-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TjBvMWFdPImYEit6UqS0J/6SUz9zhhhbrkFrtJzdpGjebJJOK6H4zBPzIb6ZpL27 s7139usXxwd6xVM05dVDqA== 0000069598-98-000010.txt : 19981116 0000069598-98-000010.hdr.sgml : 19981116 ACCESSION NUMBER: 0000069598-98-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NALCO CHEMICAL CO CENTRAL INDEX KEY: 0000069598 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS CHEMICAL PRODUCTS [2890] IRS NUMBER: 361520480 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04957 FILM NUMBER: 98748142 BUSINESS ADDRESS: STREET 1: ONE NALCO CTR CITY: NAPERVILLE STATE: IL ZIP: 60563 BUSINESS PHONE: 7083051000 MAIL ADDRESS: STREET 1: ONE NALCO CENTER CITY: NAPERVILLE STATE: IL ZIP: 60563-1198 10-Q 1 10Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-4957 NALCO CHEMICAL COMPANY Incorporated in the State of Delaware Employer Identification No. 36-1520480 One Nalco Center, Naperville, Illinois 60563-1198 Telephone 630-305-1000 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 X No The number of shares outstanding of each of the issuer's classes of common stock, as of September 30, 1998 was 65,493,692 shares common stock - par value $.1875 a share. NALCO CHEMICAL COMPANY INDEX
Page No. Part I. Financial Information: Item 1. Financial Statements Condensed Consolidated Statements of Financial Condition - September 30, 1998 (Unaudited) and December 31, 1997.........................................2 Condensed Consolidated Statements of Earnings and Comprehensive Income (Unaudited) - Three Months and Nine Months Ended September 30, 1998 and 1997.........................................3 Condensed Consolidated Statements of Cash Flows (Unaudited) - Three Months and Nine Months Ended September 30, 1998 and 1997.............................4 Notes to Condensed Consolidated Financial Statements (Unaudited)....................................................5 Report of Independent Accountants on Review of Interim Financial Information...................................9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................10 Part II. Other Information: Item 6. Exhibits and Reports on Form 8-K...............................................16 Exhibit (11) - Statement Re: Computation of Earnings Per Share................................................17 Exhibit (15) - Awareness Letter of Independent Accountants..........................................................19 Exhibit (27) - Financial Data Schedule.......................................................20 Signatures .................................................................................21
- 21 - PART I. FINANCIAL INFORMATION NALCO CHEMICAL COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31, 1998 1997 (Dollars in millions) (Unaudit (Note) ASSETS Current assets Cash and cash equivalents $ 44.7 $ 49.7 Accounts receivable, less allowances of $4.6 and $4.2, respectively 288.4 241.6 Inventories Finished products 88.6 68.2 Materials and work in process 26.6 26.3 -------- -------- 115.2 94.5 Prepaid expenses, taxes and other current assets 26.1 23.2 -------- -------- Total current assets 474.4 409.0 Investment in and advances to partnership 129.8 122.9 Goodwill, less accumulated amortization of $37.2 and $29.5, respectively 376.0 249.4 Other assets 157.6 167.1 Property, plant and equipment 1,211.7 1,135.2 Less allowances for depreciation 701.8 642.7 -------- -------- 509.9 492.5 -------- -------- $1,647.7 $1,440.9 ======== ======== LIABILITIES/SHAREHOLDERS' EQUITY Current liabilities Short-term debt $ 18.4 $ 22.1 Accounts payable 111.5 108.1 Other current liabilities 136.7 125.4 -------- -------- Total current liabilities 266.6 255.6 Long-term debt 492.8 335.3 Deferred income taxes 36.9 37.2 Accrued postretirement benefits 103.2 100.7 Other liabilities 58.4 59.4 Shareholders' equity 689.8 652.7 -------- -------- $1,647.7 $1,440.9 ======== ========
Note: The Statement of Financial Condition at December 31, 1997 has been derived from the audited financial statements at that date. See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited). NALCO CHEMICAL COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Nine Months Ended (Dollars in millions, September 30, September 30, except per share data) 1998 1997 1998 1997 -------- ------ ----- ----- Net sales $408.4 $371.0 $1,178.5 $1,060.0 Operating costs and expenses Cost of products sold 186.7 165.0 532.8 462.4 Operating expenses 157.5 139.7 459.9 418.5 ------ ------ -------- -------- 344.2 304.7 992.7 880.9 ------ ------ -------- -------- Operating earnings 64.2 66.3 185.8 179.1 Other income (expense) Other income and expense - net 0.6 (0.4) 1.3 0.8 Interest expense (7.3) (3.7) (19.1) (11.1) Equity in earnings of partnership 6.1 6.6 21.0 19.8 ------ ------ -------- -------- Earnings before income taxes 63.6 68.8 189.0 188.6 Income taxes 22.9 24.6 68.3 68.5 ------ ------ -------- -------- Net earnings 40.7 44.2 120.7 120.1 Other comprehensive income Foreign currency translation adjustments 3.7 (10.8) (8.1) (25.4) ------ ------- -------- -------- Comprehensive income $ 44.4 $ 33.4 $ 112.6 $ 94.7 ====== ====== ======== ======== Per common share: Net earnings - basic $ 0.58 $ 0.62 $ 1.70 $ 1.67 ====== ====== ======== ======= Net earnings - diluted $ 0.54 $ 0.57 $ 1.57 $ 1.54 ====== ====== ======== ======= Cash dividends $ 0.25 $ 0.25 $ 0.75 $ 0.75 ====== ====== ======== ======= Average basic shares outstanding (in thousands) 65,731 66,792 65,957 66,811 Average diluted shares outstanding (in thousands) 73,470 75,516 74,083 75,323
