Item 1. Business
NCH Corporation, a Delaware corporation, and its subsidiaries (herein collectively referred to as the "Company" or "NCH" unless the context requires differently) markets an extensive line of maintenance, repair and supply products to customers throughout the world. NCH products include chemical specialties, fasteners, welding alloys, plumbing parts and direct broadcast satellite equipment. These products are marketed principally through the Company's own sales force. Since the Resource Electronics segment was sold during the current year, electronic components are no longer included in the Company's product offerings. There have been no other significant changes in the kind of products produced or marketed by the Company since the beginning of the last fiscal year, although individual products are continually added to and deleted from the product line. Sales are generally consistent throughout the year, with no significant seasonal fluctuations.
Competitive conditions in the industry involved are severe and the Company believes that no one enterprise or group of enterprises has a dominant or preeminent position in the market. Further, the Company believes that no enterprise has a significant percentage of the market. No informative statement can be made as to the Company's rank in its industry. Not only do other concerns compete in the broad general range of maintenance, repair or supply products, but there are also many competitors who produce one or more products which compete with specific products sold by the Company. Competition in the industry is primarily on the basis of price, service and product performance. The Company's main emphasis is on service and product performance rather than price. Sales of Company products are not dependent upon a limited number of customers, and no particular customer accounts for more than 5% of net sales. However, in the Plumbing Products Group, major home building supply centers account for 30% of that segment's sales. Of the sales to home building supply centers, 63% represents one customer, which results in increased pricing pressure for the plumbing products. Also, the sales for the DBS Services Group are governed by an agreement with a major satellite service provider, and are dependent on the growth of the consumer direct-broadcast satellite market. The service provider can cancel its agreement with the DBS Services Group at any time, with 90 days notice. However, the Company has not received any indication that this agreement would be canceled in the near future.
Qualified sales representatives are crucial to the Company's operations. In addition to industry competition, the Company competes with the entire business community for qualified sales representatives. This competition has been, and remains, severe. The Company has a required formal training program for its sales representatives consisting of in-house and field training. Based on the Company's experience in the last three years, turnover of new sales representatives in the first year is estimated to be 80%. The annual cost of recruiting and training sales representatives over the past three years has averaged approximately $36 million per year.
Patents, franchises and concessions have not played an important role in the Company's business. Trademarks are extensively used on products, and are useful but not of paramount importance.
As of the end of its last fiscal year the Company employed 9,330 persons. The Company employs 66 professional or technical persons on its laboratory staff ranging from Ph.D's to nongraduate chemical technicians. Although the laboratory staff spends time on research activities relating to the development of new products or services and the improvement of existing products or services, the staff is also engaged in quality control and customer service activities. Costs cannot be broken down between these various activities. The approximate amounts spent on laboratory operations in the years ended April 30, 2000, 1999 and 1998, were $5.1 million, $5.3 million and $5.5 million, respectively. All laboratory costs, including research and development, are expensed as incurred.
Incorporated herein by reference is the footnote entitled "Segment and Geographic Information" of the Consolidated Financial Statements in the NCH Corporation Annual Report for the year ended April 30, 2000 (2000 Annual Report), filed as an exhibit to this report. NCH has six segments: Chemical Specialties, Plumbmaster Group, Partsmaster Group, Landmark Direct, DBS Services Group, and Other Product Lines.
International sales, primarily for Chemical Specialties and Partsmaster Group, are conducted through subsidiaries in Europe, Canada, Latin America, Australia and the Far East. In the Company's experience, other than currency fluctuations, the overall risk of international operations has not been appreciably higher than domestic operations, although the risk of operations in any one country may be greater than in the United States. The Company is subject to the risks inherent in operating in foreign countries, including government regulation, currency restrictions and other restraints, risk of expropriation and burdensome taxes.
The products that the Company markets in each of its segments are readily available from numerous sources. The Company buys raw materials and finished products from a large number of suppliers, none of whom would materially impact the consolidated sales or earnings of the Company should they cease to be a source of supply. In some foreign countries, licensees manufacture specialty chemical products for marketing by the Company's subsidiaries.
In each of its operating segments, the Company is subject to various federal, state and local laws and regulations affecting businesses in general, including environmental laws and regulations. All laws and regulations are subject to change and the Company cannot predict what effect, if any, changes might have on its business.
Item 2.
Item 2. Properties
The Company owns its world headquarters and domestic administrative center complex in Irving, Texas, containing approximately 319,000 square feet.
The Company owns and operates 19 manufacturing facilities in 7 states and 11 foreign countries, located in Canada, Europe, Latin America and the Far East, containing approximately 1,118,000 square feet. These facilities also include related office and warehouse space.
The Company owns and occupies a total of 17 office or office/warehouse combinations in 3 states and 6 foreign countries, located in Europe and Latin America, containing approximately 748,000 square feet.
In addition, the Company leases additional warehouse space, manufacturing plants, and office space at various locations in the United States and abroad, none of which is material in relation to the Company's overall assets.
The Company also owns seven parcels of undeveloped land in 5 states.
During the last fiscal year the Company made investments, net of dispositions, of $7,702,000 ($8,807,000 gross) in property, plant and equipment.
The plants and properties owned and operated by the Company are maintained in good condition and are believed to be suitable and adequate for the next several years.
Item 3.
Item 3. Legal Proceedings
Contingent Liabilities and Environmental Matters, appearing on page 35 of the 2000 Annual Report, is incorporated by reference herein.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
Executive Officers of the Registrant
The following are the executive officers of the Company as of June 1, 2000:
Name Office Age - ---- ------ ---
Lester A. Levy Chairman of the Board; Director 77
Milton P. Levy, Jr. Chairman of the Executive Committee; Director 74
Irvin L. Levy President; Director 71
John I. Levy Executive Vice President 38
Lester A. Levy, Jr. Executive Vice President 39
Robert M. Levy Executive Vice President 41
Walter M. Levy Executive Vice President 44
Joe Cleveland Vice President and Secretary 66
Tom Hetzer Vice President - Finance 63
Glen Scivally Vice President and Treasurer 59
Messrs. Lester A. Levy, Milton P. Levy, Jr. and Irvin L. Levy are brothers. Messrs. Walter M. Levy and Lester A. Levy, Jr. are sons of Lester A. Levy. Messrs. Robert M. Levy and John I. Levy are sons of Irvin L. Levy. Messrs. Lester A. Levy, Jr., Walter M., Robert M, and John I. Levy were elected Executive Vice Presidents of the Company effective May 1, 2000. Each has served in senior management capacities of NCH from between 14 to 20 years. Each of the remaining Company's executive officers has been an executive officer of the registrant for more than five years as his principal employment.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
Market and Dividend Information, appearing on page 42 of the 2000 Annual Report, is incorporated by reference herein.
Item 6.
Item 6. Selected Financial Data
Selected Financial Data, appearing on page 16 of the 2000 Annual Report, is incorporated by reference herein.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations, appearing on pages 16-21 of the 2000 Annual Report, is incorporated by reference herein.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company, through its foreign subsidiaries, manufactures and distributes products worldwide. As a result, the Company is from time to time exposed to market risk relating to the impact of foreign currency exchange rates; however, this exposure has not been significant in the past and is not expected to be significant in the future.
In addition, the Company maintains a portfolio of marketable securities, the majority of which are debt securities issued by U.S. Government agencies. As a result, the Company is exposed to market risk relating to interest rate movements; however, a hypothetical 10% adverse movement in interest rates would have no material impact on net income of the Company.
Item 8.
Item 8. Financial Statements and Supplementary Data
The Financial Statements and Supplementary Data, appearing on pages 22-42 of the 2000 Annual Report, is incorporated by reference herein.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information on directors of the registrant, found on pages 2-4 of the Company's Proxy Statement dated June 27, 2000, in connection with its Annual Meeting to be held July 27, 2000, is incorporated by reference herein.
Information on executive officers of the registrant, found on pages 9-10 of the Company's Proxy Statement dated June 27, 2000, is incorporated by reference herein.
Item 11.
Item 11. Executive Compensation
Information on executive compensation and transactions, found on pages 4-7 of the Company's Proxy Statement dated June 27, 2000, in connection with its Annual Meeting to be held July 27, 2000, is incorporated by reference herein.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information on security ownership of principal stockholders and management, found on pages 9-10 of the Company's Proxy Statement dated June 27, 2000, in connection with its Annual Meeting to be held on July 27, 2000, is incorporated by reference herein.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information on certain relationships and related transactions, found on pages 2-3 and 10 of the Company's Proxy Statement dated June 27, 2000, in connection with its Annual Meeting to be held on July 27, 2000, is incorporated by reference herein.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2): The response to this portion of Item 14 is submitted as a separate section of this report on pages 15-16. The information set forth on pages 15-16 of this report is incorporated by reference. The consolidated financial statements set forth on page 15 of this report are filed as part of this Form 10-K by incorporation by reference to pages 22-42 of the 2000 Annual Report.
(a) (3) and (c): Exhibits. For a list of the exhibits filed as a part of this report, see the Index to Exhibits on pages 19-20 of this report, which is incorporated by reference.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended April 30, 2000.
(d) Not applicable.
SIGNATURES
The Issuer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, NCH Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irving, and the State of Texas, on this 2nd day of June, 2000.
NCH CORPORATION, Registrant
By /s/ Irvin L. Levy -------------------------- Irvin L. Levy, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of NCH Corporation and in the capacities and on the date indicated.
Signature Capacity at Registrant Date - --------- ---------------------- ----
/s/Lester A. Levy Chairman of the Board; June 2, 2000 - -------------------------- Director Lester A. Levy
/s/Milton P. Levy, Jr. Chairman of the Executive - -------------------------- Committee; Director June 2, 2000 Milton P. Levy, Jr.
