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ecolab Ecolab2006AR

  2. 2. DESCRIPTION OF BUSINESS Ecolab is the global leader in cleaning, sanitizing, food safety and infection control products and services. Founded in 1923 and headquartered in St. Paul, Minn., Ecolab has been partnering with customers for more than 80 years. Ecolab reaches customers in more than 160 countries across North America, Europe, Asia Pacific, Latin America, the Middle East and Africa, and employs more than 23,000 associates worldwide. Ecolab delivers comprehensive programs and services to the foodservice, food and beverage processing, hospitality, healthcare, government and education, retail, textile care, commercial facilities, and vehicle wash industries. Ecolab is committed to assisting customers worldwide with their unique needs by providing them with comprehensive, value-added solutions and professional, personal service. With more than 13,000 sales-and-service experts, Ecolab employs the industry’s largest and best-trained direct sales-and-service force, which advises and assists customers in meeting a full range of cleaning, sanitation and service needs. For more information, visit or call 1-800-35-CLEAN. Ecolab common stock is traded on the New York Stock Exchange under the symbol ECL. Ecolab news releases and other selected investor information are available at FORWARD-LOOKING STATEMENTS AND RISK FACTORS We refer readers to the company’s disclosure, entitled “Forward-Looking Statements and Risk Factors,” which is located on page 26 of this Annual Report. CUSTOMER SEGMENTS BUSINESS MIX 2006 Full-service restaurants PERCENT OF TOTAL SALES Quickservice restaurants UNITED STATES 53% INTERNATIONAL 47% Hotels Institutional 27% Europe/Middle East/Africa 32% Food retail Food & Beverage 8% Asia Pacific 7% Schools Pest Elimination 6% Latin America 4% Colleges and universities Kay 5% Canada 3% Laundries and textile rental GCS Service 3% Other 1% Hospitals Healthcare 1% Nursing homes Vehicle Care 1% Other healthcare facilities Textile Care 1% Dairy farms and plants Water Care Services 1% Food, beverage and brewery plants Pharmaceutical and cosmetic facilities Office buildings Shopping malls SALES-AND-SERVICE ASSOCIATES Retail facilities 2004 2005 2006 DECEMBER 31 Movie theaters Recreational facilities Institutional 3,150 3,245 3,490 Amusement parks Kay 325 350 355 Building service contractors Pest Elimination 1,725 1,830 1,900 Cruise lines Healthcare 70 80 80 Correctional facilities GCS Service 470 470 465 Government facilities Textile Care 75 75 80 Airlines Food & Beverage Light manufacturing industries 450 425 435 Vehicle wash and detailing Water Care Services 95 125 115 Vehicle Care 100 100 105 MARKETS SERVED Europe/Middle East/Africa 3,915 4,150 4,225 United States Asia Pacific 960 995 1,070 Europe/Middle East/Africa Canada 355 375 395 Asia Pacific Latin America 590 690 715 Canada Latin America TOTAL 12,280 12,910 13,430
  3. 3. NET INCOME DILUTED NET INCOME DIVIDENDS DECLARED NET SALES PER SHARE PER SHARE DOLLARS IN MILLIONS DOLLARS IN MILLIONS DOLLARS DOLLARS $1.43 $0.4150 $369 $4,896 $4,535 $0.3625 $319 $1.23 $4,185 $0.3275 $283 $3,762 $1.09 $0.2975 $261 $0.2750 $0.99 $3,404 $196 $0.75 02 03 06 02 03 06 02 03 06 02 03 06 04 05 04 05 04 05 04 05 FINANCIAL HIGHLIGHTS PERCENT CHANGE 2006 2005 2004 2006 2005 THOUSANDS, EXCEPT PER SHARE Net Sales $4,895,814 $4,534,832 $4,184,933 8% 8% Net Income 368,615 319,481 282,693 15 13 Percent of Sales 7.5% 7.0% 6.8% Diluted Net Income Per Common Share 1.43 1.23 1.09 16 13 Diluted Weighted-Average Common Shares Outstanding 257,144 260,098 260,407 (1) – Dividends Declared Per Common Share 0.4150 0.3625 0.3275 14 11 Cash Provided by Operating Activities 627,564 590,136 570,908 6 3 Capital Expenditures 287,885 268,783 275,871 7 (3) Shareholders’ Equity 1,680,230 1,649,210 1,598,141 2 3 Return on Beginning Equity 22.4% 20.0% 21.4% Total Debt 1,066,036 746,301 701,577 43 6 Total Debt to Capitalization 38.8% 31.2% 30.5% Total Assets $4,419,365 $3,796,628 $3,716,174 16% 2% ECOLAB STOCK PERFORMANCE ECOLAB STOCK PERFORMANCE COMPARISON 1.70 2004 2005 2006 • Ecolab Stock Price Index, Dec. 31, 2003 = 1.00 $47 • Ecolab Stock Price 31, 2003 = 1.00 ECOLAB, S&P 500 INDICES QUARTER LOW HIGH LOW HIGH LOW HIGH 1.60 • S&P 500 Index, Dec. ECOLAB STOCK PRICE $42 First $26.12 $28.61 $31.20 $35.08 $33.64 $40.50 1.50 Second 27.95 31.77 30.68 34.23 37.00 41.20 1.40 Third 29.04 31.80 30.75 34.14 39.57 45.43 $37 1.30 Fourth 31.32 35.59 30.93 37.15 43.81 46.40 $32 1.20 1 .1 0 $27 1.00 $22 0.90 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2003 2004 2005 2006 All financial information for all periods reflects the company’s adoption of Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” in the fourth quarter of 2005. All prior periods have been restated. COVER: Inspiring Confidence is all about expertise. And that’s exactly what Ecolab provides to our customers around the globe. Our experts provide the most professional, timely service. The most creative, thoughtful problem-solving. The most thorough, knowledgeable research. In fact, there are more than 23,000 experts hard at work every day at Ecolab to help our customers run smoother, more efficient and more successful operations. For us, Inspiring Confidence isn’t something to aspire to – it’s a job requirement. And we wouldn’t have it any other way.
  4. 4. WE’RE INSPIRING CONFIDENCE EVERY DAY – WITH THE BEST PRODUCTS, PROGRAMS AND PEOPLE ON THE PLANET TO OUR SHAREHOLDERS: Our formula is straightforward. We take Every day, we work to build our care of our people, help our customers customers’ confidence in our ability prosper and grow, maintain a disciplined to protect and serve them better than financial approach – and we succeed. anyone else. How? By providing effective and innovative solutions. By offering Looking for additional inspiration? comprehensive and superior protection. Read on for our 2006 accomplishments: And most importantly, by delivering the DOUGLAS M. BAKER, JR. industry’s broadest and best personal FINANCIAL PERFORMANCE service – anytime, anywhere. Chairman of the Board, We are proud to report that our net President and Chief Executive Officer sales rose 8% to $4.9 billion in 2006, We have a strong bias for action – and fueled by double-digit growth in the for results. When our customers have a U.S. and Latin America, and solid need, we solve it. When we say we’ll do growth in the rest of the regions. something, we do it. Ecolab is made up Operating income was $612 million in of a diverse group of talented, dedicated 2006, up 13% from $542 million in associates who thrive on making 2005. Operating income increased to customers happy – and winning. It’s our 12.5% of net sales, compared to last team that makes us successful and the year’s 12.0%, driven by strong sales leader in our industry. gains and effective productivity initiatives. This team has enabled us to develop the Diluted net income per share was $1.43 most innovative, advanced product and for 2006, up 16% from $1.23 in 2005. program solutions to assist our Our return on beginning shareholders’ customers and exceed their expectations. equity rose to 22% in 2006, the 15th We invest millions in research and consecutive year in which the development to make sure we’re creating company achieved its long-term the best solutions for our customers at financial objective of a 20% return on the best value, which allows them to turn beginning shareholders’ equity. their focus to other areas of their We achieved record cash flow from businesses. operating activities of $628 million, and our total debt to capitalization But even companies with great people ratio was 39%. These results enabled and great products can only go so far us to retain our debt rating within the without a great growth strategy. “A” categories of the major rating Fortunately, at Ecolab, we have a proven agencies during 2006. strategy that has helped us achieve We increased our quarterly dividend strong, steady growth in the past, and rate for the 15th consecutive year, as continues to generate new opportunities it rose 15% in December to an for the future. Our Circle the Customer – indicated annual rate of $0.46 per Circle the Globe strategy charts a clear common share. course for our future as we work to help Our share price rose 25% in 2006 – customers achieve the highest levels of widely outperforming the Standard safety and sanitation throughout their & Poor’s 500 14% increase. Our share operations. performance has exceeded that of the S&P 500 in 13 of the past 16 years. 4 ANNUAL REPORT 2006
  5. 5. NEW PRODUCTS AND SERVICES LEADERSHIP DEVELOPMENT In 2006, we continued our tradition of These examples are just a few of the As previously announced, I was elected excellence in new product innovation to many launched last year. You can find to the additional post of Chairman provide superior cleaning, food safety more of our latest product, program and of the Board in May 2006 upon and health protection. For example, we service offerings in the “Review of Al Schuman’s retirement from the Ecolab built upon our strong antimicrobial Operations” section of this report. board of directors. On behalf of the platform with the introduction of entire Ecolab family, I want to thank Al Octa-Gone®, the protein (meat and Of course, beyond products and again for his 49 years of inspired service poultry) industry’s only fatty-acid based programs, our legendary customer and many contributions to Ecolab. I’m antimicrobial treatment that reduces service is Ecolab’s key differentiator and honored that the board selected me for microbial contamination on ready-to-eat No. 1 priority. In 2006, we continued to this additional responsibility, and I’m meat and poultry products, making them invest in our sales-and-service excited to lead Ecolab as we continue to safer and contributing to a longer shelf organization, adding more than 500 grow and leverage our many life. In addition, we further bolstered our new associates to our global field opportunities. food safety portfolio when Tsunami® 100 organization, which is now more than became the first EPA-registered 13,000 strong and by far the industry’s Additional important leadership antimicrobial product that reduces best and largest. This commitment to developments include: pathogens in fruit and vegetable process personal service continues to inspire water, thereby helping to reduce the risk confidence among our customers that In February, Jim Howard retired from of foodborne illness. Ecolab is a dedicated partner in the Ecolab’s board of directors. Jim had ongoing success of their businesses. served on Ecolab’s board for 15 years, In addition, we built upon our proven providing strong leadership and wise solutions and systems that maximize ACQUISITIONS counsel. We thank Jim for his performance while minimizing total We continued to make targeted outstanding service to Ecolab, and environmental impact. We expanded our acquisitions, following our disciplined wish him all the best. highly successful 360º of Protection™ approach to ensure strong strategic and In May, John Zillmer was elected to program into the long-term care market, business fit, as well as attractive the Ecolab board of directors. John creating a customized product and economics. is the chairman of the board and chief service offering that saves time, labor, executive officer of Allied Waste energy and water to increase operational In June, we acquired Shield Medicare Industries, Inc., a solid waste efficiencies. By combining a wide-range Ltd., based in Farnham, UK. With management company. In addition, of products, systems, training and annual sales of $19 million, Shield is a John has extensive experience in the service, the 360º of Protection™ leading provider of contamination managed services industry, an program represents the industry’s most control products for pharmaceutical, important Ecolab market. We welcome comprehensive solution for foodservice, medical device and hospital John to our board. hospitality and long-term care clean rooms. In November, we regretfully accepted customers. In September, we purchased Powles the resignation of Luciano Iannuzzi. Hunt & Sons International Ltd’s UK Luciano had served as executive vice We also added PERformance™, a commercial laundry business, with president of the Ecolab Europe/Middle low-temperature, proprietary oxygen $5 million in annual sales, from the East/Africa organization for the past bleach that reduces