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited). NALCO CHEMICAL COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended Nine Months Ended September 30 September 30, (Dollars in millions) 1998 1997 1998 1997 -------- --------- -------- ------ Cash provided by (used for) operating activities Net earnings $ 40.7 $ 44.2 $120.7 $120.1 Adjustments not affecting cash Depreciation and amortization 24.0 27.7 76.5 77.2 Other, net (5.0) (5.7) (11.0) (8.9) Changes in current assets and liabilities 9.2 5.4 (27.8) (18.8) ------ ------ ------ ------ Net cash provided by operations 68.9 71.6 158.4 169.6 ------ ------ ------ ------ Investing activities Additions to property, plant and equipment (26.2) (20.4) (84.4) (59.0) Business purchases (21.0) - (139.4) (39.8) Other 7.0 3.6 (3.0) (1.6) ------ ------ ------ ------ Net cash (used for) investing activities (40.2) (16.8) (226.8) (100.4) ------ ------ ------ ------- Financing activities Cash dividends (19.3) (19.6) (58.2) (58.8) Changes in short-term debt (10.1) 0.9 (8.1) 42.8 Changes in long-term debt 12.6 (1.4) 162.8 4.9 Common stock reacquired (15.8) (22.8) (41.4) (44.8) Other 0.9 8.1 8.3 16.0 ------ ------ ------ ------ Net cash provided by (used for) financing activities (31.7) (34.8) 63.4 (39.9) ------ ------ ------ ------ Effects of foreign exchange rate changes 1.7 (3.2) - (4.2) ------ ------ ------ ------ Increase (decrease)in cash and cash equivalents $ (1.3) $ 16.8 $ (5.0) $ 25.1 ====== ====== ====== ======
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited). NALCO CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) September 30, 1998 NOTE A -- BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared, without audit, in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Financial information as of December 31 has been derived from the audited financial statements of the Company, but does not include all disclosures required by generally accepted accounting principles. It is the opinion of management that the unaudited condensed consolidated financial statements include all adjustments necessary to fairly state the results of operations for the three month and nine month periods ended September 30, 1998 and 1997. The results of interim periods are not necessarily indicative of results to be expected for the year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1997. The unaudited condensed consolidated financial statements and the related notes have been reviewed by Nalco's independent accountants, PricewaterhouseCoopers LLP. The Independent Accountants' Review Report is included on page 9. NOTE B -- EARNINGS PER SHARE Tables which detail the computations of basic and diluted earnings per share for the three months and nine months ended September 30, 1998 and 1997 are included in Exhibit (11) on pages 17 and 18. NOTE C -- SHAREHOLDERS' EQUITY Shareholders' equity may be further detailed as follows:
September 30, December 31, (Dollars in millions, 1998 1997 ------------ -------- except per share figures) Preferred stock par value $1.00 per share; authorized 2,000,000 shares; Series B ESOP Convertible Preferred Stock - 375,825 shares at September 30, 1998 and 383,774 shares at December 31, 1997 $ 0.4 $ 0.4 Series C Junior Participating Preferred Stock - none issued - - Capital in excess of par value of shares 180.4 184.1 Unearned ESOP compensation (140.5) (151.1) -------- ------- 40.3 33.4 Common stock - par value $.1875 per share; authorized 200,000,000 shares; issued 80,287,568 shares 15.1 15.1 Capital in excess of par value of shares 46.0 40.8 Common stock reacquired - at cost 14,793,876 shares at September 30, 1998 and 14,251,003 shares at December 31, 1997 (449.8) (420.4) Retained earnings 1,135.2 1,072.7 Accumulated other comprehensive income (97.0) (88.9) -------- ------- Total shareholders' equity $ 689.8 $ 652.7 ======== =======
