10-Q 1 tenq1001.txt 10Q FOR SIX MONTHS ENDING 10-31-01 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal Quarter ended October 31, 2001 Commission file number 1-5838 NCH CORPORATION (Exact name of registrant as specified in its charter) Delaware 75-0457200 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) P.O. Box 152170 2727 Chemsearch Boulevard Irving, Texas 75015 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 438-0211 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 _ Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Total Shares Outstanding Class at December 14, 2001 Common Stock, $1 Par Value 5,307,830 NCH CORPORATION INDEX Page No. Part I. Financial Information: Consolidated Balance Sheets - October 31, 2001 and April 30, 2001 3 Consolidated Statements of Income - Three Months Ended and Six Months Ended October 31, 2001 and 2000 4 Consolidated Statements of Cash Flows - Six Months Ended October 31, 2001 and 2000 5 Notes to Consolidated Financial Statements 6-11 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 -22 Part II. Other Information 23

NCH CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly NCH Corporation's financial position as of October 31, 2001, the results of its operations for the three and six months ended October 31, 2001 and 2000, and cash flows for the six months then ended. The accounting policies followed by NCH Corporation (the Company) are set forth in Note 1 to the Company's consolidated financial statements in the 2001 NCH Corporation Annual Report to Shareholders, which is included in Part II of Form 10-K. The results of operations for the three and six month periods ended October 31, 2001, are not necessarily indicative of the results to be expected for the full year. 2. Discontinued Operations In the third quarter of fiscal year 2001, the Company closed the DBS Services Group due to the weakness in the direct broadcast satellite equipment market and to increased competition. Operations for this segment ceased in January 2001. The remaining net assets consisted of receivables, inventory, fixed assets and accrued closing costs. The assets were written down to their estimated net realizable values, and expenses were estimated and accrued through the estimated closing date.

3. Inventories Inventories consisted of the following (in thousands of dollars): October 31, April 30, 2001 2001 -------------- ------------ Raw Materials $ 14,520 $ 14,561 Finished Goods 65,678 66,634 Sales Supplies 1,260 1,275 -------------- ------------ $ 81,458 $ 82,470 ============== ============ 4. Earnings Per Share 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 potential common stock equivalents and are considered in the diluted earnings per share calculations if dilutive. For the three month periods ending October 31, 2001 and 2000, options totaling 325,681 and 401,402, respectively, were excluded as their effect would have been anitdilutive. For the six month period ending October 31, 2001 and 2000, options totaling 209, 531 and 401, 402, respectively, were excluded as their effect would have been antidilutive. 5. Comprehensive Income The components of comprehensive income, net of related tax, for the three-month and six-month periods ended October 31, 2001 and 2000 are as follows (in thousands):

The components of accumulated other comprehensive loss, net of related tax, at October 31, 2001 and April 30, 2001, are as follows (in thousands): October 31, April 30, 2001 2001 ----------- ----------- Unrealized gain (loss) on; Available-for-sale securities $ 809 $ 806 Foreign currency translation adjustment (50,083) (49,506) ----------- ----------- Accumulated other comprehensive loss $(49,274) $(48,700) =========== =========== 6. Segment Information The Company's segments are based on the organization structure that is used by management for making operating and investment decisions and for assessing performance. Based on this management approach, the Company currently has four segments: Chemical Specialties Group, Plumbing Products Group, Partsmaster Group, and Landmark Direct. The Company evaluates the performance of its segments primarily based on operating profit. All intercompany transactions have been eliminated, and intersegment revenues are not significant. In calculating operating profit for individual segments, administrative expenses incurred at the Company' corporate headquarters that are common to more than one segment are allocated on a usage basis. The segments were realigned during fiscal 2001 to reflect changes in the Company's decision making structure, leaving only N-E Thing Supply in Other Products Line. N-E Thing Supply was sold September 30, 2000. Information for the three and six month periods ended October 31, 2000. The following tables present a summary of the Company's segments for the three-month and six-month periods ended October 31, 2001 and 2000 (in thousands):

