FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended January 31, 1998 Commission file number 1-5838
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NCH CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 75-0457200
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 152170
2727 Chemsearch Blvd.
Irving, TX 75015-2170
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, include area code (972) 438-0211
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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
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at February 27, 1998
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Common Stock, $1 par value 7,155,299
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NCH CORPORATION
INDEX
Page No.
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Part I. Financial Information:
Consolidated Balance Sheets --
January 31, 1998 and April 30, 1997 3
Consolidated Statements of Income --
Three Months and Nine Months Ended
January 31, 1998 and 1997 4
Consolidated Statements of Cash Flows --
Nine Months Ended January 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6 - 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 16
Part II. Other Information 17
NCH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands Except Share and Per Share Data)
(Unaudited)
January 31, April 30,
1998 1997
-------- --------
Assets
Current Assets
Cash and cash equivalents $ 20,459 $ 21,273
Marketable securities 77,498 69,700
Accounts receivable, net 144,733 144,664
Inventories 117,754 107,502
Prepaid expenses 6,605 6,228
Deferred income taxes 22,066 18,579
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Total Current Assets 389,115 367,946
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Property, Plant and Equipment 206,439 202,830
Accumulated depreciation 119,492 114,330
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86,947 88,500
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Deferred Income Taxes 31,116 29,637
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Other 13,110 11,508
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Total $520,288 $497,591
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Liabilities and Stockholders' Equity
Current Liabilities
Notes payable to banks $ 6,183 $ 2,694
Current maturities of long-term debt 3,705 3,767
Accounts payable 47,907 51,057
Accrued expenses 32,128 28,286
Income taxes payable 23,562 19,874
Dividends payable 2,504 2,149
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Total Current Liabilities 115,989 107,827
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Long-term Debt, less current maturities 1,659 112
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Retirement and Deferred
Compensation Plans 111,042 107,057
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Stockholders' Equity
Common stock, par value
$1 per share, authorized
20,000,000 shares. Issued
11,769,304 shares 11,769 11,769
Additional paid-in capital 11,365 8,708
Retained earnings 463,405 448,513
Foreign currency translation
adjustment (30,656) (25,740)
Unrealized gains on investments 239 40
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456,122 443,290
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Less treasury stock
(4,614,005 and 4,606,705 shares) 164,524 160,695
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291,598 282,595
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Total $520,288 $497,591
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The accompanying notes are an integral part of these financial
statements.
NCH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(In Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended Nine Months Ended
January 31, January 31,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net Sales $195,659 $193,291 $587,276 $578,412
-------- -------- -------- --------
Operating Expenses
Cost of sales, including
warehousing and
commissions 105,778 100,798 317,545 303,422
Marketing and
administrative
expenses 78,604 79,171 230,216 232,780
-------- -------- -------- --------
184,382 179,969 547,761 536,202
-------- -------- -------- --------
Operating Income 11,277 13,322 39,515 42,210
-------- -------- -------- --------
Other (Expenses) Income
Revaluation of foreign
currencies (612) (271) (1,653) (834)
Net interest (126) 252 (405) 544
Gain on sale of subsidiary 0 0 0 3,536
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Income before Income Taxes 10,539 13,303 37,457 45,456
Provision for Income Taxes 4,276 5,565 15,401 19,010
-------- -------- -------- --------
Net Income $ 6,263 $ 7,738 $ 22,056 $ 26,446
======== ======== ======== ========
Weighted Average Number of
Shares Outstanding
Basic 7,167 7,202 7,165 7,374
======== ======== ======== ========
Diluted 7,196 7,209 7,194 7,381
======== ======== ======== ========
Earnings Per Share
Basic $ .87 $ 1.07 $ 3.08 $ 3.59
======== ======== ======== ========
Diluted $ .87 $ 1.07 $ 3.07 $ 3.58
======== ======== ======== ========
Cash Dividend Paid Per
Share $ .35 $ 1.30 $ .95 $ 1.90
======== ======== ======== ========
Cash Dividend Declared
Not Paid $ .35 $ .30 $ .35 $ .30
======== ======== ======== ========
The accompanying notes are an integral part of these financial
statements.
NCH CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Nine Months Ended
January 31,
--------------------
1998 1997
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Cash Flows from Operating Activities
Net Income $ 22,056 $ 26,446
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 10,911 11,508
Gain on sale of subsidiary 0 (3,536)
Provision for losses on accounts
receivable 5,089 5,750
Deferred income taxes (5,123) (2,631)
Retirement and deferred compensation plans 4,442 6,588
Other noncash items 187 (660)
Changes in assets and liabilities,
excluding net assets acquired in the
purchase of businesses:
Accounts receivable (6,753) (6,840)
Inventories (9,635) 1,038
Prepaid expenses (289) (1,705)
Accounts payable, accrued expenses and
income taxes payable 5,050 2,666
Other noncurrent assets (527) 1,142
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Net cash provided by operating
activities 25,408 39,766
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Cash Flows from Investing Activities
Sales of property, plant and equipment 1,063 726
Purchases of property, plant and equipment (10,589) (14,268)
Redemptions of marketable securities 29,081 38,794
Purchases of marketable securities (36,573) (20,974)
Acquisitions of businesses (2,944) (246)
Sale of subsidiary 0 7,932
Other (886) (1,012)
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Net cash provided (used) in
investing activities (20,848) 10,952
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Cash Flows from Financing Activities
Proceeds from notes payable 5,519 2,679
Payments of notes payable (2,173) (8,287)
Additional long term debt 51 124
Payments of long term debt (64) (23)
Borrowing of cash surrender values 1,930 1,914
Payments of dividends (6,809) (13,844)
Purchase of treasury stock (7,439) (27,173)
Proceeds from exercise of stock options 6,101 359
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Net cash used in financing activities (2,884) (44,251)
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Effect of Exchange Rate Changes on Cash
and Cash Equivalents (2,490) (48)
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Net Increase (Decrease) in Cash and
Cash Equivalents (814) 6,419
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Cash and Cash Equivalents at Beginning
of Year 21,273 21,806
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Cash and Cash Equivalents at End of Period $ 20,459 $ 28,225
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The accompanying notes are an integral part of these financial
statements.
NCH CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
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In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary (consisting of
only normal re-occurring accruals) to present fairly NCH Corporation's
financial position as of January 31, 1998, and April 30, 1997, the
results of its operations for the nine months ended January 31, 1998
and 1997, and cash flows for the nine months then ended.
The accounting policies followed by the Company are set forth in Note
1 to the Company's financial statements in the 1997 NCH Corporation
Report to the Shareholders, which is included in Part II of Form 10-K.
The results of operations for the nine month period ended January 31,
1998, are not necessarily indicative of the results to be expected
for the full year.
2. Inventories
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Inventories consisted of the following (in thousands of dollars):
January 31, April 30,
1998 1997
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Raw Materials $ 16,170 $ 14,580
Finished Goods 99,554 90,915
Sales Supplies 2,030 2,007
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$117,754 $107,502
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3. Earnings Per Common Share
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Effective January 31, 1998, the Company adopted SFAS No. 128,
"Earnings per Share". SFAS No. 128 replaces the presentation of
primary earnings per share (EPS) with basic EPS and replaces fully
diluted EPS with diluted EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all
entities with complex capital structures, and requires a
reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation. EPS for prior periods have been restated to conform
with this new statement.
Basic earnings per share are computed by dividing net income for the
period by the weighted average number of shares of common stock
outstanding for the period. Diluted earnings per share are determined
by dividing net income by the weighted average number of shares of
common stock and common stock equivalents outstanding. Stock options
are the Company's only common stock equivalents and are considered in
the diluted earnings per share calculations if they would not have been
antidilutive for those periods. For the three and nine month periods
ended January 31, 1998, all options were included as their effect was
dilutive for those periods. However, for the three and nine month
periods ended January 31, 1997, options totaling 105,169 and 183,126
were excluded as their effect would have been antidilutive.
4. Supplemental Cash Flow Information
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Cash payments for interest for the nine months ended January 31, 1998
and 1997, were approximately $1,717,000 and $1,112,000, respectively.
Cash payments for income taxes were approximately $16,153,000 and
$18,861,000 for the same periods, respectively.
NCH CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
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In the nine months ended January 31, 1998, working capital increased
to $273.1 million from $260.1 million at April 30, 1997. The current
ratio was 3.4 to 1 at January 31, 1998, and at April 30, 1997. The
total of cash, cash equivalents and marketable securities increased
by $7.0 million in the first nine months to $98.0 million at January
31, 1998, as shown on the Consolidated Balance Sheets. Net cash flows
from operations totaled $25.4 million. Additional cash was provided
by the exercise of stock options of $6.1 million, net proceeds from
notes payable of $3.3 million, and the borrowing of cash surrender
values of company-owned life insurance policies on key employees of
$1.9 million. Principal uses of cash consisted of net capital
expenditures of $9.5 million, net purchases of marketable securities
of $7.5 million, treasury stock purchases of $7.4 million, and payment
of dividends of $6.8 million. During the year, the Company purchased
the net assets of one small business for $2.9 million. Management
expects that operating cash flows will continue to generate sufficient
funds to finance operating needs, capital expenditures and the payment
of dividends.
