-----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, Soefcv6vjHC8d5aOq+nD5UanWTFT2YdypaeHsvLGwTTXkJKWoMIlG5BnQz2OUXzs 63RKJ/7DKSQJnOxwlk9ZYA== 0000069598-99-000010.txt : 19991117 0000069598-99-000010.hdr.sgml : 19991117 ACCESSION NUMBER: 0000069598-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99752152 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) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 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, 1999 was 68,074,345 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, 1999 (Unaudited) and December 31, 1998.........................................2 Condensed Consolidated Statements of Earnings and Comprehensive Income (Unaudited) - Three Months and Nine Months Ended September 30, 1999 and 1998.........................................3 Condensed Consolidated Statements of Cash Flows (Unaudited) - Three Months and Nine Months Ended September 30, 1999 and 1998.............................4 Notes to Condensed Consolidated Financial Statements (Unaudited)....................................................5 Report of Independent Accountants on Review of Interim Financial Information...................................10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................11 Part II. Other Information: Item 6. Exhibits and Reports on Form 8-K...............................................17 Exhibit (11) - Statement Re: Computation of Earnings Per Share................................................18 Exhibit (15) - Awareness Letter of Independent Accountants..........................................................19 Exhibit (27) - Financial Data Schedule.......................................................20 Signatures 21
PART I. FINANCIAL INFORMATION NALCO CHEMICAL COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31, 1999 1998 (Dollars in millions) (Unaudited) (Note) ASSETS Current assets Cash and cash equivalents $ 48.1 $ 31.2 Accounts receivable, less allowances of $5.5 and $6.1, respectively 332.5 276.7 Inventories Finished products 101.1 97.4 Materials and work in process 27.3 24.4 -------- --------- 128.4 121.8 Prepaid expenses, taxes and other current assets 30.5 47.9 -------- -------- Total current assets 539.5 477.6 Investment in and advances to partnership 135.0 124.5 Goodwill, less accumulated amortization of $51.7 and $40.5, respectively 394.6 376.3 Other assets 156.1 155.0 Property, plant and equipment 1,211.0 1,225.1 Less allowances for depreciation (732.8) (707.8) -------- -------- 478.2 517.3 -------- --------- $1,703.4 $1,650.7 ======== ======== LIABILITIES/SHAREHOLDERS' EQUITY Current liabilities Short-term debt $ 26.4 $ 75.8 Accounts payable 111.7 124.9 Other current liabilities 159.7 150.6 -------- --------- Total current liabilities 297.8 351.3 Long-term debt 463.6 496.2 Deferred income taxes 28.9 15.6 Accrued postretirement benefits 125.6 123.0 Other liabilities 62.8 78.7 Shareholders' equity 724.7 585.9 -------- --------- $1,703.4 $1,650.7 ======== ========
Note: The Statement of Financial Condition at December 31, 1998 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) 1999 1998 1999 1998 ------ ------ ------ -------- Net sales $406.0 $408.4 $1,200.7 $1,178.5 Operating costs and expenses Cost of products sold 185.3 186.7 543.4 532.8 Operating expenses 159.6 157.5 469.3 459.9 ------ ------ -------- -------- 344.9 344.2 1,012.7 992.7 ------ ------ -------- -------- Operating earnings 61.1 64.2 188.0 185.8 Other income (expense) Other income and expense - net 11.4 0.6 31.9 1.3 Interest expense (7.2) (7.3) (23.2) (19.1) Equity in earnings of partnership 6.2 6.1 14.7 21.0 ------ ------ -------- -------- Earnings before income taxes 71.5 63.6 211.4 189.0 Income taxes 25.5 22.9 74.0 68.3 ------ ------ -------- -------- Net earnings 46.0 40.7 137.4 120.7 Other comprehensive income Foreign currency translation adjustments 2.3 3.7 (10.9) (8.1) ------- ------ -------- -------- Comprehensive income $ 48.3 $ 44.4 $ 126.5 $ 112.6 ====== ====== ======== ======== Per common share: Net earnings - basic $ 0.64 $ 0.58 $ 1.95 $ 1.70 ====== ====== ====== ====== Net earnings - diluted $ 0.59 $ 0.54 $ 1.79 $ 1.57 ====== ====== ====== ====== Cash dividends $ 0.25 $ 0.25 $ 0.75 $ 0.75 ====== ====== ====== ====== Average basic shares outstanding (in thousands) 67,490 65,731 66,488 65,957 Average diluted shares outstanding (in thousands) 76,554 73,470 74,703 74,083
