financial discussion

FINANCIAL POSITION
Our debt continued to be rated within the “A” categories by the major rating agencies during 2003. Significant changes in our financial position during 2003 and 2002 included the following:

    Total assets reached $3.2 billion at December 31, 2003, an increase of 13 percent over total assets of $2.9 billion at year-end 2002. Approximately $290 million of this increase was related to the strengthening of foreign currencies, primarily the euro. For example, 87 percent of the increase in accounts receivable was related to currency. The increase in goodwill in 2003 over 2002 was almost entirely related to currency. Other assets also increased significantly in 2003 due to a $75 million contribution to fund our U.S. pension plan.

In the liability section of the balance sheet, short-term debt was down significantly due to strong operating cash flow, which allowed us to pay down approximately $94 million of our short-term debt. Income taxes payable increased in 2003 over 2002 due to higher current income tax expense for 2003 as compared to 2002 and lower income tax payments made during the year compared to the prior year. Longterm debt also increased in 2003 due to currency as a large portion of our debt is denominated in euros.

During 2002 total assets increased to $2.9 billion from $2.5 billion at year-end 2001. Accounts receivable increased 8 percent over yearend 2001, primarily due to the effect of business acquisitions during 2002, as well as due to the effect of exchange rates. Other assets also increased significantly from year-end 2001 due to payments totaling approximately $125 million to fund our U.S. pension plan during 2002. Other current liabilities increased from year-end 2001 primarily due to an increase in restructuring accruals and due to the effect of exchange rates.

TOTAL DEBT TO CAPITALIZATION >

(PERCENT)

    Total debt was $675 million at December 31, 2003 and decreased from total debt of $700 million at year-end 2002. This decrease in total debt during 2003 was principally due to debt repayments made during the year, which were partially offset by the increase in debt due to the strengthening of foreign currencies, primarily the euro, during 2003. As of December 31, 2003 the ratio of total debt to capitalization was 34 percent, down from 39 percent at year-end 2002 and 46 percent at year-end 2001. The lower debt to capitalization rate in 2003 and 2002 was due to debt repayments made during those years and increasing shareholders' equity levels.

CASH FLOWS

CASH PROVIDED BY OPERATING    ACTIVITIES >

Cash provided by operating activities reached a new record high of $529 million for 2003, an increase from $423 million in 2002 and $364 million in 2001. The operating cash flow for 2003 increased over 2002 due to higher sales in 2003 and a lower contribution to the pension plan compared to 2002. Operating cash flows for 2003 were also higher than 2002 due to reduced payments on restructuring liabilities and lower estimated tax payments due to tax benefits on options exercised during 2003. The increase in operating cash flows for 2002 over 2001 reflected the additional cash flows from businesses acquired, primarily the European joint venture, as well as the improvement in accounts receivable and days sales outstanding. Historically, we have had strong operating cash flows and we anticipate this will continue. We expect to continue to use this cash flow to acquire new businesses, repurchase our common stock, invest in merchandising equipment and other capital assets and pay down debt.

Cash flows used for investing activities included capital expenditures of $212 million in 2003, $213 million in 2002 and $158 million in 2001. Worldwide additions of merchandising equipment, primarily cleaning and sanitizing product dispensers, accounted for approximately 70 percent of each year's capital expenditures. Merchandising equipment is depreciated over 3 to 7 year lives. Cash used for businesses acquired included Adams Healthcare in 2003, Terminix Ltd. and Kleencare Hygiene in 2002 and Henkel-Ecolab in 2001.

Financing cash flow activity included cash used to reacquire shares and pay dividends and cash provided and used through our debt arrangements. Share repurchases totaled $227 million in 2003, $9 million in 2002 and $32 million in 2001. These repurchases were funded with operating cash flows and cash from the exercise of employee stock options. In October 2003, we announced a new authorization to repurchase up to 10 million additional shares of Ecolab common stock for the purpose of offsetting the dilutive effect of shares issued for stock option exercises and incentives and general corporate purposes.

In 2003, we increased our annual dividend rate for the twelfth consecutive year. We have paid dividends on our common stock for 67 consecutive years. Cash dividends declared per share of common stock, by quarter, for each of the last three years were as follows:

	First Quarter	Second Quarter	Third Quarter	Fourth Quarter	Year
2003	$0.0725	$0.0725	$0.0725	$0.0800	$0.2975
2002	0.0675	0.0675	0.0675	0.0725	0.2750
2001	0.0650	0.0650	0.0650	0.0675	0.2625

LIQUIDITY AND CAPITAL RESOURCES
We currently expect to fund all of the requirements which are reasonably foreseeable for 2004, including new program investments, scheduled debt repayments, dividend payments, possible acquisitions and share repurchases from operating activities, cash reserves and shortterm borrowings. In the event of a significant acquisition, funding may occur through additional long-term borrowings. Cash provided by operating activities reached an all time high of $529 million in 2003. While cash flows could be negatively affected by a decrease in revenues, we do not believe that our revenues are highly susceptible, over the short run, to rapid changes in technology within our industry. We have a $450 million U.S. commercial paper program and a 200 million Australian dollar commercial paper program. In June 2003, we established a $200 million European commercial paper program to provide a source of funding for our European and other international acquisitions and working capital requirements. All three programs are rated A-1 by Standard & Poor's and P-1 by Moody's. To support our commercial paper programs and other general business funding needs, we maintain a $275 million multi-year committed credit agreement which expires in December 2005 and a $175 million 364 day credit facility which expires in October 2004. We can draw directly on both credit facilities on a revolving credit basis. As of December 31, 2003, approximately $36 million of these credit facilities were committed to support outstanding commercial paper, leaving $414 million available for other uses. In January 2004, we issued 85 million euro (approximately $109 million at the date of the transaction) of commercial paper primarily to finance acquisitions subsequent to year-end. In addition, we have other committed and uncommitted credit lines of approximately $200 million with major international banks and financial institutions to support our general funding needs. Additional details on our credit facilities are included in Note 7 of the notes to consolidated financial statements.

During 2003, we voluntarily contributed $75 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, our intent to improve the projected benefit obligation funding ratio and the 29 percent actual asset return on our pension plan in 2003. Our contributions to the pension plan did not have a material effect on our consolidated results of operations, financial condition or liquidity. We do not expect expense for our U.S. pension plan to increase significantly for 2004.

As described further in Note 5 of the consolidated financial statements, Henkel KGaA owns 28.2 percent of our common stock outstanding at December 31, 2003. In a December 2003 filing, Henkel reported that it may sell a portion or all of its holdings of Ecolab common stock and/or its holdings of common stock of The Clorox Company, or a combination of both, in connection with refinancing their pending acquisition of The Dial Corporation. Any dispositions by Henkel of any shares of Ecolab common stock would be done in accordance with the stockholder's agreement between Henkel and Ecolab, including our right of first refusal, and applicable law.

We do not have relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purposes entities”, which are sometimes established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

A schedule of our obligations under various long-term debt agreements and operating leases with noncancelable terms in excess of one year are summarized in the following table:

(thousands)	Payments due by Period
Contractual obligations	Total	Less than   1 year	1-3 years	3-5 years	More than   5 years
Long-term debt	$608,394	$   3,953	$ 82,135	$367,021	$155,285
Operating leases	138,525	35,726	51,136	29,392	22,271
Total contractual cash obligations	$746,919	$39,679	$133,271	$396,413	$177,556

We lease sales and administrative office facilities, distribution center facilities, computers and other equipment under longer-term operating leases. Vehicle leases are generally shorter in duration. The U.S. vehicle leases have guaranteed residual value requirements that have historically been satisfied by the proceeds on the sale of the vehicles. No amounts have been recorded for these guarantees in the table above as we believe that the potential recovery of value from the vehicles when sold will be greater than the residual value guarantee.

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.

We are in compliance with all covenants and other requirements of our credit agreements and indentures. Additionally, we do not have any rating triggers that would accelerate the maturity dates of our debt.

A downgrade in our credit rating could limit or preclude our ability to issue commercial paper under our current programs. A credit rating downgrade could also adversely affect our ability to renew existing, or negotiate new credit facilities in the future and could increase the cost of these facilities. Should this occur, we could seek additional sources of funding, including issuing term notes or bonds. In addition, we have the ability at our option to draw upon our $450 million committed credit facilities prior to their termination.