NOTE D--ACQUISITIONS During the first nine months of 1998, the Company acquired thirteen businesses that operate in Nalco's core markets of water treatment and process chemicals. Each of these acquisitions was accounted for as a purchase and, accordingly, the operating results of each business were included in the consolidated results of the Company from its respective acquisition date. The Company also increased its investments in its subsidiary companies in Taiwan and India during 1998. The combined purchase price of these acquisitions was approximately $140 million. The Company is in the process of evaluating the assets that were purchased and the liabilities that were assumed and, accordingly, will make any necessary adjustments to the recorded value of the acquired assets and liabilities. Effective January 1998, the Company merged its South African affiliate company with the water treatment interests of Chemical Services Limited, South Africa's largest specialty chemicals company. The merged entity, Nalco-Chemserve, is South Africa's largest water treatment company. In connection with the merger, Nalco obtained a controlling interest in Nalco-Chemserve and, accordingly, has consolidated the results of Nalco-Chemserve from January 1, 1998. The pro forma impact as if these acquisitions had occurred at the beginning of 1997 is not significant. NOTE E--EFFECTS OF NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 establishes reporting standards for the way that enterprises report information about operating segments in annual financial statements and requires that enterprises report selected information about operating segments in interim financial reports. SFAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997. Financial statement disclosures for prior periods are required to be restated unless it is impracticable to do so. The adoption of SFAS 131 will have no impact on the Company's results of operations, financial position or cash flows. In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. SFAS 132 is effective for financial statements for fiscal years beginning after December 15, 1997. Financial statement disclosures for earlier periods provided for comparative purposes are required to be restated. The adoption of SFAS 132 will have no impact on the Company's results of operations, financial position or cash flows. In March 1998, the Accounting Standards Executive Committee (AcSEC) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use and provides guidance for determining whether computer software is for internal use. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998, and should be applied to internal-use computer software costs incurred in those fiscal years for all projects, including those projects in progress upon initial application of SOP 98-1. Earlier application is encouraged in fiscal years for which annual financial statements have not been issued. The Company currently plans to adopt SOP 98-1 in January 1999 and expects its application will not have a material effect on the Company's results of operations, financial position or cash flows. In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires that the costs of start-up activities, including organization costs, be expensed as incurred. SOP 98-5 requires adoption of its provisions for fiscal years beginning after December 15, 1998. Earlier application is encouraged in fiscal years for which annual financial statements have not been issued. Initial application of SOP 98-5 should be as of the beginning of the fiscal year in which it is adopted and should be reported as the cumulative effect of a change in accounting principle. Restatement of previously issued financial statements is not permitted. The Company plans to adopt SOP 98-5 in January 1999. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires the recognition of all derivatives as either assets or liabilities in the statement of financial position and the measurement of those instruments at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivatives and the resulting designations. SFAS 133 is effective for fiscal years beginning after June 15, 1999, but earlier application is permitted as of the beginning of any fiscal quarter subsequent to June 17, 1998. The Company presently believes that the application of SFAS 133, when adopted, will not have a material effect on the Company's results of operations, financial position or cash flows. The Company makes limited use of derivatives to manage well-defined interest rate and foreign exchange exposures. The Company does not hold or issue derivatives for trading purposes. NOTE F--COMMITMENTS AND CONTINGENCIES On September 25, 1998, the Company announced that it will be implementing a plan for reducing its overall cost structure for 1999 by $30 million. The Company is exploring ways to redesign, combine and streamline its global operations to make them more efficient, while at the same time remaining customer focused. As part of the plan, the Company has begun an early retirement program in the United States that will be in effect for a limited time. This early retirement program, combined with severance programs around the world, will result in employment being reduced by about 5 percent by the end of 1998. In connection with the plan for reducing Nalco's overall cost structure, the Company expects