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) 1999 1998 1999 1998 -------- --------- -------- ------ Cash provided by (used for) operating activities Net earnings $ 46.0 $ 40.7 $137.4 $120.7 Adjustments not affecting cash Depreciation and amortization 23.7 24.0 75.2 76.5 Other, net (9.0) (5.0) (33.6) (11.0) Changes in current assets and liabilities 19.1 9.2 (50.2) (27.8) ------ ------ ------ ------ Net cash provided by operations 79.8 68.9 128.8 158.4 ------ ------ ------ ------ Investing activities Additions to property, plant and equipment (20.3) (26.2) (58.9) (84.4) Business purchases (1.7) (21.0) (27.9) (139.4) Business sale - - 21.5 - Other 16.1 7.0 21.8 (3.0) ------ ------ ------ ------ Net cash (used for) investing activities (5.9) (40.2) (43.5) (226.8) ------ ------ ------ ------ Financing activities Cash dividends (19.4) (19.3) (57.8) (58.2) Changes in short-term debt (36.9) (10.1) (17.6) (8.1) Changes in long-term debt (51.5) 12.6 (54.4) 162.8 Common stock reacquired - (15.8) - (41.4) Stock option proceeds 46.2 0.3 65.3 12.6 Other (0.1) 0.6 0.1 (4.3) ------ ------ ------ ------ Net cash provided by (used for) financing activities (61.7) (31.7) (64.4) 63.4 ------ ------ ------ ------ Effects of foreign exchange (1.3) 1.7 (4.0) - ------ ------ ------ ------ Increase (decrease) in cash and cash equivalents $ 10.9 $ (1.3) $ 16.9 $ (5.0) ====== ====== ====== ======
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited). NALCO CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) September 30, 1999 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, 1999 and 1998. 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, 1998. 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 10. 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, 1999 and 1998 are included in Exhibit (11) on page 18. NOTE C -- SHAREHOLDERS' EQUITY Shareholders' equity may be further detailed as follows:
September 30, December 31, (Dollars in millions, 1999 1998 ------------ ------------- except per share figures) Preferred stock par value $1.00 per share; authorized 2,000,000 shares; Series B ESOP Convertible Preferred Stock - 346,611 shares at September 30, 1999 and 373,195 shares at December 31, 1998 $ 0.3 $ 0.4 Series C Junior Participating Preferred Stock - none issued - - Capital in excess of par value of shares 166.4 179.1 Unearned ESOP compensation (136.0) (140.5) -------- -------- 30.7 39.0 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 75.1 48.0 Common stock reacquired - at cost 12,213,223 shares at September 30, 1999 and 14,758,440 shares at December 31, 1998 (398.4) (449.7) Retained earnings 1,112.8 1,033.2 Accumulated other comprehensive income (110.6) (99.7) -------- -------- Total shareholders' equity $ 724.7 $ 585.9 ======== ========
NOTE D--BUSINESS SEGMENT DATA The following table presents net sales by reportable segment:
Three Months Ended Nine Months Ended September 30, September 30, (Dollars in millions) 1999 1998 1999 1998 ------ ------ ------ ------- Industrial $118.0 $120.8 $ 349.2 $ 361.0 Specialty 95.0 93.2 271.3 252.3 Pulp and Paper 92.7 91.4 281.0 267.1 Process 43.7 50.2 134.6 149.7 Latin America 20.3 22.2 59.4 65.3 Pacific 36.3 30.6 105.2 83.1 ------ ------ -------- -------- Total $406.0 $408.4 $1,200.7 $1,178.5 ====== ====== ======== ========
There are no intersegment revenues. The Company evaluates the performance of its segments based on "direct contribution." Direct contribution represents net sales, less cost of products sold, selling and research expenses directly attributable to each segment. Beginning in 1999, the Company also allocates a portion of general corporate research expenses to each reportable segment. Prior year data has been reclassified to conform with this change. The following table presents direct contribution by reportable segment and reconciles the total segment direct contribution to earnings before income taxes:
Three Months Ended Nine Months Ended September 30, September 30, (Dollars in millions) 1999 1998 1999 1998 ------ ------ ------- ------- Segment direct contribution: Industrial $ 25.7 $ 28.9 $ 76.6 $ 90.0 Specialty 23.8 22.5 65.7 57.0 Pulp and Paper 22.2 21.2 70.0 61.6 Process 10.4 9.5 29.0 29.9 Latin America 3.7 4.2 12.1 13.8 Pacific 7.9 5.7 22.6 15.4 ------- ------- ------- ------- Total segment direct contribution 93.7 92.0 276.0 267.7 Income (expenses) not allocated to segments: Unallocated operating costs and expenses (32.6) (27.8) (88.0) (81.9) ------- ------- ------- ------- Operating earnings 61.1 64.2 188.0 185.8 Other income and expense - net 11.4 0.6 31.9 1.3 Interest expense (7.2) (7.3) (23.2) (19.1) Equity in earnings of partnership 6.2 6.1 14.7 21.0 ------- ------- ------- ------- Earnings before income taxes $ 71.5 $ 63.6 $ 211.4 $ 189.0 ======= ======= ======= =======
