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 June 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 June 30, 1999 was 66,735,879 shares common stock - par value $.1875
a share.
<PAGE>
NALCO CHEMICAL COMPANY
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INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Statements of
Financial Condition - June 30, 1999
(Unaudited) and December 31, 1998.........................................2
Condensed Consolidated Statements of
Earnings and Comprehensive Income
(Unaudited) - Three Months and Six Months
Ended June 30, 1999 and 1998..............................................3
Condensed Consolidated Statements of
Cash Flows (Unaudited) - Three Months and
Six Months Ended June 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...............................................16
Exhibit (11) - Statement Re: Computation
of Earnings Per Share................................................17
Exhibit (15) - Awareness Letter of Independent
Accountants..........................................................18
Exhibit (27) - Financial Data Schedule.......................................................19
Signatures ..................................................................................20
</TABLE>
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- 21 -
PART I. FINANCIAL INFORMATION
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
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June 30, December 31,
1999 1998
(Dollars in millions) (Unaudited) (Note)
ASSETS
Current assets
Cash and cash equivalents $ 37.2 $ 31.2
Accounts receivable, less allowances
of $5.4 and $6.1, respectively 314.5 276.7
Inventories
Finished products 96.9 97.4
Materials and work in process 27.5 24.4
-------- ---------
124.4 121.8
Prepaid expenses, taxes and other
current assets 28.8 47.9
-------- --------
Total current assets 504.9 477.6
Investment in and advances
to partnership 136.1 124.5
Goodwill, less accumulated amortization
of $47.5 and $40.5, respectively 393.3 376.3
Other assets 148.8 155.0
Property, plant and equipment 1,207.9 1,225.1
Less allowances for depreciation (722.2) (707.8)
-------- --------
485.7 517.3
-------- ---------
$1,668.8 $1,650.7
======== ========
LIABILITIES/SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 67.0 $ 75.8
Accounts payable 98.0 124.9
Other current liabilities 131.4 150.6
-------- ---------
Total current liabilities 296.4 351.3
Long-term debt 510.1 496.2
Deferred income taxes 29.1 15.6
Accrued postretirement benefits 125.2 123.0
Other liabilities 58.2 78.7
Shareholders' equity 649.8 585.9
-------- ---------
$1,668.8 $1,650.7
======== ========
</TABLE>
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).
<PAGE>
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(UNAUDITED)
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Three Months Ended Six Months Ended
(Dollars in millions, June 30, June 30,
except per share data) 1999 1998 1999 1998
------------ ------ ---- ----
Net sales $384.5 $403.0 $794.7 $770.1
Operating costs and expenses
Cost of products sold 173.3 181.2 358.1 346.1
Operating expenses 157.5 156.5 309.7 302.4
------ ------ ------ ------
330.8 337.7 667.8 648.5
------ ------ ------ ------
Operating earnings 53.7 65.3 126.9 121.6
Other income (expense)
Other income and expense - net 19.3 (0.3) 20.5 0.7
Interest expense (7.8) (6.9) (16.0) (11.8)
Equity in earnings of partnership 3.9 7.6 8.5 14.9
------ ------ ------ ------
Earnings before income taxes 69.1 65.7 139.9 125.4
Income taxes 23.0 23.7 48.5 45.4
------ ------ ------ ------
Net earnings 46.1 42.0 91.4 80.0
Other comprehensive income
Foreign currency translation
adjustments (2.1) (4.9) (13.2) (11.8)
------ ------ ------ ------
Comprehensive income $ 44.0 $ 37.1 $ 78.2 $ 68.2
====== ====== ====== ======
Per common share:
Net earnings - basic $ 0.66 $ 0.59 $ 1.30 $ 1.12
====== ====== ====== ======
Net earnings - diluted $ 0.61 $ 0.55 $ 1.21 $ 1.04
====== ====== ====== ======
Cash dividends $ 0.25 $ 0.25 $ 0.50 $ 0.50
====== ====== ====== ======
Average basic shares outstanding
(in thousands) 66,161 66,070 65,951 66,079
Average diluted shares outstanding
(in thousands) 73,665 74,270 73,410 74,402
</TABLE>
See accompanying Notes to Condensed Consolidated Financial
Statements (Unaudited).
<PAGE>
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 1999 1998 1999 1998
-------- --------- -------- ---------
Cash provided by (used for)
operating activities
Net earnings $ 46.1 $ 42.0 $ 91.4 $ 80.0
Adjustments not affecting cash
Depreciation and amortization 26.0 26.9 51.5 52.5
Other, net (18.3) 3.0 (24.6) (6.0)
Changes in current assets and
liabilities (15.9) (26.8) (69.3) (37.0)
------ ------ ------ ------
Net cash provided by operations 37.9 45.1 49.0 89.5
------ ------ ------ ------
Investing activities
Additions to property,
plant and equipment (18.9) (32.4) (38.6) (58.2)
Business purchases (10.4) (95.0) (26.2) (118.4)
Business sale proceeds 21.5 - 21.5 -
Other (2.3) (6.3) 5.7 (10.0)
------ ------ ------ ------
Net cash (used for)
investing activities (10.1) (133.7) (37.6) (186.6)
------ ------ ------ ------
Financing activities
Cash dividends (19.2) (19.5) (38.4) (38.9)
Changes in short-term debt 22.2 (0.3) 19.3 2.0
Changes in long-term debt (51.3) 117.7 (2.9) 150.2
Common stock reacquired - (19.3) - (25.6)
Other 18.9 (0.8) 19.3 7.4
------ ------ ------ ------
Net cash provided by (used for)
financing activities (29.4) 77.8 (2.7) 95.1
------ ------ ------ ------
Effects of foreign exchange
rate changes (1.0) (0.6) (2.7) (1.7)
------ ------ ------ ------
Increase (decrease) in cash and
cash equivalents $ (2.6) $(11.4) $ 6.0 $ (3.7)
====== ====== ====== ======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
<PAGE>
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 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 six month periods ended June 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 six months ended June 30, 1999 and 1998 are included in
Exhibit (11) on page 17.
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NOTE C -- SHAREHOLDERS' EQUITY
Shareholders' equity may be further detailed as follows:
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June 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 - 346,795 shares
at June 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 166.5 179.1
Unearned ESOP compensation (136.0) (140.5)
-------- --------
30.8 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 56.0 48.0
Common stock reacquired - at cost
13,551,689 shares at
June 30, 1999 and 14,758,440
shares at December 31, 1998 (425.4) (449.7)
Retained earnings 1,086.2 1,033.2
Accumulated other comprehensive income (112.9) (99.7)
-------- --------
Total shareholders' equity $ 649.8 $ 585.9
======== ========
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NOTE D--BUSINESS SEGMENT DATA
The following table presents net sales by reportable segment:
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Three Months Ended Six Months Ended
June 30, June 30,
Dollars in millions) 1999 1998 1999 1998
------ ------ ------ -------
Industrial $112.1 $123.7 $231.2 $240.2
Specialty 85.2 84.9 176.3 159.1
Pulp and Paper 91.3 93.4 188.3 175.7
Process 40.0 51.2 90.9 99.5
Latin America 20.8 21.6 39.1 43.1
Pacific 35.1 28.2 68.9 52.5
------ ------ ------ ------
Total $384.5 $403.0 $794.7 $770.1
====== ====== ====== ======
</TABLE>
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:
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Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
Segment direct contribution:
Industrial $21.6 $32.7 $ 50.9 $ 61.1
Specialty 17.2 19.2 41.9 34.5
Pulp and Paper 20.3 22.6 47.8 40.4
Process 7.7 10.2 18.6 20.4
Latin America 4.9 5.0 8.4 9.6
Pacific 7.7 5.5 14.7 9.7
----- ----- ------ ------
Total segment direct contribution 79.4 95.2 182.3 175.7
Income (expenses) not allocated to segments:
Unallocated operating costs
and expenses (25.7) (29.9) (55.4) (54.1)
------ ------ ------ ------
Operating earnings 53.7 65.3 126.9 121.6
Interest and other income 19.3 (0.3) 20.5 0.7
Interest expense (7.8) (6.9) (16.0) (11.8)
Equity in earnings of partnership 3.9 7.6 8.5 14.9
------ ------ ------ ------
Earnings before income taxes $ 69.1 $ 65.7 $139.9 $125.4
====== ====== ====== ======
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NOTE E--ACQUISITIONS
During the first six months of 1999, the Company acquired six 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 $26 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.
<PAGE>
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 July 23, 1999 the Company and Suez Lyonnaise des Eaux announced that they had
received requests for additional information and other documentary material from
the U.S. Federal Trade Commission under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, with respect to Suez Lyonnaise's proposed acquisition
of Nalco. This request extends the waiting period under the HSR Act during which
the parties are prohibited from closing the transaction. The Company and Suez
Lyonnaise des Eaux are cooperating with the Federal Trade Commission's
inquiries.
<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 June 30, 1999, and for the
three month and six 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
August 3, 1999
Chicago, Illinois
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Second Quarter 1999 Operations Compared to Second Quarter 1998
Sales declined 5 percent from last year. In anticipation of a possible
interruption in product shipments due to the start-up of a new computer system
in the month of April 1999, the Company encouraged its U.S. customer base to
accept product shipments early under normal terms of sale during the first
quarter of 1999. These early shipments had the effect of shifting sales from the
second quarter to the first quarter. The Company estimates that sales and
diluted earnings per share were increased in the first quarter by $15 million
and 6 cents, respectively, as a result of the early shipments program with a
corresponding decline during the second quarter of 1999.
The Industrial Division reported a 9 percent decline in sales from last year.
The early shipment program which occurred during the first quarter and the
translation effect of the stronger U.S. dollar accounted for more than half of
this decrease. Sales by acquisitions offset unfavorable translation rates and
the effect of the early shipment program, which accounts for the modest increase
in the Specialty Division's sales over last year. Sales by the Pulp and Paper
Division declined 2 percent from a year ago as the effect of the early shipment
program and the negative impact of the stronger U.S. dollar more than offset
sales gains that were recognized from acquisitions. The Process Division
reported a 22 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 and the early shipments program. Latin America
Division sales were down 4 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
24 percent over the second quarter of 1998 as solid growth was reported by most
operations in the region. Acquisitions and the translation effect of the weaker
U.S. dollar compared to most Asian currencies accounted for slightly more than
half of the increase.
The gross margin was 54.9 percent for the second quarter of 1999 compared to
55.0 percent for the second quarter of 1998. This slight decrease was
attributable to lower margins of acquired operations.
Operating expenses (selling, administrative, research, etc.) were up $1.0
million over the second 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.
Interest and other income increased by $19.6 million over a year ago, mainly as
a result of the gain from the sale of the Company's rolling oil business.
Interest expense increased by $0.9 million over the second quarter of last year
which reflects higher borrowings to finance acquisitions and share repurchases
during 1998.
Nalco's equity in Nalco/Exxon for the second quarter of 1999 was $3.9 million, a
decrease of $3.7 million from the second quarter of 1998, reflecting depressed
oil prices and resulting cutbacks in oil production.
The effective income tax rate for the second quarter of 1999 was 33.3 percent
compared to the 36.1 percent that was reported for the second 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 12.0 percent for the second quarter of
1999, compared to a return on sales of 10.4 percent for the year-ago quarter.
Basic net earnings per share for the second quarter 1999 was 66 cents compared
to 59 cents for the second quarter 1998. Net earnings per share on a diluted
basis for the second quarter 1999 was 61 cents compared to 55 cents for the
second quarter 1998.
First Six Months 1999 Operations Compared to First Six Months 1998
Sales increased 3 percent over last year with three of the six divisions
reporting improved results.
The Industrial Division reported a 4 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 contributed to the decline. Sales by
acquisitions accounted for part of the Specialty Division's 11 percent
improvement over last year, with higher volume accounting for the balance.
Acquisitions accounted for the 7 percent sales increase posted by the Pulp
and Paper Division. The Process Division reported a 9 percent decrease from
last year, which was attributable to the loss of salesfrom the Company's
rolling oil business which was sold during the second quarterof 1999 and the
translation effect of the stronger U.S. dollar. Latin America Division sales
declined by 9 percent from last year which reflects adverse changes in
currency translation rates partly offset by acquisitions and increased
local currency sales by most operations in the region. Pacific Division
sales were up 31 percent over the first six months of 1998. Solid
improvements reported by most operations in the region and acquisitions
accounted for most of the increase.
The gross margin was 54.9 percent for the first six months of 1999 compared to
55.1 percent for the first six months of 1998. This slight decrease was
attributable to lower margins of acquired operations.
Operating expenses (selling, administrative, research, etc.) were up $7.3
million or 2 percent over the first six months of last year. Expenses of
acquisitions and higher spending in select markets more than offset
savings realized from the 1998 cost reduction program.
Interest and other income increased by $19.8 million over a year ago, mainly due
to the sale of rolling oil business. Interest expense increased by $4.2 million
over the first six 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 six months of 1999 was $8.5 million,
a decrease of $6.4 million from the second quarter of 1998, reflecting depressed
oil prices and resulting cutbacks in oil production.
The effective income tax rate for the first six months of 1999 was 34.7 percent
compared to the 36.2 percent reported for the first six 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 11.5 percent for the first six months of
1999, compared to a return on sales of 10.4 percent for the year-ago period.
Basic net earnings per share for the first six months of 1999 was $1.30 compared
to $1.12 for the first six months of 1998. Net earnings per share on a diluted
basis for the first six months of 1999 was $1.21 compared to $1.04 for the first
six months of 1998.
Changes in Financial Condition
Cash and cash equivalents increased by $6.0 million during the first six months
of 1999 as detailed in the Unaudited Condensed Consolidated Statement of Cash
Flows.
