UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2005

OR

For the transition period from              to             

Commission File No. 1-9328

ECOLAB INC.

(Exact name of registrant as specified in its charter)

(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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes   ý           No   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 October 31, 2005.

256,024,218 shares of common stock, par value $1.00 per share.

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 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.

(Continued)

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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.

(Continued)

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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 third quarter and nine-month periods ended September 30, 2005 and 2004, 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, 2004 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, 2004.

With respect to the unaudited financial information of the company for the third quarters and nine months ended September 30, 2005 and 2004 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 October 21, 2005 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. Stock-Based Compensation

Currently the company measures compensation cost for its stock incentive and option plans using the intrinsic value-based method of accounting.  Beginning in the fourth quarter of 2005, the company will adopt SFAS 123(R) Share-Based Payments, the new standard for expensing stock options.  The company expects the adoption will result in an annual charge of approximately $0.10 per share for the full year 2005.  As part of the transition to the new standard, the company expects to restate its earnings in line with pro forma amounts historically disclosed in the company’s financial statements.

Had the company used the fair value-based method of accounting to measure compensation expense for its stock incentive and option plans and charged compensation cost against income over the vesting periods, based on the fair value of options at the date of grant, net income and the related basic and diluted per common share amounts for the third quarter and nine-month periods ended September 30, 2005 and 2004 would have been reduced to the pro forma amounts in the following table:

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Stock-Based Compensation (continued)

Stock options fully vest upon an employee’s retirement if the service criteria have been met.  The company uses the nominal vesting period approach to recognize compensation relating to these stock options.  Under the nominal vesting period approach, compensation cost is recognized over the options’ stated vesting period.  If the employee retires before the end of the stated vesting period and has met the required service criteria, any remaining unrecognized compensation cost is recognized at that date.  If the company had recognized compensation expense at the time the award is no longer contingent on providing subsequent service (the “non-substantive vesting period approach”), pro forma net income would have been increased by $1.0 million and $1.4 million during the quarters ended September 30, 2005 and 2004, respectively, and $1.9 million and $2.5 million  during the nine months ended September 30, 2005 and 2004, respectively.  In Ecolab’s case, employees become “retirement eligible” at age 55 with 5 years of service.

3. Selected Balance Sheet Information

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Selected Balance Sheet Information (continued)

Accumulated other comprehensive income as of September 30, 2005 consists of $0.6 million of net unrealized losses on financial instruments and $11.4 million of additional minimum pension liabilities as well as $43.2 million of cumulative translation income.  Accumulated other comprehensive income as of December 31, 2004 consists of $4.0 million of net unrealized losses on financial instruments and $10.9 million of additional minimum pension liabilities as well as $87.1 million of cumulative translation income.  The decrease in cumulative translation income since December 31, 2004 is due to the strengthening of the U.S. dollar against foreign currencies, primarily the euro.  The increase in treasury stock is due to the repurchase of approximately $127 million of the company’s stock during the first nine months of 2005.

Interest expense was $12.9 million for the third quarter of 2005 and $38.2 million for the nine months ended September 30, 2005.  Interest expense was $12.3 million and $36.1 million for the third quarter and first nine months of 2004, respectively.  Interest income was $1.4 million for the third quarter of 2005 and $3.3 million for the nine months ended September 30, 2005.  Interest income was $0.7 million and $2.1 million for the third quarter and first nine months of 2004, 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 $1.6 million and gains of approximately $0.4 million for the third quarter of 2005 and 2004, respectively, and gains of approximately $28.4 million and losses of approximately $5.5 million for the first nine months of 2005 and 2004, respectively.

5. Comprehensive Income

Comprehensive income was as follows:

6. Special Charges

In the first quarter of 2002, management approved plans to undertake restructuring and cost saving actions during 2002, including costs related to the integration of the company’s European operations.  These actions included global workforce reductions, facility closings, and product line discontinuations.  These actions were substantially completed by December 31, 2003.  Remaining amounts accrued at December 31, 2003 and through December 31, 2004 primarily represented contractual periodic payments to be made over time.  At December 31, 2004, the accrued restructuring liabilities were satisfied.

