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OVERVIEW FOR 2004 This Financial Discussion should be read in conjunction with the information on Forward-Looking Statements and Risk Factors found at the end of the Financial Discussion. The year ended December 31, 2004 was another year of double-digit income growth and record net sales of $4.2 billion. During 2004, we expanded our sales coverage by entering new markets and geographies. We found ways to reduce costs and improve processes. Strong earnings growth during the first half of 2004 and improving travel and hospitality markets allowed us to accelerate investments during the second half of the year to improve long-term growth. Operating Highlights  We drove our Circle the Customer growth strategy with our new field
referral program, which gives ownership to our field sales team to advance this
critical strategy.We grew business with independent accounts through targeted programs
and our food distributor partnerships in the United States, Latin America and
Europe. We are committed to furthering our impact with street customers by
assigning dedicated resources to build an even more effective model for the
street segment.We bolstered our sales-and-service force, adding associates to our sales
team and making key investments in their training and productivity.We introduced new products such as our Wash 'n Walk no-rinse floor
cleaner and the Grease Exxpress high-temp grill degreaser that have led the
charge for one of the strongest new slates of products in our recent history.We increased our market specialization with the separation of
Professional Products and Healthcare in the United States. These two
businesses now have the ability to focus more aggressively on their respective
core markets, which positions them for better growth.We increased market penetration in the agri, meat and poultry markets
and expanded our product technology with the acquisition of Alcide
Corporation; broadened our product lines and distribution channels in the food
safety market with the acquisition of Daydots International; and enhanced our
offerings in the floor care market with the acquisition of certain business lines
of VIC International. These businesses had annual sales of approximately $51
million prior to acquisition.We expanded our geographic coverage and global presence as well, with
the pest elimination acquisitions of Nigiko in France and Elimco in South
Africa. These businesses had annual sales of approximately $59 million prior to
acquisition.We continued to add to our management team. We successfully
transitioned CEO responsibilities and bolstered our management group through
external hires and internal development.
Financial Performance 
Our consolidated net sales reached $4.2 billion for 2004, an increase of
11 percent over net sales of $3.8 billion in 2003. Excluding acquisitions and
divestitures, consolidated net sales increased 9 percent.Our operating income for 2004 increased 11 percent over 2003. Excluding
acquisitions and divestitures, operating income increased 7 percent.
Diluted net income per share was $1.19 for 2004, up 12 percent from
$1.06 in 2003. Included in 2003 net income is a gain of $11.1 million, or $6.7
million net of tax, from the sale of an equity investment. This item was of a
non-recurring nature.Currency translation continued to have a positive impact on our financial
results in 2004, adding approximately $11 million to net income following a
$12 million benefit in 2003.A reduction in our annual
effective income tax rate from 38.1
percent in 2003 to 36.5 percent in
2004 added approximately $8
million to net income. The
improvement was driven by tax
savings programs and the impact of
a one-time tax credit.
Return on beginning
shareholders' equity was 24 percent
for 2004 and 25 percent in 2003.
This was the thirteenth consecutive
year we exceeded our long-term
financial objective of a 20 percent
return on beginning shareholders'
equity.
Cash from operating activities
was $582 million in 2004, and
helped us fund ongoing business
operations, make business
acquisitions, repay $24 million of
debt, reacquire over $165 million of
our common stock, make additional
contributions to our United States
pension plan of $37 million and to
our various international pension
plans of $25 million, as well as
meet our ongoing obligations and
commitments.
We maintained our debt rating
within the "A" categories of the
major rating agencies during 2004.
2005 Expectations
We expect to continue to use
our strong cash flow to help make
strategic business acquisitions
which complement our Circle the Customer-Circle the Globe growth strategy.We expect to leverage our larger sales-and-service force and other
investments we made in 2004 for long-term growth.We recognize that higher oil prices, plus rising raw material prices and
freight costs, will affect our operating income and provide additional
management challenges in 2005.We will continue to seek new avenues for growth, make appropriate
pricing decisions to reflect the value provided by our products and services and
protect operating margins and identify recurring cost-saving opportunities.We expect currency translation to have a favorable impact again in 2005
but to a lesser extent than we experienced in 2004.
Beginning with our third quarter, we expect to begin expensing the fair
value of stock options as additional compensation cost, in accordance with
Statement of Financial Accounting Standard (SFAS) 123R, barring further
rulings. As part of our transition to the new standard, we expect to restate our
earnings history in line with pro forma amounts we have historically disclosed
in the notes to our financial statements.
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