to record a restructuring charge in the fourth quarter 1998. The amount of the charge is unknown at this time since it is dependent upon several factors, including the number of individuals who accept the early retirement offer, the amount of their benefits, and the amount of termination benefits to be paid under the various severance programs. REPORT OF INDEPENDENT ACCOUNTANTS ON REVIEW OF INTERIM FINANCIAL INFORMATION To the Board of Directors and Shareholders of Nalco Chemical Company We have reviewed the accompanying interim financial information of Nalco Chemical Company and consolidated subsidiaries as of September 30, 1998, and for the three month and nine month periods then ended. This interim financial information is the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, 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 review, we are not aware of any material modifications that should be made to the accompanying financial information for it to be in conformity with generally accepted accounting principles. We previously audited, in accordance with generally accepted auditing standards, the statement of consolidated financial condition as of December 31, 1997, and the related statements of consolidated earnings, of cash flows and of common shareholders' equity for the year then ended (not presented herein), and in our report dated February 2, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial condition as of December 31, 1997, is fairly stated in all material respects in relation to the statement of consolidated financial condition from which it has been derived. PricewaterhouseCoopers LLP By: Robert R. Ross Engagement Partner October 23, 1998 Chicago, Illinois Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Third Quarter 1998 Operations Compared to Third Quarter 1997 Sales increased by 10 percent over last year with five of the six divisions reporting higher results. Changes in volume, mix and price increased sales nearly 6 percent over year-ago results. Acquisitions and the consolidation of Nalco-Chemserve resulted in an additional 10 percent sales gain. Adverse foreign currency translation effects resulting from the stronger U.S. dollar compared to most foreign currencies reduced third quarter sales by $21 million or 6 percent. Sales for the third quarter 1998 and 1997 by major operating unit were as follows: Third Quarter Increase (Dollars in millions) 1998 1997 (Decrease) -------- -------- -------- Industrial $115.2 $105.9 9% Specialty 98.9 80.6 23% Pulp & Paper 91.4 86.1 6% Process 50.0 46.4 8% Latin America 22.3 20.9 7% Pacific 30.6 31.1 (2%) ------- ------- Total $408.4 $371.0 10% ======= ======= In the third quarter, sales by the Industrial Division were up 9 percent over last year. About two-thirds of the increase was attributable to acquisitions and sales by Nalco-Chemserve, which was formed at the beginning of 1998 by merging Nalco's affiliated company in South Africa with the water treatment interests of Chemical Services Limited. Acquisitions accounted for approximately three-fourths of the 23 percent improvement which was posted by the Specialty Division. Acquisitions, partly offset by the translation effect of the stronger U.S. dollar, accounted for the increases in the Pulp & Paper and the Process Divisions. Pacific Division sales were down slightly due to the stronger U.S. dollar, although operations in China, India and Japan reported strong double-digit increases. Operations in Argentina, Colombia and Mexico accounted for most of the improvement in the Latin America Division. The gross margin was 54.3 percent for the third quarter 1998 compared to 55.5 percent for the third quarter 1997. Lower margins of acquisitions and reduced margins in certain markets accounted for most of the change. Operating expenses (selling, administrative and research) were up $17.8 million over the third quarter of last year. Expenses attributable to newly acquired companies and investment in new field engineers in select markets account for most of the increase. Interest expense increased $3.6 million over the third quarter of last year which reflects higher borrowings to finance acquisitions and stock repurchases. Nalco's equity in Nalco/Exxon for the third quarter 1998 was $6.1 million, down slightly from the third quarter 1997. Net earnings as a percent to sales was 10.0 percent for the third quarter 1998, as compared to last year's return on sales of 11.9 percent. Basic net earnings per share for the third quarter 1998 was 58 cents compared to the 62 cents for the third quarter 1997. Net earnings per share on a diluted basis was 54 cents for the third quarter 1998 compared to 57 cents for the third quarter 1997. On September 25, 1998, the Company announced that it will be implementing a plan for reducing its overall cost structure for 1999 by $30 million. The Company is exploring ways to redesign, combine and streamline its global