Exhibit 13
Financial
Discussion
EXECUTIVE SUMMARY
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.
2006 was an
outstanding year for Ecolab. We achieved a strong financial performance
including record net sales of $4.9 billion and improved operating income
margins which drove 16 percent diluted earnings per share growth. We realized
major competitive gains, made significant investments in our people and
business, and further improved our long-term growth potential.
We exceeded all
three of our long-term financial objectives:
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2006 RESULTS
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LONG-TERM OBJECTIVE
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EPS Growth
|
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16.3%
|
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15%
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ROBE
|
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22.4%
|
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20%
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Balance Sheet
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A
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Investment Grade
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OPERATING
HIGHLIGHTS
·
We made important competitive gains in our
market during 2006, creating enhanced global opportunities to pursue our Circle
the Customer — Circle the Globe growth strategy as we believe Ecolab alone can
offer consistent service around the globe.
·
We enjoyed double-digit sales and profit
growth in the United States and improved sales and profit growth from our
International operations.
·
In 2006 we continued our tradition of new
product innovation building on our core product platforms. We introduced a
product in our antimicrobial platform that reduces microbial contamination in
ready-to-eat meat and poultry products, making them safer and contributing to a
longer shelf life. To help reduce the risk of foodborne illness, we introduced
the first EPA-registered antimicrobial product that reduces pathogens in fruit
and vegetable process water at food processing plants. We also continued our
efforts to customize solutions to meet specific customer needs through new
programs.
·
We continued to make business acquisitions in
order to broaden our product and service offerings in line with our Circle the
Customer — Circle the Globe strategy. Details of these acquisitions are shown
below.
·
We grew our industry-leading sales and service
force by more than 500 people, to more than 13,400 strong, and made key
investments in tools, training and technology to improve their sales
productivity and effectiveness.
·
We made significant investments in our
business systems that will drive competitive advantage in the future.
·
We continue to work to simplify and streamline
our business processes, bolstering our ability to deliver growth more
efficiently in the future.
FINANCIAL
PERFORMANCE
·
Consolidated net sales reached a record of
$4.9 billion for 2006, an increase of 8 percent over net sales of $4.5 billion
in 2005.
·
Our operating income for 2006 increased 13
percent to a record $612 million.
·
Diluted net income per share increased 16
percent to $1.43 per share for 2006, compared to $1.23 per share in 2005.
·
Cash flow from operating activities reached a
record $628 million in 2006 and allowed us to fund investments in our business
operations, make business acquisitions, reacquire $283 million of our common
stock and make a voluntary contribution of $45 million to our U.S. pension
plan.
·
We increased our quarterly dividend rate for
the fifteenth consecutive year. The dividend was increased 15 percent in
December 2006 to an indicated annual rate of $0.46 per common share.
·
Our return on beginning shareholder’s equity
(net income divided by beginning shareholder’s equity) rose to 22.4 percent in
2006, the fifteenth consecutive year in which we achieved our long-term
financial objective of a 20 percent return on beginning shareholder’s equity.
·
Our balance sheet remained strong, maintaining
our debt rating within the “A” categories of the major rating agencies during
2006. We also strengthened and solidified our capital structure, successfully
refinancing a maturing debt instrument and lowering our future financing cost.
·
We adopted the provisions of Statement of
Financial Accounting Standard No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans” (“SFAS 158”) effective as of
our 2006 year end. The impact of adopting SFAS 158 is reflected as a reduction
in net assets on our balance sheet of $168 million, with no impact to the
statements of income and cash flows. See Note 15 for more information on this
adoption.
ACQUISITIONS
·
In June, we acquired Shield Medicare Ltd.,
based in the UK. With annual sales of $19 million, Shield is a leading provider
of contamination control products for pharmaceutical, medical device and
hospital clean rooms.
·
In September, we acquired DuChem Industries,
Inc., a U.S. manufacturer and marketer of cleaning and sanitizing products for
the food and beverage market. DuChem’s core focus is the protein (meat &
poultry) market segment, and has annual sales of $10 million.
·
In September, we acquired Powles Hunt &
Sons International Ltd’s UK commercial laundry business. With annual sales of
$5 million, this acquisition will add scale to our textile care business in the
UK.
2007
EXPECTATIONS
·
We look for continued momentum from our
existing business, investments in our key growth drivers and from competitive
gains achieved in 2006 to drive growth and market share opportunities in 2007.
17
·
We will continue to leverage our Circle the
Customer — Circle the Globe growth strategy through cross-selling and enhanced
marketing of our many product and service solutions under the Ecolab brand.
·
We will continue to invest in new product,
system and service development in order to deliver improved value to our
customers and thereby earn more of their business.
·
We plan to seek strategic business
acquisitions which complement our growth strategy.
·
We will continue to work on streamlining our
business processes in order to reduce costs and improve sustainability.
·
We intend to make significant investments in our
business systems to drive growth in the future.
·
We will continue to work to deliver superior
results to our customers, returns to shareholders and opportunity to our valued
associates.
CRITICAL
ACCOUNTING ESTIMATES
Our consolidated
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP). We have adopted
various accounting policies to prepare the consolidated financial statements in
accordance with U.S. GAAP. Our most significant accounting policies are
disclosed in Note 2 of the notes to the consolidated financial statements.
Preparation of our
consolidated financial statements, in conformity with U.S. GAAP, requires us to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Estimates are
considered to be critical if they meet both of the following criteria: (1) the
estimate requires assumptions to be made about matters that are highly uncertain
at the time the accounting estimate is made, and (2) 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, have a material impact on the
presentation of the company’s results of operations.
Besides estimates
that meet the “critical” estimate criteria, we make many other accounting
estimates in preparing our 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. Our critical accounting
estimates include the following:
REVENUE
RECOGNITION
We recognize
revenue on product sales at the time title to the product and risk of loss
transfers to the customer. We recognize revenue on services as they are
performed. Our sales policies do not provide for general rights of return and
do not contain customer acceptance clauses. We record 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. Depending on market conditions, we may increase customer incentive
offerings, which could reduce 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’ 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. Estimated future legal
costs are expensed as incurred. 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 future contributions and expenses.
The assumptions
used in developing the required estimates include, among others, discount rate,
projected salary and health financial care cost increases and expected return
or earnings on assets. Beginning in 2005, the discount rate assumption for the
U.S. Plans is calculated using a bond yield curve constructed from a large population
of high-quality, non-callable, corporate bond issues with maturity dates of six
months to thirty years. Bond issues in the population are rated no less than Aa
by Moody’s Investor Services or AA by Standard & Poors. The discount rate
is calculated by matching of the plan liability cash flows to the yield curve.
Prior to 2005, the discount rate assumption was 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
advisors. The effects of actual results differing from our assumptions, as well
as changes in assumptions, are reflected in the unrecognized actuarial loss and
amortized over future periods and, therefore, generally affect our recognized
expense in future periods. Our unrecognized actuarial loss on our U.S. qualified
and nonqualified pension plans decreased to $189 million (before tax) due
primarily to a better than expected return on plan assets and an increase in
the discount rate at the end of 2006. As of December 31, 2006, this
unrecognized loss is included on our balance sheet as a component of
Accumulated Other Comprehensive Income due to the adoption of SFAS 158. Significant
differences in actual experience or significant changes in assumptions may
materially affect pension and other post-retirement obligations.
18
In determining our
U.S. pension and postretirement obligations for 2006, our discount rate
increased to 5.79 percent from 5.57 percent at year-end 2005. Our projected
salary increase was unchanged at 4.32 percent and our expected return on plan
assets used for determining 2006 expense remained unchanged at 8.75 percent.
The effect on 2007
expense of a decrease in the discount rate or expected return on assets
assumption as of December 31, 2006 is shown below assuming no changes in
benefit levels and no amortization of gains or losses for our major plans:
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Effect on U.S. Pension Plan
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Increase in
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Higher
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millions
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Assumption
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Recorded
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2007
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Assumption
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Change
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Obligation
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Expense
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Discount rate
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-0.25 pts
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$
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30.8
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$
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4.2
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Expected return on
assets
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-0.25 pts
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N/A
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$
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1.9
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Effect on U.S. Postretirement
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Health Care Benefits Plan
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Increase in
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Higher
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millions
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Assumption
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Recorded
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2007
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Assumption
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Change
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obligation
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Expense
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Discount rate
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-0.25 pts
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$
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4.8
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$
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0.7
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Expected return on
assets
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-0.25 pts
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N/A
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$
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0.1
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See Note 15 for
further discussion concerning our accounting policies, estimates, funded
status, planned contributions and overall financial positions of our pension
and post-retirement plan obligations.
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.
SHARE-BASED
COMPENSATION
Effective October
1, 2005 we adopted Statement of Financial Accounting Standards No. 123 (Revised
2004), “Share-Based Payment” (“SFAS 123R”) under the modified retrospective
application method. All prior period financial statements were restated to
recognize share-based compensation historically reported in the notes to the
consolidated financial statements. As required by SFAS 123R, we measure
compensation expense for share-based awards at fair value at the date of grant
and recognize compensation expense over the service period for awards expected
to vest. Upon adoption of SFAS 123R in the fourth quarter of 2005 we began
using a lattice-based binomial model for valuing new stock option grants. We
believe this model considers appropriate probabilities of option exercise and
post-vesting termination which are more consistent with actual and projected
experience, and therefore support more accurate valuation of a stock option. We
also started using a forfeiture estimate for all share-based awards in the
amount of compensation expense being recognized. This change from our
historical practice of recognizing forfeitures as they occur did not result in
the recognition of any cumulative adjustment to income.
Determining the
fair value of share-based awards at the grant date requires judgment, including
estimating expected volatility, exercise and post-vesting termination behavior,
expected dividends and risk-free rates of return. Additionally, the expense
that is recorded is dependent on the amount of share-based awards that is
expected to be forfeited. If actual forfeiture results differ significantly
from these estimates, share-based compensation expense and our results of
operations could be impacted. For additional information on our stock incentive
and option plans, including significant assumptions used in determining fair
value, see Note 10.
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. 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 rate is then applied to our year-to-date 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 field work examination of
our tax returns for 1999 through 2001. We expect the final resolution for these
returns by 2008. We also expect the Internal Revenue Service to complete their
field work examination of our tax returns for 2002 through 2004 in 2007.
19
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 could result in
additional tax expense and 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 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 asset’s 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 or estimated remaining
useful lives of our long-lived assets.
We review our
goodwill for impairment on an annual basis for all reporting units. If
circumstances change significantly within a reporting unit, we would test for
impairment prior to the annual test.
Goodwill and
certain intangible assets are 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. No impairments were recorded
in 2006, 2005 or 2004 as a result of the tests performed. Of the total goodwill
included in our consolidated balance sheet, 19 percent is recorded in our
United States Cleaning & Sanitizing reportable segment, 5 percent in our
United States Other Services segment and 76 percent in our International
segment.
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 in shareholders’ equity. Income statement accounts are translated at
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.
RESULTS
OF OPERATIONS
CONSOLIDATED
|
millions, except per share
|
|
2006
|
|
2005
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2004
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|
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Net sales
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$
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4,896
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$
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4,535
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$
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4,185
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Operating income
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|
612
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|
542
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|
490
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Net income
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|
369
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319
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|
283
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Diluted net income per common
share
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$
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1.43
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$
|
1.23
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$
|
1.09
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|
Our consolidated net sales for 2006 increased 8
percent over 2005. The components include 6 percent volume growth and 2 percent
favorable effect from price changes. Acquisitions and divestitures and changes
in currency translation did not have a significant impact on the consolidated
sales growth rate.
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2006
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2005
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2004
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|
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|
|
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Gross profit as
a percent of net sales
|
|
50.7
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%
|
50.4
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%
|
51.4
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%
|
|
Selling, general &
administrative expenses as a percent of net sales
|
|
38.2
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%
|
38.4
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%
|
39.6
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%
|
Our consolidated
gross profit margin (defined as gross profit divided by net sales) for 2006
increased from 2005, primarily driven by pricing and cost savings initiatives
which more than offset higher delivered product costs during the year.
Selling, general
and administrative expenses as a percentage of sales continued to improve in
2006. The improvement in the 2006 expense ratio is primarily due to increased
sales leverage and cost saving programs which more than offset investments in
the business.
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Operating income as a
percent of net sales
|
|
12.5
|
%
|
12.0
|
%
|
11.7
|
%
|
Operating income
increased 13 percent in 2006 over 2005. As a percent of sales, operating income
also increased from 2005. The increase in operating income in 2006 is due to
pricing, sales volume and cost reduction initiatives partially offset by higher
delivered product costs as well as investments in the business.
Our net income was
$369 million in 2006, an increase of 15 percent compared to $319 million in 2005.
Net income in both years included items of a non-recurring nature that are not
necessarily indicative of future operating results. Net income in 2006 included
the benefit of a $1.8 million tax settlement for stewardship costs which was
offset by a $2.8 million charge ($1.8 million net of tax benefit) in selling,
general and administrative expense to recognize minimum royalties under a
licensing agreement with no future benefit. Net income in 2005 included a tax
charge of $3.1 million related to the repatriation of foreign earnings under
the American Jobs Creation Act (AJCA). Excluding these items, net income
increased 14 percent for 2006. This increase in net income reflects improved
sales, gross margin and operating income growth. Currency translation positively
impacted net income in 2006 by approximately $2 million. Our 2006 net income
also benefited when compared to 2005 due to a lower overall effective income
tax rate which was the result of international mix, lower international
statutory rates and tax planning efforts.
20
2005
COMPARED WITH 2004
Our consolidated
net sales for 2005 increased 8 percent to $4.5 billion compared to $4.2 billion
in 2004. Acquisitions and divestitures increased consolidated net sales by 1
percent. Changes in currency translation also positively impacted the sales
growth rate by 1 percent. Sales benefited from pricing, new account gains, new
product and service offerings and investments in the sales-and-service-force.
Our consolidated
gross profit margin for 2005 decreased from 2004. The decrease was primarily
driven by higher delivered product costs, partially offset by pricing and cost
savings programs.
Selling, general
and administrative expenses as a percentage of sales improved for 2005 compared
to 2004. The improvement in the 2005 expense ratio is primarily due to pricing,
sales leverage and cost savings programs partially offset by investments in the
sales-and-service force, research and development and technology.
Operating income
for 2005 increased 11 percent over 2004. As a percent of sales, operating
income also increased from 2004. The increase in operating income in 2005 is
due to sales volume, pricing, cost reduction initiatives and lower share-based
compensation expense, partially offset by higher delivered product costs as
well as investments in the sales-and-service force, research and development
and technology. Operating income also benefited from significant operating
improvement at GCS Service in 2005.
Our net income was
$319 million in 2005, an increase of 13 percent as compared to $283 million in
2004. Net income in both years included items of a non-recurring nature that
are not necessarily indicative of future operating results. Net income in 2005
included a tax charge of $3.1 million related to the repatriation of foreign
earnings under the AJCA. 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. Excluding these
items from both years, net income increased 14 percent for 2005. This increase
in net income reflects improved operating income growth by most of our business
units in the face of a challenging raw material cost environment. Currency
translation positively impacted net income growth in 2005 by approximately $5
million. Our 2005 net income also benefited when compared to 2004 due to a
lower overall effective income tax rate which was the result of a lower
international rate, international mix and tax planning efforts. Excluding the
items of a non-recurring nature previously mentioned, net income was 7 percent
of net sales for both 2005 and 2004.
SEGMENT
PERFORMANCE
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 2006. The
difference between actual currency exchange rates and the fixed currency
exchange rates used by management is included in “Effect of Foreign Currency
Translation” within our operating segment results. All other accounting
policies of the reportable segments are consistent with U.S. GAAP 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.
SALES BY REPORTABLE SEGMENT
|
millions
|
|
2006
|
|
2005
|
|
2004
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
Cleaning & Sanitizing
|
|
$
|
2,152
|
|
$
|
1,952
|
|
$
|
1,797
|
|
|
Other Services
|
|
411
|
|
375
|
|
339
|
|
|
Total United States
|
|
2,563
|
|
2,327
|
|
2,136
|
|
|
International
|
|
2,261
|
|
2,137
|
|
2,038
|
|
|
Total
|
|
4,824
|
|
4,464
|
|
4,174
|
|
|
Effect of foreign currency translation
|
|
72
|
|
71
|
|
11
|
|
|
Consolidated
|
|
$
|
4,896
|
|
$
|
4,535
|
|
$
|
4,185
|
|
|
Percent Change From Prior Year
|
|
2006
|
|
2005
|
|
|
Net sales
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
Cleaning & Sanitizing
|
|
10
|
%
|
9
|
%
|
|
Other Services
|
|
9
|
|
11
|
|
|
Total United States
|
|
10
|
|
9
|
|
|
International (management rates)
|
|
6
|
|
5
|
|
|
Consolidated
(management rates)
|
|
8
|
|
8
|
|
|
Consolidated (public
rates)
|
|
8
|
%
|
7
|
%
|
Sales of our
United States Cleaning & Sanitizing operations increased 10 percent to $2.2
billion in 2006. Sales were driven by double-digit sales growth in our
Institutional and Kay divisions, along with good growth from our Food &
Beverage division. Institutional sales increased 11 percent in 2006, benefiting
from significant new account gains during the year. Institutional results
reflect sales growth into all end market segments, including double-digit
growth in travel, casual dining and health care markets. Food & Beverage
division sales increased 8 percent for 2006. The acquisition of DuChem added 1
percent and the remaining increase was due to double-digit gains in the meat
& poultry market as well as good gains in the dairy, food
21
and soft drink
markets. Kay recorded an 11 percent sales increase in 2006 led by gains in its
core quickservice and food retail markets. Kay benefited from good ongoing
demand from existing customers as well as new account gains.
Sales of our
United States Other Services operations increased 9 percent in 2006. Pest
Elimination continued its double-digit sales growth as sales rose 13 percent.