“Special Charges” for the third quarter and nine months ended September 30, 2004 includes the reversal of $255,000 and $750,000, respectively, of previously accrued estimated severance and lease termination costs.  Of the $750,000 reversed in the first nine months, $66,000 is included as a component of cost of sales.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Special Charges (continued)

Also included in “Special Charges” for the third quarter and nine months ended September 30, 2004 is $1.6 million of in-process research and development charges related to the Alcide acquisition.  These charges include the portion of the purchase price assigned to research and development projects not yet completed at the date of acquisition and which have no alternative future use.  For the first nine months of 2004 “Special Charges” also includes a loss related to the disposal of a grease management product line of the Institutional division of the U.S. Cleaning & Sanitizing segment of $4.0 million ($2.4 million after tax).

Remaining restructuring liabilities of $2,458,000 at September 30, 2004 are classified as a component of other current liabilities.

For segment reporting purposes, each of these items have been included in the company’s corporate segment, which is consistent with the company’s internal management reporting.

7. Business Acquisitions and Investments

In January 2005, the company acquired Associated Chemicals & Services, Inc. (aka Midland Research), a water treatment business.  Midland had annual sales of approximately $16 million and their operations became part of the company’s United States Cleaning & Sanitizing and International operations.

In February 2005, the company acquired YSC Chemical Company (YSC) based in Bangkok, Thailand.  YSC provides floor cleaning and finishing products in East Asia.  YSC had annual sales of approximately $3 million and their operations became part of the company’s International operations.

In April 2005, the company purchased certain operations of Kilco Chemicals Ltd. Based near Belfast, Northern Ireland, Kilco offers products, systems and services for the food and beverage processing industry.  Kilco had sales of approximately $5 million annually, and these operations became part of the company’s International operations.

The total cash paid for acquisitions and investments in affiliates was $0.2 million and $1.6 million during the third quarter of 2005 and 2004, respectively.  Total cash paid for acquisitions and investments in affiliates was $28.1 million and $130.5 million during the first nine months of 2005 and 2004, respectively.  In addition, 1,834,759 shares of common stock were issued with a market value of $57.1 million in the Alcide acquisition plus $23,000 of cash in-lieu of fractional shares during the third quarter ended September 30, 2004.  Cash paid for acquisitions in 2004 included payments of restructuring costs related to the integration of the former Henkel-Ecolab European joint venture that were accrued in 2002.  The aggregate purchase price of acquisitions and investments in affiliates has been reduced for any cash or cash equivalents acquired with the acquisitions.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Business Acquisitions and Investments (continued)

Based upon purchase price allocations the components of the aggregate purchase prices of the acquisitions made during the third quarter and nine months ended September 30, 2005 and 2004, and the allocation of the purchase prices, were as follows:

In the third quarter of 2004, the company finalized its purchase accounting valuation of identifiable intangibles in the Nigiko acquisition which resulted in a decrease in identifiable intangible assets of $7.9 million and a corresponding increase in goodwill.  In the third quarter of 2004, the company also recorded a charge of $1.6 million for in-process research & development as part of the allocation of purchase price in the Alcide acquisition.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Business Acquisitions and Investments (continued)

The changes in the carrying amount of goodwill for each of the company’s reportable segments for the quarter and nine months ended September 30, 2005 were as follows:

Goodwill acquired in 2005 also includes adjustments to prior year acquisitions.  Goodwill disposed of in 2005 relates to the sale of a small business in Europe and a small business in the United States.

Operations of the acquired companies have been included in the operations of the company since the date of the respective acquisition.  The purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition.  These acquisitions individually and in the aggregate are not material to the company’s operations.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. 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 4.4 million and 4.2 million shares for the third quarter and nine months ended September 30, 2005, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted common shares outstanding.  Stock options to purchase approximately 84,000 shares and 330,000 shares for the quarter and nine months ended September 30, 2004, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted common shares outstanding.

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ECOLAB INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Pension and Postretirement Plans

The components of net periodic pension and postretirement healthcare benefit costs for the third quarter are as follows: