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 July 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 September 3, 1998
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Common Stock, $1 par value 5,604,684
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NCH CORPORATION
INDEX
Page No.
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Part I. Financial Information:
Consolidated Balance Sheets --
July 31, 1998 and April 30, 1998 3
Consolidated Statements of Income --
Three Months Ended
July 31, 1998 and 1997 4
Consolidated Statements of Cash Flows --
Three Months Ended July 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 17
Part II. Other Information 18
NCH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands Except Share and Per Share Data)
(Unaudited)
July 31, April 30,
1998 1998
-------- --------
Assets
Current Assets
Cash and cash equivalents $ 22,032 $ 17,139
Marketable securities 220 101,626
Accounts receivable, net 147,324 140,758
Inventories 110,547 108,478
Prepaid expenses 11,253 9,434
Deferred income taxes 19,932 19,099
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Total Current Assets 311,308 396,534
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Property, Plant and Equipment 192,845 191,514
Accumulated depreciation 113,950 112,353
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78,895 79,161
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Deferred Income Taxes 31,239 30,848
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Other 14,345 13,161
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Total $435,787 $519,704
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Liabilities and Stockholders' Equity
Current Liabilities
Notes payable to banks $ 4,765 $ 7,178
Current maturities of long-term debt 265 292
Accounts payable 50,921 49,083
Accrued expenses 31,119 28,019
Income taxes payable 23,058 20,736
Dividends payable 1,961 2,504
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Total Current Liabilities 112,089 107,812
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Long-Term Debt, less current maturities 1,256 1,400
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Retirement and Deferred
Compensation Plans 112,674 111,088
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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 12,500 12,289
Retained earnings 479,609 474,540
Accumulated other comprehensive
income (33,697) (33,675)
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470,181 464,923
Less treasury stock
(6,166,634 and 4,615,605 shares) 260,413 165,519
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209,768 299,404
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Total $435,787 $519,704
======== ========
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 July 31,
---------------------------
1998 1997
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Net Sales $198,856 $197,996
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Operating Expenses
Cost of sales, including
warehousing and commissions 110,384 105,887
Marketing and administrative
expenses 76,427 79,309
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186,811 185,196
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Operating Income 12,045 12,800
Other (Expenses) Income
Revaluation of foreign
currencies (411) (533)
Net interest (121) (163)
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Income before Income Taxes 11,513 12,104
Provision for Income Taxes 5,027 4,897
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Net Income $ 6,486 $ 7,207
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Weighted Average Number of
Shares Outstanding
Basic 6,062 7,164
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Diluted 6,082 7,185
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Earnings Per Share
Basic $ 1.07 $ 1.01
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Diluted $ 1.07 $ 1.00
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Cash Dividend Paid Per Share $ .35 $ .30
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Cash Dividend Declared Not Paid $ .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)
Three Months Ended
July 31,
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1998 1997
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Cash Flows from Operating Activities
Net Income $ 6,486 $ 7,207
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 3,463 3,864
Provision for losses on accounts
receivable 1,420 1,533
Deferred income taxes (1,349) 809
Retirement and deferred compensation
plans 1,447 (236)
Other noncash items (177) 97
Change in assets and liabilities,
excluding net assets acquired in the
purchase of business:
Accounts receivable (6,743) (5,106)
Inventories (1,869) (7,223)
Prepaid expenses (1,780) (2,482)
Accounts payable, accrued expenses
and income taxes payable 6,258 6,809
Other noncurrent assets (34) (140)
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Net cash provided by operating
activities 7,122 5,132
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Cash Flows from Investing Activities
Sales of property, plant and equipment 118 332
Purchases of property, plant and
equipment (3,465) (4,766)
Redemptions of marketable securities 101,236 9,767
Purchases of marketable securities - (3,918)
Acquisition of business (1,843) (2,944)
Other (1,005) (1,012)
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Net cash (used) provided in
investing activities 95,041 (2,541)
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Cash Flows from Financing Activities
Proceeds from notes payable 616 87
Payments of notes payable (3,183) (495)
Additional long-term debt - 34
Payments of long-term debt (170) (16)
Borrowing of cash surrender values 2,023 2,060
Payments of dividends (1,960) (2,149)
Purchases of treasury stock (95,185) (1,075)
Proceeds from exercise of stock options 402 933
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Net cash used in financing activities (97,457) (621)
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Effect of Exchange Rate Changes on Cash
and Cash Equivalents 187 (835)
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Net Increase in Cash and Cash Equivalents 4,893 1,135
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Cash and Cash Equivalents at Beginning of
Year 17,139 21,273
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Cash and Cash Equivalents at End of Period $ 22,032 $ 22,408
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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 July 31, 1998, and April 30, 1998, the results
of its operations for the three months ended July 31, 1998 and 1997,
and cash flows for the three months then ended.