Sales were driven by growth in both core pest elimination contract and
non-contract services. Sales also benefited from new accounts and strong
customer retention. GCS Service sales grew modestly as service and installed
parts sales increased over last year. GCS Service continued to focus on
infrastructure and process development that will improve competitive advantage
and business scalability in the future.
Management rate
sales of our International operations were $2.3 billion in 2006, an increase of
6 percent over 2005. Acquisitions and divestitures added 1 percent to the year
over year sales growth in 2006. Sales in Europe increased 4 percent from 2005.
Good sales growth in the United Kingdom was partially offset by slower sales
growth in Germany, France and Italy. Europe also achieved geographic growth in
2006 through further expansion in eastern Europe. Asia Pacific sales grew 6
percent primarily driven by growth in China, Australia, Thailand and Hong Kong
partially offset by weakness in Japan. Asia Pacific sales benefited from new
corporate accounts and good results in the beverage and brewery segment. Latin
America recorded strong 14 percent sales growth in 2006. The growth over last
year was driven by results in Mexico, the Caribbean and Venezuela. Results were
due to new account gains, growth of existing accounts and success with new
programs. Sales in Canada increased 8 percent in 2006, reflecting good results
from all divisions. Sales benefited from pricing, account retention and new
business.
OPERATING
INCOME BY REPORTABLE SEGMENT
|
millions
|
|
2006
|
|
2005
|
|
2004
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
Cleaning & Sanitizing
|
|
$
|
329
|
|
$
|
280
|
|
$
|
266
|
|
|
Other Services
|
|
39
|
|
36
|
|
21
|
|
|
Total United States
|
|
368
|
|
316
|
|
287
|
|
|
International
|
|
234
|
|
219
|
|
209
|
|
|
Total
|
|
602
|
|
535
|
|
496
|
|
|
Corporate
|
|
—
|
|
—
|
|
(4
|
)
|
|
Effect of foreign currency translation
|
|
10
|
|
7
|
|
(2
|
)
|
|
Consolidated
|
|
$
|
612
|
|
$
|
542
|
|
$
|
490
|
|
|
Operating income
as a percent of net sales
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
Cleaning & Sanitizing
|
|
15.3
|
%
|
14.3
|
%
|
14.8
|
%
|
|
Other Services
|
|
9.5
|
|
9.6
|
|
6.0
|
|
|
Total United States
|
|
14.4
|
|
13.6
|
|
13.4
|
|
|
International
|
|
10.3
|
|
10.3
|
|
10.2
|
|
|
Consolidated
|
|
12.5
|
%
|
12.0
|
%
|
11.7
|
%
|
Operating income of our United States Cleaning &
Sanitizing operations increased 18 percent to $329 million in 2006. As a
percentage of net sales, operating income increased to 15.3 percent in 2006
from 14.3 percent in 2005. Acquisitions and divestitures had no effect on the
overall percentage increase in operating income. Operating income increased due
to pricing, higher sales volume and improved cost efficiencies, which more than
offset higher delivered product costs and investments in the business.
Operating income
of our United States Other Services operations increased 8 percent to $39
million in 2006. As a percentage of net sales, operating income decreased
slightly to 9.5 percent in 2006 from 9.6 percent in 2005. Double-digit
operating income growth at Pest Elimination was offset by slow sales growth as
well as investments in the GCS business. Operating income growth and operating
income margin comparisons were also impacted by a $0.5 million regulatory
expense in the second quarter of 2006 and a $0.5 million patent settlement
benefit in the first quarter of 2005.
Management-rate
based operating income of International operations rose 7 percent to $234
million in 2006. The International operating income margin was 10.3 percent in
both 2006 and 2005. Acquisitions and divestitures occurring in 2006 and 2005
increased operating income growth by 1 percent over 2005. Operating income
growth benefited from pricing, sales volume growth and cost efficiencies which
more than offset higher delivered product costs and investments in the
business.
Operating income
margins of our International operations are generally 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.
22
2005
COMPARED WITH 2004
Sales of our
United States Cleaning & Sanitizing operations reached nearly $2.0 billion
in 2005 and increased 9 percent over net sales of $1.8 billion in 2004.
Acquisitions and divestitures increased sales by 1 percent for 2005. Sales
benefited from double-digit organic growth in our Kay division, along with good
growth in our Institutional and Food & Beverage divisions. This sales
performance reflects increased account retention and penetration through
enhanced service, new product and program initiatives and aggressive new
account sales efforts. Institutional sales grew 7 percent in 2005 reflecting
sales growth in all end market segments, including travel, casual dining,
healthcare, and government markets. Food & Beverage sales increased 9
percent compared to 2004. Excluding the benefits of the 2004 Alcide acquisition,
Food & Beverage sales increased 5 percent for 2005 primarily due to gains
in the dairy, food and soft drink markets reflecting increasing penetration of
existing corporate accounts as well as new business. Kay’s sales increased 11
percent, led by strong gains in sales to its core quickservice customers and in
its food retail services business.
Sales of our
United States Other Services operations increased 11 percent to $375 million in
2005. Pest Elimination had 12 percent sales growth including double-digit sales
growth in both core pest elimination contract and non-contract services, such
as bird and termite work, fumigation, one-shot services and its food safety
audit business. GCS Service sales grew 8 percent in 2005 as service and
installed parts sales increased over 2004. GCS continued to increase technician
productivity and improve customer service satisfaction.
Management rate
sales of our International operations were $2.1 billion in 2005, an increase of
5 percent over sales of $2.0 billion in 2004. Acquisitions and divestitures
increased sales 1 percent in 2005. Sales in Europe, excluding acquisitions and
divestitures, were up 2 percent from 2004. Sales were affected by an overall
weak European economy, particularly in the major central countries. Sales in
Asia Pacific, excluding acquisitions and divestitures, increased 7 percent. The
growth was primarily driven by East Asia, including continued growth in China.
Asia Pacific growth was driven by new corporate accounts and good results in the
beverage and brewery segment. Latin America continued its double-digit sales
growth as sales grew 15 percent over 2004, reflecting growth in all countries
with Mexico, Chile and Argentina showing the strongest growth. Results were due
to new account gains, growth of existing accounts and strong equipment sales.
Sales in Canada increased 8 percent in 2005, reflecting good results from all
divisions.
Operating income
of our United States Cleaning & Sanitizing operations was $280 million in
2005, an increase of 5 percent from operating income of $266 million in 2004.
As a percentage of net sales, operating income decreased from 14.8 percent in
2004 to 14.3 percent in 2005. Acquisitions and divestitures had no effect on
the overall percentage increase in operating income. The increase in operating
income in 2005 reflects the benefits of higher sales, pricing and lower
share-based compensation expense being partially offset by higher delivered
product costs. Operating income margins declined because the negative impact of
higher delivered product costs more than offset the benefits of pricing, cost
savings and sales leverage.
Operating income
of United States Other Services operations increased 76 percent to $36 million
in 2005. The operating income margin for United States Other Services increased
to 9.6 percent in 2005 from 6.0 percent in 2004. Pest Elimination had
double-digit operating income growth and GCS Service results reflect sharp
profitability improvement in 2005. The increase in operating income for Pest
Elimination was driven by strong sales and leverage of sales and administrative
teams, with pricing and productivity improvements offsetting cost increases.
GCS Service narrowed its operating loss substantially in 2005 due to good sales
growth and operational improvements. GCS Service operating income growth also
benefited from a favorable comparison to 2004 which included a sales decline,
increased marketing expenses and higher than expected costs resulting from
centralizing the parts and administration activities.
Management-rate
based operating income of International operations rose 5 percent to $219
million in 2005 from operating income of $209 million in 2004. The
International operating income margin was 10.3 percent in 2005 and 10.2 percent
2004. Excluding the impact of acquisitions and divestitures occurring in 2005
and 2004, operating income increased 3 percent over 2004. Sales growth,
pricing, lower share-based compensation expense and cost efficiencies were
partially offset by higher delivered product costs, unfavorable business mix
and investments.
CORPORATE
We had no
operating expenses in our corporate segment in 2006 or 2005 and $4.5 million in
2004. 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 $0.8 million of income
for reductions in restructuring accruals and a $0.3 million gain on the sale of
a small international business.
INTEREST
AND INCOME TAXES
Net interest
expense was $44 million for both 2006 and 2005. An increase in interest expense
during 2006 was offset by higher interest income.
Net interest
expense in 2005 decreased to $44 million compared to $45 million in 2004. The
decrease was caused by higher interest income during the year due to increased
levels of cash and cash equivalents and short-term investments offset partially
by a small increase in interest expense.
Our effective
income tax rate was 35.0 percent for 2006, compared with an effective income
tax rate of 35.9 percent for 2005 and 36.4 percent in 2004. Reductions in our
effective income tax rates over the last three years have primarily been due to
favorable international mix, lower international statutory rates and the impact
of tax planning efforts. Excluding the benefit of the $1.8 million tax
settlement for stewardship costs and a $0.5 million benefit related to prior
years, the estimated effective income tax rate was 35.4 percent for 2006.
Excluding the effects of the $3.1 million tax charge related to the
repatriation of foreign earnings under the AJCA and other onetime benefits, the
estimated annual effective income tax rate for 2005 was 35.6 percent. Excluding
the effects of special charges mentioned above in the corporate section and a
$1.9 million tax benefit related to prior years, the estimated annual effective
income tax rate was 36.7 percent for 2004.
23
FINANCIAL POSITION & LIQUIDITY
FINANCIAL
POSITION
Our debt continued
to be rated within the “A” categories by the major rating agencies during 2006.
Significant changes in our financial position during 2006 included the
following:
Total assets
increased 16 percent to $4.4 billion as of December 31, 2006 from $3.8 billion
at year-end 2005. Total assets increased primarily due to an increase in cash
and cash equivalents resulting from $396 million of proceeds received from a
new debt offering in December. Foreign currency translation added approximately
$175 million to the value of non-U.S. assets on the balance sheet as the U.S.
dollar weakened against foreign currencies, primarily the euro. Additionally,
acquisitions added $83 million of assets.
Total liabilities
increased $592 million in 2006. This included an increase in total debt
discussed below and an increase of $81 million in post retirement healthcare
and pension benefits due to the adoption of SFAS 158 as discussed in Note 15.
Total liabilities also reflected an increase resulting from the effects of
currency translation.
Total debt was
$1.1 billion at December 31, 2006 and increased from total debt of $746 million
at year-end 2005. This increase in total debt during 2006 was primarily due to
the issuance of euro 300 million senior notes ($396 million as of December 31,
2006) to refinance our euronotes which became due in February 2007. The ratio
of total debt to capitalization (total debt divided by the sum of shareholders’
equity plus total debt) was 39 percent at year-end 2006 and 31 percent at
year-end 2005. The debt to capitalization ratio increased significantly in
2006, due to the new senior notes issued as well as a decrease in our equity of
$168 million for a change in accounting due to the adoption of SFAS 158.
Normalizing for these items, the total debt to capitalization would have been
27 percent for 2006. We view our debt to capitalization ratio as an important
indicator of our creditworthiness.
CASH
FLOWS
Cash provided by operating activities was $628 million
for 2006, an increase over $590 million in 2005 and $571 million in 2004. The
increase in operating cash flow for 2006 over 2005 reflects our higher net
income offset partially by an increase in income tax payments and accounts
receivable in 2006. The increase in operating cash flow for 2005 over 2004 is
due to higher net income and improved collection of accounts receivable as well
as better inventory management. 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, pay down debt
and meet our ongoing obligations and commitments.
Cash used for
investing activities decreased from 2005 due primarily to the timing of
purchases and sales of short-term investments offset by higher acquisition
activity, capital expenditures and capitalized software expenditures. Capital
software expenditures increased due to investments in business systems. We
expect capital software expenditures to increase significantly in 2007 as we
continue to invest in our business systems.
Financing cash flow activity included cash proceeds
from new senior note borrowings of $396 million, debt repayment and dividend
payments. Share repurchases were $283 million in 2006, $213 million in 2005 and
$165 million in 2004. These repurchases were funded with operating cash flows
and cash from the exercise of employee stock options. In December 2004, we
announced an authorization to repurchase up to 10 million shares of Ecolab
common stock. In October 2006, we announced an authorization to repurchase up
to 10 million additional shares of Ecolab common stock. As of December 31,
2006, approximately 12.9 million shares remained to be purchased under these authorizations.
Shares are repurchased for the purpose of offsetting the dilutive effect of
stock options and incentives and for general corporate purposes. During 2007,
we expect to repurchase at least enough shares to offset the dilutive effect of
stock options. Cash proceeds from the exercises as well as the tax benefits
will provide a portion of the funding for this repurchase activity.
In 2006, we increased our
indicated annual dividend rate for the fifteenth consecutive year. We have paid
dividends on our common stock for 70 consecutive years. Cash dividends declared
per share of common stock, by quarter, for each of the last three years were as
follows:
|
|
|
FIRST
|
|
SECOND
|
|
THIRD
|
|
FOURTH
|
|
|
|
|
|
|
QUARTER
|
|
QUARTER
|
|
QUARTER
|
|
QUARTER
|
|
YEAR
|
|
|
2006
|
|
$
|
0.1000
|
|
$
|
0.1000
|
|
$
|
0.1000
|
|
$
|
0.1150
|
|
$
|
0.4150
|
|
|
2005
|
|
0.0875
|
|
0.0875
|
|
0.0875
|
|
0.1000
|
|
0.3625
|
|
|
2004
|
|
0.0800
|
|
0.0800
|
|
0.0800
|
|
0.0875
|
|
0.3275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIQUIDITY
AND CAPITAL RESOURCES
We currently
expect to fund all of the requirements which are reasonably foreseeable for 2007,
including scheduled debt repayments, new investments in the business, share
repurchases, dividend payments, possible business acquisitions and pension
contributions from operating cash flow, cash reserves and short-term
borrowings.
In December 2006,
we issued and sold in a private placement euro 300 million ($396 million as of
December 31, 2006) aggregate principal amount of senior notes in two series:
4.355% Series A Senior Notes due 2013 in the aggregate principal amount of euro
125 million and 4.585% Series B Senior Notes due 2016 in the aggregate
principal amount of euro 175 million (the “Notes),” pursuant to a Note Purchase
Agreement dated July 26, 2006, between the company and the purchasers. The
Notes are not subject to prepayment except where, in certain specified
instances, we consolidate or merge all or substantially all of our assets with
any other Person (as defined in the Note Purchase Agreement). Upon such
consolidation or merger, we will offer to prepay all of the Notes at 100
percent of
24
the principal
amount outstanding plus accrued interest. In the event of a default by the
company under the Note Purchase Agreement, the Notes may become immediately due
and payable for the unpaid principal amount, accrued interest and a make-whole
amount determined as of the time of the default. The proceeds were used to
repay our euro 300 million 5.375 percent euronotes which became due in February
2007.
While cash flows
could be negatively affected by a decrease in revenues, we do not believe that
our revenues are highly susceptible, in the short term, 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 & Poor’s and P-1 by Moody’s. To support our
commercial paper programs andother general business funding needs, we maintain
a $450 million multi-year committed credit agreement which expires in June 2011
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, 2006, $30 million of this credit facility was
committed to support outstanding U.S. commercial paper, leaving $420 million
available for other uses. In addition, we have other committed and uncommitted
credit lines of approximately $190 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 6 of the notes to
consolidated financial statements.
During 2006, we
voluntarily contributed $45 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 and the tax
deductibility of the contribution. We expect our combined U.S. qualified and
nonqualified pension plan expense to decrease slightly to approximately $40
million in 2007 from $41 million in 2006, primarily due to expected returns on
a higher level of plan assets and an increase in the discount rate from 5.57
percent to 5.79 percent for the 2007 expense calculation. The expected return
on plan assets of 8.75 percent is consistent with 2006.
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:
|
|
|
PAYMENTS DUE BY PERIOD
|
|
|
THOUSANDS
|
|
|
|
LESS
|
|
|
|
|
|
MORE
|
|
|
|
|
|
|
THAN
|
|
1-3
|
|
3-5
|
|
THAN
|
|
|
Contractual Obligations
|
|
TOTAL
|
|
1 YEAR
|
|
YEARS
|
|
YEARS
|
|
5 YEARS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable
|
|
$
|
109,100
|
|
$
|
109,100
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Long-term debt
|
|
956,936
|
|
399,878
|
|
4,475
|
|
151,988
|
|
400,595
|
|
|
Operating leases
|
|
142,000
|
|
44,000
|
|
57,000
|
|
28,000
|
|
13,000
|
|
|
Interest*
|
|
223,347
|
|
34,172
|
|
64,250
|
|
54,290
|
|
70,635
|
|
|
Benefit
payments**
|
|
760,000
|
|
52,000
|
|
123,000
|
|
138,000
|
|
447,000
|
|
|
Total contractual cash
obligations
|
|
$
|
2,191,383
|
|
$
|
639,150
|
|
$
|
248,725
|
|
$
|
372,278
|
|
$
|
931,230
|
|
*
Interest on
variable rate debt was calculated using the interest rate at year-end 2006.
**
Benefit
payments are paid out of the company’s pension and postretirement health care
benefit plans.
We are not
required to make any contributions to our U.S. pension and postretirement
health care benefit plans in 2007, based on plan asset values as of December
31, 2006. Certain international pension benefit plans are required to be funded
in accordance with local government requirements. We estimate contributions to
be made to our international plans will approximate $20 million in 2007. 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. 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 preceding 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 $56 million of letters of credit supporting domestic and
international commercial relationships and transactions, 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
2006, we are in compliance with all covenants and other requirements of our
credit agreements and indentures. Our $450 million multicurrency credit
agreement, as amended and restated effective June 1, 2006, no longer includes a
covenant regarding the ratio of total debt to capitalization. Our new euro 300
million senior notes include covenants regarding the amount of indebtedness
secured by liens and subsidiary indebtedness allowed. 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.
OFF-BALANCE
SHEET ARRANGEMENTS
Other than
operating leases, we do not have any off-balance sheet financing arrangements.