energy consumption Quill International Group. This four years. We thank him for his and increases textile life, to our acquisition will bolster our textile care dedicated service and wish him the successful full cycle solutions™ suite for business in the UK, adding scale to best in his future endeavors. laundry customers. This addition is the business. In February 2007, Ulrich Lehner retired another way to help commercial Also in September, we acquired from the Ecolab board of directors. laundries reduce total operating and DuChem Industries, Inc., a Ulrich had served on Ecolab’s board environmental costs through a manufacturer and marketer of since 2001 as a member of the Finance combination of chemistry, service, cleaning and sanitizing products for Committee. We thank him for his engineering, technology and water the food and beverage processing valued service to our company, and care solutions. market based in Newnan, Ga. wish him well. DuChem’s core focus is the protein Also in February 2007, Ecolab’s board Continuing our efforts to customize (meat and poultry) market segment, of directors appointed Hans Van Bylen solutions to meet specific customer with annual sales of $10 million. to fill the vacancy left by Ulrich needs, we created a unique pest Lehner’s retirement. Hans is executive elimination program for limited-service vice president of Cosmetics/Toiletries hotels. It has seen significant customer of Henkel KGaA of Düsseldorf, success and is helping to drive Germany. We welcome Hans to continued strong growth in our the board. Pest Elimination business. ANNUAL REPORT 2006 5
  6. 6. ACHIEVEMENT & RECOGNITION OUTLOOK FOR 2007 For the seventh consecutive year, We expect 2007 to be another year of Finally, our strategy. Our investments in Ecolab was honored to be named one growth and achievement for Ecolab and our people and our products fuel our of the “100 Best Corporate Citizens” our associates. Our major end markets in Circle the Customer – Circle the Globe by Business Ethics magazine. Ecolab is foodservice, hospitality and healthcare strategy. But ultimately, Circle the one of only 16 companies to receive appear to be in solid shape as we enter Customer – Circle the Globe is successful this recognition every year since the 2007, and the ongoing need for improved because it’s driven by our customers. list’s inception. We are committed to and more effective cleaning and They tell us what they want and need to operating under the highest standards sanitation solutions in the global food improve their operations, and we listen of corporate behavior, and this award supply and foodservice system continues and deliver. Whether it’s food safety, is a terrific acknowledgement of to present new opportunities for us to employee safety, operating efficiency or our work. better serve our customers. training, we provide best practices and Ecolab also earned seventh place on programs to help them succeed. And we “America’s Best Big Companies Honor In 2007, we’ll leverage these trends and back it all up with personal service that Roll.” The honor roll recognizes 29 continue to inspire confidence in Ecolab has allowed us to deliver results to our companies that have consistently by doing the same things that have made customers, unit by unit, around the appeared on Forbes magazine’s annual us successful for the past eight decades. world. list of the 400 best big companies in This includes investing in our people, our America – also known as the Forbes product portfolio, and our Circle the We work hard to help all of our Platinum 400. This recognition Customer – Circle the Globe strategy. stakeholders succeed. We work hard so underscores our focus on consistently our customers have the best solutions achieving strong financial results in First, our people. We start here because for all of their needs. We work hard to the right way. it’s our people that set us apart. They provide our associates meaningful work In recognition of our global bring the spirit, pride, determination, opportunities that promote personal commitment to innovation and food commitment, passion and integrity of our development and reward exceptional safety, the International Association Ecolab Culture to life. We invest in our performance. And we work hard to for Food Protection selected Ecolab as people by giving them the right tools, provide our shareholders with long-term the 2006 recipient of the Black Pearl technology and training they need to get superior value. Because for Ecolab, this is Award of Corporate Excellence in Food their jobs done more quickly and what inspiring confidence is all about. Safety and Quality. This prestigious efficiently. This ranges from wireless honor is given annually to one handheld technology for our field company for its efforts in advancing representatives to robust IT systems for food safety and quality through administrative functions to streamlined consumer programs, employee processes for our supply chain Douglas M. Baker, Jr. relations, educational activities, operations to online and face-to-face Chairman of the Board, adherence to standards, and support training programs. It also includes President and Chief Executive Officer of the goals and objectives of the IAFP. fostering a workplace defined by We are honored to be chosen for this opportunities for personal growth and important recognition. professional advancement, and training Finally, Ecolab was again named to to support that growth. Selling Power’s list of “The 50 Best Companies to Sell For” among the Next, our products. We create solutions largest sales forces in the United that really work for our customers – by States. Ecolab was ranked third on the focusing on ways to lower their use of list, which uses key metrics including natural resources and drive costs out of compensation, training and career their operations. Because it’s not just the mobility. At Ecolab, we believe that safety and effectiveness of the product our sales force is at the heart of our that’s important, it’s also the ease of use success, and we believe the best way and the ability to enhance their operational to serve our customers is to have the efficiency by providing solutions to best people serving them. We’re proud better manage time, labor, water and that Selling Power has again utility costs. Every year, we introduce acknowledged our investments in exciting advancements to help our our incredible team. customers achieve even better results and promote safer workplaces for our customers and their employees. And 2007 will bring our customers effective new solutions to help them meet their challenges. 6 ANNUAL REPORT 2006
  7. 7. SOLUTIONS Only Ecolab provides total solutions for our customers. It’s not just about products, or technology, or service, or people – it’s about all of these things, all of the time. It’s about ensuring that customers have what they need to succeed – no matter what their business, no matter where they’re located around the globe. Because of this, we’re confident that we’ll always provide the best solutions for our customers, and that’s what inspires us to keep getting even better.