NOTE E--ACQUISITIONS During the first nine months of 1999, the Company acquired seven businesses that operate in Nalco's core markets of water treatment and process chemicals. Each of the 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 investment in its subsidiary company in Taiwan to 100 percent. The combined purchase price of these businesses was approximately $28 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. The pro forma impact as if these acquisitions had occurred at the beginning of 1999 is not significant. NOTE F--SALE OF LUBRICANT BUSINESS In April 1999, the Company sold its worldwide process lubricants business serving the steel and aluminum industries, including its two-piece can-making lubricants business, to D. A. Stuart Company of Warrenville, Illinois. The transaction included the sale of technology and equipment associated with the lubricants business, as well as the transfer of approximately 40 sales and support personnel. Sales of this business were about $30 million in 1998. The sale of this business resulted in a net gain of approximately $10 million (14 cents per share on a diluted basis) in the second quarter 1999. NOTE G--EFFECTS OF NEW ACCOUNTING STANDARDS 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. 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. 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 adopted SOP 98-1 and SOP 98-5 in January 1999, and their application did not have a material effect on the Company's results of operations, financial position or cash flows. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (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. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS 137 amended SFAS 133, making it effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. 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 H--SUEZ LYONNAISE DES EAUX MERGER AGREEMENT On June 27, 1999, the Company entered into a definitive Agreement and Plan of Merger with Suez Lyonnaise des Eaux, a societe anonyme organized under the laws of the Republic of France, and H2O Acquisition Co., a Delaware corporation and a wholly owned subsidiary of Suez Lyonnaise des Eaux, providing for the acquisition by Suez Lyonnaise des Eaux of all the issued and outstanding shares of (i) the Company's common stock at $53 per share and (ii) the Company's Series B ESOP Convertible Preferred Stock at $1,060 per share, in each case, in cash. The transaction is structured as a cash tender offer for all outstanding shares to be followed by a merger of H2O Acquisition Co. with the Company. On October 25, 1999 the Company and Suez Lyonnaise des Eaux announced that they had received clearance from the U.S. Federal Trade Commission with respect to Suez Lyonnaise's proposed acquisition of Nalco. The European Commission approved Suez Lyonnaise des Eaux's acquisition of Nalco Chemical Company during August 1999. As a result, Suez Lyonnaise has received all the necessary regulatory approvals to proceed with its acquisition of the Company. Suez Lyonnaise's tender offer for shares of Nalco Chemical Company stock expired at midnight, Eastern Standard Time on Monday, November 8, 1999. On November 9, 1999, Suez Lyonnaise des Eaux announced that, based on preliminary information, it will own approximately 97.1 percent of the outstanding share capital of Nalco on a fully diluted basis upon payment for the tendered shares. 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, 1999, 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, 1998, 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 6, 1999, 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, 1998, 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 November 12, 1999 Chicago, Illinois Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Third Quarter 1999 Operations Compared to Third Quarter 1998 Sales declined 1 percent from last year, which was attributable to the effect of changes in translation rates. The Industrial Division reported a 2 percent decline in sales from last year, with the translation effect of the stronger U.S. dollar accounting for more than half of this decrease. The Specialty Division posted a 2 percent improvement over last year as modest growth was reported by most of the Division's business units. Sales by acquisitions offset the effect of unfavorable translation rate changes. The Pulp and Paper Division reported a 1 percent increase over a year ago as sales by acquisitions more than offset the negative translation impact of the stronger U.S. dollar and a decline in the North American market. The Process Division reported a 13 percent decrease from last year mainly as a result of the loss of revenues from the Company's rolling oil business which was sold at the beginning of the second quarter of 1999. Latin America Division sales were down 9 percent from last year which was attributable to the decreased U.S. dollar values of the regional