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 708-305-1000. As used in this report, "Company" and "Nalco" refer to Nalco Chemical Company and its consolidated subsidiaries.
Nalco is engaged primarily in the manufacture and sale of highly specialized Service Chemicals. Specified financial information for Service Chemicals by geographic area is shown in Note 2 of the Notes to Consolidated Financial Statements in the Company's 1993 Annual Report to Shareholders and is incorporated herein by reference.
Nalco's business includes the production and sale of chemicals, technology, services, and systems (monitoring and surveillance) used in water treatment, pollution control, energy conservation, oil production and refining, steelmaking, papermaking, mining and mineral processing, electricity generation, other industrial processes, and commercial building utility systems. Service Chemicals are developed and formulated to meet specific customer needs. In general, they are part of value added programs designed to help customers maintain a high level of operating performance and efficiency in their facilities or to improve the quality of customers' end products. 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; improved combustion; separation of liquids and solids; control of dust; improvement of crude oil production through emulsion breaking and the secondary and tertiary recovery of oil; lubrication and corrosion protection in rolling, drawing and forming of metals; improved production of pulp and qualities of paper; recovery of minerals; superabsorbent polymers for disposable diapers; 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 also important considerations to customers since 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 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 utility side (e.g., boilers for power generation or cooling systems for process temperature control). 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 May 1993, Nalco sold Adco Products, Inc., a subsidiary which manufactured specialty sealants and adhesives for automotive, industrial, and construction markets. The results of Adco Products, Inc. were reported as discontinued operations in 1991, along with the results of Day-Glo Color Corp. and the Penray Companies. Day-Glo Color Corp. and the Penray Companies were sold in October 1991 and June 1992, respectively. On February 3, 1994, Nalco and Exxon Chemical Company, a division of Exxon Corporation, announced that they had signed a memorandum of understanding to form a worldwide energy chemicals joint venture. The joint venture will include Nalco's U.S. Petroleum Chemicals Division business units, certain petroleum chemical product lines of its international operations, and Exxon Chemical Company's Energy Chemicals worldwide business. The new company, to be named Nalco/Exxon Energy Chemicals, is
ITEM 1. BUSINESS (CONT'D)
targeted to start up and begin operations by mid-1994, pending government and regulatory approvals and definitive agreements between the two companies. On that same date, the Company announced that it had entered into a letter of intent to sell its Freeport, Texas plant and its automotive paint spray booth business to PPG Industries, Inc. The Freeport plant, which has 27 Nalco employees, produces chemical products for the oil production and refining market. It is expected that the Nalco/Exxon Energy Chemicals joint venture will purchase certain of its requirements for these products from PPG. Nalco's worldwide automotive paint spray booth business, approximately $10 million in size, is also included in the proposed sale to PPG. Nalco has agreed to sell and service the water treatment related applications for PPG in the automotive facilities associated with the business sold. There were no other significant changes in the markets served or in the methods of distribution since the beginning of 1993.
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
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 700 patents existed at the end of 1993 with remaining durations ranging from less than one year to 17 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 analyses of samples. Research and development expenses of continuing operations amounted to $50.4 million in 1993, compared to $48.0 million in 1992, and $45.9 million in 1991.
There were approximately 6,800 persons employed full time by Nalco at the end of 1993.
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 1994. 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
ITEM 1. BUSINESS (CONT'D)
productivity and thereby minimize the effect of rising costs. In addition, the last-in, first-out (LIFO) valuation method is used for 59 percent of the Company's inventories, which ensures that changing material costs are recognized in reported income; more importantly, these costs are recognized in 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 the local inflation rate. 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.
W. H. Clark has been Chief Executive Officer of the Company since 1982 and Chairman of the Board since 1984. He also served as President from 1982 to 1990.
E. J. Mooney has been Chief Operating Officer since 1992 and President of the Company since 1990. He had been an Executive Vice President since 1988.
M. B. Harp has been Executive Vice President, International Operations since January 1993. He had been a Group Vice President since 1988.
W. S. Weeber has been Executive Vice President, Operations Staff since January 1993. He had been a Group Vice President since 1986.
P. Dabringhausen has been Group Vice President and President, Process Chemicals Division since January 1993. He had been a Vice President since 1991, and was President, Nalco Pacific from 1989 to 1992 and an International Division Vice President, Marketing from 1987 to 1989.