/s/Irvin L. Levy President; Director - ---------------------------- (Principal Executive Officer) June 2, 2000 Irvin L. Levy
/s/Tom Hetzer Vice President - Finance June 2, 2000 - ----------------------------- (Princial Accounting Officer) Tom Hetzer
/s/Robert L. Blumenthal Director June 2, 2000 - ----------------------------- Robert L. Blumenthal
/s/Rawles Fulgham Director June 2, 2000 - ----------------------------- Rawles Fulgham
/s/Jerrold M. Trim Director June 2, 2000 - ----------------------------- Jerrold M. Trim
/s/Thomas B. Walker Jr. Director June 2, 2000 - ----------------------------- Thomas B. Walker Jr.
NCH CORPORATION AND SUBSIDIARY COMPANIES
FORM 10-K ITEMS 8, 14(a)(1) and (2) and (a)(3) and (c)
INDEX OF FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
The following consolidated financial statements are filed as part of this Form 10-K by incorporation by reference to pages 22-42 of the 2000 Annual Report.
Consolidated Financial Statements: Statements of Income, Years Ended April 30, 2000, 1999 and 1998 Balance Sheets, April 30, 2000 and 1999 Statements of Cash Flows, Years Ended April 30, 2000, 1999 and 1998 Statements of Stockholders' Equity, Years Ended April 30, 2000, 1999 and 1998 Notes to Consolidated Financial Statements Independent Auditors' Report Selected Unaudited Quarterly Data, Years Ended April 30, 2000 and 1999
The following consolidated financial statement schedule of the registrant and its subsidiaries is included in Item 14(a)(2):
Page
Consolidated Financial Statement Schedule Independent Auditors' Report 17
II - Valuation and Qualifying Accounts 18
Schedules other than those listed above are omitted because they are not required or are not applicable, the information required is immaterial in relation to the registrant's consolidated financial statements, or the required information is shown in the consolidated financial statements or notes thereto. Columns omitted from schedules filed have been omitted because the information is not applicable.
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors NCH Corporation:
Under date of May 31, 2000, we reported on the consolidated balance sheets of NCH Corporation and subsidiaries as of April 30, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended April 30, 2000, as contained in the 2000 Annual Report to Shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year ended April 30, 2000. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in the accompanying index. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP Dallas, Texas May 31, 2000
INDEX TO EXHIBITS
Exhibit Sequentially Number Exhibit Numbered Page ------- ------- -------------
Exhibit 3.1 (1) Restated Certificate of Incorporation
Exhibit 3.2 (1) Bylaws, as amended
Exhibit 10.1 (1) (3) Form of 1980 Non-Qualified Stock Option Plan, as amended
Exhibit 10.2 (7) Credit Agreement among NCH Corporation as Borrower, Chase Bank of Texas, National Association, as Agent, and the Lenders Named herein, dated August 7, 1998
Exhibit 10.3 (7) First Amendment to Credit Agreement among NCH Corporation as Borrower, Chase Bank of Texas, National Association, as Agent, dated May 28, 1999
Exhibit 10.4 (8) Asset Purchase Agreement by and among Carlton-Bates Company, NCH Corporation and Resource Electronics, Inc. dated as of October 29, 1999
Exhibit 10.5 (1) (3) Form of Non-Qualified Stock Option Agreement
Exhibit 10.6 (1) (3) Forms of Deferred Compensation Agreements with Messrs. Irvin, Lester, and Milton Levy
Exhibit 10.7 (3) (4) Fourth and Fifth Amendments to Deferred Compensation Agreements with Messrs. Irvin, Lester, and Milton Levy
Exhibit 10.8 (3) (5) Executive Committee Incentive Bonus Plan
Exhibit 10.9 (3) (6) Fourth, Fifth and Sixth Amendments to Deferred Compensation Agreements with Messrs. Irvin, Lester, and Milton Levy
Exhibit 21 (2) Subsidiaries of the Registrant
Exhibit 23 (2) Independent Auditors' Consent
Exhibit 27 (2) Financial Data Schedule
(1) Incorporated herein by reference to the exhibits with the same exhibit number and designation in the Registrant's report on Form 10-K for the fiscal year ended April 30, 1987, filed with the Securities and Exchange Commission.
(2) Filed herewith.
(3) Management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
(4) Incorporated herein by reference to the exhibit with the same exhibit number and designation in the Registrant's report on Form 10-K for the fiscal year ended April 30, 1995, filed with the Securities and Exchange Commission.
(5) Incorporated herein by reference to the exhibit with the same exhibit number and designation in the Registrant's report on Form 10-K for the fiscal year ended April 30, 1994, filed with the Securities and Exchange Commission.
(6) Incorporated herein by reference to the exhibit with the same exhibit number and designation in the Registrant's report on Form 10-K for the fiscal year ended April 30, 1997, filed with the Securities and Exchange Commission.
(7) Incorporated herein by reference to the exhibit with the same exhibit number and designation in the Registrant's report on Form 10-K for the fiscal year ended April 30, 1999, filed with the Securities and Exchange Commission.
(8) Incorporated herein by reference to the exhibit with the same exhibit number and designation in the Registrant's report on Form 10-Q for the three and six months ended October 31, 1999, filed with the Securities and Exchange Commission.
NCH CORPORATION AND SUBSIDIARIES EXHIBIT 13 ANNUAL REPORT FOR THE YEAR ENDED APRIL 30, 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Liquidity and Capital Resources
In the fiscal year ended April 30, 2000, working capital increased to $212.9 million from $182.3 million at April 30, 1999. The current ratio was 3.4 to 1 at April 30, 2000, compared to 2.7 to 1 at April 30, 1999. The total of cash, cash equivalents and marketable securities increased by $29.6 million to $52.6 million at April 30, 2000. Net cash flow from operating activities of continuing operations totaled $41.2 million for fiscal 2000. Additional cash was provided by the sale of the net assets of Resource Electronics of $12.7 million. Principal uses of cash consisted of net purchases of marketable securities of $17.0 million, net capital expenditures of $7.7 million, and payment of dividends of $7.6 million. During the year, the Company purchased the assets of two small businesses for $2.0 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 February 29, 2000, compared to February 28, 1999. This is reflected by the foreign currency translation component of accumulated other comprehensive loss, which changed from a $36.3 million reduction of stockholders' equity at April 30, 1999, to a $42.5 million reduction of stockholders' equity at April 30, 2000.
As reported on the Consolidated Balance Sheets, accounts receivable decreased by $5.3 million in the year ended April 30, 2000. The change in accounts receivable presented in the Consolidated Statements of Cash Flows excludes the effect of exchange rates on the reported asset values and shows that accounts receivable, net of the provision for losses, decreased by $.5 million compared to the end of the prior year. The decrease in accounts receivable was primarily due to decreased sales in certain of the Company's international operations during the current quarter.
As reported on the Consolidated Balance Sheets, inventories decreased by $.7 million in the year ended April 30, 2000. Inventories decreased internationally due to lower international sales and domestically due to decreased inventory levels for the Plumbmaster Group. These decreases were partially offset by increased inventory levels domestically due to higher domestic sales in the current year and increases in product costs for the DBS Services Group. The change in inventories presented in the Consolidated Statements of Cash Flows excludes the effect of exchange rates on the reported asset values and shows that inventories increased slightly in the same period.
Accounts payable, accrued expenses and income taxes payable decreased by $24.3 million as reported on the Consolidated Balance Sheets. Income taxes payable decreased due to the net loss in the fourth quarter in the current year as compared to the prior year. Accrued expenses decreased due to decreased international marketing costs. Accounts payable decreased as a result of normal business activity associated with timing of payments.
Net capital expenditures for property, plant and equipment were $7.7 million for the year ended April 30, 2000. These consisted of the installation and update of worldwide computer systems and normal additions of operating equipment. Capital expenditures for the upcoming year are not expected to vary significantly from the current year.
Deferred tax benefits represent future income tax deductions and, therefore, impact future cash flows by reducing federal income taxes to be paid in future years in which the temporary differences are expected to be recovered or settled. Management believes the Company will have sufficient future taxable income to make it more likely than not that the net deferred tax assets will be realized.
Total indebtedness, comprised of long-term debt, current maturities of long-term debt and notes payable, increased $17.3 million as reported on the Consolidated Balance Sheets. During the fourth quarter, an environmental insurance policy was purchased and funded by a note payable in a non-cash transaction. Of the $18.0 million in long-term debt, $16.9 is a note payable related to the environmental insurance policy, and $1.1 million is a note payable related to the purchase of a small domestic business in fiscal 1998. The $6.0 million of notes payable to banks consist of international subsidiary borrowings in local country currencies used primarily to finance working capital requirements.
The retirement and deferred compensation plan liability on the Consolidated Balance Sheets represents compensation deferred by employees and accrued interest on such deferrals as well as accrued retirement benefits under non-qualified retirement plans. Deferred compensation is expensed as earned with a liability recorded for payment in future years.
During fiscal year 2000, cash dividends paid amounted to $7.6 million ($1.40 per share) compared to $7.8 million in 1999 ($1.40 per share). On April 28, 2000, the directors of the Company declared a regular quarterly cash dividend of $.35 per share of Common Stock to be paid June 15, 2000, to shareholders of record June 1, 2000.
During the fiscal year 1999, the Company repurchased a total of 1,769,387 shares of NCH Common Stock for an aggregate price of $106.0 million. During fiscal year 2000, the Company repurchased 71 shares for approximately three thousand dollars.
