SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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For the Fiscal Year Ended December 31, 2004 |
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Commission File No. 1-9328 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE
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For the transition period from to
ECOLAB INC.
(Exact name of registrant as specified in its charter)
Delaware |
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41-0231510 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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370 Wabasha Street North, St. Paul, Minnesota |
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55102 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code: (651) 293-2233
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
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Name of Each Exchange on Which Registered |
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Common Stock, $1.00 par value |
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New York
Stock Exchange, Inc.
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Preferred Stock Purchase Rights |
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New York
Stock Exchange, Inc.
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES ý NO o
Aggregate market value of voting and non-voting common equity held by non-affiliates of registrant on June 30, 2004: $8,123,709,643 (see Item 12, under Part III hereof), based on a closing price of registrants Common Stock of $31.70 per share.
The number of shares of registrants Common Stock, par value $1.00 per share, outstanding as of February 28, 2005: 256,756,115 shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrants Annual Report to Stockholders for the year ended December 31, 2004 (hereinafter referred to as Annual Report) are incorporated by reference into Parts I and II.
2. Portions of the registrants Proxy Statement for the Annual Meeting of Stockholders to be held May 6, 2005 and to be filed within 120 days after the registrants fiscal year ended December 31, 2004 (hereinafter referred to as Proxy Statement) are incorporated by reference into Part III.
TABLE OF CONTENTS
Except where the context otherwise requires, references in this Form 10-K to either Ecolab, Company, we and our are to Ecolab Inc. and its subsidiaries, collectively.
Forward-Looking Statements and Risk Factors
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In this Report on Form 10-K (including Managements Discussion and Analysis of Financial Condition and Results of Operations incorporated into Item 7 hereof), Management discusses expectations regarding our future performance, including items such as anticipated business progress and expansion, business acquisitions, debt repayments, share repurchases, susceptibility to changes in technology, global economic conditions and liquidity requirements. Without limiting the foregoing, words or phrases such as will likely result, are expected to, will continue, is anticipated, we believe, estimate, project (including the negative or variations thereof) or similar terminology, generally identify forward-looking statements. Additionally, we may refer to this section of the Form 10-K to identify risk factors related to other forward looking statements made in oral presentations, including telephone conferences and/or webcasts open to the public.
Forward-looking statements generally represent challenging goals for us, and are based on current expectations and are subject to certain risks and uncertainties. We caution that undue reliance should not be placed on such forward-looking statements which speak only as of the date made. In order to comply with the terms of the safe harbor, we identify for investors important factors which could affect our financial performance and could cause actual results for future periods to differ materially from the anticipated results or other expectations expressed in the forward-looking statements.
Risks and uncertainties that may affect operating results and business performance include:
the vitality of the foodservice, hospitality, travel, health care and food processing industries;
restraints on pricing flexibility due to competitive factors, customer or vendor consolidations, and existing contractual obligations;
changes in oil or raw material prices or unavailability of adequate and reasonably priced raw materials or substitutes therefor;
the occurrence of capacity constraints or the loss of a key supplier or the inability to obtain or renew supply agreements on favorable terms;
the effect of future acquisitions or divestitures or other corporate transactions;
our ability to achieve plans for past acquisitions;
the costs and effects of complying with: (i) laws and regulations relating to the environment and to the manufacture, storage, distribution, efficacy and labeling of our products, and (ii) changes in tax, fiscal, governmental and other regulatory policies;
economic factors such as the worldwide economy, interest rates and currency movements including, in particular, our exposure to foreign currency risk;
the occurrence of (a) litigation or claims, (b) the loss or insolvency of a major customer or distributor, (c) war (including acts of terrorism or hostilities which impact our markets), (d) natural or manmade disasters, or (e) severe weather conditions or public health epidemics affecting the foodservice, hospitality and travel industries;
loss of, or changes in, executive management;
our ability to continue product introductions or reformulations and technological innovations; and
other uncertainties or risks reported from time to time in our reports to the Securities and Exchange Commission.
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In addition, we note that our stock price can be affected by fluctuations in quarterly earnings. There can be no assurances that our earnings levels will meet investors expectations. We undertake no duty to update our Forward-Looking Statements.
Item 1(a) General Development of Business .
Ecolab was incorporated as a Delaware corporation in 1924. Our fiscal year is the calendar year ending December 31.
Effective January 2004, we reorganized our businesses serving the janitorial and health care industries by splitting the Professional Products group into two divisions, Professional Products and Healthcare.
During 2004 and early 2005, we continued to make business acquisitions to broaden our product and service offerings, in line with our Circle the Customer Circle the Globe strategy. These transactions included the following:
In January 2004, we expanded our Pest Elimination business into France by acquiring Nigiko, a Paris-based business.
In February 2004, we acquired Daydots International, a provider of food safety products.
In May 2004, we purchased Elimco (Proprietary) Limited, a Pest Elimination business located in South Africa.
In June 2004, we purchased certain business lines of VIC International Corporation, a stone floor cleaner business.
In July 2004, we acquired Alcide Corporation, a producer of biocidal and sanitation products used primarily in the dairy, meat and poultry industries.
In January 2005, we acquired Associated Chemicals & Services, Inc. (a/k/a Midland Research), a water treatment business.
During 2004, we disposed of certain non-strategic businesses that did not fit our long-term global strategy.
In April 2004, we sold a grease management product line, Facilitec, which provided kitchen hood and duct cleaning services.
In September 2004, we divested assets of Hygiene Services, a small New Zealand based business.
Additional details regarding certain of the above acquisition and disposition transactions are found in Note 6 located on pages 39 and 40 of the Annual Report, and incorporated into Item 8 hereof.
Item 1(b) Financial Information About Operating Segments .
The financial information about reportable segments appearing under the heading Operating Segments in Note 16, located on pages 48 and 49 of the Annual Report, is incorporated herein by reference.
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Item 1(c) Narrative Description of Business .
General: Ecolab develops and markets premium products and services for the hospitality, foodservice, institutional and industrial markets. We provide cleaning, sanitizing, pest elimination, maintenance and repair products, systems and services primarily to hotels and restaurants, healthcare and educational facilities, quick-service (fast-food and other convenience store) units, grocery stores, commercial and institutional laundries, light industry, dairy plants and farms, food and beverage processors, pharmaceutical and cosmetics facilities and the vehicle wash industry. A strong commitment to customer support is a distinguishing characteristic of our business. Additional information on our business philosophy is found below under the heading Additional Information Competition of this Item 1(c).
The following description of business is based upon our three reportable segments (segments) as reported in our consolidated financial statements. However, we pursue a Circle the Customer Circle the Globe strategy by providing products, systems and services which serve our customer base, and do so on a global basis to meet the needs of our customers various operations around the world. Therefore, one customer may utilize the services of all three of the segments and there is a degree of interdependence among the operating segments. Revenues of our International segment include sales outside the United States by our Kay and Pest Elimination businesses.
United States Cleaning & Sanitizing Segment
The United States Cleaning & Sanitizing segment is comprised of eight divisions which provide cleaning and sanitizing services to United States markets.
Institutional : Our Institutional Division is our largest division and sells specialized cleaners and sanitizers for washing dishes, glassware, flatware, foodservice utensils and kitchen equipment (warewashing), for on-premise laundries (typically used by hotel and health care customers) and for general housekeeping functions, as well as food safety products and equipment, dishwasher racks and related kitchen sundries to the foodservice, lodging, educational and healthcare industries and water filters to the foodservice industry. The Institutional Division also provides pool and spa treatment programs for commercial and hospitality customers. The Institutional Division also manufactures and markets various chemical dispensing device systems, which are made available to customers, to dispense our cleaners and sanitizers. In addition, the Institutional Division markets a program comprised of energy-efficient dishwashing machines, detergents, rinse additives and sanitizers, including full machine maintenance.
We believe we are the leading supplier of chemical warewashing products to institutions in the United States.
The Institutional Division sells its products and services primarily through Company-employed field sales-and-service personnel. However, to a significant degree, we also utilize independent, third-party foodservice distributors to market and sell our products to smaller accounts or accounts which purchase through food distributors. We provide the same service to accounts supplied by food distributors as to direct customers.
Kay : Our Kay Division (which consists of certain wholly-owned subsidiaries of Ecolab Inc.) supplies chemical cleaning and sanitizing products primarily to the quick-service restaurant industry. This includes traditional fast-food restaurants but also other retail locations where fast food is prepared and served, such as convenience stores, airport and shopping center kiosks and other public venues typically serviced by national or regional restaurant chains. Kay also sells cleaning and sanitizing products to the food retail (i.e., grocery store) industry. Kays products include specialty
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and general purpose hard surface cleaners, degreasers, sanitizers, polishes, hand care products and assorted cleaning tools. Products are sold under the Kay brand or the customers private label. In addition, Kay supports its product sales with employee training programs and technical support designed to meet the special needs of its customers. Kays customized cleaning and sanitation programs are designed to reduce labor costs and product usage while increasing sanitation levels, cleaning performance, equipment life and safety levels.
Kay employs a direct field sales force which primarily calls upon national and regional quick-service restaurant and food retail chains and franchisees, although the sales are made to distributors who supply the chain or franchisees units.
We believe that our Kay Division is the leading supplier of chemical cleaning and sanitizing products to the traditional quick-service restaurant industry in the United States. While Kays customer base has been growing, Kays business is largely dependent upon a limited number of major quick-service restaurant chains and franchisees. Kay continues to seek growth and diversification opportunities. For example, in 2004 Kay launched a cleaning program for theaters.
Food & Beverage : Our Food & Beverage Division addresses cleaning and sanitation at the start of the food chain to facilitate the production of products for human consumption. The Division provides detergents, cleaners, sanitizers, lubricants and animal health products, as well as cleaning systems, electronic dispensers and chemical injectors for the application of chemical products, primarily to dairy plants, dairy farms, breweries, soft-drink bottling plants, and meat, poultry and other food processors as well as to pharmaceutical and cosmetic plants. The Food & Beverage Division also designs, engineers and installs CIP (clean-in-place) process control systems and facility cleaning systems for its customer base. Farm products are sold through dealers and independent, third-party distributors, while plant products are sold primarily by our field sales personnel.
We believe that we are one of the leading suppliers of cleaning and sanitizing products to the dairy plant, dairy farm, food, meat and poultry, and beverage/brewery processor industries in the United States.
Textile Care : Our Textile Care Division provides chemical laundry products and proprietary dispensing systems, as well as related services, to large industrial and commercial laundries. Typically these customers process a minimum of 1,000,000 pounds of linen each year and include free-standing laundry plants used by institutions such as hotels, restaurants and healthcare facilities as well as industrial and textile rental laundries. The Division also serves the shirt laundry market, typically comprised of smaller laundry units. Products and services include laundry cleaning and specialty products and related dispensing equipment, which are marketed primarily through a Company-employed sales force and, to a lesser extent, through independent, third-party distributors. The Divisions programs are designed to meet our customers need for exceptional cleaning, while extending the useful life of linen and reducing the customers overall operating cost.
Professional Products: The Professional Products Division provides a broad range of janitorial offerings to the janitorial market and building service contractors in the United States. Professional Products proprietary janitorial products (detergents, general purpose cleaners, carpet care, furniture polishes, disinfectants, floor care products, hand soaps and odor counteractants) are sold primarily through a network of independent, third-party distributors, supported by a Company-employed sales force.
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Healthcare : Formerly part of our Professional Products business, our Healthcare Division provides infection prevention and healthcare offerings to hospital, acute care and long-term care markets in the United States. Healthcares proprietary infection prevention/healthcare products (skin care, disinfectants and instrument cleaners) are sold primarily under the Huntington brand name.
Vehicle Care: Our Vehicle Care Division provides vehicle appearance products which include soaps, polishes, wheel and tire treatments and air fresheners. Products are sold to vehicle rental, fleet and consumer car wash and detail operations. Brand names utilized by the Vehicle Care Division include Blue Coral Ò , Black Magic Ò and Rain-X Ò .
Water Care Services : Water Care Services provides water and wastewater treatment products, services and systems for commercial/institutional customers (full service hotels, cruise ships, hospitals, healthcare, commercial real estate, government, and commercial laundries), food and beverage customers (dairies, meat, poultry, food processing and beverage) and other light industry. Water Care Services works closely with the our Institutional, Textile Care and Food & Beverage Divisions to offer customized water care strategies to their accounts that have water care needs, primarily to treat water used in heating and cooling systems and manufacturing processes and to treat wastewater.
United States Other Services Segment
The United States Other Services segment is comprised of two business units: Pest Elimination and GCS Service. In general, these businesses provide service or equipment which can augment or extend our product offering to our business customers as a part of our Circle the Customer approach.
Pest Elimination : Our Pest Elimination Division provides services for the detection, elimination and prevention of pests to restaurants, food and beverage processors, educational and healthcare facilities, hotels, quick-service restaurant and grocery operations and other institutional and commercial customers. These services are sold and performed by Company-employed sales and service personnel. In addition, through our EcoSure Food Safety Management business, the Division provides customized on-site evaluations, training and quality assurance services to foodservice operations.
GCS Service : GCS Service provides commercial equipment repair services and kitchen parts, as well as parts distribution. GCS Service offers these services to restaurant and other foodservice operations, while providing warranty service for equipment manufacturers. In addition, GCS Service offers parts at a wholesale level to repair services companies and end users.
International Segment
We conduct business in approximately 70 countries outside of the United States through wholly-owned subsidiaries or, in the case of Israel and Venezuela, through majority-owned joint ventures with local partners. In other countries, selected products are sold by our export operations to distributors, agents or licensees, although the volume of those sales is not significant in terms of our overall revenues. Our largest International operations are located in Europe, Asia Pacific, Latin America and Canada, with smaller operations in Africa and the Middle East.
In general, the businesses conducted internationally are similar to those conducted in the United States, although we customize our products and services to meet unique local requirements. The businesses which are similar to the United States Institutional and Food & Beverage businesses are the largest businesses in our International operations. They are conducted in virtually all our
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International locations and, compared to the United States, constitute a larger portion of the overall business. Kay also has sales in a number of International locations. A significant portion of Kays international sales are to international units of United States-based quick-service restaurant chains. Consequently, a substantial portion of Kays international sales are made either to domestic or internationally-located third-party distributors who serve these chains.
Through acquisitions we expanded our Pest Elimination business to Brazil in 2001, the United Kingdom and the Republic of Ireland in September 2002, to France and South Africa in 2004, and to Chile in early 2005. In addition, we entered the healthcare market in the United Kingdom by acquiring a supplier of hospital hygiene products in December 2002.
Our other businesses are conducted less extensively in our International locations. However, in general, most of the principal businesses conducted in the United States are operated in Canada.
International businesses are subject to the usual risks of foreign operations, including possible changes in trade and foreign investment laws, tax laws, currency exchange rates and economic and political conditions abroad. The profitability of our International operations has historically been lower than the profitability of our businesses in the United States. This has been due to the smaller scale of the International operations as well as the additional cost of operating in numerous and diverse foreign jurisdictions.
Additional Information
Competition : Our business units have two significant classes of competitors. First, each business unit competes with a small number of large companies selling directly or through distributors on a national or international scale. Second, all of our business units have numerous smaller regional or local competitors which focus on more limited geographies, product lines and/or end-user segments.
Our objective is to achieve a significant presence in each of our business markets. In general, competition is based on service, product performance and price. We believe we compete principally by providing superior value and differentiated products. Value is provided by state-of-the-art cleaning, sanitation and maintenance products and systems coupled with high customer support standards and continuing dedication to customer satisfaction. This is made possible, in part, by our significant on-going investment in training and technology and by our standard practice of advising customers on means to lower operating costs and comply with safety, environmental and sanitation regulations. In addition, we emphasize our ability to uniformly provide a variety of related premium cleaning and sanitation services to our customers and to provide that level of service to multiple locations of chain customer organizations worldwide. This approach is succinctly stated in our Circle the Customer - Circle the Globe strategy which is discussed above in this Item 1(c) under the heading General.
Sales and Service : Products, systems and services are primarily marketed in domestic and international markets by Company-trained sales and service personnel who also advise and assist our customers in the proper and efficient use of the products and systems in order to meet a full range of cleaning and sanitation needs. Independent, third-party distributors are utilized in several markets, as described in the business unit descriptions found under the discussion of the three reportable segments above.
Number of Employees : We have approximately 21,300 employees.
Customers and Classes of Service : We believe that our business is not materially dependent upon a single customer although, as described above in this Item 1(c) under the description of the Kay business, Kay is largely dependent upon a limited number of national and international quick-service
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chains and franchisees. Additionally, although we have a diverse customer base and no customer or distributor constitutes ten percent or more of our consolidated revenues, we do have customers and independent, third-party distributors, the loss of which could have a material negative effect on results of operations for the affected earnings periods; however, we consider it unlikely that such an event would have a material adverse impact on our financial position. No material part of our business is subject to renegotiation or termination at the election of a governmental unit. We sell two classes of products which each constitute 10 percent or more of our sales. Sales of warewashing products in 2004, 2003 and 2002 approximated 22, 23 and 23 percent, respectively, of our consolidated net sales. In addition, through our Institutional and Textile Care businesses, we sell laundry products and services to a broad range of laundry customers. Sales of laundry products and services in 2004, 2003 and 2002 approximated 10, 10 and 11 percent, respectively, of our consolidated net sales.
Patents and Trademarks : We own and license a number of patents, trademarks and other intellectual property, including through a license agreement with Henkel KGaA. While we have an active program to protect our intellectual property by filing for patents or trademarks, and pursuing legal action, when appropriate, to prevent infringement, we do not believe that our overall business is materially dependent on any individual patent or trademark.
Seasonality : Overall our business does not have a significant degree of seasonality.
Working Capital : We have invested in the past, and will continue to invest in the future, in merchandising equipment consisting primarily of systems used by customers to dispense our cleaning and sanitizing products. Otherwise, we have no unusual working capital requirements. The investment in merchandising equipment is discussed under the heading Cash Flows located on page 28 of the Annual Report and incorporated into Item 7 hereof.
Manufacturing and Distribution : We manufacture most of our products and related equipment in Company-owned manufacturing facilities. Some products are also produced for us by third-party contract manufacturers, including Henkel KGaA. Other products and equipment are purchased from third-party suppliers. Additional information on product/equipment sourcing is found in the segment discussions above and additional information on our manufacturing facilities is located beginning at page 14 hereof under the heading Properties.
Deliveries to customers are made from our manufacturing plants and a network of distribution centers and public warehouses. We use common carriers, our own delivery vehicles, and distributors. Additional information on our plant and distribution facilities is located beginning at page 14 hereof under the heading Properties.
Raw Materials : Raw materials purchased for use in manufacturing our products are inorganic chemicals, including phosphates, silicates, alkalies, salts and organic chemicals, including surfactants and solvents. These materials are generally purchased on an annual contract basis from a diverse group of chemical manufacturers. When practical, global sourcing is used so that purchasing or production locations can be shifted to control product costs at globally competitive levels. Pesticides used by our Pest Elimination Division are purchased as finished products under contract or purchase order from the producers or their distributors. We also purchase packaging materials for our manufactured products and components for our specialized cleaning equipment and systems. Most raw materials, or substitutes for those materials, used by us, with the exception of a few specialized chemicals which we manufacture, are available from several suppliers.
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Research and Development : Our research and development program consists principally of devising and testing new products, processes, techniques and equipment, improving the efficiency of existing ones, improving service program content, and evaluating the environmental compatibility of products. Key disciplines include analytical and formulation chemistry, microbiology, process and packaging engineering and product dispensing technology. Substantially all of our principal products have been developed by our research, development and engineering personnel. At times, technology has also been licensed from third parties to develop offerings. Note 13, entitled Research Expenditures located on page 44 of the Annual Report, is incorporated herein by reference.
Environmental and Regulatory Considerations : Our businesses are subject to various legislative enactments and regulations relating to the protection of the environment and public health. While we cooperate with governmental authorities and take commercially practicable measures to meet regulatory requirements and avoid or limit environmental effects, some risks are inherent in our businesses. Among the risks are costs associated with transporting and managing hazardous substances, waste disposal or plant site clean-up, fines and penalties if we are found to be in violation of law, as well as modifications, disruptions or discontinuation of certain operations or types of operations including product recalls. Additionally, although we are not currently aware of any such circumstances, there can be no assurance that future legislation or enforcement policies will not have a material adverse effect on our consolidated results of operations, financial condition or liquidity. Environmental and regulatory matters most significant to us are discussed below.
Ingredient Legislation : Various laws and regulations have been enacted by state, local and foreign jurisdictions pertaining to the sale of products which contain phosphorous, volatile organic compounds, or other ingredients that may impact human health or the environment. Under California Proposition 65, label disclosures are required for certain products containing chemicals listed by California. To date, we generally have been able to comply with such legislative requirements by reformulation or labeling modifications. Such legislation has not had a material negative effect on our consolidated results of operations, financial condition or liquidity to date.
Pesticide Legislation : Various international, federal and state environmental laws and regulations govern the manufacture and/or use of pesticides. We manufacture and sell certain disinfecting and sanitizing products which kill microorganisms (bacteria, viruses, fungi) on environmental surfaces and on certain food products. Such products constitute pesticides or antimicrobial pesticides under the current definitions of the Federal Insecticide Fungicide and Rodenticide Act (FIFRA), as amended by the Food Quality Protection Act of 1996, the principal federal statute governing the manufacture, labeling, handling and use of pesticides. We maintain approximately 400 product registrations with the United States Environmental Protection Agency (EPA). Registration entails the necessity to meet certain efficacy, toxicity and labeling requirements and to pay on-going registration fees. In addition, each state in which these products are sold requires registration and payment of a fee. In general, the states impose no substantive requirements different from those required by FIFRA. However, California and certain other states have adopted additional regulatory programs, and California imposes a tax on total pesticide sales in that State. While the cost of complying with rules as to pesticides has not had a material adverse effect on our financial condition, liquidity or the results of our operations to date, the costs and delays in receiving necessary approvals for these products have increased in recent years. Total fees paid to the EPA and the states to obtain or maintain pesticide registrations, and for the California tax, were
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approximately $2,700,000 in 2004 and $2,400,000 in 2003. In Europe, the Biocidal Product Directive (98/8/EC) is establishing a program to evaluate and authorize marketing of biocidal active substances and products. The Biocidal Product Directive requirements are transitioning into effect. In September 2006, certain biocidal active substances not notified to the European Chemicals Bureau will be withdrawn from the market. We are working with suppliers and industry groups to manage requirements associated with the Biocidal Products Directive. Anticipated registration costs are not expected to significantly affect our consolidated results of operations, financial condition or liquidity.
In addition, our Pest Elimination Division applies restricted-use pesticides which it generally purchases from third parties. That Division must comply with certain standards pertaining to the use of such pesticides and to the licensing of employees who apply such pesticides. Such regulations are enforced primarily by the states or local jurisdictions in conformity with federal regulations. We have not experienced material difficulties in complying with these requirements.
FDA Antimicrobial Product Requirements : Various laws and regulations have been enacted by federal, state, local and foreign jurisdictions regulating certain products manufactured and sold by us for controlling microbial growth on humans, animals, processed foods, and medical devices. In the United States, these requirements generally are administered by the U.S. Food and Drug Administration (FDA). The FDA has been expanding requirements applicable to such products, including proposing regulations in a Tentative Final Monograph for Healthcare Antiseptic Drug Products dated June 17, 1994 that may impose additional requirements and associated costs when finalized by the FDA. To date, such requirements have not had a material negative effect on our consolidated results of operations, financial condition or liquidity.
Other Environmental Legislation : Our manufacturing plants are subject to federal, state, local or foreign jurisdiction laws and regulations relating to discharge of hazardous substances into the environment and to the transportation, handling and disposal of such substances. The primary federal statutes that apply to our activities are the Clean Air Act, the Clean Water Act and the Resource Conservation and Recovery Act (RCRA). We are also subject to the Superfund Amendments and Reauthorization Act of 1986, which imposes certain reporting requirements as to emissions of toxic substances into the air, land and water. We make capital investments and expenditures to comply with environmental laws and regulations, to ensure employee safety and to carry out its announced environmental stewardship principles. To date, such expenditures have not had a significant adverse effect on our consolidated results of operations, financial condition or liquidity. Our capital expenditures for environmental health and safety projects were approximately $1,810,000 in 2004 and $1,800,000 in 2003. Approximately $5,900,000 has been budgeted globally for projects in 2005.
Environmental Remediation and Proceedings : Along with numerous other potentially responsible parties (PRPs), we are currently involved with waste disposal site clean-up activities imposed by the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or state equivalents at approximately 20 sites in the United States. Additionally, we have similar liability at eight sites outside the United States. In general, under CERCLA, we and each other PRP which actually contributes hazardous substances to a Superfund site are jointly and severally liable for the costs associated with cleaning
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up the site. Customarily, the PRPs will work with the EPA to agree and implement a plan for site remediation. Pursuant to an Environmental Agreement dated December 7, 2000 with Henkel KGaA, Henkel agreed to indemnify us for certain environmental liabilities associated with the parties former joint venture in Europe. Reimbursement from Henkel has been requested for 42,785 euro (or approximately $55,000) spent for such environmental liabilities prior to December 31, 2004.
Based on an analysis of our experience with such environmental proceedings, our estimated share of all hazardous materials deposited on the sites referred to in the preceding paragraph, and our estimate of the contribution to be made by other PRPs which we believe have the financial ability to pay their shares, we have accrued our best estimate of our probable future costs relating to such known sites. Unasserted claims are not reflected in the accrual. In establishing accruals, potential insurance reimbursements are not included. The accrual is not discounted. It is not feasible to predict when the amounts accrued will be paid due to the uncertainties inherent in the environmental remediation and associated regulatory processes.
Our worldwide net expenditures for contamination remediation were approximately $500,000 in 2004 and $500,000 in 2003. Including the ChemLawn matters described below, our worldwide accruals at December 31, 2004 for probable future remediation expenditures totaled approximately $4,100,000. We review our exposure for contamination remediation costs periodically and our accruals are adjusted as considered appropriate. While the final resolution of these issues could result in costs below or above current accruals and, therefore, have an impact on our consolidated financial results in a future reporting period, we believe the ultimate resolution of these matters will not have a material effect on our consolidated results of operations, financial condition or liquidity. In addition, we have retained responsibility for certain sites where our former ChemLawn business is a PRP. Currently there are five such locations and, at each, ChemLawn is a de minimis party. Anticipated costs currently accrued for these matters were included in our loss from our discontinued ChemLawn operations in 1991. The accrual remaining reflects our best estimate of probable future costs.
Item 1(d) Financial Information About Geographic Areas .
The financial information about geographic areas appearing under the heading Operating Segments in Note 16, located on page 49 of the Annual Report, is incorporated herein by reference.
Item 1(e) Available Information .
Our Internet address is www.ecolab.com. Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports, are available free of charge on our website at www.ecolab.com/investor as soon as reasonably practicable after such material is filed with, or furnished to, the Securities and Exchange Commission.
In addition, the following governance materials are available on our website at www.ecolab.com/investor/governance and the same information is available in print to any requesting persons, free of charge, by writing to the Corporate Secretary at our headquarters address, or by submitting an e-mail request to investor.info@ecolab.com: (i) charters of the Audit, Compensation, Finance and Governance Committees of our Board of Directors; (ii) our Boards Corporate Governance Principles; and (iii) our Code of Conduct and Code of Ethics for Senior Officers and Finance Associates.
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Executive Officers of the Company
The persons listed in the following table are our current executive officers. Officers are elected annually. There is no family relationship among any of the directors or executive officers, and, except as noted, no executive officer has been involved during the past five years in any legal proceedings described in applicable Securities and Exchange Commission regulations.
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Positions Held Since
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Douglas M. Baker, Jr. |
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46 |
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President and Chief Executive Officer |
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Jul. 2004 - Present |
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President and Chief Operating Officer |
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Aug. 2002 Jun. 2004 |
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President - Institutional Sector |
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Mar. 2002 Jul. 2002 |
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Senior Vice President - Institutional Sector |
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Jan. 2001 - Feb. 2002 |
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Vice President and General Manager, Kay Chemical Company |
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Jan. 2000 - Dec. 2000 |
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Lawrence T. Bell |
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57 |
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Senior Vice President, General Counsel and Secretary |
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Jul. 2002 Present |
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|
Senior Vice President-Law and General Counsel |
|
Jan. 2001 Jun. 2002 |
|
|
|
|
|
|
|
|
|
|
|
Vice President-Law and General Counsel |
|
Jan. 2000 - Dec. 2000 |
|
|
|
|
|
|
|
Steven L. Fritze |
|
50 |
|
Executive Vice President and Chief Financial Officer |
|
Feb. 2004 - Present |
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President and Chief Financial Officer |
|
Mar. 2002 - Jan. 2004 |
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President - Finance and Controller |
|
May 2001 Feb. 2002 |
|
|
|
|
|
|
|
|
|
|
|
Vice President and Controller |
|
Jan. 2000 Apr. 2001 |
|
|
|
|
|
|
|
Thomas W. Handley |
|
50 |
|
Executive Vice President - Specialty Sector |
|
Jan. 2004 Present |
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President - Strategic Planning |
|
Aug. 2003 - Dec. 2003 (1) |
|
|
|
|
|
|
|
Luciano Iannuzzi |
|
48 |
|
Executive Vice President - Europe, Africa and Middle East |
|
Jan. 2004 to Present |
12
Name |
|
Age |
|
Office |
|
Positions Held Since
|
|
|
|
|
|
|
|
Luciano Iannuzzi (cont.) |
|
|
|
Vice President and General Manager - Europe |
|
Jun. 2002 Dec. 2003 |
|
|
|
|
|
|
|
|
|
|
|
Vice President - Region West & Region South Europe |
|
Jan. 2002 May 2002 |
|
|
|
|
|
|
|
|
|
|
|
Vice President Region South Europe - Henkel-Ecolab |
|
Jan. 2000 Dec. 2001 |
|
|
|
|
|
|
|
Diana D. Lewis |
|
58 |
|
Senior Vice President - Human Resources |
|
Jan. 2001 - Present |
|
|
|
|
|
|
|
|
|
|
|
Vice President - Human Resources |
|
Jan. 2000 - Dec. 2000 |
|
|
|
|
|
|
|
Phillip J. Mason |
|
54 |
|
Executive Vice President Asia Pacific and Latin America |
|
Dec. 2004 - Present |
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President Strategic Business Development |
|
May 2004 Oct. 2004 (2) |
|
|
|
|
|
|
|
James A. Miller |
|
48 |
|
Executive Vice President - Institutional Sector North America |
|
Jan. 2004 - Present |
|
|
|
|
|
|
|
|
|
|
|
Vice President and General Manager - Institutional |
|
Sept. 2002 - Dec. 2003 |
|
|
|
|
|
|
|
|
|
|
|
Institutional Vice President-Marketing North America |
|
Oct. 2001 - Aug. 2002 (3) |
|
|
|
|
|
|
|
Susan K. Nestegard |
|
44 |
|
Senior Vice President-Research, Development and Engineering and Chief Technical Officer |
|
Dec. 2004 - Present |
|
|
|
|
|
|
|
|
|
|
|
Vice President-Research, Development and Engineering and Chief Technical Officer |
|
Mar. 2003 Nov. 2004 (4) |
|
|
|
|
|
|
|
Stephen D. Newlin |
|
52 |
|
President-Industrial Sector |
|
Jul. 2003 - Present (5) |
|
|
|
|
|
|
|
Daniel J. Schmechel |
|
45 |
|
Vice President and Controller |
|
Apr. 2002 - Present |
|
|
|
|
|
|
|
|
|
|
|
Vice President and Treasurer |
|
Jan. 2000 - Mar. 2002 |
|
|
|
|
|
|
|
John P. Spooner |
|
58 |
|
President - International |
|
Mar. 2002 - Present |
|
|
|
|
|
|
|
|
|
|
|
Executive Vice President- International |
|
Dec. 2001 - Feb. 2002 |
|
|
|
|
|
|
|
|
|
|
|
Chief Executive Officer Henkel Ecolab |
|
Jan. 2001 Nov. 2001 |
13
Name |
|
Age |
|
Office |
|
Positions Held Since
|
|
|
|
|
|
|
|
John P. Spooner (cont.) |
|
|
|
Executive Vice President International Group |
|
Jan. 2000 Dec. 2000 |
|
|
|
|
|
|
|
Robert P. Tabb |
|
54 |
|
Vice President and Chief Information Officer |
|
Sep. 2003 Present (6) |
1. Prior to joining Ecolab in August 2003, Mr. Handley was employed by the Procter & Gamble Company for 22 years in various management, marketing and executive positions including assignments in Japan and Mexico. Mr. Handleys last position at P&G was Vice President - Feminine Care Strategic Planning.
2. Mr. Mason re-joined Ecolab in May 2004, where he formerly served 23 years in various management and executive positions, most recently as Vice President Asia Pacific. Prior to re-joining Ecolab, Mr. Mason was employed by HAVI Group, LP, serving as President, HPR Partners from 1997-2004.
3. From April 1998 to April 2000, Mr. Miller served as Senior Vice President and General Manager, The Minute Maid Co. (a subsidiary of The Coca Cola Company). In May 2000, Mr. Miller was hired as President and CEO of Busy Body, Inc., a privately held retailer of home fitness equipment in the western U.S., to remedy operations that were underperforming the owners expectations. Busy Body, Inc. filed for Chapter 11 protection under federal bankruptcy laws in May 2001 and was subsequently liquidated. Mr. Miller re-joined the Company in October 2001.
4. Prior to joining Ecolab in March 2003, Ms. Nestegard was employed by 3M Company for 20 years, most recently as Business Director of Optical Components. Ms. Nestegards experience includes product and process development and technical management as Director Engineering Systems Technology Center and as Technical Director of the Electronic Products Division of 3M in Austin, Texas.
5. Prior to joining Ecolab in July 2003, Mr. Newlin was an executive with Nalco Company, a manufacturer of specialty chemicals, services and systems, where he was employed for 23 years. Following various executive assignments, Mr. Newlin became President and a Director of Nalco Chemical Company in December 1998, and served as President, Director, Chief Operating Officer and Vice Chairman from February 2000 to June 2001. From January 2000 to June 2001, Mr. Newlin also was Chairman of Nalco Exxon Energy Chemicals, a joint venture of Nalco and Exxon Energy Chemicals.
6. Prior to joining Ecolab in September 2003, Mr. Tabb held various executive positions in the systems technology industry, most recently with Focus IT Group, a consulting firm. From 1997 2000 Mr. Tabb was employed by CNF Transportation, Inc. as Vice President and Chief Information Officer. From 2000 2001 Mr. Tabb served as Vice President, Global Information Technology at Nike, Inc.
Our manufacturing philosophy is to manufacture products wherever an economic, process or quality assurance advantage exists or where proprietary manufacturing techniques dictate internal production processes. Currently, most products sold by us are manufactured at our facilities.
Our manufacturing facilities produce chemical products or equipment for all of our businesses, although the businesses constituting the United States Other Services segment purchase the majority of their products and equipment from outside suppliers. Our chemical production process consists primarily of blending and packaging powders and liquids and casting solids. Our equipment manufacturing operations consist primarily of producing chemical product dispensers and injectors and other mechanical equipment and dishwasher racks and related sundries.
The following chart profiles our main manufacturing facilities with ongoing production activities. In general, manufacturing facilities located in the United States serve the United States Cleaning & Sanitizing segment and facilities located outside of the United States serve the International segment. However, certain of the United States facilities do manufacture products for export and which are used by the International segment. The facilities having export involvement are marked with an asterisk(*).
14
ECOLAB OPERATIONS PLANT PROFILES
15
Location |
|
Size (Sq. Ft.) |
|
Types of Products |
|
Majority
|
|
|
|
|
|
|
|
|
|
Cheadle (Hulme), UK |
|
52,575 |
|
Liquids |
|
Leased |
|
Noda, JAPAN |
|
49,000 |
|
Solids, Liquids, Powders |
|
Owned |
|
Siegsdorf, GERMANY |
|
42,000 |
|
Equipment |
|
Owned |
|
Mexico City, MEXICO |
|
40,000 |
|
Liquids, Powders |
|
Owned |
|
Maribor, SLOVENIA |
|
39,000 |
|
Liquids, Powders |
|
Owned |
|
Leeds, U.K. |
|
35,000 |
|
Liquids |
|
Owned |
|
Pilar, ARGENTINA |
|
30,000 |
|
Liquids, Powders |
|
Owned |
|
Shanghai, CHINA |
|
27,000 |
|
Solids, Liquids, Powders |
|
Owned |
|
Perth, AUSTRALIA |
|
26,900 |
|
Liquids, Powders |
|
Owned |
|
Dorado, PUERTO RICO |
|
25,000 |
|
Liquids, Powders |
|
Leased |
|
Singapore, SINGAPORE |
|
25,000 |
|
Liquids, Powders |
|
Owned |
|
Dar es Salaam, TANZANIA |
|
22,900 |
|
Liquids, Powders |
|
Leased |
|
Seoul, SOUTH KOREA |
|
22,160 |
|
Liquids, Powders |
|
Owned |
|
Mandras, GREECE |
|
18,000 |
|
Liquids |
|
Owned |
|
San Jose, COSTA RICA |
|
11,000 |
|
Liquids, Powders |
|
Owned |
|
Cikarang, INDONESIA |
|
10,000 |
|
Solids, Liquids, Powders |
|
Owned |
|
Bangkok, THAILAND |
|
10,000 |
|
Liquids, Powders |
|
Owned |
|
Manilla, PHILIPPINES |
|
7,600 |
|
Liquids, Powders |
|
Owned |
|
We believe our manufacturing facilities are in good condition and are adequate to meet our existing production needs.
Most of our manufacturing plants also serve as distribution centers. In addition, around the world, we operate distribution centers, all of which are leased, and utilize various public warehouses to facilitate the distribution of our products and services. In the United States, our sales and service associates are located in approximately 60 leased offices. Additional sales offices are located internationally.
Our corporate headquarters is comprised of three adjacent multi-storied buildings located in downtown St. Paul, Minnesota. The main 19-story building was constructed to our specifications and is leased through 2008. Thereafter, it is subject to multiple renewals at our option. The second building is also subject to a long-term lease by us and the third building is owned. The corporate headquarters includes an employee training center. In April 2004, we purchased a 90 acre campus in Eagan, Minnesota to provide for future growth. At the outset, the new facility will primarily serve our new research and development and data center needs. Renovations of the buildings on this property, comprising approximately 500,000 square feet, are currently underway. Our current research center in Mendota Heights, Minnesota and the data center in St. Paul are expected to be sold in 2005.
16
Proceedings arising under laws relating to protection of the environment are discussed at Item 1(c) above, under the heading Environmental Considerations.
The Company and certain of our subsidiaries are defendants in various lawsuits and claims arising out of the normal course of business. Accruals have been established reflecting our best estimate of probable future costs relating to such matters.
The estimated effects of the future results of existing litigation is subject to certain estimates, assumptions and uncertainties and should be considered in light of the discussion of Forward-Looking Statements and Risk Factors found under Part I at the beginning of this Report.
Item 4. Submission of Matters to a Vote of Security Holders .
No matters were submitted to a vote of our security holders during the fourth quarter of 2004.
Item 5. Market for Registrants Common Equity and Related Stockholder Matters .
All per share and number of share information in Item 5, including dividends per share in Item 5(c), reflect a two-for-one stock split paid June 6, 2003 in the form of a 100 percent stock dividend to shareholders of record on May 23, 2003.
Market Information : Our Common Stock is listed on the New York Stock Exchange and the Pacific Exchange, Inc. under the symbol ECL. The Common Stock is also traded on an unlisted basis on certain other United States exchanges. The high and low sales prices of our Common Stock on the consolidated transaction reporting system during 2004 and 2003 were as follows:
|
|
2004 |
|
2003 |
|
||||||||
Quarter |
|
High |
|
Low |
|
High |
|
Low |
|
||||
First |
|
$ |
28.61 |
|
$ |
26.12 |
|
$ |
26.00 |
|
$ |
23.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second |
|
$ |
31.77 |
|
$ |
27.95 |
|
$ |
27.92 |
|
$ |
24.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third |
|
$ |
31.80 |
|
$ |
29.04 |
|
$ |
26.80 |
|
$ |
23.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth |
|
$ |
35.59 |
|
$ |
31.32 |
|
$ |
27.89 |
|
$ |
25.15 |
|
The closing Common Stock price on February 28, 2005 was $31.71.
Holders : On February 28, 2005, we had 5,102 holders of Common Stock of record.
Dividends : We have paid Common Stock dividends for 68 consecutive years. Quarterly cash dividends of $0.0725 per share were declared in February, May and August 2003. Cash dividends of $0.08 per share were declared in December 2003, and February, May and August 2004. A dividend of $0.0875 per share was declared in December 2004.
17
Item 5(c) Purchases of Equity Securities by the Issuer .
Period |
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
|
October 1-31, 2004 |
|
16,175 |
|
$ |
31.6206 |
|
14,700 |
|
6,823,600 |
|
|
|
|
|
|
|
|
|
|
|
|
November 1-30, 2004 |
|
711,733 |
|
$ |
33.5601 |
|
-0- |
|
6,823,600 |
|
|
|
|
|
|
|
|
|
|
|
|
December 1-31, 2004 |
|
1,053,287 |
|
$ |
34.8675 |
|
1,047,900 |
|
15,775,700 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
1,781,195 |
|
$ |
34.3156 |
|
1,062,600 |
|
15,775,700 |
|
(1) Includes brokerage commissions paid, plus the value of 718,595 shares reacquired from employees and/or directors as swaps for the cost to stock options, or shares surrendered to satisfy minimum statutory tax obligations, under our stock incentive plans.
(2) On October 17, 2003 and December 9, 2004, our Board of Directors authorized the repurchase of up to 10,000,000 and 10,000,000 shares of Common Stock, respectively, including shares to be repurchased under Rule 10b5-1. We intend to repurchase all shares under such authorizations, for which no expiration date has been established, in open market or privately negotiated transactions, subject to market conditions.
Item 6. Selected Financial Data .
The comparative data for the years ended December 31, 2004, 2003, 2002, 2001 and 2000 inclusive, which are set forth under the heading entitled Summary Operating and Financial Data located on pages 52 and 53 of the Annual Report, are incorporated herein by reference.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation .
The material appearing under the heading entitled Financial Discussion, located on pages 21 through 51 of the Annual Report, is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .
The material appearing under the heading entitled Market Risk, located on pages 29 and 30 of the Annual Report, is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data .
The financial statements and material which are an integral part of the financial statements listed under Item 15.I(1). below and located on pages 31 through 51 of the Annual Report, are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .
None.
18
Item 9A. Controls and Procedures .
Disclosure Controls and Procedures
As of December 31, 2004, we carried out an evaluation, under the supervision and with the participation of our management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures are effective, among other things, in timely alerting them to material information relating to us (including its consolidated subsidiaries) required to be included in our reports filed under the Securities Exchange Act of 1934, as amended.
Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our Management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004.
Our managements assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. PricewaterhouseCoopers LLP has issued an attestation report on our controls over financial reporting. Their report can be found in our Annual Report, the relevant portion of which has been filed as Exhibit (13) to this Form 10-K and is incorporated into Item 8 hereof.
During the period October 1 - December 31, 2004, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The following disclosures would otherwise be filed on Form 8-K under the heading Item 1.01 Entry into a Material Definitive Agreement .
In the paragraphs below describing our executive compensation and non-employee director plans and programs, the Named Executive Officers or NEOs refer to one or both (as indicated by the context) of the individuals who served as our Chief Executive Officer during 2004 (Allan L. Schuman was in the CEO position from January 1, 2004 through June 30, 2004, and Douglas M. Baker, Jr. from July 1, 2004 through December 31, 2004) and the next four most-highly compensated executive officers who were serving in those capacities at December 31, 2004, and the Committee refers to the Compensation Committee of the Board of Directors.
19
General
The components of the overall compensation program for the Companys executive officers include base salary, long-term incentives in the form of annual stock option awards, cash-based annual bonus incentives, participation in deferred compensation and retirement plans, and certain perquisites. A summary of the executive compensation program is filed as Exhibit (10)U to this report and is hereby incorporated by reference.