See Note 12 for information on our operating leases. 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.
NEW
ACCOUNTING PRONOUNCEMENTS
We adopted the provisions of SFAS 158 effective as of
our 2006 year end. The impact of adopting SFAS 158 is reflected as a reduction
in net assets on our balance sheet of $168 million, with no impact to the
statements of income and cash flows. See Note 15 for more information on this
adoption.
FASB
Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109” (“FIN 48”) is effective beginning January 1, 2007 with the cumulative
effect of initially applying FIN 48 recognized as a
25
change in accounting principle recorded as an
adjustment to opening retained earnings. We do not expect the impact of
adoption to be material to our consolidated financial statements.
See Note 2 for
additional information on these and other new accounting pronouncements.
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 associated
with movements in foreign exchange and interest rates on our income statement
and cash flows.
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,
2006, we had approximately $375 million notional amount 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 2006, we had an interest
rate swap that converts approximately euro 78 million (approximately $103
million U.S. dollars) of our Euronote debt from a fixed interest rate to a
floating or variable interest rate. This swap agreement expired in February
2007.
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.
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 statements include expectations
concerning:
·
business progress and expansion,
·
business acquisitions,
·
currency translation,
·
cash flows,
·
debt repayments,
·
share repurchases,
·
global economic conditions,
·
pension expenses and potential contributions,
·
income taxes
·
and liquidity requirements.
Without limiting
the foregoing, words or phrases such as “will likely result,” “are expected to,”
“will continue,” “is anticipated,” “we believe,” “we expect,” “estimate,” “project”
(including the negative or variations thereof) or similar terminology, general
identify forward-looking statements. Forward-looking statements may also
represent challenging goals for us. We caution that undue reliance should not
be placed on such forward-looking statements, which speak only as of the date
made. Some of the factors which could cause results to differ from those
expressed in any forward-looking statements are set forth under Item 1A of our
Form 10-K for the year ended December 31, 2006, entitled Risk Factors.
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.
26
Consolidated
Statement of Income
|
Year ended December 31 (thousands, except per share)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
4,895,814
|
|
$
|
4,534,832
|
|
$
|
4,184,933
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Cost of sales (including special charges (income) of
($106) in 2004)
|
|
2,416,058
|
|
2,248,831
|
|
2,033,492
|
|
|
Selling, general and administrative expenses
|
|
1,868,114
|
|
1,743,581
|
|
1,657,084
|
|
|
Special charges
|
|
|
|
|
|
4,467
|
|
|
Operating income
|
|
611,642
|
|
542,420
|
|
489,890
|
|
|
Interest
expense, net
|
|
44,418
|
|
44,238
|
|
45,344
|
|
|
Income before
income taxes
|
|
567,224
|
|
498,182
|
|
444,546
|
|
|
Provision for
income taxes
|
|
198,609
|
|
178,701
|
|
161,853
|
|
|
Net income
|
|
$
|
368,615
|
|
$
|
319,481
|
|
$
|
282,693
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.46
|
|
$
|
1.25
|
|
$
|
1.10
|
|
|
Diluted
|
|
$
|
1.43
|
|
$
|
1.23
|
|
$
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per common share
|
|
$
|
0.4150
|
|
$
|
0.3625
|
|
$
|
0.3275
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
252,132
|
|
255,741
|
|
257,575
|
|
|
Diluted
|
|
257,144
|
|
260,098
|
|
260,407
|
|
The accompanying
notes are an integral part of the consolidated financial statements.
27
Consolidated Balance Sheet
|
DECEMBER 31 (THOUSANDS, EXCEPT PER SHARE)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
484,029
|
|
$
|
104,378
|
|
|
Short-term investments
|
|
|
|
125,063
|
|
|
Accounts receivable, net
|
|
867,541
|
|
743,520
|
|
|
Inventories
|
|
364,886
|
|
325,574
|
|
|
Deferred income taxes
|
|
86,870
|
|
65,880
|
|
|
Other current assets
|
|
50,231
|
|
57,251
|
|
|
Total current assets
|
|
1,853,557
|
|
1,421,666
|
|
|
Property, plant
and equipment, net
|
|
951,569
|
|
868,053
|
|
|
Goodwill
|
|
1,035,929
|
|
937,019
|
|
|
Other intangible
assets, net
|
|
223,787
|
|
202,936
|
|
|
Other assets,
net
|
|
354,523
|
|
366,954
|
|
|
Total assets
|
|
$
|
4,419,365
|
|
$
|
3,796,628
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
508,978
|
|
$
|
226,927
|
|
|
Accounts payable
|
|
330,858
|
|
277,635
|
|
|
Compensation and benefits
|
|
252,686
|
|
214,131
|
|
|
Income taxes
|
|
17,698
|
|
39,583
|
|
|
Other current liabilities
|
|
392,510
|
|
361,081
|
|
|
Total current liabilities
|
|
1,502,730
|
|
1,119,357
|
|
|
Long-term debt
|
|
557,058
|
|
519,374
|
|
|
Postretirement
health care and pension benefits
|
|
420,245
|
|
302,048
|
|
|
Other
liabilities
|
|
259,102
|
|
206,639
|
|
|
Shareholders’
equity (a)
|
|
1,680,230
|
|
1,649,210
|
|
|
Total liabilities and
shareholders’ equity
|
|
$
|
4,419,365
|
|
$
|
3,796,628
|
|
(a)
Common stock, 400,000
shares authorized, $1.00 par value, 251,337 shares issued and outstanding at
December 31, 2006, 254,143 shares issued and outstanding at December 31, 2005.
The accompanying
notes are an integral part of the consolidated financial statements.
28
Consolidated Statement of Cash Flows
|
YEAR ENDED DECEMBER 31 (THOUSANDS)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
368,615
|
|
$
|
319,481
|
|
$
|
282,693
|
|
|
Adjustments to
reconcile net income to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
268,569
|
|
256,935
|
|
246,954
|
|
|
Deferred income taxes
|
|
(18,806
|
)
|
(13,021
|
)
|
14,342
|
|
|
Share-based compensation expense
|
|
36,326
|
|
39,087
|
|
44,660
|
|
|
Excess tax benefits from share-based payment
arrangements
|
|
(19,763
|
)
|
(11,682
|
)
|
(11,556
|
)
|
|
Disposal loss, net
|
|
387
|
|
|
|
3,691
|
|
|
Charge for in-process research and development
|
|
|
|
|
|
1,600
|
|
|
Other, net
|
|
1,282
|
|
(882
|
)
|
(2,507
|
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(66,774
|
)
|
(44,839
|
)
|
(47,217
|
)
|
|
Inventories
|
|
(17,987
|
)
|
2,553
|
|
(5,481
|
)
|
|
Other assets
|
|
(27,138
|
)
|
(21,853
|
)
|
(31,723
|
)
|
|
Accounts payable
|
|
44,519
|
|
18,987
|
|
34,841
|
|
|
Other liabilities
|
|
58,334
|
|
45,370
|
|
40,611
|
|
|
Cash provided by
operating activities
|
|
627,564
|
|
590,136
|
|
570,908
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
(287,885
|
)
|
(268,783
|
)
|
(275,871
|
)
|
|
Property
disposals
|
|
25,622
|
|
21,209
|
|
18,373
|
|
|
Capitalized
software expenditures
|
|
(33,054
|
)
|
(10,949
|
)
|
(9,688
|
)
|
|
Businesses
acquired and investments in affiliates, net of cash acquired
|
|
(65,532
|
)
|
(26,967
|
)
|
(129,822
|
)
|
|
Sale of
businesses and assets
|
|
1,802
|
|
1,441
|
|
3,417
|
|
|
Proceeds from
sales and maturities of short-term investments
|
|
125,063
|
|
60,625
|
|
|
|
|
Purchases of
short-term investments
|
|
|
|
(185,688
|
)
|
|
|
|
Cash used for
investing activities
|
|
(233,984
|
)
|
(409,112
|
)
|
(393,591
|
)
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Net borrowings
(repayments) of notes payable
|
|
(47,712
|
)
|
96,683
|
|
(17,474
|
)
|
|
Long-term debt
borrowings
|
|
396,150
|
|
4,664
|
|
7,325
|
|
|
Long-term debt
repayments
|
|
(86,287
|
)
|
(5,710
|
)
|
(6,632
|
)
|
|
Reacquired
shares
|
|
(282,764
|
)
|
(213,266
|
)
|
(165,414
|
)
|
|
Cash dividends
on common stock
|
|
(101,174
|
)
|
(89,807
|
)
|
(82,419
|
)
|
|
Exercise of
employee stock options
|
|
87,946
|
|
49,726
|
|
59,989
|
|
|
Excess tax
benefits from share-based payment arrangements
|
|
19,763
|
|
11,682
|
|
11,556
|
|
|
Other, net
|
|
(2,283
|
)
|
|
|
(800
|
)
|
|
Cash used for
financing activities
|
|
(16,361
|
)
|
(146,028
|
)
|
(193,869
|
)
|
|
|
|
|
|
|
|
|
|
|
Effect of
exchange rate changes on cash
|
|
2,432
|
|
(1,849
|
)
|
2,157
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
379,651
|
|
33,147
|
|
(14,395
|
)
|
|
Cash and cash
equivalents, beginning of year
|
|
104,378
|
|
71,231
|
|
85,626
|
|
|
Cash and cash
equivalents, end of year
|
|
$
|
484,029
|
|
$
|
104,378
|
|
$
|
71,231
|
|
The accompanying
notes are an integral part of the consolidated financial statements.
29
Consolidated Statement of Comprehensive Income and
Shareholders' Equity
|
|
|
|
|
|
|
|
|
ACCUMULATED
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL
|
|
|
|
OTHER
|
|
|
|
|
|
|
|
|
COMMON
|
|
PAID-IN
|
|
RETAINED
|
|
COMPREHENSIVE
|
|
TREASURY
|
|
|
|
|
(THOUSANDS)
|
|
STOCK
|
|
CAPITAL
|
|
EARNINGS
|
|
INCOME (LOSS)
|
|
STOCK
|
|
TOTAL
|
|
|
Balance December
31, 2003
|
|
$
|
310,284
|
|
$
|
459,974
|
|
$
|
1,294,165
|
|
$
|
4,098
|
|
$
|
(747,440
|
)
|
$
|
1,321,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
282,693
|
|
|
|
|
|
282,693
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
71,029
|
|
|
|
71,029
|
|
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
(2,674
|
)
|
|
|
(2,674
|
)
|
|
Minimum pension
liability
|
|
|
|
|
|
|
|
(293
|
)
|
|
|
(293
|
)
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
350,755
|
|
|
Cash dividends
declared
|
|
|
|
|
|
(84,410
|
)
|
|
|
|
|
(84,410
|
)
|
|
Stock options and
awards
|
|
3,624
|
|
115,238
|
|
|
|
|
|
118
|
|
118,980
|
|
|
Business
acquisitions
|
|
1,835
|
|
55,314
|
|
|
|
|
|
|
|
57,149
|
|
|
Reacquired shares
|
|
|
|
|
|
|
|
|
|
(165,414
|
)
|
(165,414
|
)
|
|
Balance December
31, 2004
|
|
315,743
|
|
630,526
|
|
1,492,448
|
|
72,160
|
|
(912,736
|
)
|
1,598,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
319,481
|
|
|
|
|
|
319,481
|
|
|
Foreign currency
translation
|
|
|
|
|
|
|
|
(50,516
|
)
|
|
|
(50,516
|
)
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
4,365
|
|
|
|
4,365
|
|
|
Minimum pension
liability
|
|
|
|
|
|
|
|
(16,245
|
)
|
|
|
(16,245
|
)
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
257,085
|
|
|
Cash dividends
declared
|
|
|
|
|
|
(92,728
|
)
|
|
|
|
|
(92,728
|
)
|
|
Stock options and
awards
|
|
2,860
|
|
96,902
|
|
|
|
|
|
216
|
|
99,978
|
|
|
Reacquired shares
|
|
|
|
|
|
|
|
|
|
(213,266
|
)
|
(213,266
|
)
|
|
Balance December
31, 2005
|
|
318,603
|
|
727,428
|
|
1,719,201
|
|
9,764
|
|
(1,125,786
|
)
|
1,649,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
368,615
|
|
|
|
|
|
368,615
|
|
|
Foreign currency
translation
|
|
|
|
|
|
|
|
65,776
|
|
|
|
65,776
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
(3,352
|
)
|
|
|
(3,352
|
)
|
|
Minimum pension
liability
|
|
|
|
|
|
|
|
(617
|
)
|
|
|
(617
|
)
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
430,422
|
|
|
Cumulative effect
adjustment for adoption of SFAS 158
|
|
|
|
|
|
|
|
(168,083
|
)
|
|
|
(168,083
|
)
|
|
Cash dividends
declared
|
|
|
|
|
|
(104,544
|
)
|
|
|
|
|
(104,544
|
)
|
|
Stock options and
awards
|
|
3,975
|
|
140,745
|
|
|
|
|
|
960
|
|
145,680
|
|
|
Reacquired shares
|
|
|
|
|
|
|
|
|
|
(272,455
|
)
|
(272,455
|
)
|
|
Balance December 31,
2006
|
|
$
|
322,578
|
|
$
|
868,173
|
|
$
|
1,983,272
|
|
$
|
(96,512
|
)
|
$
|
(1,397,281
|
)
|
$
|
1,680,230
|
|
COMMON
STOCK ACTIVITY
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
COMMON
|
|
TREASURY
|
|
COMMON
|
|
TREASURY
|
|
COMMON
|
|
TREASURY
|
|
|
YEAR ENDED DECEMBER 31 (SHARES)
|
|
STOCK
|
|
STOCK
|
|
STOCK
|
|
STOCK
|
|
STOCK
|
|
STOCK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares, beginning
of year
|
|
318,602,705
|
|
(64,459,800
|
)
|
315,742,759
|
|
(58,200,908
|
)
|
310,284,083
|
|
(52,867,561
|
)
|
|
Stock options
|
|
3,975,722
|
|
172,665
|
|
2,859,946
|
|
18,666
|
|
3,623,917
|
|
1,200
|
|
|
Stock awards, net
issuances
|
|
|
|
49,519
|
|
|
|
34,689
|
|
|
|
24,460
|
|
|
Business
acquisitions
|
|
|
|
|
|
|
|
|
|
1,834,759
|
|
|
|
|
Reacquired shares
|
|
|
|
(7,003,944
|
)
|
|
|
(6,312,247
|
)
|
|
|
(5,359,007
|
)
|
|
Shares, end of year
|
|
322,578,427
|
|
(71,241,560
|
)
|
318,602,705
|
|
(64,459,800
|
)
|
315,742,759
|
|
(58,200,908
|
)
|
The accompanying
notes are an integral part of the consolidated financial statements.
30
Notes to Consolidated Financial Statements
1. NATURE OF BUSINESS
Ecolab Inc. (the “company”)
develops and markets premium products and services for the hospitality,
foodservice, healthcare and industrial markets.
The company provides cleaning and sanitizing products and programs, as
well as pest elimination, maintenance and repair 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
and the vehicle wash industry.
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 company’s consolidated financial
reporting. All intercompany transactions and profits are eliminated in
consolidation.
USE
OF ESTIMATES
The preparation of
the company’s financial statements requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ from these estimates.
FOREIGN
CURRENCY TRANSLATION
Financial position
and results of operations of the company’s 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 2006, 2005
and 2004 was $57.0 million, $8.1 million and $87.1 million, respectively.
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 company’s international
operations. Foreign currency translation positively impacted net income by
approximately $2 million, $5 million and $11 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
RECLASSIFICATION
Capitalized
software has been reclassified on the company’s balance sheet from Other Assets to Property,
Plant and Equipment. Prior period balance sheet amounts have also been
reclassified to conform to the current year presentation. Net capitalized
software was $54.7 million and $32.6 million at December 31, 2006 and 2005,
respectively.
CASH
AND CASH EQUIVALENTS
Cash equivalents
include highly-liquid investments with a maturity of three months or less when
purchased.
SHORT-TERM
INVESTMENTS
Short-term
investments at December 31, 2005 consist solely of auction-rate debt securities
classified as available-for-sale, which are stated at estimated fair value. All
of these securities held by the company as of December 31, 2005 have auction
reset periods of 35 days or less and the carrying value approximates market
value given the short reset periods. These investments were sold in the first
quarter of 2006. No unrealized or realized gains or losses were recognized
related to short-term investments during the years ended December 31, 2006 and
2005.
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 company’s allowance
for doubtful accounts balance includes an allowance for the expected return of
products shipped and credits related to pricing or quantities shipped of
approximately $6 million and $5 million as of December 31, 2006 and 2005,
respectively. This returns and credit activity is recorded directly to sales.
The following
table summarizes the activity in the allowance for doubtful accounts:
|
THOUSANDS
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
38,851
|
|
$
|
44,199
|
|
|
Bad debt expense
|
|
12,947
|
|
11,589
|
|
|
Write-offs
|
|
(17,483
|
)
|
(14,743
|
)
|
|
Other*
|
|
3,304
|
|
(2,194
|
)
|
|
Ending balance
|
|
$
|
37,619
|
|
$
|
38,851
|
|
*
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
28 percent and 32 percent of consolidated inventories at year-end 2006 and
2005, 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 company’s 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. The company capitalizes both internal and
external costs of development or purchase of computer software for internal
use. Costs incurred for data conversion, training and maintenance associated
with capitalized software are expensed as incurred.
Depreciation is
charged to operations using the straight-line method over the assets’ estimated
useful lives ranging from 5 to 50 years for buildings and leaseholds, 3 to 11
years for machinery and equipment and 3 to 7 years for merchandising equipment
and capital software.
31
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 primarily include 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 14 years as of December 31, 2006 and 2005.
