UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                       to

 

Commission File No. 1-9328

ECOLAB INC.

(Exact name of registrant as specified in its charter)

 

370 Wabasha Street N., St. Paul, Minnesota  55102

(Address of principal executive offices)  (Zip Code)

651-293-2233

(Registrant’s telephone number, including area code)

(Not Applicable)

(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x

No  o

 

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

Large Accelerated Filer  x

Accelerated Filer  o

Non-Accelerated Filer  o

 

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

Yes  o

No  x

 

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

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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

		Third Quarter Ended
		September 30
(amounts in thousands, except per share)		2006			2005
		(unaudited)
Net sales		$	1,278,855		$	1,164,773
Cost of sales		625,554			572,862
Selling, general and administrative expenses		471,937			429,464
Operating income		181,364			162,447
Interest expense, net		11,219			11,529
Income before income taxes		170,145			150,918
Provision for income taxes		59,786			52,960
Net income		$	110,359		$	97,958
Net income per common share
Basic		$	0.44		$	0.38
Diluted		$	0.43		$	0.38
Dividends declared per common share		$	0.1000		$	0.0875
Weighted-average common shares outstanding
Basic		251,573			255,817
Diluted		256,657			259,911

 

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

2

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ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

		Nine Months Ended
		September 30
(amounts in thousands, except per share)		2006			2005
		(unaudited)
Net sales		$	3,624,814		$	3,393,317
Cost of sales		1,786,048			1,670,903
Selling, general and administrative expenses		1,372,818			1,303,728
Operating income		465,948			418,686
Interest expense, net		32,561			34,903
Income before income taxes		433,387			383,783
Provision for income taxes		151,963			134,998
Net income		$	281,424		$	248,785
Net income per common share
Basic		$	1.11		$	0.97
Diluted		$	1.09		$	0.96
Dividends declared per common share		$	0.3000		$	0.2625
Weighted-average common shares outstanding
Basic		252,422			255,854
Diluted		257,183			260,099

 

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

3

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ECOLAB INC.

CONSOLIDATED BALANCE SHEET

		September 30			December 31
(amounts in thousands)		2006			2005
		(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	54,192		$	104,378
Short-term investments		—			125,063
Accounts receivable (net of allowance of $37,751 at September 30, 2006 and $38,851 at December 31, 2005)		866,214			743,520
Inventories		354,225			325,574
Deferred income taxes		65,097			65,880
Other current assets		66,563			57,251
Total current assets		1,406,291			1,421,666
Property, plant and equipment, net		874,793			835,503
Goodwill		1,022,119			937,019
Other intangible assets, net		222,749			202,936
Other assets, net		480,924			399,504
Total assets		$	4,006,876		$	3,796,628

 

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

(Continued)

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ECOLAB INC.

CONSOLIDATED BALANCE SHEET (Continued)

		September 30			December 31
(amounts in thousands, except per share)		2006			2005
		(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Short-term debt		$	190,008		$	226,927
Accounts payable		310,597			277,635
Compensation and benefits		213,490			214,131
Income taxes		29,178			39,583
Other current liabilities		402,698			361,081
Total current liabilities		1,145,971			1,119,357
Long-term debt		542,948			519,374
Postretirement health care and pension benefits		342,079			302,048
Other liabilities		212,759			206,639
Shareholders’ equity (common stock, par value $1.00 per share; shares outstanding: September 30, 2006 – 251,153; December 31, 2005 – 254,143)		1,763,119			1,649,210
Total liabilities and shareholders’ equity		$	4,006,876		$	3,796,628

 

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

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ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

		Nine Months Ended
		September 30
(amounts in thousands)		2006			2005
		(unaudited)
OPERATING ACTIVITIES
Net income		$	281,424		$	248,785
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		177,329			168,863
Amortization		24,551			25,766
Deferred income taxes		505			(1,799		)
Share-based compensation expense		23,717			25,920
Excess tax benefits from share-based payment arrangements		(15,116		)	(9,197		)
Other, net		399			902
Changes in operating assets and liabilities:
Accounts receivable		(81,214		)	(86,802		)
Inventories		(14,820		)	(5,153		)
Other assets		(68,355		)	(4,554		)
Accounts payable		27,998			1,076
Other liabilities		47,759			57,866
Cash provided by operating activities		$	404,177		$	421,673

 

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

(Continued)

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ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

		Nine Months Ended
		September 30
(amounts in thousands)		2006			2005
		(unaudited)
INVESTING ACTIVITIES
Capital expenditures		$	(209,173	)	$	(193,484	)
Property disposals		19,353			7,378
Capitalized software expenditures		(25,599		)	(5,432		)
Businesses acquired and investments in affiliates, net of cash acquired		(64,429		)	(28,106		)
Sale of businesses and assets		1,802			1,441
Proceeds from sales and maturities of short-term investments		125,063			—
Cash used for investing activities		(152,983		)	(218,203		)
FINANCING ACTIVITIES
Net issuances of notes payable		25,410			38,811
Long-term debt borrowings		—			3,200
Long-term debt repayments		(84,273		)	(3,494		)
Reacquired shares		(250,812		)	(126,633		)
Cash dividends on common stock		(76,026		)	(67,411		)
Exercise of employee stock options		68,669			38,217
Excess tax benefits from share-based payment arrangements		15,116			9,197
Other, net		(651		)	—
Cash used for financing activities		(302,567		)	(108,113		)
Effect of exchange rate changes on cash		1,187			(1,280		)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(50,186		)	94,077
Cash and cash equivalents, beginning of period		104,378			71,231
Cash and cash equivalents, end of period		$	54,192		$	165,308

 

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

7

ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       Consolidated Financial Information

The unaudited consolidated financial information for the third quarter and nine-month periods ended September 30, 2006 and 2005, reflect, in the opinion of management, all adjustments necessary for a fair statement of the financial position, results of operations and cash flows of Ecolab Inc. (“the company”) for the interim periods presented. The financial results for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet data as of December 31, 2005 were derived from the audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America.  The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto incorporated in the company’s Annual Report on Form 10-K for the year ended December 31, 2005.

With respect to the unaudited financial information of the company for the third quarters and nine months ended September 30, 2006 and 2005 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards, which do not require an audit, for a review of such information. Therefore, their separate report dated October 20, 2006 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied.  PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the “Act”) for their report on the unaudited financial information because that report is not a report or a part of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

2.       Share-Based Compensation

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

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

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.       Share-Based Compensation  (continued)

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

3.       Selected Balance Sheet and Statement of Income Information

		September 30			December 31
(amounts in thousands)		2006			2005
		(unaudited)
Inventories
Finished goods		$	191,491		$	177,574
Raw materials and parts		177,271			161,488
Excess of fifo cost over lifo cost		(14,537		)	(13,488		)
Total		$	354,225		$	325,574
Other intangible assets, gross
Customer relationships		$	207,660		$	176,778
Intellectual property		46,809			41,887
Trademarks		72,451			63,933
Other intangibles		12,323			7,459
		339,243			290,057
Accumulated amortization
Customer relationships		(73,265		)	(55,328		)
Intellectual property		(12,903		)	(9,901		)
Trademarks		(22,213		)	(16,523		)
Other intangibles		(8,113		)	(5,369		)
Other intangible assets, net		$	222,749		$	202,936
Shareholders’ equity
Common stock		$	321,860		$	318,603
Additional paid-in capital		833,588			727,428
Retained earnings		1,924,982			1,719,201
Accumulated other comprehensive income		50,512			9,764
Treasury stock		(1,367,823		)	(1,125,786		)
Total		$	1,763,119		$	1,649,210

 

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

4.       Financial Instruments

In February 2002, the company issued euro 300 million of 5.375 percent euronotes, due February 2007. The company has designated this euronote debt as a hedge of existing foreign currency exposures related to net investments the company has in certain European subsidiaries.  Accordingly, the transaction gains and losses on the euronotes which are designated and are effective as hedges of the company’s net investments have been included as a component of the cumulative translation account.  Total transaction gains and losses related to the euronotes charged to shareholders’ equity were losses of $0.1 million and $1.6 million for the third quarter of 2006 and 2005, respectively, and losses of $31.3 million and gains of $28.4 million for the first nine months of 2006 and 2005, respectively.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.       Comprehensive Income

Comprehensive income was as follows:

		Third Quarter Ended						Nine Months Ended
		September 30						September 30
(amounts in thousands)		2006			2005			2006			2005
		(unaudited)						(unaudited)
Net income		$	110,359		$	97,958		$	281,424		$	248,785
Foreign currency translation		943			4,441			43,581			(43,891		)
Derivative instruments		2,402			(241		)	(2,833		)	2,905
Comprehensive income		$	113,704		$	102,158		$	322,172		$	207,799

 

6.       Business Acquisitions and Investments

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

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

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

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.     Business Acquisitions and Investments (continued)

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

		Third Quarter Ended						Nine Months Ended
(unaudited)		September 30						September 30
(amounts in thousands)		2006			2005			2006			2005
Net tangible assets (liabilities) acquired		$	(9,419	)	$	(2,796	)	$	(6,797	)	$	(165	)
Identifiable intangible assets		24,582			—			24,726			8,537
Goodwill		42,458			2,999			46,500			19,734
Purchase price		$	57,621		$	203		$	64,429		$	28,106

 

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

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.     Business Acquisitions and Investments (continued)

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

		United States
(unaudited)		Cleaning &			Other
(thousands)		Sanitizing			Services			Total			International			Consolidated
Balance as of December 31, 2005		$	190,317		$	48,929		$	239,246		$	697,773		$	937,019
Goodwill acquired during quarter		5			—			5			533			538
Foreign currency translation		—			—			—			7,245			7,245
Balance as of March 31, 2006		190,322			48,929			239,251			705,551			944,802
Goodwill acquired during quarter		2,514			990			3,504			—			3,504
Goodwill allocated to business dispositions		—			—			—			(423		)	(423		)
Foreign currency translation		—			—			—			29,501			29,501
Balance as of June 30, 2006		192,836			49,919			242,755			734,629			977,384
Goodwill acquired during quarter		7,030			—			7,030			35,428			42,458
Foreign currency translation		—			—			—			2,277			2,277
Balance as of September 30, 2006		$	199,866		$	49,919		$	249,785		$	772,334		$	1,022,119

 

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

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.       Net Income Per Common Share

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

		Third Quarter Ended						Nine Months Ended
(amounts in thousands,		September 30						September 30
except per share)		2006			2005			2006			2005
		(unaudited)						(unaudited)
Net income		$	110,359		$	97,958		$	281,424		$	248,785
Weighted-average common shares outstanding
Basic		251,573			255,817			252,422			255,854
Effect of dilutive stock options and awards		5,084			4,094			4,761			4,245
Diluted		256,657			259,911			257,183			260,099
Net income per common share
Basic		$	0.44		$	0.38		$	1.11		$	0.97
Diluted		$	0.43		$	0.38		$	1.09		$	0.96

 

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

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

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.       Pension and Postretirement Plans

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

														U.S.
								International						Postretirement
(unaudited)		U.S. Pension Benefits						Pension Benefits						Health Care Benefits
(amounts in thousands)		2006			2005			2006			2005			2006			2005
Service cost		$	9,505		$	9,737		$	4,579		$	3,677		$	778		$	772
Interest cost on benefit obligation		10,144			9,467			4,851			4,764			2,248			2,215
Expected return on plan assets		(15,527		)	(13,279		)	(3,341		)	(3,147		)	(614		)	(443		)
Amortization of prior service cost (benefit)		385			385			44			42			(1,609		)	(1,415		)
Amortization of unrecognized transition (asset)/obligation		—			(176		)	4			79			—			—
Recognition of net actuarial loss		3,697			2,507			828			411			2,070			1,434
Total expense		$	8,204		$	8,641		$	6,965		$	5,826		$	2,873		$	2,563

 

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

														U.S.
								International						Postretirement
(unaudited)		U.S. Pension Benefits						Pension Benefits						Health Care Benefits
(amounts in thousands)		2006			2005			2006			2005			2006			2005
Service cost		$	28,515		$	29,211		$	13,462		$	10,234		$	2,334		$	2,314
Interest cost on benefit obligation		30,432			28,400			14,228			14,104			6,744			6,645
Expected return on plan assets		(46,581		)	(39,836		)	(9,815		)	(9,020		)	(1,842		)	(1,328		)
Amortization of prior service cost (benefit)		1,155			1,154			134			32			(4,827		)	(4,245		)
Amortization of unrecognized transition (asset)/obligation		—			(527		)	14			254			—			—
Recognition of net actuarial loss		11,091			7,520			2,430			1,325			6,210			4,301
Total expense		$	24,612		$	25,922		$	20,453		$	16,929		$	8,619		$	7,687

 

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.   Pension and Postretirement Plans (continued)

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

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

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9.     Operating Segments

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

		Third Quarter Ended						Nine Months Ended
		September 30						September 30
(amounts in thousands)		2006			2005			2006			2005
		(unaudited)						(unaudited)
Net Sales
United States
Cleaning & Sanitizing		$	561,707		$	510,476		$	1,619,631		$	1,474,463
Other Services		108,297			98,315			306,432			280,453
Total		670,004			608,791			1,926,063			1,754,916
International		584,273			550,197			1,656,161			1,570,648
Effect of foreign currency translation		24,578			5,785			42,590			67,753
Consolidated		$	1,278,855		$	1,164,773		$	3,624,814		$	3,393,317
Operating Income
United States
Cleaning & Sanitizing		$	98,976		$	85,933		$	264,619		$	230,198
Other Services		12,466			11,124			31,100			28,945
Total		111,442			97,057			295,719			259,143
International		66,221			64,212			164,604			153,146
Effect of foreign currency translation		3,701			1,178			5,625			6,397
Consolidated		$	181,364		$	162,447		$	465,948		$	418,686

 

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

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.   Goodwill and Other Intangible Assets

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

Goodwill and other intangible assets arise principally from business acquisitions.  Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired.  Other intangible assets include primarily customer relationships, trademarks, patents and other technology. Other intangible assets are amortized on a straight-line basis over their estimated economic lives.  The weighted-average useful life of other intangible assets was 14 years as of September 30, 2006 and 2005.

The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the company in each reporting period.  Total amortization expense related to other intangible assets during the third quarter ended September 30, 2006 and 2005 was approximately $5.9 million and $5.8 million, respectively. Total amortization expense related to other intangible assets during the nine months ended September 30, 2006 and 2005 was approximately $17.0 million and $17.8 million, respectively.   As of September 30, 2006, future estimated amortization expense related to amortizable other identifiable intangible assets will be:

(unaudited)
(amounts in thousands)
2006 (Remainder: three-month period)		$	6,700
2007		26,400
2008		25,800
2009		24,600
2010		23,700

 

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11.   New Accounting Pronouncements

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

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

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

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

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Directors

Ecolab Inc.

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

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2005, and the related consolidated statements of income, of comprehensive income and changes in shareholders’ equity, and of cash flows for the year then ended, management’s assessment of the effectiveness of the company’s internal control over financial reporting as of December 31, 2005 and the effectiveness of the company’s internal control over financial reporting as of December 31, 2005; and in our report dated February 24, 2006, we expressed unqualified opinions thereon (our opinion contained an explanatory paragraph stating the company changed the manner in which it accounts for share-based compensation as of October 1, 2005).  The consolidated financial statements and management’s assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein.  In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
October 20, 2006

 

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis provides information that we believe is useful in understanding our operating results, cash flows and financial condition.  The discussion should be read in conjunction with the unaudited consolidated financial information and related notes included in this Form 10-Q.

The following discussion contains various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the statement entitled “Forward-Looking Statements” located at the end of Part I of this report.

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

Overview for the Quarter Ended September 30, 2006

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

Sales Performance

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

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

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

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Performance

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

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

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

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

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

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

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

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

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

Sales for each of our reportable segments are as follows:

		Third Quarter Ended						Nine Months Ended
		September 30						September 30
(amounts in thousands)		2006			2005			2006			2005
		(unaudited)						(unaudited)
Net Sales
United States
Cleaning & Sanitizing		$	561,707		$	510,476		$	1,619,631		$	1,474,463
Other Services		108,297			98,315			306,432			280,453
Total		670,004			608,791			1,926,063			1,754,916
International		584,273			550,197			1,656,161			1,570,648
Effect of foreign currency translation		24,578			5,785			42,590			67,753
Consolidated		$	1,278,855		$	1,164,773		$	3,624,814		$	3,393,317

 

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

		Percent Change
		Third Quarter		Nine Months
Net Sales
United States Cleaning & Sanitizing
Institutional		13	%	11	%
Kay		2		9
Textile Care		11		7
Professional Products		9		1
Healthcare		9		4
Water Care Services		4		7
Vehicle Care		2		5
Food & Beverage		8		8
Total United States Cleaning & Sanitizing		10	%	10	%
United States Other Services
Pest Elimination		15	%	13	%
GCS Service		1		1
Total United States Other Services		10	%	9	%
Total United States		10	%	10	%
International (management rates)
Europe		5	%	4	%
Asia Pacific		7		7
Latin America		13		12
Canada		9		8
Total International (management rates)		6	%	5	%
Consolidated (management rates)		8	%	8	%
Consolidated (public rates)		10	%	7	%

 

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