In August 1998, the Company obtained a $50 million unsecured credit facility from a group of banks which expires in August 2002, and is available for acquisitions and general corporate purposes. During fiscal 2000, the Company did not borrow any funds under this credit facility.
Subsequent Event
On May 9, 2000, the Company sold a parcel of surplus land for approximately $6.9 million. The transaction involved approximately 142 acres of undeveloped land in Coppell, Texas and will result in a pretax gain of $3.7 million ($2.4 million net of tax) in the quarter ending July 31, 2000.
Net sales from Continuing Operations were $728.2 million in fiscal 2000 compared to $723.2 million in fiscal 1999. Domestic net sales increased 7% from fiscal 1999 to 2000. Net sales from total international operations decreased 3% from fiscal 1999 to 2000 when measured on a local currency basis. Due to the strengthening of the U.S. dollar, sales from international operations reflected a decrease of 8% from fiscal 1999 to 2000 as reported in U.S. dollars, and international sales are also lower due to continued difficult economic conditions primarily in the European operations. Net sales for the Chemical Specialties segment decreased $17.2 million, or 4% from fiscal 1999 to 2000 due to a decrease in international sales, as measured in U.S. dollars, which offset increased domestic sales. Net sales in the Plumbmaster Group increased slightly from 1999 to 2000 as a result of increased domestic sales to major home building supply centers and increased sales of plumbing components to OEM manufacturers, partially offset by lower international sales. Net sales in the Partsmaster Group increased slightly from 1999 to 2000, due to increased domestic sales, partially offset by lower international sales. Net sales for Landmark Direct increased $6.8 million, or 24%, from 1999 to 2000 primarily due to increased sales of medical and first aid supplies. Net sales for DBS Services Group increased $4.5 million, or 27% from 1999 to 2000 as a result of increased sales of direct broadcast satellite equipment to retail dealers. Net sales in the Other Product Lines increased $10.3 million, or 22%, primarily due to increased sales of pet products to retail outlets and increased sales of apartment maintenance products.
Operating income decreased to $39.0 million in fiscal 2000 from $50.2 million in 1999. Domestic operating margins decreased from fiscal 1999 to 2000, primarily due to the accrual for increased environmental remediation expenses, of which approximately $16.1 million was expensed in the fourth quarter of fiscal 2000 and was partially offset by revisions of prior year liabilities of approximately $4.2 million as a result of changes in management's estimates. Internationally, operating margins increased due to lower cost of sales and marketing costs in fiscal 2000 compared to 1999. In the Chemical Specialties segment, operating income decreased $19.7 million, due to the environmental costs discussed above and lower international sales. Operating income for the Plumbmaster Group increased $4.9 million due to increased domestic sales and cost saving strategies in domestic operations. Operating income for the Partsmaster Group increased $2.6 million, or 31%, due to higher domestic and international margins. Operating income for Landmark Direct decreased $.7 million due to increased sales into bid-dependent market channels, which have historically lower gross margins. Operating income for the DBS Services Group decreased slightly from fiscal 1999 to 2000. Operating income in the Other Product Lines increased $1.9 million due to volume efficiencies gained in the sale of pet products and apartment maintenance products.
Net sales from Continuing Operations were $723.2 million in fiscal 1999 compared to $715.5 million in fiscal 1998. Domestic net sales increased 3% from fiscal 1998 to 1999. At the end of fiscal 1998, two domestic subsidiaries were sold. Net sales in fiscal 1998 for these two subsidiaries amounted to $32.2 million. For comparison purposes, total net sales increased 6% in fiscal 1999 and domestic net sales increased 12% when the net sales for these two subsidiaries are excluded from fiscal 1998. Net sales from total international operations increased 2% from fiscal 1998 to 1999 when measured on a local currency basis. Due to the strengthening of the U.S. dollar, sales from international operations reflected a decrease of 1% from fiscal 1998 to 1999 as reported in U.S. dollars. Fiscal 1999 international sales are also lower due to the general economic downturn in Asia and in South America due to weak economies in several major markets. In the Chemical Specialties segment, net sales decreased slightly from fiscal 1998 to 1999 due to a decrease in international sales, as measured in U.S. dollars, which offset increased domestic sales. An estimated $8 million of the decrease in international sales is attributable to the strength of the U.S. dollar in fiscal 1999 compared to 1998. Net sales in the Plumbmaster Group increased $14.0 million, or 13%, from 1998 to 1999 as a result of increased domestic sales to major home building supply centers. Net sales in the Partsmaster Group increased $5.5 million, or 7%, from 1998 to 1999, primarily due to increased domestic sales. Net sales for Landmark Direct increased $7.9 million, or 39%, from 1998 to 1999 primarily due to the acquisition of a small company in April 1998. Net sales for Landmark Direct increased 10% without the acquisition. Net sales for DBS Services Group increased $4.2 million, or 34%, from 1998 to 1999 as a result of increased revenues from the sale of direct broadcast satellite equipment. Net sales in the Other Product Lines decreased 34% primarily as a result of the sale of two subsidiaries in April 1998, as discussed above.
Operating income decreased to $50.2 million in fiscal 1999 from $50.6 million in 1998. Excluding the results of the two subsidiaries sold in April 1998, operating income for fiscal 1998 would have been $47.3 million. Domestic operating margins improved from fiscal 1998 to 1999 due to decreased marketing costs, partially offset by increased cost of sales and administrative expenses. Internationally, operating margins decreased due to increased cost of sales and marketing costs in fiscal 1999 compared to 1998. In the Chemical Specialties segment, operating income decreased 12%, due to decreases in international margins. Of this decrease, approximately 3%, or one million dollars, is attributable to the strength of the U.S. dollar in fiscal 1999 compared to 1998. Operating income for the Plumbmaster Group increased $2.4 million due to increased domestic sales and reductions in material costs for purchased goods. Operating income for the Partsmaster Group decreased 17%, due to increased international marketing costs. Operating income for Landmark Direct increased $1.9 million due to the acquisition of a small company and decreased expenses related to printing and mailing catalogs. DBS Services Group had an increase in operating income of $3.3 million due to increased revenues from sales of direct broadcast satellite equipment. Operating income in the Other Product Lines decreased as a result of the sale of two subsidiaries in April 1998.
Other Operating Results - Fiscal Years 2000, 1999 and 1998
In fiscal year 2000, interest expense was $5.6 million compared to $4.8 million for fiscal 1999 and $5.3 million for fiscal 1998. Interest income was $2.0 million for fiscal 2000 as compared to $2.1 million for fiscal 1999 and $4.9 million for fiscal 1998. The decrease in interest income from fiscal 1998 to fiscal 1999 is due to the reduction of marketable securities during 1999 as compared to 1998.
Loss on revaluation of foreign currencies was $2.7 million in fiscal 2000 compared to $1.5 million in fiscal 1999. The current year loss is attributable to foreign exchange expense in certain European subsidiaries and translation losses in hyper-inflationary countries. In fiscal 1999, loss on currency revaluation was $1.5 million compared to a loss of $2.3 million in 1998.
During fiscal 1998, 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 did not have a material impact on the Company's operations.
The overall corporate tax rate for fiscal 2000 was 35.3% of pre-tax income compared to 44.5% in 1999 and 40.3% in 1998. The decrease in fiscal year 2000 is due to variations in individual country income levels, tax rates in the international subsidiaries and to revisions of prior year estimated foreign tax credits of $0.6 million utilized when the Company filed its 1999 federal income tax return during the current year. A reconciliation of the effective tax rate to the U.S. statutory rate is contained in the Notes to Consolidated Financial Statements.
The sale of the net assets of Resource Electronics Inc. in fiscal 2000 resulted in a loss on disposition of discontinued operations of $3.3 million (net of income taxes of $1.8 million) in fiscal 2000. The operating loss, net of income taxes, for discontinued operations was $.9 million in fiscal 2000 as compared to $1.2 million in fiscal 1999. Operating income, net of income taxes, for discontinued operations was $.6 million in fiscal 1998.
As a result of the preceding information, net income in fiscal year 2000, including the results of discontinued operations, decreased to $17.0 million from $24.4 million in 1999. Basic and Diluted earnings per share from continuing operations decreased to $3.92 per share in fiscal 2000, due to the decrease in net income, and was partially offset by the decrease in the weighted average number of common shares outstanding during the current year. Basic and Diluted earnings per share - net income decreased to $3.15 per share in fiscal 2000. Net income in fiscal 1999 decreased to $24.4 million from $35.7 million in 1998. Included in net income for the 1998 fiscal year are the sales and income of two subsidiaries that were sold at the end of fiscal 1998. Net income for the two subsidiaries, including the gain on the sale of the subsidiaries, amounted to $8.9 million for the 1998 fiscal year. Basic earnings per share from continuing operations decreased to $4.47 per share in fiscal 1999, due to the decrease in net income, and was partially offset by the decrease in the weighted average number of common shares outstanding during fiscal 1999. Diluted earnings per share from continuing operations also decreased to $4.46 per share in fiscal 1999. Basic earnings per share - net income decreased to $4.27 per share in fiscal 1999 and Diluted earnings per share - net income decreased to $4.25 per share in fiscal 1999.
Year 2000 Compliance
The Company uses and relies on a wide variety of information technologies, computer systems and scientific equipment containing computer-related components. The Company did not experience any business interruptions related to the Year 2000 Issue. The Company is continuing to monitor its computer systems and equipment and expects that the Year 2000 Issue will not have a material adverse effect on its business, financial condition, or results of operations.
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 are developing plans to address the systems and business issues affected by the euro currency conversion. These 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.
Recent Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which must be adopted by July 31, 2000. We are currently assessing the impact of SAB 101 on our results of operations.