Base Salary
For the 2005 fiscal year, base salaries for corporate officers, including the NEOs other than the CEO, are scheduled to increase by an average of 4.2%. The salary of Douglas M. Baker, Jr. was increased to $700,000, effective upon his promotion to CEO on July 1, 2004, and was not further adjusted for 2005. Competitive market data is available for all of the executive positions. Salaries are monitored to ensure that the appropriate balance of internal value and external competitiveness is maintained. The base salaries established for the 2005 fiscal year for the NEOs are included as a part of the Named Executive Officer Salary, Stock Options and Bonus Table (the NEO Table) filed as Exhibit (10)T to this Form 10-K and incorporated by reference herein.
Long-Term Incentive Awards
For the 2005 fiscal year, long-term incentive stock options were granted to the corporate officers, including the NEOs other than the CEO, for an aggregate of 678,000 shares. The CEO received a grant for 314,000 shares. Individual stock incentive grant guidelines are established for each such officer based on market competitive values. Guidelines were developed on a position-by-position basis using market data from the Towers Perrin Single Regression and Long-Term Incentive surveys for general industry companies. The market data represents median long-term incentive values adjusted for size based on revenue. The guidelines were reviewed and approved by the Committees independent consultant, Frederic W. Cook & Co. The stock options granted for the 2005 fiscal year for the NEOs are included in the NEO Table and incorporated by reference herein. The options were granted in December 2004 pursuant to a form of agreement on file with the Securities and Exchange Commission (the SEC) and were timely reported to the SEC on Forms 4.
Bonuses
On February 25, 2005, the Committee authorized the payment of annual incentive awards (bonuses) under our Management Incentive Plan (MIP) and Management Performance Incentive Plan (MPIP) with respect to fiscal 2004 performance. The MIP is a cash-based annual incentive plan that focuses executives attention on achieving competitive annual business goals. For fiscal 2004, performance goals were based principally on diluted earnings per share and business unit operating income and revenue goals, with the relative weighting of these goals varying by executive position. Target award opportunities during 2004 for corporate officers, including the NEOs other than the CEOs, ranged from 35% to 60% of base salary, with threshold and maximum award opportunities at 40% and 200% of target opportunities, respectively. Based on overall Company, business unit and individual performance for the most recent fiscal year, actual award payments for such corporate officers were $4,374,200 in the aggregate and ranged individually from 132% to 200% of target opportunities (except 254% for one officer, reflecting a discretionary increase by the Committee for successful completion of a special project).
20
The MPIP is a stockholder approved plan that is similar to the MIP, except that it is intended to qualify for the performance-based exception to the $1,000,000 deduction limitation under Section 162(m) of the Internal Revenue Code. For fiscal 2004, the Committee selected the CEOs and two other executive officers as participants in the MPIP and established a maximum award payment opportunity equal to 300% of each participants base salary (subject to a limit of $3,000,000) based on the attainment of pre-established diluted earnings per share goals. The Committee, working with management and the Companys independent compensation consultants, also set performance goals for the Company which are in addition to the MPIP performance goals. The bonuses paid for the 2004 fiscal year for the NEOs under the MIP and MPIP are included in the NEO Table and incorporated by reference herein.
The Company intends to provide additional information regarding the compensation awarded to the Named Executive Officers in respect of and during the year ended December 31, 2004 in the definitive proxy statement for the Companys 2005 annual meeting of stockholders, which is expected to be filed with the Securities and Exchange Commission on or around March 30, 2005.
Establishment of 2005 Bonus Criteria
On February 25, 2005, the Committee established the performance criteria for the MIP and the MPIP for the Companys fiscal year ending on December 31, 2005. Consistent with previous years, target award opportunities under the MIP for corporate officers, including the NEOs other than the Chief Executive Officer, will range from 35% to 60% of base salary, with threshold and maximum award opportunities at 40% and 200% of target opportunities, respectively. Sector heads and business unit general managers will continue to have 30% of their performance measured on earnings per share (EPS) performance and 70% on business unit objectives. The majority of corporate staff officers will have 70% of their award based on total EPS and 30% on total division operating income. The Committee also selected the CEO and the President-Industrial Sector as the participants for the MPIP for the fiscal year ending on December 31, 2005. The performance goal for the participants in the MPIP will be diluted EPS, with the maximum award payment opportunity equal to 300% of the applicable participants base salary (subject to the plan limit of $3 million) if the performance is achieved.
Amendment of Management Performance Incentive Plan
On February 25, 2005 the Committee recommended and the Board approved an amendment to the MPIP in response to section 409A of the Internal Revenue Code (the Code), added by the American Jobs Creation Act of 2004. The guidance for Code section 409A provides that compensation paid to a service provider within 2½ months of the later of (i) the end of the taxable year of the service provider or (ii) the end of the taxable year of the service recipient, is not considered a deferral of compensation, and therefore not subject to Code section 409A. The amendment to the MPIP provides that all payments under the plan will be made within 2½ months of the end of the Companys fiscal year, and therefore no payments under the plan would be subject to Code section 409A. A copy of the amendment to the MPIP is filed as Exhibit (10)O(ii) to this Form 10-K and is hereby incorporated by reference.
21
Non-Employee Director Compensation
The components of the overall compensation program for the Companys non-employee directors include an annual retainer, Committee Chair fees, deferred stock units, an annual stock option grant, gift matching, travel insurance, and certain director liability protection. A summary of the non-employee director compensation program is filed as Exhibit (10)V to this Form 10-K and is hereby incorporated by reference.
Item 10. Directors and Executive Officers of the Registrant .
The biographical material regarding our directors and the paragraph relating to understandings concerning the election of directors between Henkel KGaA and the Company located in the Proxy Statement appearing under the heading entitled Proposal to Elect Directors, is incorporated herein by reference. Information regarding executive officers is presented under the heading Executive Officers of the Company in Part I on pages 12 through 14 hereof.
Disclosures concerning policies of our Board of Directors, corporate governance principles and corporate ethics practices, including our Code of Conduct, are available on our website at www.ecolab.com/investor/governance. Copies of our Code of Conduct as last amended in 1995 and the Code of Ethics for Senior Officers and Finance Associates adopted in 2003, are incorporated by reference as exhibits to this Form 10-K, and will be mailed free of charge to any shareholder upon request to the Corporate Secretary at our headquarters in St. Paul. We intend to promptly disclose on our website should there be any amendments to, or waivers by the Board of Directors of, the Code of Conduct or the Code of Ethics for Senior Officers and Finance Associates.
The material appearing under the heading entitled Section 16(a) Beneficial Ownership Reporting Compliance located in the Proxy Statement is incorporated herein by reference.
The material appearing under the heading entitled Board of Directors located in the Proxy Statement pertaining to the identity of Audit Committee members and the designation of the audit committee financial expert is incorporated herein by reference.
Item 11. Executive Compensation .
The material appearing under the heading entitled Executive Compensation located in the Proxy Statement is incorporated herein by reference. However, pursuant to Securities and Exchange Commission Regulation S-K, Item 402(a)(9), the material appearing under the headings entitled Report of the Compensation Committee on Executive Compensation and Comparison of Five Year Cumulative Total Return located in the Proxy Statement is not incorporated herein.
The material appearing under the headings entitled Security Ownership located in the Proxy Statement is incorporated herein by reference. The holdings of Henkel Chemie VmbH and Henkel Corporation are subject to certain limitations with respect to our voting securities as more fully described in our Proxy Statement under the heading Stockholder Agreement, which is incorporated herein by reference.
22
The material appearing under the heading Executive Compensation pertaining to Equity Compensation Plan Information located in our Proxy Statement is incorporated herein by reference.
A total of 1,172,487 shares of Common Stock held by our directors and executive officers, some of whom may be deemed to be affiliates of the Company, have been excluded from the computation of market value of our Common Stock on the cover page of this Form 10-K. This total represents that portion of the shares reported as beneficially owned by our directors and executive officers as of June 30, 2004, which are actually issued and outstanding.
Item 13. Certain Relationships and Related Transactions .
The material appearing under the heading entitled Director Independence, located in the Proxy Statement pertaining to Stockholder Agreement and Related Party Transactions, as well as the paragraph relating to understandings concerning the election of directors between Henkel KGaA and the Company and the biographical material pertaining to Messrs. Stefan Hamelmann, Jochen Krautter and Ulrich Lehner, both located in the Proxy Statement under the heading Proposal to Elect Directors, are incorporated herein by reference.
Item 14. Principal Accountant Fees and Services .
The material appearing under the heading entitled Audit Fees located in the Proxy Statement is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules .
I(1). |
|
The following financial statements of the Company, included in the Annual Report, are incorporated into Item 8 hereof. |
|
|
|
|
|
|
(i) |
Consolidated Statement of Income for the years ended December 31, 2004, 2003 and 2002, Annual Report page 31. |
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(ii) |
Consolidated Balance Sheet at December 31, 2004, 2003 and 2002, Annual Report page 32. |
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(iii) |
Consolidated Statement of Cash Flows for the years ended December 31, 2004, 2003 and 2002, Annual Report page 33. |
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(iv) |
Consolidated Statement of Comprehensive Income and Shareholders Equity for the years ended December 31, 2004, 2003 and 2002, Annual Report page 34. |
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(v) |
Notes to Consolidated Financial Statements, Annual Report pages 35 through 50. |
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(vi) |
Report of Independent Registered Public Accounting Firm, Annual Report page 51. |
23
I(2). |
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The following financial statement schedule to the Companys financial statements listed in Item 15.I(1). for the years ended December 31, 2004, 2003 and 2002 located on page 34 hereof, and the Report of Independent Registered Public Accounting Firm on Financial Statement Schedule at page 32 hereof, are filed as part of this Report. |
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(i) |
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2004, 2003 and 2002. |
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All other schedules, for which provision is made in the applicable regulations of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable and therefore have been omitted. All significant majority-owned subsidiaries are included in the filed consolidated financial statements. |
II. |
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The following documents are filed as exhibits to this Report. We will, upon request and payment of a fee not exceeding the rate at which copies are available from the Securities and Exchange Commission, furnish copies of any of the following exhibits to stockholders. |
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(3) |
A. |
Restated Certificate of Incorporation - Incorporated by reference to Exhibit (3) to our Form 8-K dated May 9, 2003. |
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B. |
By-Laws, as amended through February 18, 1999 - Incorporated by reference to Exhibit (3)B of our Form 10-K Annual Report for the year ended December 31, 1998. |
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(4) |
A. |
Common Stock - see Exhibits (3)A and (3)B. |
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B. |
Form of Common Stock Certificate Incorporated by reference to Exhibit (4)B of our Form 8-K dated December 6, 2004. |
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C. |
(i) |
Rights Agreement dated as of February 24, 1996 - Incorporated by reference to Exhibit (4) of our Form 8-K dated February 24, 1996. |
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(ii) |
Amendment to Rights Agreement, dated and effective as of December 6, 2004, among Ecolab Inc., EquiServe Trust Company, N.A. and Computershare Investor Services, LLC - Incorporated by reference to Exhibit (4)A of our Form 8-K filed December 6, 2004. |
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D. |
Second Amended and Restated Stockholders Agreement between Henkel KGaA and Ecolab Inc., dated November 30, 2001 - Incorporated by reference to Exhibit (4) of our Form 8-K dated November 30, 2001. |
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E. |
Amended and Restated Indenture, dated as of January 9, 2001, between Ecolab Inc. and Bank One, NA (formerly known as The First National Bank of Chicago) as Trustee - Incorporated by reference to Exhibit (4)(A) of our Current Report on Form 8-K dated January 23, 2001. |
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24
Copies of other constituent instruments defining the rights of holders of our long-term debt are not filed herewith, pursuant to Section (b)(4)(iii) of Item 601 of Regulation S-K, because the aggregate amount of securities authorized under each of such instruments is less than 10% of our total assets on a consolidated basis. We will, upon request by the Securities and Exchange Commission, furnish to the Commission a copy of each such instrument.
(10)A. Multicurrency Credit Agreement, dated as of September 29, 1993, as amended and restated as of August 13, 2004, by and among Ecolab Inc., Ecolab PTY Limited, Ecolab Finance PTY Limited, the financial institutions party thereto as Banks from time to time, the financial institutions party thereto as Issuing Banks from time to time, Citicorp USA, Inc., as administrative agent for the Banks and Issuing Banks thereunder, Citibank International PLC, as agent for the Banks in connection with certain of the Eurocurrency Advances, JPMorgan Chase Bank, as syndication agent, and Credit Suisse First Boston, as documentation agent Incorporated by reference to Exhibit (10)A(i) of our Form 10-Q for the quarter ended September 30, 2004.
B. Documents comprising global Commercial Paper Programs
(i) U.S. $200,000,000 Euro-Commercial Paper Programme
(a) Dealer Agreement dated as of 10 June 2003 among Ecolab Inc., Credit Suisse First Boston (Europe) Limited as Arranger, and Citibank International plc and Credit Suisse First Boston (Europe) Limited as Dealers - Incorporated by reference to Exhibit (10)A(i)(a) of our Form 10-Q for the quarter ended June 30, 2003.
(b) Note Agency Agreement dated as of 10 June 2003 between Ecolab Inc. and Citibank, N.A. as Issue and Paying Agent. - Incorporated by reference to Exhibit (10)A(i)(b) our Form 10-Q for the quarter ended June 30, 2003.
25
(c) Deed of Covenant made as of 10 June 2003 by Ecolab Inc. - Incorporated by reference to Exhibit (10)A(i)(c) of our Form 10-Q for the quarter ended June 30, 2003.
(ii) U.S. $450,000,000 U.S. Commercial Paper Program
(a) Form of Commercial Paper Dealer Agreement for 4 (2) Program. Agreements have been executed with Salomon e)A(ii)(a) of our Form 10-Q for the quarter ended June 30, 2003.
(b) Issuing and Paying Agency Agreement dated as of July 10, 2000 between Ecolab Inc. and Bank One, National Association as Issuing and Paying Agent - Incorporated by reference to Exhibit (10)A(ii)(b) of our Form 10-Q for the quarter ended June 30, 2003.
C. (i) Ecolab Inc. 1993 Stock Incentive Plan, as Amended and Restated as of May 12, 2000 - Incorporated by reference to Exhibit (10)D of our Form 10-K Annual Report for the year ended December 31, 2002.
(ii) Sample form of Non-Statutory Stock Option Agreement under the Ecolab Inc. 1993 Stock Incentive Plan, as in effect for grants beginning May 14, 1993 through May 8, 1997 Incorporated by reference to Exhibit (10)C of our Form 10-Q for the quarter ended June 30, 2004.
D. (i) Ecolab Inc. 1997 Stock Incentive Plan, as Amended and Restated as of August 18, 2000 - Incorporated by reference to Exhibit (10) of our Form 10-Q for the quarter ended September 30, 2000.
(ii) Non-Statutory Stock Option Agreement as in effect for grants through May 12, 2000 Incorporated by reference to Exhibit (10)B(i) of our Form 10-Q for the quarter ended June 30, 2004.
(iii) Non-Statutory Stock Option Agreement as in effect for grants beginning May 13, 2000 through May 10, 2002 Incorporated by reference to Exhibit (10)B(ii) of our Form 10-Q for the quarter ended June 30, 2004.
E. (i) 1995 Non-Employee Director Stock Option Plan - Incorporated by reference to Exhibit (10)D of our Form 10-K Annual Report for the year ended December 31, 1994.
(ii) Amendment No. 1 to 1995 Non-Employee Director Stock Option Plan effective February 25, 2000 - Incorporated by reference to Exhibit (10)E(ii) of our Form 10-K for the year ended December 31, 1999.
(iii) Amendment No. 2 to 1995 Non-Employee Director Stock Option Plan effective May 11, 2001 - Incorporated by reference to Exhibit (10)G(iii) of our Form 10-K Annual Report for the year ended December 31, 2002.
26
F. (i) Ecolab Inc. 2001 Non-Employee Director Stock Option and Deferred Compensation Plan, as amended and restated effective May 1, 2004 Incorporated by reference to Exhibit (10)H(ii) of our Form 10-K Annual Report for the year ended December 31, 2004.
(ii) Amendment No. 1 adopted December 15, 2004 to Ecolab Inc. 2001 Non-Employee Director Stock Option and Deferred Compensation Plan, as amended and restated effective May 1, 2004, with respect to the American Jobs Creation Act of 2004.
(iii) Master Agreement Relating to Options (as in effect through May 7, 2004) Incorporated by reference to Exhibit (10)D(i) of our Form 10-Q for the quarter ended June 30, 2004.
(iv) Master Agreement Relating to Periodic Options, as amended effective as of May 1, 2004 Incorporated by reference to Exhibit (10)D(ii) of our Form 10-Q for the quarter ended June 30, 2004.
G. Form of Director Indemnification Agreement. Substantially identical agreements are in effect as to each of our directors Incorporated by reference to Exhibit (10)I of our Form 10-K Annual Report for the year ended December 31, 2003.
H. (i) Ecolab Executive Death Benefits Plan, as amended and restated effective March 1, 1994 - Incorporated by reference to Exhibit (10)J of our Form 10-K Annual Report for the year ended December 31, 1994. See also Exhibit (10)N hereof.
(ii) Amendment No. 1 to Ecolab Executive Death Benefits Plan Incorporated by reference to Exhibit (10)H(ii) of our Form 10-K Annual Report for the year ended December 31, 1998.
(iii) Second Declaration of Amendment to Ecolab Executive Death Benefits Plan, effective March 1, 1998 - Incorporated by reference to Exhibit (10)H(iii) of our Form 10-K Annual Report for the year ended December 31, 1998.
I. Ecolab Executive Long-Term Disability Plan, as amended and restated effective January 1, 1994. See also Exhibit (10)N hereof.
J. Ecolab Executive Financial Counseling Plan.
K. (i) Ecolab Supplemental Executive Retirement Plan, as amended and restated effective January 1, 2003 Incorporated by reference to Exhibit (10)M of our Form 10-K Annual Report for the year ended December 31, 2003.
(ii) Amendment No. 1 and Instrument of Benefit Freeze adopted December 16, 2004 to the Ecolab Supplemental Executive Retirement Plan (As Amended and Restated effective January 1, 2003) With Respect to the American Jobs Creation Act of 2004.
L. (i) Ecolab Mirror Savings Plan, as amended and restated effective as of March 1, 2002 - Incorporated by reference to Exhibit (10)N of our Form 10-K Annual Report for the year ended December 31, 2002.
27
(ii) Amendment No. 1 adopted December 16, 2004 to the Ecolab Mirror Savings Plan (As Amended and Restated Effective as of March 1, 2002) With Respect to the American Jobs Creation Act of 2004.
M. (i) Ecolab Mirror Pension Plan, as amended and restated effective as of January 1, 2003 - Incorporated by reference to Exhibit (10)B of our Form 10-Q for the quarter ended June 30, 2003. See also Exhibit (10)P hereof.
(ii) Amendment No. 1 and Instrument of Benefit Freeze adopted December 16, 2004 to the Ecolab Mirror Pension Plan (As Amended and Restated effective January 1, 2003) With Respect to the American Jobs Creation Act of 2004.
N. (i) Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans, as amended and restated effective as of January 1, 2003 Incorporated by reference to Exhibit (10)P of our Form 10-K Annual Report for the year ended December 31, 2003.
(ii) Amendment No. 1 adopted December 16, 2004 to the Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans (As Amended and Restated effective January 1, 2003) With Respect to the American Jobs Creation Act of 2004.
O. (i) Ecolab Inc. Management Performance Incentive Plan, as amended and restated on February 28, 2004 Incorporated by reference to Exhibit (10)A of our Form 10-Q for the quarter ended March 31, 2004.
(ii) Amendment No. 1 adopted February 26, 2005 to the Ecolab Inc. Management Performance Incentive Plan.
P. Ecolab Inc. Change in Control Severance Compensation Policy, effective February 22, 2002 - Incorporated by reference to Exhibit (10)R of our Form 10-K Annual Report for the year ended December 31, 2001.
Q. (i) Master Agreement, dated as of December 7, 2000, between Ecolab Inc. and Henkel KGaA - Incorporated by reference to Exhibit 18 of HC Investments, Inc.s and Henkel KGaAs Amendment No. 5 to Schedule 13D dated December 14, 2000.
(ii) Amendment No. 1 to the Master Agreement, dated December 7, 2000, between Ecolab Inc. and Henkel KGaA - Incorporated by reference to Exhibit (10) of our Form 10-Q for the quarter ended September 30, 2001.
(iii) Intellectual Property Agreement dated November 30, 2001, between Ecolab and Henkel KGaA - Incorporated by reference to Exhibit (10) of our Form 8-K dated November 30, 2001.
R. (i) Ecolab Inc. 2002 Stock Incentive Plan - Incorporated by reference to Exhibit (10) of our Form 10-Q for the quarter ended June 30, 2002.
(ii) Non-statutory Stock Option Agreement as in effect for grants beginning May 11, 2002 through August 12, 2003 Incorporated by reference to Exhibit (10)A(i) of our Form 10-Q for the quarter ended June 30, 2004.
28
(iii) Non-statutory Stock Option Agreement as in effect for grants beginning August 13, 2003 Incorporated by reference to Exhibit (10)A(ii) of our Form 10-Q for the quarter ended June 30, 2004.
S. (i) Transition Agreement effective February 28, 2004 by and between Ecolab Inc. and Allan L. Schuman including related arrangements Incorporated by reference to Exhibit (10)B(i) of our Form 10-Q for the quarter ended March 31, 2004.
(ii) Non-statutory Stock Option Agreement Incorporated by reference to Exhibit (10)B(ii) of our Form 10-Q for the quarter ended March 31, 2004.
(iii) Mutual Release by Allan L. Schuman and Ecolab Inc. Incorporated by reference to Exhibit (10)B(iii) of our Form 10-Q for the quarter ended March 31, 2004.
(iv) Employment Agreement (Management) dated December 19, 1994 Incorporated by reference to Exhibit (10)B(iv) of our Form 10-Q for the quarter ended March 31, 2004.
T. Named Executive Officer Salary, Stock Options and Bonus Table.
U. Executive Compensation and Benefits Summary.
V. Director Compensation and Benefits Summary.
(13) Those portions of our Annual Report to Stockholders for the year ended December 31, 2004 which are incorporated by reference into Parts I and II hereof.
(14) A. Ecolab Code of Conduct Incorporated by reference to Exhibit (99)A of our Form 10-K Annual Report for the year ended December 31, 2003.
B. Code of Ethics for Senior Officers and Finance Associates Incorporated by reference to Exhibit (99)B of our Form 10-K Annual Report for the year ended December 31, 2003.
(21) List of Subsidiaries as of February 28, 2005.
(23) Consent of Independent Registered Public Accounting Firm at page hereof is filed as a part hereof.
(24) Powers of Attorney.
(31) Rule 13a-14(a) Certifications.
(32) Section 1350 Certifications.
29
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Included in the preceding list of exhibits are the following management contracts or compensatory plans or arrangements:
Exhibit No. |
|
Description |
(10)C. |
|
Ecolab Inc. 1993 Stock Incentive Plan. |
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(10)D. |
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Ecolab Inc. 1997 Stock Incentive Plan. |
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(10)E. |
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1995 Non-Employee Director Stock Option Plan. |
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(10)F. |
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Ecolab Inc. 2001 Non-Employee Director Stock Option and Deferred Compensation Plan. |
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(10)G |
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Form of Director Indemnification Agreement. |
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(10)H. |
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Ecolab Executive Death Benefits Plan. |
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(10)I. |
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Ecolab Executive Long-Term Disability Plan. |
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(10)J. |
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Ecolab Executive Financial Counseling Plan. |
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(10)K. |
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Ecolab Supplemental Executive Retirement Plan. |
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(10)L. |
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Ecolab Mirror Savings Plan. |
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(10)M. |
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Ecolab Mirror Pension Plan. |
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(10)N. |
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Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans. |
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(10)O. |
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Ecolab Inc. Management Performance Incentive Plan. |
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(10)P. |
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Ecolab Inc. Change in Control Severance Compensation Policy. |
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(10)R. |
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Ecolab Inc. 2002 Stock Incentive Plan. |
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(10)S. |
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Transition Agreement and related arrangements of Allan L. Schuman. |
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(10)T. |
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Named Executive Officer Salary, Stock Options and Bonus Table. |
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(10)U. |
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Executive Compensation and Benefits Summary. |
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(10)V. |
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Director Compensation and Benefits Summary. |
30
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Ecolab Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 3rd day of March, 2005.
|
ECOLAB INC. |
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(Registrant) |
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By |
/s/Douglas M. Baker, Jr. |
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Douglas M. Baker, Jr. |
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President and Chief Executive Officer |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Ecolab Inc. and in the capacities indicated, on the 3 rd day of March, 2005.
/s/Douglas M. Baker, Jr. |
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President and |
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Douglas M. Baker, Jr. |
Chief Executive Officer |
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(Principal Executive Officer and
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/s/Steven L. Fritze |
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Executive Vice President and |
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Steven L. Fritze |
Chief Financial Officer |
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(Principal Financial Officer) |
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/s/Daniel J. Schmechel |
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Vice President and Controller |
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Daniel J. Schmechel |
(Principal Accounting Officer) |
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/s/Lawrence T. Bell |
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Directors |
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Lawrence T. Bell |
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||||
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||||
as
attorney-in-fact for:
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31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Directors of Ecolab Inc.:
Our audits of the consolidated financial statements, of managements assessment of the effectiveness of internal control over financial reporting and of the effectiveness of internal control over financial reporting referred to in our report dated February 24, 2005 appearing in the 2004 Annual Report to Shareholders of Ecolab Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15.I(2).(i) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
|
/s/ PricewaterhouseCoopers LLP |
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PricewaterhouseCoopers LLP |
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Minneapolis, Minnesota |
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February 24, 2005 |
32
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Registration Nos. 2-60010; 2-74944; 33-1664; 33-41828; 2-90702; 33-18202; 33-55986; 33-56101; 333-95043; 33-26241; 33-34000; 33-56151; 333-18627; 33-39228; 33-56125; 333-70835; 33-60266; 333-95041; 33-65364; 333-18617; 333-79449; 333-40239; 333-95037; 333-50969; 333-58360; 333-97927; 333-115567; and 333-115568) of our reports dated February 24, 2005 relating to the consolidated financial statements, managements assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting which appears in the 2004 Annual Report to Shareholders of Ecolab Inc., which is incorporated by reference in this Annual Report on Form 10-K. We also consent to the inclusion in this Annual Report on Form 10-K of our report dated February 24, 2005 relating to the financial statement schedule of Ecolab Inc. which appears in this Form 10-K.
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/s/ PricewaterhouseCoopers LLP |
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PricewaterhouseCoopers LLP |
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Minneapolis, Minnesota |
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March 3, 2005 |
33
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ECOLAB
INC.
(In Thousands)
|
|
|
|
COL. C |
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|
|
|
|
|||||||
COL. A |
|
COL. B |
|
Additions |
|
COL. D |
|
COL. E |
|
|||||||
Description |
|
Balance at
|
|
Charged to
|
|
Charged
|
|
Deductions (B) |
|
Balance
|
|
|||||
|
|
|
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|
|
|
|
|
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|
|||||
Allowance for Doubtful Accounts: |
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|||||
|
|
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|
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|
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|
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|
|||||
Year Ended December 31, 2004 |
|
$ |
44,011 |
|
$ |
14,278 |
|
$ |
2,414 |
|
$ |
(16,504 |
) |
$ |
44,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Year Ended December 31, 2003 |
|
$ |
35,995 |
|
$ |
18,403 |
|
$ |
3,669 |
|
$ |
(14,056 |
) |
$ |
44,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Year Ended December 31, 2002 |
|
$ |
30,297 |
|
$ |
17,220 |
|
$ |
2,232 |
|
$ |
(13,754 |
) |
$ |
35,995 |
|
(A) Included primarily the effects of changes in currency translation.
(B) Uncollectible accounts charged off, net of recovery of accounts previously written off.
(C) Includes an allowance of approximately $6 million for the expected return of products shipped, credits related to pricing or quantities shipped. All of the returns and credit activity is recorded directly to accounts receivable or sales.
34
The following documents are filed as exhibits to this Report.
Exhibit No. |
|
Document |
|
Method of Filing |
||
|
|
|
|
|
||
(3) |
|
A. |
|
Restated Certificate of Incorporation. |
|
Incorporated by reference to Exhibit (3) to our Current Report on Form 8-K dated May 9, 2003. |
|
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|
|
|
B. |
|
By-Laws, as amended through February 18, 1999. |
|
Incorporated by reference to Exhibit (3)B of our Form 10-K Annual Report, for the year ended December 31, 1998. |
|
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(4) |
|
A. |
|
Common Stock. |
|
See Exhibits (3)A and (3)B. |
|
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|
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|
|
|
|
B. |
|
Form of Common Stock Certificate. |
|
Incorporated by reference to Exhibit (4)B of our Form 8-K dated December 6, 2004. |
|
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|
|
|
|
|
|
|
C. |
(i) |
Rights Agreement dated as of February 24, 1996. |
|
Incorporated by reference to Exhibit (4) of our Current Report on Form 8-K dated February 24, 1996. |
|
|
|
|
|
|
|
|
|
|
(ii) |
Amendment to Rights Agreement, dated and effective as of December 6, 2004, among Ecolab Inc., EquiServe Trust Company, N.A. and Computershare Investor Services, LLC |
|
Incorporated by reference to Exhibit (4)A of our Form 8-K filed December 6, 2004. |
|
|
|
|
|
|
|
|
|
D. |
|
Second Amended and Restated Stockholders Agreement between Henkel KGaA and Ecolab Inc., dated November 30, 2001. |
|
Incorporated by reference to Exhibit (4) of our Form 8-K dated November 30, 2001. |
Exhibit No. |
|
Document |
|
Method of Filing |
|
|
|
|
|
|
|
|
E. |
|
Amended and Restated Indenture dated as of January 9, 2001 between Ecolab Inc. and Bank One, N.A. (formerly known as The First National Bank of Chicago) as Trustee. |
|
Incorporated by reference to Exhibit (4)(A) of our Current Report on Form 8-K dated January 23, 2001. |
|
|
|
|
|
|
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F. |
|
Officers Certificate establishing terms and conditions of 6.875% Notes due February 1, 2011. |
|
Incorporated by reference to Exhibit 4(B) of our Form 8-K dated January 23, 2001. |
|
|
|
|
|
|
|
G. |
|
Form of 6.875% Note due February 2, 2011. |
|
Incorporated by reference to Exhibit 4(c) of our Form 8-K dated January 23, 2001. |
|
|
|
|
|
|
|
H. |
(i) |
Trust Deed dated 7 February 2002, constituting 300,000,000 5.375% Notes due 2007 between Ecolab Inc. and JPMorgan Chase Bank, London Branch. |
|
Incorporated by reference to Exhibit (4)H(i) of our Form 10-K Annual Report for the year ended December 31, 2001. |
|
|
|
|
|
|
|
|
(ii) |
Paying Agency Agreement, dated 7 February 2002, relating to 300,000,000 5.375% Note due 2007 among Ecolab Inc., JPMorgan Chase Bank, London Branch, J.P. Morgan Bank Luxembourg S.A. and others. |
|
Incorporated by reference to Exhibit (4)H(ii) of our Form 10-K Annual Report for the year ended December 31, 2001. |
|
|
|
|
|
|
(10) |
A. |
|
Multicurrency Credit Agreement, dated as of September 29, 1993, as amended and restated as of August 13, 2004, by and among Ecolab Inc., Ecolab PTY Limited, Ecolab Finance PTY Limited, the financial institutions party thereto as Banks from time to time, the financial institutions party thereto as Issuing Banks from time to time, Citicorp USA, Inc., as administrative agent for the Banks and Issuing Banks thereunder, Citibank International PLC, as agent for the Banks in connection with certain of the Eurocurrency Advances, JPMorgan Chase Bank, as syndication agent, and Credit Suisse First Boston, as documentation agent. |
|
Incorporated by reference to Exhibit (10)A(i) of our Form 10-Q for the quarter ended September 30, 2004. |
Exhibit No. |
|
Document |
|
Method of Filing |
|||||
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|||||
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B. |
|
Documents comprising global Commercial Paper Programs. |
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||||
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|||
|
|
|
(i) |
U.S. $200,000,000 Euro-Commercial Paper Programme. |
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|||
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||
|
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(a) |
Dealer Agreement dated as of 10 June 2003 among Ecolab Inc., Credit Suisse First Boston (Europe) Limited as Arranger, and Citibank International plc and Credit Suisse First Boston (Europe) Limited as Dealers. |
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Incorporated by reference to Exhibit (10)A(i)(a) of our Form 10-Q for the quarter ended June 30, 2003. |
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(b) |
Note Agency Agreement dated as of 10 June 2003 between Ecolab Inc. and Citibank, N.A. as Issue and Paying Agent. |
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Incorporated by reference to Exhibit (10)A(i)(b) of our Form 10-Q for the quarter ended June 30, 2003. |
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(c) |
Deed of Covenant made as of 10 June 2003 by Ecolab Inc. |
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Incorporated by reference to Exhibit (10)A(i)(c) of our Form 10-Q for the quarter ended June 30, 2003. |
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(ii) |
U.S. $450,000,000 U.S. Commercial Paper Program. |
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(a) |
Form of Commercial Paper Dealer Agreement for 4 (2) Program. Agreements have been executed with Salomon Smith Barney, Inc. and Banc One Capital Markets, Inc. |
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Incorporated by reference to Exhibit (10)A(ii)(a) of our Form 10-Q for the quarter ended June 30, 2003. |
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(b) |
Issuing and Paying Agency Agreement dated as of July 10, 2000 between Ecolab Inc. and Bank One, National Association as Issuing and Paying Agent. |
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Incorporated by reference to Exhibit (10)A(ii)(b) of our Form 10-Q for the quarter ended June 30, 2003. |
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Exhibit No. |
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Document |
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Method of Filing |
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C. |
(i) |
Ecolab Inc. 1993 Stock Incentive Plan, as Amended and Restated as of May 12, 2000. |
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Incorporated by reference to Exhibit (10)D of our Form 10-K Annual Report for the year ended December 31, 2002. |
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(ii) |
Sample form of Non-Statutory Stock Option Agreement under the Ecolab Inc. 1993 Stock Incentive Plan, as in effect for grants beginning May 14, 1993 through May 8, 1997. |
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Incorporated by reference to Exhibit (10)C of our Form 10-Q for the quarter ended June 30, 2004. |
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D. |
(i) |
Ecolab Inc. 1997 Stock Incentive Plan, as Amended and Restated as of August 18, 2000. |
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Incorporated by reference to Exhibit (10) of our Form 10-Q for the quarter ended September 30, 2000. |
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(ii) |
Non-Statutory Stock Option Agreement as in effect for grants through May 12, 2000. |
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Incorporated by reference to Exhibit (10)B(i) of our Form 10-Q for the quarter ended June 30, 2004. |
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(iii) |
Non-Statutory Stock Option Agreement as in effect for grants beginning May 13, 2000 through May 10, 2002. |
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Incorporated by reference to Exhibit (10)B(ii) of our Form 10-Q for the quarter ended June 30, 2004. |
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E. |
(i) |
1995 Non-Employee Director Stock Option Plan. |
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Incorporated by reference to Exhibit (10)D of our Form 10-K Annual Report for the year ended December 31, 1994. |
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(ii) |
Amendment No. 1 to 1995 Non-Employee Director Stock Option Plan effective February 25, 2000. |
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Incorporated by reference to Exhibit (10)E(ii) of our Form 10-K for the year ended December 31, 1999. |
Exhibit No. |
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Method of Filing |
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(iii) |
Amendment No. 2 to 1995 Non-Employee Director Stock Option Plan effective May 11, 2001. |
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Incorporated by reference to Exhibit (10)G(iii) of our Form 10-K Annual Report for the year ended December 31, 2002. |
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F. |
(i) |
Ecolab Inc. 2001 Non-Employee Director Stock Option and Deferred Compensation Plan, as amended effective May 1, 2004. |
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Incorporated by reference to Exhibit (10)H(ii) of our Form 10-K Annual Report for the year ended December 31, 2004. |
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(ii) |
Amendment No. 1 adopted December 15, 2004 to Ecolab Inc. 2001 Non-Employee Director Stock Option and Deferred Compensation Plan, as amended and restated effective May 1, 2004, with respect to the American Jobs Creation Act of 2004. |
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Filed herewith electronically. |
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(iii) |
Master Agreement Relating to Options (as in effect through May 7, 2004). |
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Incorporated by reference to Exhibit (10)D(i) of our Form 10-Q for the quarter ended June 30, 2004.
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(iv) |
Master Agreement Relating to Periodic Options, as amended effective as of May 1, 2004. |
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Incorporated by reference to Exhibit (10)D(ii) of our Form 10-Q for the quarter ended June 30, 2004. |
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G. |
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Form of Director Indemnification Agreement. Substantially identical agreements are in effect as to each of our directors |
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Incorporated by reference to Exhibit (10)I of our Form 10-K Annual Report for the year ended December 31, 2003. |
Exhibit No. |
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Method of Filing |
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H. |
(i) |
Ecolab Executive Death Benefits Plan, as amended and restated effective March 1, 1994. |
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Incorporated by reference to Exhibit (10)J of our Form 10-K Annual Report for the year ended December 31, 1994. See also Exhibit (10)N hereof. |
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(ii) |
Amendment No. 1 to Ecolab Executive Death Benefits Plan. |
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Incorporated by reference to Exhibit (10)H(ii) of our Form 10-K Annual Report for the year ended December 31, 1998. |
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(iii) |
Second Declaration of Amendment to Ecolab Executive Death Benefits Plan, effective March 1, 1998. |
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Incorporated by reference to Exhibit (10)H(iii) of our Form 10-K Annual Report for the year ended December 31, 1998. |
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I. |
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Ecolab Executive Long-Term Disability Plan, as amended and restated effective January 1, 1994. See also Exhibit (10)N hereof. |
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Filed herewith electronically. |
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J. |
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Ecolab Executive Financial Counseling Plan. |
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Filed herewith electronically. |
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K. |
(i) |
Ecolab Supplemental Executive Retirement Plan, as amended and restated effective January 1, 2003. |
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Incorporated by reference to Exhibit (10)M of our Form 10-K Annual Report for the year ended December 31, 2003. |
Exhibit No. |
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Method of Filing |
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(ii) |
Amendment No. 1 and Instrument of Benefit Freeze adopted December 16, 2004 to the Ecolab Supplemental Executive Retirement Plan (As Amended and Restated effective January 1, 2003) With Respect to the American Jobs Creation Act of 2004. |
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Filed herewith electronically. |
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L. |
(i) |
Ecolab Mirror Savings Plan, as amended and restated effective as of March 1, 2002. |
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Incorporated by reference to Exhibit (10)N of our Form 10-K Annual Report for the year ended December 31, 2002. |
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(ii) |
Amendment No. 1 adopted December 16, 2004 to the Ecolab Mirror Savings Plan (As Amended and Restated Effective as of March 1, 2002) With Respect to the American Jobs Creation Act of 2004. |
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Filed herewith electronically. |
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M. |
(i) |
Ecolab Mirror Pension Plan, as amended and restated effective as of January 1, 2003. |
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Incorporated by reference to Exhibit (10)B of our Form 10-Q for the quarter ended June 30, 2003. See also Exhibit (10)P hereof. |
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(ii) |
Amendment No. 1 and Instrument of Benefit Freeze adopted December 16, 2004 to the Ecolab Mirror Pension Plan (As Amended and Restated effective January 1, 2003) With Respect to the American Jobs Creation Act of 2004. |
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Filed herewith electronically. |
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N. |
(i) |
Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans, as amended and restated effective as of January 1, 2003. |
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Incorporated by reference to Exhibit (10)P of our Form 10-K Annual Report for the year ended December 31, 2003. |
Exhibit No. |
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Document |
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Method of Filing |
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(ii) |
Amendment No. 1 adopted December 16, 2004 to the Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans (As Amended and Restated effective January 1, 2003) With Respect to the American Jobs Creation Act of 2004. |
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Filed herewith electronically. |
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O. |
(i) |
Ecolab Inc. Management Performance Incentive Plan, as amended and restated on February 28, 2004. |
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Incorporated by reference to Exhibit (10)A of our Form 10-Q for the quarter ended March 31, 2004. |
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(ii) |
Amendment No. 1 adopted February 26, 2005 to the Ecolab Inc. Management Performance Incentive Plan. |
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Filed herewith electronically. |
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P. |
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Ecolab Inc. Change in Control Severance Compensation Policy, effective February 22, 2002. |
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Incorporated by reference to Exhibit (10)R of our Form 10-K Annual Report for the year ended December 31, 2001. |
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Q. |
(i) |
Master Agreement, dated as of December 7, 2000, between Ecolab Inc. and Henkel KGaA. |
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Incorporated by reference to Exhibit 18 of HC Investments, Inc.s and Henkel KGaAs Amendment No. 5 to Schedule 13D dated December 14, 2000. |
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(ii) |
Amendment No. 1 to the Master Agreement, dated December 7, 2000, between Ecolab Inc. and Henkel KGaA. |
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Incorporated by reference to Exhibit (10) of our Form 10-Q for the quarter ended September 30, 2001. |
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(iii) |
Intellectual Property Agreement dated November 30, 2001, between Ecolab and Henkel KGaA. |
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Incorporated by reference to Exhibit (10) of our Form 8-K dated November 30, 2001. |
Exhibit No. |
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Document |
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Method of Filing |
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R. |
(i) |
Ecolab Inc. 2002 Stock Incentive Plan. |
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Incorporated by reference to Exhibit (10) of our Form 10-Q for the quarter ended June 30, 2002. |
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(ii) |
Non-statutory Stock Option Agreement as in effect for grants beginning May 11, 2002 through August 12, 2003. |
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Incorporated by reference to Exhibit (10)A(i) of our Form 10-Q for the quarter ended June 30, 2004. |
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(iii) |
Non-statutory Stock Option Agreement as in effect for grants beginning August 13, 2003. |
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Incorporated by reference to Exhibit (10)A(ii) of our Form 10-Q for the quarter ended June 30, 2004. |
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S. |
(i) |
Transition Agreement effective February 28, 2004 by and between Ecolab Inc. and Allan L. Schuman including related arrangements. |
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Incorporated by reference to Exhibit (10)B(i) of our Form 10-Q for the quarter ended March 31, 2004. |
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(ii) |
Non-statutory Stock Option Agreement. |
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Incorporated by reference to Exhibit (10)B(ii) of our Form 10-Q for the quarter ended March 31, 2004. |
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(iii) |
Mutual Release by Allan L. Schuman and Ecolab Inc. |
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Incorporated by reference to Exhibit (10)B(iii) of our Form 10-Q for the quarter ended March 31, 2004. |
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(iv) |
Employment Agreement (Management) dated December 19, 1994. |
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Incorporated by reference to Exhibit (10)B(iv) of our Form 10-Q for the quarter ended March 31, 2004. |
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T. |
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Named Executive Officer Salary, Stock Options and Bonus Table. |
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Filed herewith electronically. |
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U. |
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Executive Compensation and Benefits Summary. |
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Filed herewith electronically. |
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V. |
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Director Compensation and Benefits Summary. |
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Filed herewith electronically. |
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(13) |
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Those portions of our Annual Report to Stockholders for the year ended December 31, 2004 which are incorporated by reference into Parts I and II hereof. |
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Filed herewith electronically. |
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(14) |
A. |
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Ecolab Code of Conduct. |
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Incorporated by reference to Exhibit (99)A of our Form 10-K Annual Report for the year ended December 31, 2003. |
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B. |
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Code of Ethics for Senior Officers and Finance Associates. |
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Incorporated by reference to Exhibit (99)B of our Form 10-K Annual Report for the year ended December 31, 2003. |
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(21) |
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List of Subsidiaries as of February 28, 2005. |
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Filed herewith electronically. |
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(23) |
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Consent of Independent Registered Public Accounting Firm at page 33 hereof is filed as a part hereof. |
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See page 33 hereof. |
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(24) |
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Powers of Attorney. |
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Filed herewith electronically. |
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(31) |
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Rule 13a-14(a) Certifications. |
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Filed herewith electronically. |
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(32) |
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Section 1350 Certifications. |
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Filed herewith electronically. |
EXHIBIT (10)F(ii)
AMENDMENT NO.