The
weighted-average useful life by type of asset at December 31, 2006 is as
follows:
|
|
|
Number of Years
|
|
|
Customer
relationships
|
|
12
|
|
|
Intellectual
property
|
|
15
|
|
|
Trademarks
|
|
20
|
|
|
Other
|
|
7
|
|
The straight-line
method of amortization reflects an appropriate allocation of the cost of the
intangible assets to earnings in proportion to the amount of economic benefits
obtained by the company in each reporting period. Total amortization expense
related to other intangible assets during the years ended December 31, 2006,
2005 and 2004 was approximately $25.0 million, $23.5 million and $21.7 million,
respectively. As of December 31, 2006, future estimated amortization expense
related to amortizable other identifiable intangible assets will be:
|
thousands
|
|
|
|
|
2007
|
|
$
|
28,000
|
|
|
2008
|
|
28,000
|
|
|
2009
|
|
26,000
|
|
|
2010
|
|
24,000
|
|
|
2011
|
|
23,000
|
|
|
|
|
|
|
|
The company tests
goodwill for impairment on an annual basis for all reporting units. Generally,
the company’s reporting units are its operating segments. 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 are established
using a discounted cash flow method. Where available and as appropriate
comparative market multiples are used to corroborate the results of the
discounted cash flow method. Based on the company’s testing, there has been no
impairment of goodwill during the three years ended December 31, 2006. The
company performs its annual goodwill impairment test during the second quarter.
If circumstances change significantly within a reporting unit, the company
would also test a reporting unit for impairment prior to the annual test.
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 may be
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 asset’s carrying value over its fair value.
REVENUE
RECOGNITION
The company
recognizes revenue as services are performed or on product sales at the time
title to the product and risk of loss transfers to the customer. The company’s
sales policies do not provide for general rights of return and do not contain
customer acceptance clauses. Trade accounts receivable are recorded at the
invoiced amount and generally 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 net income per share amounts were as follows:
|
thousands, except per share
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
368,615
|
|
$
|
319,481
|
|
$
|
282,693
|
|
|
Weighted-average
common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
252,132
|
|
255,741
|
|
257,575
|
|
|
Effect of dilutive stock options and awards
|
|
5,012
|
|
4,357
|
|
2,832
|
|
|
Diluted
|
|
257,144
|
|
260,098
|
|
260,407
|
|
|
Net income per
common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.46
|
|
$
|
1.25
|
|
$
|
1.10
|
|
|
Diluted
|
|
$
|
1.43
|
|
$
|
1.23
|
|
$
|
1.09
|
|
Restricted stock awards of 24,670 shares for 2006,
22,175 shares for 2005 and 62,300 shares for 2004 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 2.6 million shares for 2006, 7.1 million shares for 2005
and 4.2 million shares for 2004 were not dilutive and, therefore, were not
included in the computations of diluted common shares outstanding.
SHARE-BASED
COMPENSATION
Effective October
1, 2005, the company early-adopted Statement of Financial Accounting Standard
No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”) under the modified
retrospective application method. SFAS 123R requires the company to measure
compensation expense for share-based awards at fair value at the date of grant
and recognize compensation expense over the service period for awards expected
to vest. As part of the transition to the new standard, all prior period
financial statements were restated to recognize share-based compensation
expense historically reported in the notes to the consolidated financial
statements.
Effective with the
company’s adoption of SFAS 123R, new stock option grants to retirement eligible
recipients are attributed to
32
expense using the
non-substantive vesting method and are fully expensed by the time recipients
attain age 55 with at least 5 years of service. If the company had used the
non-substantive vesting method during all periods, net income for 2006, 2005
and 2004 would have increased by approximately $2.7 million, $2.5 million and
$5.2 million, respectively. In addition, the company previously accounted for
forfeitures when they occurred. Commencing at the date of adoption, the company
includes a forfeiture estimate in the amount of compensation expense being
recognized. This change from the company’s historical practice of recognizing
forfeitures as they occur did not result in the recognition of any cumulative
adjustments to income. The company has used the actual tax effects of stock
options and the transition guidance prescribed within SFAS 123R for
establishing the pool of excess tax benefits (APIC Pool).
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 hedge’s 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.
All of the company’s 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.
NEW
ACCOUNTING PRONOUNCEMENTS
In September 2006,
the FASB issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans — an amendment of FASB statements 87, 88, 106
and 132(R)” (“SFAS 158”). SFAS 158 requires the company to recognize on its
balance sheet the funded status of the company’s defined benefit pension and
post-retirement plans. SFAS 158 also requires that all benefit plans use the company’s
fiscal year-end as its measurement date. As required, the company prospectively
adopted SFAS 158 beginning with its 2006 year end. The effect of initially
adopting SFAS 158 is reflected as a cumulative adjustment to Accumulated Other Comprehensive
Income (Loss) net of applicable taxes in the year of adoption. The impact of
adopting SFAS 158 is reflected as a reduction in net assets on the company’s
balance sheet of $168 million, with no impact to the statement of income and
cash flows. See Note 15 for additional information.
In September 2006,
the FASB issued SFAS 157, “Fair Value Measurement”, which defines fair value,
establishes a framework for measuring fair value and expanded disclosures about
fair value measurement. Companies are required to adopt the new standard for
fiscal periods beginning after November 15, 2007. The company is evaluating the
impact of this standard and does not expect it will have a material impact on
its consolidated financial statements.
In July 2006, the
FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting
for uncertain tax positions in accordance with FASB Statement No. 109, “Accounting
for Income Taxes”. For each tax position the company will be required to
recognize, in its financial statements, the largest tax benefit that is “more-likely-than-not”
to be sustained on audit based solely on the technical merits of the position
as of the reporting date. FIN 48 also provides guidance on new disclosure
requirements, reporting and accrual of interest and penalties, accounting in
interim periods, and transition. FIN 48 is effective beginning January 1, 2007
with the cumulative effect of initially applying FIN 48 recognized as a change
in accounting principle recorded as an adjustment to opening retained earnings.
The company does not expect the impact of adoption to be material to the
company’s consolidated financial statements.
No other new
accounting pronouncement issued or effective has had or is expected to have a
material impact on the company’s consolidated financial statements.
3. SPECIAL CHARGES
Special charges in
2004 included a charge of $1.6 million for inprocess research and development
related to the Alcide acquisition and a charge of $4.0 million on the disposal
of a grease management product line, which were partially offset by $0.8
million of income for reductions in restructuring accruals and a $0.3 million
gain on the sale of a small international business. For segment reporting
purposes, these items have been included in the company’s corporate segment,
which is consistent with the company’s internal management reporting.
4.
RELATED PARTY TRANSACTIONS
Henkel KGaA (“Henkel”)
beneficially owned 72.7 million shares, or approximately 28.9 percent, of the
company’s outstanding common stock on December 31, 2006. Under a stockholders’ agreement between the company
and Henkel, Henkel is permitted ownership in the company of up to 35 percent of
the company’s outstanding common stock. Henkel is also entitled to proportionate
representation on the company’s board of directors.
33
In 2006, 2005 and 2004, the company and its affiliates sold products and
services in the aggregate amounts of $5.7 million, $3.6 million and $3.2
million, respectively, to Henkel or its affiliates, and purchased products and
services in the amounts of $66.0 million, $65.3 million and $70.9 million,
respectively, from Henkel or its affiliates. The transactions with Henkel and
its affiliates were made in the ordinary course of business and were negotiated
at arm’s length.
5.
BUSINESS ACQUISITIONS AND DISPOSITIONS
BUSINESS ACQUISITIONS
Business acquisitions made by the company during 2006, 2005 and 2004
were as follows:
|
|
|
|
|
|
|
ESTIMATED
|
|
|
|
|
|
|
|
|
ANNUAL SALES
|
|
|
BUSINESS
|
|
DATE OF
|
|
|
|
PRIOR TO
|
|
|
ACQUIRED
|
|
ACQUISITION
|
|
SEGMENT
|
|
ACQUISITION
|
|
|
|
|
|
|
|
|
(MILLIONS)
|
|
|
|
|
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
Shield Medicare Ltd.
|
|
June
2006
|
|
International
(Europe)
|
|
$19
|
|
|
|
DuChem Industries, Inc.
|
|
Sept.
2006
|
|
U.S.
C&S
(Food & Beverage)
|
|
10
|
|
|
|
Powles Hunt & Sons
International Ltd.
|
|
Sept.
2006
|
|
International
(Europe)
|
|
5
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Associated Chemicals
& Services, Inc.
(Aka Midland Research)
|
|
Jan.
2005
|
|
U.S.
C&S (Water Care)
|
|
16
|
|
|
|
YSC Chemical Company
|
|
Feb.
2005
|
|
International
(Asia Pacific)
|
|
3
|
|
|
|
Kilco Chemicals Ltd.
|
|
Apr.
2005
|
|
International
(Europe)
|
|
5
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
Nigiko
|
|
Jan.
2004
|
|
International
(Europe)
|
|
55
|
|
|
|
Daydots International
|
|
Feb.
2004
|
|
U.S.
C&S
(Institutional)
|
|
22
|
|
|
|
Elimco
|
|
May
2004
|
|
International
(Europe)
|
|
4
|
|
|
|
Restoration and
Maintenance unit of VIC International
|
|
June
2004
|
|
U.S.
C&S
(Professional Products)
|
|
5
|
|
|
|
Alcide Corporation
|
|
July 2004
|
|
U.S. C&S
(Food & Beverage)
|
|
24
|
|
|
The total cash consideration paid by the company for acquisitions and
investments in affiliates was approximately $66 million, $27 million and $130
million for 2006, 2005 and 2004, respectively. In addition, 1,834,759 shares of
common stock were issued with a market value of $57 million in the Alcide
acquisition in 2004, plus $23,000 of cash in lieu of fractional shares. Total
cash paid in 2004 also includes payments of restructuring costs related to the
acquisition of the remaining 50 percent interest in 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 company’s
consolidated financial statements, therefore pro forma financial information is
not presented.
Based upon purchase price allocations, the components of the aggregate
purchase prices of the acquisitions made were as follows:
|
MILLIONS
|
|
2006
|
|
2005
|
|
2004
|
|
|
Net tangible
assets acquired (liabilities assumed)
|
|
$
|
(6
|
)
|
$
|
—
|
|
$
|
14
|
|
|
Identifiable
intangible assets
|
|
28
|
|
8
|
|
44
|
|
|
In-process
research and development
|
|
|
|
|
|
2
|
|
|
Goodwill
|
|
44
|
|
19
|
|
127
|
|
|
Purchase price
|
|
$
|
66
|
|
$
|
27
|
|
$
|
187
|
|
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 appraiser’s 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.
34
The changes in the carrying amount of goodwill for each of the company’s
reportable segments for the years ended December 31, 2006, 2005 and 2004 are as
follows:
|
THOUSANDS
|
|
U.S.
CLEANING &
SANITIZING
|
|
U.S.
OTHER
SERVICES
|
|
TOTAL
U.S.
|
|
INTERNATIONAL
|
|
CONSOLIDATED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Goodwill acquired during year*
|
|
12,639
|
|
595
|
|
13,234
|
|
6,162
|
|
19,396
|
|
|
Goodwill allocated to business dispositions
|
|
(130
|
)
|
|
|
(130
|
)
|
(376
|
)
|
(506
|
)
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
(73,682
|
)
|
(73,682
|
)
|
|
Balance December
31, 2005
|
|
189,722
|
|
49,524
|
|
239,246
|
|
697,773
|
|
937,019
|
|
|
Goodwill acquired during year*
|
|
7,346
|
|
990
|
|
8,336
|
|
35,713
|
|
44,049
|
|
|
Goodwill allocated to business dispositions
|
|
|
|
|
|
|
|
(423
|
)
|
(423
|
)
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
55,284
|
|
55,284
|
|
|
Balance December 31, 2006
|
|
$
|
197,068
|
|
$
|
50,514
|
|
$
|
247,582
|
|
$
|
788,347
|
|
$
|
1,035,929
|
|
*
For
2006, 2005 and 2004, goodwill related to businesses acquired of $7.7 million,
$3.5 million and $92.8 million, respectively, is expected to be tax deductible.
Goodwill acquired in 2006, 2005 and 2004 also includes adjustments to prior
year acquisitions.
BUSINESS DISPOSITIONS
The company had no significant business dispositions in 2006 or 2005. In
April 2004, the company sold its grease management product line. 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 company’s U.S. Cleaning & Sanitizing
operations. In 2004, 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.
6. BALANCE SHEET INFORMATION
|
December 31 (thousands)
|
|
2006
|
|
2005
|
|
|
Accounts
Receivable, Net
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
905,160
|
|
$
|
782,371
|
|
|
Allowance for
doubtful accounts
|
|
(37,619
|
)
|
(38,851
|
)
|
|
Total
|
|
$
|
867,541
|
|
$
|
743,520
|
|
|
Inventories
|
|
|
|
|
|
|
Finished goods
|
|
$
|
199,516
|
|
$
|
177,574
|
|
|
Raw materials
and parts
|
|
180,619
|
|
161,488
|
|
|
Excess of fifo
cost over lifo cost
|
|
(15,249
|
)
|
(13,488
|
)
|
|
Total
|
|
$
|
364,886
|
|
$
|
325,574
|
|
|
Property,
Plant and Equipment, Net
|
|
|
|
|
|
|
Land
|
|
$
|
30,851
|
|
$
|
32,164
|
|
|
Buildings and
leaseholds
|
|
306,775
|
|
283,487
|
|
|
Machinery and
equipment
|
|
630,821
|
|
617,408
|
|
|
Merchandising
equipment
|
|
1,204,716
|
|
1,072,853
|
|
|
Capitalized
software
|
|
72,904
|
|
68,062
|
|
|
Construction in
progress
|
|
72,139
|
|
42,244
|
|
|
|
|
2,318,206
|
|
2,116,218
|
|
|
Accumulated
depreciation
|
|
(1,366,637
|
)
|
(1,248,165
|
)
|
|
Total
|
|
$
|
951,569
|
|
$
|
868,053
|
|
|
Other
Intangible Assets, Net
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
217,423
|
|
$
|
176,778
|
|
|
Intellectual property
|
|
45,569
|
|
41,887
|
|
|
Trademarks
|
|
73,216
|
|
63,933
|
|
|
Other intangibles
|
|
11,624
|
|
7,459
|
|
|
|
|
347,832
|
|
290,057
|
|
|
Accumulated
amortization
|
|
|
|
|
|
|
Customer relationships
|
|
(80,153
|
)
|
(55,328
|
)
|
|
Intellectual property
|
|
(17,254
|
)
|
(9,901
|
)
|
|
Trademarks
|
|
(23,542
|
)
|
(16,523
|
)
|
|
Other intangibles
|
|
(3,096
|
)
|
(5,369
|
)
|
|
Total
|
|
$
|
223,787
|
|
$
|
202,936
|
|
|
Other
Assets, Net
|
|
|
|
|
|
|
Deferred income
taxes
|
|
$
|
176,184
|
|
$
|
42,618
|
|
|
Pension
|
|
37,591
|
|
201,078
|
|
|
Sole supply fees
|
|
67,423
|
|
61,632
|
|
|
Other
|
|
73,325
|
|
61,626
|
|
|
Total
|
|
$
|
354,523
|
|
$
|
366,954
|
|
|
Short-Term
Debt
|
|
|
|
|
|
|
Notes payable
|
|
$
|
109,100
|
|
$
|
146,725
|
|
|
Long-term debt,
current maturities
|
|
399,878
|
|
80,202
|
|
|
Total
|
|
$
|
508,978
|
|
$
|
226,927
|
|
|
Other
Current Liabilities
|
|
|
|
|
|
|
Discounts and
rebates
|
|
$
|
190,434
|
|
$
|
152,774
|
|
|
Dividends
payable
|
|
28,930
|
|
25,526
|
|
|
Other
|
|
173,146
|
|
182,781
|
|
|
Total
|
|
$
|
392,510
|
|
$
|
361,081
|
|
|
Long-Term
Debt
|
|
|
|
|
|
|
4.355% series A
senior notes, due 2013
|
|
$
|
165,062
|
|
$
|
—
|
|
|
4.585% series B
senior notes, due 2016
|
|
231,088
|
|
—
|
|
|
6.875% notes,
due 2011
|
|
149,356
|
|
149,356
|
|
|
5.375%
euronotes, due 2007
|
|
397,415
|
|
355,246
|
|
|
7.19% senior
notes, due 2006
|
|
—
|
|
74,673
|
|
|
Other
|
|
14,015
|
|
20,301
|
|
|
|
|
956,936
|
|
599,576
|
|
|
Long-term debt,
current maturities
|
|
(399,878
|
)
|
(80,202
|
)
|
|
Total
|
|
$
|
557,058
|
|
$
|
519,374
|
|
|
Other
Liabilities
|
|
|
|
|
|
|
Deferred income
taxes
|
|
$
|
92,478
|
|
$
|
80,760
|
|
|
Income taxes
payable — noncurrent
|
|
66,202
|
|
43,695
|
|
|
Other
|
|
100,422
|
|
82,184
|
|
|
Total
|
|
$
|
259,102
|
|
$
|
206,639
|
|
35
The company has a
$450 million multicurrency credit agreement with a consortium of banks that has
a term through June 1, 2011. Under certain circumstances, this credit agreement
can be increased by $150 million for a total of $600 million. 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. Effective June 1, 2006, the credit agreement was
amended and restated by, among other things, deleting the financial covenant
regarding total debt to capitalization, increasing the lien basket from $75
million to $100 million and extending the term of the agreement from August
2009 to June 2011. No amounts were outstanding under this agreement at year-end
2006 and 2005.
The multicurrency
credit agreement supports the company’s $450 million U.S. commercial paper
program and its $200 million European commercial paper program. The company had
$30.3 million in outstanding U.S. commercial paper at December 31, 2006, with
an average annual interest rate of 5.3 percent. There was no U.S. commercial
paper outstanding at December 31, 2005. The company had $88.2 million in
outstanding European commercial paper at December 31, 2005, with an average
annual interest rate of 2.4 percent. The company had no commercial paper
outstanding under its European commercial paper program at December 31, 2006.