7. Supplemental Cash Flow Information Cash payments for interest for the six months ended October 31, 2001 and 2000 were approximately $1,563,000 and $1,490,000, respectively. Cash payments for income taxes were approximately $7,961,000 and $7,340,000 for the same periods, respectively. 8. Legal and Environmental Matters The Company and its subsidiaries are engaged in a variety of legal proceedings arising in the ordinary course of business. In the opinion of Management, the ultimate liabilities resulting from these proceedings will not have a material adverse effect on the Company's financial position or operating results. The Company's operations are subject to comprehensive laws and regulations relating to the management of hazardous substances and wastes and to the remediation of contaminated sites. The Company regularly incurs costs to comply with these laws and regulations. The amount of these costs varies each year and could be substantial in any future year. The Company believes that it is in substantial compliance with all material environmental laws and regulations. Certain environmental laws, such as the federal Superfund law, can impose liability for the entire cost of site remediation upon each of the current or former owners or operators of a site or parties who arranged for disposal of hazardous substances at a site where such substances were released into the environment. This liability can attach regardless of fault or lawfulness of the original activity. Generally, where there are a number of potentially responsible parties ("PRPs") that are financially viable, liability has been apportioned between the PRPs based on equitable factors such as the type and amount of waste attributable to each party at the site, although no assurance can be given as to how liability will be assigned on any particular site. The Company is one of three named parties in a civil lawsuit filed on November 20, 1998 in the U.S. District Court, District of New Jersey, by the U.S. Department of Justice on behalf of the U.S. Environmental Protection Agency seeking reimbursement of approximately $21 million of past costs plus future costs associated with the cleanup of a Superfund site in New Jersey. Although named as a PRP, the Company contends that it did not arrange for the disposal of any materials at this site and intends to vigorously defend this lawsuit. The Company and other defendants, as third party plaintiffs, have sued approximately 20 additional companies and individuals for contribution in this case. At this time, it is too early to determine the likelihood of an adverse result or to quantify the Company's likely exposure, if any. NCH CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources In the six months ended October 31, 2001, working capital was $227.7 million compared to $223.4 million at April 30, 2001, and the current ratio was 4.1 to 1 at October 31, 2001, compared to 3.7 to 1 at April 30, 2001. The total of cash, cash equivalents and marketable securities decreased by $9.7 million in the first six months to $78.8 million at October 31, 2001, as shown on the Consolidated Balance Sheets. Net cash flows from operating activities of continuing operations totaled a negative $2.6 million. This was primarily due to payments of an environmental insurance policy liability of $11.2 million. Management expects that operating cash flows will 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 August 31, 2001, compared to February 28, 2001. This is reflected in the foreign currency translation component of accumulated other comprehensive loss, which changed from a $49.5 million reduction of stockholders' equity at April 30, 2001 to a $50.1 million reduction of stockholders' equity at October 31, 2001. Accounts receivable increased $4.3 million in the six months ended October 31, 2001, as measured in U.S. dollars and reported on the Consolidated Balance Sheets. This increase is due to an increase in sales in the domestic operations in the second quarter as compared to the fourth fiscal quarter last year. Accounts payable, accrued expenses and income taxes payable were similarly affected by currency translation. These liabilities increased by $5.6 million when measured exclusive of the effect of exchange rate changes and the payments of an environmental insurance policy, but increased by $5.2 million as reported on the Consolidated Balance Sheets. Net expenditures for property, plant and equipment amounted to $4.3 million for the six months ended October 31, 2001, and consisted of the installation and purchase of computer systems and normal additions of operating equipment. Total indebtedness, comprised of long-term debt, current maturities of long-term debt and notes payable, decreased $10.6 million primarily due to payments of an environmental insurance policy of $11.2 million, which change is shown as a decrease of accrued expenses payable in the Consolidated Statements of Cash Flow. A regular quarterly dividend of $.35 per share was declared by the directors of the Company on October 29, 2001, payable December 14, 2001 to shareholders of record as of November 30, 2001. Cash dividends paid during the first six months of the fiscal year amounted to $3.7 million. Euro Conversion On January 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their existing currencies ("legacy currencies") and one common currency - the Euro. The Euro is now trading on currency exchanges and can be used in business transactions. Beginning in January 2002, new Euro-denominated bills and coins will be issued, and legacy currencies will be withdrawn from circulation. The Company's operating subsidiaries affected by the Euro conversion have developed plans to address the systems and business issues affected by the Euro currency conversion. The issues include, among others, the need to adapt computer and other business systems and equipment to accommodate euro-denominated transactions. The Company does not expect this conversion to have a material impact on its financial condition or results of operations. Operating Results Second Quarter Comparison - Prior Year Net Sales ------------------------------- Three Months Ended ------------------------------- October 31, October 31, 2001 2000 ----------- ----------- Chemical Specialties Group $ 106.9 $ 105.8 Plumbing Products Group 28.7 29.4 Partsmaster Group 17.7 19.2 Landmark Direct 15.8 13.7 Other - 5.7 ----------- ----------- $ 169.1 $ 173.7 =========== =========== Net Sales decreased 3% to $169.1 million from $173.7 million in the same quarter last year. Sales from international operations decreased 4% as reported in U.S. dollars, but increased 3% when measured on a local currency basis. Domestically, net sales decreased 2% in the second quarter compared to the same quarter last year. Included in prior year's figures, however, are sales from one business unit and three product lines that were sold during fiscal year 2001 which were not accounted for as a separate segment in the prior year's financial statements. Domestic sales increased 6% when these sales are excluded from prior year for comparative purposes. Net sales for the Partsmaster Group in the first quarter were 8% below the same period last year with sales being below last year in both domestic and international operations. Net sales for the Landmark Group were 16% higher than the same quarter last year, but included in Net sales last year were sales from three product lines that were sold in the fourth fiscal quarter last year. Adjusting last year's reported sales for comparative purposes, net sales for the Landmark Group were 38% higher. Increase in sales were primarily due to higher sales to schools at lower margins. Operating Income ($000) ------------------------------- Three Months Ended ------------------------------- October 31, October 31, 2001 2000 ----------- ----------- Chemical Specialties Group $ 8,672 $ 11,239 Plumbing Products Group 47 1,458 Partsmaster Group 1,702 2,058 Landmark Direct (816) 657 Other - (334) Corporate Expenses (1,456) (518) ----------- ----------- $ 8,149 $ 14,560 =========== =========== Operating income decreased 44% from $14.6 million in the second quarter last year to $8.1 million in the second quarter this year. In the second quarter, operating margins decreased to 4.8% from 8.4% in the same quarter last year. Operating income decreased in each of the four segments. In the Chemical Specialties segment, the drop in operating income was in the international operations. Operating income for the domestic operations remained flat with the same quarter last year. Except in the newer Eastern European operations, operating income dropped in all of the international areas. In general, higher operating expenses combined with flat sales contributed to lower margins in most international operations. Operating income decreased in the Plumbing Products Group due to lower sales, higher costs related to redesigning the packaging and replacing packaged merchandise in the major home repair centers, and lower profits from sales related to new home construction. In the Partsmaster Group, even though sales decreased, the operating margin increased from 9.3% in the second quarter last fiscal year to 9.6% in the same quarter this year. Also, a portion of the decrease in operating income as stated in U.S. dollars is from currency translation. Approximately 40% of sales from the Partsmaster Group come from international operations. Even though sales increased in Landmark Direct, profits deteriorated into a loss of $816,000 in the second quarter compared to an operating income of $657,000 in the same quarter last year. The major factor in the loss for the quarter was the low margin on sales to schools. Cost of material was approximately 7 percentage points higher than in the same period last year. Also, the sale of product lines from this segment in February 2001 is negatively affecting operating income. Unallocated Corporate Expenses includes adjustments to the surrender value of life insurance contracts covering certain employees. These adjustments include a charge to operations of $1.0 million in the second quarter of this year compared to a nominal change in the same period of the prior year. The loss from discontinued operations, net of income taxes in the second quarter last year was from the closing of Resource Satellite, Inc. which was previously reported as a segment. Second Quarter Comparison - Preceding Quarter Net Sales from Continuing Operations were $169.1 million in the second quarter compared to $169.0 million in the first quarter. There were no significant changes in the sales level of the four segments in the second quarter compared to the first quarter. Net Sales Three Months Ended ------------------------------- October 31, July 31, 2001 2001 ----------- ----------- Chemical Specialties Group $ 106.9 $ 109.4 Plumbing Products Group 28.7 29.0 Partsmaster Group 17.7 18.8 Landmark Direct 15.8 11.8 ----------- ----------- $ 169.1 $ 169.0 =========== =========== Operating Income, before corporate expenses, for the segments is shown in the schedule below: Operating Income ($000) Three Months Ended ------------------------------- October 31, July 31, 2001 2001 ----------- ----------- Chemical Specialties Group $ 8,672 $ 7,698 Plumbing Products Group 47 686 Partsmaster Group 1,702 1,524 Landmark Direct (816) (622) ------------ ------------ $ 9,605 $ 9,286 =========== =========== Even though sales in the Chemical Specialties segment were overall 2% less in the second quarter compared to the first quarter, operating income was approximately $1 million more. The increase in operating income was in the domestic operations, with operating income increasing due to net sales being 6% greater in the second quarter compared to the first quarter. Operating income was relatively flat between the two quarters in the international chemical operation. The decrease in operating income in the Plumbing Products Group from the first quarter was primarily due to increased costs associated with major home repair centers. Landmark