Forward-Looking Information
Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual 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.
Notes to Consolidated Financial Statements
NCH Corporation and Subsidiaries Years Ended April 30, 2000, 1999, 1998
1. Summary of Significant Accounting Policies
Principles of consolidation - The consolidated financial statements include the accounts of NCH Corporation and its majority owned subsidiaries (the "Company"). Significant intercompany transactions and balances have been eliminated. A February fiscal year-end is used for most international subsidiaries in order to meet reporting requirements.
Nature of operations - The Company markets an extensive line of maintenance, repair and supply products to customers throughout the world. Products include specialty chemicals, fasteners, welding supplies, plumbing parts, and direct broadcast satellite equipment. These products are marketed principally through the Company's own sales force.
Use of estimates in the financial statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign currency translation - With the exception of hyper-inflationary countries, all assets and liabilities of operations outside the United States are translated into U.S. dollars at period-end exchange rates, and income and expenses are translated at average rates for the year. Gains and losses resulting from translation are included in the foreign currency translation adjustment component of accumulated other comprehensive loss. The hyper-inflationary countries have been translated into U.S. dollar equivalents as follows: current assets (except for inventories), current liabilities, long-term debt and other liabilities at period-end exchange rates; inventories, property, other assets, capital stock and retained earnings at historical rates; income and expense items at average rates for the year, except for cost of sales and depreciation expense, which are translated at historical rates. Gains and losses resulting from translation for hyper-inflationary countries are recognized in the income statement as expense or income in the current period. Exchange adjustments resulting from foreign currency transactions are recognized as expense or income in the current period for all countries.
Cash and cash equivalents and marketable securities - Cash and cash equivalents include cash on hand, cash in banks and all highly liquid investments with a maturity of three months or less at the time of purchase. Cash equivalents are stated at amortized cost plus accrued interest. Marketable securities are stated at estimated fair value.
Inventories - Raw materials, sales supplies and purchased finished goods are stated at a moving average cost, which approximates cost on a first-in, first-out basis and is not in excess of market value. Manufactured finished goods are stated at an amount approximating cost of manufacturing, which is not in excess of net realizable value.
Property, plant and equipment - These assets are recorded at cost. When these assets are disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in income during that year. The cost of maintenance and repairs is charged to expense as incurred, whereas expenditures that substantially increase the useful lives of plant or equipment are capitalized.
Depreciation - Depreciation on buildings and equipment is provided for financial statement purposes using the straight-line method over the estimated useful lives of the related assets. Depreciation on certain buildings and equipment is provided for income tax purposes using accelerated methods.
Intangible assets - Intangible assets are classified as other assets in the consolidated financial statements and include goodwill, patents, computer software and trademarks. Intangible assets are amortized using the straight-line method over their estimated useful lives, but not in excess of 40 years. The unamortized cost of impaired intangible assets is charged to expense when impairment occurs.
Research and development - Research and development costs, which are included in the costs of laboratory operations, are charged to expense as incurred. Research and development costs, however, cannot be separately identified from the total laboratory costs. Total laboratory costs amounted to approximately $5.1 million in 2000, $5.3 million in 1999 and $5.5 million in 1998.
Income taxes - Deferred income taxes result from temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. State and foreign income taxes have been included in the provision for income taxes and income taxes payable.
Treasury stock - Treasury stock is stated at cost.
Retirement plans - The Company's policy is to fund its qualified retirement type plans as accrued. The cost of these retirement benefits for past service has been fully funded. Non-qualified retirement plans are not funded, but provision for the estimated liabilities arising from these plans has been made in the consolidated financial statements.
Postretirement benefits other than pensions - The Company charges to expense the estimated future costs of retiree health care benefits during the years that employees render service. The postretirement health care benefit plan is not funded.
Stock options - The Company issues shares from its treasury as options are exercised. When an option is exercised, treasury stock is credited with the average cost of the treasury shares issued, and additional paid-in capital is charged or credited for the difference between the option price and the average cost of the treasury shares. No charge to income is made in connection with the stock option plan. The Company applies the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". For the impact of the fair value of employee stock options granted during fiscal years 1996 through 2000, see footnote 8, "Capital Stock and Options".
Revenue recognition - Sales are recognized upon shipment of products when title transfers to customers.
Earnings per share - Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding. Diluted earnings per share includes the dilutive effect of stock options.
Comprehensive income - SFAS No. 130 requires foreign currency translation adjustments and unrealized gains or losses on the Company's available-for-sale securities to be included in the measure of comprehensive income and segregated in stockholders' equity as accumulated other comprehensive income.
Environmental costs - Liabilities for environmental costs are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. Any recorded liabilities would not be reduced by possible recoveries from third parties and projected cash expenditures would not be discounted unless fixed and determinable payment terms exist.
Reclassifications - Certain prior year amounts have been reclassified to conform with the current year presentation.
2. Consolidated International Subsidiaries
At April 30, 2000 and 1999, the parent Company's investment in consolidated international subsidiaries amounted to $48,589,000 and $47,342,000. The current year consolidated financial statements include international subsidiaries' assets of $137,471,000, liabilities of $55,629,000 and net income of $7,185,000, after allocation of corporate expenses and excluding intercompany sales and profits. For the prior year, these subsidiaries had assets of $146,321,000, liabilities of $61,435,000 and net income of $4,516,000.
3. Income Taxes
Income taxes from continuing operations are as follows (in thousands of dollars):
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The components of deferred tax assets and liabilities as of April 30 are as follows (in thousands of dollars):
The following is a reconciliation of the difference between the U.S. statutory income tax rate and the effective tax rate related to continuing operations:
The Company files a consolidated U.S. federal income tax return with its domestic subsidiaries. International subsidiaries file tax returns in countries of their incorporation. In addition, branches of certain U.S. and international companies file tax returns in countries in which they conduct business. Certain of these subsidiaries have operating loss carryforwards totaling approximately $8,261,000, which will expire between 2001 and 2006 and net operating loss carryforwards totaling approximately $475,000 which have no expiration date. The accumulated undistributed earnings of international subsidiaries not included in the consolidated U.S. federal income tax return approximated $76,053,000 at April 30, 2000, $78,157,000 at April 30, 1999 and $74,146,000 at April 30, 1998. No provision is made in the accompanying consolidated financial statements for the estimated taxes that would result on distribution of the accumulated undistributed earnings since the Company intends to invest indefinitely in the operations of these subsidiaries. Income from continuing U.S. operations before income taxes was $19,579,000 in 2000, $24,791,000 in 1999, and $29,521,000 in 1998. Income from foreign operations before income taxes for the same three years was $13,182,000, $21,218,000, and $29,287,000, respectively. For 2000, 1999 and 1998, worldwide income tax payments amounted to $21,841,000, $19,955,000 and $24,227,000, respectively.
4. Inventories
A summary of inventories at April 30 follows (in thousands of dollars):
5. Property, Plant and Equipment
Property, plant and equipment at April 30 consists of the following (in thousands of dollars):
Depreciation charged to income from continuing operations was $11,998,000, $12,510,000 and $13,325,000 for each of the years ended April 30, 2000, 1999 and 1998, respectively. The estimated useful life of buildings is 25 to 40 years; equipment is 3 to 10 years.
6. Long-Term Debt
Long-term debt at April 30 consists of the following (in thousands of dollars):
Scheduled maturities of long-term debt for the years following April 30, 2000, are as follows:
2001 $ 5,971,000 2002 6,427,000 2003 5,193,000 2004 214,000 2005 215,000 -------------- Total $ 18,020,000 ==============
In August 1998, the Company obtained a $50 million unsecured credit facility from a group of banks which expires in August 2002, and is available for acquisitions and general corporate purposes. Interest on the credit facility is generally payable quarterly, and at the Company's option of the Eurodollar rate plus 0.6%, or the federal funds rate plus 0.5% (which will not exceed the bank's prime rate). The credit facility is governed by certain financial covenants, including minimum tangible net worth and a maximum leverage ratio. At April 30, 2000, the Company had not borrowed any amount under this credit facility.
7. Employee Benefits
Retirement plans - The parent and its domestic subsidiaries have various qualified retirement type plans covering substantially all domestic employees. None of these plans have defined benefits. Some of the international subsidiaries also have non-defined benefit retirement plans. These plans are funded on a current basis, and the cost of retirement
benefits for past service has been fully funded. In addition, the Company has non-qualified deferred compensation plans for the primary purpose of providing retirement benefits. These plans are not funded, but provision for the estimated liabilities arising from these plans has been made in the consolidated financial statements.
Expenses for retirement plans, exclusive of interest expense, were $7,430,000, $8,872,000 and $9,433,000 in the years ended April 30, 2000, 1999 and 1998, respectively.
Postretirement benefits other than pensions - The Company and several of its domestic subsidiaries have a postretirement health care benefit plan covering substantially all domestic employees. Eligible retirees receive a specific contribution from the Company toward the cost of the health plan, which is a supplement to Medicare. The amount of the contribution is based on years of service with the Company at retirement. The plan is not funded; retiree health benefits are paid as covered expenses are incurred. Provision has been made in the accompanying consolidated financial statements for the net postretirement benefit expense of this plan. Net postretirement benefit expenses for the years ended April 30 are as follows (in thousands of dollars):
The reconciliation of changes in the benefit obligation is as follows (in thousands of dollars):
The reconciliation of the accumulated postretirement benefit obligation to the recorded liability at April 30 is as follows (in thousands of dollars):
Measurement of the accumulated postretirement benefit obligation is based on a 7% assumed discount rate for 2000 and 1999.
Certain of the Company's non-U.S. subsidiaries have health care plans for retirees, although many retirees outside of the United States are covered by government sponsored and administered programs. The provision for the estimated liabilities arising from these plans was not significant.
8. Capital Stock and Options
None of the Company's authorized 500,000 shares of $1 par value Preferred Stock has been issued.
On April 28, 2000, the directors of the Company declared a regular quarterly cash dividend of $.35 per share of Common Stock to be paid June 15, 2000, to shareholders of record June 1, 2000.
At April 30, 2000, the Company has a non-qualified stock option plan, which is described below. The Company applies APB Opinion No. 25 and related FASB Interpretations for its plan. No charge to income is made in connection with the stock option plan. Had compensation cost for the Company's stock option plan been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except per share data):
Under the 1980 Non-Qualified Stock Option Plan, the Company may grant options to its employees for up to 1.5 million shares of common stock. At April 30, 2000, 1999 and 1998, 531,000, 531,000 and 552,000 shares of the Company's Common Stock, respectively, were reserved for issuance under this plan which grants options to key employees and officers. The purchase price under the grant cannot be less than the market value at the date of grant. The options under such plan are exercisable in equal amounts at the beginning of the second, third and fourth year of their lives and expire after five years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
The annual dividend yield shown above is weighted over the expected life of the options.
A summary of the status of the Company's stock option plan as of April 30, 2000, 1999, and 1998, and changes during the years ended on those dates is presented below:
Stock options outstanding at April 30, 2000 had a range in exercise prices of $45.00 to $62.50 and an average remaining contractual life of 3.7 years. The weighted average fair value of options, calculated using the Black-Scholes option pricing model, granted during the years ended April 30,
2000, 1999 and 1998 was $3.89, $4.15, and $6.30, respectively. At April 30, 2000, 1999 and 1998, 19,000 shares of Treasury Stock were reserved for issuance to employees under a stock participation plan.
9. Comprehensive Income
Accumulated other comprehensive loss consists of the following (in thousands of dollars):
A summary of the components of other comprehensive income for the years ended April 30, 2000, 1999 and 1998 is as follows (in thousands of dollars):
10. Interest Costs
During the years ended April 30, 2000, 1999 and 1998, interest costs, including interest expense on non-funded retirement plans, amounting to $5,557,000, $4,790,000 and $5,319,000, respectively, were expensed as incurred. For the same periods, interest payments were $4,087,000, $3,664,000 and $3,067,000, respectively.
11. Leases
At April 30, 2000, the Company and its subsidiaries had a number of noncancellable leases for various office and warehouse facilities. These agreements expire at various times through 2005 and substantially all include renewal provisions. The amount of other obligations assumed, such as payment of property taxes and maintenance, is nominal. Total rent expense for 2000, 1999 and 1998 (including operating leases on data processing equipment, trucks and trailers, and office equipment) was approximately $10,608,000, $11,382,000 and $11,275,000, respectively. The minimum aggregate rentals under the terms of noncancellable operating leases for future years are:
2001 $ 7,781,000 2002 5,393,000 2003 4,111,000 2004 2,948,000 2005 3,796,000
12. Contingent Liabilities
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. See Note 13 for discussion of environmental matters.
At April 30, 2000 and 1999, the Company had standby letters of credit outstanding totaling $4,823,000 and $5,290,000, respectively, which guarantee payment to certain insurance carriers.
13. Environmental Matters
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.
During the fourth quarter of the current year, the Company obtained additional investigative findings related to a Company owned manufacturing site which indicated further environmental remediation will be required. As a result, the Company recorded an additional accrual of approximately $16.1 million, which is included in marketing and administrative expenses on the Consolidated Statements of Income. On March 10, 2000, the Company purchased an environmental insurance policy to cover this site and one other Company property. This policy covers all pollution remediation and site reclamation costs up to $40 million for these two properties for the next ten years. The premium for this policy was $18,638,000, of which $1,726,000 was paid on April 25, 2000 and the remainder was funded in a non-cash transaction by a note payable to be paid quarterly through fiscal year 2003.
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 $15 million of 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. 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.
14. Fair Value of Financial Instruments
The carrying amounts of cash equivalents, accounts receivable, accounts payable, and notes payable to banks approximate fair value because of the short maturities of these financial instruments. The carrying amounts of marketable securities approximate fair value and are based on quoted market prices obtained from an independent broker. The carrying amounts of long-term debt approximate fair value as estimated based on the discounted value of future cash flows using the Company's current borrowing rate for loans of comparable terms and maturities.
15. Marketable Securities
Marketable securities which do not meet the definition of cash equivalents are classified as marketable securities available-for-sale. These securities are reported at fair value with unrealized gains and losses (net of deferred income taxes) being recognized on the balance sheet as a component of accumulated other comprehensive loss. Values are based on quoted market prices obtained from an independent broker. Realized gains and losses are included in operating income and are immaterial. The cost of securities sold is based on the specific identification method.
The following is a summary of available-for-sale marketable securities as of April 30 (in thousands of dollars):
The contractual maturities of the marketable securities at estimated fair value as of April 30, 2000 are as follows: 2001 - $19,663,000 and 2002 - $766,000.
16. Discontinued Operations
On October 29, 1999, the Company signed an asset purchase agreement to sell substantially all the net assets of Resource Electronics Inc., a subsidiary of the Company, to Carlton-Bates Company. This sale was closed on November 11, 1999. The net assets and liabilities that were transferred consisted primarily of accounts receivable, inventories, fixed assets, and accounts payable. The selling price for these net assets was $12,697,000 in cash and was received by the Company in November 1999.
The consolidated financial statements for prior periods have been restated and the financial position, operating results, and cash flows of Resource Electronics are shown separately as discontinued operations.
Net sales of Resource Electronics for the years ended April 30, 2000, 1999, and 1998, were $32,493,000, $63,468,000, and $68,629,000, respectively. As Resource Electronics was sold in the second quarter of the current year, the above amount for fiscal year 2000 represents approximately six months of sales. These amounts are not included in net sales in the accompanying Consolidated Statements of Income.
As shown on the accompanying Consolidated Statements of Income, amounts relating to discontinued operations are as follows (in thousands except per share amounts):
17. Segment and Geographic Area 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 has six segments: Chemical Specialties, Plumbmaster Group, Partsmaster Group, Landmark Direct, DBS Services Group, and Other Product Lines. Chemical Specialties manufacture and sell a broad line of chemical cleaning and maintenance products, including water treatment and oil field production chemicals, to industrial and institutional customers worldwide. The Plumbmaster Group markets products for plumbing repair and replacement parts as well as parts for new building construction. The majority of these products are purchased finished goods, but the group also manufactures various products. These products are primarily sold in the United States to the plumbing trade, construction contractors, institutional and industrial customers, as well as to major home building supply centers, hardware stores and other retail outlets. The Partsmaster Group sells fasteners, cutting tools, electrical products, and welding alloys to industrial customers worldwide. Landmark Direct markets first-aid supplies and business and industrial products, such as safety signs, identification products and productivity tools to customers in the United States. DBS Services Group wholesales direct broadcast satellite equipment to retail consumer electronics stores in the eastern United States. Other Product Lines consists of a variety of products that are not similar to the other groups, such as pet products and apartment maintenance products. Disclosures for previous years included the Resource Electronics segment, which is now included in discontinued operations and excluded from the segment disclosures. Additionally, DBS Services Group was previously included in the Other Product Lines segment. Fiscal 1999 and 1998 information has been restated to conform to the current segment determination.
The accounting policies of the segments are the same as those described in Note 1. 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's corporate headquarters (Corporate) that are common to more than one segment are allocated on a usage basis. Certain items are maintained at Corporate and are not allocated to the segments. These are primarily marketable securities, certain corporate costs, and other corporate assets. Although the Company allocates deferred income tax assets to segments for balance sheet purposes, income tax expense is not allocated in measuring performance of individual segments.
Segment information is as follows (in thousands of dollars):
With respect to capital expenditures, the difference between the segment totals and the consolidated totals relates to assets acquired in the purchases of businesses.
A reconciliation of the segment information to the consolidated financial statements is as follows:
Geographic information is as follows:
18. Earnings Per Share
The following is a reconciliation of basic earnings per share to diluted earnings per share for the years ended April 30, 2000, 1999, and 1998 (shares in thousands):
Stock options are the Company's only potential dilutive securities and are considered in the diluted earnings per share calculations if dilutive for those periods. For the years ended April 30, 2000, and 1999, options totaling 268,000 and 97,000, respectively, were excluded as their effect would have been antildilutive. For the year ended April 30, 1998, all options were included as their effect was dilutive.
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors NCH Corporation:
We have audited the accompanying consolidated balance sheets of NCH Corporation and subsidiaries as of April 30, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended April 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NCH Corporation and subsidiaries as of April 30, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended April 30, 2000, in conformity with accounting principles generally accepted in the United States of America.
/S/ KPMG LLP
Dallas, Texas May 31, 2000
RESPONSIBILITY FOR FINANCIAL REPORTING
The management of the Company is responsible for the financial information and representations contained in the financial statements and other sections of the annual report. The financial statements have been prepared in conformity with generally accepted accounting principles, and therefore include informed estimates and judgments.
The Company's system of internal control is designed to provide reasonable, but not absolute, assurance as to the integrity, objectivity and reliability of the financial records and the safeguarding of assets. Management believes that, within a cost-effective framework, the Company's accounting controls provide reasonable assurance that material errors or irregularities are prevented or would be detected within a relatively short period of time. The possibility exists, however, that errors or irregularities may occur and not be detected. The Company has a program of internal audits and follow-up, covering separate Company operations and functions in the U.S. and its international subsidiaries.
The Board of Directors pursues its review of the audit function, internal controls and the financial statements largely through its Audit Committee, which consists solely of directors who are not employees of the Company. The Audit Committee periodically meets with management, the independent auditors and internal auditors with regard to their respective responsibilities. Both KPMG LLP and the internal auditors have full access to the Audit Committee. They meet with the committee, without management present, to discuss the scope and results of their examination, including internal control and financial reporting matters.
Management also recognizes its responsibility for fostering a strong ethical climate so that the Company's affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in the Company's code of corporate conduct, which is publicized throughout the Company. The code of conduct addresses, among other things, the necessity of ensuring open communication within the Company; potential conflicts of interests; compliance with all domestic and foreign laws, including those relating to financial disclosure; and the confidentiality of proprietary information. The Company maintains a systematic program to assess compliance with these policies.
/S/ Irvin L. Levy /S/ Tom Hetzer ----------------- -------------- Irvin L. Levy Tom Hetzer Chief Executive Officer Chief Financial Officer
Selected Unaudited Quarterly Data (In Thousands Except Per Share Data)
Years Ended April 30,
Basic earnings per share for each period is calculated based on the weighted average number of shares outstanding during the period. Diluted earnings per share includes the dilutive effect of stock options.
During the fourth quarter of the current year, the Company obtained additional investigative findings related to a Company owned manufacturing site which indicated further environmental remediation will be required. As a result, the Company recorded an additional accrual of approximately $16.1 million, which is included in marketing and administrative expenses on the Consolidated Statements of Income.
Market and Dividend Information
NCH Corporation stock is traded on the New York Stock Exchange. The high and low prices by quarter are shown for the past two years in the schedule below.
Cash dividends paid during the fiscal year ended April 30, 2000, amounted to $7.6 million compared to $7.8 million and $9.3 million in fiscal years 1999 and 1998, respectively. On April 28, 2000, a dividend of $.35 per share was declared, payable June 15, 2000. A summary of the quarterly dividends per share for the past two years is set forth in the schedule below.
As of June 1, 2000, there were 471 holders of record of the Company's Common Stock, which includes several brokerage firms that hold shares of the Company's stock for an estimated 2,000 investors.
NCH CORPORATION AND SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
NCH Corporation is the parent company of numerous wholly-owned subsidiaries engaged in the business of marketing an extensive line of maintenance, repair and supply products. At the close of the last fiscal year, thirteen of these subsidiaries were operating domestically and 119 in foreign countries. The Company is also the parent of several wholly-owned subsidiaries that market various other products, and all such subsidiaries considered in the aggregate as a single subsidiary would not constitute a significant subsidiary of NCH Corporation, and therefore are not listed here.
As of the close of the last fiscal year, the following corporation was not wholly-owned by NCH Corporation:
Immediate Parent and Jurisdiction Name of Subsidiary Percentage of Ownership of Incorporation - ------------------ ----------------------- ----------------
NCH Hua Yang Ltd. 51% NCH Corporation People's Republic of China
NCH CORPORATION AND SUBSIDIARIES EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT
The Board of Directors NCH Corporation:
We consent to incorporation by reference in the registration statement (No. 33-65206) on Form S-8 of NCH Corporation of our reports dated May 31, 2000, relating to the consolidated balance sheets of NCH Corporation and subsidiaries as of April 30, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows and related schedule for each of the years in the three-year period ended April 30, 2000, which reports appear in or are incorporated by reference in the April 30, 2000 annual report on Form 10-K of NCH Corporation.
/s/ KPMG LLP
Dallas, Texas June 21, 2000
NCH CORPORATION AND SUBSIDIARIES EXHIBIT 99 DEFINITIVE PROXY STATEMENT REGARDING THE COMPANY'S 2000 ANNUAL MEETING OF STOCKHOLDERS
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [ X ] Filed by a party other than the Registrant [ ]
Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [ X ] Definitive Proxy Statement [ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
NCH Corporation - ------------------------------------------------------------------------------- (Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
[ X ] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1)Title of each class of securities to which transaction applies:
(2)Aggregate number of securities to which transaction applies:
(3)Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):
(4)Proposed maximum aggregate value of transaction:
(5)Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
(1)Amount Previously Paid:
(2)Form, Schedule or Registration Statement No.:
(3)Filing Party:
(4)Date Filed:
[LOGO]
2727 Chemsearch Boulevard
Irving, Texas 75062
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held July 27, 2000
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of NCH Corporation will be held in the Gourmet Room II of the Crescent Club, 17th Floor, 200 Crescent Court (at the corner of Pearl and Cedar Springs Streets), Dallas, Texas, on Thursday, the 27th day of July, 2000, at 10:00 a.m., Central Daylight Time, for the following purposes:
1. To elect four Class III directors of NCH to hold office until the next annual election of Class III directors by stockholders or until their respective successors are duly elected and qualified.
2. To ratify the appointment of KPMG LLP, Certified Public Accountants, to be the independent auditors of NCH for the fiscal year ending April 30, 2001.
3. To consider and act upon a proposal submitted by a stockholder.
4. To transact such other business as may properly come before the meeting or any adjournments of the meeting.
The Board of Directors has fixed the close of business on Thursday, June 1, 2000, as the record date for determining stockholders entitled to vote at and to receive notice of the annual meeting.
Whether or not you expect to attend the meeting in person, you are urged to complete, sign, and date the enclosed form of proxy and return it promptly so that your shares of stock may be represented and voted at the meeting. If you are present at the meeting, your proxy will be returned to you if you so request.
Joe Cleveland, Secretary
Dated: June 27, 2000
[LOGO]
2727 Chemsearch Boulevard
Irving, Texas 75062
PROXY STATEMENT
For
ANNUAL MEETING OF STOCKHOLDERS
To Be Held on July 27, 2000
Dated: June 27, 2000
SOLICITATION AND REVOCABILITY OF PROXIES
The accompanying proxy is solicited by the management of, and on behalf of, NCH Corporation, a Delaware corporation ("NCH"), to be voted at the Annual Meeting of the Stockholders of NCH, to be held Thursday, July 27, 2000 (the "Meeting"), at the time and place and for the purposes set forth in the accompanying Notice of Annual Meeting. When properly executed proxies in the accompanying form are received, the shares represented thereby will be voted at the Meeting in accordance with the directions noted on the proxies; if no direction is indicated, then such shares will be voted for the election of the directors and in favor of the second proposal and against the third proposal set forth in the Notice of Annual Meeting attached to this Proxy Statement.
The enclosed proxy confers discretionary authority to vote with respect to any and all of the following matters that may come before the Meeting: (1) matters that NCH's Board of Directors does not know a reasonable time before the Meeting are to be presented at the Meeting; and (2) matters incidental to the conduct of the Meeting. Management does not intend to present any business for a vote at the Meeting other than the matters set forth in the accompanying Notice of Annual Meeting, and it has no information that others will do so. If other matters requiring the vote of the stockholders properly come before the Meeting, then, subject to the limitations set forth in the applicable regulations under the Securities Exchange Act of 1934, it is the intention of the persons named in the attached form of proxy to vote the proxies held by them in accordance with their judgment on such matters.
Any stockholder giving a proxy has the power to revoke that proxy at any time before it is voted. A proxy may be revoked by filing with the Secretary of NCH either a written revocation or a duly executed proxy bearing a date subsequent to the date of the proxy being revoked. Any stockholder may attend the Meeting and vote in person, whether or not such stockholder has previously submitted a proxy.
In addition to soliciting proxies by mail, officers and regular employees of NCH may solicit the return of proxies. Brokerage houses and other custodians, nominees, and fiduciaries may be requested to forward solicitation material to the beneficial owners of stock.
This Proxy Statement and the accompanying proxy are first being sent or given to NCH's stockholders on or about June 27, 2000.
NCH will bear the cost of preparing, printing, assembling, and mailing the Notice of Annual Meeting, this Proxy Statement, the enclosed proxy, and any additional material, as well as the cost of forwarding solicitation material to the beneficial owners of stock.
VOTING RIGHTS
The record date for determining stockholders entitled to notice of and to vote at the Meeting is the close of business on June 1, 2000. On that date there were 5,408,223 shares issued and outstanding of NCH's $1.00 par value common stock ("Common Stock"), which is NCH's only class of voting securities outstanding. Each share of NCH's Common Stock is entitled to one vote in the matter of election of directors and in any other matter that may be acted upon at the Meeting. Neither NCH's certificate of incorporation nor its bylaws permits cumulative voting. The presence, in person or by proxy, of the holders of a majority of the outstanding shares of Common Stock entitled to vote at the Meeting is necessary to constitute a quorum at the Meeting, but in no event will a quorum consist of less than one-third of the shares entitled to vote at the Meeting. The affirmative vote of a plurality of the shares of Common Stock represented at the Meeting and entitled to vote is required to elect directors. All other matters to be voted on will be decided by a majority of the shares of Common Stock represented at the meeting and entitled to vote. Abstentions and broker nonvotes are each included in determining the number of shares present at the meeting for purposes of determining a quorum. Abstentions and broker nonvotes have no effect on determining plurality, except to the extent that they affect the total votes received by any particular candidate.
ELECTION OF DIRECTORS
Effective June 1, 2000, NCH's Board of Directors unanimously voted to increase the number of directors serving on the Board from seven members to ten members, divided into three classes: Class I (three directors), Class II (three directors), and Class III (four directors). Only the Class III positions are due for nomination and election at the Meeting. The Class I and Class II positions will be due for nomination and election at the annual meetings of stockholders to be held in 2001 and 2002, respectively.
