UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the transition period from                to                

Commission File No. 1-9328

ECOLAB INC.

(Exact name of registrant as specified in its charter)

370 Wabasha Street N., St. Paul, Minnesota  55102

(Address of principal executive offices)(Zip Code)

651-293-2233

(Registrant’s telephone number, including area code)

(Not Applicable)

(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý      No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ý    Accelerated Filer o    Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o      No  ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of April 30, 2006.

252,937,584 shares of common stock, par value $1.00 per share.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

ECOLAB INC.

CONSOLIDATED STATEMENT OF INCOME

The accompanying notes are an integral part of the consolidated financial information.

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ECOLAB INC.

CONSOLIDATED BALANCE SHEET

The accompanying notes are an integral part of the consolidated financial information.

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ECOLAB INC.

CONSOLIDATED BALANCE SHEET (Continued)

The accompanying notes are an integral part of the consolidated financial information.

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ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

The accompanying notes are an integral part of the consolidated financial information.

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ECOLAB INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

The accompanying notes are an integral part of the consolidated financial information.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Consolidated Financial Information

The unaudited consolidated financial information for the first quarters ended March 31, 2006 and 2005, reflect, in the opinion of management, all adjustments necessary for a fair statement of the financial position, results of operations and cash flows of Ecolab Inc. (“the company”) for the interim periods presented. The financial results for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet data as of December 31, 2005 were derived from the audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto incorporated in the company’s Annual Report on Form 10-K for the year ended December 31, 2005.

With respect to the unaudited financial information of the company for the first quarters ended March 31, 2006 and 2005 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards, which do not require an audit, for a review of such information. Therefore, their separate report dated April 21, 2006 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the “Act”) for their report on the unaudited financial information because that report is not a report or a part of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

2. Share-Based Compensation

Effective October 1, 2005, the company early-adopted Statement of Financial Accounting Standards No.123 (Revised 2004) Share-Based Payment, (SFAS No.123R) under the modified retrospective application method. SFAS No.123R requires the company to measure compensation expense for share-based awards at fair value at the date of grant and recognize compensation expense over the service period for awards expected to vest. As part of the transition to the new standard, all prior period financial statements were restated to recognize share-based compensation expense historically reported in the notes to the consolidated financial statements.

Total compensation expense related to share-based compensation plans was $8.0 million ($5.1 million net of tax benefit) and $8.5 million ($5.3 million net of tax benefit) for the first quarters ended March 31, 2006 and 2005, respectively.

Effective with the company’s adoption of SFAS No.123R, new stock option grants to retirement eligible recipients will be attributed to expense using the non-substantive vesting method and expensed at the time recipients attain age 55 with at least 5 years of service. If the company had used the non-substantive vesting method during all periods, net income would have been increased by $0.7 million and $0.3 million for the quarters ended March 31, 2006 and 2005, respectively. During the first quarter of 2006, 1.4 million shares were issued for stock option exercises.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Selected Balance Sheet Information

Accumulated other comprehensive income as of March 31, 2006 consists of $0.1 million of net unrealized losses on financial instruments and $27.4 million of additional minimum pension liabilities as well as $53.3 million of cumulative translation income. Accumulated other comprehensive income as of December 31, 2005 consists of $0.3 million of net unrealized gains on financial instruments and $27.1 million of additional minimum pension liabilities as well as $36.6 million of cumulative translation income. The increase in cumulative translation income since December 31, 2005 is due to the weakening of the U.S. dollar against foreign currencies, primarily the Euro. The increase in treasury stock is primarily due to the repurchase of approximately $72.5 million (2 million shares) of the company’s stock during the first three months of 2006.

