assets $ 503,514 $ 509,501 $ 435,507 $ 358,072
Property, plant and equipment, net 420,205 395,562 332,314 292,937
Investment in Henkel-Ecolab joint venture 253,646 239,879 285,237 302,298
Other assets 293,630 271,357 155,351 107,573
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 1,470,995 $ 1,416,299 $ 1,208,409 $ 1,060,880
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Current liabilities $ 399,791 $ 404,464 $ 327,771 $ 310,538
Long-term debt 227,041 259,384 148,683 89,402
Postretirement health care and pension benefits 85,793 76,109 73,577 70,666
Other liabilities 67,829 124,641 138,415 133,616
Shareholders' equity 690,541 551,701 519,963 456,658
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,470,995 $ 1,416,299 $ 1,208,409 $ 1,060,880
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
SELECTED CASH FLOW INFORMATION
Cash provided by operating activities $ 235,642 $ 235,098 $ 254,269 $ 166,463
Depreciation and amortization 121,971 100,879 89,523 76,279
Capital expenditures 147,631 121,667 111,518 109,894
EBITDA from continuing operations 383,951 319,383 274,840 238,965
Cash dividends declared per common share $ 0.39 $ 0.335 $ 0.29 $ 0.2575
SELECTED FINANCIAL MEASURES/OTHER
Total debt and preferred stock $ 295,032 $ 308,268 $ 176,292 $ 161,049
Total debt and preferred stock to capitalization 29.9% 35.8% 25.3% 26.1%
Book value per common share $ 5.33 $ 4.27 $ 4.01 $ 3.53
Return on beginning equity 28.0% 25.8% 24.8% 21.5%
Dividends/diluted net income per common share 33.9% 33.5% 34.1% 35.3%
Annual common stock price range $38.00-26.13 $28.00-18.13 $19.75-14.56 $15.88-10.00
Number of employees 12,007 10,210 9,573 9,026
- -----------------------------------------------------------------------------------------------------------------------
50
December 31 (thousands, except per share) 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net sales
United States $ 942,070 $ 867,415 $ 816,405 $ 757,564
International (at average rates of currency
exchange during the year) 265,544 234,981 241,229 201,738
Europe (at average rates of currency
exchange during the year)
- -----------------------------------------------------------------------------------------------------------------------
Total 1,207,614 1,102,396 1,057,634 959,302
Cost of sales 533,143 491,306 485,206 447,356
Selling, general and administrative expenses 529,507 481,639 446,814 393,700
Merger costs and nonrecurring expenses 8,000
- -----------------------------------------------------------------------------------------------------------------------
Operating income 136,964 129,451 125,614 118,246
Interest expense, net 12,909 21,384 35,334 30,489
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income
taxes and equity in earnings of Henkel-Ecolab 124,055 108,067 90,280 87,757
Provision for income taxes 50,444 33,422 27,392 29,091
Equity in earnings of Henkel-Ecolab joint venture 10,951 8,127 8,600 4,573
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 84,562 82,772 71,488 63,239
Income (loss) from discontinued operations (274,693)
Extraordinary loss and changes in accounting principles 715 (24,560)
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) 84,562 83,487 71,488 (236,014)
Preferred stock dividends (4,064)
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) to common shareholders, as reported 84,562 83,487 71,488 (240,078)
Pro forma adjustments 5,902 (2,667) (2,797) (2,933)
- -----------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) to common shareholders $ 90,464 $ 80,820 $ 68,691 $ (243,011)
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) per common share, as reported
Basic -- continuing operations $ 0.63 $ 0.61 $ 0.53 $ 0.51
Basic -- net income (loss) 0.63 0.62 0.53 (2.05)
Diluted -- continuing operations 0.62 0.60 0.52 0.50
Diluted -- net income (loss) 0.62 0.61 0.52 (2.05)
Pro forma income (loss) per common share
Basic -- continuing operations 0.67 0.59 0.51 0.48
Basic -- net income (loss) 0.67 0.60 0.51 (2.08)
Diluted -- continuing operations 0.66 0.58 0.50 0.48
Diluted -- net income (loss) $ 0.66 $ 0.59 $ 0.50 $ (2.08)
Weighted-average common shares outstanding -- basic 135,100 135,056 134,408 117,050
Weighted-average common shares outstanding -- diluted 137,306 137,421 136,227 118,178
SELECTED INCOME STATEMENT RATIOS
Gross profit 55.9% 55.4% 54.1% 53.4%
Selling, general and administrative expenses 44.6 43.7 42.2 41.1
Operating income 11.3 11.7 11.9 12.3
Income from continuing operations before income taxes 10.3 9.8 8.5 9.1
Income from continuing operations 7.0 7.5 6.8 6.6