Both programs were rated A-1 by Standard & Poor’s and P-1 by Moody’s as of
December 31, 2006.
In December 2006,
the company issued and sold in a private placement 300 million euro ($396
million as of December 31, 2006) aggregate principal amount of the company’s
senior notes in two series: 4.355% Series A Senior Notes due 2013 in the
aggregate principal amount of 125 million euro and 4.585% Series B Senior Notes
due 2016 in the aggregate principal amount of 175 million euro, pursuant to a
Note Purchase Agreement dated July 26, 2006, between the company and the
purchasers. The company used the proceeds to repay its euro 300 million ($396
million as of December 31, 2006) 5.375 percent euronotes which became due in
February 2007.
In January 2006, the company repaid the $75 million
7.19% senior notes which were due January 2006.
As of December 31,
the weighted-average interest rate on notes payable was 6.0 percent in 2006,
3.9 percent in 2005 and 5.7 percent in 2004.
As of December 31,
2006, the aggregate annual maturities of long-term debt for the next five years
were:
|
thousands
|
|
|
|
2007
|
|
$399,878
|
|
|
2008
|
|
2,830
|
|
|
2009
|
|
1,645
|
|
|
2010
|
|
1,277
|
|
|
2011
|
|
150,711
|
|
7. INTEREST
Interest expense was $51.3 million in 2006, $49.8 million in 2005 and
$48.5 million in 2004. Interest income was $6.9 million in 2006, $5.6 million
in 2005 and $3.2 million in 2004. Total interest paid was $50.6 million in
2006, $49.4 million in 2005 and $47.0 million in 2004.
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 company’s European operations and are denominated in euros. The company had
foreign currency forward exchange contracts that totaled approximately $375
million at December 31, 2006, $395 million at December 31, 2005 and $239
million at December 31, 2004. 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, 2006, other comprehensive income includes a cumulative loss of
$1.3 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 May 2006, the
company entered into two forward starting interest rate swap agreements in
connection with the senior note private placement offering that convert euro
250 million (euro 125 million due December 2013 and euro 125 million due
December 2016) of the private placement funding from a variable interest rate
to a fixed interest rate. The interest rate swap agreements were designated as,
and effective as a cash flow hedge of the private placement offering. In June
2006 the company closed the swap agreements. The decline in fair value of $2.1
million, net of tax, was recorded in other comprehensive income and will be
recognized in earnings as part of interest expense as the forecasted transactions
occur.
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 $103 million at year-end 2006) 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 $1.7 million, $4.0 million and $7.0 million as of
December 31, 2006, 2005 and 2004, 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.
NET
INVESTMENT HEDGES
The company designated all euro 300 million 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
that are designated and effective as hedges of the company’s net investments
have been included as a component of the cumulative translation account within
accumulated other comprehensive income (loss). Total transaction gains and
losses related to the euronotes and charged to this shareholders’ equity
account were a loss of $44.8 million in 2006, a gain of $45.7 million for 2005
and a loss of $39.6 million for 2004.
36
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.
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)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Carrying amount
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
484,029
|
|
$
|
104,378
|
|
|
Short-term investments
|
|
|
|
125,063
|
|
|
Accounts receivable
|
|
867,541
|
|
743,520
|
|
|
Notes payable
|
|
78,850
|
|
58,525
|
|
|
Commercial paper
|
|
30,250
|
|
88,200
|
|
|
Long-term debt (including current maturities)
|
|
956,936
|
|
599,576
|
|
|
Fair value
|
|
|
|
|
|
|
Long-term debt (including
current maturities)
|
|
$
|
967,020
|
|
$
|
623,040
|
|
The carrying amounts of cash equivalents, short-term investments, 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.
9.
SHAREHOLDERS’ EQUITY
Authorized common stock, par value $1.00 per share, was 400 million
shares in 2006, 2005 and 2004. Treasury stock is stated at cost. Dividends
declared per share of common stock were $0.4150 for 2006, $0.3625 for 2005 and
$0.3275 for 2004.
The company has 15
million shares, without par value, of authorized but unissued preferred stock.
Of these 15 million shares, 0.4 million shares were designated as Series A
Junior Participating Preferred Stock and 14.6 million shares were undesignated.
In February 2006,
the company’s Board of Directors authorized the renewal of the company’s
shareholder rights plan. Under the company’s renewed shareholder rights plan,
one preferred stock purchase right is issued for each outstanding share of the
company’s common stock. A right entitles the holder, upon occurrence of certain
events, to buy one one-thousandth of a share of Series A Junior Participating
Preferred Stock at a purchase price of $135, subject to adjustment. The rights,
however, do not become exercisable unless and until, among other things, any
person or group acquires 15 percent or more of the outstanding common stock of
the company, or the company’s board of directors declares a holder of 10
percent or more of the outstanding common stock to be an “adverse person” as defined
in the rights plan. Upon the occurrence of either of these events, the rights
will become exercisable for common stock of the company (or in certain cases
common stock of an acquiring company) having a market value of twice the
exercise price of a right. The rights provide that the holdings by Henkel KGaA
or its affiliates at the time of the renewal of the rights plan, 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 10, 2016.
The company reacquired 6,875,400 shares of its common stock in 2006,
5,974,300 shares in 2005 and 4,581,400 shares in 2004 through open and private
market purchases. The company also reacquired 128,544 shares, 337,947 shares
and 777,607 shares of its common stock in 2006, 2005 and 2004, respectively,
related to the exercise of stock options and the vesting of stock awards. In
December 2004, the company’s Board of Directors authorized the repurchase of up
to 10 million shares of the company’s common stock, including shares to be
repurchased under Rule 10b5-1. In October 2006, the company’s Board of Directors
authorized the repurchase of up to 10 million additional shares of common
stock, including shares to be repurchased under Rule 10b5-1. Shares are
repurchased to offset the dilutive effect of stock options and incentives and
for general corporate purposes. As of December 31, 2006, 12,926,000 shares
remained to be purchased under the company’s repurchase authority. The company
intends to repurchase all shares under this authorization, for which no
expiration date has been established, in open market or privately negotiated
transactions, subject to market conditions. The company expects to repurchase
at least enough shares during 2007 to offset the dilutive effect of stock
options, based on estimates of stock option exercises for 2007. Cash proceeds
from the exercises as well as the tax benefits will provide a portion of the
funding for this repurchase activity.
10. STOCK
INCENTIVE AND OPTION PLANS
The company’s 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 11,689,435 for 2006, 12,748,989 for 2005 and
4,216,012 for 2004. Common shares available for grant reflect 12 million shares
approved by shareholders in 2005 for issuance under the plans.
Almost all of the awards granted are non-qualified stock options granted
to employees that vest annually in equal amounts over a three year service
period. Options are granted to purchase shares of the company’s stock at the
average daily share price on the date of grant. These options generally expire
within ten years from the grant date. The company recognizes compensation
expense for these awards on a straight-line basis over the three year vesting
period, in accordance with SFAS 123R. Upon adoption of SFAS 123R, new stock
option grants to retirement eligible recipients are attributed to expense using
the non-substantive vesting method.
37
A summary of stock option activity and average exercise prices is as
follows:
|
SHARES
|
|
2006
|
|
2005
|
|
2004
|
|
|
Granted
|
|
2,669,223
|
|
3,862,966
|
|
4,876,408
|
|
|
Exercised
|
|
(4,215,387
|
)
|
(2,878,612
|
)
|
(3,625,117
|
)
|
|
Canceled
|
|
(368,984
|
)
|
(148,568
|
)
|
(386,512
|
)
|
|
December 31:
|
|
|
|
|
|
|
|
|
Outstanding
|
|
21,653,143
|
|
23,568,291
|
|
22,732,505
|
|
|
Exercisable
|
|
15,804,403
|
|
16,461,958
|
|
15,332,623
|
|
|
AVERAGE
PRICE PER SHARE
|
|
2006
|
|
2005
|
|
2004
|
|
|
Granted
|
|
$
|
44.93
|
|
$
|
33.93
|
|
$
|
33.49
|
|
|
Exercised
|
|
21.57
|
|
17.27
|
|
16.55
|
|
|
Canceled
|
|
33.36
|
|
29.03
|
|
24.81
|
|
|
December 31:
|
|
|
|
|
|
|
|
|
Outstanding
|
|
29.74
|
|
26.61
|
|
24.20
|
|
|
Exercisable
|
|
26.36
|
|
23.87
|
|
21.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total
intrinsic value of options (the amount by which the stock price exceeded the
exercise price of the option on the date of exercise) that were exercised
during 2006, 2005 and 2004 was $80.2 million, $45.3 million and $53.8 million,
respectively.
Information
related to stock options outstanding and stock options exercisable as of
December 31, 2006, is as follows:
|
OPTIONS OUTSTANDING
|
|
|
RANGE OF
|
|
|
|
WEIGHTED-
AVERAGE
|
|
WEIGHTED-
AVERAGE
|
|
|
EXERCISE
|
|
OPTIONS
|
|
REMAINING
|
|
EXERCISE
|
|
|
PRICES
|
|
OUTSTANDING
|
|
CONTRACTURAL LIFE
|
|
PRICE
|
|
|
$10.95-19.27
|
|
3,542,308
|
|
4.0
years
|
|
$
|
18.62
|
|
|
$19.72-24.90
|
|
3,880,787
|
|
5.4
years
|
|
23.67
|
|
|
$25.21-30.58
|
|
4,119,915
|
|
7.0
years
|
|
27.52
|
|
|
$31.29-34.08
|
|
4,374,642
|
|
8.7
years
|
|
33.86
|
|
|
$34.26-34.50
|
|
3,049,590
|
|
7.9
years
|
|
34.50
|
|
|
$35.26-46.05
|
|
2,685,633
|
|
9.9
years
|
|
44.92
|
|
|
$93.42*
|
|
268
|
|
0.8
years
|
|
93.42
|
|
|
|
|
21,653,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Includes 268
shares of Ecolab’s common stock subject to stock options which Ecolab assumed
in connection with the acquisition of Alcide Corporation in June 2004.
|
OPTIONS EXERCISABLE
|
|
|
RANGE OF
|
|
|
|
WEIGHTED-
AVERAGE
|
|
WEIGHTED-
AVERAGE
|
|
|
EXERCISE
|
|
OPTIONS
|
|
REMAINING
|
|
EXERCISE
|
|
|
PRICES
|
|
EXERCISABLE
|
|
CONTRACTURAL LIFE
|
|
PRICE
|
|
|
$10.95-19.27
|
|
3,542,308
|
|
4.0
years
|
|
$
|
18.62
|
|
|
$19.72-24.90
|
|
3,880,787
|
|
5.4
years
|
|
23.67
|
|
|
$25.21-30.58
|
|
4,054,239
|
|
7.0
years
|
|
27.49
|
|
|
$31.29-34.08
|
|
2,145,597
|
|
8.5
years
|
|
33.68
|
|
|
$34.26-34.50
|
|
2,031,021
|
|
7.9
years
|
|
34.50
|
|
|
$35.26-46.05
|
|
150,183
|
|
9.4
years
|
|
41.08
|
|
|
$93.42*
|
|
268
|
|
0.8
years
|
|
93.42
|
|
|
|
|
15,804,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Includes
268 shares of Ecolab’s common stock subject to stock options which Ecolab
assumed in connection with the acquisition of Alcide Corporation in June 2004.
The total
aggregate intrinsic value of options outstanding and options exercisable as of
December 31, 2006 was $336.7 million and $299.1 million, respectively.
The lattice
(binomial) option-pricing model was used to estimate the fair value of options
at grant date beginning in the fourth quarter of 2005. The company’s primary
employee option grant occurs during the fourth quarter. Prior to adoption of
SFAS 123R, the Black-Scholes option-pricing model was used. The weighted-average
grant-date fair value of options granted in 2006, 2005 and 2004, and the
significant assumptions used in determining the underlying fair value of each
option grant, on the date of grant were as follows:
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant-date fair value of options granted at market
prices
|
|
$12.92
|
|
$9.35
|
|
$9.45
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions
|
|
|
|
|
|
|
|
|
Risk-free rate of
return
|
|
4.5
|
%
|
4.4
|
%
|
3.8
|
%
|
|
Expected life
|
|
6 years
|
|
6 years
|
|
6 years*
|
|
|
Expected volatility
|
|
24.4
|
%
|
24.3
|
%
|
25.5
|
%
|
|
Expected dividend yield
|
|
1.0
|
%
|
1.2
|
%
|
1.0
|
%
|
*
During
2004 significant reload options were also granted with a weighted-average
expected life of 3.5 years.
The risk-free rate
of return is determined based on a yield curve of U.S. treasury rates from one
month to ten years and a period commensurate with the expected life of the
options granted. Expected volatility is established based on historical
volatility of the company’s stock price. The expected dividend yield is
determined based on the company’s annual dividend amount as a percentage of the
average stock price at the time of the grant.
The expense
associated with shares of restricted stock issued under the company’s stock
incentive plans is based on the market price of the company’s 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 12 and 36 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 14,845 shares in 2006, 11,479 shares in 2005 and 13,550 shares in 2004
under its restricted stock award program.
38
A summary of non-vested stock option and stock award activity is as
follows:
|
NON-VESTED STOCK OPTIONS AND STOCK AWARDS
|
|
|
|
|
|
|
WEIGHTED-
|
|
|
|
WEIGHTED-
|
|
|
|
|
|
|
AVERAGE
|
|
|
|
AVERAGE
|
|
|
|
|
|
|
FAIR VALUE
|
|
|
|
FAIR VALUE
|
|
|
|
|
STOCK
|
|
AT GRANT
|
|
STOCK
|
|
AT GRANT
|
|
|
|
|
OPTIONS
|
|
DATE
|
|
AWARDS
|
|
DATE
|
|
|
December 31,
2005
|
|
7,106,333
|
|
$
|
9.37
|
|
22,175
|
|
$
|
32.53
|
|
|
Granted
|
|
2,669,223
|
|
12.92
|
|
14,845
|
|
44.46
|
|
|
Vested/Earned
|
|
(3,537,235
|
)
|
9.16
|
|
(10,350
|
)
|
32.85
|
|
|
Cancelled
|
|
(389,581
|
)
|
9.27
|
|
(2,000
|
)
|
36.57
|
|
|
December 31, 2006
|
|
5,848,740
|
|
$
|
11.13
|
|
24,670
|
|
$
|
39.25
|
|
Total compensation
expense related to share-based compensation plans was $36.3 million, ($23.1
million net of tax benefit), $39.1 million, ($24.7 million net of tax benefit)
and $44.7 million, ($28.1 million net of tax benefit) during 2006, 2005 and
2004, respectively.
As of December 31,
2006, there was $54.0 million of total measured but unrecognized compensation
expense related to non-vested share-based compensation arrangements granted
under our plans. That cost is expected to be recognized over a weighted-average
period of 1.9 years.
Total cash
received from the exercise of share-based instruments in 2006 was $87.9
million.
The company
generally issues authorized but previously unissued shares to satisfy stock
option exercises. The company has a policy of repurchasing shares on the open
market to offset the dilutive effect of stock options, as discussed in Note 9.
11.
INCOME TAXES
Income before income taxes consisted of:
|
THOUSANDS
|
|
2006
|
|
2005
|
|
2004
|
|
|
Domestic
|
|
$
|
321,117
|
|
$
|
278,795
|
|
$
|
238,307
|
|
|
Foreign
|
|
246,107
|
|
219,387
|
|
206,239
|
|
|
Total
|
|
$
|
567,224
|
|
$
|
498,182
|
|
$
|
444,546
|
|
The provision for income taxes
consisted
of:
|
THOUSANDS
|
|
2006
|
|
2005
|
|
2004
|
|
|
Federal and
state
|
|
$
|
143,647
|
|
$
|
121,409
|
|
$
|
79,830
|
|
|
Foreign
|
|
73,768
|
|
70,313
|
|
67,681
|
|
|
Currently
payable
|
|
217,415
|
|
191,722
|
|
147,511
|
|
|
|
|
|
|
|
|
|
|
|
Federal and
state
|
|
(15,847
|
)
|
(8,901
|
)
|
13,470
|
|
|
Foreign
|
|
(2,959
|
)
|
(4,120
|
)
|
872
|
|
|
Deferred
|
|
(18,806
|
)
|
(13,021
|
)
|
14,342
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income
taxes
|
|
$
|
198,609
|
|
$
|
178,701
|
|
$
|
161,853
|
|
The company’s overall net deferred tax assets and deferred tax
liabilities
were comprised of the following:
|
DECEMBER 31 (THOUSANDS)
|
|
2006
|
|
2005
|
|
|
Deferred tax
assets
|
|
|
|
|
|
|
Other accrued liabilities
|
|
$
|
56,979
|
|
$
|
49,257
|
|
|
Loss carryforwards
|
|
6,256
|
|
6,538
|
|
|
Share-based compensation
|
|
47,253
|
|
45,718
|
|
|
Other comprehensive income
|
|
163,092
|
|
42,028
|
|
|
Other, net
|
|
36,457
|
|
24,739
|
|
|
Valuation allowance
|
|
(376
|
)
|
(2,711
|
)
|
|
Total
|
|
309,661
|
|
165,569
|
|
|
Deferred tax
liabilities
|
|
|
|
|
|
|
Postretirement health care and pension benefits
|
|
7,787
|
|
3,217
|
|
|
Property, plant and equipment basis differences
|
|
37,785
|
|
61,489
|
|
|
Intangible assets
|
|
95,516
|
|
73,853
|
|
|
Other, net
|
|
3,484
|
|
2,631
|
|
|
Total
|
|
144,572
|
|
141,190
|
|
|
Net deferred tax assets
|
|
$
|
165,089
|
|
$
|
24,379
|
|
A reconciliation of the statutory U.S. federal income
tax
rate to the company’s effective income tax
rate was:
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Statutory U.S.
rate
|
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
|
State income
taxes, net of federal benefit
|
|
2.3
|
|
2.3
|
|
2.4
|
|
|
Foreign
operations
|
|
(1.8
|
)
|
(2.0
|
)
|
(0.9
|
)
|
|
Reinvested
earnings in U.S. under the American Jobs Creation Act
|
|
|
|
0.6
|
|
|
|
|
Other, net
|
|
(0.5
|
)
|
|
|
(0.1
|
)
|
|
Effective income tax
rate
|
|
35.0
|
%
|
35.9
|
%
|
36.4
|
%
|
Cash paid for
income taxes was approximately $182 million in 2006, $165 million in 2005 and
$163 million in 2004.
