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 March 31, 1997
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 March 31, 1997 was 66,754,397 shares common stock - par value
$.1875 a share.
<PAGE>
NALCO CHEMICAL COMPANY
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Statements of
Financial Condition - March 31, 1997
(Unaudited) and December 31, 1996.........2
Condensed Consolidated Statements of
Earnings (Unaudited) - Three Months
Ended March 31, 1997 and 1996.............3
Condensed Consolidated Statements of
Cash Flows (Unaudited) - Three Months
Ended March 31, 1997 and 1996.............4
Notes to Condensed Consolidated Financial
Statements (Unaudited)....................5
Report of Independent Accountants on
Review of Interim Financial Information...7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.............................8
Part II. Other Information:
Item 4. Submission of Matters to a Vote of
Security Holders.........................10
Item 6. Exhibits and Reports on Form 8-K..............10
Exhibit (11) - Statement Re: Computation
of Earnings Per Share...............11
Exhibit (15) - Awareness Letter of Independent
Accountants.........................13
Exhibit (27) - Financial Data Schedule......................14
Signatures..................................................15
<PAGE>
PART I. FINANCIAL INFORMATION
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
1997 1996
(Dollars in millions) (Unaudited) (Note)
ASSETS
Current assets
Cash and cash equivalents $ 41.0 $ 38.8
Accounts receivable, less allowances
of $5.1 and $4.9, respectively 244.3 233.4
Inventories
Finished products 64.1 61.4
Materials and work in process 26.0 29.4
------- --------
90.1 90.8
Prepaid expenses, taxes and other
current assets 20.9 22.2
------- --------
Total current assets 396.3 385.2
Investment in and advances
to partnership 124.4 126.0
Goodwill, less accumulated amortization
of $25.8 and $24.7, respectively 228.7 202.5
Other assets 155.6 158.8
Property, plant and equipment 1,161.1 1,169.4
Less allowances for depreciation (653.9) (647.4)
-------- --------
507.2 522.0
-------- --------
$1,412.2 $1,394.5
======== ========
LIABILITIES/SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 77.1 $ 31.3
Accounts payable 99.7 114.6
Other current liabilities 136.2 143.8
-------- --------
Total current liabilities 313.0 289.7
Long-term debt 242.2 252.6
Deferred income taxes 42.7 42.9
Accrued postretirement benefits 99.1 98.5
Other liabilities 55.7 56.3
Shareholders' equity 659.5 654.5
-------- --------
$1,412.2 $1,394.5
======== ========
Note: The Statement of Financial Condition at December 31, 1996 has been
derived from the audited financial statements at that date.
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
<PAGE>
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended
(Amounts in millions, March 31
except per share data) 1997 1996
Net sales $334.6 $301.9
Operating costs and expenses
Cost of products sold 144.8 135.0
Operating expenses 136.4 123.1
------ ------
281.2 258.1
------ ------
Operating earnings 53.4 43.8
Other income (expense)
Interest and other income 0.8 0.5
Interest expense (3.6) (3.7)
Equity in earnings of partnership 5.8 6.4
------ ------
Earnings from continuing operations
before income taxes 56.4 47.0
Income taxes 20.6 17.0
------ ------
Earnings from continuing operations 35.8 30.0
Discontinued operations, net of income taxes - 1.8
------ ------
Net earnings $ 35.8 $ 31.8
====== =======
Per common share - Primary
Earnings from continuing operations $ 0.49 $ 0.40
Discontinued operations,
net of income taxes - 0.03
------ ------
Net earnings $ 0.49 $ 0.43
====== ======
Per common share - Fully diluted
Earnings from continuing operations $ 0.46 $ 0.38
Discontinued operations,
net of income taxes - 0.02
------ ------
Net earnings $ 0.46 $ 0.40
====== ======
Per common share - Cash dividends $ 0.25 $ 0.25
====== ======
Average primary shares outstanding
(in thousands) 67,505 67,529
Average fully diluted shares
outstanding (in thousands) 75,338 75,511
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
<PAGE>
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31
(Dollars in millions) 1997 1996
-------- ------
Cash provided by (used for)
operating activities
Net earnings $ 35.8 $ 31.8
Adjustments not affecting cash
Depreciation and amortization 23.8 24.1
Other, net (2.4) (3.8)
Changes in current assets and
liabilities (22.9) (16.9)
------ ------
Net cash provided by operations 34.3 35.2
------ ------
Investing activities
Additions to property,
plant and equipment (16.4) (27.3)
Business purchases (32.2) -
Other 5.8 3.3
------ ------
Net cash (used for)
investing activities (42.8) (24.0)
------ ------
Financing activities
Cash dividends (19.6) (19.7)
Changes in short-term debt 46.8 6.5
Changes in long-term debt ( 1.3) (1.9)
Common stock reacquired (18.0) -
Other 4.1 2.8
----- ------
Net cash provided by (used for)
financing activities 12.0 (12.3)
------ ------
Effects of foreign exchange
rate changes (1.3) 0.7
------ ------
Increase (decrease) in cash
and cash equivalents $ 2.2 $ (0.4)
====== ======
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
<PAGE>
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1997
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 periods ended March 31, 1997 and 1996.