operations to make them more efficient, while at the same time remaining customer focused. As part of the plan, the Company has begun an early retirement program in the United States that will be in effect for a limited time. This early retirement program, combined with severance programs around the world, will result in employment being reduced by about 5 percent by the end of 1998. In connection with the plan for reducing Nalco's overall cost structure, the Company expects to record a restructuring charge in the fourth quarter 1998. The amount of the charge is unknown at this time since it is dependent upon several factors, including the number of individuals who accept the early retirement offer, the amount of their benefits, and the amount of termination benefits to be paid under the various severance programs. First Nine Months 1998 Operations Compared to First Nine Months 1997 Sales rose 11 percent with all divisions except the Pacific Division reporting increases. Changes in volume, mix and price increased sales more than 5 percent over last year, while acquisitions and the consolidation of Nalco-Chemserve contributed an additional 9 percent. The policy of reporting freight revenues as a component of sales rather than offsetting freight expenses in cost of products sold, effective July 1, 1997, increased sales an additional 3 percent over last year. However, the translation effect of the stronger U.S. dollar compared to most other currencies reduced sales 6 percent. Sales for the first nine months of 1998 and 1997 by major operating unit were as follows: Nine Months Increase (Dollars in millions) 1998 1997 (Decrease) -------- -------- ---------- Industrial $ 350.6 $ 305.5 15% Specialty 262.9 223.4 18% Pulp & Paper 267.1 247.4 8% Process 149.0 136.0 10% Latin America 65.8 60.9 8% Pacific 83.1 86.8 (4%) -------- -------- Total $1,178.5 $1,060.0 11% ======== ======== The Industrial Division reported a 15 percent increase over the first nine months of 1997, with sales by acquired companies and Nalco-Chemserve accounting for slightly less than two-thirds of the increase. Specialty Division sales rose by 18 percent with acquisitions contributing more than two-thirds of the increase. Acquisitions also accounted for approximately three-fourths of the 8 percent improvement in sales which was posted by the Pulp & Paper Division. The 10 percent improvement in Process Division sales was largely attributable to acquisitions, but the translation effect of the stronger U.S. dollar compared to most foreign currencies offset nearly half the increase from acquisitions. Double-digit sales gains in Latin America were reported by operations in Argentina and Mexico. Pacific Division sales were adversely affected by currency translation rate changes which negated strong double-digit sales gains by operations in China, India and Japan. Freight revenues and acquisitions had a minimal impact on Pacific and Latin America Division sales. The gross margin was 54.8 percent for the first nine months of 1998 compared to 56.4 percent for the nine months ended September 30, 1997. The 1998 drop in gross margin reflects the effect of classifying over $30 million of freight revenues as sales rather than as a reduction of cost of products sold. The gross margin for the nine months ended September 30, 1998 would have been 56.3 percent had freight revenues been reported on a comparable basis with last year. Operating expenses (selling, administrative and research) increased $41.4 million over the same period last year, which was mainly attributable to acquisitions and the addition of new field engineers in select markets. Interest expense rose $8.0 million to $19.1 million for the nine months ended September 30, 1998, which reflects higher borrowing levels to finance acquisitions and stock repurchases. Nalco's equity in the operations of Nalco/Exxon increased $1.2 million over last year's reported amount of $19.8 million. Net earnings per share on a diluted basis for the first nine months of 1998 was $1.57 compared to $1.54 for the first nine months of 1997. Changes in Financial Condition Cash and cash equivalents decreased by $5.0 million during the first nine months as detailed in the Unaudited Condensed Consolidated Statement of Cash Flows. Days sales outstanding were 65 days at September 30, 1998 and 61 days at December 31, 1997. Working capital at September 30, 1998 totaled $207.8 million, a $54.4 million increase from the $153.4 million at December 31, 1997. This increase is largely attributable to acquisitions and the consolidation of Nalco-Chemserve. The ratio of current assets to current liabilities was 1.8 to 1 at September 30, 1998. The $126.6 million increase in goodwill is mainly attributable to acquisitions, the consolidation of Nalco-Chemserve, and the additional investments in subsidiary companies in Taiwan and India. Acquisitions were financed primarily by the issuance of