As of December 31,
2006, the company had undistributed earnings of international affiliates of
approximately $607 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. 109-1, “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”, 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
39
and liabilities existing at the enactment date. Rather, the impact of
this deduction is reported in the period in which the deduction is claimed on
the company’s tax return. The company recorded a modest benefit in both 2006
and 2005 from this deduction.
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. In the fourth quarter of 2005 the company approved a plan for the
reinvestment of foreign earnings in the U.S. pursuant to the provisions of the
Act. The company repatriated $223 million of foreign earnings into the U.S. As
a result of completing the repatriation, the company recorded tax expense of
approximately $3.1 million, net of available foreign tax credits, in the fourth
quarter of 2005.
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 $104.3
million in 2006, $97.3 million in 2005 and $86.6 million in 2004. As of
December 31, 2006, future minimum payments under operating leases with
noncancelable terms in excess of one year were:
|
thousands
|
|
|
|
2007
|
|
$44,000
|
|
|
2008
|
|
33,000
|
|
|
2009
|
|
24,000
|
|
|
2010
|
|
17,000
|
|
|
2011
|
|
11,000
|
|
|
Thereafter
|
|
13,000
|
|
|
Total
|
|
$142,000
|
|
The company enters into operating leases for vehicles whose noncancelable
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 $51 million in 2007. 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.
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 $73.3 million in 2006, $68.4
million in 2005 and $61.5 million in 2004.
14. COMMITMENTS AND CONTINGENCIES
The company and certain subsidiaries are party to various lawsuits,
claims and environmental actions that have arisen in the ordinary course of
business. These include 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 all actions on the company’s 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 management’s best estimate of future costs. The accrual for
environmental remediation costs was $4.9 million and $4.3 million at December
31, 2006 and 2005, respectively. Potential insurance reimbursements are not
anticipated in the company’s 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 company’s consolidated financial results in a future reporting period,
management believes the ultimate outcome will not have a significant effect on
the company’s consolidated results of operations, financial position or cash
flows.
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 employees hired prior to January 1, 2003,
plan benefits are based on years of service and highest average compensation
for five consecutive years of employment. For employees hired after December
31, 2002, plan benefits are based on contribution credits equal to a fixed
percentage of their current salary and interest credits. 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 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 fiscal
year-end of the company’s international affiliates. The information following
includes all of the company’s 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 is December 31.
Certain employees outside the U.S. are covered under government-sponsored
programs, which are not required to be fully funded. The expense and obligation
for providing international postretirement healthcare benefits is not
significant.
40
Effective December
31, 2006, the company prospectively adopted Statement of Financial Accounting
Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106 and
132(R) (“SFAS 158”). As a result of the adoption of SFAS 158, the company has
recorded a cumulative effect adjustment as a component of other comprehensive
income within shareholders’ equity. The company’s disclosures for the fiscal
year ended 2006 also reflect the revised accounting and disclosure requirements
of SFAS 158. Reported items for fiscal years 2005 and 2004 were not affected.
The adoption of
SFAS 158 on December 31, 2006 resulted in incremental adjustments to the following
individual line items in the consolidated balance
sheet:
|
|
|
Before
|
|
|
|
After
|
|
|
|
|
Application of
|
|
|
|
Application of
|
|
|
thousands
|
|
SFAS 158
|
|
Adjustments
|
|
SFAS 158
|
|
|
Deferred income
taxes
|
|
$
|
86,084
|
|
$
|
786
|
|
$
|
86,870
|
|
|
Other assets,
net*
|
|
456,833
|
|
(102,310
|
)
|
354,523
|
|
|
Total assets
|
|
4,520,889
|
|
(101,524
|
)
|
4,419,365
|
|
|
Compensation and
benefits
|
|
244,172
|
|
8,514
|
|
252,686
|
|
|
Postretirement
health care and pension benefit liabilities
|
|
338,990
|
|
81,255
|
|
420,245
|
|
|
Other
liabilities**
|
|
282,312
|
|
(23,210
|
)
|
259,102
|
|
|
Shareholders’
equity
|
|
1,848,313
|
|
(168,083
|
)
|
1,680,230
|
|
|
Total liabilities and
shareholders’ equity
|
|
4,520,889
|
|
(101,524
|
)
|
4,419,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
The
adjustment to “Other assets, net” represents the net effect of an adjustment of
$(179,046) to the company’s net pension assets, an adjustment of $99,946 for
the recognition of deferred taxes and the reclassification of deferred tax
liabilities of $(23,210) from the application of SFAS 158.
**
The adjustment to
the “Other liabilities” represents the recognition and reclassification of
deferred taxes from the application of SFAS 158.
A
reconciliation
of
changes in the benefit obligations and fair value of assets of the company’s
plan as follows:
|
|
|
U.S. Pension Benefits
(Qualified and
Non Qualified Plans)
|
|
International
Pension Benefits
|
|
U.S. Postretirement
Health Care Benefits
|
|
|
thousands
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Benefit
obligation, beginning of year
|
|
$
|
785,664
|
|
$
|
709,676
|
|
$
|
402,317
|
|
$
|
372,045
|
|
$
|
165,358
|
|
$
|
158,030
|
|
|
Service cost
|
|
40,635
|
|
40,646
|
|
18,899
|
|
14,970
|
|
3,113
|
|
3,085
|
|
|
Interest cost
|
|
43,611
|
|
40,174
|
|
18,995
|
|
18,307
|
|
8,992
|
|
8,860
|
|
|
Participant
contributions
|
|
|
|
|
|
2,336
|
|
2,539
|
|
2,675
|
|
2,467
|
|
|
Divestitures
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
Plan amendments,
settlements and curtailments
|
|
1,175
|
|
|
|
(2,159
|
)
|
18
|
|
127
|
|
(3,566
|
)
|
|
Actuarial loss
(gain)
|
|
(15,076
|
)
|
17,482
|
|
8,375
|
|
48,342
|
|
1,276
|
|
7,535
|
|
|
Benefits paid
|
|
(22,199
|
)
|
(22,314
|
)
|
(19,629
|
)
|
(14,622
|
)
|
(12,183
|
)
|
(11,053
|
)
|
|
Foreign currency
translation
|
|
|
|
|
|
48,806
|
|
(39,224
|
)
|
|
|
|
|
|
Benefit obligation, end
of year
|
|
$
|
833,810
|
|
$
|
785,664
|
|
$
|
477,940
|
|
$
|
402,317
|
|
$
|
169,358
|
|
$
|
165,358
|
|
|
|
|
U.S. PENSION BENEFITS
(QUALIFIED AND
NON QUALIFIED PLANS)
|
|
INTERNATIONAL
PENSION BENEFITS
|
|
U.S. POSTRETIREMENT
HEALTH CARE BENEFITS
|
|
|
THOUSANDS
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Fair value of
plan assets, beginning of year
|
|
$
|
679,209
|
|
$
|
618,133
|
|
$
|
220,143
|
|
$
|
201,482
|
|
$
|
25,224
|
|
$
|
21,740
|
|
|
Actual gains on
plan assets
|
|
89,974
|
|
42,171
|
|
22,245
|
|
23,126
|
|
3,610
|
|
1,499
|
|
|
Company
contributions
|
|
46,416
|
|
41,219
|
|
18,873
|
|
27,273
|
|
12,176
|
|
10,571
|
|
|
Participant
contributions
|
|
|
|
|
|
2,336
|
|
2,539
|
|
1,388
|
|
2,467
|
|
|
Settlements
|
|
|
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
Benefits paid
|
|
(22,199
|
)
|
(22,314
|
)
|
(19,629
|
)
|
(14,622
|
)
|
(12,183
|
)
|
(11,053
|
)
|
|
Foreign currency
translation
|
|
|
|
|
|
25,987
|
|
(19,655
|
)
|
|
|
|
|
|
Fair value of plan
assets, end of year
|
|
$
|
793,400
|
|
$
|
679,209
|
|
$
|
269,640
|
|
$
|
220,143
|
|
$
|
30,215
|
|
$
|
25,224
|
|
41
A reconciliation of the funded status for the pension and postretirement
plans to the net amount recognized is as follows:
|
|
|
U.S. PENSION BENEFITS
(QUALIFIED AND
NON QUALIFIED PLANS)
|
|
INTERNATIONAL
PENSION BENEFITS
|
|
U.S. POSTRETIREMENT
HEALTH CARE BENEFITS
|
|
|
THOUSANDS
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Funded status
|
|
$
|
(40,410
|
)
|
$
|
(106,455
|
)
|
$
|
(208,300
|
)
|
$
|
(182,174
|
)
|
$
|
(139,143
|
)
|
$
|
(140,134
|
)
|
|
Unrecognized
actuarial loss
|
|
|
|
248,451
|
|
|
|
82,672
|
|
|
|
58,539
|
|
|
Unrecognized
prior service cost (benefit)
|
|
|
|
6,978
|
|
|
|
1,425
|
|
|
|
(25,981
|
)
|
|
Unrecognized net
transition (asset) obligation
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(40,410
|
)
|
$
|
148,974
|
|
$
|
(208,300
|
)
|
$
|
(98,098
|
)
|
$
|
(139,143
|
)
|
$
|
(107,576
|
)
|
The total amounts recognized in the balance sheet, including accumulated
other comprehensive income, and the accumulated benefit obligation are as
follows:
|
|
|
U.S. PENSION BENEFITS
(QUALIFIED AND
NON QUALIFIED PLANS)
|
|
INTERNATIONAL
PENSION BENEFITS
|
|
U.S. POSTRETIREMENT
HEALTH CARE BENEFITS
|
|
|
THOUSANDS
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Noncurrent
benefit asset
|
|
$
|
13,591
|
|
$
|
174,063
|
|
$
|
24,000
|
|
$
|
27,015
|
|
|
|
|
|
|
Current benefit
liability
|
|
(3,400
|
)
|
|
|
(6,484
|
)
|
|
|
$
|
(1,130
|
)
|
|
|
|
Noncurrent
benefit liability
|
|
(50,601
|
)
|
(25,089
|
)
|
(225,816
|
)
|
(169,143
|
)
|
(138,013
|
)
|
$
|
(107,576
|
)
|
|
Intangible asset
|
|
|
|
|
|
|
|
1,211
|
|
|
|
|
|
|
Accumulated
other comprehensive loss (pre-tax)
|
|
195,080
|
|
|
|
86,955
|
|
42,819
|
|
30,965
|
|
|
|
|
Total amount
recognized
|
|
$
|
154,670
|
|
$
|
148,974
|
|
$
|
(121,345
|
)
|
$
|
(98,098
|
)
|
$
|
(108,178
|
)
|
$
|
(107,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit
obligation
|
|
$
|
687,708
|
|
$
|
627,917
|
|
$
|
330,751
|
|
$
|
358,837
|
|
$
|
169,358
|
|
$
|
165,358
|
|
Accumulated other comprehensive loss for pension and other
postretirement benefit plan activity is as follows:
|
|
|
U.S. PENSION BENEFITS
(QUALIFIED AND NON
QUALIFIED PLANS)
|
|
INTERNATIONAL
PENSION BENEFITS
|
|
U.S. POSTRETIREMENT
HEALTH CARE BENEFITS
|
|
|
THOUSANDS
|
|
2006
|
|
2006
|
|
2006
|
|
|
Accumulated other
comprehensive loss, beginning of year
|
|
$
|
—
|
|
$
|
27,117
|
|
$
|
—
|
|
|
Recognition of
additional minimum pension liability
|
|
|
|
979
|
|
|
|
|
Cumulative effect
adjustment of change in accounting — adoption of SFAS 158 to recognize funded
status
|
|
195,080
|
|
43,157
|
|
30,965
|
|
|
Tax
benefit
|
|
(75,569
|
)
|
(13,917
|
)
|
(11,995
|
)
|
|
Accumulated other comprehensive loss (income), end of year
|
|
$
|
119,511
|
|
$
|
57,336
|
|
$
|
18,970
|
|
The
components of accumulated other comprehensive loss related to pension and
postretirement benefit plans are as follows:
|
|
|
U.S. PENSION BENEFITS
(QUALIFIED AND NON
QUALIFIED PLANS)
|
|
INTERNATIONAL
PENSION BENEFITS
|
|
U.S. POSTRETIREMENT
HEALTH CARE BENEFITS
|
|
|
THOUSANDS
|
|
2006
|
|
2006
|
|
2006
|
|
|
Unrecognized net
actuarial losses
|
|
$
|
188,924
|
|
$
|
87,248
|
|
$
|
50,384
|
|
|
Unrecognized net prior
service costs (benefits)
|
|
6,156
|
|
(325
|
)
|
(19,419
|
)
|
|
Unrecognized net
transition costs
|
|
|
|
32
|
|
|
|
|
Tax benefit
|
|
(75,569
|
)
|
(29,619
|
)
|
(11,995
|
)
|
|
Accumulated other comprehensive loss, end of year
|
|
$
|
119,511
|
|
$
|
57,336
|
|
$
|
18,970
|
|
42
Estimated amounts in
accumulated other comprehensive income expected to be reclassified to net
period cost during 2007 are as follows:
|
THOUSANDS
|
|
U.S. PENSION BENEFITS
(QUALIFIED AND NON
QUALIFIED PLANS)
|
|
INTERNATIONAL
PENSION BENEFITS
|
|
U.S. POSTRETIREMENT
HEALTH CARE BENEFITS
|
|
|
Net actuarial losses
|
|
$
|
13,021
|
|
$
|
3,048
|
|
$
|
7,354
|
|
|
Net prior service
costs/(benefits)
|
|
2,008
|
|
21
|
|
(6,419
|
)
|
|
Net transition costs
|
|
—
|
|
4
|
|
—
|
|
|
Total
|
|
$
|
15,029
|
|
$
|
3,073
|
|
$
|
935
|
|
For certain international pension plans, the accumulated benefit
obligations exceeded the fair value of plan assets. The company recognized an
addition to the minimum pension liability in other comprehensive income of $1.0
million pre-tax ($0.6 million net of deferred tax asset) in 2006, $24.4 million
pre-tax ($16.2 million net of deferred tax asset) during 2005 and $0.4 million
pre-tax ($0.3 million net of deferred tax asset) during 2004. The additional
minimum pension liability recognized prior to adoption of SFAS 158 was
considered in determining the cumulative effect adjustment of adopting SFAS 158
as of December 31, 2006.
The aggregate projected
benefit obligation, accumulated benefit obligation and fair value of plan
assets for those U.S. nonqualified plans and international plans with
accumulated benefit obligations in excess of plan assets were as follows:
|
|
|
DECEMBER 31
|
|
|
THOUSANDS
|
|
2006
|
|
2005
|
|
|
Aggregate
projected benefit obligation
|
|
$
|
414,731
|
|
$
|
385,141
|
|
|
Accumulated
benefit obligation
|
|
364,034
|
|
331,640
|
|
|
Fair value of plan
assets
|
|
138,479
|
|
136,937
|
|
|
|
|
|
|
|
|
|
|
These plans relate to various international subsidiaries and the U.S.
nonqualified plans and are funded consistent with local practices and
requirements. As of December 31, 2006, there were approximately $17 million of
future postretirement benefits covered by insurance contracts.
PLAN ASSETS
UNITED STATES
The
company’s pension and postretirement health care benefits plans at December 31,
2006 and 2005 and target allocation for 2007 are as follows:
|
ASSET
|
|
2007
TARGET
ASSET
ALLOCATION
|
|
PERCENTAGE OF PLAN ASSETS
|
|
|
CATEGORY
|
|
PERCENTAGE
|
|
2006
|
|
2005
|
|
|
Large cap equity
|
|
43
|
%
|
|
43
|
%
|
|
43
|
%
|
|
|
Small cap equity
|
|
12
|
|
|
12
|
|
|
12
|
|
|
|
International equity
|
|
15
|
|
|
16
|
|
|
16
|
|
|
|
Fixed income
|
|
25
|
|
|
24
|
|
|
24
|
|
|
|
Real estate
|
|
5
|
|
|
5
|
|
|
5
|
|
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
The company’s 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 plan population 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 better
long-term returns, lower pension costs and better funded status in the long
run.
Since diversification is widely recognized as important to reduce unnecessary
risk, the pension fund is diversified across a number of asset classes and
securities. Selected individual portfolios within the asset classes may be
undiversified while maintaining the diversified nature of total plan assets.
The company’s U.S. investment policies prohibit investing in letter
stock, warrants and options, and engaging in short sales, margin transactions,
private placements, 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 fund’s guidelines. Selected derivatives
may only be used for hedging and transactional efficiency.
INTERNATIONAL
The
company’s plan asset allocations for its international defined benefit pension
plans at December 31, 2006 and 2005 are as follows:
|
ASSET
|
|
PERCENTAGE OF PLAN ASSETS
|
|
|
CATEGORY
|
|
2006
|
|
2005
|
|
|
Equity securities
|
|
40%
|
|
44%
|
|
|
Fixed income
|
|
46
|
|
45
|
|
|
Real estate
|
|
5
|
|
2
|
|
|
Other
|
|
9
|
|
9
|
|
|
Total
|
|
100%
|
|
100%
|
|
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. Therefore, no target asset allocation
for 2007 is presented. The funds are invested in a variety of stocks, fixed
income and real estate investments and in some cases, the assets are managed by
insurance companies which may offer a guaranteed rate of return. Total
international pension plan assets represent 24 percent of total Ecolab pension
plan assets worldwide.