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, 1996.
The unaudited condensed consolidated financial statements and the related notes
have been reviewed by Nalco's independent accountants, Price Waterhouse LLP. The
Independent Accountants' Review Report is included on page 7.
NOTE B -- EFFECT OF CHANGING ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share." SFAS
128 establishes standards for computing and presenting earnings per share (EPS)
and simplifies the standards for computing earnings per share previously found
in APB Opinion No. 15 (APB 15), "Earnings per Share." It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB 15.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted. SFAS 128 requires restatement of all prior-period EPS data presented.
Adoption of SFAS 128 is expected to have little or no impact on the Company's
future and previously reported EPS.
<PAGE>
NOTE C -- SHAREHOLDERS' EQUITY
Shareholders' equity may be further detailed as follows:
March 31, December 31,
(Dollars in millions, 1997 1996
------------ -----------
except per share figures)
Preferred stock
par value $1.00 per share;
authorized 2,000,000 shares;
Series B ESOP Convertible
Preferred Stock - 390,471 shares
at March 31, 1997 and 392,851
shares at December 31, 1996 $ 0.4 $ 0.4
Series C Junior Participating
Preferred Stock - none issued - -
Capital in excess of par value
of shares 187.4 188.6
Unearned ESOP compensation (151.1) (162.6)
------- -------
36.7 26.4
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 32.5 31.2
Retained earnings 1,008.2 992.0
Minimum pension liability adjustment (6.1) (6.1)
Foreign currency translation
adjustments (49.0) (39.9)
Common stock reacquired - at cost
13,533,171 shares at
March 31, 1997 and 13,263,648
shares at December 31, 1996 (377.9) (364.2)
------- -------
Total shareholders' equity $ 659.5 $ 654.5
======= =======
NOTE D -- ACQUISITIONS
In January 1997, the Company acquired the stock of International Water
Consultants Beheer B.V. (IWC) and the assets of Nutmeg Technologies, Inc.
(Nutmeg). IWC serves the water treatment needs of customers in the Netherlands,
Belgium, Germany and the Commonwealth of Independent States and Nutmeg is a
water treatment company which serves markets mainly in the Northeast United
States. They had 1996 sales of just under $30 million. The purchase price of
these two businesses was $32.2 million. The Company is in the process of
evaluating the assets that were purchased and the liabilities that were assumed
in these acquistions and accordingly will make any necessary adjustments to the
recorded value of the acquired assets and liabilities.
<PAGE>
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 March 31, 1997, and for the
three month period 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, 1996, 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 3, 1997, 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, 1996, is fairly stated in all material respects in relation to the
statement of consolidated financial condition from which it has been derived.
Price Waterhouse LLP
By: Robert R. Ross
Engagement Partner
April 17, 1997
Chicago, Illinois
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
First Quarter 1997 Operations Compared to First Quarter 1996
Sales increased by 11 percent over last year with improvements reported by all
five divisions. The Water and Waste Treatment Division reported a sales increase
of 22 percent which included sales by Diversey Water Technologies (DWT), a
middle market water treatment business acquired by the Company in mid-1996.