commercial paper. On May 12, 1998 the Company issued $150 million of 6.25% unsecured notes under a shelf registration statement filed with the Securities and Exchange Commission in April 1998. The notes are due May 15, 2008. Proceeds from the issuance were used to reduce outstanding commercial paper borrowings. This issuance accounts for most of the increase in long-term debt. Notes up to $250 million remain available under the shelf registration statement. Capital investments totaled $84.4 million for the first nine months of 1998. Major expenditures included additional investments to install the Company's new global management information systems, additional PORTA-FEED(R) units, vehicles for the sales force and manufacturing improvements. Effects of New Accounting Standards There are several recently issued accounting standards that are pending adoption by the Company. See Note E of the "Notes to Condensed Consolidated Financial Statements" for further discussion. Year 2000 Compliance Many information and operational systems in use today may be unable to interpret dates subsequent to the year 1999 to the extent such systems allow only two digits to indicate the year. As a result, the inability of such systems during this changeover to distinguish between the year 2000 and the year 1900 could have adverse consequences on the operations of the Company, its constituent parts and the integrity of information processing. This potential problem is referred to as the "Y2K issue." The Company began addressing Y2K compliance primarily with a review of its internal information technology systems beginning in mid-1995. This led to a decision by the Company to acquire new systems software (primarily based on software purchased from SAP America, Inc. and other vendors), together with internal upgrades of existing systems. This worldwide business systems replacement and remediation project began in 1996. The major consideration for this upgrade was improvement of the Company's business systems. However, it was also intended to substantially improve the Company's ability to be Y2K compliant. New systems for business processing have been used in Canada since mid-1998, and Nalco is on schedule to be converted to these systems in the U.S. by April 1999. In Europe, Nalco has completed and tested an upgrade of its BPCS business processing software, which provides full Y2K compliance. The Company's European operations have been running on this Y2K compliant system since April 1998. In Australia, Nalco is upgrading its VAX-based business processing software to provide full Y2K compliance. The upgrade will be completed, tested and implemented by the end of 1998. In the Pacific, Nalco is implementing a new version of its PC-based business processing software that addresses Y2K compliance, and completion is expected by mid-1999. In Latin America, (except for Venezuela), Nalco has modified or replaced its PC-based systems to ensure Y2K compliance. In Venezuela, Nalco is replacing its non-compliant BPCS software with a compliant PC-based system. This will be completed by mid-1999. As Nalco addressed its internal information processing and business system needs, it also began to establish a formalized structure for managing its Y2K compliance efforts. A Y2K compliance team was initiated in early 1998, consisting of a multidisciplined team cutting across all critical operating areas within the Company. This team is headed by a senior executive officer of the Company. At the same time, Nalco accelerated its focus on two critical areas: plant process control systems and equipment containing embedded chips provided to customers. Team leadership regularly reports to the Company's Board of Directors. Consequently, the Company now has in place a global Company-wide program to address the Y2K issue. This effort encompasses software, hardware, electronic data interchange, networks, PCs, manufacturing and other facilities, and supplier and customer readiness, along with embedded chip issues both internally and at customer locations. Y2K compliance progress is tracked along functional lines for all areas at Nalco worldwide. The Company's plant process control systems are currently being inventoried and assessed. Where needed, remediation plans are being made and implemented, and these systems will be Y2K compliant by the third quarter 1999 or earlier. Any of the Company's products that contain microprocessors, software or embedded chips have been or are being tested, and upgrades identified for those which are noncompliant. The Company is surveying its suppliers and other service providers to ensure that its supply chain is not interrupted. The Company also has commenced looking at the Y2K compliance efforts of its equipment, service and material suppliers. The Company has sent questionnaires to all of its significant suppliers regarding their Y2K compliance status, and is attempting to identify