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 March 31, 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 March 31, 1999 was 65,813,192 shares common stock - par value
$.1875 a share.
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NALCO CHEMICAL COMPANY
INDEX
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Page No.
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Statements of
Financial Condition - March 31, 1999
(Unaudited) and December 31, 1998.........................................2
Condensed Consolidated Statements of
Earnings and Comprehensive Income
(Unaudited) - Three Months Ended
March 31, 1999 and 1998...................................................3
Condensed Consolidated Statements of
Cash Flows (Unaudited) - Three Months
Ended March 31, 1999 and 1998.............................................4
Notes to Condensed Consolidated Financial
Statements (Unaudited)....................................................5
Report of Independent Accountants on
Review of Interim Financial Information...................................9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.............................................................10
Part II. Other Information:
Item 4. Submission of Matters to a Vote of
Security Holders..........................................................14
Item 6. Exhibits and Reports on Form 8-K...............................................14
Exhibit (11) - Statement Re: Computation
of Earnings Per Share................................................15
Exhibit (15) - Awareness Letter of Independent
Accountants..........................................................17
Exhibit (27) - Financial Data Schedule.......................................................18
Signatures...................................................................................19
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- 5 -
PART I. FINANCIAL INFORMATION
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
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March 31, December 31,
1999 1998
(Dollars in millions) (Unaudited) (Note)
ASSETS
Current assets
Cash and cash equivalents $ 39.8 $ 31.2
Accounts receivable, less allowances
of $5.8 and $6.1, respectively 304.9 276.7
Inventories
Finished products 101.9 97.4
Materials and work in process 27.9 24.4
-------- ---------
129.8 121.8
Prepaid expenses, taxes and other
current assets 27.8 47.9
-------- --------
Total current assets 502.3 477.6
Investment in and advances
to partnership 128.5 124.5
Goodwill, less accumulated amortization
of $43.3 and $40.5, respectively 387.6 376.3
Other assets 146.5 155.0
Property, plant and equipment 1,203.6 1,225.1
Less allowances for depreciation (706.9) (707.8)
-------- --------
496.7 517.3
-------- ---------
$1,661.6 $1,650.7
======== ========
LIABILITIES/SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 38.0 $ 75.8
Accounts payable 110.9 124.9
Other current liabilities 127.0 150.6
-------- ---------
Total current liabilities 275.9 351.3
Long-term debt 569.3 496.2
Deferred income taxes 29.0 15.6
Accrued postretirement benefits 123.6 123.0
Other liabilities 57.9 78.7
Shareholders' equity 605.9 585.9
-------- ---------
$1,661.6 $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)
Three Months Ended
(Dollars in millions, March 31,
except per share data) 1999 1998
Net sales $410.2 $367.1
Operating costs and expenses
Cost of products sold 184.8 164.9
Operating expenses 152.2 145.9
------ ------
337.0 310.8
------ ------
Operating earnings 73.2 56.3
Other income (expense)
Interest and other income 1.2 1.0
Interest expense (8.2) (4.9)
Equity in earnings of partnership 4.6 7.3
------ ------
Earnings before income taxes 70.8 59.7
Income taxes 25.5 21.7
------ ------
Net earnings 45.3 38.0
Other comprehensive income
Foreign currency translation
adjustments (11.1) (6.9)
------ ------
Comprehensive income $ 34.2 $ 31.1
====== ======
Per common share:
Net earnings - basic $ 0.65 $ 0.53
====== ======
Net earnings - diluted $ 0.60 $ 0.49
====== ======
Cash dividends $ 0.25 $ 0.25
====== ======
Average basic shares outstanding
(in thousands) 65,706 66,116
Average diluted shares outstanding
(in thousands) 73,093 74,570
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) 1999 1998
-------- ---------
Cash provided by (used for)
operating activities
Net earnings $ 45.3 $ 38.0
Adjustments not affecting cash
Depreciation and amortization 25.5 25.6
Other, net (6.3) (9.0)
Changes in current assets and
liabilities (53.4) (10.2)
------ ------
Net cash provided by operations 11.1 44.4
------ ------
Investing activities
Additions to property,
plant and equipment (19.7) (25.8)
Business purchases (15.8) (23.4)
Other 8.0 (3.7)
------ ------
Net cash (used for)
investing activities (27.5) (52.9)
------ ------
Financing activities
Cash dividends (19.2) (19.4)
Changes in short-term debt (2.9) 2.3
Changes in long-term debt 48.4 32.5
Common stock reacquired - (6.3)
Other 0.4 8.2
------ ------
Net cash provided by
financing activities 26.7 17.3
------ ------
Effects of foreign exchange
rate changes (1.7) (1.1)
------ ------
Increase in cash and
cash equivalents $ 8.6 $ 7.7
====== ======
See accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
<PAGE>
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 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 periods ended March 31, 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 9.