1 TO
ECOLAB INC. 2001 NON-EMPLOYEE DIRECTOR STOCK OPTION AND
DEFERRED COMPENSATION PLAN
(As Amended and Restated Effective as of May 1, 2004)
WITH RESPECT TO THE AMERICAN JOBS CREATION ACT OF 2004
WHEREAS, Ecolab Inc. (the Company) adopted an amended and restated 2001 Non-Employee Director Stock Option and Deferred Compensation Plan (the Plan) effective as of May 1, 2004; and
WHEREAS, the American Jobs Creation Act of 2004, P.L. 108-357 (the AJCA) added a new Section 409A to the Code, which significantly changed the Federal tax law applicable to certain amounts deferred under the Plan after December 31, 2004 that would be within the definition of deferred compensation; and
WHEREAS, pursuant to the AJCA, the Secretary of the Treasury and the Internal Revenue Service will issue proposed, temporary or final regulations and/or other guidance with respect to the provisions of new Section 409A of the Code (collectively, the AJCA Guidance); and
WHEREAS, the AJCA Guidance has not yet been issued; and
WHEREAS, to the fullest extent permitted by Code Section 409A and the AJCA Guidance, the Company wants to protect the grandfathered status of the Plan benefits that are deferred prior to January 1, 2005;
NOW THEREFORE, pursuant to Section 14.1 of the Plan, the Company hereby adopts this Amendment No. 1 to the Plan, effective January 1, 2005, which amendment is intended to (1) allow deferred compensation that was deferred prior to January 1, 2005 to qualify for grandfathered status and to continue to be governed by the law applicable to nonqualified deferred compensation prior to the addition of Code Section 409A (as specified in the Plan as in effect before the adoption of this Amendment No. 1); (2) cause deferred compensation that is deferred after December 31, 2004 to be in compliance with the requirements of Code Section 409A; and (3) to clarify certain share accounting matters to comply with shareholder approval requirements of the New York Stock Exchange.
Section 1
Article 1 of the Plan is hereby amended by adding the following new Section 1.5 to the end thereof, to read as follows:
1.5 American Jobs Creation Act (AJCA) .
(a) It is intended that the Plan (including any Amendments thereto) comply with the provisions of Section 409A of the Code, as enacted by the AJCA, so as to prevent the inclusion in gross income of any amount credited to a Participants Account
hereunder in a taxable year that is prior to the taxable year or years in which such amounts would otherwise be actually distributed or made available to the Participant. It is intended that the Plan be administered in a manner that will comply with Section 409A of the Code, including proposed, temporary or final regulations or any other guidance issued by the Secretary of the Treasury and the Internal Revenue Service with respect thereto (collectively with the AJCA, the AJCA Guidance). Any Plan provision that would cause the Plan to fail to satisfy Section 409A of the Code (including any provision added by Amendment No. 1 thereto) shall have no force and effect until amended to comply with Code Section 409A (which amendment may be retroactive to the extent permitted by the AJCA Guidance).
(b) The Administrator shall not take any action hereunder that would violate any provision of Section 409A of the Code. It is intended that all Participant elections hereunder will comply with Code Section 409A and the AJCA Guidance. The Administrator is authorized to adopt rules or regulations deemed necessary or appropriate in connection therewith to anticipate and/or comply with the requirements thereof (including any transition or grandfather rules thereunder). In this regard, the Administrator is authorized to permit Participant elections with respect to amounts deferred after December 31, 2004 and is also permitted to give the Participants the right to amend or revoke such elections in accordance with the AJCA Guidance.
(c) The effective date of Amendment No. 1 to this Plan is January 1, 2005. Amendment No. 1 creates two separate Sub-Accounts for each Participants Account hereunder (a) the Pre-2005 Sub-Account for amounts that are deferred (as such terms is defined in the AJCA Guidance) as of December 31, 2004 (and earnings thereon) and (b) the Post-2004 Sub-Account for amounts that are deferred after December 31, 2004 (and earnings thereon). Amendment No. 1 also modifies the distribution elections and provisions for the Post-2004 Sub-Accounts to comply with the requirements of Code Section 409A.
(d) In furtherance of, but without limiting the foregoing, any deferrals (and the earnings thereon) that are deemed to have been deferred prior to January 1, 2005 and that qualify for grandfathered status under Section 409A of the Code shall continue to be governed by the law applicable to nonqualified deferred compensation prior to the addition of Section 409A to the Code and shall be subject to the terms and conditions specified in the Plan as in effect prior to the effective date of Amendment No. 1 thereto.
Section 2
Section 2.1(c) of the Plan is hereby amended by deleting the period at the end of the third sentence and adding the following language to the end of the third sentence to read as follows:
, to the extent permitted by Code Section 409A.
Section 3
Article 3 of the Plan is hereby amended by adding the following sentence to the end thereof, to read as follows:
2
For each Participant, each of the Cash Account and Share Account shall be further divided into the following two Sub-Accounts: (a) the Pre-2005 Sub-Account for amounts that are deferred (as such term is defined in the AJCA Guidance) as of December 31, 2004 (and earnings thereon), including carryover credits described in Article 4, and (b) the Post-2004 Sub-Account for amounts that are deferred after December 31, 2004 (and earnings thereon).
Section 4
Section 5.1 of the Plan is hereby amended by adding the following sentence to the end thereof, to read as follows:
All credits made to the Qualified Directors Share Account after December 31, 2004 will be made to the Post-2004 Sub-Account.
Section 5
Section 5.2(d) of the Plan is hereby amended by adding the following sentence to the end thereof, to read as follows:
All credits made to the Qualified Directors Cash Account and/or Share Account after December 31, 2004 will be made to the respective Post-2004 Sub-Account.
Section 6
Section 5.2(a) of the Plan is hereby amended by adding the following sentence to the end thereof, to read as follows:
Notwithstanding the foregoing, all Qualified Directors shall be required to make a deferral election for the 2005 Plan Year and prior elections shall not be given any further force or effect.
Section 7
Section 6.1 of the Plan is hereby amended by adding the following sentence to the end thereof, to read as follows:
Interest will be credited separately for the Pre-2005 Sub-Account and Post-2004 Sub-Account of the Participants Cash Account.
Section 8
Section 6.2 of the Plan is hereby amended by adding the following sentence to the end thereof, to read as follows:
Dividends will be credited separately for the Pre-2005 Sub-Account and Post-2004 Sub-Account of the Participants Share Account.
3
Section 9
Section 8.1(a) the Plan is hereby amended in its entirety to read as follows:
8.1 Distribution of Cash and Share Accounts to a Participant Upon Termination of Service .
(a) Form of Distribution . A Participants Pre-2005 Sub-Account of his or her Cash Account and Share Account will be distributed as provided in this section in a lump sum payment unless:
(i) the Participant elects, on a properly completed election form, to receive his or her distribution in the form of annual installment payments for a period of not more than 10 years, and
(ii) except when cessation results from Disability, the date on which he or she ceases to be a member of the Board follows by more than one year the date on which a properly completed election form is received by the Administrator.
Any election made pursuant to this section may be changed from time to time upon the Administrators receipt of a properly completed election form, provided that, unless cessation results from Disability, such change will not be valid and will not have any effect unless it is made more than one year prior to a Participants cessation of service as member of the Board. A new election to change has no effect on any previous election until the new election becomes effective, at which time any previous election will automatically be void. (For example, if the Administrator receives an election to change on July 1 of year 1 and another election on September 1 of year 1, the July 1 election will become effective on July 1 of year 2 and will remain in effect through August 30 of year 2. On September 1 of year 2, the September 1 election will become effective.) Any election made pursuant to this section will apply to the entire balance of the Participants Pre-2005 Sub-Accounts of his or her Cash and Share Accounts attributable to credits with respect to the period through the date on which he or she ceases to be a member of the Board. If a Participant has a valid election in effect under any Prior Deferred Compensation Plan, such Participants prior election will automatically be deemed to be the Participants election under this section unless and until a new election is made and has become effective. Any distribution from a Participants Pre-2005 Sub-Account of his or her Cash Account will be made in cash only. Subject to Section 13, any distribution from a Participants Pre-2005 Sub-Account of his or her Share Account will be made in whole Shares only, rounded up to the next whole Share.
A Participants Post-2004 Sub-Account of his or her Cash Account and Share Account will be distributed as a lump sum payment. Any distribution from a Participants Post-2004 Sub-Account of his or her Cash Account will be made in cash only. Subject to Section 13, any distribution from a Participants Post-2004 Sub-Account of his or her Share Account will be made in whole Shares only, rounded up to the next whole Share
4
(b) Time of Distribution . To the extent allowed under Section 409A of the Code, distribution to a Participant will be made (to the extent a distribution is in the form of a lump sum) or commence (to the extent that the Participants Pre-2005 Sub-Account will be distributed in installments) as soon as administratively practicable after the next Credit Date after the Participant ceases to be a member of the Board; provided that if a lump sum distribution from a Participants Share Account would otherwise be made after the record date for a dividend but before the payment date for such dividend, the distribution will be delayed and made as soon as administratively practicable after the earnings credits have been made to the Share Account pursuant to Section 6.2 on the payment date of the dividend (the Time of Distribution).
If a Participant is considered to be a key employee, as defined under Code Section 409A, no distribution will be made or commence before the date that is six months after the Participants separation from service, as defined under Code Section 409A, (except in case of the Participants death).
(c) Amount of Distribution for Cash Account .
(i) Lump Sum . The amount of a lump sum payment from a Participants applicable Sub-Account of his or her Cash Account will be equal to the balance of the applicable Sub-Account of his or her Cash Account as of the Time of Distribution.
(ii) Installments . The amount of each installment payment from a Participants Pre-2005 Sub-Account of the Cash Account will be determined by dividing the balance of the Pre-2005 Sub-Account of the Cash Account as of the distribution date for such installment payment by the total number of remaining payments (including the current payment).
(d) Amount of Distribution for Share Account .
(i) Lump Sum . A lump sum distribution from a Participants applicable Sub-Account of his or her Share Account will consist of the number of Shares equal to the number of Share Units credited to the applicable Sub-Account of his or her Share Account as of the Time of Distribution, rounded up to the next whole Share.
(ii) Installments . Each installment distribution from a Participants Pre-2005 Sub-Account of the Share Account will consist of the number of Shares determined by dividing the number of whole Share Units credited to the Pre-2005 Sub-Account of the Share Account as of the distribution date for such installment distribution by the total number of remaining payments (including the current payment) and rounding the quotient to the next whole Share.
(e) Reduction of Account Balance . The balance of the applicable Sub-Account of the Cash or Share Account from which a distribution is made will be reduced, as of the date of the distribution, by the cash amount or number of Shares distributed.
5
Section 10
Section 8.2(a) the Plan is hereby amended in its entirety to read as follows:
(a) Withdrawals Due to Unforeseeable Emergency . A distribution will be made to a Participant from his or her Account if the Participant submits a written distribution request to the Administrator and the Administrator determines that the Participant has experienced an Unforeseeable Emergency. The amount of the distribution may not exceed the lesser of:
(i) the amount necessary to satisfy the emergency, as determined by the Administrator, or
(ii) the sum of the balances of the Participants Accounts as of the date of the distribution, as the case may be.
Payments made on account of an Unforeseeable Emergency will not be made to the extent that such Unforeseeable Emergency is or may be relieved through reimbursement or compensation by insurance or otherwise, by liquidation of the Participants assets (to the extent that such liquidation would not itself cause severe financial hardship) or, to the extent permitted by Code Section 409A, by cessation of deferrals under Section 5.2. Any distribution pursuant to this section will be made as soon as administratively practicable after the Administrators determination that the Participant has experienced an Unforeseeable Emergency and in the form of a lump sum payment that is in cash from the Cash Account and in Shares from the Share Account (rounded up to the next whole Share). Any distribution pursuant to this section will be made first from the Participants Cash Account, then from the Participants Share Account.
Section 11
Section 8.2(c) of the Plan is amended in its entirety to read as follows:
(c) Accelerated Distribution . A Participant may, at any time, elect an immediate distribution of his or her Pre-2005 Sub-Accounts of his or her Cash and Share Accounts in an amount equal to 90 percent of the sum of the balances of the Pre-2005 Sub-Accounts of his or her Cash and Share Accounts as of the date of the distribution, in which case the remaining balances of such Pre-2005 Sub-Accounts of his or her Cash and Share Accounts will be forfeited. The distribution will be made in the form of a lump sum payment as soon as administratively practicable after the Administrators receipt of a written application in form prescribed by the Administrator. Any distribution pursuant to this section from a Participants Pre-2005 Sub-Accounts of his or her Cash Account will be made in cash. Any distribution pursuant to this section from a Participants Pre-2005 Sub-Accounts of his or her Share Account will be made in whole Shares (rounded up to the next whole Share). The balance of the Pre-2005 Sub-Accounts of his or her Cash or Share Accounts from which a distribution is made will be reduced to zero as of the date of the distribution.
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No distribution of a Participants Post-2004 Sub-Accounts of his or her Cash or Share Accounts will be allowed.
Section 12
Section 8.2(e) of the Plan is amended in its entirety to read as follows:
(e) Reduction of Account Balance . Except in the case of accelerated distributions pursuant to Section 8.2(c), the balance of the Sub-Account of the Cash or Share Account from which a distribution is made will be reduced, as of the date of the distribution, by the cash amount or number of Shares distributed, as the case may be.
Section 13
Section 8.3(a) of the Plan is amended by deleting the period at the end of the first sentence and adding the following language to the end of the first sentence to read as follows
, to the extent permitted by Code Section 409A.
Section 14
A new Section 14.1(e) is added to the Plan to read as follows:
(e) Notwithstanding the other provisions in this Section 14.1, including any limitation on the right of the Company to amend the Plan in Section 14.1(b), the Company will have the right to amend the Plan as it deems necessary or reasonable (as determined in the sole discretion of the Company) to comply with the requirements of Code Section 409A.
Section 15
Section 15.7 of the Plan is amended by adding the following sentence at the end to read as follows:
The Cash Account will include a Pre-2005 Sub-Account and Post-2004 Sub-Account.
Section 16
Section 15.28 of the Plan is amended by adding the following sentence at the end to read as follows:
The Share Account will include a Pre-2005 Sub-Account and Post-2004 Sub-Account.
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Section 17
Section 15.34 of the Plan is amended in its entirety to read as follows:
Unforeseeable Emergency . With respect to a Participants Post-2004 Sub-Accounts, Unforeseeable Emergency shall mean an event which results in a severe financial hardship to the Participant as a consequence of (1) an illness or accident of the Participant, the Participant s spouse or a dependent within the meaning of Code Section 152, (2) loss of the Participant s property due to casualty or (3) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. With respect to a Participant Pre-2005 Sub-Accounts, Unforeseeable Emergency shall mean an unanticipated emergency that is caused by an event beyond the Participants control resulting in a severe financial hardship that cannot be satisfied through other means. The existence of an Unforeseeable Emergency will be determined by the Administrator.
Section 18
A new Section 15.35 is added to the Plan to read as follows:
Sub-Account . Sub-Account refers to the Participants Pre-2005 Sub-Account, accounting for those amounts deferred into the Plan prior January 1, 2005 (and related earnings credits), the Participants Post-2004 Sub-Account, accounting for those amounts deferred into the Plan after December 31, 2004 (and related earnings), or both as the context requires.
Section 19
Section 17.2 of the Plan is amended in its entirety to read as follows:
Accounting . Shares that are issued or distributed under the Plan or that are subject to outstanding Periodic Options granted under the Plan or Share Units will be applied to reduce the maximum number of Shares remaining available for issuance or distribution under the Plan. Any Shares that are subject to a Periodic Option granted under the Plan that lapses, expires, is forfeited or for any reason is terminated unexercised and any Shares that are subject to Share Units in a Share Account that are forfeited pursuant to Section 8.2(c) will automatically again become available for issuance or distribution under the Plan. To the extent that the exercise price of any Periodic Option granted under the Plan and/or associated tax withholding obligations are paid by tender or attestation as to ownership of Previously Acquired Shares on or before May 11, 2011 (the date ten years following approval of the Plan by the Companys stockholders), or to the extent that such tax withholding obligations are satisfied by withholding of shares
8
otherwise issuable upon exercise of the Periodic Option, only the number of Shares issued net of the number of Shares tendered, attested to or withheld will be applied to reduce the maximum number of Shares remaining available for issuance under the Plan.
IN WITNESS WHEREOF, Ecolab Inc. has executed this Amendment No. 1 and has caused its corporate seal to be affixed this 15 th day of December, 2004.
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ECOLAB INC. |
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Douglas M. Baker
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Lawrence T. Bell
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9
EXHIBIT (10)I
ECOLAB
EXECUTIVE LONG-TERM DISABILITY PLAN
(As Amended and Restated Effective January 1, 1994)
Pursuant to Section 7.1 of the Ecolab Executive Long-Term Disability Plan (the Plan) and the resolutions of the Board of Directors of Ecolab Inc. dated February 26, 1994, Ecolab Inc. hereby amends and restates the Plan in its entirety to read as follows, effective January 1, 1994.
ARTICLE I
PREFACE
SECTION 1.1 . Effective Date . The effective date of this amendment and restatement of the Plan is January 1, 1994. The benefit, if any, payable with respect to a former Executive who became Disabled prior to the Effective Date (and who does not recover from the Disability and is not rehired by a member of the Controlled Group thereafter) shall be determined by, and paid in accordance with, the terms and provisions of the Plan as in effect prior to the Effective Date.
SECTION 1.2 . Purpose of the Plan . The purpose of this Plan is to provide further means whereby the Company may afford financial security for certain management and highly compensated employees who perform management and professional functions for the company and certain related entities, by providing a level of protection from the financial losses that may be suffered on account of the disability of such an employee.
SECTION 1.3 . Administrative Document . This Plan includes the Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans (the Administrative Document), which is incorporated herein by reference.
ARTICLE II
DEFINITIONS
Words and phrases used herein with initial capital letters which are defined in the Administrative Document or the Ecolab Long-Term Disability Plan are used herein as so defined, unless otherwise specifically defined herein or the context clearly indicates otherwise. The following words and phrases when used in this Plan with initial capital letters shall have the following respective meanings, unless the context clearly indicates otherwise:
SECTION 2.1 . Annual Earnings for a Plan Year shall mean the Annual Earnings of an Executive used under the LTD Plan for purposes of determining benefits under the LTD Plan; provided, however, that (1) Annual Earnings shall not be subject to the limitation contained in Section 505(b)(7) of the code, (2) Annual Earnings shall include an Executives deferrals under the Ecolab Mirror Savings Plan, and (3) Annual Earning shall not exceed $700,000.
SECTION 2.2 . Disability or Disabled . An Executive shall be deemed to have a Disability or be Disabled if the Executives active employment with an Employer ceases due to a Total Disability that entitles the Executive to benefits under the LTD Plan.
SECTION 2.3 . Executive shall mean an Employee who is selected by the Administrator to participate in the Plan and (1) who is in a pay grade of 24 or above, or (2) whose Annual Earnings exceeds the dollar limitation described in Code Section 505(b)(7) for a Plan Year.
SECTION 2.4 . Executive Disability Benefits shall mean the benefits described in Article III.
SECTION 2.5 . LTD Plan shall mean the Ecolab Long-Term Disability Plan, as amended from time to time.
SECTION 2.6 . Plan shall mean the Ecolab Executive Long-Term Disability Plan, as described herein and as it may be amended from time to time.
ARTICLE III
EXECUTIVE DISABILITY BENEFITS
SECTION 3.1 . Coverage .
(1) Commencement of Coverage . An Employee shall become covered under the Plan as of the first date on or after the Effective Date on which he is an Executive.
(2) Termination of Coverage . An Executive shall cease to be covered under the Plan on the earliest to occur of (a) the date the Executive ceases to be employed by the Employer for any reason other than Disability, (b) the date of a change in the Executives employment status so that he no longer satisfies the requirements of an Executive, or (c) the date the Plan is terminated or amended to eliminate coverage with respect to the Executive.
SECTION 3.2 . Amount of Executive Disability Benefits . An Executive who becomes Disabled shall be entitled to a monthly Executive Disability Benefit equal to
2
sixty percent (60%) of one-twelfth (1/12) of the Executives Annual Earnings, reduced by (1) the amount of the Monthly Benefit payable to the Executive under the LTD Plan, and (2) the amount of any benefit reductions made to the Monthly Benefits under the LTD Plan pursuant to the offset provisions of the LTD Plan; provided, however, that in no event shall the monthly Executive Disability Benefit under this Plan, when combined with the amount of benefit under the LTD Plan, exceed $35,000.
ARTICLE IV
PAYMENT OF EXECUTIVE DISABILITY BENEFITS
SECTION 4.1 . Commencement of Executive Disability Benefits . An Executives Executive Disability Benefits shall be paid to the Executive at the same time and under the same conditions as the Executives Monthly Benefits under the LTD Plan. Notwithstanding the foregoing, in the event that payment at such time is prevented due to reasons outside of the Administrators control, the executive Disability Benefits shall commence as soon as practicable after the Monthly Benefits commence under the LTD Plan, and the first payment hereunder shall include any Disability Benefits not made as a result of the delay in payment.
SECTION 4.2 . Termination of Executive Disability Benefits . Payment of an Executives Executive Disability Benefits shall cease on the earliest to occur of (1) the date the Executive recovers from the Disability, (2) the date of termination of Monthly Benefits under the LTD Plan for any reason, or (3) the date the Plan is terminated or amended to eliminate Executive Disability Benefits with respect to the Executive.
IN WITNESS WHEREOF, Ecolab Inc. has executed this Executive Long-Term Disability Plan and has caused its corporate seal to be affixed this 29 th day of August, 1994.
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ECOLAB INC. |
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Michael E. Shannon |
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Vice Chairman, Chief Financial |
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/s/ Kenneth A. Iverson |
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Kenneth A. Iverson |
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Secretary |
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3
EXHIBIT (10)J
ECOLAB
EXECUTIVE FINANCIAL COUNSELING PLAN
(Effective January 1, 1989)
ARTICLE I - Name and Purpose
1.1 Plan Name . The name of the Plan is Ecolab Executive Financial Counseling Plan.
1.2 Purpose . The purpose of the Plan is to reimburse Executive Employees of the Company for certain expenses incurred by such Executives for financial counseling.
ARTICLE II - Definitions
For purposes of this Plan, each of the terms set forth in this article shall, unless the context otherwise requires, have the meaning prescribed in this article.
2.1 Plan . The Plan is the Ecolab Executive Financial Counseling Plan set forth in this instrument as it may be amended from time to time.
2.2 Company . The Company is Ecolab Inc., a Delaware corporation, or its successor.
2.3 Executive . An Executive is an Employee who has been selected by the Chief Executive Officer of the Company to participate in the Plan. In the event coverage under the Plan continues for a period following the Executives death, the term Executive shall refer to the executor or other personal representative of the deceased Executives estate.
2.4 Annual Compensation . An Executives Annual Compensation for a Plan Year is the rate of the Executives annual base compensation as of December 31 of the immediately preceding Plan Year, or, in the case of an Executive who was not an Employee on such December 31, the date he or she became an Employee.
2.5 Employee . Employee is a common-law employee of the Company or of any other corporation at least fifty percent of the outstanding stock of which is owned, directly or indirectly, by the Company.
2.6 Financial Counseling . Financial Counseling shall refer to services rendered for an Executive (or his or her estate) for financial/investment planning, estate planning, tax planning, tax return preparing and tax audit assistance by an Authorized Vendor.
2.7 Authorized Vendor . Any accounting/tax, investing and legal vendor(s), selected at the discretion of the Executive to perform Financial Counseling, with respect to whom the Executive has provided written notice to the Administrator; provided, however, that any vendor who is not licensed in the area of expertise in which he or she practices or who is a relative of the Executive shall not be an Authorized Vendor unless the Company authorizes the use of such vendor in writing.
2.8 Annual Percentage . The Annual Percentage with respect to an Executive for a Plan Year shall be an amount equal to three percent (3%) of the Executives applicable Annual Compensation for that Plan Year.
2.9 Annual Reimbursement Limit . The Annual Reimbursement Limit with respect to an Executive for any Plan Year shall be the sum of his or her Annual Percentage for such Plan Year and for each
of the two immediately preceding Plan Years, less the total amount of benefits previously paid under this Plan with respect to the Executive during the two immediately preceding Plan years.
2.10 Permanent and Total Disability . For purposes of this Plan, an Executive shall be considered to be Permanently and Totally Disabled only if, by reason of bodily injury or disease, he or she is entitled to receive long-term disability benefits under the Companys long-term disability plan.
2.11 Plan Year . The Plan Year is the calendar year.
ARTICLE III - Administration
3.1 Administrator . The Company shall be the Administrator of the Plan. The Vice President - Corporate Human Resources of the Company (or the functional equivalent of such officer in the event the title or responsibility of that office change) shall perform the duties of the Administrator on behalf of the Company. Such Vice President may, by written instrument, delegate any or all of the duties of the Administrator to any person who shall serve at the pleasure of such Vice President.
3.2 Duties . The Administrator shall take such actions and adopt such rules and procedures as shall be necessary or advisable to carry out the provisions of the Plan.
3.3 Indemnification . The Company shall indemnify the Vice President - Corporate Human Resources and each person performing duties as Administrator against all liabilities such person may incur in the administration of the Plan. The Administrator shall be entitled to reimbursement from the Company for expenses incurred in the performance of the duties of Administrator.
3.4 Claims . The Administrator shall give each Executive, within a reasonable time following the Executives submission of a request for payment of benefits, written notice of the amount of benefits to which the Executive is entitled. The Executive may, within thirty days after receiving such notice, file with the Administrator a written objection to the Administrators determination of such amount. The Administrator shall review the claim and shall respond in writing to the Executive within sixty days after receiving the objection. If the Administrator, upon review, denies any part or all of the benefits claimed by the Executive, the Executive may, within sixty days of receiving the Administrators response, appeal the Administrators decision by written notice to the Chief Executive Officer of the Company. Within ninety days after receiving the Executives notice of appeal, the Chief Executive Officer shall render a decision with respect to the claim, which decision shall be final and binding upon the Company and the Executive.
ARTICLE IV - Benefits
4.1 Coverage .
(A) Each Executive shall be covered under the Plan as of the first date on or after the Effective Date on which he or she is an Executive.
(B) An Executive shall cease to be covered under the Plan as of the earliest of:
(1) The date his or her employment as an Executive ceases for any reason other than death or Permanent and Total Disability;
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(2) If the coverage under the Plan continued during a period of the Executives Permanent and Total Disability, the end of the twelfth month following the month in which the Permanent and Total Disability occurred or such earlier date as the Permanent and Total Disability ceases; and
(3) If coverage under the Plan continued as a result of the Executives death, the end of the twelfth month following the month in which the death occurred.
4.2 Benefits .
(A) Subject to subparagraph (B), an Executive shall be entitled to reimbursement of expenses incurred for Financial Counseling by an Authorized Vendor while the coverage under the Plan was in effect, such reimbursement not to exceed the Annual Reimbursement Limit in any Plan Year.
(B) Notwithstanding anything to the contrary in subparagraph (A), total reimbursements with respect to eligible expenses incurred during a period of coverage continuation following death or Permanent and Total Disability of the Executive pursuant to Section 4.1 (A)(2) or (3) may be equal to, but shall not exceed, the Executives Annual Percentage for the Plan Year in which such death or Permanent and Total Disability occurred, irrespective of any benefits already paid for such Plan Year prior to such period of coverage continuation.
4.3 Request for Reimbursement . Within a reasonable time following the occurrence of expenses eligible for reimbursement under this Plan, the Executive shall file with the Administrator a request for reimbursement which includes the itemized statement from the Authorized Vendor to the Executive and the Executives written confirmation of the accuracy of the statement, and such other information as the Administrator shall from time to time deem necessary or desirable in administering the Plan.
4.4 Payment of Benefit . Benefit payments with respect to eligible expenses shall be made, at the discretion of the Administrator, directly to the Authorized Vendor or to the Executive (or the Executives estate in the event of his or her death) within a reasonable time following submission of a properly filed request for reimbursement.
4.5 Facility of Payment . If the Administrator determines that a person entitled to benefits under the Plan is under legal disability or is otherwise unable to receipt for any benefit payment, the Administrator may, in his sole discretion, pay such benefit to a spouse, parent or adult child of such person, or to any individual whom the Administrator determines to have assumed responsibility for such persons financial affairs. The receipt of the distributee selected by the Administrator shall be a complete release of all claims of the person on whose behalf such payment is made and the payment to such distributee shall fully discharge the Companys obligation under the Plan to the extent of such payment.
4.6 Non-alienation . No Executive may in any way pledge, assign, encumber or otherwise alienate his interest in any benefit payable under the Plan. The Company shall give no effect to any instrument purporting to alienate any persons interest in Plan benefits.
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ARTICLE V - Funding
5.1 Company Obligations . Benefits under the Plan shall be paid directly by the Company from its general assets. No specific property of the Company shall in any manner be dedicated to or segregated for payment of such benefits.
5.2 Executives Rights . No Executive shall have any right to any specific assets of the Company under the Plan, but shall, to the extent the Company does not pay benefits when they are due, be a general creditor of the Company.
ARTICLE VI - Amendment and Termination
6.1 Amendment . The Plan may be amended from time to time by an instrument signed by either the General Counsel or the Vice President - Corporate Human Resources of the Company (or the functional equivalent of such offices in the event the title or responsibilities of the office change).
6.2 Termination . The Plan may be terminated at any time by an instrument signed by either the General Counsel or the Vice President - Corporate Human Resources of the Company (or the functional equivalent of such offices in the event the title or responsibilities of the office change).
6.3 Restriction . No amendment or termination shall operate to deprive any Executive of any benefit otherwise payable during the Plan Year in which the amendment or termination occurs with respect expenses incurred by the Executive prior to the date on which the resolution amending or terminating the Plan is adopted.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its duly authorized officer and its corporate seal to be affixed this 15th day of April, 1992.
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/s/ William R. Rosengren |
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William R. Rosengren |
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Senior Vice President - Law, |
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General Counsel and Secretary |
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4
EXHIBIT (10)K(ii)
AMENDMENT
NO.
1 AND INSTRUMENT OF
BENEFIT FREEZE
TO THE ECOLAB SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(As Amended and Restated effective January 1, 2003)
WITH RESPECT TO
THE AMERICAN JOBS CREATION ACT OF 2004
WHEREAS, Ecolab Inc. (the Company) amended and restated the Ecolab Supplemental Executive Retirement Plan (the Plan) effective January 1, 2003; and
WHEREAS, the Plan is classified as a nonqualified deferred compensation plan under the Code; and
WHEREAS, the American Jobs Creation Act of 2004, P.L. 108-357 (the AJCA) added a new Section 409A to the Code, which significantly changed the Federal tax law applicable to amounts deferred under the Plan after December 31, 2004; and
WHEREAS, pursuant to the AJCA, the Secretary of the Treasury and the Internal Revenue Service will issue proposed, temporary or final regulations and/or other guidance with respect to the provisions of new Section 409A of the Code (collectively, the AJCA Guidance); and
WHEREAS, the AJCA Guidance has not yet been issued; and
WHEREAS, to the fullest extent permitted by Section 409A of the Code and the AJCA Guidance, the Company wants to protect the grandfathered status of the SERP Benefits that are accrued prior to January 1, 2005; and
WHEREAS, due to the uncertainty regarding the effect of the AJCA on SERP Benefits under the Plan, the Company has decided to temporarily freeze all SERP Benefits as of December 31, 2004;
NOW, THEREFORE, pursuant to Section 1.3 of the Plan and Section 5.1 of the Administrative Document, the Company hereby adopts this Amendment No. 1 to the Plan, which amendment is intended to (1) allow amounts deferred prior to January 1, 2005 to qualify for grandfathered status and continue to be governed by the law applicable to nonqualified deferred compensation prior to the addition of Section 409A of the Code (as specified in the Plan as in effect prior January 1, 2005); and (2) temporarily freeze the accrual of SERP Benefits hereunder as of December 31, 2004.
Words and phrases used herein with initial capital letters that are defined in the Plan are used herein as so defined and the provisions hereof shall be effective as of the close of business on December 31, 2004.
Section 1
Article I of the Plan is hereby amended by the addition of the following new Section 1.4 at the end thereof, to read as follows:
Section 1.4 American Jobs Creation Act (AJCA) .
(a) To the extent applicable, it is intended that the Plan (including all Amendments thereto) comply with the provisions of Section 409A of the Code, as enacted by the AJCA, so as to prevent the inclusion in gross income of any amount of SERP Benefit accrued hereunder in a taxable year that is prior to the taxable year or years in which such amounts would otherwise be actually distributed or made available to the Executives. The Plan shall be administered in a manner that will comply with Section 409A of the Code, including proposed, temporary or final regulations or any other guidance issued by the Secretary of the Treasury and the Internal Revenue Service with respect thereto (collectively with the AJCA, the AJCA Guidance). Any Plan provisions that would cause the Plan to fail to satisfy Section 409A of the Code (including, without limitation, those added or amended by this Amendment No. 1) shall have no force and effect until amended to comply with Code Section 409A (which amendment may be retroactive to the extent permitted by the AJCA Guidance).
(b) The Administrator shall not take any action hereunder that would violate any provision of Section 409A of the Code. The Administrator is authorized to adopt rules or regulations deemed necessary or appropriate in connection with the AJCA Guidance to anticipate and/or comply with the requirements thereof (including any transition or grandfather rules thereunder).
(c) The effective date of Amendment No. 1 to this Plan is December 31, 2004. This Amendment No. 1 temporarily freezes the SERP Benefits under the Plan effective as of December 31, 2004, with the intent being that the Company will rescind the freeze upon issuance of the AJCA Guidance. In furtherance thereof, but without limiting the foregoing, any SERP Benefit that is deemed to have been deferred prior to January 1, 2005 and that qualifies for grandfathered status under Section 409A of the Code shall continue to be governed by the law applicable to nonqualified deferred compensation prior to the addition of Section 409A to the Code and shall be subject to the terms and conditions specified in the Plan as in effect prior to January 1, 2005.
Section 2
Article III of the Plan is hereby amended by the addition of the following new Section 3.2(3) thereto, immediately following Section 3.2(2), to read as follows:
(3) Benefit Freeze . Notwithstanding any provision of the Plan to the contrary, all SERP Benefits under the Plan shall be frozen as of December 31, 2004. In furtherance thereof, but without limiting the foregoing, a Participant shall not receive credit under this Plan for any service or compensation that is earned after December 31, 2004 (even if such service and compensation is taken into account for purposes of
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calculating the Pension Benefit). The Company intends that SERP Benefits that are accrued (and, only if required under the AJCA Guidance, vested) on or before December 31, 2004 will qualify for grandfathered status under the AJCA and will continue to be governed by the law applicable to nonqualified deferred compensation prior to the addition of Section 409A of the Code.
Section 3
Section 6.1 of the Plan is hereby amended by adding the following clause to the end thereof, to read as follows:
; provided, however, that this limitation shall not apply the extent deemed necessary by the Company to comply with the requirements of Code Section 409A.
Section 4
Section 6.4(2)(b)(iii) of the Plan is hereby amended by adding the following clause to the end thereof, to read as follows:
; to the extent permitted by Section 409A.
IN WITNESS WHEREOF, Ecolab Inc. has executed this Amendment No. 1 and has caused its corporate seal to be affixed this 16 th day of December, 2004.
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ECOLAB INC. |
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Steven L. Fritze |
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Executive Vice President and |
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Chief Financial Officer |
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Lawrence T. Bell |
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Senior Vice President, |
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3
EXHIBIT (10)L(ii)
AMENDMENT NO. 1
TO
THE ECOLAB MIRROR SAVINGS PLAN
(As Amended and Restated Effective as of March 1, 2002)
WITH RESPECT TO
THE AMERICAN JOBS CREATION ACT OF 2004
WHEREAS, Ecolab Inc. (the Company) adopted an amended and restated Ecolab Mirror Savings Plan (the Plan) effective as of March 1, 2002; and
WHEREAS, the Plan is classified as a nonqualified deferred compensation plan under the Internal Revenue Code of 1986, as amended (the Code); and
WHEREAS, the American Jobs Creation Act of 2004, P.L. 108-357 (the AJCA) added a new Section 409A to the Code, which significantly changed the Federal tax law applicable to amounts deferred under the Plan after December 31, 2004; and
WHEREAS, pursuant to the AJCA, the Secretary of the Treasury and the Internal Revenue Service will issue proposed, temporary or final regulations and/or other guidance with respect to the provisions of new Section 409A of the Code (collectively, the AJCA Guidance); and
WHEREAS, the AJCA Guidance has not yet been issued; and
WHEREAS, pursuant to Article V of the Plan, all Mirror Savings Plan Benefits under the Plan are 100% vested (subject to certain non-service related forfeiture provisions); and
WHEREAS, to the fullest extent permitted by Code Section 409A and the AJCA Guidance, the Company wants to protect the grandfathered status of the Mirror Savings Plan Benefits that are deferred prior to January 1, 2005;
NOW THEREFORE, pursuant to Section 1.3 of the Plan and Section 5.1 of the Administrative Document, the Company hereby adopts this Amendment No. 1 to the Plan, which amendment is intended to (1) allow amounts deferred prior to January 1, 2005 to qualify for grandfathered status and to continue to be governed by the law applicable to nonqualified deferred compensation prior to the addition of Code Section 409A (as specified in the Plan as in effect before the adoption of this Amendment No. 1) and (2) cause amounts deferred after December 31, 2004 to be deferred in compliance with the requirements of Code Section 409A.
Words used herein with initial capital letters that are defined in the Plan are used herein as so defined.
Section 1
Article I of the Plan is hereby amended by adding the following new Section 1.4 to the end thereof, to read as follows:
SECTION 1.4 American Jobs Creation Act (AJCA) .
(1) It is intended that the Plan (including any Amendments thereto) comply with the provisions of Section 409A of the Code, as enacted by the AJCA, so as to prevent the inclusion in gross income of any amount credited to an Executives Account hereunder in a taxable year that is prior to the taxable year or
years in which such amounts would otherwise be actually distributed or made available to the Executive. It is intended that the Plan be administered in a manner that will comply with Section 409A of the Code, including proposed, temporary or final regulations or any other guidance issued by the Secretary of the Treasury and the Internal Revenue Service with respect thereto (collectively with the AJCA, the AJCA Guidance). Any Plan provision that would cause the Plan to fail to satisfy Section 409A of the Code (including any provision added by Amendment No. 1 thereto) shall have no force and effect until amended to comply with Code Section 409A (which amendment may be retroactive to the extent permitted by the AJCA Guidance).
(2) The Administrator shall not take any action hereunder that would violate any provision of Section 409A of the Code. It is intended that all Executives elections hereunder will comply with Code Section 409A and the AJCA Guidance. The Administrator is authorized to adopt rules or regulations deemed necessary or appropriate in connection therewith to anticipate and/or comply with the requirements thereof (including any transition or grandfather rules thereunder). In this regard, the Administrator is authorized to permit Executive elections with respect to amounts deferred after December 31, 2004 and is also permitted to give the Executives the right to amend or revoke such elections in accordance with the AJCA Guidance.
(3) The effective date of Amendment No. 1 to this Plan is January 1, 2005. Amendment No. 1 creates two separate Sub-Accounts for each Executives Mirror Savings Benefits hereunder (a) the Pre-2005 Sub-Account for amounts that are deferred (as such terms is defined in the AJCA Guidance) as of December 31, 2004 (and earnings thereon) and (b) the Post-2004 Sub-Account for amounts that are deferred after December 31, 2004 (and earnings thereon). Amendment No. 1 also modifies the distribution elections and provisions for the Post-2004 Sub-Accounts to comply with the requirements of Code Section 409A.
(4) In furtherance of, but without limiting the foregoing, any Executive Deferrals and Matching Contributions (and the earnings thereon) that are deemed to have been deferred prior to January 1, 2005 and that qualify for grandfathered status under Section 409A of the Code shall continue to be governed by the law applicable to nonqualified deferred compensation prior to the addition of Section 409A to the Code and shall be subject to the terms and conditions specified in the Plan as in effect prior to the effective date of Amendment No. 1 thereto. In particular, to the extent permitted under AJCA Guidance, (a) the Bonus Deferrals relating to a Bonus that is earned during 2004, but paid in 2005, shall be allocated to the Executives Pre-2005 Sub-Account hereunder and (b) the forfeiture provisions of Section 5.1(2) hereof shall not result in amounts that are allocated the Executives Pre-2005 Sub-Account losing their grandfathered status under Section 409A of the Code.
Section 2
Section 2.1 of the Plan is hereby amended by adding the following sentence to the end thereof, to read as follows:
The Executives Account shall be further divided into the following two Sub-Accounts: (a) the Pre-2005 Sub-Account for amounts that are deferred (as such term is defined in the AJCA Guidance) as of December 31, 2004 (and earnings thereon), which includes the Minimum Benefit, and (b) the Post-2004 Sub-Account for amounts that are deferred after December 31, 2004 (and earnings thereon).
Section 3
Section 2.5 of the Plan is hereby amended in its entirety to read as follows:
SECTION 2.5. Disability or Disabled . With respect to an Executives Post-2004 Sub-Account, an Executive shall be deemed to have a Disability or be Disabled if the Executive (1) is unable to engage
2
in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve months, or (2) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve months, receiving income replacement benefits for a period of not less than three months under an Employer-sponsored accident and health plan. With respect to an Executives Pre-2005 Sub-Account, an Executive shall be deemed to have a Disability or be Disabled if the Executives active employment with an Employer ceased due to a disability that entitles the Executive to benefits under (1) any long-term disability plan sponsored by the Company, or (2) in the event that the Executive is not a participant in any such plan, the Social Security Act of the United States.
Section 4
Section 2.15 of the Plan is hereby amended in its entirety to read as follows:
SECTION 2.15 . Unforeseeable Emergency. With respect to an Executives Post-2004 Sub-Account, Unforeseeable Emergency shall mean an event which results in a severe financial hardship to the Executive as a consequence of (1) an illness or accident of the Executive, the Executives spouse or a dependent within the meaning of Code Section 152, (2) loss of the Executives property due to casualty or (3) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Executive. With respect to an Executives Pre-2005 Sub-Account, Unforeseeable Emergency shall mean an event which results (or will result) in severe financial hardship to the Executive as a consequence of an unexpected illness or accident or loss of the Executives property due to casualty or other similar extraordinary or unforeseen circumstances out of the control of the Executive.
Section 5
Article II of the Plan is hereby amended by adding the following new Sections to the end thereof, to read as follows:
SECTION 2.16. Key Employees shall mean a key employee, as defined in Section 416(i) of the Code (without regard to paragraph (5) thereof) of an Employer so long as the Employer is a corporation, any stock in which is publicly traded on an established securities market or otherwise.
SECTION 2.17. Termination of Employment means a separation of service as defined in the AJCA Guidance issued under Code Section 409A.
SECTION 2.18. Total Salary Deferrals means the sum of Salary Deferrals, as defined in Section 3.1(1), plus the maximum before-tax savings contributions required to be allocated to the Executives account under the Savings Plan to attract the maximum matching contribution thereunder, based on the Executives Base Salary for the Plan Year.
Section 6
Article III of the Plan is hereby amended in its entirety to read as follows:
ARTICLE III
3
MIRROR SAVINGS BENEFIT
4
5
SECTION 3.5 Statement of Account . The Company shall deliver to each Executive a written statement of his Account not less frequently than annually as of the end of each Plan Year.
Section 7
Section 4.1(1)(a) of the Plan is hereby amended in its entirety to read as follows:
(a) An Executive shall be entitled to receive his Account upon the earlier of (i) his becoming Disabled or (ii) his termination of employment with the Controlled Group for any reason, including retirement (or, with respect to amounts that are allocated to an Executives Post-2004 Sub-Account, upon his Termination of Employment); provided, however, in no event shall distribution be made, or commence to be made, with respect to a Key Employee before the date that is six months after the date of Termination of Employment of the Key Employee (or, if earlier, the date of death), to the extent that Code Section 409A(a)(2)(B)(i) is applicable.
Section 8
The last sentence of Section 4.1(1)(b) of the Plan is hereby amended in its entirety to read as follows:
Section 9
Section 4.1(1)(c) of the Plan is hereby amended by adding the following clause to the end thereof: ; to the extent permitted by Code Section 409A.
Section 10
Section 4.2(2)(b) of the Plan is hereby amended by changing the parenthetical therein to read as follows:
(or the remaining installments thereof from an Executives Pre-2005 Sub-Account if payment to the Executive had commenced).
Section 11
Section 4.2(2)(c) of the Plan is hereby amended in its entirety to read as follows:
6
(c) Small Benefits . Notwithstanding any provision of the Plan to the contrary, in the event that an Executives Mirror Savings Benefit does not exceed $25,000 (or such lesser amount required to comply with the requirements of Code Section 409A), such Benefit shall be paid to the Executive in the form of a single lump sum payment.
Section 12
Section 4.2(3)(a) of the Plan is hereby amended by adding the following new clause to the end thereof, to read as follows:
; provided, however, the election provided by this Section 4.2(3) shall apply only to the Executives Pre-2005 Sub-Account (other than the Executives Minimum Benefit), and shall not apply to the Executives Post-2004 Sub-Account.
Section 13
The first sentence of Section 6.1(2) of the Plan is hereby amended in its entirety to read as follows:
To the extent permitted by Code Section 409A, the Hypothetical Investment Funds for purposes of the portion of an Executives Account which is attributable to his Executive Deferrals shall be those same Investment Funds designated by the Company under the Savings Plan, as in effect on December 31, 2004.
Section 14
Section 7.1 of the Plan is hereby amended by adding the following new clause to the end thereof, to read as follows:
; provided, however that this limitation shall not apply to any amendment or termination that is deemed necessary or reasonable (as determined in the sole discretion of the Committee) to comply with the requirements of Code Section 409A and the AJCA Guidance.
Section 15
The last three sentences of Section 7.2 of the Plan are amended in their entirety to read as follows:
To the extent permitted by Code Section 409A, in the event that any payment or benefit intended to be provided under this Plan or otherwise is required to be reduced pursuant to this Section, the Executive (in his or her sole discretion) shall be entitled to designate the payments and/or benefits to be so reduced in order to give effect to this Section. The Company shall provide the Executive with all information reasonably requested by the Executive to permit the Executive to make such designation. In the event that the Executive fails to make such designation within ten (10) business days of receiving such information, the Company may effect such reduction in any manner it deems appropriate, to the extent permitted by Code Section 409A.
Section 16
Section 7.3(2)(b)(iii) of the Plan is amended it its entirety to read as follows:
to the extent permitted by Code Section 409A, the Trust Fund shall automatically terminate (A) in the event that it is determined by a final decision of the United States Department of Labor (or, if an appeal is taken therefrom, by a court of competent jurisdiction) that by reason of the creation of, and a transfer of assets to, the Trust, the Trust is considered funded for purposes of Title I of ERISA or (B) in the event that
7
it is determined by a final decision of the Internal Revenue Service (or, if an appeal is taken therefrom, by a court of competent jurisdiction) that (I) a transfer of assets to the Trust is considered a transfer of property for purposes of Code Section 83 or any successor provision thereto, or (II) pursuant to Code Sections 451 or 409A or any successor provisions thereto, amounts are includable as compensation in the gross income of a Trust Fund beneficiary in a taxable year that is prior to the taxable year or years in which such amounts would otherwise be actually distributed or made available to such beneficiary by the trustee. Upon such termination of the Trust, all assets shall revert to the Company.
Section 17
Section 7.3(2)(g) of the Plan is amended by adding the following new clause to the end thereof, to read as follows
; provided, however that this limitation shall not apply to any amendment that is deemed necessary or reasonable (as determined in the sole discretion of the Committee) to comply with the requirements of Code Section 409A and the AJCA Guidance.
IN WITNESS WHEREOF, Ecolab Inc. has executed this Amendment No. 1 and has caused its corporate seal to be affixed this 16 th day of December, 2004.
|
ECOLAB INC. |
||
|
|
||
|
|
||
|
By: |
/s/ Steven L. Fritze |
|
|
Steven L. Fritze |
||
|
Executive Vice President and |
||
|
Chief Financial Officer |
||
|
|||
(Seal) |
|||
|
|||
Attest: |
|||
|
|||
|
|||
/s/ Lawrence T. Bell |
|
||
Lawrence T. Bell |
|||
Senior Vice President, |
|||
General Counsel and Secretary |
|||
8
EXHIBIT (10)M(ii)
AMENDMENT NO. 1 AND INSTRUMENT OF
BENEFIT FREEZE
TO THE ECOLAB MIRROR PENSION PLAN
(As Amended and Restated effective January 1, 2003)
WITH RESPECT TO
THE AMERICAN JOBS CREATION ACT OF 2004
WHEREAS, Ecolab Inc. (the Company) amended and restated the Ecolab Mirror Pension Plan (the Plan) effective January 1, 2003; and
WHEREAS, the Plan is classified as a nonqualified deferred compensation plan under the Code; and
WHEREAS, the American Jobs Creation Act of 2004, P.L. 108-357 (the AJCA) added a new Section 409A to the Code, which significantly changed the Federal tax law applicable to amounts deferred under the Plan after December 31, 2004; and
WHEREAS, pursuant to the AJCA, the Secretary of the Treasury and the Internal Revenue Service will issue proposed, temporary or final regulations and/or other guidance with respect to the provisions of new Section 409A of the Code (collectively, the AJCA Guidance); and
WHEREAS, the AJCA Guidance has not yet been issued; and
WHEREAS, to the fullest extent permitted by Section 409A of the Code and the AJCA Guidance, the Company wants to protect the grandfathered status of the Mirror Pension Benefits that are accrued prior to January 1, 2005; and
WHEREAS, due to the uncertainty regarding the effect of the AJCA on Mirror Pension Benefits under the Plan, the Company has decided to temporarily freeze all Mirror Pension Benefits as of December 31, 2004;
NOW, THEREFORE, pursuant to Section 1.3 of the Plan and Section 5.1 of the Administrative Document, the Company hereby adopts this Amendment No. 1 to the Plan, which amendment is intended to (1) allow amounts deferred prior to January 1, 2005 to qualify for grandfathered status and continue to be governed by the law applicable to nonqualified deferred compensation prior to the addition of Section 409A of the Code (as specified in the Plan as in effect prior January 1, 2005); and (2) temporarily freeze the accrual of Mirror Pension Benefits hereunder as of December 31, 2004.
Words and phrases used herein with initial capital letters that are defined in the Plan are used herein as so defined and the provisions hereof shall be effective as of the close of business on December 31, 2004.
Section 1
Article I of the Plan is hereby amended by the addition of the following new Section 1.4 at the end thereof, to read as follows:
Section 1.4 American Jobs Creation Act (AJCA) .
(a) To the extent applicable, it is intended that the Plan (including all Amendments thereto) comply with the provisions of Section 409A of the Code, as enacted by the AJCA, so as to prevent the inclusion in gross income of any amount of Mirror Pension Benefit accrued hereunder in a taxable year that is prior to the taxable year or years in which such amounts would otherwise be actually distributed or made available to the Executives. The Plan shall be administered in a manner that will comply with Section 409A of the Code, including proposed, temporary or final regulations or any other guidance issued by the Secretary of the Treasury and the Internal Revenue Service with respect thereto (collectively with the AJCA, the AJCA Guidance). Any Plan provisions that would cause the Plan to fail to satisfy Section 409A of the Code (including, without limitation, those added or amended by this Amendment No. 1) shall have no force and effect until amended to comply with Code Section 409A (which amendment may be retroactive to the extent permitted by the AJCA Guidance).
(b) The Administrator shall not take any action hereunder that would violate any provision of Section 409A of the Code. The Administrator is authorized to adopt rules or regulations deemed necessary or appropriate in connection with the AJCA Guidance to anticipate and/or comply with the requirements thereof (including any transition or grandfather rules thereunder).
(c) The effective date of Amendment No. 1 to this Plan is December 31, 2004. This Amendment No. 1 temporarily freezes the Mirror Pension Benefits under the Plan effective as of December 31, 2004, with the intent being that the Company will rescind the freeze upon issuance of the AJCA Guidance. In furtherance thereof, but without limiting the foregoing, any Mirror Pension Benefit that is deemed to have been deferred prior to January 1, 2005 and that qualifies for grandfathered status under Section 409A of the Code shall continue to be governed by the law applicable to nonqualified deferred compensation prior to the addition of Section 409A to the Code and shall be subject to the terms and conditions specified in the Plan as in effect prior to January 1, 2005.
Section 2
Article III of the Plan is hereby amended by the addition of the following new Section 3.1(4) thereto, immediately following Section 3.1(3), to read as follows:
(4) Benefit Freeze . Notwithstanding any provision of the Plan to the contrary, all Mirror Pension Benefits under the Plan shall be frozen as of December 31, 2004. In furtherance thereof, but without limiting the foregoing, a Participant shall not receive credit under this Plan for any service or compensation that is earned after December 31, 2004 (even if such service and compensation is taken into account for purposes of
2
calculating the Actual Pension Plan Benefit or the amount credited to the Executives Retirement Account in the Pension Plan). The Company intends that Mirror Pension Benefits that are accrued (and, only if required under the AJCA Guidance, vested) on or before December 31, 2004 will qualify for grandfathered status under the AJCA and will continue to be governed by the law applicable to nonqualified deferred compensation prior to the addition of Section 409A of the Code.
Section 3
Section 6.1 of the Plan is hereby amended by adding the following clause to the end thereof, to read as follows:
; provided, however, that this limitation shall not apply the extent deemed necessary by the Company to comply with the requirements of Code Section 409A.
Section 4
Section 6.3(2)(b)(iii) of the Plan is hereby amended by adding the following clause to the end thereof, to read as follows:
; to the extent permitted by Section 409A.
IN WITNESS WHEREOF, Ecolab Inc. has executed this Amendment No. 1 and has caused its corporate seal to be affixed this 16 th day of December, 2004.
|
ECOLAB INC. |
||
|
|
||
|
|
||
|
By: |
/s/ Steven L. Fritze |
|
|
Steven L. Fritze |
||
|
Executive Vice President and |
||
|
Chief Financial Officer |
||
|
|||
(Seal) |
|||
|
|||
Attest: |
|||
|
|||
|
|||
/s/ Lawrence T. Bell |
|
||
Lawrence T. Bell |
|||
Senior Vice President, |
|||
General Counsel and Secretary |
|||
3
EXHIBIT (10)N(ii)
AMENDMENT NO.
1
TO THE ECOLAB INC.
ADMINISTRATIVE DOCUMENT FOR NON-QUALIFIED BENEFIT PLANS
(As Amended and Restated effective January 1, 2003)
WITH RESPECT TO
THE AMERICAN JOBS CREATION ACT OF 2004
WHEREAS, Ecolab Inc. (the Company) amended and restated the Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans (the Administrative Document) effective January 1, 2003; and
WHEREAS, the Administrative Document provides for the administration of the non-qualified benefit plans listed on Exhibit A thereto, one or more of which is classified as a nonqualified deferred compensation plan under the Code (each a Non-Qualified Plan); and
WHEREAS, the American Jobs Creation Act of 2004, P.L. 108-357 (the AJCA) added a new Section 409A to the Code, which significantly changed the Federal tax law applicable to amounts deferred under a Non-Qualified Plan after December 31, 2004; and
WHEREAS, pursuant to the AJCA, the Secretary of the Treasury and the Internal Revenue Service will issue proposed, temporary or final regulations and/or other guidance with respect to the provisions of new Section 409A of the Code (collectively, the AJCA Guidance); and
WHEREAS, the AJCA Guidance has not yet been issued; and
WHEREAS, to the fullest extent permitted by Section 409A of the Code and the AJCA Guidance, the Company wants to protect the grandfathered status of the benefits that are accrued under the Non-Qualified Plans prior to January 1, 2005;
NOW THEREFORE, pursuant to Section 5.1 of the Administrative Document, the Company hereby adopts this Amendment No. 1 to the Administrative Document, which amendment is intended to (1) allow amounts deferred under the Non-Qualified Plans prior to January 1, 2005 to qualify for grandfathered status and to continue to be governed by the law applicable to nonqualified deferred compensation prior to the addition of Code Section 409A (as specified in the Non-Qualified Plans as in effect before the adoption of this Amendment No. 1) and (2) cause amounts deferred under the Non-Qualified Plans after December 31, 2004 to be deferred in compliance with the requirements of Code Section 409A.
Words and phrases used herein with initial capital letters that are defined in the Administrative Document are used herein as so defined and the provisions hereof shall be effective as of the close of business on December 31, 2004.
Section 1
Article IV of the Administrative Document is hereby amended by the addition of the following new Section 4.6 at the end thereof, to read as follows:
Section 4.6 American Jobs Creation Act (AJCA) .
(a) To the extent applicable, it is intended that each Non-Qualified Plan (including all amendments thereto) comply with the provisions of Section 409A of the Code, as enacted by the AJCA, so as to prevent the inclusion in gross income of any amount of benefit
accrued hereunder in a taxable year that is prior to the taxable year or years in which such amounts would otherwise be actually distributed or made available to the Executives. Each Non-Qualified Plan shall be administered in a manner that will comply with Section 409A of the Code, including proposed, temporary or final regulations or any other guidance issued by the Secretary of the Treasury and the Internal Revenue Service with respect thereto (collectively with the AJCA, the AJCA Guidance). Any provisions of this Administrative Document that would cause any Non-Qualified Plan to fail to satisfy Section 409A of the Code (including, without limitation, those added or amended by this Amendment No. 1) shall have no force and effect until amended to comply with Code Section 409A (which amendment may be retroactive to the extent permitted by the AJCA Guidance).
(b) The Administrator shall not take any action under the Non-Qualified Plans that would violate any provision of Section 409A of the Code. The Administrator is authorized to adopt rules or regulations deemed necessary or appropriate in connection with the AJCA Guidance to anticipate and/or comply with the requirements thereof (including any transition or grandfather rules thereunder).
(c) The effective date of this Amendment No. 1 is December 31, 2004. In furtherance thereof, but without limiting the foregoing, any benefit under a Non-Qualified Plan that is deemed to have been deferred prior to January 1, 2005 and that qualifies for grandfathered status under Section 409A of the Code shall continue to be governed by the law applicable to nonqualified deferred compensation prior to the addition of Section 409A to the Code and shall be subject to the terms and conditions specified in the Administrative Document as in effect prior to January 1, 2005.
IN WITNESS WHEREOF, Ecolab Inc. has executed this Amendment No. 1 and has caused its corporate seal to be affixed this 16 th day of December, 2004.
|
ECOLAB INC. |
||
|
|
||
|
|
||
|
By: |
/s/ Steven L. Fritze |
|
|
Steven L. Fritze |
||
|
Executive Vice President and |
||
|
Chief Financial Officer |
||
|
|||
(Seal) |
|||
|
|||
Attest: |
|||
|
|||
|
|||
|
|||
/s/ Lawrence T. Bell |
|
||
Lawrence T. Bell |
|||
Senior Vice President, |
|||
General Counsel and Secretary |
|||
2
EXHIBIT (10)O(ii)
AMENDMENT
NO. 1
TO THE ECOLAB INC. MANAGEMENT PERFORMANCE INCENTIVE PLAN
(as amended and restated on February 28, 2004)
WHEREAS, Ecolab Inc. (the Company) adopted an amended and restated Management Incentive Plan (the Plan) effective as of February 28, 2004; and
WHEREAS, the American Jobs Creation Act of 2004, P.L. 108-357 (the AJCA) added a new Section 409A to the Internal Revenue Code (the Code), which significantly changed the Federal tax law applicable to certain amounts deferred under the Plan after December 31, 2004 that would be within the definition of deferred compensation; and
WHEREAS, pursuant to the AJCA, the Secretary of the Treasury and the Internal Revenue Service has issued guidance with respect to the provisions of new Section 409A of the Code; and
WHEREAS, the Company intends for the benefits provided under the Plan to not be subject to the requirements of Section 409A of the Code;
NOW THEREFORE, pursuant to Section 10 of the Plan, the Board of Directors of the Company hereby adopts this Amendment No. 1 to the Plan, effective as of January 1, 2005, which amendment is intended to cause all amounts paid under the Plan to satisfy certain exceptions from being subject to the requirements of Section 409A of the Code.
Section 1
Section 6 of the Plan is amended to read as follows:
6. Payment of Awards .
As soon as practicable after the Committee has received the appropriate financial and other data after the end of a Plan Year, the Committee will for each Participant certify in writing the extent to which the applicable Performance Goals for such Participant have been met and the corresponding amount of the Award earned by such Participant. Payment of each Award in a cash lump sum, less applicable withholding taxes pursuant to Section 8 of the Plan, shall be made as soon as practicable thereafter, but no later than 2½ months after the end of the Plan Year. Notwithstanding anything in the Plan to the contrary, no payment made pursuant to any Award in respect of any Performance Period shall exceed $3 million. If the Committee determines in good faith that there is a reasonable likelihood that any compensation paid or payable to a Participant by the Company or a Subsidiary pursuant to the Plan for a Plan Year would not be deductible by the Company or the Subsidiary solely by reason of the limitation under Section
162(m) of the Code, the Committee may reduce all or a portion of the amounts otherwise payable pursuant to the Plan to the extent deemed necessary by the Committee to ensure that the entire amount of any distribution to such Participant is deductible.
Section 2
Section 7.2 of the Plan is amended to read as follows
7.2 Termination for Reasons Other than Death, Disability or Retirement . In the event a Participants employment is terminated with the Company and all Subsidiaries prior to the end of the Performance Period for any reason other than death, Disability or Retirement, or a Participant is in the employ of a Subsidiary and the Subsidiary ceases to be a Subsidiary of the Company (unless the Participant continues in the employ of the Company or another Subsidiary), the Participants Award for such Performance Period shall be immediately forfeited and the Participant shall have no right to any payment thereafter; provided, however, that under such circumstances the Committee may pay the Participant an amount not to exceed a percentage of the amount earned according to the terms of the Award equal to the portion of the Performance Period through the Participants termination. Any amount paid to the Participant shall be made no later than 2½ months after the end of the Plan Year of such Performance Period.
EXHIBIT (10)T
NAMED EXECUTIVE OFFICER
SALARY, STOCK OPTIONS AND BONUS TABLE
NEO Table
The table below sets forth (i) base salaries established for the 2005 fiscal year for the individuals who served as the Companys Chief Executive Officer during 2004 (Allan L. Schuman was CEO from January 1, 2004 to June 30, 2004, and Douglas M. Baker, Jr. from July 1, 2004 to December 31, 2004) and the next four most-highly compensated executive officers who were serving in those capacities at December 31, 2004 (the NEOs); (ii) stock options granted for the 2005 fiscal year for the NEOs, which are listed in the table as 2004 grants; and (iii) bonuses paid to the NEOs for the 2004 fiscal year. Although the reload feature was eliminated for option grants subsequent to 2002, certain past grants provided for a one-time automatic grant of a reload stock option if the optionee exercises the original stock option by tendering shares of previously owned Common Stock of the Company. The reload option (i) is for the same number of shares tendered to exercise the original stock option and the number of shares required to be withheld to satisfy minimum statutory tax obligations, (ii) has an exercise price equal to the fair market value of the Companys Common Stock on the reload grant date, and (iii) is immediately exercisable at any time during the remaining exercise term of the original stock option.
|
|
Salary |
|
Option Grant |
|
Bonus |
|
||||||||||
Name and Principal Position |
|
Year |
|
Amount |
|
Year |
|
Initial |
|
Reloads |
|
Year |
|
Amount |
|
||
Allan L. Schuman,
|
|
2005 |
|
$ |
500,000 |
(1) |
2004 |
|
310,000 |
(1) |
711,162 |
|
2004 |
|
$ |
1,500,000 |
(1) |
|
2004 |
|
$ |
1,000,000 |
|
2003 |
|
650,000 |
|
0 |
|
2003 |
|
$ |
1,662,500 |
|
|
|
2003 |
|
$ |
1,000,000 |
|
2002 |
|
640,000 |
|
0 |
|
2002 |
|
$ |
1,500,000 |
|
|
Douglas M. Baker, Jr.,
|
|
2005 |
|
$ |
700,000 |
|
2004 |
|
314,000 |
|
0 |
|
2004 |
|
$ |
850,000 |
|
|
2004 |
|
$ |
625,000 |
|
2003 |
|
220,000 |
|
0 |
|
2003 |
|
$ |
400,000 |
|
|
|
2003 |
|
$ |
475,000 |
|
2002 |
|
220,000 |
|
0 |
|
2002 |
|
$ |
400,000 |
|
|
John P. Spooner,
|
|
2005 |
|
$ |
485,000 |
|
2004 |
|
0 |
|
0 |
|
2004 |
|
$ |
400,000 |
|
|
2004 |
|
$ |
485,000 |
|
2003 |
|
100,000 |
|
0 |
|
2003 |
|
$ |
330,000 |
|
|
|
2003 |
|
$ |
470,000 |
|
2002 |
|
100,000 |
|
0 |
|
2002 |
|
$ |
402,000 |
|
|
Stephen D. Newlin,
|
|
2005 |
|
$ |
475,000 |
|
2004 |
|
54,100 |
|
0 |
|
2004 |
|
$ |
375,000 |
|
|
2004 |
|
$ |
457,000 |
|
2003 |
|
100,000 |
|
0 |
|
2003 |
|
$ |
112,500 |
|
|
|
2003 |
|
$ |
225,000 |
|
2002 |
|
N/A |
|
N/A |
|
2002 |
|
N/A |
|
||
Steven L. Fritze, Executive
|
|
2005 |
|
$ |
380,000 |
|
2004 |
|
88,200 |
|
0 |
|
2004 |
|
$ |
371,000 |
|
|
2004 |
|
$ |
345,500 |
|
2003 |
|
100,000 |
|
0 |
|
2003 |
|
$ |
250,000 |
|
|
|
2003 |
|
$ |
320,000 |
|
2002 |
|
140,000 |
|
0 |
|
2002 |
|
$ |
258,200 |
|
|
Lawrence T. Bell,
|
|
2005 |
|
$ |
330,000 |
|
2004 |
|
54,100 |
|
0 |
|
2004 |
|
$ |
307,500 |
|
|
2004 |
|
$ |
315,000 |
|
2003 |
|
70,000 |
|
0 |
|
2003 |
|
$ |
202,800 |
|
|
|
2003 |
|
$ |
300,000 |
|
2002 |
|
117,000 |
|
0 |
|
2002 |
|
$ |
228,600 |
|
(1) Amount of compensation established pursuant to the terms of transition arrangements dated February 28, 2004 between the Company and Mr. Schuman relating to Mr. Schumans retirement on December 31, 2004.
EXHIBIT (10)U
EXECUTIVE COMPENSATION AND BENEFITS SUMMARY
For purposes of this summary, the Named Executive Officers or NEOs generally refers to the Companys Chief Executive Officer and the next four most-highly compensated executive officers, and the Committee refers to the Compensation Committee of the Board of Directors of the Company.
BASE SALARY
The Committee reviews base salaries for corporate officers, including NEOs, on an annual basis in light of relevant market data and individual performance to determine whether an increase is appropriate, with salary increases becoming effective at various times throughout the year. Competitive market data is available for all of the executive positions. Salaries are monitored to ensure that the appropriate balance of internal value and external competitiveness is maintained.
BONUSES
Management Incentive Plan (MIP) / Management Performance Incentive Plan (MPIP)
The MIP is a cash-based annual incentive plan that focuses executives attention on achieving competitive annual business goals. The Committee, with input from Management, sets specific performance goals at the beginning of each year and communicates them to the Companys executives. A mix of corporate, business unit, and individual goals is used to foster cross-divisional cooperation and to assure that executives have a reasonable measure of control over the factors affecting their awards.
The MPIP is a stockholder-approved plan that is similar to the MIP, except that it is intended to qualify for the performance-based exception to the $1,000,000 deduction limitation under Section 162(m) of the Internal Revenue Code. The Committee, working with Management and the independent compensation consultant, Frederic W. Cook & Co., also set performance goals for the Company which are in addition to the MPIP performance targets.
The Committee, in general, makes awards based strictly on the level of achievement against pre-established goals. Under the MIP, the Committee may, in its sole discretion, make awards at a level higher or lower than that determined by strict application of achievement against goals based upon such other business and individual performance criteria as the Committee determines appropriate. Under the MPIP, however, the Committee may make awards only at a level that is at or lower than the level determined by strict application of achievement against goals.
LONG-TERM INCENTIVE AWARDS
Long-term incentive awards, typically in the form of stock options, are granted annually based on pre-established grant guidelines approved by the Committee under a stockholder-approved plan with exercise prices not less than the fair market value of the Companys Common Stock on the date of grant, providing no value to the executive unless the Companys stock price increases after the grants are made. Individual stock incentive grant guidelines are established for each such officer based on market competitive values. Stock options generally have a 10-year exercise term and vest ratably on the first three anniversaries of the date of grant, subject to accelerated vesting in the event of certain terminations of employment or a defined change-in-control of the Company. With the consent of the Committee, stock options granted to plan participants, including executive officers, may be transferred to defined family members or legal entities established for their benefit. Certain stock option grants made in 2000, 2001, and 2002 also provided for a one-time automatic grant of a reload stock option if the optionee exercises the original stock option by tendering shares of previously owned Common Stock of the Company (the reload feature was eliminated for grants subsequent to 2002). The reload stock option is for the same number of shares tendered to exercise the original stock option and the number of shares required to be withheld to satisfy minimum statutory tax obligations, has an exercise price equal to the fair market value of the Companys Common Stock on the reload grant date, and is immediately exercisable at any time during the remaining exercise term of the original stock option.
The Committee from time to time approves the grant of restricted stock awards on a selective basis in connection with promotions and recruitment and retention purposes.
BENEFITS
Mirror Savings Plan
Under the Mirror Savings Plan, participating executives can defer up to 25% of their base pay and annual incentive bonus. The Company generally matches 100% of a participants deferrals up to 3% of compensation and 50% of a participants deferrals of the next 2% of compensation, reduced by the match that could be received by the participant in the Companys Ecolab Savings Plan and ESOP. The investment options generally are the same as those offered for the Ecolab Savings Plan and ESOP and deferrals earn the rate of return equal to the rate of return of the designated investment funds. However, unlike the Ecolab Savings Plan and ESOP, assets are not actually invested in the designated funds. Subject to certain forfeiture provisions, participants are 100% vested in their deferrals and the Companys matching contribution. This plan is unfunded and participants are general unsecured creditors of the Company.
Supplemental Executive Retirement Plan and Mirror Pension Plan
In general, the SERP and the Mirror Pension Plan bridge the gap between a participants target retirement benefit and the benefits provided by the Ecolab Pension Plan, which is subject to the various Internal Revenue Code limits on compensation and benefit payments. The plans are unfunded. Benefits under the SERP and the Mirror Pension Plan are subject to certain forfeiture provisions.
Change in Control Severance Policy
The Company has a Change in Control Severance Compensation policy (the Policy), which applies to elected officers (other than assistant officers) of the Company. The Policy, in general, runs until the later of either two years after a notice of termination of the Policy is given by the Board of Directors or, if a change in control has occurred, two years after a change in control.
Under the Policy, if within two years following a change in control the employment of such an officer with the Company is terminated without Just Cause (as defined in the Policy) or the officer voluntarily terminates his/her employment for Good Reason (as defined in the Policy), the officer is entitled to a severance payment. The severance payment is paid in a lump sum and is equal to the aggregate of (i) two times the sum of the officers base salary plus target annual bonus; and (ii) a pro-rated portion of the target annual bonus for the year of termination. The officer also is entitled to payment of reasonable outplacement service fees up to 20% of base salary and continuation, for up to 18 months, of medical and dental health coverage at the cost the officer paid prior to termination of employment. It is a condition of the payment of such benefits that the officer provide the Company with a release from claims against the Company.
In addition, the Companys non-qualified deferred compensation plans provide that the interests of participants shall vest and become non-forfeitable upon a change in control of the Company. For the purpose of the Policy, and the defined compensation plans, a change in control of the Company occurs if:
a person or group acquires 25% or more of the Companys outstanding voting power. However, if the acquisition was approved by the Board of Directors, then a change in control occurs at 34% ownership. If the acquiring person, prior to becoming a 25% shareholder, has entered into (and is in compliance with) a shareholder agreement which imposes limits on the persons maximum Company shareholdings, then a change in control occurs only upon acquisition of 50% of the Companys voting power;
during any 36 consecutive month period, individuals who constitute the Board on the first day of the period or any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election relating to the election of directors) whose election or nomination for election by the Companys stockholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who were directors on the first day of such period (or whose election or nomination were previously so approved) shall cease for any reason to constitute at least a majority of the Board of Directors;
the Company engages in a merger or consolidation, other than a merger or consolidation in which the Companys voting securities immediately prior to the transaction continue to represent over 50% of the voting power of the Company or the surviving entity immediately after the transaction and in which no person or group acquires 50% or more of the voting power of the Company or surviving entity; and
the Companys stockholders approve a plan of complete liquidation or the Company sells all or substantially all of the Companys assets, other than to an entity with more than 50% of its voting power owned by the Companys stockholders in substantially the same proportion as their ownership of the Company immediately prior to the sale
PERQUISITES
Executive Long Term Disability Plan
This plan, in conjunction with the Companys standard long term disability plan, provide benefits equal to 60% of an executives pay, up to a maximum of $35,000 per month, in the event of such executives total and permanent disability lasting longer than six months. The Company pays the full cost. Payments generally continue until an executive reaches age 65 or is no longer disabled, but may continue longer if disability occurs after age 60.
Executive Death Benefit
Under this plan, an executive is eligible for (i) a death benefit equal to three times the executives prior year compensation (base salary and bonus), limited to a $3 million benefit, (ii) an additional three times prior year compensation, up to a $3 million limit if death is the result of an accident, and (iii) an additional $750,000 if death is caused by an accident while traveling on company business. Additionally, a retired executive who has satisfied certain age and service requirements is eligible for a post-retirement death benefit equal to five times such executives high five-year average compensation, up to a maximum of $750,000. The Company pays the entire cost of these benefits.
Executive Financial Counseling Plan
This plan provides executive participants with the reimbursement of expenses for financial counseling by an authorized service provider. Financial counseling services covered by the plan are financial/investment planning, estate planning, tax return preparation and tax audit assistance. The reimbursement amount for any given year is limited to three percent (five percent for the CEO) of the sum of the executives annual base salary as of December 31 for each of the preceding three years, less the amount of any benefits paid under the plan during the last two years.
Miscellaneous Perquisites
The Company provides each corporate officer with an automobile and pays for the associated maintenance and insurance. Additionally, the Company pays for a complete annual physical examination for each corporate officer. The Company also pays the dues for club membership for the CEO (and no other NEOs) used by such officer for business purposes. Lastly, the Board of Directors of the Company has encouraged the Companys Chairman of the Board and its President and Chief Executive Officer to use private aircraft transportation due to security concerns, to the extent deemed appropriate.
EXHIBIT (10)V
NON-EMPLOYEE DIRECTOR COMPENSATION AND BENEFITS SUMMARY
COMPENSATION
Annual Payments
Annual Retainer |
|
$ |
55,000 |
|
|
|
|
|
|
Committee Chair Fee |
|
|
|
|
Audit |
|
$ |
11,000 |
|
Compensation, Finance and Governance |
|
$ |
6,000 |
|
In addition, a number of shares of stock units are credited annually to each directors deferred stock unit account. Currently, the Board has fixed the annual value of the stock units at $25,000.
All reasonable travel, telephone and other expenses incurred on behalf of Ecolab are reimbursable.
Directors may choose, at the time of initial election to the Board and annually thereafter, to have the portions of their compensation which are paid in cash deferred into an interest-bearing deferred account or the stock unit account.
Deferred Accounts
Deferred accounts are of two types: (i) stock unit accounts which are comprised of stock equivalents which increase/decrease with Ecolabs stock price and are credited with dividend equivalents; and (ii) interest-bearing accounts which are credited with interest at the prime rate.
Deferred accounts for a director are tax deferred until the director ceases Board service. At that time the proceeds are paid in a lump sum or in equal annual installments for up to 10 years depending on the directors election, which can be made, generally, as late as one year prior to leaving the Board for amounts deferred before 2005. Amounts deferred in 2005 or later must be paid in a lump sum. Amounts deferred to the interest-bearing account, are paid in cash. Amounts in the stock unit account are paid in Ecolab stock. Upon death a lump sum of any remaining amounts will be paid to the directors beneficiary.
BENEFITS
Stock Option Plan
Directors receive a non-qualified option to purchase a number of shares of Common Stock, as fixed from time to time by the fair market value on such date. The right to exercise the option vests on grant. Currently, the Board has fixed the value of the annual stock option grant at $55,000.
Options may be exercised for a period of 10 years from grant. However, in the event a director ceases to be a director, the exercise period is shortened to the lesser of five years from the date the director terminates director status or the remaining term of the original option period.
Matching Gifts
Ecolab will match, up to $1,000 per fiscal year, a directors contributions to accredited U.S. educational institutions and an additional $100 for contributions to qualifying U.S. public radio and television stations.
Eligibility for this program continues through the calendar year in which a director ceases to be a director.
Travel Insurance
Directors are covered by $50,000 business travel accident coverage while traveling on Ecolab business.
Director Liability Protection
The current D&O coverage is $60 million. There is no individual deductible.
Ecolabs Certificate of Incorporation eliminates the ability of Ecolab or its stockholders to recover monetary damages resulting from good-faith breaches of certain fiduciary duties by a director.
Directors are entitled to indemnification by Ecolab for actions as a director taken in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of Ecolab.
Exhibit (13)
OVERVIEW FOR 2004
This Financial Discussion should be read in conjunction with the information on Forward-Looking Statements and Risk Factors found at the end of the Financial Discussion.
The year ended December 31, 2004 was another year of double-digit income growth and record net sales of $4.2 billion. During 2004, we expanded our sales coverage by entering new markets and geographies. We found ways to reduce costs and improve processes. Strong earnings growth during the first half of 2004 and improving travel and hospitality markets allowed us to accelerate investments during the second half of the year to improve long-term growth.
Operating Highlights
We drove our Circle the Customer growth strategy with our new field referral program, which gives ownership to our field sales team to advance this critical strategy.
We grew business with independent accounts through targeted programs and our food distributor partnerships in the United States, Latin America and Europe. We are committed to furthering our impact with street customers by assigning dedicated resources to build an even more effective model for the street segment.
We bolstered our sales-and-service force, adding associates to our sales team and making key investments in their training and productivity.
We introduced new products such as our Wash n Walk no-rinse floor cleaner and the Grease Exxpress high-temp grill degreaser that have led the charge for one of the strongest new slates of products in our recent history.
We increased our market specialization with the separation of Professional Products and Healthcare in the United States. These two businesses now have the ability to focus more aggressively on their respective core markets, which positions them for better growth.
We increased market penetration in the agri, meat and poultry markets and expanded our product technology with the acquisition of Alcide Corporation; broadened our product lines and distribution channels in the food safety market with the acquisition of Daydots International; and enhanced our offerings in the floor care market with the acquisition of certain business lines of VIC International. These businesses had annual sales of approximately $51 million prior to acquisition.
We expanded our geographic coverage and global presence as well, with the pest elimination acquisitions of Nigiko in France and Elimco in South Africa. These businesses had annual sales of approximately $59 million prior to acquisition.
We continued to add to our management team. We successfully transitioned CEO responsibilities and bolstered our management group through external hires and internal development.
Financial Performance
Our consolidated net sales reached $4.2 billion for 2004, an increase of 11 percent over net sales of $3.8 billion in 2003. Excluding acquisitions and divestitures, consolidated net sales increased 9 percent.
Our operating income for 2004 increased 11 percent over 2003. Excluding acquisitions and divestitures, operating income increased 7 percent.
Diluted net income per share was $1.19 for 2004, up 12 percent from $1.06 in 2003. Included in 2003 net income is a gain of $11.1 million, or $6.7 million net of tax, from the sale of an equity investment. This item was of a non-recurring nature.
Currency translation continued to have a positive impact on our financial results in 2004, adding approximately $11 million to net income following a $12 million benefit in 2003.
A reduction in our annual effective income tax rate from 38.1 percent in 2003 to 36.5 percent in 2004 added approximately $8 million to net income. The improvement was driven by tax savings programs and the impact of a one-time tax credit.
Return on beginning shareholders equity was 24 percent for 2004 and 25 percent in 2003. This was the thirteenth consecutive year we exceeded our long-term financial objective of a 20 percent return on beginning shareholders equity.
Cash from operating activities was $582 million in 2004, and helped us fund ongoing business operations, make business acquisitions, repay $24 million of debt, reacquire over $165 million of our common stock, make additional contributions to our United States pension plan of $37 million and to our various international pension plans of $25 million as well as meet our ongoing obligations and commitments.
We maintained our debt rating within the A categories of the major rating agencies during 2004.
2005 Expectations
We expect to continue to use our strong cash flow to help make strategic business acquisitions which complement our Circle the Customer-Circle the Globe growth strategy.
We expect to leverage our larger sales-and-service force and other investments we made in 2004 for long-term growth.
We recognize that higher oil prices, plus rising raw material prices and freight costs will affect our operating income and provide additional management challenges in 2005.
We will continue to seek new avenues for growth, make appropriate pricing decisions to reflect the value provided by our products and services andprotect operating margins and identify recurring cost-saving opportunities.
We expect currency translation to have a favorable impact again in 2005 but to a lesser extent than we experienced in 2004.
Beginning with our third quarter, we expect to begin expensing the fair value of stock options as additional compensation cost, in accordance with Statement of Financial Accounting Standard (SFAS) 123R, barring further rulings. As part of our transition to the new standard, we expect to restate our earnings history in line with pro forma amounts we have historically disclosed in the notes to our financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In May 2002, the Securities & Exchange Commission (SEC) issued a proposed rule: Disclosure in Managements Discussion and Analysis about the
21
Application of Critical Accounting Policies. Although the SEC has not issued a final rule yet, the following discussion has been prepared on the basis of the guidelines in the SEC rule proposal. If adopted as proposed, the rule would require disclosures connected with estimates a company makes in applying its accounting policies. However, such discussion would be limited to critical accounting estimates, or those that management believes meet two criteria in the proposal: First, the accounting estimate must require a company to make assumptions about matters that are highly uncertain at the time the accounting estimate is made. Second, different estimates that the company reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, must have a material impact on the presentation of the companys financial condition, changes in financial condition or results of operations. Besides estimates that meet the critical estimate criteria, the company makes many other accounting estimates in preparing its financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenues and expenses as well as disclosures of contingent assets and liabilities. Estimates are based on experience and other information available prior to the issuance of the financial statements. Materially different results can occur as circumstances change and additional information becomes known, even from estimates not deemed critical under the SEC rule proposal.
Revenue Recognition
We recognize revenue as services are performed or on product sales at the time title transfers to the customer. We record estimated reductions to revenue for customer programs and incentive offerings including pricing arrangements, promotions and other volume-based incentives at the time of sale. Depending on market conditions, we may increase customer incentive offerings, which could reduce sales and gross profit margins at the time the incentive is offered.
Valuation Allowances and Accrued Liabilities
We estimate sales returns and allowances by analyzing historical returns and credits, and apply these trend rates to the most recent 12 months sales data to calculate estimated reserves for future credits. We estimate the allowance for doubtful accounts by analyzing accounts receivable balances by age, applying historical write-off trend rates to the most recent 12 months sales, less actual write-offs to date. In addition, our estimates also include separately providing for 100 percent of specific customer balances when it is deemed probable that the balance is uncollectible. Actual results could differ from these estimates under different assumptions.
Estimates used to record liabilities related to pending litigation and environmental claims are based on our best estimate of probable future costs. We record the amounts that represent the points in the range of estimates that we believe are most probable or the minimum amounts when no amount within the range is a better estimate than any other amount. Potential insurance reimbursements are not anticipated in our accruals for environmental liabilities. While the final resolution of litigation and environmental contingencies could result in amounts different than current accruals, and therefore have an impact on our consolidated financial results in a future reporting period, we believe the ultimate outcome will not have a significant effect on our consolidated results of operations, financial position or cash flows.
Actuarially Determined Liabilities
The measurement of our pension and postretirement benefit obligations are dependent on a variety of assumptions determined by management and used by our actuaries. These assumptions affect the amount and timing of futurecontributions and expenses.
The assumptions used in developing the required estimates include discount rate, projected salary and health care cost increases and expected return or earnings on assets. The discount rate assumption is based on the investment yields available at year-end on corporate long-term bonds rated AA. Projected salary and health care cost increases are based on our long-term actual experience, the near-term outlook and assumed inflation. The expected return on plan assets reflects asset allocations, investment strategies and the views of investment managers over a long-term perspective. The effects of actual results differing from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense in future periods.
In determining our U.S. pension and postretirement obligations for 2004, our discount rates decreased from 6.25 percent to 5.75 percent, while our expected return on plan assets remained at 9.00 percent and our projected salary increase was unchanged at 4.3 percent.
The effect on 2005 expense of a decrease in discount rate or expected return on assets assumption as of December 31, 2004 is shown below assuming no changes in benefit levels and no amortization of gains or losses for our major plans:
(dollars in millions) |
|
Effect on U.S.Pension Plan |
|
||||||
Assumption |
|
Assumption
|
|
Decline in
|
|
Higher
|
|
||
|
|
|
|
|
|
|
|
||
Discount rate |
|
-0.25 pts |
|
$ |
29.8 |
|
$ |
4.1 |
|
Expected return on assets |
|
-0.25 pts |
|
N/A |
|
$ |
1.5 |
|
|
(dollars in millions) |
|
Effect on U.S. Postretirement
|
|
||||||
Assumption |
|
Assumption
|
|
Decline in
|
|
Higher
|
|
||
|
|
|
|
|
|
|
|
||
Discount rate |
|
-0.25 pts |
|
$ |
5.2 |
|
$ |
0.6 |
|
We are self-insured in North America for most workers compensation, general liability and automotive liability losses, subject to per occurrence and aggregate annual liability limitations. We are insured for losses in excess of these limitations. We have recorded both a liability and an offsetting receivable for amounts in excess of these limitations. We are also self-insured for health care claims for eligible participating employees, subject to certain deductibles and limitations. We determine our liabilities for claims incurred but not reported on an actuarial basis. A change in these assumptions would cause reported results to differ.
Income Taxes
Judgment is required to determine the annual effective income tax rate, deferred tax assets and liabilities and any valuation allowances recorded against net deferred tax assets. Our effective income tax rate is based on annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. We establish liabilities or reserves when we believe that certain positions are likely to be challenged by authorities and we may not succeed, despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit. Our annual effective income tax rate includes the impact of reserve provisions and changes to reserves that we consider appropriate. During interim periods, this annual
22
rate is then applied to our quarterly operating results. In the event that there is a significant one-time item recognized in our interim operating results, the tax attributable to that item would be separately calculated and recorded in the same period as the one-time item.
Tax regulations require items to be included in our tax returns at different times than the items are reflected in our financial statements. As a result, the effective income tax rate reflected in our financial statements differs from that reported in our tax returns. Some of these differences are permanent, such as expenses that are not deductible on our tax return, and some are temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which we have already recorded the tax benefit in our income statement. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not likely to support the utilization of the deduction or credit. Deferred tax liabilities generally represent items for which we have already taken a deduction in our tax return, but have not yet recognized that tax benefit in our financial statements. Undistributed earnings of foreign subsidiaries are considered to have been reinvested indefinitely or available for distribution with foreign tax credits available to offset the amount of applicable income tax and foreign withholding taxes that might be payable on earnings. It is impractical to determine the amount of incremental taxes that might arise if all undistributed earnings were distributed.
A number of years may elapse before a particular tax matter, for which we have established a reserve, is audited and finally resolved. The number of tax years with open tax audits varies depending on the tax jurisdiction. In the United States during 2004, the Internal Revenue Service completed their examination of our tax returns for 1999 through 2001. While it is often difficult to predict the final outcome or the timing of resolution of any tax matter, we believe that our reserves reflect the probable outcome of known tax contingencies. Unfavorable settlement of any particular issue would require the use of cash. Favorable resolution could result in reduced income tax expense reported in the financial statements in the future. Our tax reserves are generally presented in the balance sheet within other non-current liabilities.
Long-Lived and Intangible Assets
We periodically review our long-lived and intangible assets for impairment and assess whether significant events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. This could occur when the carrying amount of an asset exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded, if any, is calculated as the excess of the assets carrying value over its estimated fair value. We also periodically reassess the estimated remaining useful lives of our long-lived assets. Changes to estimated useful lives would impact the amount of depreciation and amortization expense recorded in earnings. We have experienced no significant changes in the carrying value of our long-lived assets.
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets , requires that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques. Specifically, goodwill impairment is determined using a two-step process. Both the first step of determining the fair value of a reporting unit and the second step of determining the fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) are judgmental in nature and often involve the use of significant estimates and assumptions. Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions. These valuation methodologies use significant estimates and assumptions, which include projected future cash flows (including timing), discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, and determination of appropriate market comparables. Of the total goodwill included in our consolidated balance sheet, 18 percent is recorded in our United States Cleaning & Sanitizing reportable segment, 5 percent in our United States Other Services segment and 77 percent in our International segment.
In 2002, SFAS No. 142 became effective and as a result, we ceased to amortize goodwill in 2002. We were required to perform an initial impairment review of our goodwill at the beginning of 2002 under the guidelines of SFAS No. 142. The result of testing goodwill for impairment was a non-cash charge of $4.0 million after-tax ($0.02 per share). All of the impairment charge was related to our Africa/Export operations due to the difficult economic environment in that region. We have continued to review our goodwill for impairment on an annual basis for all reporting units, including businesses reporting losses such as GCS Service, under the guidelines of SFAS No. 142. If circumstances change significantly within a reporting unit, the company would test for impairment prior to the annual test.
Functional Currencies
In preparing the consolidated financial statements, we are required to translate the financial statements of our foreign subsidiaries from the currency in which they keep their accounting records, generally the local currency, into United States dollars. Assets and liabilities of these operations are translated at the exchange rates in effect at each fiscal year end. The translation adjustments related to assets and liabilities that arise from the use of differing exchange rates from period to period are included in accumulated other comprehensive income (loss) in shareholders equity. Income statement accounts are translated at the average rates of exchange prevailing during the year. We evaluate our International operations based on fixed rates of exchange; however, the different exchange rates from period to period impact the amount of reported income from our consolidated operations.
OPERATING RESULTS
Consolidated
(thousands, except per share) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
Net sales |
|
$ |
4,184,933 |
|
$ |
3,761,819 |
|
$ |
3,403,585 |
|
|
|
|
|
|
|
|
|
|||
Operating income |
|
$ |
534,122 |
|
$ |
482,658 |
|
$ |
395,866 |
|
Income |
|
|
|
|
|
|
|
|||
Continuing operations before change in accounting |
|
$ |
310,488 |
|
$ |
277,348 |
|
$ |
211,890 |
|
Change in accounting |
|
|
|
|
|
(4,002 |
) |
|||
Discontinued operations |
|
|
|
|
|
1,882 |
|
|||
Net income |
|
$ |
310,488 |
|
$ |
277,348 |
|
$ |
209,770 |
|
Diluted income per common share |
|
|
|
|
|
|
|
|||
Continuing operations before change in accounting |
|
$ |
1.19 |
|
$ |
1.06 |
|
$ |
0.81 |
|
Change in accounting |
|
|
|
|
|
(0.02 |
) |
|||
Discontinued operations |
|
|
|
|
|
0.01 |
|
|||
Net income |
|
$ |
1.19 |
|
$ |
1.06 |
|
$ |
0.80 |
|
Our consolidated net sales reached $4.2 billion for 2004, an increase of 11 percent over net sales of $3.8 billion in 2003. Excluding acquisitions and divestitures, consolidated net sales increased 9 percent. Changes in currency translation positively impacted the consolidated sales growth rate by 4.5 percentage points, primarily due to the strength of the euro against the U.S.
23
dollar. Sales also benefited from aggressive new account sales, new product and service offerings and providing more solutions for existing customers.
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Gross profit as a percent of net sales |
|
51.5 |
% |
50.9 |
% |
50.4 |
% |
Selling, general & administrative expenses as a percent of net sales |
|
38.6 |
% |
38.1 |
% |
37.7 |
% |
Our consolidated gross profit margin for 2004 increased over 2003. The increase is principally due to the benefits of cost savings initiatives, acquisitions and favorable raw material prices, especially in Europe.
Selling, general and administrative expenses for 2004 increased as a percentage of sales over 2003. The increase in the 2004 expense ratio is primarily due to investments in the sales-and-service force, information technology, research and development, acquisitions and higher incentive-based compensation costs.
(thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
Operating income |
|
$ |
534,122 |
|
$ |
482,658 |
|
$ |
395,866 |
|
|
|
|
|
|
|
|
|
|||
Operating income as a percent of net sales |
|
12.8 |
% |
12.8 |
% |
11.6 |
% |
|||
Operating income for 2004 increased 11 percent over 2003. As a percent of sales, operating income remained the same as 2003. The increase in operating income in 2004 is due to the favorable sales volume increases and cost reduction initiatives, partially offset by investments in technology, research and development and the sales-and-service force.
Our net income was $310 million in 2004 as compared to $277 million in 2003, an increase of 12 percent. Net income in both years included items of a non-recurring nature that are not necessarily indicative of future operating results. Net income in 2004 included benefits from a reduction in previously recorded restructuring expenses of $0.6 million after tax and a gain on the sale of a small international business of $0.2 million after tax. Income tax expense and net income in 2004 also included a tax benefit of $1.9 million related to prior years. These benefits were more than offset by a charge of $1.6 million for in-process research and development as part of the acquisition of Alcide Corporation and a charge of $2.4 million after tax related to the disposal of a grease management product line. Net income in 2003 included a gain on the sale of an equity investment of $6.7 million after tax and a reduction in previously recorded restructuring expenses of $0.8 million after tax, partially offset by a write-off of $1.7 million of goodwill related to an international business sold in 2003. If these items are excluded from both 2004 and 2003, net income increased 15 percent for 2004. This net income improvement reflects improving operating income growth across most of our divisions. Our 2004 net income also benefited when compared to 2003 due to a lower effective income tax rate which was the result of a lower international rate, tax savings efforts and the favorable tax benefit related to prior years that was recorded in 2004. Excluding the items of a non-recurring nature previously mentioned, net income for 2004 was 7.5 percent of net sales versus 7.2 percent in 2003.
2003 compared with 2002
Our consolidated net sales reached $3.8 billion for 2003, an increase of 11 percent over net sales of $3.4 billion in 2002. Excluding acquisitions and divestitures, consolidated net sales increased 10 percent. Changes in currency translation positively impacted the consolidated sales growth rate by 7 percentage points. Sales benefited from aggressive new account sales, new products and selling more solutions to existing customers.
Our consolidated gross profit margin in 2003 increased over 2002. In 2002, cost of sales included $9.0 million of restructuring costs. If these costs were excluded, the gross profit margin for 2002 would have been 50.7 percent. The increase in the margin for 2003 also benefited from business mix and cost reduction actions, partially offset by poor results in GCS Service during 2003.
Selling, general and administrative expenses for 2003 increased as a percentage of sales over 2002. The increase in the 2003 expense ratio is primarily due to an increase in sales-and-service investments, rising insurance costs, increased headcount and health care costs and start-up expenses related to legal entity restructuring, partially offset by cost savings initiatives.
In the first quarter of 2002, we approved plans to undertake restructuring cost-saving actions. Restructuring savings were approximately $31 million and $16 million in 2003 and 2002, respectively. Most of these savings were reinvested in the business.
Operating income for 2003 increased 22 percent over 2002. Excluding special charges in 2002 of $46 million, operating income in 2003 increased 9 percent over 2002. Adjusting for special charges, operating income in 2002 would have been 13.0 percent of net sales. The decline in 2003 operating income margins from this level reflects increased headcount and benefit costs and investments in the sales force, partially offset by favorable sales volume increases and cost reduction initiatives.
Our net income was $277 million in 2003 as compared to $210 million in 2002, an increase of 32 percent. Net income in 2003 included a gain on the sale of an equity investment of $6.7 million after tax and a reduction of previously recorded restructuring expenses of $0.8 million after tax, offset by a write-off of $1.7 million of goodwill related to an international business sold in 2003. Net income in 2002 included a gain from discontinued operations of $1.9 million after tax, offset by special charges of $28.9 million after tax and a SFAS No. 142 transitional impairment charge of $4.0 million after tax. These items are of a non-recurring nature and are not necessarily indicative of future operating results. If these items are excluded from both 2003 and 2002, net income increased 13 percent for 2003. This improvement in net income reflected good fixed-rate operating income growth in our International segment, particularly in Europe. Currency translation also positively impacted net income by approximately $12 million due primarily to the strength of the euro against the U.S. dollar. The comparison of net income benefited from a lower effective income tax rate in 2003 which was the result of cost savings initiatives, a lower overall international rate and improved international mix. Excluding the items of a non-recurring nature previously mentioned, net income for 2003 was 7.2 percent of net sales, up slightly from 7.1 percent in 2002.
OPERATING SEGMENT PERFORMANCE
Our operating segments have similar products and services and we are organized to manage our operations geographically. Our operating segments have been aggregated into three reportable segments: United States Cleaning & Sanitizing, United States Other Services and International. We evaluate the performance of our International operations based on fixed management rates of currency exchange. Therefore, International sales and operating income totals, 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 2004. All other accounting policies of the reportable segments are consistent with accounting principles generally accepted in the United States of America and the accounting policies of the company described in Note 2 of the notes to consolidated financial statements. Additional information about our reportable segments is included in Note 16 of the notes to consolidated financial statements.
24
Sales by Operating Segment
(thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
Net sales |
|
|
|
|
|
|
|
|||
United States |
|
|
|
|
|
|
|
|
|
|
Cleaning & Sanitizing |
|
$ |
1,796,355 |
|
$ |
1,694,323 |
|
$ |
1,615,171 |
|
Other Services |
|
339,305 |
|
320,444 |
|
308,329 |
|
|||
Total United States |
|
2,135,660 |
|
2,014,767 |
|
1,923,500 |
|
|||
International |
|
1,931,321 |
|
1,797,400 |
|
1,759,000 |
|
|||
Total |
|
4,066,981 |
|
3,812,167 |
|
3,682,500 |
|
|||
Effect of foreign currency translation |
|
117,952 |
|
(50,348 |
) |
(278,915 |
) |
|||
Consolidated |
|
$ |
4,184,933 |
|
$ |
3,761,819 |
|
$ |
3,403,585 |
|
The following chart presents the comparative percentage change in net sales for each of our operating segments for 2004 and 2003.
Sales Growth Information
|
|
Percent Change
|
|
||
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Net sales |
|
|
|
|
|
United States Cleaning & Sanitizing |
|
|
|
|
|
Institutional |
|
5 |
% |
5 |
% |
Kay |
|
16 |
|
12 |
|
Textile Care |
|
6 |
|
(10 |
) |
Professional Products |
|
(15 |
) |
9 |
|
Healthcare |
|
6 |
|
|
|
Water Care Services |
|
10 |
|
4 |
|
Vehicle Care |
|
(2 |
) |
4 |
|
Food & Beverage |
|
9 |
|
3 |
|
Total United States Cleaning & Sanitizing |
|
6 |
% |
5 |
% |
United States Other Services |
|
|
|
|
|
Pest Elimination |
|
10 |
% |
11 |
% |
GCS Service |
|
(1 |
) |
(7 |
) |
Total United States Other Services |
|
6 |
% |
4 |
% |
Total United States |
|
6 |
% |
5 |
% |
International |
|
|
|
|
|
Europe |
|
8 |
% |
1 |
% |
Asia Pacific |
|
4 |
|
2 |
|
Latin America |
|
13 |
|
6 |
|
Canada |
|
4 |
|
4 |
|
Other |
|
22 |
|
30 |
|
Total International |
|
7 |
% |
2 |
% |
Consolidated |
|
11 |
% |
11 |
% |
Sales of our United States Cleaning & Sanitizing operations were $1.8 billion in 2004 and increased 6 percent over net sales of $1.7 billion in 2003. Excluding acquisitions and divestitures, sales increased 5 percent in 2004. Sales benefited from double-digit growth in our Kay division, along with good growth in our Institutional division. This sales performance reflects increased account retention through enhanced service, new product and program initiatives and aggressive new account sales efforts. Institutional results include sales increases in all end markets, including restaurant, lodging, healthcare, travel and government markets. Kays double-digit sales increase over 2003 was led by strong gains in sales to its core quickservice customers and in its food retail services business. New customers, better account penetration, new products and programs and more effective field sales coverage contributed to this sales increase. Textile Care sales increased this year, driven by a significant corporate account gain made early in the year and improved account retention. Professional Products sales, excluding the VIC acquisition, decreased 18 percent as sales growth in corporate accounts was more than offset by the planned phase down of the janitorial equipment distribution business and weak distributor sales. Sales in our Healthcare division were driven by strong growth in instrument care solids and skincare products which were partially offset by the exit of a private label product line. Food & Beverage sales, excluding the benefits of the Alcide acquisition, increased 5 percent primarily due to improved retention and corporate account growth in sales to the dairy, soft drink and agri markets. Water Care had good sales growth in the dairy, canning, meat and food processing markets. Our Circle the Customer strategy continues to produce new account gains as our Water Care division works with our Food & Beverage and Healthcare divisions to drive its sales growth. Vehicle Care sales declined due to bad weather, the impact of higher fuel prices on customer purchase decisions and the sale of retail gas stations by major oil companies to smaller franchises, which correspondingly affects distributor sales.
Sales of our United States Other Services operations increased 6 percent to $339 million in 2004, from $320 million in 2003. Pest Elimination sales increased with good growth in both core pest elimination contract and non-contract services, such as bird work, the Stealth fly program, one-shot services and its food safety audit business. GCS Service sales decreased slightly in 2004, however, sales grew in the second half of the year as a result of an increase in direct parts revenue.
25
Management rate sales of our International operations reached $1.9 billion in 2004, an increase of 7 percent over sales of $1.8 billion in 2003. Excluding acquisitions and divestitures, sales increased 4 percent for 2004. Sales in Europe, excluding acquisitions and divestitures, were up 3 percent primarily due to successful new product launches, increased marketing and added sales-and-service headcount that was partially offset by the effects of a weak European economy. Europes Institutional division made significant improvement over their 2003 trend, and strength in their Healthcare and Textile Care businesses helped overcome Germanys poor economic climate and reduced European tourism and beverage consumption. Sales in Asia Pacific, excluding divestitures, increased 5 percent, led by good results in East Asia and New Zealand. In Northeast Asia, China and Hong Kong led the sales increase with strong results in both Institutional and Food & Beverage. New Zealand sales increased over last year primarily due to growth in the Food & Beverage business. Sales in Japan and Australia were flat versus 2003. Sales growth in Latin America reflected good growth in all countries and was driven by the success in new business gains in global/regional accounts, continuing to implement the Circle the Customer growth strategy and the successful launch of new programs such as MarketGuard and LaunderCare . Sales in Canada increased, reflecting an improved hospitality industry and recovery from the impact of the Severe Acute Respiratory Syndrome (SARS) outbreak in Canada in 2003.
Operating Income by Operating Segment
(thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
Operating income |
|
|
|
|
|
|
|
|||
United States |
|
|
|
|
|
|
|
|
|
|
Cleaning & Sanitizing |
|
$ |
290,366 |
|
$ |
285,212 |
|
$ |
271,838 |
|
Other Services |
|
24,432 |
|
21,031 |
|
33,051 |
|
|||
Total United States |
|
314,798 |
|
306,243 |
|
304,889 |
|
|||
International |
|
210,595 |
|
187,864 |
|
165,182 |
|
|||
Total |
|
525,393 |
|
494,107 |
|
470,071 |
|
|||
Corporate |
|
(4,361 |
) |
(4,834 |
) |
(46,008 |
) |
|||
Effect of foreign currency translation |
|
13,090 |
|
(6,615 |
) |
(28,197 |
) |
|||
Consolidated |
|
$ |
534,122 |
|
$ |
482,658 |
|
$ |
395,866 |
|
Operating income as a percent of net sales |
|
|
|
|
|
|
|
|||
United States |
|
|
|
|
|
|
|
|||
Cleaning & Sanitizing |
|
16.2 |
% |
16.8 |
% |
16.8 |
% |
|||
Other Services |
|
7.2 |
|
6.6 |
|
10.7 |
|
|||
Total |
|
14.7 |
|
15.2 |
|
15.9 |
|
|||
International |
|
10.9 |
|
10.5 |
|
9.4 |
|
|||
Consolidated |
|
12.8 |
% |
12.8 |
% |
11.6 |
% |
Operating income of our United States Cleaning & Sanitizing operations was $290 million in 2004, an increase of 2 percent from operating income of $285 million in 2003. As a percentage of net sales, operating income decreased from 16.8 percent in 2003 to 16.2 percent in 2004. Excluding acquisitions and divestitures, operating income declined 1 percent from 2003 and the operating income margin also declined from 17.2 percent in 2003 to 16.2 percent in 2004. This decline is primarily due to investments in the sales-and-service force, research and development, information technology, higher incentive-based compensation costs and higher delivered product cost. This was partially offset by favorable business mix and cost efficiency improvements. The number of sales-and service associates in our United States Cleaning & Sanitizing operations declined by 60 people in 2004, as the addition of 190 new associates was offset by a decrease of 250 people due to the divestiture of our grease management product line.
Operating income of United States Other Services operations increased 16 percent to $24 million in 2004. The operating income margin for United States Other Services increased to 7.2 percent in 2004 from 6.6 percent in 2003. Pest Elimination had strong operating income growth, while GCS Service results reflected a slightly higher operating loss. The increase in operating income for Pest Elimination was driven by increased sales volume, lower product cost and general expense controls. GCS Service results reflected an operating loss due to a decline in sales, increased marketing expenses and higher than expected costs resulting from centralizing the parts and administration activities. During 2004, we added 15 sales-and-service associates to our United States Other Services operations. This is net of a decrease in GCS Service technicians.
Management-rate based operating income of International operations rose 12 percent to $211 million in 2004 from operating income of $188 million in 2003. The International operating income margin increased from 10.5 percent in 2003 to 10.9 percent in 2004. Excluding the impact of acquisitions and divestitures occurring in 2004 and 2003, operating income increased 8 percent over 2003, and the International operating income margin increased from 10.4 percent in 2003 to 10.8 percent in 2004. This result was due to good operating income growth and margin improvement across all of our international regions. Both higher sales and careful cost management drove this achievement. We added 640 sales-and-service associates to our International operations during 2004, reflecting our investment in our core business and the impact of acquisitions.
Operating income margins of our International operations are less than those realized for our U.S. operations. The lower International margins are due to (i) the additional costs caused by the difference in scale of International operations where many operating locations are smaller in size, (ii) the additional cost of operating in numerous and diverse foreign jurisdictions and (iii) higher costs of importing raw materials and finished goods. Proportionately larger investments in sales, technical support and administrative personnel are also necessary in order to facilitate the growth of our International operations.
2003 compared with 2002
Sales of our United States Cleaning & Sanitizing operations were $1.7 billion in 2003 and increased 5 percent over net sales of $1.6 billion in 2002. Business acquisitions had no effect on the growth in sales for 2003. Sales benefited from good growth in our Kay and Professional Products operations, partially offset by lower sales in Textile Care. The increase in our Institutional division reflected our continued efforts to generate new accounts, the successful introduction of new products and improved customer service. Trends in the foodservice, hospitality and healthcare industries were challenging in early 2003 but showed signs of improvement late in the year. Kays sales increase reflected solid growth in its food retail services business and to quickservice restaurants as well as through the introduction of new products and programs. Textile Care
23
sales decreased, particularly to distributors, due to soft industry demand and strong competition within the industry. Textile Care focused on improving its service and reestablishing its relationships with distributors in an effort to increase sales growth. Textile Care also continued to take a selective approach to new business to ensure it meets our profit guidelines. Sales of Professional Products increased due to strong gains in the healthcare market offsetting the continuing phase-out of the specialty business. Our introduction of the first solid-based product offering to the acute care market in the second quarter of 2003 helped drive the sales growth in the healthcare market. Professional Products janitorial sales were also positively impacted in 2003 by a long-term supply agreement that began in December 2002. Effective January 2004, our Professional Products division was reorganized to better serve janitorial and healthcare customers by splitting the Professional Products division into two divisions, Professional Products and Healthcare. Our Food & Beverage sales were driven by improved retention and corporate account growth in the dairy, soft drink, meat and poultry and food markets. This increase was partially offset by a decrease in agricultural sales due to overall market weakness. Water Care Services had good growth in sales to the food and beverage, hospitality, healthcare and commercial accounts due to solid gains in new customer accounts. Vehicle Care sales were driven by new business with major oil companies and successful new product introductions.
Sales of our United States Other Services operations increased 4 percent to $320 million in 2003, from $308 million in 2002. Business acquisitions had no effect on the growth in sales for 2003. Pest Eliminations sales in 2003 reflected strong growth in both contract sales, due to the addition of new large accounts, and non-contract services, due to the aggressive efforts of the sales force. GCS Service sales decreased in 2003 due to service interruptions caused by the restructuring of field operations and the transition to a new centralized administration center, which began operation in 2003. In an effort to increase sales going forward, GCS Service implemented productivity improvement measures in the fourth quarter of 2003.
Management rate sales for our International segment were $1.8 billion for 2003, an increase of 2 percent over sales in 2002. Excluding the effects of acquisitions and divestitures, sales increased 1 percent. Sales in Europe, excluding the effects of acquisitions and divestitures, decreased 1 percent. Successful new housekeeping and Ecotemp programs were offset by a weak European economy and strong competition. We focused on expanding our Pest Elimination business in Europe through acquisitions such as the Terminix operations in the United Kingdom, which was purchased in December 2002, and Nigiko with operations in France, acquired in January 2004. We expect to leverage the success of this business in the United States to become a global provider of pest elimination services. The increase in Asia Pacific was driven by Japan, New Zealand and Northeast Asia. In Japan, sales to chain restaurants and resort hotel customers improved and New Zealand showed strong growth in its pest elimination services business. In Northeast Asia, Koreas growth was propelled by strong Institutional sales while China experienced excellent growth in its Food & Beverage sales. Good growth in these areas was partially offset by a sales decline in Australia due to soft Food & Beverage and Water Care business. Sales in Latin America, excluding acquisitions, grew 6 percent in 2003 and most Latin America countries experienced good growth except Venezuela, where a country-wide strike at the beginning of 2003 resulted in virtually no sales for the first two fiscal months of 2003. Mexico, the Caribbean and Central America all had double-digit sales growth in 2003. Growth in Latin America was fueled by good growth in food retail programs, a demand for improved sanitation and expansion of pest elimination services. Sales in Canada increased due to continued focus on obtaining new customers and selling additional solutions to existing customers, partially offset by the impact of the Severe Acute Respiratory Syndrome (SARS) outbreak in Canada.
Operating income of our United States Cleaning & Sanitizing operations increased 5 percent in 2003. Operating income as a percent of sales remained the same in 2003 as 2002 due to the investments in developing the sales force and higher operating costs being offset by cost savings initiatives. We added 100 sales-and-service associates to our United States Cleaning & Sanitizing operations during 2003.
Operating income of United States Other Services operations decreased 36 percent. As a percentage of net sales, operating income decreased significantly as well. Pest Elimination had strong operating income growth, while GCS Service results reflected an operating loss. Strong growth in both contract and non-contract services, coupled with tight expense control, has helped fuel Pest Eliminations growth. GCS Service results reflected an operating loss due to a decrease in sales resulting from operational issues encountered with a transition to a centralized administration center and the related costs invested in this initiative. This lost revenue adversely impacted operating income due to the relatively fixed nature of GCS Services expenses. During 2003, we added 95 sales-and-service associates to our United States Other Services operations.
Operating income of our International operations rose 14 percent in 2003 at management rates. Excluding the effects of acquisitions and divestitures, operating income increased 12 percent. Our International operating income margin also increased in 2003 over 2002. Operating income as a percent of net sales excluding acquisitions and divestitures that occurred in 2003 and 2002 was 10.8 in 2003 versus 9.8 in 2002. This result was due to good operating income growth and margin improvement in our European, Asia Pacific and Canadian businesses. Operating income growth was also good in Latin America. The primary reason for these significant improvements was the successful introduction of new products and programs as well as careful cost management. We added 80 sales-and-service associates to our International operations during 2003.
Corporate
Our corporate operating expenses totaled $4.4 million in 2004, compared with $4.8 million in 2003 and $46.0 million in 2002. In 2004, corporate operating expense included a charge of $1.6 million for in-process research and development as part of the acquisition of Alcide Corporation and a charge of $4.0 million related to the disposal of a grease management product line, which were partially offset by $0.9 million of income for reductions in restructuring accruals and a $0.3 million gain on the sale of a small international business. Corporate operating expense in 2003 included a writeoff of $1.7 million of goodwill related to an international business sold in 2003, $1.4 million of income for reductions in restructuring accruals and $4.5 million of expense for postretirement death benefits for retired executives. In 2002, corporate operating expense included restructuring and merger integration costs of $51.8 million, which were partially offset by a curtailment gain of $5.8 million related to benefit plan changes.
Interest and Income Taxes
Net interest expense of $45 million was flat when compared to interest expense in 2003 with a slight decrease in interest expense being offset by a similar decrease in interest income. Higher interest expense on our euro denominated debt due to the stronger euro was offset by lower interest expense on other notes payable.
Net interest expense for 2003 was $45 million, an increase of 3 percent over net interest expense of $44 million in 2002. The increase was primarily due to our euro-denominated debt and the strength of the euro against the U.S. dollar partially offset by lower debt levels.
Our effective income tax rate was 36.5 percent for 2004, compared with effective income tax rates of 38.1 percent and 39.8 percent in 2003 and 2002, respectively. Excluding the effects of special charges mentioned above in the
24
corporate section and a $1.9 million tax benefit related to prior years, the estimated annual effective income tax rate was 36.8 percent for 2004. Excluding the effects of the gain on the sale of an equity investment and the effect of special charges, the effective income tax rate was 38.0 percent for 2003. Excluding the effects of special charges in 2002, the estimated annual effective income tax rate was 39.5 percent. Reductions in our effective income tax rates over the last two years have primarily been due to a lower overall international rate, favorable international mix and tax savings efforts. The companys acquisition of its European operations at the end of 2001 resulted in additional tax saving opportunities.
FINANCIAL POSITION
Our debt continued to be rated within the A categories by the major rating agencies during 2004. Significant changes in our financial position during 2004 and 2003 included the following:
During 2004, total assets increased 15 percent to $3.7 billion from $3.2 billion at year-end 2003. Acquisitions added approximately $233 million in assets to the balance sheet. Also, assets increased by approximately $181 million related to the strengthening of foreign currencies, primarily the euro. Of the increase in accounts receivable, 53 percent is due to acquisitions and currency. The increase in goodwill is 65 percent due to acquisitions and 35 percent due to currency. The increase in other assets is primarily due to the $37 million voluntary contribution made in 2004 to fund the U.S. pension plan.
Total liabilities increased approximately $220 million in 2004. Again, acquisitions and currency accounted for a large portion of this increase, approximately 71 percent.
Total assets reached $3.2 billion at December 31, 2003, an increase of 13 percent over total assets of $2.9 billion at year-end 2002. Approximately $290 million of this increase was related to the strengthening of foreign currencies, primarily the euro. For example, 87 percent of the increase in accounts receivable was related to currency. The increase in goodwill in 2003 over 2002 was almost entirely related to currency. Other assets also increased significantly in 2003 due to a $75 million contribution to fund our U.S. pension plan.
In the liability section of the balance sheet, short-term debt decreased significantly in 2003 from 2002 due to strong operating cash flow, which allowed us to pay down approximately $94 million of our short-term debt. Income taxes payable increased in 2003 over 2002 due to higher current income tax expense for 2003 as compared to 2002 and lower income tax payments made during the year compared to the prior year. Long-term debt also increased in 2003 due to currency as a large portion of our debt is denominated in euros.
Total debt was $702 million at December 31, 2004 and increased from total debt of $675 million at year-end 2003. This increase in total debt during 2004 was principally due to an increase in our euronotes due to the strengthening of the euro being partially offset by repayments of notes payable made during 2004. As of December 31, 2004 the ratio of total debt to capitalization was 31 percent, down from 34 percent at year-end 2003 and 39 percent at year-end 2002. The lower debt to capitalization ratio in 2004 and 2003 was due to debt repayments made during those years and increasing shareholders equity levels.
CASH FLOWS
Cash provided by operating activities reached a record high of $582 million for 2004, an increase from $529 million in 2003 and $423 million in 2002. The increase in operating cash flow for 2004 over 2003 is due to increasing net income and a smaller contribution to the U.S. pension plan compared to 2003. The increase was partially offset by an increase in U.S. income tax payments in 2004 over 2003. The operating cash flow for 2003 increased over 2002 also due to higher net income in 2003 and a lower contribution to the pension plan compared to 2002. Operating cash flows for 2003 were also higher than 2002 due to reduced payments on restructuring liabilities and lower estimated tax payments due to tax benefits on options exercised during 2003. Historically, we have had strong operating cash flows and we anticipate this will continue. We expect to continue to use this cash flow to acquire new businesses, repurchase our common stock, invest in merchandising equipment and other capital assets and pay down debt.
Cash flows used for investing activities included capital expenditures of $276 million in 2004, $212 million in 2003 and $213 million in 2002. Worldwide additions of merchandising equipment, primarily cleaning and sanitizing product dispensers, accounted for approximately 58 percent, 69 percent and 63 percent of each years capital expenditures in 2004, 2003 and 2002, respectively. Merchandising equipment is depreciated over 3 to 7 year lives. Cash used for businesses acquired included Nigiko, Daydots International, Elimco and certain business lines for VIC International in 2004, Adams Healthcare in 2003 and Terminix Ltd., Kleencare Hygiene and Audits International in 2002.
Financing cash flow activity included cash used to reacquire shares of our common stock and pay dividends as well as cash provided and used through our debt arrangements. Share repurchases totaled $165 million in 2004, $227 million in 2003 and $9 million in 2002. These repurchases were funded with operating cash flows and cash from the exercise of employee stock options. In October 2003 and December 2004, we announced authorizations to repurchase up to an aggregate of 20 million additional shares of Ecolab common stock for the purpose of offsetting the dilutive effect of shares issued for stock option exercises and incentives and for general corporate purposes.
25
In 2004, we increased our annual dividend rate for the thirteenth consecutive year. We have paid dividends on our common stock for 68 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
|
|
Year |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
2004 |
|
$ |
0.0800 |
|
$ |
0.0800 |
|
$ |
0.0800 |
|
$ |
0.0875 |
|
$ |
0.3275 |
|
2003 |
|
0.0725 |
|
0.0725 |
|
0.0725 |
|
0.0800 |
|
0.2975 |
|
|||||
2002 |
|
0.0675 |
|
0.0675 |
|
0.0675 |
|
0.0725 |
|
0.2750 |
|
|||||
LIQUIDITY AND CAPITAL RESOURCES
We currently expect to fund all of the requirements which are reasonably foreseeable for 2005, including new program investments, scheduled debt repayments, dividend payments, possible business acquisitions, pension contributions and share repurchases from operating activities, cash reserves and short-term borrowings. In the event of a significant acquisition, funding may occur through additional long-term borrowings. Cash provided by operating activities reached an all time high of $582 million in 2004. While cash flows could be negatively affected by a decrease in revenues, we do not believe that our revenues are highly susceptible, over the short run, to rapid changes in technology within our industry. We have a $450 million U.S. commercial paper program and a $200 million European commercial paper program. Both programs are rated A-1 by Standard & Poors and P-1 by Moodys. To support our commercial paper programs and other general business funding needs, we maintain a $450 million multi-year committed credit agreement which expires in August 2009 and under certain circumstances can be increased by $150 million for a total of $600 million. We can draw directly on the credit facility on a revolving credit basis. As of December 31, 2004, approximately $9 million of this credit facility was committed to support outstanding commercial paper, leaving $441 million available for other uses. In addition, we have other committed and uncommitted credit lines of approximately $209 million with major international banks and financial institutions to support our general global funding needs. Additional details on our credit facilities are included in Note 7 of the notes to consolidated financial statements.
During 2004, we voluntarily contributed $37 million to our U.S. pension plan. In making this contribution, we considered the normal growth in accrued plan benefits, the impact of lower year-end discount rates on the plan liability, the 10 percent actual asset return on our pension plan in 2004 and the tax deductibility of the contribution. Our contributions to the pension plan did not have a material effect on our consolidated results of operations, financial condition or liquidity. We expect our U.S. pension plan expense to increase to $35 million in 2005 from $21 million in 2004 primarily due to the decrease in our discount rate from 6.25 percent to 5.75 percent and the decrease in our expected long-term return on plan assets from 9.00 percent to 8.75 percent.
We do not have relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purposes entities, which are sometimes established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
A schedule of our obligations under various notes payable, long-term debt agreements, operating leases with noncancelable terms in excess of one year, interest obligations and benefit payments are summarized in the following table:
(thousands) |
|
Payments due by Period |
|
|||||||||||||
Contractual
|
|
Total |
|
Less
|
|
1-3
|
|
3-5
|
|
More
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Notes payable |
|
$ |
50,980 |
|
$ |
50,980 |
|
$ |
|
|
$ |
|
|
$ |
|
|
Long-term debt |
|
650,597 |
|
5,152 |
|
487,972 |
|
2,695 |
|
154,778 |
|
|||||
Operating leases |
|
153,089 |
|
40,709 |
|
58,154 |
|
32,255 |
|
21,971 |
|
|||||
Interest* |
|
121,384 |
|
38,529 |
|
47,988 |
|
22,013 |
|
12,854 |
|
|||||
Benefit payments** |
|
526,000 |
|
39,000 |
|
83,000 |
|
96,000 |
|
308,000 |
|
|||||
Total contractual cash obligations |
|
$ |
1,502,050 |
|
$ |
174,370 |
|
$ |
677,114 |
|
$ |
152,963 |
|
$ |
497,603 |
|
* Interest on variable rate debt was calculated using the interest rate at year-end 2004.
** Benefit payments are paid out of the companys pension and post retirement healthcare benefit plans.
We are not required to make any contributions to our U.S. pension and postretirement health care benefit plans in 2005. The maximum tax deductible contribution for 2005 is $45 million for our U.S. pension plan. Our best estimate of contributions to be made to our international plans is $17 million in 2005. These amounts have been excluded from the schedule of contractual obligations.
We lease sales and administrative office facilities, distribution center facilities, computers and other equipment under longer-term operating leases. Vehicle leases are generally shorter in duration. The U.S. vehicle leases have guaranteed residual value requirements that have historically been satisfied by the proceeds on the sale of the vehicles. No amounts have been recorded for these guarantees in the table above as we believe that the potential recovery of value from the vehicles when sold will be greater than the residual value guarantee.
Except for approximately $48 million of letters of credit supporting domestic and international commercial relationships and transactions and as described in Note 7 of the notes to the consolidated financial statements, we do not have significant unconditional purchase obligations, or significant other commercial commitments, such as commitments under lines of credit, standby letters of credit, guarantees, standby repurchase obligations or other commercial commitments.
As of year-end 2004, we are in compliance with all covenants and other requirements of our credit agreements and indentures. Additionally, we do not have any rating triggers that would accelerate the maturity dates of our debt.
A downgrade in our credit rating could limit or preclude our ability to issue commercial paper under our current programs. A credit rating downgrade could also adversely affect our ability to renew existing, or negotiate new credit facilities in the future and could increase the cost of these facilities. Should this occur, we could seek additional sources of funding, including issuing term notes or bonds. In addition, we have the ability at our option to draw upon our $450 million committed credit facilities prior to their termination and, under certain conditions, can increase this amount to $600 million.
MARKET RISK
We enter into contractual arrangements (derivatives) in the ordinary course of business to manage foreign currency exposure and interest rate risks. We do not enter into derivatives for trading purposes. Our use of derivatives is subject to internal policies that provide guidelines for control, counterparty risk and ongoing monitoring and reporting and is designed to reduce the volatility
26
associated with movements in foreign exchange and interest rates on our income statement.
We enter into forward contracts, swaps and foreign currency options to hedge certain intercompany financial arrangements, and to hedge against the effect of exchange rate fluctuations on transactions related to cash flows and net investments denominated in currencies other than U.S. dollars. At December 31, 2004, we had approximately $239 million of foreign currency forward exchange contracts with face amounts denominated primarily in euros.
We manage interest expense using a mix of fixed and floating rate debt. To help manage borrowing costs, we may enter into interest rate swap agreements. Under these arrangements, we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. At year-end 2004, we had an interest rate swap that converts approximately euro 78 million (approximately $104 million U.S. dollars) of our Euronote debt from a fixed interest rate to a floating or variable interest rate. This swap agreement is effective until February 2007. In September 2003, we entered into an interest rate swap agreement that converts $30 million of the 7.19% senior notes from a fixed interest rate to a floating or variable interest rate. This agreement is effective until January 2006.
Based on a sensitivity analysis (assuming a 10 percent adverse change in market rates) of our foreign exchange and interest rate derivatives and other financial instruments, changes in exchange rates or interest rates would not materially affect our financial position and liquidity. The effect on our results of operations would be substantially offset by the impact of the hedged items.
SUBSEQUENT EVENTS
In January 2005, we acquired Associated Chemicals & Services, Inc. (aka Midland Research Laboratories), a Kansas-based provider of water treatment products, process chemicals and services serving the commercial, institutional, industrial, food and sugar processing markets. Midland has annual sales of approximately $16 million. These operations will become part of the companys U.S. Cleaning & Sanitizing operations in 2005.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This 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 include expectations concerning business progress and expansion, business acquisitions, currency translation, cash flows, debt repayments, share repurchases, susceptibility to changes in technology, global economic conditions and liquidity requirements. These statements, which represent our expectations or beliefs concerning various future events, are based on current expectations. Therefore, they involve a number of risks and uncertainties that could cause actual results to differ materially from those of such Forward-Looking Statements. These risks and uncertainties include the vitality of the foodservice, hospitality, travel, health care and food processing industries; restraints on pricing flexibility due to competitive factors, customer or vendor consolidation and existing contractual obligations; changes in oil or raw material prices or unavailability of adequate and reasonably priced raw materials or substitutes therefor; the occurrence of capacity constraints or the loss of a key supplier or the inability to obtain or renew supply agreements on favorable terms; the effect of future acquisitions or divestitures or other corporate transactions; our ability to achieve plans for past acquisitions; the costs and effects of complying with: (i) laws and regulations relating to the environment and to the manufacture, storage, distribution, efficacy and labeling of our products, and (ii) changes in tax, fiscal, governmental and other regulatory policies; economic factors such as the worldwide economy, interest rates and currency movements, including, in particular, our exposure to foreign currency risk; the occurrence of (a) litigation or claims, (b) the loss or insolvency of a major customer or distributor, (c) war (including acts of terrorism or hostilities which impact our markets), (d) natural or manmade disasters, or (e) severe weather conditions or public health epidemics affecting the foodservice, hospitality and travel industries; loss of, or changes in, executive management; our ability to continue product introductions or reformulations and technological innovations; and other uncertainties or risks reported from time to time in our reports to the Securities and Exchange Commission. In addition, we note that our stock price can be affected by fluctuations in quarterly earnings. There can be no assurances that our earnings levels will meet investors expectations. We undertake no duty to update our Forward-Looking Statements.
30
Consolidated Statement of Income
Year ended December 31 (thousands, except per share) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
Net sales |
|
$ |
4,184,933 |
|
$ |
3,761,819 |
|
$ |
3,403,585 |
|
Operating expenses |
|
|
|
|
|
|
|
|||
Cost of sales (including special charges (income) of ($106) in 2004, ($76) in 2003 and $8,977 in 2002) |
|
2,031,280 |
|
1,845,202 |
|
1,687,597 |
|
|||
Selling, general and administrative expenses |
|
1,615,064 |
|
1,433,551 |
|
1,283,091 |
|
|||
Special charges |
|
4,467 |
|
408 |
|
37,031 |
|
|||
Operating income |
|
534,122 |
|
482,658 |
|
395,866 |
|
|||
Gain on sale of equity investment |
|
|
|
11,105 |
|
|
|
|||
Interest expense, net |
|
45,344 |
|
45,345 |
|
43,895 |
|
|||
Income from continuing operations before income taxes |
|
488,778 |
|
448,418 |
|
351,971 |
|
|||
Provision for income taxes |
|
178,290 |
|
171,070 |
|
140,081 |
|
|||
Income from continuing operations before cumulative effect of change in accounting |
|
310,488 |
|
277,348 |
|
211,890 |
|
|||
Cumulative effect of change in accounting |
|
|
|
|
|
(4,002 |
) |
|||
Gain from discontinued operations |
|
|
|
|
|
1,882 |
|
|||
Net income |
|
$ |
310,488 |
|
$ |
277,348 |
|
$ |
209,770 |
|
|
|
|
|
|
|
|
|
|||
Basic income per common share |
|
|
|
|
|
|
|
|||
Income from continuing operations before change in accounting |
|
$ |
1.21 |
|
$ |
1.07 |
|
$ |
0.82 |
|
Change in accounting |
|
|
|
|
|
(0.02 |
) |
|||
Gain from discontinued operations |
|
|
|
|
|
0.01 |
|
|||
Net income |
|
$ |
1.21 |
|
$ |
1.07 |
|
$ |
0.81 |
|
Diluted income per common share |
|
|
|
|
|
|
|
|||
Income from continuing operations before change in accounting |
|
$ |
1.19 |
|
$ |
1.06 |
|
$ |
0.81 |
|
Change in accounting |
|
|
|
|
|
(0.02 |
) |
|||
Gain from discontinued operations |
|
|
|
|
|
0.01 |
|
|||
Net income |
|
$ |
1.19 |
|
$ |
1.06 |
|
$ |
0.80 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
|
|
|
|
|
|||
Basic |
|
257,575 |
|
259,454 |
|
258,147 |
|
|||
Diluted |
|
261,776 |
|
262,737 |
|
261,574 |
|
The accompanying notes are an integral part of the consolidated financial statements.
31
Consolidated Balance Sheet
December 31 (thousands, except per share) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
ASSETS |
|
|
|
|
|
|
|
|||
Current assets |
|
|
|
|
|
|
|
|||
Cash and cash equivalents |
|
$ |
71,231 |
|
$ |
85,626 |
|
$ |
49,205 |
|
Accounts receivable, net |
|
738,266 |
|
626,002 |
|
553,154 |
|
|||
Inventories |
|
338,603 |
|
309,959 |
|
291,506 |
|
|||
Deferred income taxes |
|
76,038 |
|
75,820 |
|
71,147 |
|
|||
Other current assets |
|
54,928 |
|
52,933 |
|
50,925 |
|
|||
Total current assets |
|
1,279,066 |
|
1,150,340 |
|
1,015,937 |
|
|||
Property, plant and equipment, net |
|
834,730 |
|
736,797 |
|
680,265 |
|
|||
Goodwill |
|
991,811 |
|
797,211 |
|
695,700 |
|
|||
Other intangible assets, net |
|
229,095 |
|
203,859 |
|
188,670 |
|
|||
Other assets, net |
|
381,472 |
|
340,711 |
|
285,335 |
|
|||
Total assets |
|
$ |
3,716,174 |
|
$ |
3,228,918 |
|
$ |
2,865,907 |
|
|
|
|
|
|
|
|
|
|||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|||
Current liabilities |
|
|
|
|
|
|
|
|||
Short-term debt |
|
$ |
56,132 |
|
$ |
70,203 |
|
$ |
160,099 |
|
Accounts payable |
|
269,561 |
|
212,287 |
|
205,665 |
|
|||
Compensation and benefits |
|
231,856 |
|
190,386 |
|
184,239 |
|
|||
Income taxes |
|
22,709 |
|
59,829 |
|
12,632 |
|
|||
Other current liabilities |
|
359,289 |
|
319,237 |
|
291,193 |
|
|||
Total current liabilities |
|
939,547 |
|
851,942 |
|
853,828 |
|
|||
Long-term debt |
|
645,445 |
|
604,441 |
|
539,743 |
|
|||
Postretirement health care and pension benefits |
|
270,930 |
|
249,906 |
|
207,596 |
|
|||
Other liabilities |
|
297,733 |
|
227,203 |
|
164,989 |
|
|||
Shareholders equity (common stock, par value $1.00 per share; shares outstanding: 2004 257,542; 2003 257,417 and 2002 129,940) |
|
1,562,519 |
|
1,295,426 |
|
1,099,751 |
|
|||
Total liabilities and shareholders equity |
|
$ |
3,716,174 |
|
$ |
3,228,918 |
|
$ |
2,865,907 |
|
The accompanying notes are an integral part of the consolidated financial statements.