The accounting policies followed by the Company are set forth in Note 1
to the Company's financial statements in the 1998 NCH Corporation
Report to the Shareholders, which is included in Part II of Form 10-K.
The results of operations for the three month period ended July 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):
July 31, April 30,
1998 1998
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Raw Materials $ 13,810 $ 13,904
Finished Goods 94,966 92,795
Sales Supplies 1,771 1,779
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$110,547 $108,478
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3. Earnings Per Common Share
-------------------------
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 month period ended July
31, 1998, all options were included as their effect was dilutive for
that period. However, for the three month period ended July 31, 1997,
options totaling 43,283 were excluded as their effect would have been
antidilutive.
4. Comprehensive Income
--------------------
As of May 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
The adoption of this statement had no impact on the Company's net
income or stockholders' equity. SFAS 130 established new rules for the
reporting and display of comprehensive income and its components.
SFAS 130 requires foreign currency translation adjustments and
unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income.
Amounts in prior year financial statements have been reclassified to
conform to SFAS 130.
The components of comprehensive income, net of related tax, for the
three-month periods ended July 31, 1998 and 1997 are as follows
(in thousands):
Three Months Ended
July 31,
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1998 1997
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Net income $ 6,486 $ 7,207
Unrealized gain on available-
for-sale securities:
Gain arising during period - 170
Reclassification adjustment (111) -
Foreign currency translation
adjustment 89 (1,039)
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Comprehensive income $ 6,464 $ 6,338
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The components of accumulated other comprehensive income, net of
related tax, at July 31, 1998 and April 30, 1998 are as follows
(in thousands):
July 31, April 30,
1998 1998
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Unrealized gain on available-
for-sale securities $ - $ 111
Foreign currency translation
adjustment (33,697) (33,786)
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Comprehensive income $(33,697) $(33,675)
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5. Supplemental Cash Flow Information
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Cash payments for interest for the three months ended July 31, 1998
and 1997, were approximately $121,000 and $418,000, respectively.
Cash payments for income taxes were approximately $3,989,000 and
$3,289,000 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 three months ended July 31, 1998, working capital decreased
to $199.2 million from $288.7 million at April 30, 1998, and the
current ratio was 2.8 to 1 at July 31, 1998, compared to 3.7 to 1 at
April 30, 1998. The total of cash, cash equivalents and marketable
securities decreased by $96.5 million in the first three months to
$22.3 million at July 31, 1998, as shown on the Consolidated Balance
Sheets. Net cash flows from operations totaled $7.1 million.
Additional cash was provided by redemptions of marketable securities
of $101.2 million, and the borrowing of cash surrender values of
company-owned life insurance policies on key employees of $2.0
million. Principal uses of cash consisted of treasury stock purchases
of $95.2 million, net capital expenditures of $3.3 million, net
payment of notes payable and long-term debt of $2.7 million, and
payment of dividends of $2.0 million. During the first quarter, the
Company purchased the assets of two small businesses for $1.8 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
current assets and liabilities of the Company's international
subsidiaries increased as a result of the change in the Company's
composite spot rate at May 31, 1998, compared to February 28, 1998.
