Operating Segment Performance

The company’s operating segments have similar products and services and the company is organized to manage its operations geographically. The company’s operating segments have been aggregated into three reportable segments: United States Cleaning & Sanitizing, United States Other Services, and International Cleaning & Sanitizing. The company evaluates the performance of its 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 2001. All other accounting policies of the reportable segments are consistent with accounting principles generally accepted in the United States of America and the accounting policies of the company described in Note 2 of the notes to consolidated financial statements. Additional information about the company’s reportable segments is included in Note 15 of the notes to consolidated financial statements. The following chart presents the comparative percentage change in net sales for each of the company’s operating segments for 2001 and 2000.

Sales of the company’s United States Cleaning & Sanitizing operations were nearly $1.6 billion in 2001 and increased 3 percent over net sales of $1.5 billion in 2000. Business acquisitions accounted for approximately 1 percentage point of the growth in sales for 2001. Sales reflected solid growth in the company’s Kay, Professional Products and Vehicle Care operations. The sales improvement also reflected benefits from new products and services, as well as aggressive sales efforts and programs. Net selling price increases during 2001 were not significant. U.S. Institutional operations sales growth during 2001 reflected modest growth in its specialty, housekeeping and Ecotemp programs, which were partially offset by the continuing slow down in the economy and the weaker demand in the lodging and restaurant markets due to the events of September 11, 2001. Excluding the acquisition of Facilitec, Institutional’s sales increased 2 percent for 2001. Sales of Kay’s U.S. operations increased over the prior year with significant growth in its food retail business and good growth in sales to the quickservice market. Excluding the acquisition of Southwest Sanitary Distributing Company (SSDC) in February 2000, Kay’s sales for 2001 increased 5 percent over the prior year. Textile Care sales decreased from the prior year due to exiting selected business and a very competitive market. Professional Products sales increased in 2001 with good growth in its healthcare and janitorial sales. Professional Products’ sales have been positively impacted by long-term supply agreements in its janitorial business. Water Care Services sales increased over the prior year with good growth in sales to the food and beverage and hospitality markets. Vehicle Care sales growth for 2001 was primarily due to new products and additional business with major oil company chains. Food & Beverage U.S. sales increased from the prior year with good growth in the beverage market.

Sales of United States Other Services operations increased 10 percent to $273 million in 2001, from $248 million in 2000. Excluding the effects of businesses acquired and disposed of, sales increased 7 percent for 2001. Pest Elimination’s sales in 2001 included solid growth in contract services, slightly offset by a slowdown in non-contract services due to economic conditions. GCS Service sales growth increased over last year reflecting the continued expansion of its operations through acquisitions. Excluding the effects of businesses acquired, GCS sales increased 4 percent for 2001. In the fourth quarter of 2000, the company sold its Jackson dishmachine manufacturing business.

Management rate-based sales of the company’s International Cleaning & Sanitizing operations reached $522 million for 2001, an increase of 12 percent over sales of $465 million in 2000. Business acquisitions accounted for approximately 5 percentage points of the sales increase in 2001 for International Cleaning & Sanitizing operations. Excluding business acquisitions, Asia Pacific sales increased 8 percent with double-digit sales growth in New Zealand and East Asia and good growth in Japan. The increase in Asia Pacific sales was primarily from the food and beverage and institutional markets. Latin America sales increased 7 percent in 2001, excluding business acquisitions, with good growth in almost all countries. Sales in Canada increased over the prior year due to strong growth in sales to the institutional and food and beverage markets. Sales of the Africa/Export region increased sharply in 2001 due to strong results in South Africa and the full-year sales effect of a business, which was acquired in September 2000.

Operating income of the company’s United States Cleaning & Sanitizing operations was $247 million in 2001, a decrease of 1 percent from operating income of $249 million in 2000. Business acquisitions had little effect on operating income for 2001. Operating income included strong growth for Professional Products and Water Care Services with moderate growth in Kay and Vehicle Care operations. Operating income of Institutional, Food & Beverage and Textile Care was lower than the prior year. As a percentage of net sales, operating income decreased from 16.3 percent in 2000 to 15.6 percent in 2001. Operating income margins declined due to lower sales volumes, unfavorable sales mix, increased storage and handling costs and increased raw material costs. The company added 50 sales-and-service associates to its United States Cleaning & Sanitizing operations during 2001.

Operating income of United States Other Services operations increased 15 percent to $29 million in 2001. Excluding operating income of businesses acquired in 2001 and the annualized effect of businesses acquired and disposed of in 2000, operating income for 2001 increased 20 percent. Both Pest Elimination and GCS reported double-digit increases in operating income. The operating income margin of United States Other Services operations was 10.7 percent, which is up from 10.3 percent of net sales in 2000. This increase reflected GCS’ efforts to improve income by focusing on operational efficiencies, as well as Pest Elimination’s increased productivity, more efficient use of products and cost controls. During 2001, the company added 120 sales-and-service associates to its United States Other Services operations.

Operating income of International Cleaning & Sanitizing operations rose 5 percent to $50 million in 2001 from operating income of $47 million in 2000. The effects of businesses acquired accounted for approximately 1 percentage point of the growth in operating income for 2001. The International operating income margin decreased from 10.1 percent in 2000 to 9.5 percent in 2001. While the Latin America and Africa/Export regions showed operating income margin improvement, the margins for Asia Pacific and Canada declined due to higher raw material costs. Excluding associates added by Henkel-Ecolab, the company added 160 sales-and-service associates to its International Cleaning & Sanitizing operations during 2001.

Operating income margins of the company’s International operations are presently less than the operating income margins realized for the company’s U.S. operations. The lower International margins are due to higher costs of importing raw materials and finished goods, increased investments in dispensing equipment and the additional costs caused by the difference in scale of International operations where operating locations are smaller in size as well as to the additional cost of operating in numerous and diverse foreign jurisdictions. Proportionately larger investments in sales, technical support and administrative personnel are also necessary in order to facilitate growth of International operations.

2000 compared with 1999
Sales of the company’s United States Cleaning & Sanitizing operations exceeded $1.5 billion in 2000 and increased 8 percent over net sales of $1.4 billion in 1999. Business acquisitions accounted for approximately 2 percentage points of the growth in sales for 2000. Sales reflected double-digit growth in sales of Kay’s operations and good growth in the core Institutional operations. The sales improvement also reflected sales of new products and services, a larger and better trained sales-and-service force, aggressive sales efforts and programs and generally good conditions in the hospitality and lodging industries. Selling price increases during 2000 were not significant. Sales of U.S. Institutional operations increased in 2000 with good growth in its specialty, housekeeping and Ecotemp programs, and modest growth in warewashing and laundry sales. Business acquisitions were not significant to Institutional’s sales growth. Excluding the acquisition of SSDC, Kay’s U.S. sales increased 14 percent over 1999 with good growth in sales to the quickservice market and continued growth and expansion of its food retail business. Textile Care sales decreased in 2000 as markets remained very price competitive. Sales of Professional Products decreased reflecting lower sales to the private label and government markets, partially offset by higher sales of healthcare products. Water Care Services sales increased due to good growth in sales to the hospitality and food and beverage markets. Excluding the annualized effect of the Blue Coral business acquired in February 1999, Vehicle Care sales decreased 1 percent for 2000 reflecting the loss of some customers during the integration of the Blue Coral business, which included sales force reorganizations and product consolidation. Food & Beverage U.S. sales increased moderately with strong growth in sales to the dairy and beverage markets.

Sales of United States Other Services operations increased 17 percent to $248 million in 2000, from $212 million in 1999. Excluding the effects of businesses acquired, sales increased 10 percent for 2000. Pest Elimination’s sales increased due to high growth in new contract sales and a continuation of solid growth across all of its business lines. Sales of the GCS commercial kitchen equipment parts and repair operations rose as the company continued to expand operations through business acquisitions. Excluding the effects of businesses acquired, GCS sales increased 9 percent for 2000. In the fourth quarter of 2000, the company sold its Jackson dishmachine manufacturing business. Jackson’s sales in 2000, prior to its divestiture, were flat compared with the full year sales for 1999.

Management rate-based sales of the company’s International Cleaning & Sanitizing operations reached $465 million for 2000, an increase of 11 percent over sales of $421 million in 1999. Business acquisitions accounted for approximately 50 percent of the increase in International Cleaning & Sanitizing sales for 2000. Excluding business acquisitions, Asia Pacific sales increased 3 percent with double-digit growth in East Asia, good growth in New Zealand and Japan and lower sales in Australia. Asia Pacific sales reflected good growth in sales to both the institutional and food and beverage markets. Excluding businesses acquired, Latin America sales increased 10 percent with continued significant growth in Mexico and modest growth in Brazil. Sales in Canada rose with solid growth in sales to the institutional markets and improved sales to the food and beverage, textile care and professional products markets. Sales of Africa/Export operations increased due to an additional Export business acquired and good growth in sales of Africa’s operations.

Operating income of the company’s United States Cleaning & Sanitizing operations reached $249 million in 2000 and increased 8 percent over operating income of $231 million in 1999. Business acquisitions accounted for approximately 10 percent of the growth in operating income for 2000. Operating income included good growth in Kay, Institutional and Water Care operations and modest growth in Food & Beverage. Operating income of Professional Products, Vehicle Care and Textile Care was lower than in 1999. As a percentage of net sales, operating income increased slightly to 16.3 percent in 2000, from 16.2 percent in 1999. This margin improvement reflected strong results of the core Institutional operations, growth in sales of new products, synergies from the integration of businesses acquired, modest increases in raw material costs and tight cost controls. These benefits were substantially offset by poor results of Professional Products operations, investments in the sales-and-service force, lower margins of businesses acquired and higher fuel costs. The company added 280 sales-and-service associates to its United States Cleaning & Sanitizing operations during 2000.

Operating income of United States Other Services operations increased 2 percent to $26 million in 2000. Excluding operating income of businesses acquired in 2000 and the annualized effect of 1999 acquisitions, operating income for 2000 was virtually unchanged from the prior year. Near double-digit growth in Pest Elimination operating income was offset by lower operating income of GCS operations. Growth in the operating income of the divested Jackson business was not significant. The operating income margin of United States Other Services operations was 10.3 percent of net sales for 2000, down from 11.9 percent of net sales in 1999. This decrease reflected higher GCS operational expenses including fuel surcharges, rising labor rates and insurance losses, partially offset by growth in the sales of new Pest Elimination service offerings and cost controls. During 2000 the company added 225 sales-and-service associates to its United States Other Services operations.

Operating income of International Cleaning & Sanitizing operations was $47 million in 2000 and increased 30 percent over operating income of $36 million in 1999. The effects of businesses acquired accounted for approximately 20 percent of this operating income growth. The International operating income margin improved to 10.1 percent of net sales in 2000 from 8.6 percent in 1999. All of the company’s international regions of operations reported double-digit growth in operating income and improved operating margins for 2000. These improvements reflected sales growth from new customers, including sales of new products, and tight cost controls. The company added 395 sales-and-service associates to its International Cleaning & Sanitizing operations during 2000.