The Company's international subsidiaries operate on a fiscal year
ending on the last day of February. The reported values of both
assets and liabilities of the Company's international subsidiaries
decreased as a result of the change in the Company's composite spot
rate at November 30, 1997, compared to February 28, 1997. This is
reflected by the foreign currency translation component of
stockholders' equity, which changed from a $25.7 million reduction of
equity at April 30, 1997, to a $30.7 million reduction of equity at
January 31, 1998.
Accounts receivable increased by $.1 million and inventories
increased by $10.3 million in the nine months ended January 31, 1998,
as measured in U.S. dollars and reported on the Consolidated Balance
Sheets. As stated above, the result of exchange rate deviations from
the end of the previous year to the end of the first nine months was
to decrease the reported U.S. dollar values of both assets and
liabilities. The change in accounts receivable and inventories shown
in the Consolidated Statements of Cash Flows is exclusive of the effect
of exchange rates on the reported asset values, and shows accounts
receivable increasing by $1.7 million for the nine month period, net
of the provision for losses on accounts receivable of $5.1 million.
The increase in accounts receivable was primarily in the Company's
international operation due to increased sales volume. The
Consolidated Statements of Cash Flows shows inventories increasing by
$9.6 million during the nine months ended January 31, 1998, exclusive
of the effect of exchange rates. The increase in inventory was
primarily in the Company's domestic operation, where inventory was
increased to support the 9% increase in sales in the nine months over
the prior year and due to an acquisition made in May of this fiscal
year.
Accounts payable, accrued expenses and income taxes payable were
similarly affected by currency translation. These liabilities
increased by $5.1 million when measured exclusive of the effect of
exchange rate changes, but increased by $4.4 million as reported on
the Consolidated Balance Sheets. This increase was primarily due to
an increase in income taxes payable in the Company's domestic
operation, due to normal timing differences in the amounts of tax
payments in the current quarter compared to the fourth quarter of the
prior year.
Net expenditures for property, plant and equipment amounted to $9.5
million for the nine months ended January 31, 1998, and consisted of
the installation and update of worldwide computer systems and normal
additions of operating equipment. As with the other assets and
liabilities, the effect of currency translation on the reported U.S.
dollar values of property, plant and equipment was to decrease those
reported values.
Total bank indebtedness, comprised of long-term debt, current
maturities of long-term debt and notes payable, increased, exclusive
of the effect of exchange rate changes and the indebtedness acquired
in the purchase of a business, by $3.3 million during the nine months
ended January 31, 1998. The increase was due primarily to additional
short-term loans in the Company's European subsidiaries. The bank
indebtedness shown on the Consolidated Balance Sheets was also affected
by currency translation, and shows an increase of $5.0 million,
including indebtedess of $1.5 million related to the purchase of a
business.
The directors of the Company declared a regular quarterly dividend of
$.35 per share on January 14, 1998, payable March 16, 1998, to
shareholders of record March 2, 1998. Cash dividends paid during the
first nine months of the fiscal year amounted to $6.8 million.
Year 2000 Compliance
--------------------
The Company is continuing to review its worldwide computer systems to
identify and address any code changes, testing, and implementation
procedures necessary to make its systems year 2000 compliant. The
Company believes that with modifications to existing software, and
converting to new software, the year 2000 issue will not pose
significant operational problems for the Company's computer systems as
so modified and converted. The Company expects to be compliant by the
end of fiscal year 1999. Amounts expensed for year 2000 projects have
not been and are not expected to be significant to the Company's
results of operations.
Subsequent Event
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The Company has executed a non-binding letter of intent to sell two
subsidiaries and negotiations are in progress. A definitive agreement
has not been executed and significant uncertainties remain to be
resolved before the transaction can be completed.
Operating Results
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Third Quarter Comparison - Prior Year
Net sales for the third quarter increased 1% to $195.7 million in
the current year as compared with $193.3 million reported in the same
quarter of the last fiscal year. Domestically, net sales in the third
quarter of the current year increased 8% over the third quarter of the
prior year. International net sales, measured on a local currency
basis, increased 4% compared to the third quarter of the prior year,
but decreased 5% when measured in U.S. dollars due to the negative
effects of changes in currency translation rates.