NCH expects Mssrs. Milton P. Levy, Jr. and Lester A. Levy to tender their resignations from the Board of Directors at the meeting of the Board of Directors scheduled to take place on July 27, 2000. In accordance with NCH's bylaws, the two vacant Class I director positions created by the expansion of the Board of Directors and the resignation of Lester A. Levy, and the vacant Class II director position created by the resignation of Milton P. Levy, Jr. shall be filled by appointment by the existing directors, to occur at the July 27, 2000 meeting of the Board of Directors. At such time, the Board of Directors expects to appoint Robert M. Levy and Lester A. Levy, Jr. as the new Class I directors and John I. Levy as the new Class II director. At the April 28, 2000 meeting of the Board of Directors, the directors elected Irvin L. Levy to serve as the Chairman of the Board of Directors, effective upon his re-election as a Class III director by the NCH stockholders at the Meeting on July 27, 2000.
The intention of the persons named in the enclosed proxy, unless such proxy specifies otherwise, is to vote the shares represented by such proxy for the election of Jerrold M. Trim, Irvin L. Levy, Walter M. Levy and Ronald G. Steinhart as the Class III directors. Messrs. Jerrold M. Trim, Irvin L. Levy, Walter M. Levy and Ronald G. Steinhart have been nominated to stand for election by the Board of Directors until their terms expire or until their respective successors are duly elected and qualified. Messrs. Jerrold M. Trim and Irvin L. Levy are presently directors of NCH.
Messrs. Irvin, Lester, and Milton Levy are brothers. Walter M. Levy and Lester A. Levy, Jr. are the sons of Mr. Lester A. Levy. Robert M. Levy and John I. Levy are the sons of Irvin L. Levy. Robert L. Blumenthal is a first cousin of Messrs. Irvin, Lester, and Milton Levy. Certain information regarding each nominee and director is set forth below. The number of shares beneficially owned by each nominee is listed under "Security Ownership of Principal Stockholders and Management."
Class I Directors
Rawles Fulgham, 72, has been a director of NCH since 1981. Mr. Fulgham was an executive director of Merrill Lynch Private Capital Inc. from 1982 until 1989, and served as a Senior Advisor to Merrill Lynch & Co., Inc. from 1989 until 1998. He was also a director, the Chairman of the Board and Chief Executive Officer of Global Industrial Technologies, Inc., located in Dallas, Texas, until it was acquired by RHI-AG, located in Vienna, Austria, on December 31, 1999. Mr. Fulgham also served on the Board of Directors of BancTec, Inc. and currently serves on the Audit and Advisory Committees of Dorchester Hugoton, Ltd. From 1975 through October 1998, he served on the Board of Directors of Dresser Industries, Inc. until it was merged with Halliburton Company. Mr. Fulgham is a member of the Audit Committee and the Compensation Committee.
Lester A. Levy, 77, has been a director and officer of NCH since 1947, and since 1965 has served as Chairman of the Board of Directors of NCH. He is either the president or a vice president of substantially all of NCH's subsidiaries. Mr. Levy is a member of the Stock Option Committee and the Executive Committee.
At the meeting of the Board of Directors scheduled to take place on July 27, 2000, the directors expect to appoint Robert M. Levy and Lester A. Levy, Jr. as new Class I directors. These appointments will fill the vacant Class I director positions created by the expansion of the Board of Directors and the resignation of Lester A. Levy, as described above.
Robert M. Levy, 41, joined NCH in 1985 after attending business school at the University of Texas at Austin. His initial responsibility was in domestic chemical marketing, after which he served in management positions with increasing responsibility in Europe and the United States. He is an officer and/or director of several of NCH's subsidiaries.
Lester A. Levy, Jr., 39, joined NCH in 1985 after attending business school at Northwestern University. His initial responsibility was in domestic chemical sales, after which he served in management positions with increasing responsibility in Europe and the United States. Mr. Levy is an officer and/or director of several of NCH's subsidiaries.
Class II Directors
Robert L. Blumenthal, 69, has engaged in the practice of law since 1957. He is a partner at the Dallas law firm of Carrington, Coleman, Sloman & Blumenthal, L.L.P., which serves as NCH's legal counsel.
Thomas B. Walker, Jr., 76, has been a director of NCH since 1987. Mr. Walker was a general partner of Goldman, Sachs & Co. from 1968 until 1984 and a limited partner of The Goldman Sachs Group, L.P. ("Goldman Sachs") from 1984 through May 1999, when he assumed his current position as a Senior Director to Goldman Sachs. Mr. Walker is also a director of Sysco Corporation and Riviana Foods, Inc. He is a member of the Audit Committee and the Compensation Committee.
Milton P. Levy, Jr., 74, has been a director and officer of NCH since 1947, and since 1965 has served as Chairman of the Executive Committee of NCH. He is either the president or a vice president of substantially all of NCH's subsidiaries. Mr. Levy is a member of the Stock Option Committee and the Executive Committee.
At the meeting of the Board of Directors scheduled to take place on July 27, 2000, the directors expect to appoint John I. Levy as a new Class II director in order to fill the vacant Class II director position created by the resignation of Milton P. Levy, Jr., as described above.
John I. Levy, 38, joined NCH in 1985 after attending business school at Southern Methodist University. His initial responsibility was in corporate planning, after which he served in management positions with increasing responsibility in Europe and the United States. Mr. Levy is currently an officer and/or director of several of NCH's subsidiaries.
Class III Directors and Nominees
Jerrold M. Trim, 63, has been a director of NCH since 1980 and is the President and majority shareholder of Windsor Association, Inc., which is engaged primarily in investment consulting services. He is a member of the Audit Committee and the Compensation Committee.
Irvin L. Levy, 71, has been a director and an officer of NCH since 1950, and has served as NCH's President since 1965. He is either president or a vice president of substantially all of NCH's subsidiaries. Mr. Levy is a member of the Stock Option Committee and the Executive Committee. If re-elected as a Class III director by the NCH stockholders at the Meeting on July 27, 2000, Mr. Levy shall serve as Chairman of the Board of Directors of NCH.
Walter M. Levy, 45, joined NCH in 1980 after attending business school at the University of Virginia. His initial responsibility was in field sales, after which he served in management positions with increasing responsibility in Europe, Asia and the United States. He is currently an officer and/or director of several of NCH's subsidiaries.
Ronald G. Steinhart, 60, is the Vice Chairman of the Board of Directors of Bank One, Texas. He served as President and Chief Operating Officer of InterFirst Corporation from 1981 through 1988, at which time he became Chairman and Chief Executive Officer of Deposit Guaranty Bank (later renamed Team Bank). After Team Bank's merger with Bank One, Texas in 1992, Mr. Steinhart was named President and Chief Operating Officer. In 1995, Mr. Steinhart was appointed Chairman and Chief Executive Officer of Bank One, Texas, and in 1996, he was appointed Chairman and Chief Executive Officer of Bank One Corporation's Commercial Banking Group. After the merger of Bank One Corporation with First Chicago NBD Corporation in 1998, Mr. Steinhart was named to the Management Committee, in which capacity he served until his retirement in January 2000. Mr. Steinhart also serves as a Trustee of Prentiss Properties Trust, a publicly-traded real estate investment trust.
If any of the above nominees for Class III directors should become unavailable to serve as a director, then the shares represented by proxy will be voted for such substitute nominees as may be nominated by the Board of Directors. NCH has no reason to believe that any of the above nominees are, or will be, unavailable to serve as a director.
Meeting Attendance and Committees of the Board
NCH has audit, compensation, executive, and stock option committees of the Board, whose members are noted above. During the last fiscal year, the Board of Directors met on five occasions, the Compensation Committee met once, the Audit Committee met once, the Executive Committee met at least 25 times, and the Stock Option Committee met once. NCH does not have a standing nominating committee of the Board. Nominees to the Board are selected by the entire Board.
The Audit Committee of the Board reviews the scope of the independent auditors' examinations and the scope of activities of NCH's internal auditors. Additionally, it receives and reviews reports of NCH's independent auditors and internal auditors. The Audit Committee also meets (without management's presence, if the Audit Committee so desires) with the independent auditors and members of the internal auditing staff, receives recommendations or suggestions for change, and may initiate or supervise any special investigations it may choose to undertake.
The Compensation Committee recommends to the Board of Directors the salaries of the members of the Executive Committee.
The Executive Committee possesses all of the powers of the Board of Directors between meetings of the Board.
The Stock Option Committee of the Board determines those employees of NCH and its subsidiaries who will receive stock options and the amount of such options.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Director Compensation
Directors who are not executive officers of NCH receive compensation of $25,000 per annum and $1,000 for each meeting of the Board of Directors or Board committee attended. All other directors receive $1,000 for each such meeting attended. Members of the Stock Option Committee and Executive Committee are not compensated separately for their services on such committees.
Report on Executive Compensation
Responsibility for Executive Compensation
Three outside directors, as the Compensation Committee of NCH (Messrs. Fulgham, Trim, and Walker), have primary responsibility for recommending to the Board the executive compensation program for the members of the Executive Committee. The Compensation Committee recommends to the Board annual base compensation for the members of the Executive Committee and is responsible for administering and approving incentive compensation for the members of the Executive Committee. The Executive Committee is responsible for setting the compensation for all other officers of NCH.
Executive Compensation Strategy
With respect to compensation of all key executives other than those executives whose compensation is determined by the Compensation Committee, NCH's strategy is generally as follows:
* Attract and retain key executives by delivering a market competitive rate of base pay. Market competitive rates of pay are determined by reviewing compensation data from other companies that resemble NCH in terms of lines of business, size, scope, and complexity.