NOTE B--EARNINGS PER SHARE
Tables which detail the computations of basic and diluted earnings per share for
the three months ended March 31, 1999 and 1998 are included in Exhibit (11) on
pages 15 and 16.
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NOTE C -- SHAREHOLDERS' EQUITY
Shareholders' equity may be further detailed as follows:
March 31, 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 - 360,301 shares
at March 31, 1999 and 373,195
shares at December 31, 1998 $ 0.4 $ 0.4
Series C Junior Participating
Preferred Stock - none issued - -
Capital in excess of par value
of shares 172.9 179.1
Unearned ESOP compensation (136.0) (140.5)
-------- --------
37.3 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 48.9 48.0
Common stock reacquired - at cost
14,474,376 shares at
March 31, 1999 and 14,758,440
shares at December 31, 1998 (443.9) (449.7)
Retained earnings 1,059.3 1,033.2
Accumulated other comprehensive income (110.8) (99.7)
-------- --------
Total shareholders' equity $ 605.9 $ 585.9
======== ========
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NOTE D--BUSINESS SEGMENT DATA
The following table presents net sales by reportable segment:
Three Months Ended
March 31,
(Dollars in millions) 1999 1998
------ -------
Industrial $119.1 $116.5
Specialty 91.1 74.2
Pulp and Paper 97.0 82.3
Process 50.9 48.3
Latin America 18.3 21.5
Pacific 33.8 24.3
------ ------
Total $410.2 $367.1
====== ======
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 restated 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
March 31,
(Dollars in millions) 1999 1998
------ -------
Segment direct contribution:
Industrial $ 29.3 $ 28.4
Specialty 24.7 15.3
Pulp and Paper 27.5 17.8
Process 10.9 10.2
Latin America 3.5 4.6
Pacific 7.0 4.2
------ ------
Total segment direct contribution 102.9 80.5
Income (expenses) not allocated to segments:
Unallocated operating costs and expenses (29.7) (24.2)
------ ------
Operating earnings 73.2 56.3
Interest and other income 1.2 1.0
Interest expense (8.2) (4.9)
Equity in earnings of partnership 4.6 7.3
------ ------
Earnings before income taxes $ 70.8 $ 59.7
====== ======
NOTE E--ACQUISITIONS
During the first quarter 1999, the Company acquired three 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 $16 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.
<PAGE>
NOTE F--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 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. SFAS 133 is
effective for fiscal years beginning after June 15, 1999, but earlier
application is permitted as of the beginning of any fiscal quarter subsequent to
June 17, 1998. The Company presently believes that the application of SFAS 133,
when adopted, will not have a material effect on the Company's results of
operations, financial position or cash flows. The Company makes limited use of
derivatives to manage well-defined interest rate and foreign exchange exposures.
The Company does not hold or issue derivatives for trading purposes.
NOTE G--SUBSEQUENT EVENT
In April 1999, the Company announced the sale of 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 includes 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 will result in a pretax gain of
approximately $18 million in the second quarter 1999.
<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, 1999, 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, 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
April 29, 1999
Chicago, Illinois
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
First Quarter 1999 Operations Compared to First Quarter 1998
Sales increased 12 percent over last year with five of the six divisions
reporting improved results. In anticipation of a possible interruption in
product shipments due to the start-up of a new computer system, the Company
encouraged its U.S. customer base to accept product shipments early under normal
terms of sale. 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.