Direct had an operating loss of $816,000 in the second quarter compared to $622,000 in the first quarter. Seasonal sales to schools, which are sold at a lower margin, contributed to this increased loss. Six Months Comparison - Prior Year Net Sales from Continuing Operations were $338.1 million for the six months ended October 31, 2001, compared to $354.4 million in the first six months of last fiscal year as follows: Net Sales ------------------------------- Six Months Ended ------------------------------- October 31, October 31, 2001 2000 ----------- ----------- Chemical Specialties Group $ 216.3 $ 216.1 Plumbing Products Group 57.7 58.2 Partsmaster Group 36.4 39.1 Landmark Direct 27.7 26.3 Other - 14.7 ----------- ----------- $ 338.1 $ 354.4 =========== =========== Comparing sales of just the four active segments, sales were $338.1 million in the six months this year compared to $339.7 million in the same period last year. In the Chemical Specialties group, domestic sales were 5% higher in the current six months and international sales were 5% lower. The decrease in the international sales level was primarily due to the effect of the strong U.S. dollar on the currency translation. In the remaining segments, sales were relatively the same as in the six month period last year. Operating income for the four segments was significantly lower in the six months this year compared to the same period last year as shown below: Operating Income ($000) ------------------------------- Six Months Ended ------------------------------- October 31, October 31, 2001 2000 ----------- ----------- Chemical Specialties Group $ 16,370 $ 20,752 Plumbing Products Group 733 3,906 Partsmaster Group 3,226 3,779 Landmark Direct (1,438) 568 ------------ ------------ $ 18,891 $ 29,005 =========== =========== In the Chemical Specialties Group, operating income for the domestic operation was up in the six months over the same period last year due to higher sales volume and cost control efforts. In the international operation, flat sales combined with higher operating costs, principally marketing costs, were responsible for a decrease in operating income. In the Plumbing Products Group significant expenses were incurred in the six months this year in redesigning the packaging and replacing packaged merchandise in major home repair centers. The decrease in operating income in the Partsmaster Group is primarily due to the decrease in sales compared to the same period last year. Landmark Direct had an operating loss of $1.4 million in the six months this fiscal year compared to operating income of $.6 million in the same period last year. This was caused by competitive pressures on selling price, lower margins in sales to schools, sale of three product lines in January 2001, and the cost of material, which was approximately 9 percentage points higher in the six months this year versus the same period last year. Unallocated Corporate Expenses includes adjustments to the surrender value of life insurance contracts covering certain employees. These adjustments include a charge to operations of $1.1 million in the current six months compared to a nominal change in the same period of the prior year. Provision for Income Taxes was 27.3% of Income from Continuing Operations compared to 39.6% in the six months last year. This reduction is primarily due to a tax deduction from the disposition of a foreign subsidiary during the first quarter. There is a nominal book gain from the disposition. Deferred taxes were not previously provided because management had not made the decision to dispose of this investment. Net sales for this subsidiary have been approximately $1 million a year with small operating losses. Pending Buy-Out Proposal On October 1, 2001, the Board of Directors of the Company announced that the Company received a buy-out proposal at $47.50 per share from Irvin Levy, the Company's President and Chairman, and his brother Lester Levy on behalf of certain members of the Levy family, who currently own 57.5% of the shares of the Company's stock. The Board of Directors has appointed a committee of independent directors to consider the proposal. Forward-Looking Information Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report contain forward-looking statements that are based on current expectations, estimates and assumptions regarding the worldwide economy, technological innovation, competitive activity, interest rates, pricing, and currency movements. These statements are not guarantees of future results or events, and involve certain risk and uncertainties which are difficult to predict and many of which are beyond the control of the Company. Actual results and events could differ materially from those anticipated by the forward-looking statements. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (b) Reports on Form 8-K -- A report on Form 8-K was filed on October 1, 2001. 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 ----------------------------------- (Registrant) Date: December 14, 2001 /s/ Tom Hetzer ----------------------------------- Tom Hetzer Vice President - Finance (Principal Accounting Officer) December 14, 2001 Securities and Exchange Commission 450 5th Street, N.W. Judiciary Plaza Washington, D.C. 20549 RE: NCH Corporation Commission File Number 1-5838 Form 10-Q for Fiscal Quarter Ended October 31, 2001 Ladies and Gentlemen: Pursuant to the requirements of the Securities Exchange Act of 1934, we are transmitting herewith the attached Form 10-Q for filing by electronic transmission pursuant to the Commission's EDGAR program. Sincerely, /s/ Tom Hetzer Tom Hetzer Vice President - Finance

NCH CORP 10-Q