32
Consolidated Statement of Cash Flows
Year ended December 31 (thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|||
Net income |
|
$ |
310,488 |
|
$ |
277,348 |
|
$ |
209,770 |
|
Cumulative effect of change in accounting |
|
|
|
|
|
4,002 |
|
|||
Gain from discontinued operations |
|
|
|
|
|
(1,882 |
) |
|||
Income from continuing operations |
|
310,488 |
|
277,348 |
|
211,890 |
|
|||
Adjustments to reconcile income from continuing operations to cash provided by operating activities: |
|
|
|
|
|
|
|
|||
Depreciation |
|
213,523 |
|
201,512 |
|
194,840 |
|
|||
Amortization |
|
33,859 |
|
28,144 |
|
28,588 |
|
|||
Deferred income taxes |
|
24,309 |
|
42,455 |
|
49,923 |
|
|||
Gain on sale of equity investment |
|
|
|
(11,105 |
) |
|
|
|||
Disposal loss, net |
|
3,691 |
|
|
|
|
|
|||
Charge for in-process research and development |
|
1,600 |
|
|
|
|
|
|||
Special charges asset disposals |
|
|
|
1,684 |
|
6,180 |
|
|||
Other, net |
|
(2,507 |
) |
1,837 |
|
1,835 |
|
|||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|||
Accounts receivable |
|
(47,217 |
) |
(5,547 |
) |
78 |
|
|||
Inventories |
|
(5,481 |
) |
(2,902 |
) |
(3,567 |
) |
|||
Other assets |
|
(31,723 |
) |
(39,224 |
) |
(141,926 |
) |
|||
Accounts payable |
|
34,841 |
|
(13,329 |
) |
(8,860 |
) |
|||
Other liabilities |
|
47,081 |
|
48,326 |
|
84,345 |
|
|||
Cash provided by operating activities |
|
582,464 |
|
529,199 |
|
423,326 |
|
|||
|
|
|
|
|
|
|
|
|||
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|||
Capital expenditures |
|
(275,871 |
) |
(212,035 |
) |
(212,757 |
) |
|||
Property disposals |
|
18,373 |
|
8,502 |
|
6,788 |
|
|||
Capitalized software expenditures |
|
(9,688 |
) |
(8,951 |
) |
(4,490 |
) |
|||
Businesses acquired and investments in affiliates, net of cash acquired |
|
(129,822 |
) |
(31,726 |
) |
(62,825 |
) |
|||
Sale of businesses and assets |
|
3,417 |
|
27,130 |
|
|
|
|||
Cash used for investing activities |
|
(393,591 |
) |
(217,080 |
) |
(273,284 |
) |
|||
|
|
|
|
|
|
|
|
|||
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|||
Net repayments of notes payable |
|
(17,474 |
) |
(94,412 |
) |
(368,834 |
) |
|||
Long-term debt borrowings |
|
7,325 |
|
5,959 |
|
261,039 |
|
|||
Long-term debt repayments |
|
(6,632 |
) |
(13,270 |
) |
(1,257 |
) |
|||
Reacquired shares |
|
(165,414 |
) |
(227,145 |
) |
(8,894 |
) |
|||
Cash dividends on common stock |
|
(82,419 |
) |
(75,413 |
) |
(69,583 |
) |
|||
Exercise of employee stock options |
|
59,989 |
|
126,615 |
|
45,531 |
|
|||
Other, net |
|
(800 |
) |
(313 |
) |
(1,746 |
) |
|||
Cash used for financing activities |
|
(205,425 |
) |
(277,979 |
) |
(143,744 |
) |
|||
|
|
|
|
|
|
|
|
|||
Effect of exchange rate changes on cash |
|
2,157 |
|
2,281 |
|
1,114 |
|
|||
|
|
|
|
|
|
|
|
|||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
(14,395 |
) |
36,421 |
|
7,412 |
|
|||
Cash and cash equivalents, beginning of year |
|
85,626 |
|
49,205 |
|
41,793 |
|
|||
Cash and cash equivalents, end of year |
|
$ |
71,231 |
|
$ |
85,626 |
|
$ |
49,205 |
|
The accompanying notes are an integral part of the consolidated financial statements.
33
Consolidated Statement of Comprehensive Income and Shareholders Equity
(thousands) |
|
Common
|
|
Additional
|
|
Retained
|
|
Deferred
|
|
Accumulated
|
|
Treasury
|
|
Total |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
BALANCE DECEMBER 31, 2001 |
|
$ |
149,734 |
|
$ |
319,452 |
|
$ |
1,021,049 |
|
$ |
(3,676 |
) |
$ |
(95,623 |
) |
$ |
(510,584 |
) |
$ |
880,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net income |
|
|
|
|
|
209,770 |
|
|
|
|
|
|
|
209,770 |
|
|||||||
Foreign currency translation |
|
|
|
|
|
|
|
|
|
20,500 |
|
|
|
20,500 |
|
|||||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
67 |
|
|
|
67 |
|
|||||||
Minimum pension liability |
|
|
|
|
|
|
|
|
|
(1,052 |
) |
|
|
(1,052 |
) |
|||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
229,285 |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Cash dividends declared |
|
|
|
|
|
(71,156 |
) |
|
|
|
|
|
|
(71,156 |
) |
|||||||
Stock options, including tax benefits |
|
2,216 |
|
64,617 |
|
|
|
|
|
|
|
|
|
66,833 |
|
|||||||
Stock awards, net issuances |
|
|
|
2,139 |
|
|
|
(827 |
) |
|
|
(658 |
) |
654 |
|
|||||||
Business acquisitions |
|
|
|
|
|
|
|
|
|
|
|
(116 |
) |
(116 |
) |
|||||||
Reacquired shares |
|
|
|
|
|
|
|
|
|
|
|
(8,894 |
) |
(8,894 |
) |
|||||||
Amortization |
|
|
|
|
|
|
|
2,793 |
|
|
|
|
|
2,793 |
|
|||||||
BALANCE DECEMBER 31, 2002 |
|
151,950 |
|
386,208 |
|
1,159,663 |
|
(1,710 |
) |
(76,108 |
) |
(520,252 |
) |
1,099,751 |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net income |
|
|
|
|
|
277,348 |
|
|
|
|
|
|
|
277,348 |
|
|||||||
Foreign currency translation |
|
|
|
|
|
|
|
|
|
90,601 |
|
|
|
90,601 |
|
|||||||
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
(865 |
) |
|
|
(865 |
) |
|||||||
Minimum pension liability |
|
|
|
|
|
|
|
|
|
(9,530 |
) |
|
|
(9,530 |
) |
|||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
357,554 |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Cash dividends declared |
|
|
|
|
|
(77,132 |
) |
|
|
|
|
|
|
(77,132 |
) |
|||||||
Stock options, including tax benefits |
|
3,596 |
|
136,941 |
|
|
|
|
|
|
|
|
|
140,537 |
|
|||||||
Stock awards, net issuances |
|
|
|
604 |
|
|
|
(253 |
) |
|
|
(43 |
) |
308 |
|
|||||||
Reacquired shares |
|
|
|
|
|
|
|
|
|
|
|
(227,145 |
) |
(227,145 |
) |
|||||||
Amortization |
|
|
|
|
|
|
|
1,553 |
|
|
|
|
|
1,553 |
|
|||||||
Stock dividend |
|
154,738 |
|
(154,738 |
) |
|
|
|
|
|
|
|
|
|
|
|||||||
BALANCE DECEMBER 31, 2003 |
|
310,284 |
|
369,015 |
|
1,359,879 |
|
(410 |
) |
4,098 |
|
(747,440 |
) |
1,295,426 |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net income |
|
|
|
|
|
310,488 |
|
|
|
|
|
|
|
310,488 |
|
|||||||
Foreign currency translation |
|
|
|
|
|
|
|
|
|
71,029 |
|
|
|
71,029 |
|
|||||||
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
(2,674 |
) |
|
|
(2,674 |
) |
|||||||
Minimum pension liability |
|
|
|
|
|
|
|
|
|
(293 |
) |
|
|
(293 |
) |
|||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
378,550 |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Cash dividends declared |
|
|
|
|
|
(84,410 |
) |
|
|
|
|
|
|
(84,410 |
) |
|||||||
Stock options, including tax benefits |
|
3,624 |
|
76,994 |
|
|
|
|
|
|
|
5 |
|
80,623 |
|
|||||||
Stock awards, net issuances |
|
|
|
486 |
|
|
|
(432 |
) |
|
|
113 |
|
167 |
|
|||||||
Business acquisitions |
|
1,835 |
|
55,314 |
|
|
|
|
|
|
|
|
|
57,149 |
|
|||||||
Reacquired shares |
|
|
|
|
|
|
|
|
|
|
|
(165,414 |
) |
(165,414 |
) |
|||||||
Amortization |
|
|
|
|
|
|
|
428 |
|
|
|
|
|
428 |
|
|||||||
BALANCE DECEMBER 31, 2004 |
|
$ |
315,743 |
|
$ |
501,809 |
|
$ |
1,585,957 |
|
$ |
(414 |
) |
$ |
72,160 |
|
$ |
(912,736 |
) |
$ |
1,562,519 |
|
COMMON STOCK ACTIVITY
|
|
2004 |
|
2003 |
|
2002 |
|
||||||
Year ended December 31 (shares) |
|
Common
|
|
Treasury
|
|
Common
|
|
Treasury
|
|
Common
|
|
Treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares, beginning of year |
|
310,284,083 |
|
(52,867,561 |
) |
151,950,428 |
|
(22,010,334 |
) |
149,734,067 |
|
(21,833,949 |
) |
Stock options |
|
3,623,917 |
|
1,200 |
|
3,595,961 |
|
|
|
2,216,361 |
|
|
|
Stock awards, net issuances |
|
|
|
24,460 |
|
|
|
12,241 |
|
|
|
25,065 |
|
Business acquisitions |
|
1,834,759 |
|
|
|
|
|
|
|
|
|
(2,672 |
) |
Reacquired shares |
|
|
|
(5,359,007 |
) |
|
|
(6,666,861 |
) |
|
|
(198,778 |
) |
Stock dividends |
|
|
|
|
|
154,737,694 |
|
(24,202,607 |
) |
|
|
|
|
Shares, end of year |
|
315,742,759 |
|
(58,200,908 |
) |
310,284,083 |
|
(52,867,561 |
) |
151,950,428 |
|
(22,010,334 |
) |
The accompanying notes are an integral part of the consolidated financial statements.
34
Notes to Consolidated Financial Statements
NOTE 1. NATURE OF BUSINESS
Ecolab Inc. (the company) develops and markets premium products and services for the hospitality, foodservice, institutional and industrial markets. The company provides cleaning, sanitizing, pest elimination, maintenance and repair products, systems and services primarily to hotels and restaurants; healthcare and educational facilities; quickservice (fast-food and convenience stores) units; grocery stores; commercial and institutional laundries; light industry; dairy plants and farms; food and beverage processors; pharmaceutical and cosmetic facilities; and the vehicle wash industry.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the company and all majority-owned subsidiaries. International subsidiaries are included in the financial statements on the basis of their November 30 fiscal year-ends to facilitate the timely inclusion of such entities in the companys consolidated financial reporting. All intercompany transactions and profits are eliminated in consolidation.
Foreign Currency Translation
Financial position and results of operations of the companys international subsidiaries 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. The translation adjustments related to assets and liabilities that arise from the use of differing exchange rates from period to period are included in accumulated other comprehensive income (loss) in shareholders equity. The cumulative translation gain as of year-end 2004 and 2003 was $87,093,000 and $16,064,000, respectively. The cumulative translation loss as of year-end 2002 was $74,537,000. Income statement accounts are translated at the average rates of exchange prevailing during the year. The different exchange rates from period to period impact the amount of reported income from the companys international operations.
Cash and Cash Equivalents
Cash equivalents include highly-liquid investments with a maturity of three months or less when purchased.
Allowance for Doubtful Accounts
The company estimates the balance of allowance for doubtful accounts by analyzing accounts receivable balances by age and applying historical write-off trend rates to the most recent 12 months sales, less actual write-offs to date. The company estimates include separately providing for specific customer balances when it is deemed probable that the balance is uncollectible. Account balances are charged off against the allowance when it is probable the receivable will not be recovered.
The companys allowance for doubtful accounts balance includes an allowance of approximately $6 million for the expected return of products shipped, credits related to pricing or quantities shipped. All of this returns and credits activity is recorded directly to accounts receivable or sales.
The following table summarizes the activity in the allowance for doubtful accounts:
(thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
Beginning balance |
|
$ |
44,011 |
|
$ |
35,995 |
|
$ |
30,297 |
|
Bad debt expense |
|
14,278 |
|
18,403 |
|
17,220 |
|
|||
Write-offs |
|
(16,504 |
) |
(14,056 |
) |
(13,754 |
) |
|||
Other* |
|
2,414 |
|
3,669 |
|
2,232 |
|
|||
Ending balance |
|
$ |
44,199 |
|
$ |
44,011 |
|
$ |
35,995 |
|
* Other amounts are primarily the effects of changes in currency.
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 30 percent, 29 percent and 30 percent of consolidated inventories at year-end 2004, 2003 and 2002, 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 the companys cleaning and sanitizing products and 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 is charged to operations using the straight-line method over the assets estimated useful lives ranging from 5 to 50 years for buildings, 3 to 7 years for merchandising equipment, and 3 to 11 years for machinery and equipment.
Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments, which significantly extend the useful lives of existing plant and equipment, are capitalized and depreciated. Upon retirement or disposition of plant and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in income.
Goodwill and Other Intangible Assets
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. The fair value of identifiable intangible assets is estimated based upon discounted future cash flow projections. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. The weighted-average useful life of other intangible assets was 13 years, 12 years and 15 years as of December 31, 2004, 2003 and 2002, respectively.
The weighted-average useful life by class at December 31, 2004 is as follows:
|
|
Number of Years |
|
|
|
|
|
Customer relationships |
|
11 |
|
Intellectual property |
|
15 |
|
Trademarks |
|
20 |
|
Other |
|
5 |
|
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
35
economic benefits obtained by the company in each reporting period. Total amortization expense related to other intangible assets during the years ended December 31, 2004, 2003 and 2002 was approximately $21.7 million, $21.2 million and $16.9 million, respectively. As of December 31, 2004, future estimated amortization expense related to amortizable other identifiable intangible assets will be:
(thousands) |
|
|
|
|
|
|
|
|
|
2005 |
|
$ |
24,473 |
|
2006 |
|
23,704 |
|
|
2007 |
|
23,347 |
|
|
2008 |
|
23,125 |
|
|
2009 |
|
21,634 |
|
|
Effective with the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets , the company was required to test all existing goodwill for impairment as of January 1, 2002 on a reporting unit basis. Generally, the companys reporting units are its operating segments. Under SFAS No. 142, the fair value approach is used to test goodwill for impairment. This method differed from the companys prior policy of using an undiscounted cash flow method for testing goodwill impairment. An impairment charge is recognized for the amount, if any, by which the carrying amount of goodwill exceeds its implied fair value. Fair values of reporting units were established using a discounted cash flow method. Where available and as appropriate, comparative market multiples were used to corroborate the results of the discounted cash flow method.
The result of testing goodwill for impairment in accordance with the adoption of SFAS No. 142, was a non-cash charge of $4.0 million after tax, or $0.02 per share, which is reported on the accompanying consolidated statement of income as a cumulative effect of a change in accounting in 2002. The impairment charge relates to the Africa/Export operations, which is part of the International reportable segment. The primary factor resulting in the impairment charge was the difficult economic environment in the region.
In accordance with SFAS No. 142, the company continues to test goodwill for impairment on an annual basis for all reporting units, including businesses reporting losses such as GCS Service. Based on the companys testing in 2004 and 2003, there has been no additional impairment of goodwill. The company performs its annual goodwill impairment test during the second quarter. If circumstances change significantly within a reporting unit, the company would test for impairment prior to the annual test.
Long-Lived Assets
The company periodically reviews its long-lived assets for impairment and assesses whether significant events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded, if any, is calculated by the excess of the assets carrying value over its fair value.
Revenue Recognition
The company recognizes revenue as services are performed or on product sales at the time title transfers to the customer. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The company records estimated reductions to revenue for customer programs and incentive offerings, including pricing arrangements, promotions and other volume-based incentives at the time the sale is recorded. The company also records estimated reserves for anticipated uncollectible accounts and for product returns and credits at the time of sale.
Income Per Common Share
The computations of the basic and diluted income from continuing operations per share amounts were as follows:
(thousands, except per share) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
Income from continuing operations before change in accounting |
|
$ |
310,488 |
|
$ |
277,348 |
|
$ |
211,890 |
|
Weighted-average common shares outstanding |
|
|
|
|
|
|
|
|||
Basic |
|
257,575 |
|
259,454 |
|
258,147 |
|
|||
Effect of dilutive stock options and awards |
|
4,201 |
|
3,283 |
|
3,427 |
|
|||
Diluted |
|
261,776 |
|
262,737 |
|
261,574 |
|
|||
Income from continuing operations before change in accounting per common share |
|
|
|
|
|
|
|
|||
Basic |
|
$ |
1.21 |
|
$ |
1.07 |
|
$ |
0.82 |
|
Diluted |
|
$ |
1.19 |
|
$ |
1.06 |
|
$ |
0.81 |
|
Restricted stock awards of approximately 62,300 shares for 2004, 52,800 shares for 2003 and 203,550 shares for 2002 were excluded from the computation of basic weighted-average shares outstanding because such shares were not yet vested at those dates.
Stock options to purchase approximately 4.2 million shares for 2004, 4.3 million shares for 2003 and 8.4 million shares for 2002 were not dilutive and, therefore, were not included in the computations of diluted common shares outstanding.
Stock-Based Compensation
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 and charged compensation cost against income, over the vesting periods, based on the fair value of options at the date of grant, net income and the related basic and diluted per common share amounts for 2004, 2003 and 2002 would have been reduced to the pro forma amounts in the following table:
(thousands, except per share) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
Net income, as reported |
|
$ |
310,488 |
|
$ |
277,348 |
|
$ |
209,770 |
|
Add: Stock-based employee compensation expense included in reported net income, net of tax |
|
261 |
|
941 |
|
1,688 |
|
|||
Deduct: Total stock-based employee compensation expense under fair value-based method, net of tax |
|
(28,056 |
) |
(17,699 |
) |
(15,145 |
) |
|||
Pro forma net income |
|
$ |
282,693 |
|
$ |
260,590 |
|
$ |
196,313 |
|
Basic net income per common share |
|
|
|
|
|
|
|
|||
As reported |
|
$ |
1.21 |
|
$ |
1.07 |
|
$ |
0.81 |
|
Pro forma |
|
1.10 |
|
1.00 |
|
0.76 |
|
|||
Diluted net income per common share |
|
|
|
|
|
|
|
|||
As reported |
|
1.19 |
|
1.06 |
|
0.80 |
|
|||
Pro forma |
|
$ |
1.09 |
|
$ |
0.99 |
|
$ |
0.75 |
|
36
Pro forma net income for 2004 includes approximately $0.03 per share of after-tax expense related to the acceleration of vesting and issuance of options under a reload feature associated with executive retirements.
Note 10 to the consolidated financial statements contains the significant assumptions used in determining the underlying fair value of options.
Comprehensive Income
Comprehensive income includes net income, foreign currency translation adjustments, minimum pension liabilities, gains and losses on derivative instruments designated and effective as cash flow hedges and nonderivative instruments designated and effective as foreign currency net investment hedges that are charged or credited to the accumulated other comprehensive income (loss) account in shareholders equity.
Derivative Instruments and Hedging Activities
The company uses foreign currency forward contracts, interest rate swaps and foreign currency debt to manage risks generally associated with foreign exchange rates, interest rates and net investments in foreign operations. The company does not hold derivative financial instruments of a speculative nature. On the date that the company enters into a derivative contract, it designates the derivative as (1) a hedge of (a) the fair value of a recognized asset or liability or (b) an unrecognized firm commitment (a fair value hedge), (2) a hedge of (a) a forecasted transaction or (b) the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a cash flow hedge); or (3) a foreign-currency fair-value or cash flow hedge (a foreign currency hedge). The company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. The company also formally assesses (both at the hedges inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, the company will discontinue hedge accounting prospectively. The company believes that on an ongoing basis its portfolio of derivative instruments will generally be highly effective as hedges. Hedge ineffectiveness during the years ended December 31, 2004, 2003 and 2002 was not significant.
All of the companys derivatives are recognized on the balance sheet at their fair value. The earnings impact resulting from the change in fair value of the derivative instruments is recorded in the same line item in the consolidated statement of income as the underlying exposure being hedged.
Use of Estimates
The preparation of the companys 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.
New Accounting Pronouncements
In December 2003, The Financial Accounting Standards Board (FASB) issued a revision to SFAS No. 132, Employers Disclosures about Pensions and Other Post Retirement Benefits , which requires additional disclosures about the assets, obligations, cash flows and period benefit costs of defined benefit pension plans and other defined benefit post retirement plans. The company adopted these provisions for domestic plans in 2003 and, as permitted under the standard, for international plans in 2004. Note 15 presents the new disclosure requirements.
In March 2004, the FASB issued Emerging Issues Task Force (EITF) No. 03-01, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments , which provides new guidance for assessing impairment losses on debt and equity investments. The new impairment model applies to investments accounted for under the cost or equity method and investments accounted for under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities . EITF No. 03-01 also includes new disclosure requirements for cost method investments and for all investments that are in an unrealized loss position. In September 2004, the FASB delayed the accounting provisions of EITF No. 03-01; however the disclosure requirements remain effective and the applicable ones have been adopted for the companys year-end 2004. The company does not expect this guidance to have a significant impact on its consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) Share-Based Payments (SFAS No. 123R). SFAS No. 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123R will require the company to expense share-based payment awards with compensation cost measured at the fair value of the award. SFAS No. 123R requires the company to adopt the new accounting provisions beginning in the third quarter of 2005. The company expects to restate prior period results as part of its transition to the new standard in line with the pro forma amounts shown in Note 2 under Stock-Based Compensation.
In May 2004, the FASB issued a FASB Staff Position (FSP) regarding SFAS No. 106, Employers Accounting for Postretirement Benefits Other than Pensions. FSP No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 , discusses the effect of the Medicare Prescription Drug, Improvement and Modernization Act (the Act) enacted in April 2004 and supersedes FSP No. 106-1, which was issued in January 2004. FSP No. 106-2 considers the effect of the two new features introduced in the Act in determining our accumulated postretirement benefit obligation (APBO) and net periodic postretirement benefit cost. The effect on the APBO will be accounted for as an actuarial experience gain to be amortized into income over the average remaining service period of plan participants. The companys adoption of FSP No. 106-2 in the third quarter of 2004 resulted in an after-tax reduction of the net periodic pension cost of approximately $1.0 million and a reduction of the benefit obligation of $15.5 million during 2004.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs an amendment of ARB No. 43 (SFAS No. 151), which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be recognized as current-periodic charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. 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 December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets an Amendment of APB Opinion
No. 29, (SFAS No. 153). SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.
37
The company is currently evaluating the impact of this standard and does not expect it to have a significant impact on its consolidated financial statements.
In December 2004, the FASB issued an FSP regarding Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 , SFAS 109-1. Under the guidance in SFAS No. 109-1, the deduction will be treated as a special deduction as described in SFAS No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on the companys tax return. The company expects to benefit from this deduction with a modest benefit beginning in 2005.
In December 2004, the FASB issued an FSP regarding Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (AJCA), SFAS No. 109-2. SFAS No. 109-2 allows the company time beyond the fourth quarter of 2004, the period of enactment, to evaluate the effect of the AJCA on its plans for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109, Accounting for Income Taxes. The AJCA includes a deduction for 85 percent of certain foreign earnings that are repatriated, as defined in the AJCA, at an effective tax cost of 5.25 percent on any such repatriated foreign earnings. Companies may elect to apply this provision to qualifying earnings repatriations in fiscal 2005. The company has begun an evaluation of the effects of the repatriation provisions; however, the company does not expect to be able to complete this evaluation until Congress or the Treasury Department provides additional clarifying language on key elements of the provision. The company expects to complete its evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the additional clarifying language.
NOTE 3. SPECIAL CHARGES
In the first quarter of 2002, management approved plans to undertake restructuring and cost saving actions during 2002, including costs related to the integration of the companys European operations. These actions included global workforce reductions, facility closings and product line discontinuations. As a result, the company recorded restructuring expense of $47,767,000 ($29,867,000 after tax) for the year ended December 31, 2002. This includes $36,366,000 for employee termination benefits, $6,180,000 for asset disposals and $5,221,000 for other charges. The company also incurred merger integration costs of $4,032,000 ($2,521,000 after tax) related to European and other operations. Restructuring and merger integration costs have been included as special charges on the consolidated statement of income with a portion of restructuring expenses included as a component of cost of sales. Amounts included as a component of cost of sales include asset disposals of $6,180,000 and manufacturing related severance of $2,797,000 for the year ended December 31, 2002.
Also included in special charges on the consolidated statement of income for the year ended December 31, 2002 is a one-time curtailment gain of $5,791,000 ($3,501,000 after tax), related to changes to postretirement healthcare benefits made in the first quarter of 2002.
Restructuring liabilities are classified as a component of other current liabilities.
Employee termination benefit expenses in 2002 included 695 net personnel reductions through voluntary and involuntary terminations, with the possibility that some of these people may be replaced. Individuals were affected through facility closures and consolidation primarily within the corporate administrative, operations and research and development functions.
Asset disposals include inventory and property, plant, and equipment charges. Inventory charges for the year ended December 31, 2002 were $2,391,000 and reflect the discontinuance of product lines which are not consistent with the companys long-term strategies. Property, plant and equipment charges during the year ended December 31, 2002 were $3,789,000 and reflect the downsizing and closure of production facilities as well as global changes to manufacturing and distribution operations in connection with the integration of European operations.
Other charges of $5,221,000 for the year ended December 31, 2002, include lease termination costs and other miscellaneous exit costs.
The company recorded restructuring and merger integration charges throughout 2002 and completed these activities by December 31, 2002.
During 2004 and 2003, restructuring activity includes the reversal of $927,000 and $1,359,000, respectively, of previously accrued severance and other costs as project expenses were favorable to previous estimates. Of this amount, for 2004 and 2003, $106,000 and $76,000, respectively, is included as a component of cost of sales and $821,000 and $1,283,000, respectively, is included as a component of special charges.
Also included in special charges for 2004 is a charge $1.6 million of in-process research and development related to the Alcide acquisition, a loss of $4.0 million ($2.4 million after tax) on the disposal of a grease management product line and a gain of $0.3 million ($0.2 million after tax) on the disposal of a small international business. For 2003, special charges also includes a write-off of $1.7 million of goodwill related to an international business.
For segment reporting purposes, each of these items has been included in the companys corporate segment, which is consistent with the companys internal management reporting. Changes to the restructuring liability accounts included the following:
(thousands) |
|
Employee
|
|
Asset
|
|
Other |
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Restructuring liability, December 31, 2001 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial expense and accrual |
|
36,366 |
|
6,180 |
|
5,221 |
|
47,767 |
|
||||
Cash payments |
|
(16,033 |
) |
|
|
(1,711 |
) |
(17,744 |
) |
||||
Non-cash charges |
|
|
|
(6,180 |
) |
|
|
(6,180 |
) |
||||
Restructuring liability, December 31, 2002 |
|
20,333 |
|
0 |
|
3,510 |
|
23,843 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Cash payments |
|
(16,770 |
) |
|
|
(2,471 |
) |
(19,241 |
) |
||||
Non-cash credits |
|
|
|
7 |
|
|
|
7 |
|
||||
Revisions to prior estimates |
|
(1,352 |
) |
(7 |
) |
|
|
(1,359 |
) |
||||
Effect of foreign currency translation |
|
1,222 |
|
|
|
670 |
|
1,892 |
|
||||
Restructuring liability, December 31, 2003 |
|
3,433 |
|
0 |
|
1,709 |
|
5,142 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Cash payments |
|
(3,130 |
) |
|
|
(1,374 |
) |
(4,504 |
) |
||||
Revisions to prior estimates |
|
(490 |
) |
|
|
(437 |
) |
(927 |
) |
||||
Effect of foreign currency translation |
|
187 |
|
|
|
102 |
|
289 |
|
||||
Restructuring liability, December 31, 2004 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
$ |
0 |
|
NOTE 4. GAIN FROM DISCOUNTED OPERATION
During the first quarter of 2002, the company resolved a legal issue related to the disposal of its ChemLawn business in 1992. This resulted in the recognition of a gain from discontinued operations of $1,882,000 (net of income tax benefit of $1,079,000), or $0.01 per diluted share during the year ended December 31, 2002.
38
NOTE 5. RELATED PARTY TRANSACTIONS
Henkel KGaA (Henkel) beneficially owned 72.7 million shares, or approximately 28.2 percent, of the companys outstanding common stock on December 31, 2004. Under a stockholders agreement between the company and Henkel, Henkel is permitted ownership in the company of up to 35 percent of the companys outstanding common stock. Henkel is also entitled to proportionate representation on the companys board of directors.
In 2004, 2003 and 2002, the company and its affiliates sold products and services in the aggregate amounts of $3,222,000, $3,426,000 and $6,986,000, respectively, to Henkel or its affiliates, and purchased products and services in the amounts of $70,946,000, $71,265,000 and $74,192,000, respectively, from Henkel or its affiliates. The transactions with Henkel and its affiliates are negotiated at arms length.
NOTE 6. BUSINESS ACQUISITIONS AND DISPOSITIONS
Business Acquisitions
Business acquisitions made by the company during 2004, 2003 and 2002 were as follows:
Business
|
|
Date of
|
|
Ecolab
|
|
Estimated
|
|
|
|
|
|
|
|
|
(unaudited) |
|
|
2004 |
|
|
|
|
|
|
|
|
Nigiko |
|
Jan. 2004 |
|
Europe (Pest Elimination) |
|
$ |
55 |
|
|
|
|
|
|
|
|
|
|
Daydots International |
|
Feb. 2004 |
|
Institutional |
|
22 |
|
|
|
|
|
|
|
|
|
|
|
Elimco |
|
May 2004 |
|
Europe (Pest Elimination) |
|
4 |
|
|
|
|
|
|
|
|
|
|
|
Restoration and Maintenance unit of VIC International |
|
June 2004 |
|
Professional Products |
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Alcide Corporation |
|
July 2004 |
|
Food & Beverage |
|
24 |
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
Adams Healthcare |
|
Dec. 2002 |
|
Europe (Healthcare) |
|
19 |
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
|
|
|
|
|
|
|
Kleencare Hygiene |
|
Jan. 2002 |
|
Europe (Food & Beverage) |
|
30 |
|
|
|
|
|
|
|
|
|
|
|
Audits International |
|
Jan. 2002 |
|
Pest Elimination |
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Terminix Ltd. |
|
Sept. 2002 |
|
Europe (Pest Elimination) |
|
65 |
|
|
The total cash consideration paid by the company for acquisitions and investments in affiliates was approximately $130 million, $32 million and $63 million for 2004, 2003 and 2002, respectively. In addition, 1,834,759 shares of common stock were issued with a market value of $57 million in the Alcide acquisition, plus $23,000 of cash in lieu of fractional shares. Total cash paid also includes payments of restructuring costs related to the acquisition of the remaining 50 percent interest of the former Henkel-Ecolab joint venture that were accrued in 2002. The aggregate purchase price has been reduced for any cash or cash equivalents acquired with the acquisitions.
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 companys consolidated results of operations, financial position and cash flows.
Based upon purchase price allocations, the components of the aggregate purchase prices of the acquisitions made, the allocation of the purchase prices were as follows:
(millions) |
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
||
Net tangible assets acquired |
|
$ |
14 |
|
$ |
18 |
|
Identifiable intangible assets |
|
44 |
|
13 |
|
||
In-process research and development |
|
2 |
|
|
|
||
Goodwill |
|
127 |
|
1 |
|
||
Purchase price |
|
$ |
187 |
|
$ |
32 |
|
The allocation of purchase price includes adjustments to preliminary allocations from prior periods, if any. During 2004, the company recorded a charge of $1.6 million for in-process research and development (IPR&D) as part of the allocation of purchase price in the Alcide acquisition. The value assigned to IPR&D is based on an independent appraisers valuation and was determined by identifying research projects in areas for which technological feasibility had not been established and no alternative uses for the technology existed. The values were determined by estimating the discounted amount of after-tax cash flows attributable to these projects. The future cash flows were discounted to present value utilizing a risk-adjusted rate of return that considered the uncertainty surrounding the successful development of the IPR&D.
In January 2005, the company acquired Associated Chemicals & Services, Inc. (aka Midland Research Laboratories), a Kansas-based provider of water treatment products, process chemicals and services serving the commercial, institutional, industrial, food and sugar processing markets. Midland has annual sales of approximately $16 million. These operations will become part of the companys United States Cleaning & Sanitizing operations in 2005.
39
The changes in the carrying amount of goodwill for each of the companys reportable segments for the years ended December 31, 2004, 2003 and 2002 are as follows:
|
|
United States |
|
|
|
|
|
|||||||||
(thousands) |
|
Cleaning &
|
|
Other
|
|
Total
|
|
International |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance December 31, 2001 |
|
$ |
121,046 |
|
$ |
44,796 |
|
$ |
165,842 |
|
$ |
431,083 |
|
$ |
596,925 |
|
Goodwill acquired during year* |
|
3,532 |
|
4,510 |
|
8,042 |
|
58,862 |
|
66,904 |
|
|||||
Foreign currency translation |
|
|
|
|
|
|
|
38,472 |
|
38,472 |
|
|||||
Impairment losses upon adoption of SFAS No. 142 on January 1, 2002 |
|
|
|
|
|
|
|
(4,002 |
) |
(4,002 |
) |
|||||
Impairment losses during 2002 |
|
(2,599 |
) |
|
|
(2,599 |
) |
|
|
(2,599 |
) |
|||||
Balance December 31, 2002 |
|
121,979 |
|
49,306 |
|
171,285 |
|
524,415 |
|
695,700 |
|
|||||
Goodwill acquired during year* |
|
367 |
|
(377 |
) |
(10 |
) |
825 |
|
815 |
|
|||||
Goodwill allocated to business dispositions |
|
|
|
|
|
|
|
(2,708 |
) |
(2,708 |
) |
|||||
Foreign currency translation |
|
|
|
|
|
|
|
103,404 |
|
103,404 |
|
|||||
Balance December 31, 2003 |
|
122,346 |
|
48,929 |
|
171,275 |
|
625,936 |
|
797,211 |
|
|||||
Goodwill acquired during year* |
|
54,936 |
|
|
|
54,936 |
|
72,270 |
|
127,206 |
|
|||||
Goodwill allocated to business dispositions |
|
(69 |
) |
|
|
(69 |
) |
(25 |
) |
(94 |
) |
|||||
Foreign currency translation |
|
|
|
|
|
|
|
67,488 |
|
67,488 |
|
|||||
Balance December 31, 2004 |
|
$ |
177,213 |
|
$ |
48,929 |
|
$ |
226,142 |
|
$ |
765,669 |
|
$ |
991,811 |
|
* For 2004, all of the goodwill except approximately $34.4 million is expected to be tax deductible. All of the goodwill related to businesses acquired in 2003 and 2002 is expected to be tax deductible. Goodwill acquired in 2004, 2003 and 2002 also includes adjustments to prior year acquisitions. United States Other Services goodwill acquired during 2003 includes a reduction of $0.4 million for an adjustment related to the Audits International acquisition. International goodwill acquired during 2003 includes a reduction of $4.7 million for the Terminix acquisition primarily related to a finalization of the pension valuation at the date of acquisition.
Business Dispositions
In April 2004, the company sold its grease management product line to National Fire Services of Gurnee, Illinois. This sale resulted in a loss of approximately $4.0 million ($2.4 million after tax). Sales of the grease management product line totaled approximately $20 million in 2003 and were included in the companys U.S. Cleaning & Sanitizing operations. The company also recognized a gain of $0.3 million ($0.2 million after tax) on the sale of a small Hygiene Services business in its International operations.
In December 2002, the company sold its Darenas janitorial products distribution business based in Birmingham, United Kingdom. This sale resulted in a loss of approximately $1.7 million principally due to the amount of goodwill allocated to the disposed business. The annualized sales of this entity were approximately $30 million. In June 2003, the company sold its minority interest investment in Comac S.p.A., a floor care machine manufacturing company based in Verona, Italy, for a gain of approximately $11.1 million ($6.7 million after tax). The company accounted for this investment under the equity method of accounting. In September 2003, the company sold the consumer dermatology business of the Adams Healthcare business at a nominal gain. Goodwill allocated to the sale of the dermatology business was approximately $1.0 million. The annualized sales of the dermatology business that was sold were approximately $2.5 million. These operations and investment were a part of the companys International segment.
NOTE 7. BALANCE SHEET INFORMATION
December 31 (thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
Accounts Receivable, Net |
|
|
|
|
|
|
|
|||
Accounts receivable |
|
$ |
782,465 |
|
$ |
670,013 |
|
$ |
589,149 |
|
Allowance for doubtful accounts |
|
(44,199 |
) |
(44,011 |
) |
(35,995 |
) |
|||
Total |
|
$ |
738,266 |
|
$ |
626,002 |
|
$ |
553,154 |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
|
|
|
|
|
|||
Finished goods |
|
$ |
167,787 |
|
$ |
159,633 |
|
$ |
136,721 |
|
Raw materials and parts |
|
176,336 |
|
152,127 |
|
156,628 |
|
|||
Excess of fifo cost over lifo cost |
|
(5,520 |
) |
(1,801 |
) |
(1,843 |
) |
|||
Total |
|
$ |
338,603 |
|
$ |
309,959 |
|
$ |
291,506 |
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, Net |
|
|
|
|
|
|
|
|||
Land |
|
$ |
34,469 |
|
$ |
26,921 |
|
$ |
21,914 |
|
Buildings and leaseholds |
|
272,931 |
|
243,795 |
|
231,119 |
|
|||
Machinery and equipment |
|
639,046 |
|
589,620 |
|
525,359 |
|
|||
Merchandising equipment |
|
1,065,482 |
|
949,553 |
|
821,109 |
|
|||
Construction in progress |
|
37,106 |
|
21,488 |
|
18,830 |
|
|||
|
|
2,049,034 |
|
1,831,377 |
|
1,618,331 |
|
|||
Accumulated depreciation and amortization |
|
(1,214,304 |
) |
(1,094,580 |
) |
(938,066 |
) |
|||
Total |
|
$ |
834,730 |
|
$ |
736,797 |
|
$ |
680,265 |
|
|
|
|
|
|
|
|
|
|
|
|
Other Intangible Assets, Net |
|
|
|
|
|
|
|
|||
Cost |
|
|
|
|
|
|
|
|||
Customer relationships |
|
$ |
189,572 |
|
$ |
153,479 |
|
$ |
120,324 |
|
Intellectual property |
|
38,130 |
|
77,793 |
|
71,104 |
|
|||
Trademarks |
|
62,874 |
|
52,283 |
|
50,308 |
|
|||
Other intangibles |
|
17,104 |
|
16,012 |
|
13,502 |
|
|||
|
|
307,680 |
|
299,567 |
|
255,238 |
|
|||
Accumulated amortization |
|
|
|
|
|
|
|
|||
Customer relationships |
|
(43,798 |
) |
(27,565 |
) |
(9,238 |
) |
|||
Intellectual property |
|
(7,726 |
) |
(45,809 |
) |
(39,641 |
) |
|||
Trademarks |
|
(12,764 |
) |
(9,313 |
) |
(5,947 |
) |
|||
Other intangibles |
|
(14,297 |
) |
(13,021 |
) |
(11,742 |
) |
|||
Total |
|
$ |
229,095 |
|
$ |
203,859 |
|
$ |
188,670 |
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets, Net |
|
|
|
|
|
|
|
|||
Deferred income taxes |
|
$ |
49,478 |
|
$ |
43,168 |
|
$ |
36,797 |
|
Pension |
|
170,625 |
|
161,098 |
|
106,314 |
|
|||
Other |
|
161,369 |
|
136,445 |
|
142,224 |
|
|||
Total |
|
$ |
381,472 |
|
$ |
340,711 |
|
$ |
285,335 |
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Debt |
|
|
|
|
|
|
|
|||
Notes payable |
|
$ |
50,980 |
|
$ |
66,250 |
|
$ |
146,947 |
|
Long-term debt, current maturities |
|
5,152 |
|
3,953 |
|
13,152 |
|
|||
Total |
|
$ |
56,132 |
|
$ |
70,203 |
|
$ |
160,099 |
|
|
|
|
|
|
|
|
|
|
|
|
Other Current Liabilities |
|
|
|
|
|
|
|
|||
Discounts and rebates |
|
$ |
154,797 |
|
$ |
145,508 |
|
$ |
127,418 |
|
Other |
|
204,492 |
|
173,729 |
|
163,775 |
|
|||
Total |
|
$ |
359,289 |
|
$ |
319,237 |
|
$ |
291,193 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt |
|
|
|
|
|
|
|
|||
6.875% notes, due 2011 |
|
$ |
149,228 |
|
$ |
149,101 |
|
$ |
148,974 |
|
5.375% Euronotes, due 2007 |
|
404,716 |
|
364,399 |
|
299,777 |
|
|||
7.19% senior notes, due 2006 |
|
74,715 |
|
75,017 |
|
75,000 |
|
|||
Other |
|
21,938 |
|
19,877 |
|
29,144 |
|
|||
|
|
650,597 |
|
608,394 |
|
552,895 |
|
|||
Long-term debt, current maturities |
|
(5,152 |
) |
(3,953 |
) |
(13,152 |
) |
|||
Total |
|
$ |
645,445 |
|
$ |
604,441 |
|
$ |
539,743 |
|
40
The company has a $450 million multicurrency credit agreement with a consortium of banks that has a term through August 2009. Under certain circumstances, this credit agreement can be increased by $150 million for a total of $600 million. Prior to October 2004, the company had two similar agreements in place which provided $450 million of available credit. The company may borrow varying amounts in different currencies from time to time on a revolving credit basis. The company has the option of borrowing based on various short-term interest rates. This agreement includes a covenant regarding the ratio of total debt to capitalization. No amounts were outstanding under these agreements at year-end 2004, 2003 and 2002.
This credit agreement supports the companys $450 million U.S. commercial paper program and its $200 million European commercial paper program. The company had $8.8 million and $64.1 million in outstanding U.S. commercial paper at December 31, 2004 and 2002, respectively, with average annual interest rates of 1.2 percent and 1.4 percent, respectively. There was no U.S. commercial paper outstanding at December 31, 2003. The company had no commercial paper outstanding under its European commercial paper program at December 31, 2004 and 2003. Both programs were rated A-1 by Standard & Poors and P-1 by Moodys as of December 31, 2004.
In December 2004, the company terminated a third commercial paper program, its 200 million Australian dollar commercial paper program. The company had 50.0 million of Australian dollar denominated commercial paper outstanding at December 31, 2003 and 2002 (in U.S. dollars, approximately $36 million and $28 million, respectively), with average annual interest rates of 5.1 percent and 4.8 percent, respectively.
In February 2002, the company issued euro 300 million ($265.9 million at rates prevailing at that time) of 5.375 percent Euronotes, due February 2007. As described further in Note 8, the company accounts for the transaction gains and losses related to the Euronotes as a component of the cumulative translation account within accumulated other comprehensive income (loss).
As of December 31, the weighted-average interest rate on notes payable was 5.7 percent in 2004, 6.3 percent in 2003 and 4.6 percent in 2002.
As of December 31, 2004, the aggregate annual maturities of long-term debt for the next five years were: 2005 - $5,152,000; 2006 - $79,708,000; 2007 - $408,264,000; 2008 - $1,906,000 and 2009 - $789,000.
Interest expense was $48,479,000 in 2004, $49,342,000 in 2003 and $47,210,000 in 2002. Interest income was $3,135,000 in 2004, $3,997,000 in 2003 and $3,315,000 in 2002. Total interest paid was $47,014,000 in 2004, $47,428,000 in 2003 and $45,056,000 in 2002.