  8. 8. INNOVATION Through industry-leading innovation, we inspire confidence by discovering new and better ways to tackle customers’ biggest issues. Ways to lower costs through operational efficiencies, such as time and labor savings, lower water and energy use, and reduced packaging and waste. Our research and development team figures in all of this for our latest formulas – and our customers can be confident that this knowledge and know-how is all built right in. 8 ANNUAL REPORT 2006
  9. 9. SERVICE Nothing inspires confidence more than professional, timely service that addresses the unique needs of our customers. We seek out, train and develop the best people to provide personal service and pay special attention to the challenges our customers face. Our brand of service is all about listening, understanding and helping customers make their operations better. Their success is our first priority – and that’s why we’ve been able to build relationships with customers that have lasted decades. ANNUAL REPORT 2006 9
  10. 10. INSPIRING CONFIDENCE 2006 REVIEW OF OPERATIONS How do we inspire confidence every day with customers around the globe? It’s simple. Through personal service. Innovative products. And consistently superior results. Our people across all business units continually provide customers with the best products, programs and services they need to make their operations run smoothly and efficiently. The following is a detailed summary of 2006 and outlook for 2007 from each of our core businesses. HIGHLIGHTS Increased its sales force productivity Accomplished continued, strong with the completed national rollout success with its proven 360° of of portable 360° Advisor™ tablet Protection™ program, a computers, which gather critical comprehensive suite of solutions for service reporting information in real foodservice, hospitality and long-term time and enhance operational data, care customers that significantly helping customers increase food increases food safety, guest safety and operational efficiencies. satisfaction, operating efficiency and Continued to make significant employee safety. investments in its field sales-and- Achieved substantial competitive service organization through hiring gains with new corporate accounts UNITED STATES: additional sales-and-service associates, and independent (street) customers. INSTITUTIONAL training and new technology. Integrated the Professional Products Institutional drove record 11% sales line into the Institutional range of growth and increased profits in 2006, OUTLOOK solutions, leveraging the breadth and thanks to significant new account gains Institutional expects to once again expertise of the Institutional sales and comprehensive, differentiated achieve strong growth in 2007. The force to deliver value-added floor care programs. The division also achieved division will invest in additional sales- and janitorial products to customers in greater operating efficiency, successfully and-service associates, technology, hospitality, healthcare and commercial offset increases in raw materials and training and R&D to ensure it continues facilities. fuel costs, and further penetrated key to deliver the highest level of exceptional Drove accelerated growth in the customer segments with additional service to customers. The water water care solutions market, thanks solutions. solutions segment offers particularly in part to a newly designed FresH2O™ good growth potential, and new product water filtration system, which is used launches will also enhance the division’s by restaurants and hospitality 360° value proposition. customers to purify tap water used in beverages and food. 10 ANNUAL REPORT 2006
  11. 11. PEST ELIMINATION KAY HEALTHCARE Pest Elimination enjoyed strong, 13% By focusing on large new customer gains Healthcare achieved record sales sales growth in 2006 driven by new in its core quickservice and food retail and improved market share in its contract sales, Circle the Customer and markets, Kay accomplished another year instrument care and rinseless hand penetration of existing accounts in core of strong double-digit growth, with hygiene segments in 2006. Nonetheless, segments. The division also significantly record sales increasing 11%. Kay also comparing against a strong year-ago improved its operating income, and expanded its reach in all of its markets period, sales grew 4%. The division earned the highest level of customer through aggressive penetration of new invested in new training programs for retention in its history. and existing customer accounts, while sales, leadership and key technical roles benefiting from continued growth and in order to further strengthen the field HIGHLIGHTS success of its global chain customers. organization and drive sales. Attained significant growth in sales of its Innspect Bed Bug Service™ for HIGHLIGHTS HIGHLIGHTS the hospitality market and its Wing Enjoyed good gains across the board Made significant new account gains CommandSM bird program in the retail in the quickservice food industry, as and successfully renewed key GPO and government segments. new accounts, new programs, new (group purchasing organization) Created a new, limited-service hotel products and improved product contracts. program in response to customer penetration all contributed to the gain. Expanded its highly successful need for bundled services, which has Continued to drive Circle the Customer Asepti-Solid™ program with additional achieved considerable sales and is – Circle the Globe success through the solutions that further solidify its driving growth with franchises. MarketGuard™ food retail program, presence as the market leader in Expanded its proven EcoProSM FS which combines best-of-industry central sterile. program to the quickservice solutions for food safety, pest Upgraded its hand hygiene dispensing restaurant segment, where it elimination and floor care. systems, offering superior, touchless provides exceptional protection Introduced the Formula Foam™ technology while preventing drips against pests such as fruit flies, Cleaning System, a portable, and clogs. cockroaches, mice, rats and ants. self-contained, high-foaming system Partnered with industry experts to Achieved outstanding double-digit designed for cleaning fresh foods develop programs to promote hand growth in the EcoSure food safety departments in food retail locations hygiene compliance and reduce and quality assurance business, driven more quickly and thoroughly. healthcare-associated infections. by Circle the Customer relationships Launched Polar Blue™, a high- and focus on operational efficiencies. performance pot-and-pan detergent OUTLOOK Invested in a number of strategies to designed specifically for cold Healthcare expects strong growth in reduce work-related injuries, increase temperatures found in certain areas 2007 as it continues to make further driver safety, attract and recruit top of the food retail environment. investments in field sales-and-service talent, and more efficiently manage its personnel and their capabilities, invest in routes, all to further enhance its high OUTLOOK R&D, and pursue strategic acquisition service levels and customer Kay expects continued aggressive growth opportunities. The division plans further satisfaction. in 2007 in all of its market segments, expansion into the gastrointestinal fueled by a healthy mix of corporate market with a broad cleaning and OUTLOOK account gains and new product disinfection portfolio. Its growth is also In 2007, Pest Elimination expects innovations. Kay will also help develop expected to come from its core product continued strong growth as it drives new additional solutions for its customers, portfolio for instrument care and hand contract sales and additional service and further growth for Ecolab, through hygiene, as well as from its strong base solutions in its core segments. The application of the Circle the Customer – of contract sales. division also plans to introduce an Circle the Globe strategy in its core improved food and beverage segment markets of quickservice and food retail. program, including new programs for the education and healthcare sectors. ANNUAL REPORT 2006 11