The Industrial Division reported a modest sales gain of 2 percent. Higher sales
resulting from the early shipments program and acquisitions were partly offset
by the translation effect of the stronger U.S. dollar compared to a year ago.
Acquisitions accounted for approximately two-thirds of the 23 percent
improvement in sales that was reported by the Specialty Division, while
favorable exchange rates had a minor positive effect. It is estimated that the
early shipments program increased Specialty Division sales about 6 percent over
the year-ago quarter. The Pulp and Paper Division reported an 18 percent gain in
sales, with acquisitions contributing slightly less than two-thirds of the gain.
The early shipments program accounted for an estimated one-fourth of the
Division's improvement. The Process Division's 5 percent sales gain over last
year was mainly attributable to the early shipments program. Increased sales
resulting from acquisitions were offset by the translation impact of the
stronger U.S. dollar compared to last year. The Latin America Division reported
a 15 percent sales decline which was the result of adverse changes in currency
translation rates, most notably for the Brazilian real. Pacific Division sales
increased by 39 percent over last year with more than half of the improvement
attributable to changes in volume, mix and price. Acquisitions accounted for
slightly more than one-third of the increase, while favorable translation rate
changes had a slightly positive effect over last year.
The gross margin was 54.9 percent for the first quarter of 1999 compared to 55.1
percent for the first quarter of 1998. The decrease is attributable to lower
margins of acquired operations.
Operating expenses (selling, administrative, research, etc.) were up $6.3
million over the first quarter of last year. Expenses of acquisitions more than
offset savings realized from the cost reduction program.
Interest and other income increased by $0.2 million over a year ago, mainly as a
result of favorable foreign exchange results, which were slightly offset by
lower interest income and higher charges for minority interests. Interest
expense increased by $3.3 million over the first quarter of last year which
reflects higher borrowings to finance acquisitions and share repurchases during
1998.
Nalco's equity in Nalco/Exxon for the first quarter of 1999 was $4.6 million, a
decrease of $2.7 million from the first quarter of 1998, reflecting depressed
oil prices and resulting cutbacks in oil production.
The effective income tax rate for the first quarter of 1999 was 36.0 percent
compared to the 36.3 percent that was reported for the first quarter of 1998.
Net earnings as a percent to sales was 11.0 percent for the first 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 first quarter 1999 was 65 cents compared to
53 cents for the first quarter 1998. Net earnings per share on a diluted basis
for the first quarter 1999 was 60 cents compared to 49 cents for the first
quarter 1998.
In April 1999, the Company announced the sale of its worldwide process
lubricants business serving the steel and aluminum industries. Sales of this
business were about $30 million in 1998. The sale of this business will result
in a pretax gain of approximately $18 million in the second quarter 1999.
Changes in Financial Condition
Cash and cash equivalents increased by $8.6 million during the first three
months of 1999 as detailed in the Unaudited Condensed Consolidated Statement of
Cash Flows.
Days sales outstanding were 64 days at March 31, 1999, down slightly from the 65
days outstanding at December 31, 1998. Working capital at March 31, 1999 totaled
$226.4 million, a $100.1 million increase from the $126.3 million at December
31, 1998. The reclassification of $40.0 million of commercial paper borrowings
from short-term debt to long-term debt, higher accounts receivable resulting
from increased sales, 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 1.8 to 1 at March 31, 1999.
The $11.3 million increase in goodwill is mainly attributable to acquisitions
that were made during the first quarter 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 $19.7 million for the first three 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 F 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.
New systems for business processing have been used in Canada since mid-1998, and
in the U.S. since early April 1999. In Europe, Nalco has completed and tested an
upgrade of its BPCS(R) business processing software, which provides full Y2K
compliance. The Company's European operations have been running on this Y2K
compliant system since April 1998. In Australia, Nalco has upgraded its
VAX(R)-based business processing software to provide full Y2K compliance. The
upgrade was completed, tested and implemented by the end of March 1999. In Asia,
Nalco is implementing a new version of its PC-based business processing software
that addresses Y2K compliance, and completion is expected by mid-1999. In Latin
America (except Venezuela), Nalco has modified or replaced its PC-based systems
to ensure Y2K compliance. In Venezuela, Nalco is replacing its noncompliant BPCS
software with a Y2K compliant PC-based system, and completion is expected by
mid-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.
