Financial Position

The company has maintained its long-term financial objective of an investment-grade balance sheet since 1993. The company’s debt continued to be rated within the “A” categories by the major rating agencies during 2001. Significant changes in the company’s financial position during 2001 and 2000 included the following:

• Total assets reached $2.5 billion at December 31, 2001, an increase of 47 percent over total assets of $1.7 billion at year-end 2000. At year-end 2001, the balance sheet of Henkel-Ecolab was consolidated with the company’s balance sheet due to the acquisition of the remaining 50 percent of Henkel-Ecolab from Henkel KGaA. Total assets as of November 30, 2001 increased approximately $0.7 billion as a result of this acquisition and the consolidation of Henkel-Ecolab.
  
  During 2000, total assets increased to $1.7 billion at year-end 2000 from $1.6 billion at year-end 1999. This increase reflects growth in ongoing operations and assets added through business acquisitions over the year. The increase in goodwill and other intangible assets was primarily due to the acquisition of Spartan, Southwest Sanitary Distributing Company and Facilitec in 2000. Accounts receivable, inventories and property, plant and equipment were also added in 2000 as a result of these acquisitions.
  
  
• Working capital levels increased to $102 million at December 31, 2001 from $69 million at year-end 2000 reflecting lower levels of current liabilities prior to the Henkel-Ecolab acquisition, as well as increases in accounts receivable and inventory due to the consolidation of Europe’s balance sheet for the first time as of year-end 2001. During 2001, short-term debt increased approximately $97 million due to the issuance of commercial paper to finance the acquisition of Henkel-Ecolab. Working capital levels at year-end 2000 of $69 million were down from $107 million at year-end 1999 reflecting higher levels of short-term debt, accounts payable and other current liabilities.
  
  
• Total debt was $746 million at December 31, 2001 and increased from total debt of $371 million at year-end 2000 and $281 million at year-end 1999. Additional commercial paper borrowings were incurred during 2001 to fund the acquisition of the remaining 50 percent of Henkel-Ecolab. At December 31, 2001, the company classified $265.9 million of commercial paper borrowings as long-term debt. In February 2002, the company refinanced $265.9 million of commercial paper borrowings through the issuance of euro 300 million of Eurobonds. The company reduced debt under its 9.68 percent Senior Notes through scheduled debt repayments during both 2001 and 2000. As of December 31, 2001, the ratio of total debt to capitalization rose to 46 percent, from 33 percent at year-end 2000 and 27 percent at year-end 1999. The higher debt to capitalization ratio for 2001 was due to funding for the company’s acquisition of Henkel-Ecolab. The increase in the debt to capitalization ratio for 2000 was due to funding for the company’s share repurchase program.

Cash Flows

Cash provided by operating activities reached a new record high of $364 million for 2001, an increase from $315 million in 2000 and $293 million in 1999. The operating cash flow for 2001 increased due to a reduction in year-end accounts receivable and the additional cash flows generated by business acquisitions. The operating cash flow increase during 2000 benefited from strong earnings growth, including additional earnings and cash flows from businesses acquired. Changes in net operating asset levels positively affected the operating cash flow by approximately $10 million in 2001 and negatively affected it by approximately $2 million in 2000 and $16 million in 1999.

Cash flows used for investing activities included capital expenditures of $158 million in 2001, $150 million in 2000 and $146 million in 1999. 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. The company also continued to invest in additional manufacturing facilities through construction and business acquisitions in order to meet sales requirements more efficiently. Cash used for businesses acquired included Henkel-Ecolab in 2001, Spartan and Facilitec in 2000 and Blue Coral in 1999. Investing cash flow activity also included the proceeds from the sale of the Jackson business in 2000 and the sale of certain Gibson businesses and duplicate facilities in 1999 which the company chose not to retain.

Financing cash flow activity included cash used to reacquire shares and pay dividends and cash provided and used through the company’s debt arrangements. In May 2000, the company announced a program to repurchase up to $200 million of its common stock. Share repurchases totaled $32 million in 2001, $187 million in 2000 and $42 million in 1999. These repurchases were funded with operating cash flows and additional debt. In December 2000, the company announced an authorization to repurchase up to 5 million additional shares of common stock.

In 2001, the company increased its annual dividend rate for the tenth consecutive year. The company has paid dividends on its common stock for 65 consecutive years. Cash dividends declared per share of common stock, by quarter, for each of the last three years were as follows:

Liquidity and Capital Resources

The company currently expects to fund all of the requirements which are reasonably foreseeable for 2002, including new program investments, scheduled debt repayments, dividend payments, possible acquisitions, and share repurchases from operating activities, including cash flows from the recently acquired Henkel-Ecolab operations, and funds raised through the February 2002 Eurobond issuance and commercial paper issuance. Cash provided by operating activities reached an all-time high of $364 million in 2001, despite the impact of deteriorating economic conditions on key customer segments. While cash flows could be negatively affected by a decrease in revenues, the company does not believe that its revenues are highly susceptible, over the short run, to rapid changes in technology within our industry. The company has a $450 million U.S. commercial paper program and a 200 million Australian dollar commercial paper program. Both programs are rated A-1 by Standard & Poor’s and P-1 by Moody’s. To support its commercial paper programs, the company maintains a $275 million multi-year committed credit agreement (terminating December 2005) and a $175 million 364-day committed credit facility (terminating December 2002). The company can draw directly on both credit facilities. As of February 14, 2002, approximately $167.5 million of these credit facilities were committed to support outstanding commercial paper, leaving $282.5 million available for other uses. Additional details on the company’s credit facilities are included in Note 6 of the notes to consolidated financial statements.

The company does not have relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purposes entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes. As such, the company is not materially exposed to any financing, liquidity, market or credit risk that could arise if Ecolab had engaged in such relationships.

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

The company does 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.

The company is in compliance with all covenants and other requirements of its credit agreements and indentures. Additionally, the company does not have any rating triggers that would accelerate the maturity dates of its debt.

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