43
AMENDMENTS
During 2004, the American Jobs Creation Act of 2004 (the “Act”) added a
new Section 409A to the Internal Revenue Code (the “Code”) which 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 unforeseeable 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 continue 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 2007 and final amendments to comply with
the Act are required by the end of 2007. 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 2006, the company’s 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 company’s pension and postretirement health
care benefit plans are as follows:
|
|
|
|
|
MEDICARE
SUBSIDY
|
|
|
THOUSANDS
|
|
ALL PLANS
|
|
RECEIPTS
|
|
|
2007
|
|
$
|
52,000
|
|
$
|
1,000
|
|
|
2008
|
|
59,000
|
|
1,000
|
|
|
2009
|
|
64,000
|
|
1,000
|
|
|
2010
|
|
66,000
|
|
1,000
|
|
|
2011
|
|
72,000
|
|
1,000
|
|
|
2012-2016
|
|
447,000
|
|
11,000
|
|
|
|
|
|
|
|
|
|
|
The company’s 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 plan’s 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 2007. The company estimates contributions to be
made to the international plans will approximate $20 million in 2007.
The company is not aware of any expected refunds of plan assets within
the next 12 months from any of its existing U.S. or international pension or
postretirement benefit plans.
NET PERIODIC BENEFIT COSTS
Pension and postretirement health care benefits expense for the
company’s operations was:
|
|
|
U.S. PENSION BENEFITS
(QUALIFIED AND NON
QUALIFIED PLANS)
|
|
INTERNATIONAL
PENSION BENEFITS
|
|
U.S. POSTRETIREMENT
HEALTH CARE BENEFITS
|
|
|
THOUSANDS
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
|
Service cost —
employee benefits earned during the year
|
|
$
|
40,635
|
|
$
|
40,646
|
|
$
|
32,806
|
|
$
|
18,899
|
|
$
|
14,970
|
|
$
|
13,409
|
|
$
|
3,113
|
|
$
|
3,085
|
|
$
|
3,188
|
|
|
Interest cost on
benefit obligation
|
|
43,611
|
|
40,174
|
|
36,401
|
|
18,995
|
|
18,307
|
|
17,830
|
|
8,992
|
|
8,860
|
|
9,041
|
|
|
Expected return
on plan assets
|
|
(62,109
|
)
|
(53,114
|
)
|
(50,161
|
)
|
(13,192
|
)
|
(11,751
|
)
|
(11,403
|
)
|
(2,457
|
)
|
(1,770
|
)
|
(1,843
|
)
|
|
Recognition of
net actuarial loss
|
|
16,586
|
|
11,183
|
|
6,547
|
|
3,059
|
|
1,597
|
|
1,458
|
|
8,278
|
|
5,734
|
|
5,706
|
|
|
Amortization of
prior service cost (benefit)
|
|
1,997
|
|
1,906
|
|
2,026
|
|
45
|
|
162
|
|
426
|
|
(6,435
|
)
|
(5,660
|
)
|
(5,696
|
)
|
|
Amortization of
net transition (asset) obligation
|
|
|
|
(702
|
)
|
(1,403
|
)
|
24
|
|
329
|
|
333
|
|
|
|
|
|
|
|
|
Curtailment
(gain) loss
|
|
|
|
|
|
|
|
(170
|
)
|
(40
|
)
|
(51
|
)
|
|
|
|
|
|
|
|
Total expense
|
|
$
|
40,720
|
|
$
|
40,093
|
|
$
|
26,216
|
|
$
|
27,660
|
|
$
|
23,574
|
|
$
|
22,002
|
|
$
|
11,491
|
|
$
|
10,249
|
|
$
|
10,396
|
|
44
PLAN
ASSUMPTIONS
|
|
|
U.S. PENSION BENEFITS
|
|
INTERNATIONAL
PENSION BENEFITS
|
|
U.S. POSTRETIREMENT
HEALTH CARE BENEFITS
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
|
Weighted-average
actuarial assumptions used to determine benefit obligations as of December
31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
5.79
|
%
|
5.57
|
%
|
5.75
|
%
|
4.65
|
%
|
4.54
|
%
|
5.22
|
%
|
5.79
|
%
|
5.57
|
%
|
5.75
|
%
|
|
Projected salary
increase
|
|
4.32
|
|
4.30
|
|
4.30
|
|
3.27
|
|
3.15
|
|
3.13
|
|
|
|
|
|
|
|
|
Weighted-average
actuarial assumptions used to determine net cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
5.57
|
|
5.75
|
|
6.25
|
|
4.56
|
|
5.18
|
|
5.37
|
|
5.57
|
|
5.75
|
|
6.25
|
|
|
Expected return
on plan assets
|
|
8.75
|
|
8.75
|
|
9.00
|
|
5.80
|
|
5.68
|
|
5.75
|
|
8.75
|
%
|
8.75
|
%
|
9.00
|
%
|
|
Projected salary
increase
|
|
4.30
|
%
|
4.30
|
%
|
4.30
|
%
|
3.21
|
%
|
3.12
|
%
|
3.07
|
%
|
|
|
|
|
|
|
The expected long-term rate of return is generally based on the pension
plan’s 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, 2006,
10 percent (for pre-age 65 retirees) and 11 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 2012 for pre-age 65 retirees and 5 percent in 2013 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 maximum 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 company’s 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
|
|
$
|
509
|
|
$
|
(453
|
)
|
|
Effect on
postretirement benefit obligation
|
|
9,597
|
|
(8,531
|
)
|
|
|
|
|
|
|
|
|
|
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 company’s
U.S. postretirement health care benefits plan offers prescription drug benefits.
The company amended its plan effective January 1, 2005 in order 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 after-tax benefit for 2004 was 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. 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 employee’s
ESOP account while so invested. The company’s contributions are invested in
Ecolab common stock and amounted to $18.9 million in 2006, $17.4 million in
2005 and $15.8 million in 2004. Effective January 1, 2006, the plan was amended
to allow employees to immediately re-allocate company matching contributions in
Ecolab common stock to other investment funds within the plan.
16.
OPERATING SEGMENTS
The company’s thirteen operating segments have been aggregated into
three reportable segments.
The “United States Cleaning & Sanitizing” reportable segment provides
cleaning and sanitizing products to United States markets through its
Institutional, Food & Beverage, Kay, Textile Care, Healthcare, Vehicle Care
and Water Care Services operating segments. The company’s Professional Products
operating segment has been combined with Institutional to leverage
Institutional’s sales force, delivering the professional products line to
customers in the hospitality, healthcare and commercial markets. These
operating segments exhibit similar products, manufacturing processes,
customers, distribution methods and economic characteristics.
The “United States Other Services” reportable 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 operating segments. These two operating segments are primarily fee for
service businesses. Since the primary focus of these segments is service, they
have not been combined with the company’s “United States Cleaning &
Sanitizing” reportable segment. These operating segments are combined and
disclosed as an “all other” category in accordance with SFAS 131. Total service
revenue for this segment was $334 million, $300 million and $269 million for 2006,
2005 and 2004, respectively.
45
The company’s “International” reportable segment includes four operating
segments; Europe/Middle East/Africa (EMEA), Asia Pacific, Latin America and
Canada. These segments provide cleaning and sanitizing products as well as pest
elimination service. International operations are managed by geographic region
and exhibit similar products, manufacturing processes, customers, distribution
methods and economic characteristics. Total service revenue for international
pest elimination was $169 million, $161 million and $146 million for 2006, 2005
and 2004, respectively.
Information on the types of products and services of each of the company’s
operating segments is included on the inside front cover under “Services/Products
Provided” of the Ecolab Overview section of this Annual Report.
The company evaluates the performance of its International operations based
on fixed management currency exchange rates. All other accounting policies of
the reportable segments are consistent with 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 company’s operating segments is evaluated
by management based on operating income.
Financial information for each of the company’s reportable segments is
as follows:
|
THOUSANDS
|
|
U.S.
CLEANING &
SANITIZING
|
|
U.S.
OTHER
SERVICES
|
|
TOTAL
U.S.
|
|
INTERNATIONAL
|
|
FOREIGN
CURRENCY
TRANSLATION
|
|
CORPORATE
|
|
CONSOLIDATED
|
|
|
NET SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
2,152,330
|
|
$
|
410,480
|
|
$
|
2,562,810
|
|
$
|
2,261,414
|
|
$
|
71,590
|
|
|
|
$
|
4,895,814
|
|
|
2005
|
|
1,952,220
|
|
375,234
|
|
2,327,454
|
|
2,136,664
|
|
70,714
|
|
|
|
4,534,832
|
|
|
2004
|
|
1,796,355
|
|
339,305
|
|
2,135,660
|
|
2,037,907
|
|
11,366
|
|
|
|
4,184,933
|
|
|
OPERATING INCOME
(LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
329,155
|
|
38,943
|
|
368,098
|
|
233,587
|
|
9,957
|
|
|
|
611,642
|
|
|
2005
|
|
279,960
|
|
36,012
|
|
315,972
|
|
219,104
|
|
7,344
|
|
|
|
542,420
|
|
|
2004
|
|
266,072
|
|
20,447
|
|
286,519
|
|
209,490
|
|
(1,758
|
)
|
$
|
(4,361
|
)
|
489,890
|
|
|
DEPRECIATION
& AMORTIZATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
132,030
|
|
6,416
|
|
138,446
|
|
117,911
|
|
4,522
|
|
7,690
|
|
268,569
|
|
|
2005
|
|
123,644
|
|
5,460
|
|
129,104
|
|
113,564
|
|
7,595
|
|
6,672
|
|
256,935
|
|
|
2004
|
|
119,831
|
|
5,254
|
|
125,085
|
|
112,726
|
|
3,644
|
|
5,499
|
|
246,954
|
|
|
TOTAL ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
1,301,916
|
|
174,970
|
|
1,476,886
|
|
2,237,915
|
|
171,091
|
|
533,473
|
|
4,419,365
|
|
|
2005
|
|
1,348,706
|
|
154,870
|
|
1,503,576
|
|
2,100,205
|
|
(30,983
|
)
|
223,830
|
|
3,796,628
|
|
|
CAPITAL
EXPENDITURES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
165,324
|
|
5,855
|
|
171,179
|
|
113,050
|
|
3,656
|
|
|
|
287,885
|
|
|
2005
|
|
149,100
|
|
7,246
|
|
156,346
|
|
108,245
|
|
4,192
|
|
|
|
268,783
|
|
|
2004
|
|
153,503
|
|
4,993
|
|
158,496
|
|
117,698
|
|
(323
|
)
|
|
|
275,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consistent with the company’s internal management reporting, corporate operating
income includes special charges included on the consolidated statement of
income for 2004. Corporate assets are principally cash and cash equivalents and
short-term investments.
The company has two classes of products 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 21 percent, 21 percent and 22 percent of consolidated net sales
in 2006, 2005 and 2004, respectively. Sales of laundry products were
approximately 10 percent, 11 percent and 10 percent of consolidated net sales
in 2006, 2005 and 2004, respectively.
Property, plant and equipment of the company’s United States and
International
|
DECEMBER 31 (THOUSANDS)
|
|
2006
|
|
2005
|
|
|
United States
|
|
$
|
599,153
|
|
$
|
532,430
|
|
|
International
|
|
332,200
|
|
338,117
|
|
|
Effect of
foreign currency translation
|
|
20,216
|
|
(2,494
|
)
|
|
Consolidated
|
|
$
|
951,569
|
|
$
|
868,053
|
|
46
17.
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
THOUSANDS, EXCEPT PER SHARE
|
|
FIRST
QUARTER
|
|
SECOND
QUARTER
|
|
THIRD
QUARTER
|
|
FOURTH
QUARTER
|
|
YEAR
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Cleaning & Sanitizing
|
|
$
|
513,447
|
|
$
|
544,477
|
|
$
|
561,707
|
|
$
|
532,699
|
|
$
|
2,152,330
|
|
|
United States Other Services
|
|
93,233
|
|
104,902
|
|
108,297
|
|
104,048
|
|
410,480
|
|
|
International
|
|
510,088
|
|
561,800
|
|
584,273
|
|
605,253
|
|
2,261,414
|
|
|
Effect of foreign currency translation
|
|
3,307
|
|
14,705
|
|
24,578
|
|
29,000
|
|
71,590
|
|
|
Total
|
|
1,120,075
|
|
1,225,884
|
|
1,278,855
|
|
1,271,000
|
|
4,895,814
|
|
|
Cost of sales
|
|
552,491
|
|
608,003
|
|
625,554
|
|
630,010
|
|
2,416,058
|
|
|
Selling, general
and administrative expenses
|
|
436,127
|
|
464,754
|
|
471,937
|
|
495,296
|
|
1,868,114
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Cleaning & Sanitizing
|
|
79,525
|
|
86,118
|
|
98,976
|
|
64,536
|
|
329,155
|
|
|
United States Other Services
|
|
8,009
|
|
10,625
|
|
12,466
|
|
7,843
|
|
38,943
|
|
|
International
|
|
43,238
|
|
55,145
|
|
66,221
|
|
68,983
|
|
233,587
|
|
|
Effect of foreign currency translation
|
|
685
|
|
1,239
|
|
3,701
|
|
4,332
|
|
9,957
|
|
|
Total
|
|
131,457
|
|
153,127
|
|
181,364
|
|
145,694
|
|
611,642
|
|
|
Interest
expense, net
|
|
10,328
|
|
11,014
|
|
11,219
|
|
11,857
|
|
44,418
|
|
|
Income before
income taxes
|
|
121,129
|
|
142,113
|
|
170,145
|
|
133,837
|
|
567,224
|
|
|
Provision for
income taxes
|
|
43,243
|
|
48,934
|
|
59,786
|
|
46,646
|
|
198,609
|
|
|
Net income
|
|
$
|
77,886
|
|
$
|
93,179
|
|
$
|
110,359
|
|
$
|
87,191
|
|
$
|
368,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.31
|
|
$
|
0.37
|
|
$
|
0.44
|
|
$
|
0.35
|
|
$
|
1.46
|
|
|
Diluted
|
|
$
|
0.30
|
|
$
|
0.36
|
|
$
|
0.43
|
|
$
|
0.34
|
|
$
|
1.43
|
|
|
Weighted-average
common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
253,540
|
|
252,152
|
|
251,573
|
|
251,263
|
|
252,132
|
|
|
Diluted
|
|
258,055
|
|
256,692
|
|
256,657
|
|
256,639
|
|
257,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Cleaning & Sanitizing
|
|
$
|
467,179
|
|
$
|
496,808
|
|
$
|
510,476
|
|
$
|
477,757
|
|
$
|
1,952,220
|
|
|
United States Other Services
|
|
85,810
|
|
96,328
|
|
98,315
|
|
94,781
|
|
375,234
|
|
|
International
|
|
483,997
|
|
536,454
|
|
550,197
|
|
566,016
|
|
2,136,664
|
|
|
Effect of foreign currency translation
|
|
32,894
|
|
29,074
|
|
5,785
|
|
2,961
|
|
70,714
|
|
|
Total
|
|
1,069,880
|
|
1,158,664
|
|
1,164,773
|
|
1,141,515
|
|
4,534,832
|
|
|
Cost of sales
|
|
526,975
|
|
571,066
|
|
572,862
|
|
577,928
|
|
2,248,831
|
|
|
Selling, general
and administrative expenses
|
|
424,918
|
|
449,346
|
|
429,464
|
|
439,853
|
|
1,743,581
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Cleaning & Sanitizing
|
|
71,605
|
|
72,660
|
|
85,933
|
|
49,762
|
|
279,960
|
|
|
United States Other Services
|
|
7,534
|
|
10,287
|
|
11,124
|
|
7,067
|
|
36,012
|
|
|
International
|
|
36,503
|
|
52,431
|
|
64,212
|
|
65,958
|
|
219,104
|
|
|
Effect of foreign currency translation
|
|
2,345
|
|
2,874
|
|
1,178
|
|
947
|
|
7,344
|
|
|
Total
|
|
117,987
|
|
138,252
|
|
162,447
|
|
123,734
|
|
542,420
|
|
|
Interest
expense, net
|
|
11,190
|
|
12,184
|
|
11,529
|
|
9,335
|
|
44,238
|
|
|
Income before
income taxes
|
|
106,797
|
|
126,068
|
|
150,918
|
|
114,399
|
|
498,182
|
|
|
Provision for
income taxes
|
|
37,371
|
|
44,667
|
|
52,960
|
|
43,703
|
|
178,701
|
|
|
Net income
|
|
$
|
69,426
|
|
$
|
81,401
|
|
$
|
97,958
|
|
$
|
70,696
|
|
$
|
319,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.27
|
|
$
|
0.32
|
|
$
|
0.38
|
|
$
|
0.28
|
|
$
|
1.25
|
|
|
Diluted
|
|
$
|
0.27
|
|
$
|
0.31
|
|
$
|
0.38
|
|
$
|
0.27
|
|
$
|
1.23
|
|
|
Weighted-average
common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
256,272
|
|
255,474
|
|
255,817
|
|
255,402
|
|
255,741
|
|
|
Diluted
|
|
260,626
|
|
259,594
|
|
259,911
|
|
259,723
|
|
260,098
|
|
Per share amounts do not necessarily sum due to changes in the
calculation of shares outstanding for each discrete period and rounding.
47
REPORTS
OF MANAGEMENT
To our Shareholders:
MANAGEMENT’S 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 management’s 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 company’s 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.
MANAGEMENT’S 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,
2006.
Management’s assessment of the effectiveness of the company’s internal
control over financial reporting as of December 31, 2006 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.
|
|
|
Douglas M.
Baker, Jr.
|
|
Chairman of the
Board, President and Chief Executive Officer
|
|
/s/ Steven L.