Operating income in the third quarter was $11.3 million compared to
$13.3 million in the third quarter last year. Of this decrease, an
estimated $1.3 million is attributable to the strength of the U.S.
dollar this year compared to last year. Operating margins in the
domestic operations decreased from last year due to increased cost of
sales and increased marketing expenses. Operating margins in the
Pacific and Far East decreased due to the regional business
environment and were also negatively impacted by the strength of the
U.S. dollar relative to regional currencies. As a result, operating
income before other expenses and income taxes was 5.8% of net sales
for the quarter ended January 31, 1998, compared to 6.9% of net sales
for the quarter ended January 31, 1997.
In the quarter ended January 31, 1998, net interest expense was $.1
million compared to net interest income of $.3 million in the same
quarter of the prior year. Revaluation of foreign currencies was a
loss of $.6 million in the third quarter of the current year compared
to a loss of $.3 million in the same period of the prior year.
Provision for income taxes was 40.6% of pre-tax income in the third
quarter of the current year compared to 41.8% of pre-tax income in the
prior year. Net income for the quarter ended January 31, 1998, was
3.2% of net sales compared to 4.0% of net sales in the quarter ended
January 31, 1997.
Third Quarter Comparison - Preceding Quarter
Net sales of $195.7 million for the third quarter of fiscal 1998
were 1% higher than the $193.6 million net sales reported in the
second quarter. International net sales were 24% higher when measured
in U.S. dollars, as a result of normal quarter-to-quarter sales
fluctuations and the effect of exchange rate changes. Domestic net
sales were 13% lower than the previous quarter due to normal
quarter-to-quarter sales fluctuations.
Operating expenses were 94.2% of net sales in the current quarter
compared to 92.0% in the second quarter. Operating expenses in both
the international and domestic operations were higher as a percent of
net sales due to increased cost of sales and increased marketing
expenses. As a result, operating income before other expenses and
income taxes was 5.8% of net sales for the quarter ended January 31,
1998, compared to 8.0% of net sales for the quarter ended October 31,
1997.
Net interest expense amounted to $.1 million in both the second and
third quarters of the current year. The revaluation of foreign
currencies resulted in a loss of $.6 million in the third quarter of
the current year compared to a loss of $.5 million in the second
quarter of the current year.
Provision for income taxes amounted to 40.6% of pre-tax income in
the quarter ended January 31, 1998, compared to 42.0% of pre-tax
income in the quarter ended October 31, 1997. The lower overall tax
rate in the third quarter was due to the impact of variations in
individual country income levels and tax rates on combined
international results as well as lower domestic earnings in the third
quarter. Net income was 3.2% of net sales for the quarter ended
January 31, 1998, compared to 4.4% of net sales in the quarter ended
October 31, 1997.
Nine Months Comparison - Prior Year
-----------------------------------
Net sales for the nine months ended January 31, 1998, increased to
$587.3 million as compared with $578.4 million reported in the first
nine months of the last fiscal year. Domestically, net sales
increased 9% in the nine months compared to a year ago. International
net sales were negatively affected by changes in currency translation
rates and decreased 7% as reported in U.S. dollars. When measured on
a local country currency basis, international net sales increased
approximately 3%.
Operating income for the nine months this year was $2.7 million
below the operating income reported for the nine months ended January
31, 1997. Operating income, calculated on a local country currency
basis, increased $800,000 for the nine months this year compared to
last year, but the strength of the U.S. dollar negatively impacted
reported operating income from international operations by $3.5
million. Operating income in the nine months this year decreased to
6.7% of net sales from 7.3% of net sales in the nine months ended
January 31, 1997. Cost of sales and marketing expenses were higher
in the domestic operation in the nine months this year compared to
last year.
Net interest expense was $.4 million in the nine months ended
January 31, 1998, compared to net interest income of $.5 million in
the first nine months of the prior year. Revaluation of foreign
currencies resulted in a loss of $1.7 million in the first nine months
of the current year compared to a loss of $.8 million in the same
period of the prior year. The sale of subsidiary assets in the nine
months ended January 31, 1997 resulted in a pre-tax gain of $3.5
million ($2.3 million after tax).
Provision for income taxes was 41.1% of pre-tax income in the first
nine months of the current year compared to 41.8% of pre-tax income in
the prior year. Net income was 3.8% of net sales for the nine months
ended January 31, 1998 compared to 4.6% of net sales for the nine
months ended January 31, 1997.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K -- There were no reports on Form 8-K
filed for the nine months ended January 31, 1998.
SIGNATURE
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.
NCH Corporation
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(Registrant)
Date March 5, 1998 /s/ Tom Hetzer
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Tom Hetzer
Vice President - Finance
(Principal Accounting Officer)