Effective income tax rate 40.7% 30.9% 30.3% 33.1%
FINANCIAL POSITION
Current assets $ 401,179 $ 311,051 $ 264,512 $ 293,053
Property, plant and equipment, net 246,191 219,268 207,183 198,086
Investment in Henkel-Ecolab joint venture 284,570 255,804 289,034 296,292
Other assets 88,416 105,607 98,135 152,857
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 1,020,356 $ 891,730 $ 858,864 $ 940,288
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Current liabilities $ 253,665 $ 201,498 $ 192,023 $ 240,219
Long-term debt 105,393 131,861 215,963 325,492
Postretirement health care and pension benefits 70,882 72,647 63,393 56,427
Other liabilities 128,608 93,917 29,179 11,002
Shareholders' equity 461,808 391,807 358,306 307,148
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,020,356 $ 891,730 $ 858,864 $ 940,288
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
SELECTED CASH FLOW INFORMATION
Cash provided by operating activities $ 169,346 $ 175,674 $ 120,217 $ 128,999
Depreciation and amortization 66,869 60,609 60,443 55,653
Capital expenditures 88,457 68,321 59,904 53,752
EBITDA from continuing operations 203,833 190,060 186,057 173,899
Cash dividends declared per common share $ 0.2275 $ 0.1975 $ 0.17875 $ 0.175
SELECTED FINANCIAL MEASURES/OTHER
Total debt and preferred stock $ 147,213 $ 151,281 $ 236,695 $ 407,221
Total debt and preferred stock to capitalization 24.2% 27.9% 39.8% 57.0%
Book value per common share $ 3.41 $ 2.90 $ 2.66 $ 2.30
Return on beginning equity 21.6% 23.3% 23.3% 13.6%
Dividends/diluted net income per common share 36.7% 32.4% 34.4% 42.7%
Annual common stock price range $11.75-9.63 $11.91-9.07 $9.57-6.66 $8.38-4.88
Number of employees 8,206 7,822 7,601 7,428
- -----------------------------------------------------------------------------------------------------------------------
December 31 (thousands, except per share) 1990 1989 1988
- -------------------------------------------------------------------------------------------------------
OPERATIONS
Net sales
United States $ 712,579 $ 646,895 $ 589,715
International (at average rates of currency
exchange during the year) 184,220 179,705 159,374
Europe (at average rates of currency
exchange during the year) 150,809 122,871 122,250
- -----------------------------------------------------------------------------------------------------------------------
Total 1,047,608 949,471 871,339
Cost of sales 495,086 461,256 433,734
Selling, general and administrative expenses 425,983 383,512 337,707
Merger costs and nonrecurring expenses 12,978
- -----------------------------------------------------------------------------------------------------------------------
Operating income 126,539 91,725 99,898
Interest expense, net 28,321 31,628 31,097
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income
taxes and equity in earnings of Henkel-Ecolab 98,218 60,097 68,801
Provision for income taxes 32,494 19,411 21,285
Equity in earnings of Henkel-Ecolab joint venture
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 65,724 40,686 47,516
Income (loss) from discontinued operations (4,408) (29,379) 4,238
Extraordinary loss and changes in accounting principles
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) 61,316 11,307 51,754
Preferred stock dividends (7,700) (429)
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) to common shareholders, as reported 53,616 10,878 51,754
Pro forma adjustments (2,956) (3,196) (2,622)
- -----------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) to common shareholders $ 50,660 $ 7,682 $ 49,132
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) per common share, as reported
Basic -- continuing operations $ 0.56 $ 0.34 $ 0.41
Basic -- net income (loss) 0.52 0.09 0.44
Diluted -- continuing operations 0.56 0.34 0.40
Diluted -- net income (loss) 0.51 0.09 0.43
Pro forma income (loss) per common share
Basic -- continuing operations 0.53 0.31 0.38
Basic -- net income (loss) 0.49 0.06 0.42
Diluted -- continuing operations 0.53 0.31 0.38
Diluted -- net income (loss) $ 0.49 $ 0.06 $ 0.41
Weighted-average common shares outstanding -- basic 103,298 118,516 117,188
Weighted-average common shares outstanding -- diluted 104,258 120,196 119,586
SELECTED INCOME STATEMENT RATIOS
Gross profit 52.7% 51.4% 50.2%
Selling, general and administrative expenses 40.6 41.7 38.7
Operating income 12.1 9.7 11.5
Income from continuing operations before income taxes 9.4 6.3 7.9
Income from continuing operations 6.3 4.3 5.5
Effective income tax rate 33.1% 32.3% 30.9%
FINANCIAL POSITION
Current assets $ 216,612 $ 370,875 $ 265,291