NOTE 8. FINANCIAL INSTRUMENTS
Foreign Currency Forward Contracts
The company has entered into foreign currency forward contracts to hedge transactions related to intercompany debt, subsidiary royalties, product purchases, firm commitments and other intercompany transactions. The company uses these contracts to hedge against the effect of foreign currency exchange rate fluctuations on forecasted cash flows. These contracts generally relate to the companys European operations and are denominated in euros. The company had foreign currency forward exchange contracts that totaled approximately $239 million at December 31, 2004, $239 million at December 31, 2003 and $199 million at December 31, 2002. These contracts generally expire within one year. The gains and losses related to these contracts were included as a component of other comprehensive income until the hedged item is reflected in earnings. As of December 31, 2004, other comprehensive income includes a cumulative loss of $4.1 million related to these contracts.
Interest Rate Swap Agreements
The company enters into interest rate swap agreements to manage interest rate exposures and to achieve a desired proportion of variable and fixed rate debt.
In 2003, the company entered into an interest rate swap agreement that converts $30 million of the 7.19% senior notes from a fixed interest rate to a floating or variable interest rate. This agreement is effective until January 2006. The interest rate swap was designated as a fair value hedge and had an insignificant value as of December 31, 2004. The mark to market gain on this agreement has been recorded as part of interest expense and has been offset by the market to market on this portion of the 7.19% senior notes.
During 2002, the company entered into an interest rate swap agreement in connection with the issuance of its Euronotes. This agreement converts approximately euro 78 million (approximately $104 million at year-end 2004) of the Euronote debt from a fixed interest rate to a floating or variable interest rate and is effective until February 2007. This interest rate swap was designated as a fair value hedge and had a value of $7.0 million, $6.4 million and $3.5 million as of December 31, 2004, 2003 and 2002, respectively. The mark to market gain on this agreement has been recorded as part of interest expense and has been offset by the loss recorded in interest expense on the mark to market on this portion of the Euronotes. There is no hedge ineffectiveness on this interest rate swap.
The company also had an interest rate swap agreement to provide for a fixed rate of interest on the first 50 million Australian dollars of Australian floating-rate debt. This agreement expired in November 2004 and had a fixed annual pay rate of approximately 6 percent. This interest rate swap agreement was designated as, and effective as, a cash flow hedge of the outstanding debt. The change in fair value of the interest rate swap was recorded in other comprehensive income and recognized in earnings as part of interest expense to offset the forecasted hedged transactions as they occurred.
Net Investment Hedges
In February 2002, the company issued euro 300 million of 5.375 percent Euronotes, due 2007. The company designated a portion (approximately euro 300 million at year-end 2004, euro 290 million at year-end 2003 and euro 200 million at year-end 2002) of 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 this portion of the Euronotes that are designated and effective as hedges of the companys net investments have been included as a component of the cumulative translation account within accumulated other comprehensive income (loss). Total transaction losses related to the Euronotes and charged to this shareholders equity account were $39.6 million, $52.5 million and $26.0 million for the years ended December 31, 2004, 2003 and 2002, respectively. Transaction gains and losses on the remaining portion of the Euronotes have been included in earnings and were offset by transaction gains and losses related to other euro denominated assets held by the companys U.S. operations.
Credit Risk
The company is exposed to credit loss in the event of nonperformance of counterparties for foreign currency forward exchange contracts and interest rate swap agreements. The company monitors its exposure to credit risk by using credit approvals and credit limits and selecting major international banks and financial institutions as counterparties. The company does not anticipate nonperformance by any of these counterparties.
41
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) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
Carrying amount |
|
|
|
|
|
|
|
|||
Cash and cash equivalents |
|
$ |
71,231 |
|
$ |
85,626 |
|
$ |
49,205 |
|
Accounts receivable |
|
738,266 |
|
626,002 |
|
553,154 |
|
|||
Notes payable |
|
42,180 |
|
30,050 |
|
54,847 |
|
|||
Commercial paper |
|
8,800 |
|
36,200 |
|
92,100 |
|
|||
Long-term
debt
|
|
650,597 |
|
608,394 |
|
552,895 |
|
|||
Fair value |
|
|
|
|
|
|
|
|||
Long-term debt
|
|
$ |
690,066 |
|
$ |
656,576 |
|
$ |
588,003 |
|
The carrying amounts of cash equivalents, accounts receivable, notes payable and commercial paper 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 debt instruments.
NOTE 9. SHAREHOLDERS EQUITY
The companys common stock was split two-for-one in the form of a 100 percent stock dividend paid June 6, 2003 to shareholders of record on May 23, 2003. All per share data have been adjusted to reflect the stock split, except for prior year data in the Consolidated Balance Sheet and the Consolidated Statement of Comprehensive Income and Shareholders Equity.
Authorized common stock, par value $1.00 per share, was 400 million shares in 2004 and 2003 and 200 million shares in 2002. Treasury stock is stated at cost. Dividends declared per share of common stock were $0.3275 for 2004, $0.2975 for 2003 and $0.275 for 2002.
The company has 15 million shares, without par value, of authorized but unissued preferred stock. Of these 15 million shares, 1 million shares are designated as Series A Junior Participating Preferred Stock and 14 million shares are undesignated.
Each share of outstanding common stock entitles the holder to one-fourth 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 companys 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 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.
The company reacquired 4,581,400 shares of its common stock in 2004, 6,218,000 shares in 2003 and 165,000 shares in 2002 through open and private market purchases. The equivalent number of shares reacquired on a post stock-split basis was 8,014,500 in 2003 and 330,000 shares in 2002. In October 2003 and December 2004, the company approved authorizations to repurchase up to an aggregate of 20 million additional shares of Ecolab common stock for the purpose of offsetting the dilutive effect of shares issued for stock option exercises and incentives and for general corporate purposes. As of December 31, 2004, 15,775,700 shares remained to be purchased under the companys repurchase authority. The company also reacquired 777,607 shares of its common stock in 2004 related to the exercise of stock options and the vesting of stock awards. On a pre-split basis, the company reacquired 448,861 shares of its common stock in 2003 and 33,778 shares in 2002 related to the exercise of stock options and the vesting of stock awards.
NOTE 10. STOCK INCENTIVE AND OPTION PLANS
The companys stock incentive and option plans provide for grants of stock options, stock awards and other incentives. Common shares available for grant as of December 31 were 4,216,012 for 2004, 8,674,459 for 2003 and 12,305,052 for 2002. Common shares available for grant reflect 12 million shares approved by shareholders during 2002 for issuance under the plans.
Options may be granted to purchase shares of the companys stock at not less than fair market value at the date of grant. Options granted in 2004, 2003 and 2002 generally become exercisable over three 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 |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Granted |
|
4,876,408 |
|
4,765,823 |
|
4,912,674 |
|
Exercised |
|
(3,625,117 |
) |
(6,383,227 |
) |
(4,432,722 |
) |
Canceled |
|
(386,512 |
) |
(379,634 |
) |
(1,473,670 |
) |
December 31: |
|
|
|
|
|
|
|
Outstanding |
|
22,732,505 |
|
21,867,726 |
|
23,864,764 |
|
Exercisable |
|
15,332,623 |
|
12,823,743 |
|
14,444,562 |
|
Average exercise price per share |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
Granted |
|
$ |
33.49 |
|
$ |
27.18 |
|
$ |
24.24 |
|
Exercised |
|
16.55 |
|
19.84 |
|
10.27 |
|
|||
Canceled |
|
24.81 |
|
21.87 |
|
21.08 |
|
|||
December 31: |
|
|
|
|
|
|
|
|||
Outstanding |
|
24.20 |
|
20.87 |
|
19.35 |
|
|||
Exercisable |
|
$ |
21.31 |
|
$ |
17.96 |
|
$ |
17.77 |
|
Information related to stock options outstanding and stock options exercisable as of December 31, 2004, is as follows:
*Includes 15,872 shares of Ecolab common stock subject to stock options which Ecolab assumed in connection with the acquisition of Alcide Corporation in June 2004.
42
* Includes 15,872 shares of Ecolab common stock subject to stock options which Ecolab assumed in connection with the acquisition of Alcide Corporation in June 2004.
The weighted-average grant-date fair value of options granted in 2004, 2003 and 2002, 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:
|
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
Weighted-average grant-date fair value of options granted at market prices |
|
$ |
9.45 |
|
$ |
7.85 |
|
$ |
7.10 |
|
Assumptions |
|
|
|
|
|
|
|
|||
Risk-free interest rate |
|
3.8 |
% |
3.5 |
% |
3.6 |
% |
|||
Expected life |
|
6 years |
** |
6 years |
|
6 years |
|
|||
Expected volatility |
|
25.5 |
% |
26.8 |
% |
26.5 |
% |
|||
Expected dividend yield |
|
1.0 |
% |
1.2 |
% |
1.1 |
% |
|||
**Reload options were also granted during 2004 with a weighted-average expected life of 3.5 years.
The expense associated with shares of restricted stock issued under the companys stock incentive plan is based on the market price of the companys stock at the date of grant and is amortized on a straight-line basis over the periods during which the restrictions lapse. The company currently has restricted stock outstanding that vests over periods between 18 and 48 months. Stock awards are not performance based and vest with continued employment. Stock awards are subject to forfeiture in the event of termination of employment. The company granted 13,550 shares in 2004, 10,500 shares in 2003 and 67,200 shares in 2002 under its restricted stock award program.
The company uses the intrinsic value-based method of accounting to measure compensation expense for its stock incentive and option plans. See Note 2 to the consolidated financial statements for the pro forma net income and related basic and diluted per common share amounts had the company used the fair value-based method of accounting to measure compensation expense. Effective with third quarter 2005, the company expects to adopt SFAS No. 123R and its requirements to expense the fair value of its stock options, barring further rulings.
NOTE 11. INCOME TAXES
Income from continuing operations before income taxes consisted of:
(thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
Domestic |
|
$ |
278,841 |
|
$ |
286,003 |
|
$ |
258,779 |
|
Foreign |
|
209,937 |
|
162,415 |
|
93,192 |
|
|||
Total |
|
$ |
488,778 |
|
$ |
448,418 |
|
$ |
351,971 |
|
The provision for income taxes consisted of:
(thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
Federal and state |
|
$ |
86,300 |
|
$ |
78,928 |
|
$ |
59,601 |
|
Foreign |
|
67,681 |
|
49,687 |
|
30,557 |
|
|||
Currently payable |
|
153,981 |
|
128,615 |
|
90,158 |
|
|||
Federal and state |
|
22,966 |
|
33,178 |
|
43,974 |
|
|||
Foreign |
|
1,343 |
|
9,277 |
|
5,949 |
|
|||
Deferred |
|
24,309 |
|
42,455 |
|
49,923 |
|
|||
Provision for income taxes |
|
$ |
178,290 |
|
$ |
171,070 |
|
$ |
140,081 |
|
The companys overall net deferred tax assets and deferred tax liabilities were comprised of the following:
December 31 (thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
Deferred tax assets |
|
|
|
|
|
|
|
|||
Postretirement health care and pension benefits |
|
$ |
827 |
|
$ |
1,008 |
|
$ |
19,249 |
|
Other accrued liabilities |
|
57,316 |
|
53,924 |
|
52,399 |
|
|||
Loss carryforwards |
|
11,709 |
|
11,756 |
|
13,932 |
|
|||
Other, net |
|
27,250 |
|
27,856 |
|
28,090 |
|
|||
Valuation allowance |
|
(2,847 |
) |
(2,719 |
) |
(1,462 |
) |
|||
Total |
|
94,255 |
|
91,825 |
|
112,208 |
|
|||
Deferred tax liabilities |
|
|
|
|
|
|
|
|||
Property, plant and equipment basis differences |
|
72,204 |
|
61,062 |
|
53,320 |
|
|||
Intangible assets |
|
74,064 |
|
49,465 |
|
38,696 |
|
|||
Other, net |
|
4,055 |
|
4,714 |
|
3,273 |
|
|||
Total |
|
150,323 |
|
115,241 |
|
95,289 |
|
|||
Net deferred tax assets (liabilities) |
|
$ |
(56,068 |
) |
$ |
(23,416 |
) |
$ |
16,919 |
|
A reconciliation of the statutory U.S. federal income tax rate to the companys effective income tax rate was:
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Statutory U.S. rate |
|
35.0 |
% |
35.0 |
% |
35.0 |
% |
State income taxes, net of federal benefit |
|
2.5 |
|
2.7 |
|
3.2 |
|
Foreign operations |
|
(1.0 |
) |
0.5 |
|
1.0 |
|
Other, net |
|
0.0 |
|
(0.1 |
) |
0.6 |
|
Effective income tax rate |
|
36.5 |
% |
38.1 |
% |
39.8 |
% |
Cash paid for income taxes was approximately $163 million in 2004, $90 million in 2003 and $95 million in 2002.
As of December 31, 2004, the company had undistributed earnings of international affiliates of approximately $525 million. These earnings are considered to be reinvested indefinitely or available for distribution with foreign tax credits available to offset the amount of applicable income tax and foreign withholding taxes that might be payable on earnings. It is impractical to determine the amount of incremental taxes that might arise if all undistributed earnings were distributed.
On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the Act). The Act provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the Act also provides for a two-year phase-out of the existing extra-territorial income exclusion (ETI) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union.
Under the guidance in FASB Staff Position No. FAS 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction
43
on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 , the deduction will be treated as a special deduction as described in SFAS No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on the companys tax return. The company expects to benefit from this deduction with a modest benefit beginning in 2005.
The Act also creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations and, as of today, uncertainty remains as to how to interpret numerous provisions in the Act. As such, we are not yet in a position to decide on whether, and to what extent, we might repatriate foreign earnings that have not yet been remitted to the U.S. The company does not expect to be able to complete its evaluation until after Congress or the Treasury Department provides clarifying language on key elements of the provision. The company expects to complete its evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the additional clarifying language.
NOTE 12. RENTALS AND LEASES
The company leases sales and administrative office facilities, distribution center facilities, automobiles, computers and other equipment under operating leases. Rental expense under all operating leases was $86,626,000 in 2004, $81,781,000 in 2003 and $77,593,000 in 2002. As of December 31, 2004, future minimum payments under operating leases with noncancelable terms in excess of one year were:
(thousands) |
|
|
|
|
|
|
|
|
|
2005 |
|
$ |
40,709 |
|
2006 |
|
33,407 |
|
|
2007 |
|
24,747 |
|
|
2008 |
|
17,428 |
|
|
2009 |
|
14,827 |
|
|
Thereafter |
|
21,971 |
|
|
Total |
|
$ |
153,089 |
|
The company enters into operating leases in the U.S. for vehicles whose noncancellable terms are one year or less in duration with month-to-month renewal options. These leases have been excluded from the table above. The company estimates payments under such leases will approximate $39,000,000 in 2005. These automobile leases have guaranteed residual values that have historically been satisfied primarily by the proceeds on the sale of the vehicles. No estimated losses have been recorded for these guarantees as the company believes, based upon the results of previous leasing arrangements, that the potential recovery of value from the vehicles when sold will be greater than the residual value guarantee.
NOTE 13. RESEARCH EXPENDITURES
Research expenditures that related to the development of new products and processes, including significant improvements and refinements to existing products are expensed as incurred. Such costs were $61,471,000 in 2004, $53,171,000 in 2003 and $49,860,000 in 2002.
NOTE 14. COMMITMENTS AND CONTINGENCIES
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 companys financial position, results of operations and cash flows to date has not been material. The company is currently participating in environmental assessments and remediation at a number of locations and environmental liabilities have been accrued reflecting managements best estimate of future costs. At December 31, 2004, the accrual for environmental remediation costs was approximately $4.1 million. Potential insurance reimbursements are not anticipated in the companys accruals for environmental liabilities.
The company is self-insured in North America for most workers compensation, general liability and automotive liability losses subject to per occurrence and aggregate annual liability limitations. The company is insured for losses in excess of these limitations. The company has recorded both a liability and an offsetting receivable for amounts in excess of these limitations. The company is self-insured for health care claims for eligible participating employees subject to certain deductibles and limitations. The company determines its liability for claims incurred but not reported on an actuarial basis.
While the final resolution of these contingencies could result in expenses different than current accruals, and therefore have an impact on the companys consolidated financial results in a future reporting period, management believes the ultimate outcome will not have a significant effect on the companys consolidated results of operations, financial position or cash flows.
NOTE 15. RETIREMENT PLANS
Pension and Postretirement Health Care Benefits Plans
The company has a noncontributory defined benefit pension plan covering most of its U.S. employees. Effective January 1, 2003, the U.S. pension plan was amended to provide a cash balance type pension benefit to employees hired on or after the effective date. For participants enrolled prior to January 1, 2003, plan benefits are based on years of service and highest average compensation for five consecutive years of employment. For participants enrolled after December 31, 2002, plan benefits are based on contribution credits equal to a fixed percentage of their current salary and interest credits. The measurement date used for determining the U.S. pension plan assets and obligations is December 31. Various international subsidiaries also have defined benefit pension plans. The measurement date used for determining the international pension plan assets and obligations is November 30. The information following includes all of the companys significant international defined benefit pension plans.
The company provides postretirement health care benefits to certain U.S. employees. The plan is contributory based on years of service and family status, with retiree contributions adjusted annually. The measurement date used to determine the U.S. postretirement healthcare plan assets and obligations was December 31. Certain employees outside the U.S. were covered under government-sponsored programs, which are not required to be fully funded. The expense and obligation for providing international postretirement healthcare benefits was not significant.
44
A reconciliation of changes in the benefits obligations and fair value of assets of the companys plans is as follows:
|
|
U.S. Pension Benefits |
|
International
|
|
U.S. Postretirement Health Care
|
|
|||||||||||||||||||||
(thousands) |
|
2004 |
|
2003 |
|
2002 |
|
2004 |
|
2003 |
|
2002 |
|
2004 |
|
2003 |
|
2002 |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Benefit obligation, beginning of year |
|
$ |
556,076 |
|
$ |
485,155 |
|
$ |
396,827 |
|
$ |
321,906 |
|
$ |
245,876 |
|
$ |
172,328 |
|
$ |
155,030 |
|
$ |
131,206 |
|
$ |
134,116 |
|
Service cost |
|
31,453 |
|
26,442 |
|
21,635 |
|
13,409 |
|
11,997 |
|
9,412 |
|
3,188 |
|
7,447 |
|
2,814 |
|
|||||||||
Interest cost |
|
34,192 |
|
32,208 |
|
29,237 |
|
17,830 |
|
14,633 |
|
10,973 |
|
9,041 |
|
8,597 |
|
7,651 |
|
|||||||||
Company contributions |
|
|
|
|
|
|
|
|
|
|
|
137 |
|
|
|
|
|
|
|
|||||||||
Participant contributions |
|
|
|
|
|
|
|
2,503 |
|
1,515 |
|
68 |
|
2,267 |
|
1,856 |
|
1,214 |
|
|||||||||
Acquisitions |
|
|
|
|
|
|
|
1,441 |
|
1,086 |
|
43,135 |
|
|
|
|
|
|
|
|||||||||
Divestitures |
|
|
|
|
|
|
|
(611 |
) |
|
|
|
|
|
|
|
|
|
|
|||||||||
Plan amendments, settlements and curtailments |
|
|
|
|
|
|
|
473 |
|
(948 |
) |
1,522 |
|
288 |
|
(1,930 |
) |
(40,760 |
) |
|||||||||
Changes in assumptions |
|
52,728 |
|
33,397 |
|
53,467 |
|
|
|
|
|
|
|
10,046 |
|
8,675 |
|
24,588 |
|
|||||||||
Actuarial loss (gain)* |
|
10,801 |
|
(5,232 |
) |
(1,889 |
) |
2,335 |
|
13,007 |
|
(2,554 |
) |
(11,257 |
) |
7,828 |
|
8,659 |
|
|||||||||
Benefits paid |
|
(17,314 |
) |
(15,894 |
) |
(14,122 |
) |
(13,961 |
) |
(11,892 |
) |
(8,913 |
) |
(10,573 |
) |
(8,649 |
) |
(7,076 |
) |
|||||||||
Foreign currency translation |
|
|
|
|
|
|
|
26,720 |
|
46,632 |
|
19,768 |
|
|
|
|
|
|
|
|||||||||
Benefit obligation, end of year |
|
$ |
667,936 |
|
$ |
556,076 |
|
$ |
485,155 |
|
$ |
372,045 |
|
$ |
321,906 |
|
$ |
245,876 |
|
$ |
158,030 |
|
$ |
155,030 |
|
$ |
131,206 |
|
Fair value of plan assets, beginning of year |
|
$ |
544,802 |
|
$ |
378,504 |
|
$ |
311,164 |
|
$ |
170,975 |
|
$ |
134,089 |
|
$ |
108,485 |
|
$ |
21,979 |
|
$ |
18,911 |
|
$ |
23,811 |
|
Actual gains (losses) on plan assets |
|
53,645 |
|
107,192 |
|
(43,112 |
) |
7,006 |
|
9,400 |
|
(9,438 |
) |
2,018 |
|
5,054 |
|
(2,866 |
) |
|||||||||
Acquisitions |
|
|
|
|
|
|
|
|
|
263 |
|
23,331 |
|
|
|
|
|
|
|
|||||||||
Company contributions |
|
37,000 |
|
75,000 |
|
124,574 |
|
25,124 |
|
12,743 |
|
7,794 |
|
6,049 |
|
4,807 |
|
3,828 |
|
|||||||||
Participant contributions |
|
|
|
|
|
|
|
2,503 |
|
1,407 |
|
1,052 |
|
2,267 |
|
1,856 |
|
1,214 |
|
|||||||||
Settlements |
|
|
|
|
|
|
|
|
|
(547 |
) |
|
|
|
|
|
|
|
|
|||||||||
Benefits paid |
|
(17,314 |
) |
(15,894 |
) |
(14,122 |
) |
(13,961 |
) |
(11,892 |
) |
(7,800 |
) |
(10,573 |
) |
(8,649 |
) |
(7,076 |
) |
|||||||||
Foreign currency translation |
|
|
|
|
|
|
|
9,835 |
|
25,512 |
|
10,665 |
|
|
|
|
|
|
|
|||||||||
Fair value of plan assets, end of year |
|
$ |
618,133 |
|
$ |
544,802 |
|
$ |
378,504 |
|
$ |
201,482 |
|
$ |
170,975 |
|
$ |
134,089 |
|
$ |
21,740 |
|
$ |
21,979 |
|
$ |
18,911 |
|
* The actuarial gain in 2004 for the U.S. Postretirement Health Care Benefits plan includes a gain of $15.5 million resulting from the enactment of the Medicare Prescription Drug, Improvement and Modernization Act of 2003.
A reconciliation of the funded status for the pension and postretirement plans is as follows:
|
|
U.S. Pension Benefits |
|
International
|
|
U.S. Postretirement Health Care
|
|
|||||||||||||||||||||
(thousands) |
|
2004 |
|
2003 |
|
2002 |
|
2004 |
|
2003 |
|
2002 |
|
2004 |
|
2003 |
|
2002 |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Funded status |
|
$ |
(49,803 |
) |
$ |
(11,274 |
) |
$ |
(106,651 |
) |
$ |
(170,563 |
) |
$ |
(150,931 |
) |
$ |
(111,787 |
) |
$ |
(136,290 |
) |
$ |
(133,051 |
) |
$ |
(112,295 |
) |
Unrecognized actuarial loss |
|
215,466 |
|
160,939 |
|
201,006 |
|
55,746 |
|
44,123 |
|
25,881 |
|
56,467 |
|
63,559 |
|
56,823 |
|
|||||||||
Unrecognized prior service cost (benefit) |
|
5,664 |
|
7,400 |
|
9,329 |
|
1,589 |
|
2,265 |
|
(55 |
) |
(28,075 |
) |
(34,059 |
) |
(37,431 |
) |
|||||||||
Unrecognized net transition (asset) obligation |
|
(702 |
) |
(2,105 |
) |
(3,508 |
) |
357 |
|
627 |
|
833 |
|
|
|
|
|
|
|
|||||||||
Net amount recognized |
|
$ |
170,625 |
|
$ |
154,960 |
|
$ |
100,176 |
|
$ |
(112,871 |
) |
$ |
(103,916 |
) |
$ |
(85,128 |
) |
$ |
(107,898 |
) |
$ |
(103,551 |
) |
$ |
(92,903 |
) |
45
The net amount recognized in the balance sheet and the accumulated benefit obligation is as follows:
|
|
U.S. Pension Benefits |
|
International
|
|
U.S. Postretirement Health Care
|
|
|||||||||||||||||||||
(thousands) |
|
2004 |
|
2003 |
|
2002 |
|
2004 |
|
2003 |
|
2002 |
|
2004 |
|
2003 |
|
2002 |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Prepaid benefit cost |
|
$ |
170,625 |
|
$ |
154,960 |
|
$ |
100,176 |
|
$ |
28,986 |
|
$ |
26,533 |
|
$ |
13,175 |
|
$ |
|
|
$ |
|
|
$ |
|
|
Accrued benefit cost |
|
|
|
|
|
|
|
(162,730 |
) |
(146,180 |
) |
(99,355 |
) |
(107,898 |
) |
(103,551 |
) |
(92,903 |
) |
|||||||||
Intangible asset |
|
|
|
|
|
|
|
2,202 |
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Accumulated other comprehensive loss |
|
|
|
|
|
|
|
18,671 |
|
15,731 |
|
1,052 |
|
|
|
|
|
|
|
|||||||||
Net amount recognized |
|
$ |
170,625 |
|
$ |
154,960 |
|
$ |
100,176 |
|
$ |
(112,871 |
) |
$ |
(103,916 |
) |
$ |
(85,128 |
) |
$ |
(107,898 |
) |
$ |
(103,551 |
) |
$ |
(92,903 |
) |
Accumulated benefit obligation |
|
$ |
522,214 |
|
$ |
441,488 |
|
$ |
375,406 |
|
$ |
335,628 |
|
$ |
283,464 |
|
$ |
208,732 |
|
$ |
158,030 |
|
$ |
155,030 |
|
$ |
131,206 |
|
For certain international pension plans, the accumulated benefit obligations exceeded the fair value of plan assets. Therefore, the company recognized an addition to the minimum pension liability in other comprehensive income of $0.4 million pre-tax ($0.3 million net of deferred tax asset) during 2004, $14.5 million pre-tax ($9.5 million net of deferred tax asset) during 2003 and $1.1 million during 2002. As of December 31, 2004, other comprehensive income includes minimum pension liability adjustments of $16.0 million pre-tax ($10.9 million net of deferred tax asset).
The aggregate projected benefit obligation, accumulated benefit obligation and fair value of plan assets for those plans with accumulated benefit obligations in excess of plan assets were as follows:
|
|
December 31 |
|
|||||||
(thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
Aggregate projected benefit obligation |
|
$ |
316,609 |
|
$ |
261,138 |
|
$ |
103,063 |
|
Accumulated benefit obligation |
|
286,165 |
|
238,819 |
|
90,428 |
|
|||
Fair value of plan assets |
|
126,453 |
|
95,655 |
|
14,163 |
|
|||
These plans relate to various international subsidiaries and are funded consistent with local practices and requirements. As of December 31, 2004, there were approximately $4.3 million of future postretirement benefits covered by insurance contracts.
Plan Assets
United States
The companys plan asset allocations for its U.S. defined benefit pension and postretirement health care benefits plans at December 31, 2004, 2003 and 2002, and target allocation for 2005 are as follows:
The companys U.S. investment strategy and policies are designed to maximize the possibility of having sufficient funds to meet the long-term liabilities of the pension fund, while achieving a balance between the goals of asset growth of the plan and keeping risk at a reasonable level. Current income is not a key goal of the plan. The pension and health care plans demographic characteristics generally reflect a younger workforce relative to an average pension plan. Therefore, the asset allocation position reflects the ability and willingness to accept relatively more short-term variability in the performance of the pension plan portfolio in exchange for the expectation of a better funded status, better long-term returns and lower pension costs in the long run.
Since diversification is widely recognized as important to reduce unnecessary risk, the pension fund is diversified across several asset classes and securities. Selected individual portfolios may be undiversified while maintaining the diversified nature of total plan assets.
The plan prohibits investing in letter stock, warrants and options, and engaging in short sales, margin transactions, or other specialized investment activities. The use of derivatives is also prohibited for the purpose of speculation or introducing leverage in the portfolio, circumventing the investment guidelines or taking risks that are inconsistent with the funds guidelines. Selected derivatives may only be used for hedging and transactional efficiency.
International
The companys plan asset allocations for its international defined benefit pension plans at December 31, 2004, 2003 and 2002, and target allocation for 2005 are as follows:
Assets of funded retirement plans outside the U.S. are managed in each local jurisdiction and asset allocation strategy is set in accordance with local rules, regulations and practice. The funds are invested in a variety of stocks, fixed income and real estate investments; in some cases, the assets are managed by insurance companies which may offer a guaranteed rate of return. Total non-U.S. pension plan assets represent 25% of total Ecolab pension plan assets worldwide.
During 2004, the American Jobs Creation Act of 2004 (the Act) added a new Section 409A to the Internal Revenue Code (the Code) which
46
significantly changed the federal tax law applicable to amounts deferred after December 31, 2004 under nonqualified deferred compensation plans. In response to this, the company amended the Non-Employee Director Stock Option and Deferred Compensation Plan (Director Plan) and the Mirror Savings Plan in December 2004. The amendments (1) allow compensation that was deferred (as defined by the Act) prior to January 1, 2005 to qualify for grandfathered status and to continue to be governed by the law applicable to nonqualified deferred compensation prior to the addition of Internal Revenue Code Section 409A by the Act, and (2) cause deferred compensation that is deferred after December 31, 2004 to be in compliance with the requirements of Code Section 409A. For amounts deferred after December 31, 2004, the amendments generally (1) require that such amounts be distributed as a single lump sum payment as soon as practicable after the participant has had a separation of service, with the exception of payments to key employees (as defined by the Act) which lump sum payments are required to be held for 6 months after their separation from service, and (2) prohibit the acceleration of distribution of such amounts except for an unforseeable emergency (as defined by the Act).
Additionally, in December 2004 the company amended the Supplemental Executive Retirement Plan (SERP) and the Mirror Pension Plan to (1) allow amounts deferred prior to January 1, 2005 to qualify for grandfathered status and to coninue to be governed by the law applicable to nonqualified deferred compensation prior to the Act, and (2) temporarily freeze the accrual of benefits as of December 31, 2004 due to the uncertainty regarding the effect of the Act on such benefits. The Secretary of Treasury and the Internal Revenue Service are expected to issue regulations and/or other guidance with respect to the provisions of the new Act throughout 2005 and final amendments to comply with the Act are required by the end of 2005. The company currently intends to rescind the freeze, following issuance of regulations to ensure compliance for post-2004 benefit accruals.
Cash Flows
As of year-end 2004, the companys estimate of benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter for the companys pension and postretirement health care benefit plans are as follows:
(thousands) |
|
|
|
|
|
|
|
|
|
2005 |
|
$ |
39,000 |
|
2006 |
|
40,000 |
|
|
2007 |
|
43,000 |
|
|
2008 |
|
47,000 |
|
|
2009 |
|
49,000 |
|
|
2010-2014 |
|
308,000 |
|
|
The companys funding policy for the U.S. pension plan is to achieve and maintain a return on assets that meets the long-term funding requirements identified by the projections of the pension plans actuaries while simultaneously satisfying the fiduciary responsibilities prescribed in ERISA. The company also takes into consideration the tax deductibility of contributions to the benefit plans. The company is not required to make any contributions to the U.S. pension and postretirement health care benefit plans in 2005. The maximum tax deductible contribution for 2005 is $45 million for the U.S. pension plan. The companys best estimate of contributions to be made to the international plans is $17 million in 2005.
Net Periodic Benefit Costs
Pension and postretirement health care benefits expense for the companys operations was:
|
|
U.S. Pension Benefits |
|
International
|
|
U.S. Postretirement Health Care
|
|
|||||||||||||||||||||
(thousands) |
|
2004 |
|
2003 |
|
2002 |
|
2004 |
|
2003 |
|
2002 |
|
2004 |
|
2003 |
|
2002 |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Service cost employee benefits earned during the year |
|
$ |
31,453 |
|
$ |
26,442 |
|
$ |
21,635 |
|
$ |
13,409 |
|
$ |
11,997 |
|
$ |
9,412 |
|
$ |
3,188 |
|
$ |
2,945 |
|
$ |
2,814 |
|
Interest cost on benefit obligation |
|
34,192 |
|
32,208 |
|
29,237 |
|
17,830 |
|
14,633 |
|
10,973 |
|
9,041 |
|
8,597 |
|
7,651 |
|
|||||||||
Adjustments for death benefits for retired executives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,502 |
|
|
|
|||||||||
Expected return on plan assets |
|
(50,161 |
) |
(42,411 |
) |
(32,675 |
) |
(11,403 |
) |
(9,908 |
) |
(8,556 |
) |
(1,843 |
) |
(1,580 |
) |
(2,071 |
) |
|||||||||
Recognition of net actuarial loss (gain) |
|
5,518 |
|
3,451 |
|
|
|
1,458 |
|
932 |
|
394 |
|
5,706 |
|
6,293 |
|
2,005 |
|
|||||||||
Amortization of prior service cost (benefit) |
|
1,736 |
|
1,929 |
|
1,929 |
|
426 |
|
41 |
|
204 |
|
(5,696 |
) |
(5,302 |
) |
(4,431 |
) |
|||||||||
Amortization of net transition (asset) obligation |
|
(1,403 |
) |
(1,403 |
) |
(1,403 |
) |
333 |
|
493 |
|
272 |
|
|
|
|
|
|
|
|||||||||
Curtailment (gain) loss |
|
|
|
|
|
|
|
(51 |
) |
|
|
1,522 |
|
|
|
|
|
(5,791 |
) |
|||||||||
Total expense |
|
$ |
21,335 |
|
$ |
20,216 |
|
$ |
18,723 |
|
$ |
22,002 |
|
$ |
18,188 |
|
$ |
14,221 |
|
$ |
10,396 |
|
$ |
15,455 |
|
$ |
177 |
|
The company also has U.S. 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 $23 million at December 31, 2004. The annual expense for these plans was approximately $5 million in 2004, $4 million in 2003 and $3 million in 2002.
47
Plan Assumptions
|
|
U.S. Pension Benefits |
|
International
|
|
U.S. Postretirement Health Care
|
|
||||||||||||
|
|
2004 |
|
2003 |
|
2002 |
|
2004 |
|
2003 |
|
2002 |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average actuarial assumptions used to determine benefit obligations as of December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
5.75 |
% |
6.25 |
% |
6.75 |
% |
5.22 |
% |
5.39 |
% |
5.42 |
% |
5.75 |
% |
6.25 |
% |
6.75 |
% |
Projected salary increase |
|
4.30 |
|
4.30 |
|
4.80 |
|
3.13 |
|
3.31 |
|
3.40 |
|
|
|
|
|
|
|
Weighted-average actuarial assumptions used to determine net cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
6.25 |
|
6.75 |
|
7.50 |
|
5.37 |
|
5.11 |
|
5.37 |
|
6.25 |
|
6.75 |
|
7.50 |
|
Expected return on plan assets |
|
9.00 |
|
9.00 |
|
9.00 |
|
5.75 |
|
5.97 |
|
5.26 |
|
9.00 |
% |
9.00 |
% |
9.00 |
% |
Projected salary increase |
|
4.30 |
% |
4.80 |
% |
4.80 |
% |
3.07 |
% |
3.25 |
% |
3.36 |
% |
|
|
|
|
|
|
The expected long-term rate of return is generally based on the pension plans asset mix, assumptions of equity returns based on historical long-term returns on asset categories, expectations for inflation, and estimates of the impact of active management of the assets.
For postretirement benefit measurement purposes as of December 31, 2004, 8.0 percent (for pre-age 65 retirees) and 10.0 percent (for post-age 65 retirees) annual rates of increase in the per capita cost of covered health care were assumed. The rates were assumed to decrease by 1 percent each year until they reach 5 percent in 2008 for pre-age 65 retirees and 5 percent in 2010 for post-age 65 retirees and remain at those levels thereafter. Health care costs which are eligible for subsidy by the company are limited to a 4 percent annual increase beginning in 1996 for certain employees.
Assumed health care cost trend rates have a significant effect on the amounts reported for the companys U.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 service and interest cost components |
|
$ |
523 |
|
$ |
(466 |
) |
Effect on postretirement benefit obligation |
|
9,008 |
|
(8,023 |
) |
||
Effective March 2002, the company changed its postretirement health care benefits plan to discontinue the employer subsidy for postretirement health care benefits for most active employees. These subsidized benefits will continue to be provided to certain defined active employees and all retirees who were participating at the time of the change. As a result of these actions, the company recorded a curtailment gain of approximately $6 million in the first quarter of 2002.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans. The companys U.S. postretirement health care benefits plan offers prescription drug benefits. The company does not anticipate that its plan will need to be amended to obtain the benefits provided under the Act. In accordance with FSP No. 106-2 Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 , the company began recording favorable benefits of the Act in the third quarter of 2004, using the prospective transition method consistent with this guidance. The annual after-tax benefit for 2004 is approximately $1.0 million. The company recognized an actuarial gain and a reduction in its postretirement benefit obligation of $15.5 million at July 1, 2004 related to the Act.
Savings Plan and ESOP
The company provides a 401(k) savings plan for substantially all U.S. employees. Prior to March 2002, employee contributions of up to 6 percent of eligible compensation were matched 50 percent by the company. In March 2002, the company changed its 401(k) savings plan and added an employee stock ownership plan (ESOP) feature to the existing plan. Employee before-tax contributions of up to 3 percent of eligible compensation are matched 100 percent by the company and employee before-tax contributions between 3 percent and 5 percent of eligible compensation are matched 50 percent by the company. The match is 100 percent vested immediately. Effective January 2003, the plan was amended to provide that all employee contributions which are invested in Ecolab stock will be part of the employees ESOP account while so invested. The companys contributions are invested in Ecolab common stock and amounted to $15,822,000 in 2004, $14,854,000 in 2003 and $12,905,000 in 2002.
NOTE 16. OPERATING SEGMENTS
The companys operating segments have generally similar products and services and the company is organized to manage its operations geographically. The companys 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, Healthcare, Vehicle Care, Water Care Services 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 kitchen equipment repair and maintenance through its Pest Elimination and GCS Service operations.
The companys International segment provides cleaning and sanitizing product and service offerings as well as pest elimination services to international markets in Europe, Asia Pacific, Latin America and Canada.
Information on the types of products and services of each of the companys operating segments is included on the inside front cover under Services/Products Provided of the Ecolab Overview section of this Annual Report.
48
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 accounting principles generally accepted in the United States of America and the accounting policies of the company described in Note 2 of these notes to consolidated financial statements. The profitability of the companys operating segments is evaluated by management based on operating income. Intersegment sales and transfers were not significant.
Financial information for each of the companys reportable segments is as follows:
|
|
United States |
|
|
|
Other |
|
|
|
|||||||||||||
(thousands) |
|
Cleaning &
|
|
Other
|
|
Total
|
|
International |
|
Foreign
|
|
Corporate |
|
Consolildated |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
2004 |
|
$ |
1,796,355 |
|
$ |
339,305 |
|
$ |
2,135,660 |
|
$ |
1,931,321 |
|
$ |
117,952 |
|
|
|
$ |
4,184,933 |
|
|
2003 |
|
1,694,323 |
|
320,444 |
|
2,014,767 |
|
1,797,400 |
|
(50,348 |
) |
|
|
3,761,819 |
|
|||||||
2002 |
|
1,615,171 |
|
308,329 |
|
1,923,500 |
|
1,759,000 |
|
(278,915 |
) |
|
|
3,403,585 |
|
|||||||
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
2004 |
|
290,366 |
|
24,432 |
|
314,798 |
|
210,595 |
|
13,090 |
|
$ |
(4,361 |
) |
534,122 |
|
||||||
2003 |
|
285,212 |
|
21,031 |
|
306,243 |
|
187,864 |
|
(6,615 |
) |
(4,834 |
) |
482,658 |
|
|||||||
2002 |
|
271,838 |
|
33,051 |
|
304,889 |
|
165,182 |
|
(28,197 |
) |
(46,008 |
) |
395,866 |
|
|||||||
Depreciation & amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
2004 |
|
119,831 |
|
5,254 |
|
125,085 |
|
107,716 |
|
8,654 |
|
5,927 |
|
247,382 |
|
|||||||
2003 |
|
114,516 |
|
4,903 |
|
119,419 |
|
106,563 |
|
(3,276 |
) |
6,950 |
|
229,656 |
|
|||||||
2002 |
|
112,303 |
|
4,615 |
|
116,918 |
|
109,914 |
|
(10,852 |
) |
7,448 |
|
223,428 |
|
|||||||
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
2004 |
|
1,284,006 |
|
146,701 |
|
1,430,707 |
|
2,033,246 |
|
182,274 |
|
69,947 |
|
3,716,174 |
|
|||||||
2003 |
|
1,112,994 |
|
143,552 |
|
1,256,546 |
|
1,874,450 |
|
(10,716 |
) |
108,638 |
|
3,228,918 |
|
|||||||
2002 |
|
1,067,226 |
|
129,498 |
|
1,196,724 |
|
1,897,541 |
|
(300,735 |
) |
72,377 |
|
2,865,907 |
|
|||||||
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
2004 |
|
153,503 |
|
4,993 |
|
158,496 |
|
111,703 |
|
5,672 |
|
|
|
275,871 |
|
|||||||
2003 |
|
117,361 |
|
3,726 |
|
121,087 |
|
93,701 |
|
(2,894 |
) |
141 |
|
212,035 |
|
|||||||
2002 |
|
$ |
111,349 |
|
$ |
3,105 |
|
$ |
114,454 |
|
$ |
110,954 |
|
$ |
(13,140 |
) |
$ |
489 |
|
$ |
212,757 |
|
Consistent with the companys internal management reporting, corporate operating income includes special charges included on the consolidated statement of income and recorded for 2004, 2003 and 2002. In addition, corporate expense includes an adjustment made for death benefits for retired executives in 2003. Corporate assets are principally cash and cash equivalents.
The company has two classes of products and services within its United States Cleaning & Sanitizing and International operations which comprise 10 percent or more of consolidated net sales. Sales of warewashing products were approximately 22 percent, 23 percent and 23 percent of consolidated net sales in 2004, 2003 and 2002, respectively. Sales of laundry products and services were approximately 10 percent, 10 percent and 11 percent of consolidated net sales in 2004, 2003 and 2002, respectively.