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's plant process control systems 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 Y2K compliance. The
Company had an independent review by an outside engineering firm for the Y2K
work at its North American plants, and a similar outside independent review is
being conducted at its European plants.
Any of the Company's products (or third party products provided by the Company
to its customers) that contain microprocessors or software or embedded chips
have been or are being tested, 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.
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 currently looking at development of basic contingency plans to
restore the material functions of each of its systems or activities in the event
of a Y2K failure. It is expected that contingency plans would cover all material
levels of activity within each business location and functional area (including
acquired operations and subsidiaries not integrated into the Company).
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(TM) 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 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Nalco Chemical Company was held on April
29, 1999, for the purpose of electing three Class III Directors and one Class II
Director; 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Class III Director Shares Voted "For" Shares Withheld
B. S. Kelly 64,650,240 1,734,672
S. D. Newlin 64,665,067 1,719,845
J. J. Shea 64,679,558 1,705,354
Class II Director Shares Voted "For" Shares Withheld
W. S. Weeber 64,740,007 1,644,905
</TABLE>
The appointment of PricewaterhouseCoopers LLP as independent accountants for the
Company was approved:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Shares Voted "For" Shares Voted "Against" Shares Abstaining
65,332,796 630,136 421,980
</TABLE>
The Shareholder Proposal regarding endorsement of the CERES Principles was not
approved:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Shares Voted "For" Shares Voted "Against" Shares Abstaining Broker Non-Votes
4,513,334 52,961,616 2,927,938 5,982,024
</TABLE>
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, 1999.
<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 13, 1999 W. E. BUCHHOLZ
----------------------------------------
W. E. Buchholz - Senior Vice President,
Chief Financial Officer
Date: May 13, 1999 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) 1999 1998
Basic
Average shares outstanding 65,706 66,116
======= =======
Net earnings $45,277 $38,001
Dividends on preferred stock,
net of taxes (2,740) (2,904)
------- -------
Net earnings to common shareholders $42,537 $35,097
======= =======
Per share amounts:
Net earnings to common shareholders $0.65 $0.53
======= =======
<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) 1999 1998
Diluted
Average shares outstanding
used in Basic earnings per share 65,706 66,116
Effect of dilutive securities:
Assumed conversion of
preferred stock 7,299 7,668
Stock options and contingently
issuable shares 88 786
------- -------
TOTALS 73,093 74,570
======= =======
Net earnings $45,277 $38,001
Additional ESOP expense resulting
from assumed conversion of
preferred stock, net of taxes (1,042) (1,122)
Income tax adjustment on assumed
common dividends (273) (286)
------- -------
Net earnings to common shareholders $43,962 $36,593
======= =======
Per share amounts:
Net earnings to common shareholders $0.60 $0.49
======= =======
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 29, 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
May 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 MARCH 31, 1999 AND
THE CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED
MARCH 31, 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> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 39,800,000
<SECURITIES> 0
<RECEIVABLES> 310,700,000
<ALLOWANCES> (5,800,000)
<INVENTORY> 129,800,000
<CURRENT-ASSETS> 502,300,000
<PP&E> 1,203,600,000
<DEPRECIATION> (706,900,000)
<TOTAL-ASSETS> 1,661,600,000
<CURRENT-LIABILITIES> 275,900,000
<BONDS> 569,300,000
37,300,000
0
<COMMON> 15,100,000
<OTHER-SE> 553,500,000
<TOTAL-LIABILITY-AND-EQUITY> 1,661,600,000
<SALES> 410,200,000
<TOTAL-REVENUES> 410,200,000
<CGS> 184,800,000
<TOTAL-COSTS> 184,800,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,200,000
<INCOME-PRETAX> 70,800,000
<INCOME-TAX> 25,500,000
<INCOME-CONTINUING> 45,300,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,300,000
<EPS-PRIMARY> .65
<EPS-DILUTED> .60
</TABLE>