This is reflected by the foreign currency translation component of
accumulated other comprehensive income, which decreased slightly from
April 30, 1998 to July 31, 1998.
Accounts receivable increased by $6.6 million and inventories
increased by $2.1 million in the three months ended July 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 three months was
to increase 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 $5.3 million and inventories
increasing by $1.9 million during the quarter. The increase in
inventory occurred primarily in the Company's international operations,
due to the 5% increase in sales in the current quarter over the
previous quarter. The increase in accounts receivable resulted from
the purchase of a small business in the fourth quarter of the previous
fiscal year and due to an increase in sales from the previous quarter
in the international subsidiaries.
Accounts payable, accrued expenses and income taxes payable were
similarly affected by currency translation. These liabilities
increased by $6.3 million when measured exclusive of the effect of
exchange rate changes, but increased by $7.3 million as reported on the
Consolidated Balance Sheets. Accounts payable and accrued expenses
increased as a result of normal business activity associated with
timing of payments and due to higher inventory levels. The increase in
income taxes payable was primarily due to normal timing differences in
the amounts of tax payments in the Company's domestic and European
operations in the current quarter compared to the preceding quarter.
Net expenditures for property, plant and equipment amounted to $3.3
million for the three months ended July 31, 1998, and consisted of the
installation and update of worldwide computer systems and normal
additions of operating equipment. As these amounts are translated at
historical exchange rates, 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, decreased, exclusive
of the effect of exchange rate changes, by $2.7 million during the
three months ended July 31, 1998. The decrease was due primarily to
the maturation and repayment of 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 a
decrease of $2.6 million.
A regular quarterly dividend of $.35 per share, declared by the
directors of the Company on April 8, 1998, was paid on June 15, 1998,
amounting to $2.0 million. The directors of the Company declared a
regular quarterly dividend of $.35 per share on July 23, 1998, payable
September 15, 1998, to shareholders of record September 1, 1998.
On May 26, 1998, the Board of Directors authorized the repurchase of
an aggregate of 1,266,176 shares of NCH Corporation Common Stock from
the Milton P. Levy, Jr. family. These shares were acquired on May 26,
1998 at $60.89 per share. The closing trading price of NCH Common
Stock on that date was $65.44 per share. In addition, the Company
purchased an additional 284,839 shares on the open market. In these
two transactions, the Company repurchased 1,551,015 shares of NCH
Common Stock for an aggregate price of $93.8 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
----------------
In August 1998, the Company obtained a $50 million unsecured credit
facility from a group of banks which expires in August 2001, and is
available for acquisitions and general corporate purposes. Interest
on the credit facility is generally payable quarterly, at the
Company's option of the Eurodollar rate plus 0.6%, or the lower of
the federal funds rate plus 0.5% or the bank's prime rate. The credit
facility is governed by certain financial covenants, including
minimum tangible net worth and a maximum leverage ratio.
Operating Results
-----------------
First Quarter Comparison - Prior Year
-------------------------------------
Net sales for the first quarter increased to $198.9 million in the
current year as compared with $198.0 million reported in the same
quarter of the last fiscal year. Domestically, net sales in the first
quarter of the current year increased 3% over the first quarter of the
prior year as previously reported. Domestic net sales increased 12%
over the first quarter of the prior year after excluding the results of
two subsidiaries sold during the prior fiscal year. International net
sales decreased 2% as reported in U.S. dollars and were negatively
affected by changes in currency translation rates. International net
sales, when measured on a local currency basis, increased approximately
3% as compared to the first quarter of the prior year.
Operating expenses as a percent of net sales increased in the current
quarter to 93.9% of net sales compared to 93.5% in the first quarter
last year. The increase as a percent of sales is due to higher product
costs, partially offset by decreased marketing and administrative
costs in both the domestic operations and international subsidiaries.