any problem areas with respect to them, particularly with respect to those suppliers identified as critical to ongoing operations. This effort will be ongoing, and will continue to focus on assessment of the risk that any problems may cause the shutdown of a customer's plant or other problems which the Company believes would have a material adverse impact on its operations. The Company has not yet developed contingency plans in the event of a Y2K failure caused by a supplier or a third party, but continues to seek to identify those potential failures. In some cases, especially with respect to utility vendors, alternative suppliers may not be available. The Company believes that its area of greatest risk relates to significant suppliers failing to remediate their Y2K issues in a timely manner, which may cause supply interruption for its customers. The Company has relationships with certain significant suppliers at most of the locations in which it operates. These relationships may be material to some local operations and, in the aggregate, may be material to the Company. If a number of significant suppliers are not Y2K compliant, this could have a material adverse effect on the Company's results of operations, financial position or cash flow. To mitigate the effect of one or more significant supplier's potential failure to reach Y2K compliance in a timely manner, the Company will seek to have in place appropriate contingency and corrective action plans. The Company is dependent upon its customers for sales and cash flow. Interruptions in the operations of Nalco's customers resulting from their Y2K failures could result in reduced sales, increased inventory or receivable levels, and cash flow reductions. While these events are possible, Nalco's customer base is wide and diverse, and the Company does not expect Y2K failures by its customers to have a material impact on the Company's consolidated financial position, results of operations or cash flows. The Company is currently looking at development of basic contingency plans to restore the material functions of each of its systems or activities in case of a Y2K failure. It is expected that contingency plans would cover all material levels of activity within each business location and functional area. Management does not expect the financial impact of being Y2K compliant to be material to the Company's consolidated financial position, results of operations or cash flows. It is currently estimated that the aggregate cost of the Company's Y2K compliance efforts will not exceed $3 million. These costs are being expensed as they are incurred and are being funded through operating cash flow. These amounts do not include any costs associated with the implementation of contingency plans, which are in the process of being developed. The costs associated with the replacement of computer systems, hardware or equipment, substantially all of which would be capitalized, are not included in the above estimates. Replacement systems consist primarily of the SAP software, related hardware and implementation costs, and is estimated to have a total cost of over $50 million. The Company's share of SAP costs is estimated at approximately $40 million, with the balance being borne by the Company's joint venture affiliate, Nalco/Exxon Energy Chemicals, L.P. The Company's Y2K readiness program is an ongoing process and the estimates of costs and completion dates for various components of the Y2K program described above are subject to change. The estimates and conclusions herein contain forward-looking statements and are based on management's best estimates of future events. Risks to achieving material Y2K compliance include the availability of resources, our ability to discover and correct potential Y2K sensitive or critical problems which could have a serious impact on specific facilities of the Company or its customers, and the ability of suppliers, customers and external agencies to bring their systems into Y2K compliance. Euro Conversion On January 1, 1999, eleven of fifteen member countries of the European Union will establish fixed conversion rates between their existing sovereign currencies ("legacy currencies") and the European Union's common currency, the euro. As of that date, the euro will trade on currency exchanges and may be used in business transactions. The legacy currencies will remain legal tender in the participating countries for a transition period between January 1, 1999 and at least January 1, 2002 (but not later than July 1, 2002). Beginning in January 2002, new euro-denominated bills and coins will be issued, and legacy currencies will be withdrawn from circulation. The Company has begun to identify issues associated with the conversion to the euro, including, among others, the need to adapt computer and financial systems to accommodate euro-denominated transactions and the impact of one common currency on pricing. Since