Property, plant and equipment, net 187,735 203,056 194,509
Investment in Henkel-Ecolab joint venture
Other assets 480,911 420,115 444,827
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 885,258 $ 994,046 $ 904,627
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Current liabilities $ 177,643 $ 201,585 $ 181,758
Long-term debt 208,147 228,632 257,500
Postretirement health care and pension benefits 8,742 12,859 12,768
Other liabilities 138,792 135,343 11,590
Shareholders' equity 351,934 415,627 441,011
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 885,258 $ 994,046 $ 904,627
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
SELECTED CASH FLOW INFORMATION
Cash provided by operating activities $ 154,208 $ 123,215 $ 113,514
Depreciation and amortization 61,024 53,113 48,282
Capital expenditures 58,069 54,430 62,125
EBITDA from continuing operations 187,563 144,838 148,180
Cash dividends declared per common share $ 0.1675 $ 0.165 $ 0.16
SELECTED FINANCIAL MEASURES/OTHER
Total debt and preferred stock $ 353,886 $ 382,764 $ 300,448
Total debt and preferred stock to capitalization 50.1% 47.9% 40.5%
Book value per common share $ 3.41 $ 3.55 $ 3.73
Return on beginning equity 12.9% 2.5% 12.9%
Dividends/diluted net income per common share 32.8% 183.3% 37.2%
Annual common stock price range $7.78-4.16 $8.94-6.22 $6.94-5.32
Number of employees 8,106 7,845 7,684
- -----------------------------------------------------------------------------------------------------------------------
Pro forma results for 1994 and prior years reflect adjustments to
eliminate unusual items associated with Ecolab's merger with Kay Chemical
Company in December 1994. All per share, shares outstanding and market price
data reflect the two-for-one stock splits declared in 1997 and 1998. Other
assets includes net assets of Econo Europe and discontinued operations prior
to 1992. Other liabilities includes $110 million of convertible preferred
stock at year-end 1989 and 1990. The rates of return on beginning equity and
dividends diluted net income per common share exclude the change in
accounting principle and the loss on the ChemLawn divestiture in 1991. Number
of employees excludes ChemLawn operations.
APPENDIX: GRAPHIC AND IMAGE MATERIAL
PAGE
NUMBER DESCRIPTION
- ------ -----------
24 Bar graph illustrating total return to shareholders (share
appreciation plus dividends) for the last five fiscal years
as follows:
1998 31.9%
1997 49.0%
1996 27.3%
1995 46.1%
1994 (5.3)%
24 Bar graph illustrating return on beginning equity for the
last five fiscal years as follows:
1998 28.0%
1997 25.8%
1996 24.8%
1995 21.5%
1994 21.6%
27 Pie chart illustrating the United States Cleaning and
Sanitizing business mix for 1998 as well as consolidated
net sales (in millions) for the last three fiscal years
as follows:
1998 Institutional mix 60%
1998 Food & Beverage mix 18%
1998 Professional Products mix 8%
1998 Kay mix 7%
1998 Textile Care mix 5%
1998 Water Care mix 2%
1998 sales $1,297
1997 sales $1,157
1996 sales $1,041
28 Pie chart illustrating United States Other Services
consolidated business mix for 1998 as well as consolidated
net sales (in millions) for the last three fiscal years as
follows:
1998 Pest Elimination mix 77%
1998 GCS Service mix 15%
1998 Jackson mix 8%
1998 sales $160
1997 sales $119
1996 sales $108
PAGE
NUMBER DESCRIPTION
- ------ -----------
29 Pie chart illustrating the International Cleaning and
Sanitizing business mix for 1998 as well as consolidated
net sales (in millions) for the last three fiscal years
as follows:
1998 Asia Pacific mix 48%
1998 Latin America mix 20%
1998 Canada mix 19%
1998 Africa, Export and Other mix 13%
1998 sales $441
1997 sales $335
1996 sales $306
30 Pie chart illustrating the Henkel-Ecolab Joint Venture
business mix for 1998 as well as Ecolab's equity in
earnings of Henkel-Ecolab (in millions) for the last
three fiscal years as follows:
1998 Institutional mix 36%
1998 Professional Hygiene mix 26%
1998 Food & Beverage P3 mix 25%
1998 Textile Hygiene (Textile Care) mix 13%
1998 Henkel-Ecolab equity $16
1997 Henkel-Ecolab equity $13
1996 Henkel-Ecolab equity $13
32 Pie chart illustrating mix of shareholders' equity
and total debt for 1998 as well as total debt to
capitalization ratio for the last three fiscal years
as follows:
1998 Shareholders' Equity mix 70%
1998 Total Debt mix 30%
1998 debt/equity ratio 30%
1997 debt/equity ratio 36%
1996 debt/equity ratio 25%
33 Bar graph illustrating cash from continuing operating
activities (in millions) for the last five fiscal years
as follows:
1998 $275
1997 $235
1996 $254
1995 $163
1994 $154