ITEM 1. BUSINESS.
Nalco Chemical Company was incorporated in 1928 in Delaware and has its principal executive offices at One Nalco Center, Naperville, Illinois 60563. Its telephone number is 630-305-1000. As used in this report, "Company" and "Nalco" refer to Nalco Chemical Company and its consolidated subsidiaries.
Nalco is engaged in the manufacture and sale of highly specialized Service Chemicals. Specified financial information by geographic area is shown in Note 2 of the Notes to Consolidated Financial Statements in the Company's 1996 Annual Report to Shareholders and is incorporated herein by reference.
Nalco is in the business of providing services, chemicals, technology, equipment, and systems (monitoring and surveillance) used in water treatment, pollution control, energy conservation, steelmaking, papermaking, mining and mineral processing, electricity generation, other industrial processes, and commercial building utility systems. Service Chemicals are developed, formulated, and manufactured to meet specific customer needs. They are part of value added programs designed to help customers maintain a high level of operating performance and efficiency in their facilities, improve the quality of customers' end products, or help customers meet environmental discharge limits in a cost-effective way. Nalco products are used for purposes such as: control of scale, corrosion, foam and fouling in cooling systems, boilers, and other equipment; clarification of water; separation of liquids and solids; improving combustion; control of dust; lubrication and corrosion protection in rolling, drawing and forming of metals; improving production of pulp and qualities of paper; recovery of minerals; and specialized process applications in a variety of industries. The quality and on-site availability of technical expertise provided through highly qualified Nalco personnel are very important considerations to customers. The effective use of the Company's products requires a substantial amount of problem solving, monitoring, and technical assistance on the part of Nalco employees.
Service Chemicals are usually marketed through Nalco's own organization because of the high degree of technical service required. The worldwide field sales force is trained in the application and use of Nalco Service Chemicals, and is supported by a marketing and research staff of specialists in the technology and use of various Nalco Service Chemicals.
Competitive conditions vary for Nalco depending on the industries served and the products involved. Management believes the Company is one of the most important worldwide suppliers of water treatment products and Service Chemical programs, based on estimated sales of comparable products for industrial customers on the process side (e.g., the manufacturing process, which a plant uses to produce its end product) and the water treatment side (e.g., boilers for power generation or cooling systems for process temperature control). The Company sells its products and Service Chemical programs in more than 120 countries, and is the largest or second largest supplier of those products in most of the countries it does business. All aspects of this business are considered to be very competitive, and companies providing similar products or programs range in size from very large multinational companies to small local manufacturers. The number of competitors varies by product application and ranges from a few large companies to hundreds of small local companies. The Company's principal method of competition is based on quality service, product performance and technology through safe, practical applied science.
In October 1996, the Company completed the sale of its discontinued superabsorbent chemicals business. The gain on the sale was $3 million, net of income taxes of $1 million. This business generated revenue of approximately $63 million up to the date of the sale.
In June 1996, the Company completed the acquisition of Diversey Water Technologies, a middle market water treatment business with operations in North America and Europe and annual revenues of approximately $60 million. In December 1996, the Company purchased the water treatment services chemicals business of Albright & Wilson, which serves customers such as steel and electric utility companies throughout the United Kingdom. Annual revenues are approximately $5 million.
In January 1997, the Company completed the acquisition of International Water Consultants Beheer B.V. (IWC) and the assets of Nutmeg Technologies, Inc. (Nutmeg). IWC, which serves the water treatment needs of customers in the Netherlands, Belgium, Germany and the Commonwealth of Independent States, reported 1996 revenues of approximately $20 million. Nutmeg, a water treatment company which serves markets mainly in the Northeast United States, had 1996 sales of approximately $9 million.
There were no other significant changes in the markets served or in the methods of distribution since the beginning of 1996.
Although no single Service Chemicals product represents a material portion of the business, historically, new product and new market developments have been designed to increase market penetration and to maintain sales and earnings growth.
OTHER MATTERS
Primarily as a result of the formation of the Nalco/Exxon joint venture, the Company adopted a worldwide consolidation plan in 1994 for manufacturing and support operations. The production volume reduction caused by redundancies associated with the joint venture formation required the Company to down size, close, and consolidate operations. In addition, certain support functions have been or are being regionalized on a pan-European basis in order to more efficiently serve customers. The majority of these activities have been completed, and all should be completed by the end of 1997.
The principal raw materials used by Nalco ordinarily are available in adequate quantities from several sources of supply in the United States and in foreign countries. Purchases of chemicals are made in the ordinary course of business and in accordance with the requirements of production.
Inventories of Service Chemicals are maintained in Nalco-owned facilities and in warehouses situated throughout the United States and in countries in which subsidiaries operate. Shipments to customers may be made from either manufacturing plants or warehouse stocks.
Nalco owns or is licensed under a large number of patents relating to a number of products and processes. Nalco's rights under such patents and licenses are of significant importance in the operation of the business, but no single patent or license is believed to be material with respect to its business. Over 800 patents existed at the end of 1996 with remaining durations ranging from less than one year to 20 years with an average duration of about 10 years.
Nalco's business is considered nonseasonal. Large dollar amounts of backlogs are unusual since chemicals are normally shipped within a few days of the receipt of orders. The dollar amount of the normal backlog of orders is not considered to be significant in relation to the total annual dollar volume of sales of Nalco.
The Company does not depend upon either a single customer, or very few customers, for a material part of the business.
Nalco's laboratories are involved in research and development of chemical products and in providing technical support, including chemical analyses of water and process samples. Research and development expenses of continuing operations amounted to $41.9 million in 1996, compared to $39.8 million in 1995, and $45.7 million in 1994.
There were approximately 6,500 persons employed full time by Nalco at the end of 1996.
Compliance with Federal, State, and local regulations relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings, or competitive position of Nalco. There are no material capital expenditures for environmental control facilities anticipated during 1997. Compliance with increasingly stringent regulations should not have a material effect upon earnings but may strengthen the competitive position of Nalco because of available capital and technical resources.
Although inflation is not a significant factor domestically, the Company adjusts selling prices to maintain profit margins wherever possible. Investments are made in modern plants and equipment that will increase productivity and thereby minimize the effect of rising costs. In addition, the last-in, first-out (LIFO) valuation method is used for some of the Company's inventories, so that changing material costs are recognized in reported income and pricing decisions. The impact of inflation in foreign exchange movements at foreign subsidiaries is managed by minimizing assets exposed to currency movements and by increasing sales prices to parallel increases in local inflation rates. The Company emphasizes working capital management, frequent dividend remittance, timely settlement of intercompany account balances, foreign currency borrowings, and selected hedging. In most hyperinflationary economies, the rate of local currency devaluation is related to and approximately equal to the local inflation rate. Therefore, Nalco attempts to increase its local selling prices to help offset the impact of devaluation on exposed assets and the impact of increases in local content costs.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Registrant are named below together with their principal occupation. During the last 5 years all of the executive officers have been employed by the Company, as indicated, except for W. E. Buchholz.
E. J. Mooney has been Chairman of the Board and Chief Executive Officer of the Company since 1994 and President since 1990. He had been Chief Operating Officer since 1992 and an Executive Vice President since 1988.
M. B. Harp has been Executive Vice President, Operations since 1995. He had been Executive Vice President, International Operations since 1993 and a Group Vice President since 1988.
W. S. Weeber has been Executive Vice President, Operations Staff since 1993. He had been a Group Vice President since 1986.
P. Dabringhausen has been Group Vice President and President, Process Chemicals Division since 1993. He had been a Vice President since 1991, and was President, Nalco Pacific from 1989 to 1992.
S. D. Newlin has been Group Vice President, President, Nalco Europe since 1994. He had been Vice President, President, Nalco Pacific since 1992. During 1992 he was General Manager, Pulp and Paper Chemicals Group; and from 1990 to 1992 he was General Manager of UNISOLV(R).
J. D. Tinsley has been Group Vice President and President, Water and Waste Treatment Division since 1993. During 1992 he was a Group Vice President and President, Process Chemicals Division; and from 1986 to 1992 he was Vice President, Corporate Development.
G. M. Brannon was elected Group Vice President, President, Nalco Pacific effective February 1997. He had been Vice President, President, Nalco Pacific since 1994; and from 1990 to 1994 he was General Manager of the Utility Chemicals Group.
G. Pinzon was elected Group Vice President, President, Nalco Latin America effective February 1997. He had been Vice President, President, Nalco Latin America since 1994. He was Division Vice President, Latin America from 1989 to 1994, and Company Manager of Nalco de Venezuela, C.A. from 1992 to 1994.
W. E. Buchholz was elected Senior Vice President and Chief Financial Officer effective February 1997. He had been Vice President and Chief Financial Officer since 1993. He was formerly Vice President--Finance and Chief Financial Officer for Cincinnati Milacron, Inc. (a manufacturer of industrial equipment, supplies and services for the metal cutting and plastic processing industries) since 1987.
The corporate officers of the Registrant are usually elected at the annual meeting of directors and hold office for a term of one year.