Solid improvements were also posted by the Basic Industry and WATERGY(R) Groups.
The Process Chemicals Division reported a 5 percent sales gain with the Paper
Chemicals Group and the newly formed Pulp Group turning in strong increases. The
Europe Division reported a 7 percent gain over the first quarter 1996. This
included sales by IWC, which was acquired in January 1997, and the European
operations of DWT. Sales increases in local currencies were also reported by
most other operations in the Division, but these were moderated by translation
effects due to the strengthening of the U.S. dollar versus most European
currencies compared to last year. The Latin America Division reported a 3
percent sales increase for the period. Operations in Argentina, Chile, and
Mexico reported significant double-digit sales increases over last year. The
Pacific Division posted an 11 percent sales gain over last year with strong
sales increases in Australia, China, Japan, Korea, Philippines,
Singapore/Malaysia, and Thailand.
The gross margin was 56.7 percent for the quarter compared to last year's rate
of 55.3 percent. This improvement was mainly attributable to higher margins of
the newly acquired DWT. In addition, improved margins in North America were
partly offset by slight declines in the Europe, Latin America and Pacific
Divisions.
Operating expenses (selling, service, research, etc.) were up $13.3 million or
11 percent over last year, primarily because of the additions of DWT and IWC.
Nalco's equity in earnings of Nalco/Exxon for the first quarter of 1997 was $5.8
million, a decrease of $0.6 million from the first quarter of 1996. The decrease
was largely attributable to the strengthening of the U.S. dollar compared to
most European currencies.
The effective income tax rate for the first quarter 1997 was 36.5 percent,
compared to the 36.2 percent rate that was reported for the first quarter 1996.
Earnings from continuing operations as a percent to sales was 10.7 percent for
the first quarter 1997, a slight improvement compared to the 9.9 percent for the
first quarter 1996. First quarter 1997 fully diluted earnings per share from
continuing operations was 46 cents compared to 38 cents for the first quarter
1996. Net earnings per share on a fully diluted basis for the first quarter 1997
was 46 cents compared to 40 cents for the first quarter 1996 which included the
results of the discontinued superabsorbent chemical business.
<PAGE>
Changes in Financial Condition
Cash and cash equivalents increased by $2.2 million during the quarter as
detailed in the Unaudited Condensed Consolidated Statement of Cash Flows.
Days sales outstanding were 65 days at March 31, 1997, up slightly from the 64
days at the end of 1996. Working capital at March 31, 1997 totaled $83.3
million, down slightly from the $95.5 million at last year end. The ratio of
current assets to current liabilities was 1.3 to 1 at March 31, 1997.
The $26.2 million increase in goodwill is mainly attributable to the
acquisitions of IWC and Nutmeg. See Note D -- Acquisitions. These acquisitions
were financed primarily by the issuance of commercial paper, which accounted for
most of the increase in short-term debt.
Capital investments totaled $16.4 million for the first quarter of 1997. Major
expenditures were for additional PORTA-FEED(R) units and automobiles for the
sales force.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Nalco Chemical Company was held on April
17, 1997, for the purpose of electing four Class I Directors; approving the
appointment of independent accountants; and a shareholder proposal regarding
endorsement of the CERES Principles. Proxies for the meeting were solicited
pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was
no solicitation in opposition to management's solicitation. All of management's
nominees for directors as listed in the proxy statement were elected.
The vote electing the individual directors was as follows:
Class I Director Shares Voted "For" Shares Withheld
- ---------------- ------------------ ---------------
J. L. Ballesteros 55,863,329 10,463,563
J. P. Frazee, Jr. 55,804,314 10,522,578
A. L. Kelly 55,882,795 10,444,097
F. A. Krehbiel 55,911,070 10,415,822
The appointment of Price Waterhouse LLP as independent accountants for the
Company was approved:
Shares Voted "For" Shares Voted "Against" Shares Abstaining
65,829,059 310,564 187,269
The Shareholder Proposal regarding endorsement of the CERES Principles was not
approved:
Shares Voted "For" Shares Voted "Against" Shares Abstaining Broker Non-Votes
6,210,334 49,374,933 5,546,862 5,194,763
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 March 31, 1997.