Interest expense was $12.1 million and $12.0 million for the first quarter of 2006 and 2005, respectively. Interest income was $1.8 million and $0.8 million for the first quarter of 2006 and 2005, respectively.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Financial Instruments

In February 2002, the company issued euro 300 million of 5.375 percent euronotes, due February 2007. The company has designated this euronote debt as a hedge of existing foreign currency exposures related to net investments the company has in certain European subsidiaries. Accordingly, the transaction gains and losses on the euronotes which are designated and are effective as hedges of the company’s net investments have been included as a component of the cumulative translation account. Total transaction gains and losses related to the euronotes charged to shareholders’ equity were losses of approximately $4.4 million and gains of approximately $1.8 million for the first quarter of 2006 and 2005, respectively.

5. Comprehensive Income

Comprehensive income was as follows:

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Business Acquisitions and Investments

The total cash paid related to acquisition and investment activity was $0.8 million and $21.0 million during the first quarter of 2006 and 2005, respectively. The aggregate purchase price of acquisitions and investments in affiliates has been reduced for any cash or cash equivalents acquired with the acquisitions.

Based upon purchase price allocations the components of the aggregate purchase prices of the acquisitions and investments in affiliates made during the three months ended March 31, 2006 and 2005, were as follows:

The changes in the carrying amount of goodwill for each of the company’s reportable segments for the quarter ended March 31, 2006 were as follows:

Goodwill acquired in 2006 relates to adjustments to prior year acquisitions.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Net Income Per Common Share

The computations of the basic and diluted net income per share amounts were as follows:

Stock options to purchase approximately 6.7 million and 4.4 million shares for the first quarters ended March 31, 2006 and 2005, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted common shares outstanding.

Restricted stock awards of 21,690 shares and 20,000 shares for the first quarters ended March 31, 2006 and 2005, respectively, were excluded from the computation of basic weighted-average shares outstanding because such shares were not yet vested at these dates.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Pension and Postretirement Plans

The components of net periodic pension and postretirement health care benefit costs for the first quarter are as follows:

The company is not required to make any contributions to its U.S. pension plan and postretirement health care benefits plans for 2006. However, in the first quarter of 2006 the company made a $45 million voluntary contribution to the U.S. pension plan. The maximum tax deductible contribution for 2006 is estimated to be approximately $50 to $60 million for the U.S. pension plan.

Certain international pension benefit plans are required to be funded in accordance with local government requirements. The company contributed approximately $4.4 million to its international pension benefit plans during the first quarter ended March 31, 2006. The company currently estimates that it will contribute approximately $10 to $15 million to the international pension benefit plans during the remainder of 2006.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Operating Segments

Financial information for each of the company’s reportable segments is as follows:

The International amounts included above are based on translation into U.S. dollars at the fixed currency exchange rates used by management for 2006.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Goodwill and Other Intangible Assets

Under Statement of Financial Accounting Standards (SFAS) No. 142, goodwill must be tested annually for impairment. The company performs its annual goodwill impairment test during the second quarter. If circumstances change significantly within a reporting unit, the company would test for impairment prior to the annual test for impairment.

Goodwill and other intangible assets arise principally from business acquisitions. Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired. Other intangible assets include primarily customer relationships, trademarks, patents and other technology. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. The weighted-average useful life of other intangible assets was 14 and 13 years as of March 31, 2006 and 2005, respectively.

The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the company in each reporting period. Total amortization expense related to other intangible assets during the first quarter ended March 31, 2006 and 2005 was approximately $5.3 million and $6.0 million, respectively. As of March 31, 2006, future estimated amortization expense related to amortizable other identifiable intangible assets will be:

11. New Accounting Pronouncements

No new accounting pronouncement issued or effective has had or is expected to have a material impact on the company’s consolidated financial statements.

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REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Directors

Ecolab Inc.