  12. 12. GCS SERVICE TEXTILE CARE FOOD & BEVERAGE In 2006, GCS Service focused on Textile Care showed a strong Food & Beverage achieved solid growth developing systems and processes improvement in 2006, with sales rising and record sales in 2006, fueled by that will drive competitive advantage, 10% to record levels and significantly double-digit gains in its meat and poultry business scalability and profitable long- improved operating income. The division business and steady gains in the dairy term growth. Reflecting that focus on continued to invest in field sales-and- and soft drink segments. Ecolab’s Circle infrastructure development, sales grew service associates and training. Its full the Customer strategy led the 8% sales only modestly, while substantial progress cycle solutions™ program, an application growth, as the division expanded its was made in achieving important of Ecolab’s Circle the Customer strategy, antimicrobial platforms, upgraded its strategic priorities. continued to perform well and helped field training and bolstered its market drive growth. position through an acquisition. HIGHLIGHTS Invested in a major systems conversion HIGHLIGHTS HIGHLIGHTS Introduced Octa-Gone®, a to remove inefficient systems, enhance Leveraged tunnel washer technology speed and service quality, and become from its sister division in Europe for revolutionary, fatty acid-based better positioned to meet customer the U.S. launch of PERformance™, a antimicrobial product that reduces challenges. low-temperature, proprietary oxygen microbial contamination on ready-to- Retooled its business model, including bleach that reduces energy and eat meat and poultry product surfaces strengthening the management team increases textile life. – the first of its kind on the market. Tsunami® 100 became the first and increasing associate retention. Continued to build on the success of Sharpened the focus on the parts the Aquamiser water reuse system EPA-registered antimicrobial business, including establishing a and Energy Optimiser heat exchange product that reduces pathogens in courier program to replenish parts system to provide customers with fruit and vegetable process water. Tsunami® 100 also controls spoilage- daily, thereby increasing technician substantial water and energy savings. efficiency, improving first-time fix Made important account wins and causing organisms, enhances shelf results and reducing customer better account penetration, including life, and requires no rinsing. equipment downtime, improving gains in the growing healthcare linen Acquired Georgia-based DuChem customer satisfaction. market. Industries, further solidifying Ecolab’s Achieved continued success with Drove continued success with its full leadership position in the meat and Unit-Trax™, an asset tracking system cycle solutions™, a complete program poultry segment, improving service that supplies customers with encompassing chemistry, service, coverage, and enhancing growth. important information about their water care, engineering and Launched DryExx™, a dry lube for kitchen equipment, related repair technology that helps commercial beverage plants that increases history and costs. laundries lower costs and optimize productivity by reducing soil buildup their operations. and eliminating drips and associated OUTLOOK hazards. By investing heavily in its service model OUTLOOK in 2006, GCS Service has made essential Textile Care expects solid sales OUTLOOK progress in building the right growth in 2007. The division foresees In 2007, Food & Beverage expects infrastructure to drive long-term growth. accelerated growth in the healthcare and continued strong growth in its protein and antimicrobial segments. Tsunami® GCS expects to benefit from these workwear markets, driven by its unique investments in 2007 as infrastructure lineup of superior solutions. Textile Care 100 is expected to show good strength work is completed. Long-term, the need will also further develop its information thanks to its unique process water for a national independent kitchen management systems, and plans to make pathogen claims. The division will equipment repair service remains strategic investments in R&D aimed at also invest in training and service important for leading chain accounts, helping customers reduce operating management tools to further enhance its and GCS will meet that demand as it costs. successful value proposition, and will leverages its efficient systems and pursue strategic acquisitions that benefit national footprint. the business. 12 ANNUAL REPORT 2006
  13. 13. WATER CARE SERVICES VEHICLE CARE Water Care Services improved its Vehicle Care posted record sales with performance in 2006 through aggressive growth of 5% in 2006, led by the Circle the Customer partnerships with development of new product innovations, Food & Beverage and Institutional, new account gains, and the addition of growing sales 8% to record levels. sales-and-service associates. The division also achieved improved profitability HIGHLIGHTS through increased efficiency, reduced Leveraged Ecolab’s expertise in solids costs and an improved operations technology to introduce a solid network. product solution for boiler and cooling towers that replaces large liquid drums HIGHLIGHTS of product with compact, easy-to-use Built momentum as the industry’s solid capsules and state-of-the-art innovation leader with its highly successful Rain-X® Online Protectant, dispensing systems. Achieved record growth in the marine a complete surface protectant, which market, including cruise lines, and was named Most Innovative New strong double-digit growth in the food Product of 2006 by the International and beverage market, by partnering Car Wash Association. with other Ecolab divisions to provide Extended its expertise to new markets solutions to their core customer base. and customers with the launch of its Blue Coral® Solid Power program, Introduced its indoor air quality program that helps reduce indoor air which includes an alkaline detergent quality issues that arise from mold, and a powerful presoak that require dust, allergens and other less space, less labor and reduced contaminants. storage requirements compared to Made investments in talent and field traditional liquids. technology to strengthen its field Made significant new account gains team and provide excellent service through its focus on advanced to customers. technology, superior service and powerful marketing. OUTLOOK Strengthened its current business Water Care Services expects to see through increased direct sales and further growth in 2007 through a distributor partnerships. continued focus on Circle the Customer opportunities aided by new innovation. OUTLOOK Water Care plans to further invest in its Vehicle Care anticipates further growth infrastructure by attracting, developing in 2007 as it aggressively drives new and retaining top talent and building its platforms to create additional, value- field service capabilities through the added products to meet customer needs introduction of new service reporting and drive sales. The division expects tools. strong performances from its full-service, convenience store and fleet segments. Vehicle Care will also leverage its TURN THE PAGE FOR MORE dispensing systems and presoaks 2006 HIGHLIGHTS... technology, and will add field sales-and- service staff. ANNUAL REPORT 2006 13