<PAGE>
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: May 12, 1997 W. E. BUCHHOLZ
--------------------------
W. E. Buchholz - Senior Vice President,
Chief Financial Officer
Date: May 12, 1997 S. J. GIOIMO
--------------------------
S. J. Gioimo - Secretary
EXHIBIT (11)
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
Three Months Ended
(Amounts in thousands, March 31
except per share data) 1997 1996
------ -----
Primary
Average shares outstanding 66,880 67,223
Net effect of dilutive stock options
and shares contingently issuable-based
on the treasury stock method using
average market price 625 306
------- -------
TOTALS 67,505 67,529
======= =======
Earnings from continuing operations $ 35,831 $ 30,008
Earnings from discontinued operations,
net of income taxes - 1,765
-------- --------
Net earnings 35,831 31,773
Preferred stock dividends,
net of income taxes (2,878) (2,855)
-------- --------
Net earnings to
common shareholders $ 32,953 $ 28,918
======== ========
Per share amounts:
Earnings from continuing operations $ 0.49 $ 0.40
Earnings from discontinued operations,
net of income taxes - 0.03
------- -------
Net earnings to common shareholders $ 0.49 $ 0.43
======= =======
<PAGE>
EXHIBIT (11)
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
Three Months Ended
(Amounts in thousands, March 31
except per share data) 1997 1996
------ -----
Fully Diluted
Average shares outstanding 66,880 67,223
Average dilutive effect of
assumed conversion of ESOP
Convertible Preferred shares 7,831 7,982
Additional shares assuming exercise
of dilutive stock options and shares
contingently issuable-based on the
treasury stock method using the
quarter-end market price, if higher
than average market price 627 306
-------- --------
TOTALS 75,338 75,511
======== ========
Earnings from continuing operations $ 35,831 $ 30,008
Earnings from discontinued operations
net of income taxes - 1,765
------- --------
Net earnings 35,831 31,773
Additional ESOP contribution
resulting from assumed
conversion, net of income taxes (1,123) (1,141)
Tax adjustment on assumed
common dividends (261) (230)
-------- --------
Net earnings to
common shareholders $ 34,447 $ 30,402
======== ========
Per share amounts:
Earnings from continuing operations $ 0.46 $ 0.38
Earnings from discontinued operations,
net of income taxes - 0.02
------- -------
Net earnings to common shareholders $ 0.46 $ 0.40
======= =======
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 April 17, 1997 (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. 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,
Price Waterhouse LLP
By: Robert R. Ross
Engagement Partner
May 12, 1997
Chicago, Illinois
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT MARCH 31, 1997
AND THE CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE THREE MONTHS
ENDED MARCH 31, 1997 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 41,000,000
<SECURITIES> 0
<RECEIVABLES> 249,400,000
<ALLOWANCES> (5,100,000)
<INVENTORY> 90,100,000
<CURRENT-ASSETS> 396,300,000
<PP&E> 1,161,100,000
<DEPRECIATION> (653,900,000)
<TOTAL-ASSETS> 1,411,900,000
<CURRENT-LIABILITIES> 313,000,000
<BONDS> 241,900,000
0
400,000
<COMMON> 15,100,000
<OTHER-SE> 644,000,000
<TOTAL-LIABILITY-AND-EQUITY> 1,411,900,000
<SALES> 334,600,000
<TOTAL-REVENUES> 334,600,000
<CGS> 144,800,000
<TOTAL-COSTS> 144,800,000
<OTHER-EXPENSES> 136,400,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,600,000
<INCOME-PRETAX> 56,400,000
<INCOME-TAX> 20,600,000
<INCOME-CONTINUING> 35,800,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,800,000
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.46
</TABLE>