currencies. Acquisitions tempered this translation effect of the stronger U.S. dollar. Pacific Division sales rose 19 percent over the third quarter of 1998 as solid growth was reported by most operations in the region. The translation effect of the weaker U.S. dollar compared to most Asian currencies accounted for slightly less than two-thirds of the increase. The gross margin was 54.4 percent for the third quarter of 1999 compared to 54.3 percent for the third quarter of 1998. Operating expenses (selling, administrative, research, etc.) were up $2.1 million over the third quarter of last year. Expenses of acquisitions and increased expenses in select markets more than offset savings realized from the Company's 1998 cost reduction program. Other income increased $10.8 million over a year ago, mainly as a result of a gain from the sale of a parcel of land at the Company's headquarters campus in Naperville, Illinois. Interest expense was down $0.1 million from the third quarter of last year which reflects a reduction in average borrowings compared to the third quarter 1998. Nalco's equity in Nalco/Exxon for the third quarter of 1999 was $6.2 million, an increase of $0.1 million over the third quarter of 1998. The effective income tax rate for the third quarter of 1999 was 35.7 percent compared to the 36.0 percent that was reported for the third quarter of 1998. This decrease is due to changes related to the consolidation and centralization of certain functions in Europe. Net earnings as a percent to sales was 11.3 percent for the third quarter of 1999, compared to a return on sales of 10.0 percent for the year-ago quarter. Basic net earnings per share for the third quarter 1999 was 64 cents compared to 58 cents for the third quarter 1998. Net earnings per share on a diluted basis for the third quarter 1999 was 59 cents compared to 54 cents for the third quarter 1998. First Nine Months 1999 Operations Compared to First Nine Months 1998 Sales rose 2 percent over last year with three of the six divisions reporting improved results. Acquisitions, net of the effect of lost revenues from the Company's rolling oil business which was sold in April 1999, increased sales 2 percent, while a slight improvement in sales volume/prices was offset by the translation effect of the stronger U.S. dollar compared to most European and Latin American currencies. The Industrial Division reported a 3 percent decline in sales from last year. The translation effect of the stronger U.S. dollar and lower sales in the Basic Industries North American market accounted for most of the decline. Sales by acquisitions accounted for part of the Specialty Division's 8 percent improvement over last year, with higher volume accounting for the balance. Acquisitions, slightly offset by the translation effect of the stronger U.S. dollar, accounted for the 5 percent sales increase posted by the Pulp and Paper Division. The Process Division reported a 10 percent decrease from last year, which was attributable to the loss of sales from the Company's rolling oil business which was sold at the beginning of the second quarter of 1999. Latin America Division sales declined 9 percent from last year which reflects adverse changes in currency translation rates partly offset by acquisitions and strong local currency sales gains by operations in Colombia and Mexico. Pacific Division sales were up 27 percent over the first nine months of 1998. Solid improvements reported by most operations in the region and acquisitions accounted for most of the increase. The gross margin was 54.7 percent for the first nine months of 1999 compared to 54.8 percent for the first nine months of 1998. This slight decrease was attributable to lower margins of acquired operations. Operating expenses (selling, administrative, research, etc.) were up $9.4 million or 2 percent over the first nine months of last year. Expenses of acquisitions and higher spending in select markets more than offset savings realized from the 1998 cost reduction program. Other income increased by $30.6 million over a year ago, mainly due to gains on the sales of the Company's rolling oil business and a parcel of land at the Company's Naperville campus. Interest expense increased by $4.1 million over the first nine months of last year which reflects higher borrowings to finance acquisitions and share repurchases during 1998. Nalco's equity in Nalco/Exxon for the first nine months of 1999 was $14.7 million, a decrease of $6.3 million from last year reflecting depressed oil prices and resulting cutbacks in oil production that were experienced during the first six months of 1999. The effective income tax rate for the first nine months of 1999 was 35.0 percent compared to the 