Fritze
|
|
|
Steven L. Fritze
|
|
Executive Vice
President and Chief Financial Officer
|
48
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Directors of Ecolab Inc.:
We have completed integrated audits of Ecolab Inc.’s consolidated
financial statements and of its internal control over financial reporting as of
December 31, 2006, 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 sheet 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, 2006 and
2005, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2006 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.
As discussed in Note 2 to the consolidated financial statements, Ecolab
Inc. changed the manner in which it accounts for defined benefit pension and other
postretirement plans effective December 31, 2006.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Also, in our opinion, management’s assessment, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting, that Ecolab
Inc. maintained effective internal control over financial reporting as of
December 31, 2006 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, 2006, 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 management’s 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 management’s
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 company’s 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 company’s 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 company’s 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 23, 2007
49
SUMMARY OPERATING AND FINANCIAL DATA
|
DECEMBER 31 (THOUSANDS, EXCEPT PER SHARE)
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,562,810
|
|
$
|
2,327,454
|
|
$
|
2,135,660
|
|
$
|
2,014,767
|
|
|
International (at average rates of currency exchange
during the year)
|
|
2,333,004
|
|
2,207,378
|
|
2,049,273
|
|
1,747,052
|
|
|
Total
|
|
4,895,814
|
|
4,534,832
|
|
4,184,933
|
|
3,761,819
|
|
|
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)
|
|
2,416,058
|
|
2,248,831
|
|
2,033,492
|
|
1,846,584
|
|
|
Selling, general
and administrative expenses
|
|
1,868,114
|
|
1,743,581
|
|
1,657,084
|
|
1,459,818
|
|
|
Special charges,
sale of business and merger expenses
|
|
|
|
|
|
4,467
|
|
408
|
|
|
Operating income
|
|
611,642
|
|
542,420
|
|
489,890
|
|
455,009
|
|
|
Gain on sale of
equity investment
|
|
|
|
|
|
|
|
11,105
|
|
|
Interest expense,
net
|
|
44,418
|
|
44,238
|
|
45,344
|
|
45,345
|
|
|
Income from
continuing operations before income taxes, equity earnings and changes in
accounting principle
|
|
567,224
|
|
498,182
|
|
444,546
|
|
420,769
|
|
|
Provision for
income taxes
|
|
198,609
|
|
178,701
|
|
161,853
|
|
160,179
|
|
|
Equity in
earnings of Henkel-Ecolab
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing operations
|
|
368,615
|
|
319,481
|
|
282,693
|
|
260,590
|
|
|
Gain from
discontinued operations
|
|
|
|
|
|
|
|
|
|
|
Changes in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
Net income, as
reported
|
|
368,615
|
|
319,481
|
|
282,693
|
|
260,590
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
Adjusted net
income
|
|
$
|
368,615
|
|
$
|
319,481
|
|
$
|
282,693
|
|
$
|
260,590
|
|
|
Income per common
share, as reported
|
|
|
|
|
|
|
|
|
|
|
Basic - continuing operations
|
|
$
|
1.46
|
|
$
|
1.25
|
|
$
|
1.10
|
|
$
|
1.00
|
|
|
Basic - net income
|
|
1.46
|
|
1.25
|
|
1.10
|
|
1.00
|
|
|
Diluted - continuing operations
|
|
1.43
|
|
1.23
|
|
1.09
|
|
0.99
|
|
|
Diluted - net income
|
|
1.43
|
|
1.23
|
|
1.09
|
|
0.99
|
|
|
Adjusted income
per common share
|
|
|
|
|
|
|
|
|
|
|
Basic - continuing operations
|
|
1.46
|
|
1.25
|
|
1.10
|
|
1.00
|
|
|
Basic - net income
|
|
1.46
|
|
1.25
|
|
1.10
|
|
1.00
|
|
|
Diluted - continuing operations
|
|
1.43
|
|
1.23
|
|
1.09
|
|
0.99
|
|
|
Diluted - net income
|
|
$
|
1.43
|
|
$
|
1.23
|
|
$
|
1.09
|
|
$
|
0.99
|
|
|
Weighted-average
common shares outstanding — basic
|
|
252,132
|
|
255,741
|
|
257,575
|
|
259,454
|
|
|
Weighted-average
common shares outstanding — diluted
|
|
257,144
|
|
260,098
|
|
260,407
|
|
262,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELECTED
INCOME STATEMENT RATIOS
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
50.7
|
%
|
50.4
|
%
|
51.4
|
%
|
50.9
|
%
|
|
Selling, general
and administrative expenses
|
|
38.2
|
|
38.4
|
|
39.6
|
|
38.8
|
|
|
Operating income
|
|
12.5
|
|
12.0
|
|
11.7
|
|
12.1
|
|
|
Income from
continuing operations before income taxes
|
|
11.6
|
|
11.0
|
|
10.6
|
|
11.2
|
|
|
Income from
continuing operations
|
|
7.5
|
|
7.0
|
|
6.8
|
|
6.9
|
|
|
Effective income
tax rate
|
|
35.0
|
%
|
35.9
|
%
|
36.4
|
%
|
38.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL
POSITION
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
1,853,557
|
|
$
|
1,421,666
|
|
$
|
1,279,066
|
|
$
|
1,150,340
|
|
|
Property, plant
and equipment, net
|
|
951,569
|
|
868,053
|
|
866,982
|
|
769,112
|
|
|
Investment in
Henkel-Ecolab
|
|
|
|
|
|
|
|
|
|
|
Goodwill,
intangible and other assets
|
|
1,614,239
|
|
1,506,909
|
|
1,570,126
|
|
1,309,466
|
|
|
Total assets
|
|
$
|
4,419,365
|
|
$
|
3,796,628
|
|
$
|
3,716,174
|
|
$
|
3,228,918
|
|
|
Current
liabilities
|
|
$
|
1,502,730
|
|
$
|
1,119,357
|
|
$
|
939,547
|
|
$
|
851,942
|
|
|
Long-term debt
|
|
557,058
|
|
519,374
|
|
645,445
|
|
604,441
|
|
|
Postretirement
health care and pension benefits
|
|
420,245
|
|
302,048
|
|
270,930
|
|
249,906
|
|
|
Other liabilities
|
|
259,102
|
|
206,639
|
|
262,111
|
|
201,548
|
|
|
Shareholders’
equity
|
|
1,680,230
|
|
1,649,210
|
|
1,598,141
|
|
1,321,081
|
|
|
Total liabilities
and shareholders’ equity
|
|
$
|
4,419,365
|
|
$
|
3,796,628
|
|
$
|
3,716,174
|
|
$
|
3,228,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELECTED
CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
Cash provided by
operating activities
|
|
$
|
627,564
|
|
$
|
590,136
|
|
$
|
570,908
|
|
$
|
523,932
|
|
|
Depreciation and
amortization
|
|
268,569
|
|
256,935
|
|
246,954
|
|
228,103
|
|
|
Capital
expenditures
|
|
287,885
|
|
268,783
|
|
275,871
|
|
212,035
|
|
|
Cash dividends
declared per common share
|
|
$
|
0.4150
|
|
$
|
0.3625
|
|
$
|
0.3275
|
|
$
|
0.2975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELECTED
FINANCIAL MEASURES/OTHER
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
1,066,036
|
|
$
|
746,301
|
|
$
|
701,577
|
|
$
|
674,644
|
|
|
Total debt to
capitalization
|
|
38.8
|
%
|
31.2
|
%
|
30.5
|
%
|
33.8
|
%
|
|
Book value per
common share
|
|
$
|
6.69
|
|
$
|
6.49
|
|
$
|
6.21
|
|
$
|
5.13
|
|
|
Return on
beginning equity
|
|
22.4
|
%
|
20.0
|
%
|
21.4
|
%
|
23.3
|
%
|
|
Dividends per
share/diluted net income per common share
|
|
29.0
|
%
|
29.5
|
%
|
30.0
|
%
|
30.1
|
%
|
|
Net interest
coverage
|
|
13.8
|
|
12.3
|
|
10.8
|
|
10.0
|
|
|
Year end market
capitalization
|
|
$
|
11,360,426
|
|
$
|
9,217,763
|
|
$
|
9,047,445
|
|
$
|
7,045,490
|
|
|
Annual common
stock price range
|
|
$
|
46.40-33.64
|
|
$
|
37.15-30.68
|
|
$
|
35.59-26.12
|
|
$
|
27.92-23.08
|
|
|
Number of employees
|
|
23,130
|
|
22,404
|
|
21,338
|
|
20,826
|
|
Property, plant and equipment amounts have been restated to include
capital software which was previously classified in other assets. Results for 2004 through 1996 have been
restated to reflect the effect of retroactive application of SFAS No. 123R, “Share-Based
Payment”. The former Henkel-Ecolab joint venture is included as a consolidated
subsidiary effective November 30, 2001.
Adjusted results for 1996 through 2001 reflect the pro forma effect of
the discontinuance of the amortization of goodwill as if SFAS No. 142 had been
in effect since January 1, 1996. 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.
50
|
2002
|
|
2001
|
|
2000
|
|
1999
|
|
1998
|
|
1997
|
|
1996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 1,923,500
|
|
$
|
1,821,902
|
|
$
|
1,746,698
|
|
$
|
1,605,385
|
|
$
|
1,429,711
|
|
$
|
1,251,517
|
|
$
|
1,127,281
|
|
|
1,480,085
|
|
498,808
|
|
483,963
|
|
444,413
|
|
431,366
|
|
364,524
|
|
341,231
|
|
|
3,403,585
|
|
2,320,710
|
|
2,230,661
|
|
2,049,798
|
|
1,861,077
|
|
1,616,041
|
|
1,468,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,688,710
|
|
1,121,133
|
|
1,056,899
|
|
963,900
|
|
875,102
|
|
745,437
|
|
694,909
|
|
|
1,304,239
|
|
898,159
|
|
864,072
|
|
804,436
|
|
730,170
|
|
655,726
|
|
590,641
|
|
|
37,031
|
|
824
|
|
(20,736
|
)
|
|
|
|
|
|
|
|
|
|
373,605
|
|
300,594
|
|
330,426
|
|
281,462
|
|
255,805
|
|
214,878
|
|
182,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,895
|
|
28,434
|
|
24,605
|
|
22,713
|
|
21,742
|
|
12,637
|
|
14,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
329,710
|
|
272,160
|
|
305,821
|
|
258,749
|
|
234,063
|
|
202,241
|
|
168,590
|
|
|
131,277
|
|
110,453
|
|
124,467
|
|
106,412
|
|
99,340
|
|
83,911
|
|
69,840
|
|
|
|
|
15,833
|
|
19,516
|
|
18,317
|
|
16,050
|
|
13,433
|
|
13,011
|
|
|
198,433
|
|
177,540
|
|
200,870
|
|
170,654
|
|
150,773
|
|
131,763
|
|
111,761
|
|
|
1,882
|
|
|
|
|
|
|
|
38,000
|
|
|
|
|
|
|
(4,002
|
)
|
|
|
(2,428
|
)
|
|
|
|
|
|
|
|
|
|
196,313
|
|
177,540
|
|
198,442
|
|
170,654
|
|
188,773
|
|
131,763
|
|
111,761
|
|
|
|
|
18,471
|
|
17,762
|
|
16,631
|
|
14,934
|
|
11,195
|
|
10,683
|
|
|
$ 196,313
|
|
$
|
196,011
|
|
$
|
216,204
|
|
$
|
187,285
|
|
$
|
203,707
|
|
$
|
142,958
|
|
$
|
122,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.77
|
|
$
|
0.70
|
|
$
|
0.79
|
|
$
|
0.66
|
|
$
|
0.58
|
|
$
|
0.51
|
|
$
|
0.43
|
|
|
0.76
|
|
0.70
|
|
0.78
|
|
0.66
|
|
0.73
|
|
0.51
|
|
0.43
|
|
|
0.76
|
|
0.68
|
|
0.76
|
|
0.63
|
|
0.56
|
|
0.49
|
|
0.42
|
|
|
0.75
|
|
0.68
|
|
0.75
|
|
0.63
|
|
0.70
|
|
0.49
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.77
|
|
0.77
|
|
0.86
|
|
0.72
|
|
0.64
|
|
0.55
|
|
0.47
|
|
|
0.76
|
|
0.77
|
|
0.85
|
|
0.72
|
|
0.79
|
|
0.55
|
|
0.47
|
|
|
0.76
|
|
0.75
|
|
0.83
|
|
0.70
|
|
0.62
|
|
0.53
|
|
0.46
|
|
|
$ 0.75
|
|
$
|
0.75
|
|
$
|
0.82
|
|
$
|
0.70
|
|
$
|
0.76
|
|
$
|
0.53
|
|
$
|
0.46
|
|
|
258,147
|
|
254,832
|
|
255,505
|
|
259,099
|
|
258,314
|
|
258,891
|
|
257,983
|
|
|
261,574
|
|
259,855
|
|
263,892
|
|
268,837
|
|
268,095
|
|
267,643
|
|
265,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50.4%
|
|
51.7
|
%
|
52.6
|
%
|
53.0
|
%
|
53.0
|
%
|
53.9
|
%
|
52.7
|
%
|
|
38.3
|
|
38.7
|
|
38.7
|
|
39.2
|
|
39.2
|
|
40.6
|
|
40.2
|
|
|
11.0
|
|
13.0
|
|
14.8
|
|
13.7
|
|
13.7
|
|
13.3
|
|
12.5
|
|
|
9.7
|
|
11.7
|
|
13.7
|
|
12.6
|
|
12.6
|
|
12.5
|
|
11.5
|
|
|
5.8
|
|
7.7
|
|
9.0
|
|
8.3
|
|
8.1
|
|
8.2
|
|
7.6
|
|
|
39.8%
|
|
40.6
|
%
|
40.7
|
%
|
41.1
|
%
|
42.4
|
%
|
41.5
|
%
|
41.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 1,015,937
|
|
$
|
929,583
|
|
$
|
600,568
|
|
$
|
577,321
|
|
$
|
503,514
|
|
$
|
509,501
|
|
$
|
435,507
|
|
|
716,095
|
|
668,413
|
|
512,581
|
|
454,376
|
|
423,941
|
|
400,537
|
|
336,314
|
|
|
|
|
|
|
199,642
|
|
219,003
|
|
253,646
|
|
239,879
|
|
285,237
|
|
|
1,133,875
|
|
943,400
|
|
411,871
|
|
341,966
|
|
293,528
|
|
267,731
|
|
151,403
|
|
|
$ 2,865,907
|
|
$
|
2,541,396
|
|
$
|
1,724,662
|
|
$
|
1,592,666
|
|
$
|
1,474,629
|
|
$
|
1,417,648
|
|
$
|
1,208,461
|
|
|
$ 853,828
|
|
$
|
827,952
|
|
$
|
532,034
|
|
$
|
470,674
|
|
$
|
399,791
|
|
$
|
404,464
|
|
$
|
327,771
|
|
|
539,743
|
|
512,280
|
|
234,377
|
|
169,014
|
|
227,041
|
|
259,384
|
|
148,683
|
|
|
207,596
|
|
183,281
|
|
117,790
|
|
97,527
|
|
85,793
|
|
76,109
|
|
73,577
|
|
|
144,993
|
|
121,135
|
|
72,803
|
|
86,715
|
|
67,829
|
|
124,641
|
|
138,415
|
|
|
1,119,747
|
|
896,748
|
|
767,658
|
|
768,736
|
|
694,175
|
|
553,050
|
|
520,015
|
|
|
$ 2,865,907
|
|
$
|
2,541,396
|
|
$
|
1,724,662
|
|
$
|
1,592,666
|
|
$
|
1,474,629
|
|
$
|
1,417,648
|
|
$
|
1,208,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 412,697
|
|
$
|
358,508
|
|
$
|
309,813
|
|
$
|
290,098
|
|
$
|
233,727
|
|
$
|
234,126
|
|
$
|
253,819
|
|
|
220,635
|
|
158,785
|
|
143,212
|
|
129,240
|
|
117,646
|
|
97,449
|
|
86,791
|
|
|
212,757
|
|
157,937
|
|
150,009
|
|
145,622
|
|
147,631
|
|
121,667
|
|
111,518
|
|
|
$ 0.2750
|
|
$
|
0.2625
|
|
$
|
0.2450
|
|
$
|
0.2175
|
|
$
|
0.1950
|
|
$
|
0.1675
|
|
$
|
0.1450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 699,842
|
|
$
|
745,673
|
|
$
|
370,969
|
|
$
|
281,074
|
|
$
|
295,032
|
|
$
|
308,268
|
|
$
|
176,292
|
|
|
38.5%
|
|
45.4
|
%
|
32.6
|
%
|
26.8
|
%
|
29.8
|
%
|
35.8
|
%
|
25.3
|
%
|
|
$ 4.31
|
|
$
|
3.51
|
|
$
|
3.02
|
|
$
|
2.97
|
|
$
|
2.68
|
|
$
|
2.14
|
|
$
|
2.01
|
|
|
21.9%
|
|
23.1
|
%
|
25.8
|
%
|
24.6
|
%
|
34.1
|
%
|
25.3
|
%
|
24.5
|
%
|
|
36.7%
|
|
38.6
|
%
|
32.7
|
%
|
34.5
|
%
|
27.9
|
%
|
34.2
|
%
|
34.5
|
%
|
|
8.5
|
|
10.6
|
|
13.4
|
|
12.4
|
|
11.8
|
|
17.0
|
|
12.7
|
|
|
$ 6,432,035
|
|
$
|
5,147,980
|
|
$
|
5,492,072
|
|
$
|
5,063,409
|
|
$
|
4,685,512
|
|
$
|
3,579,240
|
|
$
|
2,450,258
|
|
|
$ 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
|
|
|
20,417
|
|
19,326
|
|
14,250
|
|
12,870
|
|
12,007
|
|
10,210
|
|
9,573
|
|
51