As a result, operating income before other expenses and income taxes
for the quarter ended July 31, 1998, was 6.1% of net sales compared to
6.5% of net sales for the quarter ended July 31, 1997. Operating
income before other expenses and income taxes would have been 6.3% in
the prior year, excluding the results of the two subsidiaries sold in
the prior fiscal year.
In the quarter ended July 31, 1998, net interest expense was $.1
million compared to $.2 million in the same quarter of the prior year.
Revaluation of foreign currencies was a loss of $.4 million in the
first quarter of the current year compared to a loss of $.5 million in
the same period of the prior year.
Provision for income taxes was 43.7% of pre-tax income in the first
quarter of the current year compared to 40.5% of pre-tax income in the
prior year. This increase is due to the reduction of marketable
securities during the quarter, which reduced the amount of tax-exempt
interest income, and is also due to variations in individual country
income levels and tax rates in the international subsidiaries. Net
income for the quarter ended July 31, 1998, was 3.3% of net sales
compared to 3.6% of net sales in the quarter ended July 31, 1997.
First Quarter Comparison - Preceding Quarter
--------------------------------------------
Net sales of $198.9 million for the first quarter of fiscal 1999
were 1% higher than the $196.8 million net sales reported in the
fourth quarter of fiscal 1998. International net sales were 5% higher
when measured in U.S. dollars and 2% higher when measured on a local
currency basis, as a result of normal quarter-to-quarter sales
fluctuations. Domestic net sales were 2% lower than the fourth
quarter of the prior year as previously reported. Domestic net sales
increased 5% over the fourth quarter of the prior year after excluding
the results of two subsidiaries sold during the fourth quarter of the
prior fiscal year.
Operating expenses as a percent of net sales were 93.9% in the
current quarter compared to 93.8% in the fourth quarter of the last
fiscal year. Operating expenses decreased as a percent of sales due
to lower product costs and lower administrative costs in the Company's
international subsidiaries, and lower marketing costs in both the
domestic operations and international subsidiaries. As a result,
operating income before other expenses and income taxes for the quarter
ended July 31, 1998, was 6.1% of net sales compared to 6.2% of net
sales for the quarter ended April 30, 1998. Operating income before
other expenses and income taxes would have been 5.8% in the quarter
ended April 30, 1998, excluding the results of the two subsidiaries
sold during the quarter ended April 30, 1998.
Net interest expense in the three months ended July 31, 1998,
amounted to $.1 million compared to net interest expense of $.0 million
in the three months ended April 30, 1998. The revaluation of foreign
currencies resulted in a loss of $.4 million in the first quarter of
the current year compared to a loss of $.7 million in the fourth
quarter of the prior year.
During the fourth quarter of the prior year, the Company sold two
subsidiaries, resulting in a gain of $11.0 million before taxes
($7.1 million after taxes). Sales for these two subsidiaries were
less than 5% of the Company's consolidated annual sales, and therefore
this transaction has not had a material impact on the Company's
current operations.
Provision for income taxes in the quarter ended July 31, 1998,
amounted to 43.7% of pre-tax income compared to 39.4% of pre-tax income
in the quarter ended April 30, 1998. This increase is due to the
reduction of marketable securities during the current quarter, which
reduced the amount of tax-exempt interest income, and is also due to
the impact of variations in individual country income levels and tax
rates on combined international results. Net income for the quarter
ended July 31, 1998, was 3.3% of net sales compared to 6.9% of net
sales in the quarter ended April 30, 1998.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K -- The Company filed Form 8-K on June 3,
1998 announcing that its board of directors authorized the repurchase
of an aggregate of 1,266,176 shares of NCH Common Stock from Milton P.
Levy, Jr., certain members of his family, including his children, their
spouses and his grandchildren, and trusts for the benefit of his family
members.
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 September 14, 1998 /s/ Tom Hetzer
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Tom Hetzer
Vice President - Finance
(Principal Accounting Officer)