36.1 percent reported for the first nine months of 1998. This decrease is due to changes related to the consolidation and centralization of certain functions in Europe. Net earnings as a percent to sales was 11.4 percent for the first nine months of 1999, compared to a return on sales of 10.2 percent for the year-ago period. Basic net earnings per share for the first nine months of 1999 was $1.95 compared to $1.70 for the first nine months of 1998. Net earnings per share on a diluted basis for the first nine months of 1999 was $1.79 compared to $1.57 for the first nine months of 1998. Changes in Financial Condition Cash and cash equivalents increased by $16.9 million during the first nine months of 1999 as detailed in the Unaudited Condensed Consolidated Statement of Cash Flows. Days sales outstanding (DSO) were 75 days at September 30, 1999, compared to the 65 days outstanding at December 31, 1998. The increase in DSO was the result of collection delays associated with the implementation of the Company's new business information systems. Working capital at September 30, 1999 totaled $241.7 million, an increase of $115.4 million over the $126.3 million at December 31, 1998. Higher accounts receivable and lower short-term debt accounted for most of the increase. The ratio of current assets to current liabilities was 1.8 to 1 at September 30, 1999. The $18 million increase in goodwill is mainly attributable to acquisitions that were made during the first nine months of 1999, net of amortization. These acquisitions were financed by the issuance of commercial paper, which is classified as long-term debt. Capital investments totaled $58.9 million for the first nine months of 1999. Major expenditures were for additional PORTA-FEED(R) units and the Company's new global management information systems. Effects of New Accounting Standards See Note G of the "Notes to Condensed Consolidated Financial Statements" for further discussion. Suez Lyonnaise des Eaux Merger Agreement On June 27, 1999, the Company entered into a definitive Agreement and Plan of Merger with Suez Lyonnaise des Eaux, a societe anonyme organized under the laws of the Republic of France, and H2O Acquisition Co., a Delaware corporation and a wholly owned subsidiary of Suez Lyonnaise des Eaux, providing for the acquisition by Suez Lyonnaise des Eaux of all the issued and outstanding shares of (i) the Company's common stock at $53 per share and (ii) the Company's Series B ESOP Convertible Preferred Stock at $1,060 per share, in each case, in cash. The transaction is structured as a cash tender offer for all outstanding shares to be followed by a merger of H2O Acquisition Co. with the Company. On October 25, 1999 the Company and Suez Lyonnaise des Eaux announced that they had received clearance from the U.S. Federal Trade Commission with respect to Suez Lyonnaise's proposed acquisition of Nalco. The European Commission approved Suez Lyonnaise des Eaux's acquisition of Nalco Chemical Company during August 1999. As a result, Suez Lyonnaise has received all the necessary regulatory approvals to proceed with its acquisition of the Company. Suez Lyonnaise's tender offer for shares of Nalco Chemical Company stock expired at midnight, Eastern Standard Time on Monday, November 8, 1999. On November 9, 1999, Suez Lyonnaise des Eaux announced that, based on preliminary information, it will own approximately 97.1 percent of the outstanding share capital of Nalco on a fully diluted basis upon payment for the tendered shares. 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 to distinguish between the year 2000 and the year 1900 during this changeover 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. The Company has addressed its Year 2000 issues with business processing software through three main methods: complete system replacement, repair of existing systems, and upgrades to new Y2K compliant releases of existing systems. All of the Company's business processing systems have been made Year 2000 compliant except for Saudi Arabia where a replacement system will be installed by the end of November. The following table lists the major locations where the Company has business processing software in use, the method used to achieve Year 2000 compliance, and the date compliance was achieved:
Canada Complete replacement with SAP(TM) June 1998 United States Complete replacement with SAPTM April 1999 Europe Remediation of BPCS(R) April 1998 Australia Remediation of VAX(R)-based system March 1999 Pacific countries Upgrade of PC-based systems Dec. 1998 - June 1999 Venezuela Replacement with PC/LAN-based system July 1999 Other Latin American countries Upgrade of PC-based systems Dec. 1998 United Arab Emirates Upgrade of PC-based system May 1999 Nalco Diversified Technologies Remediation of AS/400 based system Aug. 1999