We have reviewed the accompanying consolidated balance sheet of Ecolab Inc. and its subsidiaries as of March 31, 2006, and the related consolidated statements of income and of cash flows for the three-month periods ended March 31, 2006 and 2005. These financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the interim consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2005, and the related consolidated statements of income, of comprehensive income and changes in shareholders’ equity, and of cash flows for the year then ended, management’s assessment of the effectiveness of the company’s internal control over financial reporting as of December 31, 2005 and the effectiveness of the company’s internal control over financial reporting as of December 31, 2005; and in our report dated February 24, 2006, we expressed unqualified opinions thereon (our opinion contained an explanatory paragraph stating the company changed the manner in which it accounts for share-based compensation as of October 1, 2005). The consolidated financial statements and management’s assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis provides information that we believe is useful in understanding our operating results, cash flows and financial condition. The discussion should be read in conjunction with the unaudited consolidated financial information and related notes included in this Form 10-Q.

The following discussion contains various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the statement entitled “Forward-Looking Statements” located at the end of Part I of this report.

Overview for the Quarter Ended March 31, 2006

Continued strong sales growth in our U.S., Latin America and Asia Pacific businesses led our results for the first quarter ended March 31, 2006. Consolidated net sales reached a record $1.1 billion. Net income increased 12 percent to a record $78 million, or $0.30 per diluted share.

We early-adopted the provisions of Statement of Financial Accounting Standard No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123R), the new accounting standard for expensing stock options, in the fourth quarter of 2005. As part of the transition to the new standard, all prior period financial statements were restated to recognize share-based compensation expense historically reported in the notes to our consolidated financial statements. All financial results presented in this Form 10-Q include the impact of expensing stock options.

Sales Performance

•      First quarter sales for our United States Cleaning & Sanitizing operations rose 10 percent to $513 million, led by Institutional sales growth of 11 percent. Kay and Food & Beverage sales were each up 9 percent over the first quarter of 2005. Water Care also showed strong sales growth over last year.

•      Sales of our United States Other Services operations increased 9 percent to $93 million reflecting double-digit sales growth by Pest Elimination and a modest increase by GCS.

•      Sales of our International operations rose 5 percent to $510 million in the first quarter when measured in fixed rates of currency exchange. Latin America had a double-digit sales increase in the first quarter while Asia Pacific and Canada showed good sales growth. Europe recorded a moderate sales gain. Foreign currency translation had an unfavorable impact on sales. When measured at public currency rates, International sales decreased 1 percent.

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Performance

•      Diluted net income per share was $0.30 for the first quarter of 2006, up 11 percent from $0.27 in the first quarter of 2005.

•      Currency translation had a negative impact on our net income, decreasing net income by approximately $1 million for the first three months of 2006.

•      Our income tax rate was 35.7 percent in the first quarter of 2006 and 35.0 percent in the first quarter of last year. Last year’s first quarter tax rate included one-time benefits. Excluding these one-time items, the effective income tax rate for the first quarter of 2005 was 36.1 percent.

•      Our strong cash and short-term investment position at December 31, 2005 and cash from operating activities allowed us to repay our $75 million senior notes, make a $45 million voluntary contribution to our U.S. pension plan and repurchase 2 million shares of our common stock under our share repurchase program during the first three months of 2006.

Results of Operations - First Quarter Ended March 31, 2006

Consolidated net sales for the first quarter ended March 31, 2006 were $1.120 billion, an increase of 5 percent over net sales of $1.070 billion in the first quarter of last year. Sales volume and selling price increases were partially offset by unfavorable foreign currency translation which decreased sales growth by 3 percentage points for the first quarter ended March 31, 2006. Sales rose 8 percent when measured in fixed currency rates.

The gross profit margin (defined as the difference between net sales less cost of sales divided by net sales) was 50.7 percent of net sales for both first quarters ended March 31, 2006 and 2005. Selling price increases and cost savings initiatives offset continued increases in raw material costs for the first quarter of 2006. We expect gross margins to show year over year improvement through the remainder of 2006. We expect raw material costs to increase through 2006 but we anticipate the year over year increase to be lower than we experienced in 2005.