There is no family relationship between any of the executive officers. No arrangement or understanding exists between the executive officers and any other person pursuant to which such officers were selected as officers of the Registrant.
For further information on the executive officers of the Registrant, please refer to page 42 of the Company's 1996 Annual Report to Shareholders, which is incorporated herein by reference.
ITEM 2.
ITEM 2. PROPERTIES.
Nalco has facilities used to produce and store inventories and service customer needs at 9 domestic and 26 foreign locations. Primary domestic manufacturing plants are located in:
Other domestic manufacturing and/or warehouse facilities are located in: Oklahoma City, Oklahoma; Clarksburg, West Virginia; and Vancouver, Washington.
The general offices of the Company are located on a 146-acre site in Naperville, Illinois. This facility includes three five-story buildings totaling 417,000 square feet. About 317,000 square feet is used for office space and the balance is used for support services and storage. A power plant with a cogeneration system (steam and electricity) serves both the Corporate and Technical Centers and has 31,000 square feet of space.
The primary domestic research facility is located in Naperville, Illinois. The Naperville Technical Center is adjacent to the Corporate Center and houses process simulation areas in buildings which total 235,000 square feet.
Primary foreign manufacturing plants are located in:
Other foreign facilities are located in: Perth, Australia; Vienna, Austria; Buenos Aires, Argentina; Santiago, Chile; Suzhou, The People's Republic of China; Soledad, Colombia; Lerma, Mexico; West Bengal, India; Bogor, Indonesia; Kashima, Japan; Tilburg, the Netherlands; Auckland, New Zealand; Calamba, Laguna, Philippines; Dammam, Saudi Arabia; Jurong Town, Singapore; Hsin Chu Hsien, Taiwan; and Maracaibo, Venezuela.
The Company also has a 72,000 square-foot business and technical center on a 12-acre site in Oegstgeest, the Netherlands. This facility serves customers throughout Europe.
In addition to the property mentioned above, Nalco occupies general and sales offices and warehouses which are rented under short-term leases. Except for land leased in the Philippines, Saudi Arabia, Chile, The People's Republic of China, and Argentina, all other real property (including all production facilities) is owned by Nalco.
While the plants are of varying ages, the Company believes that they are well maintained, are equipped with modern and efficient equipment, and are in good operating condition and suitable for the purposes for which they are being used.
In 1996, the Company opened a new manufacturing plant, laboratory and offices on a four-acre site in Suzhou, The People's Republic of China. This 30,000 square-foot facility is located near Shanghai.
Consolidation of operations continued in 1996 with the closing of the Edmonton, Canada plant. Also in 1996, the Company sold its superabsorbent polymer production plant located in Garyville, Louisiana, and its plant in Jordbro, Sweden.
A new manufacturing plant, under construction near Buenos Aires, Argentina, is scheduled to open in 1997.
Capital expenditures for 1997 should approximate $100.0 million compared to the $92.5 million spent in 1996, if planned sales and earnings for 1997 are reached.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
For information on this item, please refer to Note 19 of the Notes to Consolidated Financial Statements in the Company's 1996 Annual Report to Shareholders, which is incorporated herein by reference.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.
The Registrant's Common Stock is listed on the New York and Chicago Stock Exchanges. The number of holders of record of Common Stock, par value $0.1875 per share, at December 31, 1996 was 5,349. Dividends and Common Stock market prices included in the Quarterly Summary in the Company's 1996 Annual Report to Shareholders are incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Selected Financial Data including net sales, earnings from continuing operations, earnings from continuing operations per common share, total assets, long-term debt, and cash dividends paid are reported in the Eleven Year Summary in the Company's 1996 Annual Report to Shareholders and are incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Financial Condition and Results of Operations
Management's discussion and analysis of financial condition and results of operations which is included in the section titled "Management's Discussion and Analysis--1996 vs. 1995," "Management's Discussion and Analysis--1995 vs. 1994," and "Management's Discussion and Analysis--Financial Condition" in the Company's 1996 Annual Report to Shareholders is incorporated herein by reference.
Liquidity and Capital Resources
Management's discussion of liquidity and capital resources which is included in the section titled "Management's Discussion and Analysis--Cash Flows" in the Company's 1996 Annual Report to Shareholders is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Report of Independent Accountants, the Consolidated Financial Statements, and the Notes to Consolidated Financial Statements of the Registrant and its subsidiaries, included in the Company's 1996 Annual Report to Shareholders, are incorporated herein by reference.