S. D. Newlin was elected Group Vice President, President, Nalco Europe on March 1, 1994. He had been Vice President, President, Nalco Pacific since December 1992. From January 1992 to December 1992 he was General Manager, Pulp and Paper Chemicals Group; from 1990 to 1992 he was General Manager of UNISOLV(R); and from 1987 to 1990 he was General Manager, WATERGY(R).
J. D. Tinsley has been Group Vice President and President, Water and Waste Treatment Division since January 1993. From March to December 1992, he was a Group Vice President and President, Process Chemicals Division, and from 1986 to 1992 he was Vice President, Corporate Development.
W. E. Buchholz has been Vice President and Chief Financial Officer since January 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 the inside back cover of the Company's 1993 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 16 domestic and 27 foreign locations. Primary domestic manufacturing plants are located in:
(East & West (East facilities) facility)
Other domestic manufacturing and/or warehouse facilities are located in: Kenai, Alaska; Bakersfield, California; Hobbs, New Mexico; Oklahoma City, Oklahoma; Odessa, Texas; Clarksburg, West Virginia; Vancouver, Washington; and Evansville, Wyoming.
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 dual energy system (steam and electricity) serves both the Corporate and Technical Centers and has 31,000 square feet of space.
Primary domestic research facilities are located in Naperville, Illinois and Sugar Land, Texas. The Naperville Technical Center is adjacent to the Corporate Center and houses process simulation areas and a technical library in buildings which total 235,000 square feet. The Sugar Land West facility has process simulation areas and a technical library. Total building area at this facility is about 202,000 square feet.
Primary foreign manufacturing plants, which also generally include laboratory and office facilities, are located in:
Other foreign facilities are located in: Perth, Australia; Buenos Aires, Argentina; Edmonton, Canada; Santiago, Chile; Quito, Ecuador; Maurepas, France; Bogor, Indonesia; Kashima, Japan; Auckland, New Zealand; Calamba, Laguna, Philippines; Dammam, Saudi Arabia; Jurong Town, Singapore; Hsin Chu Hsien, Taiwan; and Maracaibo, Venezuela.
ITEM 2. PROPERTIES (CONT'D)
In 1992, the Company acquired 12 acres of land in Oegstgeest, The Netherlands, for the purpose of constructing a business and technical center to serve Nalco customers throughout Europe. Construction of this 88,000 square- foot facility is in process, and it is scheduled for completion in 1994.
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, Ecuador 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.
Capital expenditures for 1994 should remain near the $117.8 million spent in 1993, if planned sales and earnings for 1994 are reached.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
For information on this item, please refer to Note 15 of the Notes to Consolidated Financial Statements in the Company's 1993 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, 1993 was 6,111. Dividends and Common Stock market prices included in the Quarterly Summary in the Company's 1993 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 1993 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 sections titled "Management's Discussion and Analysis--Results of Operations" and "Management's Discussion and Analysis--Financial Condition" in the Company's 1993 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 1993 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 1993 Annual Report to Shareholders, are incorporated herein by reference. The Reports of Independent Auditors, which were included in the Company's 1992 and 1991 Annual Reports to Shareholders, are incorporated herein by reference from the Registrant's Form 10-K for the years ended 1992 and 1991.
The Quarterly Summary in the Company's 1993 Annual Report to Shareholders is incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
The information called for hereunder has been previously reported (as defined in Rule 12b-2 under the Securities and Exchange Act of 1934) in the Registrant's Form 8-K dated February 16, 1993 and Form 8 dated April 14, 1993.
PART III
ITEM 10.


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Item 10 information is set forth in Part I, Item 1, page 3 and also in the Company's Proxy Statement dated March 18, 1994, under Election of Directors through Election of Directors--Meetings 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, 1994, 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, 1994, 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 1993 Annual Report to Shareholders are incorporated herein by reference in Item 8:
The Reports of Independent Auditors, which were included in the Company's 1992 and 1991 Annual Reports to Shareholders, are incorporated herein by reference from the Registrant's Form 10-K for the years ended 1992 and 1991.