financial systems and processes currently accommodate multiple currencies, the Company does not anticipate system conversion costs to be material. Since the euro conversion may affect cross-border competition by creating cross-border price transparency, the Company will be assessing its pricing strategies to ensure it remains competitive in a broader European market. Based on information currently available and the Company's current assessment, Nalco does not expect that the conversion to the euro will have a material adverse effect on its business or financial condition. Forward-Looking Statements Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report contain forward-looking statements that are based on current expectations, estimates and assumptions regarding the worldwide economy, technological innovation, competitive activity, interest rates, pricing, currency movements, and the development of certain markets. These statements are not guarantees of future results or events, and involve certain risk and uncertainties which are difficult to predict and many of which are beyond the control of the Company. Actual results and events could differ materially from those anticipated by the forward-looking statements. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are included herein: (11) Statement Re: Computation of Earnings Per Share (15) Awareness Letter of Independent Accountants (27) Financial Data Schedule (b) The Registrant did not file any reports on Form 8-K during the three months ended September 30, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NALCO CHEMICAL COMPANY (Registrant) Date: November 13, 1998 W. E. BUCHHOLZ --------------------------- W. E. Buchholz - Senior Vice President, Chief Financial Officer Date: November 13, 1998 S. J. GIOIMO ------------------------ S. J. Gioimo - Secretary EX-11 2 EXHIBIT 11 EXHIBIT (11) STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE NALCO CHEMICAL COMPANY AND SUBSIDIARIES
Three Months Ended Nine Months Ended (Amounts in thousands, September 30, September 30, except per share data) 1998 1997 1998 1997 ------ ------- ------ ----- Basic Average shares outstanding 65,731 66,792 65,957 66,811 ======== ======== ======== ======== Net earnings $40,759 $44,197 $120,715 $120,092 Dividends on preferred stock, net of taxes (2,854) (2,857) (8,636) (8,610) ------- ------- ------- ------- Net earnings to common shareholders $37,905 $41,340 $112,079 $111,482 ======= ======= ======== ======== Per share amounts: Net earnings to common shareholders $0.58 $0.62 $1.70 $1.67 ======== ======== ======== ========
EXHIBIT (11) STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE NALCO CHEMICAL COMPANY AND SUBSIDIARIES
Three Months Ended Nine Months Ended (Amounts in thousands, September 30, September 30, except per share data) 1998 1997 1998 1997 ------ ------- ------ ----- Diluted Average shares outstanding used in Basic earnings per share 65,731 66,792 65,957 66,811 Effect of dilutive securities: Assumed conversion of preferred stock 7,554 7,734 7,611 7,783 Stock options and contingently issuable shares 185 990 515 729 ------- ------- ------- ------- TOTALS 73,470 75,516 74,083 75,323 ======= ======= ======= ======= Net earnings $40,759 $44,197 $120,715 $120,092 Additional ESOP expense resulting from assumed conversion of preferred stock, net of taxes (1,088) (1,109) (3,313) (3,354) Income tax adjustment on assumed common dividends (289) (262) (863) (784) ------- ------- ------- ------- Net earnings to common shareholders $39,382 $42,826 $116,539 $115,954 ======= ======= ======== ======== Per share amounts: Net earnings to common shareholders $0.54 $0.57 $1.57 $1.54 ======= ======= ======= =======
EX-15 3 EXHIBIT 15 EXHIBIT (15) AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Dear Sirs: We are aware that Nalco Chemical Company has included our report dated October 23, 1998 (issued pursuant to the provisions of Statement on Auditing Standards No. 71) in the Prospectuses constituting part of its Registration Statements on Form S-3 (Nos. 333-50469, 33-57363, 33-53111, 33-9934 and 2-97721) and Form S-8 (Nos. 333-06955, 333-06963, 33-54377, 33-38033, 33-38032, 33-29149, 2-97721, 2-97131 and 2-82642). We are also aware of our responsibilities under the Securities Act of 1933. Yours very truly, PricewaterhouseCoopers LLP By: Robert R. Ross Engagement Partner November 13, 1998 Chicago, Illinois EX-27 4 FDS --
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND THE CONDENSED CONSOLIDATED OF EARNINGS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 44,700,000 0 293,000,000 (4,600,000) 115,200,000 474,400,000 1,211,700,000 (701,800,000) 1,647,700,000 266,600,000 492,800,000 400,000 0 15,100,000 674,300,000 1,647,700,000 1,178,500,000 1,178,500,000 532,800,000 532,800,000 0 0 19,100,000 189,000,000 68,300,000 120,700,000 0 0 0 120,700,000 1.70 1.57
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