Selling, general and administrative expenses were 38.9 percent of consolidated net sales for the first quarter of 2006, a decrease from 39.7 percent of net sales in the comparable quarter of last year. Selling, general and administrative expenses as a percent of sales improved primarily due to pricing, cost savings programs and sales leverage which more than offset investments made in the business.

Net income totaled $78 million for the first quarter of 2006 and $69 million for the comparable period of 2005. On a per share basis, diluted net income per common share was $0.30 for the first quarter of 2006 and increased 11 percent over diluted net income per share of $0.27 in the first quarter of 2005. Currency translation negatively impacted net income growth by approximately $1 million for the first quarter of 2006 and positively impacted net income growth by approximately $1.5 million for the first quarter of 2005. The comparison of net income was also unfavorably impacted by a lower effective income tax rate in 2005 which included the benefit of one-time items.

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations - First Quarter Ended March 31, 2006 (continued)

Sales for each of our reportable segments are as follows:

The following table shows the increase or growth in sales for the first quarter ended March 31, 2006 over the first quarter of 2005 by operating segment:

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations - First Quarter Ended March 31, 2006 (continued)

Sales of our United States Cleaning & Sanitizing operations were $513 million, an increase of 10 percent compared with sales of $467 million in the first quarter of last year. Sales in the first quarter were led by double-digit growth in Institutional as well as good growth in Food & Beverage and Kay. The increase in sales of our Institutional division reflects growth in all end market segments, selling price increases, improved account penetration and continued success of new programs. Kay’s performance reflects growth in food retail service and quickservice restaurants. Kay continues to see good ongoing demand from existing customers as well as new account gains. Textile Care had a strong quarter as sales increased 8 percent reflecting new accounts and selling price increases as well as new products and programs. Professional Products sales declined during the first quarter as success with new floor care product introductions and corporate account sales was offset by weaker distributor sales and a soft market for non-floor care products. Our Healthcare division reported a 5 percent sales increase over last year. Sales were unfavorably impacted by large distributor sales in the fourth quarter of 2005. End-user sales of instrument care solids as well as waterless skincare products continue to do well. Water Care Services had double-digit sales growth in the first quarter of 2006 driven primarily by growth in the food and beverage and institutional markets as we leveraged cross-selling opportunities. Selling price increases also helped sales growth. Vehicle Care sales increased moderately due to new product sales and increased pricing, which offset slow market trends and comparison against a strong first quarter of 2005 which included sales in anticipation of a price increase. Our Food & Beverage division sales increased due to gains in the dairy, meat and poultry and soft drink markets. Food & Beverage sales benefited from selling price increases, better penetration of accounts with existing and new products as well as new business.

Sales of our United States Other Services operations totaled $93 million for the first quarter of 2006, an increase of 9 percent over net sales of $86 million in the first quarter of last year. Pest Elimination had double-digit sales increases in both contract and non-contract services, driven by new accounts, selling price increases, one-shot services, bird work and fumigation work. GCS Service reported a 3 percent increase in sales as service and installed parts sales increased over the first quarter of last year. Customer service satisfaction ratings remained high and technician productivity improved over the first quarter of 2005.

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ECOLAB INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations - First Quarter Ended March 31, 2006 (continued)

We evaluate the performance of our International operations based on fixed management rates of currency exchange. Management rate sales for our International operations were $510 million for the first quarter of 2006, an increase of 5 percent over sales of $484 million in the comparable quarter of last year. Sales in Europe increased 4 percent for the first quarter of 2006 with all divisions reporting sales increases. Sales benefited from new customers as well as new products. Sales for Asia Pacific increased 7 percent due to continued double-digit growth in mainland Asia and good growth in Australia. Latin America sales increased 10 percent for the quarter. Sales were strong throughout the region due to new account gains, increased product penetration, as well as success with new products and programs and global accounts. Sales in Canada increased 6 percent for the quarter ended March 31, 2006, due to strong results for Institutional and improved results for Food & Beverage.

Operating income for each of our reportable segments for the quarters ended March 31, 2006 and 2005 are as follows: