Henkel-Ecolab

Prior to November 30, 2001, the company operated cleaning and sanitizing businesses in Europe through a 50 percent economic interest in the Henkel-Ecolab joint venture. On November 30, 2001, Ecolab purchased the remaining 50 percent interest of Henkel-Ecolab it did not previously own from Henkel KGaA. Additional details related to this purchase are included in Note 4 of the notes to consolidated financial statements.

The company included the results of Henkel-Ecolab operations in its financial statements using the equity method of accounting through November 30, 2001. The company’s equity in earnings of Henkel-Ecolab, which includes royalty income and goodwill amortization, was $16 million in 2001, a decrease of 19 percent when compared to $20 million in 2000. When measured in euros, net income of Henkel-Ecolab for 2001 decreased 13 percent and reflected lower sales volumes driven by slowing economies and increasing raw material, energy and other costs, which were partially offset by price increases.

Henkel-Ecolab sales, although not consolidated in Ecolab’s financial statements, increased 4 percent when measured in euros. Sales reflected the impact of Europe’s slowing economies and reduced orders from distributors as they lowered inventory levels. When measured in U.S. dollars, Henkel-Ecolab sales were flat when compared to the prior year due to the negative effects of a stronger U.S. dollar.

Ecolab consolidated Henkel-Ecolab’s operations effective with the November 30, 2001 acquisition date and end of Henkel-Ecolab’s fiscal year for 2001. Because the company consolidates its International operations on the basis of their November 30 fiscal year ends, Henkel-Ecolab’s balance sheet has been consolidated with Ecolab’s balance sheet as of year-end 2001. The income statement for the European operations will be consolidated with Ecolab’s operations beginning in 2002.

2000 compared with 1999
The company’s equity in earnings of Henkel-Ecolab increased 7 percent to $20 million in 2000 from $18 million in 1999. When measured in euros, earnings of Henkel-Ecolab increased 18 percent and reflected the benefits of good sales growth, improved income margins, a lower effective income tax rate and tight cost controls, which more than offset investments in the sales-and-service force.

Sales of Henkel-Ecolab increased 7 percent when measured in euros. All major business lines contributed to the overall sales growth for 2000. Sales continued to benefit from expansion of global contracts, new product introductions and acquisitions. Henkel-Ecolab sales decreased 7 percent when measured in U.S. dollars due to the negative effects of a stronger U.S. dollar.

Corporate

Corporate operating expense totaled $5 million in 2001, compared with corporate operating income of $18 million in 2000 and corporate operating expense of $5 million in 1999. Historically, corporate operating expense includes overhead costs directly related to the Henkel-Ecolab joint venture. However, in 2000, corporate operating income also included the $25.9 million gain on the sale of the Jackson business, special charges of $7.1 million and income of $4.4 million for net reductions in probable losses related to certain environmental matters.

Interest and Income Taxes

Net interest expense for 2001 was $28 million, an increase of 16 percent over net interest expense of $25 million in 2000. This increase reflected higher debt levels during the year, including the additional debt incurred to purchase the remaining 50 percent of Henkel-Ecolab.

Net interest expense of $25 million for 2000 increased 8 percent over net interest expense of $23 million in 1999. This increase reflected higher average debt levels during 2000 incurred to fund stock repurchases and business acquisitions.

The company’s effective income tax rate was 40.5 percent for 2001, a decrease from the effective income tax rates in 2000 and 1999 of 40.7 percent and 41.1 percent, respectively. Excluding the effects of the sale of Jackson and special charges, the effective income tax rate for 2000 was 40.5 percent. The decrease in the 2001 and 2000 effective tax rates from 1999 was principally due to lower overall effective rates on earnings of International operations. International’s effective income tax rate varies from year-to-year with the pre-tax income mix of the various countries in which the company operates. The 1999 effective income tax rate also benefited slightly from a one-time gain of $1.5 million related to the demutualization of an insurance company.