Days sales outstanding (DSO) were 73 days at June 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 June 30, 1999 totaled $208.5
million, an $82.2 million increase from the $126.3 million at December 31, 1998.
Higher accounts receivable and charges against the accrual for the Company's
1998 cost reduction program accounted for most of the increase. The ratio of
current assets to current liabilities was 1.7 to 1 at June 30, 1999.
The $17 million increase in goodwill is mainly attributable to acquisitions that
were made during the first six 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 $38.6 million for the first six 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.
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, and Nalco
Diversified Technologies where remediation is still in process. The following
table lists the locations where the Company has business processing software in
use, the method used to achieve Year 2000 compliance, and the date compliance
was achieved:
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Canada Complete replacement with SAP(TM) June 1998
United States Complete replacement with SAP 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
</TABLE>
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 have been made and are
being 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. Upgrades are in process
at the Biebesheim, Germany, and Singapore plants. These systems are expected to
be Y2K compliant by the third quarter 1999. 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
noncompliant. 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. Those suppliers identified as "mission critical" are
scheduled for additional in-person and/or on-site review and assessment. 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 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 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.
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 is in the process of developing 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 most of the Company's manufacturing sites, and will be completed
for other critical functional areas during the third quarter of 1999. 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.
BPCS is a registered trademark of System Software Associates, Inc. VAX is a
registered trademark of Digital Equipment Corporation.
SAP is a trademark of SAP AG.
<PAGE>
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 filed Form 8-K on June 28, 1999 and reported
that on June 27, 1999, the registrant 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 H20 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 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. 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 registrant.
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)
W. E. BUCHHOLZ
Date: August 13, 1999 -------------------------------------------
W. E. Buchholz - Senior Vice President,
Chief Financial Officer
Date: August 13, 1999 S. J. GIOIMO
---------------------------------------------
S. J. Gioimo - Secretary
EXHIBIT (11)
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
(Amounts in thousands, June 30, June 30,
except per share data) 1999 1998 1999 1998
------ ------- ------ -------
Basic
Average shares outstanding 66,161 66,070 65,951 66,079
======= ======= ======= =======
Net earnings $46,137 $41,955 $91,414 $79,956
Dividends on preferred stock,
Net of taxes (2,645) (2,878) (5,385) (5,782)
------- ------- ------- -------
Net earnings to common shareholders $43,492 $39,077 $86,029 $74,174
======= ======= ======= =======
Per share amounts:
Net earnings to common shareholders $0.66 $0.59 $1.30 $1.12
======= ======= ======= =======
Diluted
Average shares outstanding
used in Basic earnings per share 66,161 66,070 65,951 66,079
Effect of dilutive securities:
Assumed conversion of
preferred stock 7,085 7,615 7,190 7,639
Stock options and contingently
issuable shares 419 585 269 684
------- ------- ------- -------
TOTALS 73,665 74,270 73,410 74,402
======= ======= ======= =======
Net earnings $46,137 $41,955 $91,414 $79,956
Additional ESOP expense resulting
from assumed conversion of
preferred stock, net of taxes (991) (1,103) (2,033) (2,225)
Income tax adjustment on assumed
common dividends (288) (288) (561) (574)
------- ------- ------- -------
Net earnings to common shareholders $44,858 $40,564 $88,820 $77,157
======= ======= ======= =======
Per share amounts:
Net earnings to common shareholders $0.61 $0.55 $1.21 $1.04
======= ======= ======= =======
</TABLE>
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 August 3, 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
August 13, 1999
Chicago, Illinois
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT JUNE 30, 1999 AND THE
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE SIX MONTHS ENDED JUNE 30,
1999 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-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 37,200,000
<SECURITIES> 0
<RECEIVABLES> 319,900,000
<ALLOWANCES> (5,400,000)
<INVENTORY> 124,400,000
<CURRENT-ASSETS> 504,900,000
<PP&E> 1,207,900,000
<DEPRECIATION> (722,200,000)
<TOTAL-ASSETS> 1,668,800,000
<CURRENT-LIABILITIES> 296,400,000
<BONDS> 510,100,000
300,000
0
<COMMON> 15,100,000
<OTHER-SE> 634,400,000
<TOTAL-LIABILITY-AND-EQUITY> 1,668,800,000
<SALES> 794,700,000
<TOTAL-REVENUES> 794,700,000
<CGS> 358,100,000
<TOTAL-COSTS> 358,100,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,000,000
<INCOME-PRETAX> 139,900,000
<INCOME-TAX> 48,500,000
<INCOME-CONTINUING> 91,400,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91,400,000
<EPS-BASIC> 1.30
<EPS-DILUTED> 1.21
</TABLE>