Property, plant and equipment of the companys United States and International operations were as follows:
December 31 (thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|||
United States |
|
$ |
476,804 |
|
$ |
404,209 |
|
$ |
418,973 |
|
International |
|
319,493 |
|
322,801 |
|
290,049 |
|
|||
Corporate |
|
|
|
|
|
4,653 |
|
|||
Effect of foreign currency translation |
|
38,433 |
|
9,787 |
|
(33,410 |
) |
|||
Consolidated |
|
$ |
834,730 |
|
$ |
736,797 |
|
$ |
680,265 |
|
49
NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
(thousands, except per share) |
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Year |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
2004 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|||||
United States Cleaning & Sanitizing |
|
$ |
430,734 |
|
$ |
450,625 |
|
$ |
478,464 |
|
$ |
436,532 |
|
$ |
1,796,355 |
|
United States Other Services |
|
77,775 |
|
85,875 |
|
89,157 |
|
86,498 |
|
339,305 |
|
|||||
International |
|
439,174 |
|
485,819 |
|
497,717 |
|
508,611 |
|
1,931,321 |
|
|||||
Effect of foreign currency translation |
|
31,688 |
|
20,392 |
|
24,978 |
|
40,894 |
|
117,952 |
|
|||||
Total |
|
979,371 |
|
1,042,711 |
|
1,090,316 |
|
1,072,535 |
|
4,184,933 |
|
|||||
Cost of sales (including special charges (income) of $(50), $(16) and $(40) in the first, second and fourth quarters, respectively) |
|
474,094 |
|
504,609 |
|
519,669 |
|
532,908 |
|
2,031,280 |
|
|||||
Selling, general and administrative expenses |
|
385,333 |
|
402,487 |
|
410,360 |
|
416,884 |
|
1,615,064 |
|
|||||
Special charges (income) |
|
3,805 |
|
(254 |
) |
1,345 |
|
(429 |
) |
4,467 |
|
|||||
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|||||
United States Cleaning & Sanitizing |
|
77,290 |
|
75,297 |
|
86,443 |
|
51,336 |
|
290,366 |
|
|||||
United States Other Services |
|
5,198 |
|
8,123 |
|
6,697 |
|
4,414 |
|
24,432 |
|
|||||
International |
|
34,949 |
|
50,049 |
|
64,020 |
|
61,577 |
|
210,595 |
|
|||||
Corporate |
|
(3,755 |
) |
270 |
|
(1,345 |
) |
469 |
|
(4,361 |
) |
|||||
Effect of foreign currency translation |
|
2,457 |
|
2,130 |
|
3,127 |
|
5,376 |
|
13,090 |
|
|||||
Total |
|
116,139 |
|
135,869 |
|
158,942 |
|
123,172 |
|
534,122 |
|
|||||
Interest expense, net |
|
11,173 |
|
11,217 |
|
11,566 |
|
11,388 |
|
45,344 |
|
|||||
Income before income taxes |
|
104,966 |
|
124,652 |
|
147,376 |
|
111,784 |
|
488,778 |
|
|||||
Provision for income taxes |
|
38,960 |
|
46,359 |
|
52,429 |
|
40,542 |
|
178,290 |
|
|||||
Net income |
|
$ |
66,006 |
|
$ |
78,293 |
|
$ |
94,947 |
|
$ |
71,242 |
|
$ |
310,488 |
|
Basic net income per common share |
|
$ |
0.26 |
|
$ |
0.30 |
|
$ |
0.37 |
|
$ |
0.28 |
|
$ |
1.21 |
|
Diluted net income per common share |
|
$ |
0.25 |
|
$ |
0.30 |
|
$ |
0.36 |
|
$ |
0.27 |
|
$ |
1.19 |
|
Weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|||||
Basic |
|
257,025 |
|
257,135 |
|
258,368 |
|
257,774 |
|
257,575 |
|
|||||
Diluted |
|
260,227 |
|
260,905 |
|
262,252 |
|
262,282 |
|
261,776 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
2003 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|||||
United States Cleaning & Sanitizing |
|
$ |
417,299 |
|
$ |
430,901 |
|
$ |
444,791 |
|
$ |
401,332 |
|
$ |
1,694,323 |
|
United States Other Services |
|
73,329 |
|
82,963 |
|
83,497 |
|
80,655 |
|
320,444 |
|
|||||
International |
|
415,723 |
|
448,744 |
|
460,371 |
|
472,562 |
|
1,797,400 |
|
|||||
Effect of foreign currency translation |
|
(30,499 |
) |
(15,873 |
) |
(5,893 |
) |
1,917 |
|
(50,348 |
) |
|||||
Total |
|
875,852 |
|
946,735 |
|
982,766 |
|
956,466 |
|
3,761,819 |
|
|||||
Cost of sales (including special charges (income) of $(45) and $(31) in first and fourth quarters) |
|
430,482 |
|
466,734 |
|
478,163 |
|
469,823 |
|
1,845,202 |
|
|||||
Selling, general and administrative expenses |
|
344,033 |
|
358,783 |
|
357,923 |
|
372,812 |
|
1,433,551 |
|
|||||
Special charges (income) |
|
(197 |
) |
(147 |
) |
1,224 |
|
(472 |
) |
408 |
|
|||||
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|||||
United States Cleaning & Sanitizing |
|
69,906 |
|
71,943 |
|
82,472 |
|
60,891 |
|
285,212 |
|
|||||
United States Other Services |
|
3,647 |
|
6,785 |
|
8,755 |
|
1,844 |
|
21,031 |
|
|||||
International |
|
30,580 |
|
44,524 |
|
56,772 |
|
55,988 |
|
187,864 |
|
|||||
Corporate |
|
242 |
|
106 |
|
(1,184 |
) |
(3,998 |
) |
(4,834 |
) |
|||||
Effect of foreign currency translation |
|
(2,841 |
) |
(1,993 |
) |
(1,359 |
) |
(422 |
) |
(6,615 |
) |
|||||
Total |
|
101,534 |
|
121,365 |
|
145,456 |
|
114,303 |
|
482,658 |
|
|||||
Gain on sale of equity investment |
|
|
|
|
|
10,877 |
|
228 |
|
11,105 |
|
|||||
Interest expense, net |
|
10,703 |
|
11,752 |
|
12,051 |
|
10,839 |
|
45,345 |
|
|||||
Income before income taxes |
|
90,831 |
|
109,613 |
|
144,282 |
|
103,692 |
|
448,418 |
|
|||||
Provision for income taxes |
|
35,513 |
|
42,458 |
|
56,843 |
|
36,256 |
|
171,070 |
|
|||||
Net income |
|
$ |
55,318 |
|
$ |
67,155 |
|
$ |
87,439 |
|
$ |
67,436 |
|
$ |
277,348 |
|
Basic net income per common share |
|
$ |
0.21 |
|
$ |
0.26 |
|
$ |
0.34 |
|
$ |
0.26 |
|
$ |
1.07 |
|
Diluted net income per common share |
|
$ |
0.21 |
|
$ |
0.25 |
|
$ |
0.33 |
|
$ |
0.26 |
|
$ |
1.06 |
|
Weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|||||
Basic |
|
260,448 |
|
261,246 |
|
258,694 |
|
257,428 |
|
259,454 |
|
|||||
Diluted |
|
263,637 |
|
264,553 |
|
261,609 |
|
260,628 |
|
262,737 |
|
Special charges are included in corporate operating income. Per share amounts do not necessarily sum due to changes in the calculation of shares outstanding for each discrete period and rounding.
50
REPORTS OF MANAGEMENT AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORTS OF MANAGEMENT
To the Shareholders:
Managements Responsibility for Financial Statements
Management is responsible for the integrity and objectivity of the consolidated financial statements. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, accordingly, include certain amounts based on managements best estimates and judgments.
The Board of Directors, acting through its Audit Committee composed solely of independent 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 companys independent registered public accounting firm, subject to ratification by the shareholders. It meets regularly with management, the internal auditors and the independent auditors.
The independent registered public accounting firm has audited the consolidated financial statements included in this annual report and have expressed their opinion regarding whether these consolidated financial statements present fairly in all material respects our financial position and results of operation and cash flows as stated in their report presented separately herein.
Managements Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, an evaluation of the design and operating effectiveness of internal control over financial reporting was conducted based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation under the framework in Internal Control Integrated Framework, management concluded that internal control over financial reporting was effective as of December 31, 2004.
Managements assessment of the effectiveness of the companys internal control over financial reporting as of December 31, 2004 has been audited by PricwaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
/s/ Douglas M. Baker, Jr. |
|
/s/ Steven L. Fritze |
Douglas M. Baker, Jr. |
|
Steven L. Fritze |
President and Chief Executive Officer |
|
Executive Vice President
and
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Directors of Ecolab Inc.:
We have completed an integrated audit of Ecolab Inc.s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated Financial Statements
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows, of comprehensive income and shareholders equity present fairly, in all material respects, the financial position of Ecolab Inc. and its subsidiaries at December 31, 2004, 2003, and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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 our opinion.
As discussed in Note 2 to the consolidated financial statements, Ecolab Inc. changed the manner in which it accounts for goodwill and other intangible assets as of January 1, 2002.
Internal Control Over Financial Reporting
Also, in our opinion, managements assessment, included in the accompanying Managements Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, Ecolab Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the COSO. Ecolab Inc.s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on managements assessment and on the effectiveness of Ecolab Inc.s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP |
|
PricewaterhouseCoopers LLP |
|
Minneapolis, Minnesota |
|
February 24, 2005 |
|
51
Summary Operating and Financial Data
December 31 (thousands, except per share) |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
1995 |
|
1994 |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
United States |
|
$ |
2,135,660 |
|
$ |
2,014,767 |
|
$ |
1,923,500 |
|
$ |
1,821,902 |
|
$ |
1,746,698 |
|
$ |
1,605,385 |
|
$ |
1,429,711 |
|
$ |
1,251,517 |
|
$ |
1,127,281 |
|
$ |
1,008,910 |
|
$ |
923,667 |
|
International (at average rates of currency exchange during the year) |
|
2,049,273 |
|
1,747,052 |
|
1,480,085 |
|
498,808 |
|
483,963 |
|
444,413 |
|
431,366 |
|
364,524 |
|
341,231 |
|
310,755 |
|
265,544 |
|
|||||||||||
Total |
|
4,184,933 |
|
3,761,819 |
|
3,403,585 |
|
2,320,710 |
|
2,230,661 |
|
2,049,798 |
|
1,861,077 |
|
1,616,041 |
|
1,468,512 |
|
1,319,665 |
|
1,189,211 |
|
|||||||||||
Cost of sales (including special charges (income) of $(106) in 2004, $(76) in 2003 and $8,977 in 2002, $(566) in 2001 and $1,948 in 2000) |
|
2,031,280 |
|
1,845,202 |
|
1,687,597 |
|
1,120,254 |
|
1,056,263 |
|
963,476 |
|
874,793 |
|
745,256 |
|
694,791 |
|
622,342 |
|
550,308 |
|
|||||||||||
Selling, general and administrative expenses |
|
1,615,064 |
|
1,433,551 |
|
1,283,091 |
|
881,453 |
|
851,995 |
|
796,371 |
|
724,304 |
|
652,281 |
|
588,404 |
|
534,637 |
|
493,939 |
|
|||||||||||
Special charges, sale of business and merger expenses |
|
4,467 |
|
408 |
|
37,031 |
|
824 |
|
(20,736 |
) |
|
|
|
|
|
|
|
|
|
|
8,000 |
|
|||||||||||
Operating income |
|
534,122 |
|
482,658 |
|
395,866 |
|
318,179 |
|
343,139 |
|
289,951 |
|
261,980 |
|
218,504 |
|
185,317 |
|
162,686 |
|
136,964 |
|
|||||||||||
Gain on sale of equity investment |
|
|
|
11,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Interest expense, net |
|
45,344 |
|
45,345 |
|
43,895 |
|
28,434 |
|
24,605 |
|
22,713 |
|
21,742 |
|
12,637 |
|
14,372 |
|
11,505 |
|
12,909 |
|
|||||||||||
Income from continuing operations before income taxes, equity earnings and changes in accounting principle |
|
488,778 |
|
448,418 |
|
351,971 |
|
289,745 |
|
318,534 |
|
267,238 |
|
240,238 |
|
205,867 |
|
170,945 |
|
151,181 |
|
124,055 |
|
|||||||||||
Provision for income taxes |
|
178,290 |
|
171,070 |
|
140,081 |
|
117,408 |
|
129,495 |
|
109,769 |
|
101,782 |
|
85,345 |
|
70,771 |
|
59,694 |
|
50,444 |
|
|||||||||||
Equity in earnings of Henkel-Ecolab |
|
|
|
|
|
|
|
15,833 |
|
19,516 |
|
18,317 |
|
16,050 |
|
13,433 |
|
13,011 |
|
7,702 |
|
10,951 |
|
|||||||||||
Income from continuing operations |
|
310,488 |
|
277,348 |
|
211,890 |
|
188,170 |
|
208,555 |
|
175,786 |
|
154,506 |
|
133,955 |
|
113,185 |
|
99,189 |
|
84,562 |
|
|||||||||||
Gain from discontinued operations |
|
|
|
|
|
1,882 |
|
|
|
|
|
|
|
38,000 |
|
|
|
|
|
|
|
|
|
|||||||||||
Changes in accounting principle |
|
|
|
|
|
(4,002 |
) |
|
|
(2,428 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income, as reported |
|
310,488 |
|
277,348 |
|
209,770 |
|
188,170 |
|
206,127 |
|
175,786 |
|
192,506 |
|
133,955 |
|
113,185 |
|
99,189 |
|
84,562 |
|
|||||||||||
Adjustments |
|
|
|
|
|
|
|
18,471 |
|
17,762 |
|
16,631 |
|
14,934 |
|
11,195 |
|
10,683 |
|
8,096 |
|
12,757 |
|
|||||||||||
Adjusted net income |
|
$ |
310,488 |
|
$ |
277,348 |
|
$ |
209,770 |
|
$ |
206,641 |
|
$ |
223,889 |
|
$ |
192,417 |
|
$ |
207,440 |
|
$ |
145,150 |
|
$ |
123,868 |
|
$ |
107,285 |
|
$ |
97,319 |
|
Income per common share, as reported |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Basic - continuing operations |
|
$ |
1.21 |
|
$ |
1.07 |
|
$ |
0.82 |
|
$ |
0.74 |
|
$ |
0.82 |
|
$ |
0.68 |
|
$ |
0.60 |
|
$ |
0.52 |
|
$ |
0.44 |
|
$ |
0.38 |
|
$ |
0.31 |
|
Basic - net income |
|
1.21 |
|
1.07 |
|
0.81 |
|
0.74 |
|
0.81 |
|
0.68 |
|
0.75 |
|
0.52 |
|
0.44 |
|
0.38 |
|
0.31 |
|
|||||||||||
Diluted - continuing operations |
|
1.19 |
|
1.06 |
|
0.81 |
|
0.72 |
|
0.79 |
|
0.65 |
|
0.58 |
|
0.50 |
|
0.43 |
|
0.37 |
|
0.31 |
|
|||||||||||
Diluted - net income |
|
1.19 |
|
1.06 |
|
0.80 |
|
0.72 |
|
0.78 |
|
0.65 |
|
0.72 |
|
0.50 |
|
0.43 |
|
0.37 |
|
0.31 |
|
|||||||||||
Adjusted income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Basic - continuing operations |
|
1.21 |
|
1.07 |
|
0.82 |
|
0.81 |
|
0.89 |
|
0.74 |
|
0.66 |
|
0.56 |
|
0.48 |
|
0.41 |
|
0.36 |
|
|||||||||||
Basic - net income |
|
1.21 |
|
1.07 |
|
0.81 |
|
0.81 |
|
0.88 |
|
0.74 |
|
0.80 |
|
0.56 |
|
0.48 |
|
0.41 |
|
0.36 |
|
|||||||||||
Diluted - continuing operations |
|
1.19 |
|
1.06 |
|
0.81 |
|
0.80 |
|
0.86 |
|
0.72 |
|
0.63 |
|
0.54 |
|
0.47 |
|
0.40 |
|
0.35 |
|
|||||||||||
Diluted - net income |
|
$ |
1.19 |
|
$ |
1.06 |
|
$ |
0.80 |
|
$ |
0.80 |
|
$ |
0.85 |
|
$ |
0.72 |
|
$ |
0.77 |
|
$ |
0.54 |
|
$ |
0.47 |
|
$ |
0.40 |
|
$ |
0.35 |
|
Weighted-average common shares outstanding - basic |
|
257,575 |
|
259,454 |
|
258,147 |
|
254,832 |
|
255,505 |
|
259,099 |
|
258,314 |
|
258,891 |
|
257,983 |
|
264,387 |
|
270,200 |
|
|||||||||||
Weighted-average common shares outstanding - diluted |
|
261,776 |
|
262,737 |
|
261,574 |
|
259,855 |
|
263,892 |
|
268,837 |
|
268,095 |
|
267,643 |
|
265,634 |
|
269,912 |
|
274,612 |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Selected Income Statement Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
|
51.5 |
% |
50.9 |
% |
50.4 |
% |
51.7 |
% |
52.6 |
% |
53.0 |
% |
53.0 |
% |
53.9 |
% |
52.7 |
% |
52.8 |
% |
53.7 |
% |
|||||||||||
Selling, general and administrative expenses |
|
38.6 |
|
38.1 |
|
37.7 |
|
38.0 |
|
38.2 |
|
38.9 |
|
38.9 |
|
40.4 |
|
40.1 |
|
40.5 |
|
41.5 |
|
|||||||||||
Operating income |
|
12.8 |
|
12.8 |
|
11.6 |
|
13.7 |
|
15.4 |
|
14.1 |
|
14.1 |
|
13.5 |
|
12.6 |
|
12.3 |
|
11.5 |
|
|||||||||||
Income from continuing operations before income taxes |
|
11.7 |
|
11.9 |
|
10.3 |
|
12.5 |
|
14.3 |
|
13.0 |
|
12.9 |
|
12.7 |
|
11.6 |
|
11.5 |
|
10.4 |
|
|||||||||||
Income from continuing operations |
|
7.4 |
|
7.4 |
|
6.2 |
|
8.1 |
|
9.3 |
|
8.6 |
|
8.3 |
|
8.3 |
|
7.7 |
|
7.5 |
|
7.1 |
|
|||||||||||
Effective income tax rate |
|
36.5 |
% |
38.1 |
% |
39.8 |
% |
40.5 |
% |
40.7 |
% |
41.1 |
% |
42.4 |
% |
41.5 |
% |
41.4 |
% |
39.5 |
% |
40.7 |
% |
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Current assets |
|
$ |
1,279,066 |
|
$ |
1,150,340 |
|
$ |
1,015,937 |
|
$ |
929,583 |
|
$ |
600,568 |
|
$ |
577,321 |
|
$ |
503,514 |
|
$ |
509,501 |
|
$ |
435,507 |
|
$ |
358,072 |
|
$ |
401,179 |
|
Property, plant and equipment, net |
|
834,730 |
|
736,797 |
|
680,265 |
|
644,323 |
|
501,640 |
|
448,116 |
|
420,205 |
|
395,562 |
|
332,314 |
|
292,937 |
|
246,191 |
|
|||||||||||
Investment in Henkel-Ecolab |
|
|
|
|
|
|
|
|
|
199,642 |
|
219,003 |
|
253,646 |
|
239,879 |
|
285,237 |
|
302,298 |
|
284,570 |
|
|||||||||||
Goodwill, intangible and other assets |
|
1,602,378 |
|
1,341,781 |
|
1,169,705 |
|
951,094 |
|
412,161 |
|
341,506 |
|
293,630 |
|
271,357 |
|
155,351 |
|
107,573 |
|
88,416 |
|
|||||||||||
Total assets |
|
$ |
3,716,174 |
|
$ |
3,228,918 |
|
$ |
2,865,907 |
|
$ |
2,525,000 |
|
$ |
1,714,011 |
|
$ |
1,585,946 |
|
$ |
1,470,995 |
|
$ |
1,416,299 |
|
$ |
1,208,409 |
|
$ |
1,060,880 |
|
$ |
1,020,356 |
|
Current liabilities |
|
$ |
939,547 |
|
$ |
851,942 |
|
$ |
853,828 |
|
$ |
827,952 |
|
$ |
532,034 |
|
$ |
470,674 |
|
$ |
399,791 |
|
$ |
404,464 |
|
$ |
327,771 |
|
$ |
310,538 |
|
$ |
253,665 |
|
Long-term debt |
|
645,445 |
|
604,441 |
|
539,743 |
|
512,280 |
|
234,377 |
|
169,014 |
|
227,041 |
|
259,384 |
|
148,683 |
|
89,402 |
|
105,393 |
|
|||||||||||
Postretirement health care and pension benefits |
|
270,930 |
|
249,906 |
|
207,596 |
|
183,281 |
|
117,790 |
|
97,527 |
|
85,793 |
|
76,109 |
|
73,577 |
|
70,666 |
|
70,882 |
|
|||||||||||
Other liabilities |
|
297,733 |
|
227,203 |
|
164,989 |
|
121,135 |
|
72,803 |
|
86,715 |
|
67,829 |
|
124,641 |
|
138,415 |
|
133,616 |
|
128,608 |
|
|||||||||||
Shareholders equity |
|
1,562,519 |
|
1,295,426 |
|
1,099,751 |
|
880,352 |
|
757,007 |
|
762,016 |
|
690,541 |
|
551,701 |
|
519,963 |
|
456,658 |
|
461,808 |
|
|||||||||||
Total liabilities and shareholders equity |
|
$ |
3,716,174 |
|
$ |
3,228,918 |
|
$ |
2,865,907 |
|
$ |
2,525,000 |
|
$ |
1,714,011 |
|
$ |
1,585,946 |
|
$ |
1,470,995 |
|
$ |
1,416,299 |
|
$ |
1,208,409 |
|
$ |
1,060,880 |
|
$ |
1,020,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash provided by operating activities |
|
$ |
582,464 |
|
$ |
529,199 |
|
$ |
423,326 |
|
$ |
364,481 |
|
$ |
315,486 |
|
$ |
293,494 |
|
$ |
235,642 |
|
$ |
235,098 |
|
$ |
254,269 |
|
$ |
166,463 |
|
$ |
169,346 |
|
Depreciation and amortization |
|
247,382 |
|
229,656 |
|
223,428 |
|
162,990 |
|
148,436 |
|
134,530 |
|
121,971 |
|
100,879 |
|
89,523 |
|
76,279 |
|
66,869 |
|
|||||||||||
Capital expenditures |
|
275,871 |
|
212,035 |
|
212,757 |
|
157,937 |
|
150,009 |
|
145,622 |
|
147,631 |
|
121,667 |
|
111,518 |
|
109,894 |
|
88,457 |
|
|||||||||||
Cash dividends declared per common share |
|
$ |
0.3275 |
|
$ |
0.2975 |
|
$ |
0.2750 |
|
$ |
0.2625 |
|
$ |
0.2450 |
|
$ |
0.2175 |
|
$ |
0.1950 |
|
$ |
0.1675 |
|
$ |
0.1450 |
|
$ |
0.1288 |
|
$ |
0.1138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Selected Financial Measures/Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total debt |
|
$ |
701,577 |
|
$ |
674,644 |
|
$ |
699,842 |
|
$ |
745,673 |
|
$ |
370,969 |
|
$ |
281,074 |
|
$ |
295,032 |
|
$ |
308,268 |
|
$ |
176,292 |
|
$ |
161,049 |
|
$ |
147,213 |
|
Total debt to capitalization |
|
31.0 |
% |
34.2 |
% |
38.9 |
% |
45.9 |
% |
32.9% |
|
26.9 |
% |
29.9 |
% |
35.8 |
% |
25.3 |
% |
26.1 |
% |
24.2 |
% |
|||||||||||
Book value per common share |
|
$ |
6.07 |
|
$ |
5.03 |
|
$ |
4.23 |
|
$ |
3.44 |
|
$ |
2.98 |
|
$ |
2.94 |
|
$ |
2.67 |
|
$ |
2.14 |
|
$ |
2.01 |
|
$ |
1.76 |
|
$ |
1.71 |
|
Return on beginning equity |
|
24.0 |
% |
25.2 |
% |
23.8 |
% |
24.9 |
% |
27.1% |
|
25.5 |
% |
34.9 |
% |
25.8 |
% |
24.8 |
% |
21.5 |
% |
21.6 |
% |
|||||||||||
Dividends per share/diluted net income per common share |
|
27.5 |
% |
28.1 |
% |
34.4 |
% |
36.2 |
% |
31.4 |
% |
33.2 |
% |
27.1 |
% |
33.5 |
% |
34.1 |
% |
35.3 |
% |
36.7 |
% |
|||||||||||
Annual common stock price range |
|
$ |
35.59-26.12 |
|
$ |
27.92-23.08 |
|
$ |
25.20-18.27 |
|
$ |
22.10-14.25 |
|
$ |
22.85-14.00 |
|
$ |
22.22-15.85 |
|
$ |
19.00-13.07 |
|
$ |
14.00-9.07 |
|
$ |
9.88-7.28 |
|
$ |
7.94-5.00 |
|
$ |
5.88-4.82 |
|
Number of employees |
|
21,338 |
|
20,826 |
|
20,417 |
|
19,326 |
|
14,250 |
|
12,870 |
|
12,007 |
|
10,210 |
|
9,573 |
|
9,026 |
|
8,206 |
|
The former Henkel-Ecolab joint venture is included as a consolidated subsidiary effective November 30, 2001. Adjusted results for 1994 through 2001 reflect the effect of retroactive application of the discontinuance of the amortization of goodwill as if SFAS No. 142 had been in effect since January 1, 1994. For 1994 the adjustments also reflect adjustments to eliminate unusual items associated with Ecolabs acquisition of Kay Chemical Company in December 1994. All per share, shares outstanding and market price data
reflect the two-for-one stock splits declared in 2003 and 1997. Return on beginning equity is net income divided by beginning shareholders equity.
52-53
EXHIBIT (21)
Registrant
ECOLAB INC.
Name of Affiliate |
|
State or
Other
|
|
Percentage
|
|
|
|
|
|
Ecolab (Antigua) Ltd. |
|
Antigua |
|
100 |
|
|
|
|
|
Ecolab S.A. |
|
Argentina |
|
100 |
|
|
|
|
|
Ecolab Australia Pty Ltd. |
|
Australia |
|
100 |
|
|
|
|
|
Ecolab Finance Pty Ltd. |
|
Australia |
|
100 |
|
|
|
|
|
Ecolab Pty Ltd. |
|
Australia |
|
100 |
|
|
|
|
|
Ecolab Water Care Services Pty Limited |
|
Australia |
|
100 |
|
|
|
|
|
Gibson Chemical Industries Pty Ltd. |
|
Australia |
|
100 |
|
|
|
|
|
Gibson Chemicals (NSW) Pty Limited |
|
Australia |
|
100 |
|
|
|
|
|
Gibson Chemicals Fiji Pty Limited |
|
Australia |
|
100 |
|
|
|
|
|
Gibson Chemicals Pty Limited |
|
Australia |
|
100 |
|
|
|
|
|
Robust Chemicals Pty Limited |
|
Australia |
|
100 |
|
|
|
|
|
Vessey Chemicals (Holdings) Pty Limited |
|
Australia |
|
95 |
|
|
|
|
|
Vessey Chemicals Pty Limited |
|
Australia |
|
95 |
|
|
|
|
|
Vessey Chemicals (Vic.) Pty Limited |
|
Australia |
|
95 |
|
|
|
|
|
Vessey Chemicals (WA) Pty Limited |
|
Australia |
|
95 |
|
|
|
|
|
Ecolab Ges.m.b.H |
|
Austria |
|
100 |
|
|
|
|
|
Ecolab Holding Europe GmbH |
|
Austria |
|
100 |
|
|
|
|
|
Ecolab Limited |
|
Bahamas |
|
100 |
|
|
|
|
|
Ecolab (Barbados) Limited |
|
Barbados |
|
100 |
|
|
|
|
|
Ecolab B.V.B.A./S.P.R.L. |
|
Belgium |
|
100 |
|
|
|
|
|
Kay N.V. |
|
Belgium |
|
100 |
|
|
|
|
|
Ecolab Emprecendimentos E Participacoes Ltda. |
|
Brazil |
|
100 |
Name of Affiliate |
|
State or Other
|
|
Percentage
|
|
|
|
|
|
|
|
Ecolab Quimica Ltda. |
|
Brazil |
|
100 |
|
|
|
|
|
|
|
Ecolab EOOD |
|
Bulgaria |
|
100 |
|
|
|
|
|
|
|
Ecolab Co. |
|
Canada |
|
100 |
|
|
|
|
|
|
|
Ecolab S.A. |
|
Chile |
|
100 |
|
|
|
|
|
|
|
Ecolab Colombia S.A. |
|
Colombia |
|
100 |
|
|
|
|
|
|
|
Ecolab, Sociedad Anonima |
|
Costa Rica |
|
100 |
|
|
|
|
|
|
|
Ecolab d.o.o. |
|
Croatia |
|
100 |
|
|
|
|
|
|
|
Ecolab Holding (Cyprus) Limited |
|
Cyprus |
|
100 |
|
|
|
|
|
|
|
Ecolab Hygiene s.r.o. |
|
Czech Republic |
|
100 |
|
|
|
|
|
|
|
Ecolab ApS |
|
Denmark |
|
100 |
|
|
|
|
|
|
|
Ecolab Holding Denmark ApS |
|
Denmark |
|
100 |
|
|
|
|
|
|
|
Ecolab, S.A. de C.V. |
|
El Salvador |
|
100 |
|
|
|
|
|
|
|
Oy Ecolab AB |
|
Finland |
|
100 |
|
|
|
|
|
|
|
ABP SAS |
|
France |
|
100 |
|
|
|
|
|
|
|
AEDES SAS |
|
France |
|
100 |
|
|
|
|
|
|
|
Aidamort SAS |
|
France |
|
100 |
|
|
|
|
|
|
|
Artois Chimie SAS |
|
France |
|
100 |
|
|
|
|
|
|
|
Alpha Holding SAS |
|
France |
|
100 |
|
|
|
|
|
|
|
Amboile Services SAS |
|
France |
|
100 |
|
|
|
|
|
|
|
Amperia SARL |
|
France |
|
100 |
|
|
|
|
|
|
|
Biophyte SARL |
|
France |
|
100 |
|
|
|
|
|
|
|
Centre Régional de Désinfectisation et de Dératisation SAS |
|
France |
|
100 |
|
|
|
|
|
|
|
Compagnie Française de Services SARL |
|
France |
|
100 |
|
|
|
|
|
|
|
Ecolab SAS |
|
France |
|
100 |
|
Name of Affiliate |
|
State or Other
|
|
Percentage
|
|
|
|
|
|
|
|
Ecolab SNC |
|
France |
|
100 |
|
|
|
|
|
|
|
HIE Piguy SAS |
|
France |
|
100 |
|
|
|
|
|
|
|
Hygiene Champenoise SAS |
|
France |
|
100 |
|
|
|
|
|
|
|
Hygiene de LEst SAS |
|
France |
|
100 |
|
|
|
|
|
|
|
Lorillou Hygiene SAS |
|
France |
|
100 |
|
|
|
|
|
|
|
Muliser SA |
|
France |
|
100 |
|
|
|
|
|
|
|
Nigiko SAS |
|
France |
|
100 |
|
|
|
|
|
|
|
Omniser SARL |
|
France |
|
100 |
|
|
|
|
|
|
|
Paragerm SNC |
|
France |
|
100 |
|
|
|
|
|
|
|
SCI Aphomia |
|
France |
|
100 |
|
|
|
|
|
|
|
SCI Dugard |
|
France |
|
100 |
|
|
|
|
|
|
|
SCI Dumoulin |
|
France |
|
100 |
|
|
|
|
|
|
|
SCI Eliomys |
|
France |
|
100 |
|
|
|
|
|
|
|
SCI Erebia |
|
France |
|
100 |
|
|
|
|
|
|
|
SCI Louvette |
|
France |
|
100 |
|
|
|
|
|
|
|
SCI Marco |
|
France |
|
100 |
|
|
|
|
|
|
|
SCI Orly |
|
France |
|
100 |
|
|
|
|
|
|
|
Bionagro Natureprodukte GmbH |
|
Germany |
|
100 |
|
|
|
|
|
|
|
Ecolab Beteiligungs GmbH |
|
Germany |
|
100 |
|
|
|
|
|
|
|
Ecolab Deutschland GmbH |
|
Germany |
|
100 |
|
|
|
|
|
|
|
Ecolab Export GmbH |
|
Germany |
|
100 |
|
|
|
|
|
|
|
Ecolab Holding GmbH |
|
Germany |
|
100 |
|
|
|
|
|
|
|
Ecolab GmbH & Co. OHG |
|
Germany |
|
100 |
|
Name of Affiliate |
|
State or Other
|
|
Percentage
|
|
|
|
|
|
|
|
Ecolab Management GmbH |
|
Germany |
|
100 |
|
|
|
|
|
|
|
Ecolab NFK Beteilgungen Management GmbH |
|
Germany |
|
100 |
|
|
|
|
|
|
|
Ecolab NFK R&D GmbH & Co. OHG |
|
Germany |
|
100 |
|
|
|
|
|
|
|
Ecolab NFK R&D Verwaltungs GmbH |
|
Germany |
|
100 |
|
|
|
|
|
|
|
Ecolab Technologies GmbH |
|
Germany |
|
100 |
|
|
|
|
|
|
|
Lang Apparatebau GmbH |
|
Germany |
|
100 |
|
|
|
|
|
|
|
Lang Engineering GmbH |
|
Germany |
|
100 |
|
|
|
|
|
|
|
Lang Hygiene Systeme GmbH |
|
Germany |
|
100 |
|
|
|
|
|
|
|
Ecolab A.E.B.E. |
|
Greece |
|
100 |
|
|
|
|
|
|
|
Ecolab, Sociedad Anonima |
|
Guatemala |
|
100 |
|
|
|
|
|
|
|
Peter Cox Insurance Co. Limited |
|
Guernsey |
|
100 |
|
|
|
|
|
|
|
Quimicas Ecolab, S.A. |
|
Honduras |
|
100 |
|
|
|
|
|
|
|
Ecolab Limited |
|
Hong Kong |
|
100 |
|
|
|
|
|
|
|
Ecolab Holding Hungary Ltd. |
|
Hungary |
|
100 |
|
|
|
|
|
|
|
Ecolab Hygiene Kft. |
|
Hungary |
|
100 |
|
|
|
|
|
|
|
P.T. Ecolab Indonesia |
|
Indonesia |
|
100 |
|
|
|
|
|
|
|
Eclab Export Limited |
|
Ireland |
|
100 |
|
|
|
|
|
|
|
Ecolab Co. |
|
Ireland |
|
100 |
|
|
|
|
|
|
|
Ecolab Finance Company Limited |
|
Ireland |
|
100 |
|
|
|
|
|
|
|
Ecolab (Holdings) Limited |
|
Ireland |
|
100 |
|
|
|
|
|
|
|
Ecolab Limited |
|
Ireland |
|
100 |
|
|
|
|
|
|
|
Ecolab JVZ Limited |
|
Israel |
|
100 |
|
|
|
|
|
|
|
Ecolab-Zohar Dalia L.P. |
|
Israel |
|
51 |
|
|
|
|
|
|
|
Ecolab-Zohar Dalia Management Company Ltd. |
|
Israel |
|
51 |
|
|
|
|
|
|
|
Elton Chemical Srl |
|
Italy |
|
100 |
|
Name of Affiliate |
|
State or
Other
|
|
Percentage
|
|
|
|
|
|
Ecolab Holding Italy Srl |
|
Italy |
|
100 |
|
|
|
|
|
Ecolab Srl |
|
Italy |
|
100 |
|
|
|
|
|
Findesadue Srl |
|
Italy |
|
100 |
|
|
|
|
|
Findesaquattro Srl |
|
Italy |
|
100 |
|
|
|
|
|
H. E. Distribution Srl |
|
Italy |
|
100 |
|
|
|
|
|
Ecolab Limited |
|
Jamaica |
|
100 |
|
|
|
|
|
Ecolab K.K. |
|
Japan |
|
100 |
|
|
|
|
|
Ecolab East Africa (Kenya) Limited |
|
Kenya |
|
100 |
|
|
|
|
|
Ecolab Korea Ltd. |
|
Korea |
|
100 |
|
|
|
|
|
Ecolab SIA |
|
Latvia |
|
100 |
|
|
|
|
|
Ecolab Sdn Bhd |
|
Malaysia |
|
100 |
|
|
|
|
|
Ecolab, S. de R.L. de C.V. |
|
Mexico |
|
100 |
|
|
|
|
|
Ecolab Holdings Mexico, S.A. de C.V. |
|
Mexico |
|
100 |
|
|
|
|
|
Midland Research Laboratories de Mexico, S.A. de C.V. |
|
Mexico |
|
100 |
|
|
|
|
|
Ecolab Maroc S. A. |
|
Morocco |
|
100 |
|
|
|
|
|
Ecolab (Proprietary) Limited |
|
Namibia |
|
100 |
|
|
|
|
|
Ecolab Finance N.V. |
|
Netherlands Antilles (Curacao) |
|
100 |
|
|
|
|
|
Ecolabone B.V. |
|
Netherlands |
|
100 |
|
|
|
|
|
Ecolabtwo B.V. |
|
Netherlands |
|
100 |
|
|
|
|
|
Ecolab Holdings B.V. |
|
Netherlands |
|
100 |
|
|
|
|
|
Ecolab International B.V. |
|
Netherlands |
|
100 |
|
|
|
|
|
Ecolab B.V. |
|
Netherlands |
|
100 |
|
|
|
|
|
Ecolab Limited |
|
New Zealand |
|
100 |
|
|
|
|
|
Ecolab Nicaragua, S.A. |
|
Nicaragua |
|
100 |
|
|
|
|
|
Ecolab A/S |
|
Norway |
|
100 |
Name of Affiliate |
|
State or
Other
|
|
Percentage
|
|
|
|
|
|
Ecolab S.A. |
|
Panama |
|
100 |
|
|
|
|
|
Ecolab Chemicals Ltd. |
|
Peoples Republic of China |
|
100 |
|
|
|
|
|
Ecolab Philippines Inc. |
|
Philippines |
|
100 |
|
|
|
|
|
Ecolab Sp.z o.o. |
|
Poland |
|
100 |
|
|
|
|
|
Ecolab S.R.L. |
|
Romania |
|
100 |
|
|
|
|
|
ZAO Ecolab |
|
Russia |
|
100 |
|
|
|
|
|
Ecolab Hygiene d.o.o. |
|
Serbia / Montenegro |
|
100 |
|
|
|
|
|
Ecolab Pte. Ltd. |
|
Singapore |
|
100 |
|
|
|
|
|
Ecolab s.r.o. |
|
Slovakia |
|
100 |
|
|
|
|
|
Ecolab d.o.o. |
|
Slovenia |
|
100 |
|
|
|
|
|
Ecolab (Proprietary) Ltd. |
|
South Africa |
|
100 |
|
|
|
|
|
Ecolab Hispano-Portuguesa, S.A. |
|
Spain |
|
100 |
|
|
|
|
|
Ecolab (St. Lucia) Limited |
|
St. Lucia |
|
100 |
|
|
|
|
|
Ecolab AB |
|
Sweden |
|
100 |
|
|
|
|
|
Ecolab GmbH |
|
Switzerland |
|
100 |
|
|
|
|
|
Ecolab Ltd. |
|
Taiwan |
|
100 |
|
|
|
|
|
Ecolab East Africa (Tanzania) Limited |
|
Tanzania |
|
100 |
|
|
|
|
|
Ecolab Ltd. |
|
Thailand |
|
100 |
|
|
|
|
|
Ecolab Temizleme Sistemleri A.S. |
|
Turkey |
|
100 |
|
|
|
|
|
Ecolab East Africa (Uganda) Limited |
|
Uganda |
|
100 |
|
|
|
|
|
Ecolab LLC |
|
Ukraine |
|
100 |
|
|
|
|
|
Ecolab Limited |
|
United Kingdom |
|
100 |
|
|
|
|
|
Ecolab (U.K.) Holdings Limited |
|
United Kingdom |
|
100 |
|
|
|
|
|
Peter Cox Limited |
|
United Kingdom |
|
100 |
Name of Affiliate |
|
State or
Other
|
|
Percentage
|
|
|
|
|
|
Midland Research Laboratories UK Limited |
|
United Kingdom |
|
100 |
|
|
|
|
|
Ecolab S. A. |
|
Uruguay |
|
100 |
|
|
|
|
|
Ecolab Foreign Sales Corp. |
|
U.S. Virgin Islands |
|
100 |
|
|
|
|
|
Ecolab S.A. |
|
Venezuela |
|
74 |
|
|
|
|
|
Ecolab Zimbabwe (Pvt) Ltd. |
|
Zimbabwe |
|
100 |
|
|
|
|
|
United States |
|
|
|
|
|
|
|
|
|
Associated Chemicals & Services, Inc. |
|
Kansas |
|
100 |
|
|
|
|
|
Daydots Inc. |
|
Delaware |
|
100 |
|
|
|
|
|
Ecolabone LLC |
|
Delaware |
|
100 |
|
|
|
|
|
Ecolabtwo LLC |
|
Delaware |
|
100 |
|
|
|
|
|
Ecolabthree LLC |
|
Delaware |
|
100 |
|
|
|
|
|
Ecolabfour LLC |
|
Delaware |
|
100 |
|
|
|
|
|
Ecolabfive LLC |
|
Delaware |
|
100 |
|
|
|
|
|
Ecolabsix LLC |
|
Delaware |
|
100 |
|
|
|
|
|
Ecolabseven LLC |
|
Delaware |
|
100 |
|
|
|
|
|
Ecolab Finance Inc. |
|
Delaware |
|
100 |
|
|
|
|
|
Ecolab Finance (Australia) Inc. |
|
Delaware |
|
100 |
|
|
|
|
|
Ecolab Holdings Inc. |
|
Delaware |
|
100 |
|
|
|
|
|
Ecolab Holdings (Europe) Inc. |
|
Delaware |
|
100 |
|
|
|
|
|
Ecolab Investment Inc. |
|
Delaware |
|
100 |
|
|
|
|
|
Ecolab Israel Holdings LLC |
|
Delaware |
|
100 |
|
|
|
|
|
Ecolab Manufacturing Inc. |
|
Delaware |
|
100 |
Name of Affiliate |
|
State or Other
|
|
Percentage
|
|
|
|
|
|
|
|
Ecolab Marketing LLC |
|
Delaware |
|
100 |
|
|
|
|
|
|
|
GCS Service, Inc. |
|
Delaware |
|
100 |
|
|
|
|
|
|
|
Ecolab Foundation |
|
Minnesota |
|
100 |
|
|
|
|
|
|
|
Kay Chemical Company |
|
North Carolina |
|
100 |
|
|
|
|
|
|
|
Kay Chemical International, Inc. |
|
North Carolina |
|
100 |
|
|
|
|
|
|
|
Midland Research Laboratories, Inc. |
|
Kansas |
|
100 |
|
|
|
|
|
|
|
ProForce Inc. |
|
North Carolina |
|
100 |
|
|
|
|
|
|
|
Wabasha Leasing LLC |
|
Delaware |
|
100 |
|
Certain additional subsidiaries, which are not significant in the aggregate, are not shown.
KNOW ALL MEN BY THESE PRESENTS, That the undersigned, a director of Ecolab Inc., a Delaware corporation, does hereby make, nominate and appoint TIMOTHY P. DORDELL and LAWRENCE T. BELL, and each of them, to be my attorney-in-fact, with full power and authority to sign his name to the Annual Report on Form 10-K of Ecolab Inc. for the fiscal year ended December 31, 2004, and all amendments thereto, provided that the Annual Report and any amendments thereto, in final form, be approved by said attorney-in-fact; and his name, when thus signed, shall have the same force and effect as though I had manually signed said document.
IN WITNESS WHEREOF, I have hereunto affixed my signature this 25th day of February, 2005.
|
/s/Les S. Biller |
|
|
|
Les S. Biller |
|
|
|
|
|
|
|
/s/Richard U. De Schutter |
|
|
|
Richard U. De Schutter |
|
|
|
|
|
|
|
/s/Jerry A. Grundhofer |
|
|
|
Jerry A. Grundhofer |
|
|
|
|
|
|
|
/s/Stefan Hamelmann |
|
|
|
Stefan Hamelmann |
|
|
|
|
|
|
|
/s/James J. Howard |
|
|
|
James J. Howard |
|
|
|
|
|
|
|
/s/Joel W. Johnson |
|
|
|
Joel W. Johnson |
|
|
|
|
|
|
|
/s/Jochen Krautter |
|
|
|
Jochen Krautter |
|
|
|
|
|
|
|
/s/Ulrich Lehner |
|
|
|
Ulrich Lehner |
|
|
|
|
|
|
|
/s/Jerry W. Levin |
|
|
|
Jerry W. Levin |
|
|
|
|
|
|
|
/s/Beth M. Pritchard |
|
|
|
Beth M. Pritchard |
|
|
|
|
|
|
|
/s/Allan L. Schuman |
|
|
|
Allan L. Schuman |
|
|
EXHIBIT (31)
I, Douglas M. Baker, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Ecolab Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: March 3, 2005
/s/Douglas M. Baker, Jr. |
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Douglas M. Baker, Jr. |
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President and Chief Executive Officer |
I, Steven L. Fritze, certify that:
1. I have reviewed this annual report on Form 10-K of Ecolab Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: March 3, 2005
/s/Steven L. Fritze |
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Steven L. Fritze |
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Executive Vice President and
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EXHIBIT (32)
Pursuant to 18 U.S.C. Section 1350, each of the undersigned officers of Ecolab Inc. does hereby certify that:
(a) the Annual Report on Form 10-K of Ecolab Inc. for the year ended December 31, 2004 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(b) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Ecolab Inc.
Dated: March 3, 2005 |
/s/Douglas M. Baker, Jr. |
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Douglas M. Baker, Jr. |
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President and Chief Executive Officer |
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Dated: March 3, 2005 |
/s/Steven L. Fritze |
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Steven L. Fritze |
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Executive Vice
President and
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