As Nalco addressed its internal information processing and business system needs, it also established a formalized structure for managing its Y2K issue. A Y2K compliance team was initiated in early 1998, consisting of a multidiscipline 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. In addition to the corporate compliance team, local Y2K compliance teams have been formed at most of the Company's operations in Latin America, Asia Pacific and Europe. These teams are responsible for handling local Year 2000 issues. Consequently, Nalco 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 continues to review its process of informing and communicating with the media, Company employees, neighboring communities, and customers regarding the Y2K compliance status of the Company and its constituent operations. The Company's plant process control systems for all plants worldwide have been inventoried and assessed. Where needed, remediation plans were made and implemented. The Company believes that all significant Y2K issues at its plants have been identified, and either (i) corrected or (ii) projects for correction are underway and will be completed by year-end 1999. Specifically, control system upgrades have been completed at the Company's plants in Garyville, Louisiana, and Perth and Sydney, Australia. An upgrade is in process at the Biebesheim, Germany plant. That upgrade is scheduled to be completed in mid-November. The Company has completed a successful test of its control system upgrade at its Garyville, Louisiana plant for Year 2000 compliance. The Company has had an independent review by an outside engineering firm for the Year 2000 work at both its North American plants and its European plants. This review found no significant Year 2000 problems. The Company's products (or third party products provided by the Company to its customers) that contain microprocessors, software or embedded chips have been reviewed for Y2K compliance, and upgrades identified for those which are non-compliant. The Company is continuously in the process of assessing its customer sites for the Y2K compliance status of Nalco-provided equipment containing embedded chips. The Company continues to look at the Y2K compliance efforts of its equipment, service and material suppliers. It is surveying suppliers and other service providers to ensure that the supply chain is not interrupted. 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. For "mission critical" suppliers, the Company performed an additional in-person review of their Y2K readiness. As part of its process for managing supply chain risk, the Company became a signatory on July 30, 1999, to the "CPR Year 2000 ADR Commitment" ("Commitment") and the "Year 2000 Supply Chain Pledge" ("Pledge"). The CPR Institute for Dispute Resolution maintains a registry of signed Commitments and Pledges. 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 strong 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 flows. As a result, the Company has identified its "mission critical" suppliers and is working closely with them to better understand the level of risk presented. The Company is making contingency plans so that the failure of a critical supplier will not impact the Company's ability to manufacture and ship products. A second area of risk involves the Company's ability to ship its products through foreign ports. If the customs operations in other countries are significantly affected by the Y2K problem, the result could be delays that would slow the shipment of product. Consequently, the Company has chosen to move some materials through customs in advance of January 1 to avoid this potential problem. The Company believes that the worst case scenario it faces would involve the failure of a significant supplier, combined with unexpectedly long delays in customs clearing. This could affect the Company's ability to manufacture and deliver product. The Company is also reviewing requests from customers for additional supplies of product for the December 1999 to January 2000 time period. The Company is prepared to meet moderate increases in customer order patterns, but large scale stockpiling would interfere with the Company's ability to operate efficiently. Significant increases in orders across a broad range of industries could overload transportation and logistics systems, and affect the Company's ability to deliver products to its customers. Consequently, the Company is discouraging, and does not expect any, large scale stockpiling. 