  14. 14. Food & Beverage introduced a new INTERNATIONAL: ASIA PACIFIC innovation in low-pressure foaming EUROPE/MIDDLE EAST/AFRICA In 2006, Asia Pacific achieved a 6% with Chameleon™, which uses Market-leading innovations and sales increase with sales reaching record frequency-controlled pumps to reduce increasing solutions with existing levels. The region enjoyed strong growth energy and water required to clean customers served to offset continuing in China and Southeast Asia, particularly food processing plants. F&B also widespread unfavorable market in Thailand and Indochina, as it expanded leveraged the successful global conditions in Europe, yielding 4% growth its Professional Products and Pest DryExx™ dry lubricant technology to in fixed currency exchange rates for the Elimination programs, added field help customers achieve water and region. Europe also realized geographic associates and launched new offerings. energy savings while improving growth through further expansion in workplace safety with the elimination Eastern Europe, including Russia, HIGHLIGHTS of wet, slippery floors. Romania and Bulgaria. In the Middle Drove improved growth in its Australia Pest Elimination drove new account East and Africa, Turkey and South Africa business, where innovation, including sales through investments in its are creating solid foundations for the launch of Aquamiser, a highly corporate accounts team, including continued growth. efficient water reuse system, has led establishing an expanded sales team to solid business growth and new in France and accelerating corporate HIGHLIGHTS account gains. account growth in the UK. In addition, Institutional made important gains in Successfully introduced Exelerate™ Pest Elimination introduced new the retail segment, using the HS, which penetrates dairy soils and solutions for high-potential markets in MarketGuard™ program to secure new speeds up the cleaning process for Europe, and increased customer corporate accounts. Institutional also dairy pasteurizers and other heated retention through its Service introduced comprehensive programs process equipment, while also offering Excellence program. that provide a complete suite of savings in water usage and effluent Middle East and Africa achieved a products and services for its varied surcharges. strong sales performance led by markets, including the 360º of Strengthened the China business excellent growth in South Africa. Protection™ program for foodservice infrastructure and added new capacity Notably, Food & Beverage and Pest customers, the HotelGuard program to supply our rapid growth with a new, Elimination secured solid gains for hospitality customers, and the state-of-the-art manufacturing plant through the acquisition of new HealthGuard program for hospitals and in Guangzhou. customers. long-term care facilities. Launched proven North American Textile Care achieved solid growth programs, including the successful OUTLOOK through the ongoing success of its 360° of Protection™ program, a Europe plans to build on the success of water and energy saving systems, as comprehensive program for the 360º of Protection™ program and on well as the introduction of new foodservice, hospitality and long-term its strengthened distributor network, in services and products, such as the care customers. addition to investing in its field teams, extensions to its successful Turbo line new technology and new products in and special oxygen bleaching agent. OUTLOOK 2007. By focusing on customer segments The business also expanded its Asia Pacific expects strong growth in and strengthening corporate account presence in the UK market through the 2007, led by gains in Southeast Asia, teams across the region, Europe also acquisition of Powles Hunt, which has China and Hong Kong. The region plans expects to expand its customer portfolio annual sales of $5 million. to launch a slate of new products, and with gains in hospitality, retail, building Healthcare strengthened its market will expand its Pest Elimination program services contractors, and food and leadership in endoscope reprocessing into new markets. It also intends to beverage. with Sekumatic Multi-clean, a new increase efficiency in Japan and formula for cleaning surgical Australia through automated service instruments, and sterile disinfectants reporting, and will strengthen functional fueled record growth in the support in areas such as IT, marketing, pharmaceutical and long-term care R&D and human resources. markets. In addition, Healthcare entered the clean room contamination control products market through the acquisition of Shield Medicare Ltd., a UK-based firm with sales of $19 million. 14 ANNUAL REPORT 2006
  15. 15. CANADA LATIN AMERICA Canada delivered solid sales growth of Latin America turned in another solid 8% in 2006, driven by strong year of double-digit growth and record performances in its core markets and sales, increasing sales by 14% in fixed large hospitality customer gains. currency exchange rates. Key Investments in the field team, as well as investments in its field team and the continued focus on Circle the Customer introduction of proven programs from efforts, created additional synergies other regions helped Latin America make across the region. significant customer gains and achieve strong growth. HIGHLIGHTS Experienced success with Oasis® 146 HIGHLIGHTS Multi-Quat Sanitizer, a food contact Launched a new sales automation hard surface antimicrobial registered tool, which creates specialized, for sanitizing and disinfecting uses, easy-to-use reports to assist in gaining sales with independent customer business reviews by restaurants and chain customers. recording information such as the Increased its business with quality of results, operational independent restaurant customers efficiency, customer satisfaction, with the addition of dedicated sales training of employees and service personnel and by working with key work performed. distributor partners. Successfully introduced the 360º of Leveraged the PERformance™ product Protection™ program for foodservice line, which offers low-temperature, and hospitality customers, providing chlorine-free bleaching, as well as the customers with one complete cleaning Aquamiser water and energy reuse and sanitation program. system to save customers significant Achieved continued success with operating costs. DryExx™ dry lube for beverage Introduced the Sanova® antimicrobial bottling plants, a dry lubricant that food surface treatment to the protein eliminates the need to use water to market, secured several new poultry dilute the lubricant, and accelerated customers and made additional its success with Exelerate™ CIP, a inroads in the market. premium liquid detergent for milk Drove growth in the healthcare processing facilities that removes market with a strong performance in tough soils and rinses faster than the instrument cleaning segment, as traditional detergents. well as expansion into the surgical Improved its supply chain efficiencies scrub segment for operating rooms. with the opening of a state-of-the-art manufacturing facility in São Paulo, OUTLOOK Brazil. In 2007, Canada expects to leverage additional investments in field service OUTLOOK tools to drive continued customer gains. In 2007, Latin America expects further New products should provide Canada strong growth as it drives organic sales vehicles for further growth, as well as through Circle the Customer – Circle the offer robust opportunities for Circle the Globe partnerships. Investments in sales Customer collaboration. force automation, sales training and supply chain efficiencies should further spur growth across the region. ANNUAL REPORT 2006 15