(2) The following consolidated financial statement schedules for the years 1993, 1992 and 1991 are submitted herewith:
Report of Independent Accountants on Financial Statement Schedules
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONT'D) 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
(b) Reports on Form 8-K filed in the fourth quarter of 1993 are: None - -------- /1/Incorporated herein by reference from the Registrant's Form 10-K for the year ended 1986. /2/Incorporated herein by reference from the Registrant's Form 10-K for the year ended 1987. /3/Incorporated herein by reference from the Registrant's Form 8-K dated July 24, 1986. /4/Incorporated herein by reference from the Registrant's Form 8-K dated May 15, 1989. /5/Incorporated herein by reference from the Registrant's Form 10-K for the year ended 1989. /6/Incorporated herein by reference from the Registrant's Form 10-K for the year ended 1990. /7/Incorporated herein by reference from the Registrant's Form 10-Q for the quarter ended September 30, 1992. /8/Incorporated herein by reference from the Registrant's Form 10-K for the year ended 1991. /9/Incorporated herein by reference from the Registrant's March 16, 1992 Proxy Statement. /1//0/Incorporated herein by reference from the Registrant's Form 10-K for the year ended 1992. /1//1/Incorporated herein by reference from the Registrant's Notice of Annual Meeting and Proxy Statement dated March 18, 1994.
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
W. H. Clark By___________________________________ W. H. Clark Chairman and Chief Executive Officer
Date: March 25, 1994
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW ON MARCH 25, 1994 BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Nalco Chemical Company
Our audit of the consolidated financial statements referred to in our report dated January 25, 1994, except as to Note 17, which is as of February 3, 1994, appearing on page 16 of the 1993 Annual Report 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 Schedules listed in Item 14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PRICE WATERHOUSE
Chicago, Illinois January 25, 1994
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
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SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
- -------- Note A--Additions represent expansion of production, distribution, laboratory and other facilities. The more significant 1993 expenditures are described on page 20 of the 1993 Annual Report to Shareholders. Note B--Mainly the retirement of transportation equipment. Note C--Mainly the sale of Day-Glo Color Corp. Note D--Mainly the sale of Day-Glo Color Corp. and the retirement of transportation equipment. Note E--Foreign currency translation adjustments. Note F--December 1992 net change; the fiscal year end of the consolidated foreign subsidiaries was changed from November 30 to December 31. Note G--Reclassification of additions of Adco Products, Inc. and the Penray Companies to Net Assets of Discontinued Operations. Note H--Acquisition of Alchem, Inc., Catoleum (Pty.) Ltd., and Nalfloc Limited. Note I--Reclassification of assets of Adco Products, Inc. and the Penray Companies to Net Assets of Discontinued Operations.
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
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SCHEDULE VI--ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
- -------- Note A--Foreign currency translation adjustments. Note B--December 1992 net change; the fiscal year end of the consolidated foreign subsidiaries was changed from November 30 to December 31. Note C--Acquisition of Alchem, Inc., Catoleum (Pty.) Ltd., and Nalfloc Limited. Note D--Reclassification of assets of Adco Products, Inc. and the Penray Companies to Net Assets of Discontinued Operations.
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
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SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
- -------- Note A--Excess of accounts written off over recoveries. Note B--U.S. Subsidiaries' allowance for doubtful accounts reclassified to Net Assets of Discontinued Operations. Note C--Allowance for doubtful accounts of Alchem, Inc., Catoleum (Pty) Ltd., and Nalfloc Limited at date of acquisition.
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
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SCHEDULE IX--SHORT-TERM BORROWINGS
- -------- Note A--Substantially all short-term borrowings at year end were payable to banks under lines of credit arrangements with no termination date and include bank overdrafts and short-term notes payable used by foreign subsidiaries for working capital requirements, and the current portion of long-term debt. Note B--Excludes amounts classified as noncurrent. Note C--The unusually large weighted average interest rate is the result of local borrowings by the Registrant's subsidiary in Brazil, a hyperinflationary country. Excluding Brazil, the weighted average interest rate is 8.5%, 20.1%, and 16.5% for 1993, 1992, and 1991, respectively. Note D--Average borrowings were determined based on the amounts outstanding at each month-end for foreign borrowings and the current portion of long- term debt and daily or monthly amounts outstanding during the year under domestic lines of credit. Note E--The weighted average interest rate during the year was computed by dividing actual interest expense in each year by average short-term borrowings outstanding during the year. Note F--The unusually large weighted average interest rate during the year is the result of local borrowings by the Registrant's subsidiary in Brazil, a hyperinflationary country. Excluding Brazil, the weighted average interest rate during the year was 8.5%, 17.1%, and 17.2% for 1993, 1992, and 1991, respectively.
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
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SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION
- -------- Note--Amounts for amortization of intangible assets, royalties, taxes (other than payroll and income taxes) and advertising costs have been omitted, as such amounts are less than 1% of total sales and revenues.