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 has a sophisticated customer base which 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 has developed basic contingency plans to restore the material functions of each of its systems or activities in the event of a Y2K failure. Contingency plans will cover all material levels of activity within each business location and functional area (including acquired operations and subsidiaries not integrated into the Company). Contingency planning has been completed for the Company's manufacturing sites, and will be completed for other critical functional areas by November. Management does not expect the financial impact of the Company's Y2K compliance efforts 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 expensed as incurred and are funded through operating cash flows. These amounts do not include any costs associated with the implementation of contingency plans, which continue to be 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 estimate. Replacement systems consist primarily of the SAP software, related hardware and implementation costs, and are 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, Nalco/Exxon. 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; the Company's 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 those external agencies which may have a material impact on the Company to bring their systems into Y2K compliance. SAP is a trademark of SAP AG. BPCS is a registered trademark of System Software Associates, Inc. VAX is a registered trademark of Digital Equipment Corporation. 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, 1999. The Registrant filed Form 8-K on November 9, 1999 and reported that there was a change in control of the Registrant. The offer (the "Offer") by H2O Acquisition Co., a Delaware corporation and an indirect, wholly owned subsidiary of Suez Lyonnaise des Eaux, a societe anonyme organized under the laws of the Republic of France, to purchase all the issued and outstanding shares (the "Shares") of (i) the registrant's common stock at $53 per share and (ii) the registrant's Series B ESOP Convertible Preferred Stock at $1,060 per share, in each case, in cash, without interest thereon, expired as scheduled at 12:00 midnight, New York City time, on Monday, November 8, 1999. On Tuesday, November 9, 1999 effective as of 12:01 a.m. all Shares validly tendered and not withdrawn prior to the expiration of the Offer were accepted for payment. Suez Lyonnaise des Eaux and H2O Acquisition Co. announced the completion of the Offer through a press release dated November 9, 1999. 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 12, 1999 W. E. BUCHHOLZ ----------------------------------- W. E. Buchholz - Senior Vice President, Chief Financial Officer Date: November 12, 1999 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) 1999 1998 1999 1998 ------ ------- ------ ------- Basic Average shares outstanding 67,490 65,731 66,488 65,957 ======= ======= ======= ======= Net earnings $46,043 $40,759 $137,457 $120,715 Dividends on preferred stock, net of taxes (2,590) (2,854) (7,975) (8,636) ------- ------- -------- -------- Net earnings to common shareholders $43,453 $37,905 $129,482 $112,079 ======= ======= ======== ======== Per share amounts: Net earnings to common shareholders $0.64 $0.58 $1.95 $1.70 ======= ======= ======= ======= Diluted Average shares outstanding used in Basic earnings per share 67,490 65,731 66,488 65,957 Effect of dilutive securities: Assumed conversion of preferred stock 6,934 7,554 7,113 7,611 Stock options and contingently issuable shares 2,130 185 1,102 515 ------- ------- ------- ------- TOTALS 76,554 73,470 74,703 74,083 ======= ======= ======= ======= Net earnings $46,043 $40,759 $137,457 $120,715 Additional ESOP expense resulting from assumed conversion of preferred stock, net of taxes (962) (1,088) (2,995) (3,313) Income tax adjustment on assumed common dividends (242) (289) (803) (863) ------- ------- ------- ------- Net earnings to common shareholders $44,839 $39,382 $133,659 $116,539 ======= ======= ======== ======== Per share amounts: Net earnings to common shareholders $0.59 $0.54 $1.79 $1.57 ======= ======= ======= =======
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 November 12, 1999 (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 12, 1999 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, 1999 AND THE CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 48,100,000 0 338,000,000 (5,500,000) 128,400,000 539,500,000 1,211,000,000 (732,800,000) 1,703,400,000 297,800,000 463,600,000 300,000 0 15,100,000 709,300,000 1,703,400,000 1,200,700,000 1,200,700,000 543,400,000 543,400,000 0 0 23,200,000 211,400,000 74,000,000 137,400,000 0 0 0 137,400,000 1.95 1.79
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