  16. 16. Sustainable financial performance is only part of our responsibility as a company. To continuously earn the trust of our customers, shareholders and associates, we know we must uphold the highest standards of integrity. While we value and expect good business results, we also place great value on how we achieve those results. ENVIRONMENTAL SUSTAINABILITY Ecolab strives to use resources efficiently in our manufacturing operations to reduce waste and improve our environmental performance. It’s good for the environment, and its good for business. We make every effort to use environmentally responsible and sustainable raw materials to meet our needs, and invest in improving energy efficiency and conservation in our operations. Sustainability is a growing area of interest to our customers. We meet demand with a systematic approach to creating products, programs and services that reduce environmental impact. Our superior technology, global knowledge base and commitment to research and development allow us to continue investing in innovative solutions. Our products and services provide superior performance while preserving our environment, and at SOCIAL RESPONSIBILITY the same time, provide us important We also take a passionate approach in differentiation in the marketplace. our commitment to our communities. Ecolab promotes the well-being of associates, customers and shareholders by contributing to the quality of life in The financial portion of this our communities through charitable report was printed on 100% giving and volunteerism. post-consumer recycled paper. The Ecolab Foundation celebrated its ENVIRONMENTAL SAVINGS 20th anniversary this year, and over the Number of trees saved 459 years has contributed more than $35 Water (gallons) 78,329 million to our communities. Through the Energy (000 BTUs) 107,501 107,501 Foundation, we continued to sustain this Solid Waste (lbs.) 8,416 strong giving tradition in 2006 by Water-borne wastes (lbs.) 539 contributing $4 million – approximately Atmospheric emissions (lbs.) 16,322 1.2 percent of U.S. pretax earnings. We also helped strengthen our communities by supporting our associates in volunteering thousands of hours to charitable organizations and by providing over $1 million of in-kind cleaning and sanitizing products. 16 ANNUAL REPORT 2006
  17. 17. million in 2006 and allowed us to fund investments in our FINANCIAL DISCUSSION business operations, make business acquisitions, reacquire EXECUTIVE SUMMARY $283 million of our common stock and make a voluntary This Financial Discussion should be read in conjunction with the contribution of $45 million to our U.S. pension plan. information on Forward-Looking Statements and Risk Factors We increased our quarterly dividend rate for the fifteenth found at the end of the Financial Discussion. consecutive year. The dividend was increased 15 percent in December 2006 to an indicated annual rate of $0.46 per 2006 was an outstanding year for Ecolab. We achieved a strong common share. financial performance including record net sales of $4.9 billion Our return on beginning RETURN ON BEGINNING and improved operating income margins which drove 16 percent EQUITY shareholders’ equity (net diluted earnings per share growth. We realized major income divided by beginning competitive gains, made significant investments in our people 23.3% shareholders’ equity) rose to 22.4% and business, and further improved our long-term growth 21.9% 22.4 percent in 2006, the 21.4% potential. 20.0% fifteenth consecutive year in which we achieved our long- We exceeded all three of our long-term financial objectives: term financial objective of a 20 percent return on 2006 RESULTS LONG-TERM OBJECTIVE beginning shareholders’ EPS Growth 16.3% 15% equity. ROBE 22.4% 20% Our balance sheet remained strong, maintaining our debt Balance Sheet A Investment Grade rating within the “A” 02 03 06 04 05 categories of the major OPERATING HIGHLIGHTS rating agencies during We made important competitive gains in our market during TOTAL RETURN TO 2006. We also strengthened 2006, creating enhanced global opportunities to pursue SHAREHOLDERS and solidified our capital our Circle the Customer – Circle the Globe growth strategy as structure, successfully 28.7% we believe Ecolab alone can offer consistent service around refinancing a maturing debt the globe. 29.5% instrument and lowering our 11.8% We enjoyed double-digit sales and profit growth in the United 24.3% future financing cost. 4.4% States and improved sales and profit growth from our 25.9% We adopted the provisions International operations. of Statement of Financial In 2006 we continued our tradition of new product innovation Accounting Standard No. building on our core product platforms. We introduced a 10.9% 4.9% 15.8% 158, “Employers’ Accounting product in our antimicrobial platform that reduces microbial for Defined Benefit Pension contamination in ready-to-eat meat and poultry products, and Other Postretirement making them safer and contributing to a longer shelf life. To Plans” (“SFAS 158”) help reduce the risk of foodborne illness, we introduced the effective as of our 2006 (22.1)% first EPA-registered antimicrobial product that reduces year end. The impact of 02 03 06 04 05 pathogens in fruit and vegetable process water at food adopting SFAS 158 is processing plants. We also continued our efforts to customize Share appreciation plus dividends reflected as a reduction in S&P 500 total return solutions to meet specific customer needs through new net assets on our balance programs. sheet of $168 million, with no impact to the statements of We continued to make business acquisitions in order to income and cash flows. See Note 15 for more information on broaden our product and service offerings in line with our this adoption. Circle the Customer – Circle the Globe strategy. Details of these acquisitions are shown below. ACQUISITIONS We grew our industry-leading sales and service force by more In June, we acquired Shield Medicare Ltd., based in the UK. than 500 people, to more than 13,400 strong, and made key With annual sales of $19 million, Shield is a leading provider of investments in tools, training and technology to improve their contamination control products for pharmaceutical, medical sales productivity and effectiveness. device and hospital clean rooms. We made significant investments in our business systems that In September, we acquired DuChem Industries, Inc., a U.S. will drive competitive advantage in the future. manufacturer and marketer of cleaning and sanitizing We continue to work to simplify and streamline our business products for the food and beverage market. DuChem’s core processes, bolstering our ability to deliver growth more focus is the protein (meat & poultry) market segment, and has efficiently in the future. annual sales of $10 million. In September, we acquired Powles Hunt & Sons International FINANCIAL PERFORMANCE Ltd’s UK commercial laundry business. With annual sales of Consolidated net sales reached a record of $4.9 billion $5 million, this acquisition will add scale to our textile care for 2006, an increase of 8 percent over net sales of business in the UK. $4.5 billion in 2005. Our operating income for 2006 increased 13 percent to a 2007 EXPECTATIONS record $612 million. We look for continued momentum from our existing business, Diluted net income per share increased 16 percent to $1.43 investments in our key growth drivers and from competitive per share for 2006, compared to $1.23 per share in 2005. gains achieved in 2006 to drive growth and market share Cash flow from operating activities reached a record $628 opportunities in 2007. ANNUAL REPORT 2006 17