The Quarterly Summary in the Company's 1996 Annual Report to Shareholders is incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Item 10 information is set forth in Part I, Item 1, under Executive Officers of the Registrant and also in the Company's Proxy Statement dated March 18, 1997, under Election of Directors through Election of Directors--Meeting of the Board and Committees of the Board, which is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under Election of Directors--Directors' Remuneration and Retirement Policies through Election of Directors--Change in Control in the Company's Proxy Statement dated March 18, 1997, with respect to executive compensation and transactions, is incorporated herein by reference in response to this item.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under Shares Outstanding and Voting Rights in the Company's Proxy Statement dated March 18, 1997, with respect to security ownership of certain beneficial owners and management, is incorporated herein by reference in response to this item.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) The following consolidated financial statements of the Registrant and its subsidiaries included in the Company's 1996 Annual Report to Shareholders are incorporated herein by reference in Item 8:
(2) The following consolidated financial statement schedule for the years 1996, 1995 and 1994 is submitted herewith:
Report of Independent Accountants on Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(3) Exhibits
Exhibit Nos. 10A-10P constitute management contracts, compensation plans, or arrangements covering directors and officers of the Company.
(b) Reports on Form 8-K filed in the fourth quarter of 1996 are: None - - -------- /1Incorporated/herein by reference from the Registrant's Form 10-K for the year ended 1986. /2Incorporated/herein by reference from the Registrant's Form 10-K for the year ended 1987. /3Incorporated/herein by reference from the Registrant's Form 8-K dated July 24, 1986. /4Incorporated/herein by reference from the Registrant's Form 8-K dated May 15, 1989. /5Incorporated/herein by reference from the Registrant's Form 10-K for the year ended 1990. /6Incorporated/herein by reference from the Registrant's Form 10-K for the year ended 1991. /7Incorporated/herein by reference from the Registrant's Form 10-K for the year ended 1992. /8Incorporated/herein by reference from the Registrant's Notice of Annual Meeting and Proxy Statement dated March 18, 1996. /9Incorporated/herein by reference from the Registrant's Form 10-Q for the quarter ended June 30, 1996. /1/Incorporated/herein0by/reference from the Registrant's Form 10-Q for the quarter ended September 30, 1996. /1/Incorporated/herein1by/reference from the Registrant's Form 8-K dated June 24, 1996. /1/Incorporated/herein2by/reference from the Registrant's Form 8-A dated June 24, 1996. /1/Incorporated/herein3by/reference from the Registrant's Notice of Annual Meeting and Proxy Statement dated March 18, 1997.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
NALCO CHEMICAL COMPANY
E. J. Mooney By___________________________________ E. J. Mooney Chairman, Chief Executive Officer and President
Date: March 27, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW ON MARCH 27, 1997 BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Nalco Chemical Company
Our audits of the consolidated financial statements referred to in our report dated February 3, 1997 appearing on page 17 of the 1996 Annual Report to Shareholders of Nalco Chemical Company (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
Price Waterhouse LLP
Chicago, Illinois February 3, 1997
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
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SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
- - -------- Note A--Valuation of assets acquired. Note B--Excess of accounts written off over recoveries.
EXHIBIT (11)
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
EXHIBIT (11)
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
EXHIBIT (21)
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
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SUBSIDIARIES OF THE REGISTRANT
Subsidiaries of the registrant, all of which are wholly-owned unless otherwise indicated, are as follows:
- - -------- Note (1)--80% of voting securities owned by Registrant Note (2)--60% of voting securities owned by Registrant Note (3)--51% of voting securities owned by Registrant Note (4)--55% of voting securities owned by Registrant Note (5)--65% of voting securities owned by Registrant Note (6)--95% of voting securities owned by Registrant
EXHIBIT (23)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus constituting part of this Registration Statement on Form S-3 (Numbers 33-57363, 33-53111, 2-97721, 33-9934 and 2-97721) and Form S-8 (Numbers 333-06955, 333- 06963, 33-54377, 33-38033, 33-38032, 33-29149, 2-97721, 2-97131 and 2-82642) of our report dated February 3, 1997, which appears on page 17 of the 1996 Annual Report to Shareholders of Nalco Chemical Company, which is incorporated by reference in Nalco Chemical Company's Annual Report on Form 10-K for the year ended December 31, 1996. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 10 of this Form 10-K. We also consent to the incorporation by reference in the Registration Statement of our report dated March 17, 1997 appearing on page 1 of the Annual Report of the Nalco Chemical Company Profit Sharing, Investment and Pay Deferral Plan on Form 11-K for the year ended December 31, 1996.
Price Waterhouse LLP
Chicago, Illinois March 27, 1997