  18. 18. We will continue to leverage our Circle the Customer – Circle VALUATION ALLOWANCES AND ACCRUED LIABILITIES the Globe growth strategy through cross-selling and enhanced We estimate sales returns and allowances by analyzing historical marketing of our many product and service solutions returns and credits, and apply these trend rates to the most under the Ecolab brand. recent 12 months’ sales data to calculate estimated reserves for We will continue to invest in new product, system and service future credits. We estimate the allowance for doubtful accounts development in order to deliver improved value to our by analyzing accounts receivable balances by age, applying customers and thereby earn more of their business. historical write-off trend rates to the most recent 12 months’ We plan to seek strategic business acquisitions which sales, less actual write-offs to date. In addition, our estimates complement our growth strategy. also include separately providing for 100 percent of specific We will continue to work on streamlining our business customer balances when it is deemed probable that the balance processes in order to reduce costs and improve sustainability. is uncollectible. Actual results could differ from these estimates We intend to make significant investments in our business under different assumptions. systems to drive growth in the future. We will continue to work to deliver superior results to our Estimates used to record liabilities related to pending litigation customers, returns to shareholders and opportunity to our and environmental claims are based on our best estimate of valued associates. probable future costs. Estimated future legal costs are expensed as incurred. We record the amounts that represent the points in CRITICAL ACCOUNTING ESTIMATES the range of estimates that we believe are most probable or the Our consolidated financial statements are prepared in minimum amounts when no amount within the range is a better accordance with accounting principles generally accepted in the estimate than any other amount. Potential insurance United States of America (U.S. GAAP). We have adopted various reimbursements are not anticipated in our accruals for accounting policies to prepare the consolidated financial environmental liabilities. While the final resolution of litigation statements in accordance with U.S. GAAP. Our most significant and environmental contingencies could result in amounts accounting policies are disclosed in Note 2 of the notes to the different than current accruals, and therefore have an impact on consolidated financial statements. our consolidated financial results in a future reporting period, we believe the ultimate outcome will not have a significant effect on Preparation of our consolidated financial statements, in our consolidated results of operations, financial position or conformity with U.S. GAAP, requires us to make estimates and cash flows. assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. ACTUARIALLY DETERMINED LIABILITIES Estimates are considered to be critical if they meet both of the The measurement of our pension and postretirement benefit following criteria: (1) the estimate requires assumptions to be obligations are dependent on a variety of assumptions made about matters that are highly uncertain at the time the determined by management and used by our actuaries. These accounting estimate is made, and (2) different estimates that the assumptions affect the amount and timing of future company reasonably could have used for the accounting contributions and expenses. estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to The assumptions used in developing the required estimates period, have a material impact on the presentation of the include, among others, discount rate, projected salary and health company’s financial condition, changes in financial condition or care cost increases and expected return or earnings on assets. results of operations. Beginning in 2005, the discount rate assumption for the U.S. Plans is calculated using a bond yield curve constructed from a Besides estimates that meet the “critical” estimate criteria, we large population of high-quality, non-callable, corporate bond make many other accounting estimates in preparing our issues with maturity dates of six months to thirty years. Bond financial statements and related disclosures. All estimates, issues in the population are rated no less than Aa by Moody’s whether or not deemed critical, affect reported amounts of Investor Services or AA by Standard & Poors. The discount rate assets, liabilities, revenues and expenses as well as disclosures of is calculated by matching of the plan liability cash flows to the contingent assets and liabilities. Estimates are based on yield curve. Prior to 2005, the discount rate assumption was experience and other information available prior to the issuance based on the investment yields available at year-end on of the financial statements. Materially different results can occur corporate long-term bonds rated AA. Projected salary and health as circumstances change and additional information becomes care cost increases are based on our long-term actual known, even from estimates not deemed critical. Our critical experience, the near-term outlook and assumed inflation. The accounting estimates include the following: expected return on plan assets reflects asset allocations, investment strategies and the views of investment advisors. The REVENUE RECOGNITION effects of actual results differing from our assumptions, as well We recognize revenue on product sales at the time title to the as changes in assumptions, are reflected in the unrecognized product and risk of loss transfers to the customer. We recognize actuarial loss and amortized over future periods and, therefore, revenue on services as they are performed. Our sales policies do generally affect our recognized expense in future periods. Our not provide for general rights of return and do not contain unrecognized actuarial loss on our U.S. qualified and customer acceptance clauses. We record estimated reductions to nonqualified pension plans decreased to $189 million (before tax) revenue for customer programs and incentive offerings including due primarily to a better than expected return on plan assets pricing arrangements, promotions and other volume-based and an increase in the discount rate at the end of 2006. As of incentives at the time the sale is recorded. Depending on market December 31, 2006, this unrecognized loss is included on our conditions, we may increase customer incentive offerings, which balance sheet as a component of Accumulated Other could reduce gross profit margins at the time the incentive Comprehensive Income due to the adoption of SFAS 158. is offered. Significant differences in actual experience or significant changes in assumptions may materially affect pension and other post-retirement obligations. 18 ANNUAL REPORT 2006