* Provide salary increases to key executives based on their individual effort and performance. In addition to the individual's experience, job duties, and performance, annual increases are influenced by NCH's overall performance.
* Provide annual incentive opportunities based on objectives that NCH feels are critical to its success during the year. Target incentive levels are set on an individual basis and actual awards are made at the Executive Committee's discretion.
* Provide long-term incentives to key employees so that employees are focused on activities and decisions that promote NCH's long-term financial and operational success. To meet this objective, NCH offers stock options to certain key employees. Options are generally granted for a period of five years at a price that is at least equal to the fair market value of the Common Stock at the time of grant. Options vest in equal increments over a three-year period from the time of grant.
Compensation for the Members of the Executive Committee
In 1994, the Compensation Committee, with assistance from an outside consulting firm, determined the competitiveness of the compensation for the Office of the Executive Committee. Based on survey and proxy analyses performed by the consulting firm, the Compensation Committee adopted the incentive bonus plan described below. All of the companies in the peer group in NCH=s performance graph on page 9 of this Proxy Statement, other than Lilly Industries and Lubrizol Corporation, were included in the analysis performed by the consulting firm. Although no formula or preset goal is used in setting the base salary for the Office of the Executive Committee, performance in sales and earnings as well as the current economic and competitive environment is considered.
NCH has adopted a separate strategy with respect to the incentive compensation of the Office of the Executive Committee, as currently composed. Since these individuals are very significant long-term stockholders of NCH, some of the typical approaches to executive compensation that exist in the marketplace have not necessarily been relevant at NCH. Long-term incentive programs are implemented for senior executives to create a link between the corporation's performance and the executive's own personal wealth. In light of the shareholding of Messrs. Irvin and Lester Levy, they are already significantly impacted financially by NCH's overall performance. The Compensation Committee generally feels that in this situation any long-term incentive program should be tied to salary or bonus.
To qualify all compensation paid to the Executive Committee of the Board of Directors as a deductible expense under ss. 162 of the Internal Revenue Code (the "Code"), on April 28, 1994, the Compensation Committee of the Board of Directors adopted an incentive bonus plan (the "Bonus Plan"), for the Office of the Executive Committee, which was approved by the stockholders at the 1994 Annual Meeting.
The Bonus Plan provides a formula for determining the amounts of annual bonuses to be paid to each member of the Executive Committee. Bonus amounts will depend on the amount by which NCH's net income after taxes, but before accrual for any bonus under the Bonus Plan, for a particular fiscal year increases over its net income before accrual for any bonus for the preceding fiscal year. An amendment to the original formula for determining the amounts of annual bonuses was adopted by the Compensation Committee on June 7, 1996, which was approved by the stockholders at the 1996 Annual Meeting, because the formula could have resulted in a member receiving over $1 million in annual compensation, which amount in excess of $1 million would not have been deductible by NCH under ss. 162(m) of the Code. As amended, the formula provides as follows. Increases from 10% to less than 15% will result in payment of a $225,000 bonus to each member of the Executive Committee. Increases of 15% or greater will result in payment of a $325,000 bonus to each Executive Committee member. For fiscal 2000, no bonus was payable because NCH's net income did not increase by 10% or more over its net income for fiscal 1999.
The Bonus Plan prohibits amendment of its terms to increase the cost of the Bonus Plan to NCH or to change the persons to whom bonuses will be paid under the Bonus Plan without a vote of NCH's stockholders.
Conclusion
The Compensation Committee believes that current compensation arrangements in place at NCH are reasonable and competitive given NCH's size and status and the current regulatory environment surrounding executive compensation. The base salary program allows NCH to attract and retain management talent. In addition, for those employees who are incentive eligible, such systems continue to provide the necessary link between the attainment of NCH's performance objectives and the compensation received by executives.
Executive Committee & Compensation Committee Stock Option Committee
Rawles Fulgham Irvin L. Levy Jerrold M. Trim Lester A. Levy Thomas B. Walker, Jr. Milton P. Levy, Jr.
The report on executive compensation will not be deemed to be incorporated by reference into any filing by NCH under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that NCH specifically incorporates the above report by reference.
Compensation Committee Interlocks and Insider Participation in Compensation Decisions
Messrs. Irvin, Lester, and Milton Levy are members of the Executive Committee of NCH's Board of Directors, which committee determines most salaries and promotions with respect to officers of NCH and its subsidiaries, and of the Stock Option Committee, which determines those employees of NCH and its subsidiaries who will receive stock options and the amount of such options. Messrs. Irvin, Lester, and Milton Levy are executive officers and employees of NCH.
NCH's Board of Directors (with the subject members abstaining) determines the salaries of the members of the Executive Committee after recommendation of the Compensation Committee, whose members are Rawles Fulgham, Jerrold M. Trim, and Thomas B. Walker, Jr.
Executive Compensation
The following table summarizes the compensation paid to Messrs. Irvin, Lester, and Milton Levy, who together comprised the Executive Committee, and to NCH's two other most highly compensated executive officers (whose compensation exceeded $100,000 in fiscal 2000) for services rendered in all capacities to NCH during the fiscal years ended April 30, 2000, 1999, and 1998.
SUMMARY COMPENSATION TABLE
Annual Compensation(1) Name and Fiscal ---------------------- All Other Principal Positions Year Salary(2) Bonus Compensation (3) - ------------------------ ----- -------- ----- ----------------
Irvin L. Levy, President 2000 $916,505 -- $4,200 1999 913,106 -- 4,000 1998 889,420 -- 4,000
Lester A. Levy, 2000 $918,264 -- $3,200 Chairman of the Board 1999 918,667 -- 3,200 1998 894,087 -- 3,200
Milton P. Levy, Jr., 2000 $920,355 -- $3,200 Chairman of the Executive 1999 920,636 -- 3,200 Committee 1998 896,074 -- 3,200
Thomas F. Hetzer, 2000 $250,918 -- $4,200 Vice President - Finance 1999 235,995 $11,000 4,000 1998 221,331 28,000 4,000
Glen L. Scivally, 2000 $215,603 -- $4,200 Vice President and 1999 205,765 $6,000 4,000 Treasurer 1998 195,846 27,000 4,000
- --------------------
(1) Certain of NCH's executive officers receive personal benefits in addition to annual salary and bonus. The aggregate amounts of the personal benefits, however, do not exceed the lesser of $50,000 or 10% of the total of the annual salary and bonus reported for the named executive officer.
(2) Includes compensation for services as a director (other than Mr. Hetzer and Mr. Scivally).
(3) The amounts included in this column were contributed to the accounts of the executives included in the table under NCH's qualified profit sharing and savings plan.
Retirement Agreements
NCH has entered into retirement agreements allowing retirement at any time after age 59-1/2 with Messrs. Irvin, Lester, and Milton Levy that provide for lifetime monthly payments and guarantee 120 monthly payments beginning at death, retirement, or disability. Payment under these agreements is $500,000 per year for each of Messrs. Irvin, Lester and Milton Levy, subject to adjustment each year for increases in the United States Consumer Price Index for the preceding year. The Board of Directors expects that Lester Levy shall retire as Chairman of the Board of Directors effective as of the Meeting, and that Milton Levy shall retire as Chairman of the Executive Committee effective as of the Meeting.
Executive Vice Presidents
Mssrs. John I. Levy, Lester A. Levy, Jr., Robert M. Levy and Walter M. Levy were each elected to serve as an Executive Vice-President of NCH by the Board of Directors effective as of May 1, 2000.
FIVE YEAR COMPARISON OF CUMULATIVE TOTAL RETURN
The following graph presents NCH's cumulative stockholder return during the period beginning April 30, 1995, and ending April 30, 2000. NCH is compared to the S&P 500 and a peer group consisting of companies that collectively represent lines of business in which NCH competes. The companies included in the peer group index are Betz Laboratories, Inc. ("Betz"), The Dexter Corporation, Ecolab Inc., Lawson Products, Inc., Lilly Industries, Lubrizol Corporation, Nalco Chemical Company ("Nalco"), National Service Industries, Inc., Petrolite Corporation ("Petrolite"), Premier Industrial Corporation ("Premier"), Quaker Chemical Corporation, Safety-Kleen Corporation, and Snap-On Tools Corporation. During fiscal year 1997, Premier was acquired by another corporation. Since Premier's shareholder return is no longer available, they were excluded from the peer group for performance after 1996. During fiscal year 1998, Petrolite was acquired by another corporation, and was excluded from the peer group for performance after 1997. During fiscal year 1999, Betz was acquired by another corporation, and was excluded from the peer group for performance after 1998. During fiscal year 2000, Nalco was acquired by another corporation, and was excluded from the peer group for performance after 1999. Each index assumes $100 invested at the close of trading on April 30, 1995, and is calculated assuming quarterly reinvestment of dividends and quarterly weighting by market capitalization.
[STOCK PERFORMANCE GRAPH FILED UNDER COVER OF FORM S-E]
1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- NCH Corporation 100 94 106 109 96 79 S&P 500 Index 100 130 163 230 280 308 Peer Group 100 114 143 174 170 140
Data source: S&P Compustat, a division of McGraw-Hill, Inc.
The stock price performance depicted in the graph above is not necessarily indicative of future price performance. The graph will not be deemed to be incorporated by reference in any filing by NCH under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that NCH specifically incorporates the graph by reference.
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership of NCH's Common Stock as of June 1, 2000, by: (i) persons known to management to beneficially own more than 5% of NCH's Common Stock; (ii) each director and nominee for director; (iii) the three persons holding the office of the Executive Committee and NCH's two other most highly compensated executive officers (whose compensation exceeded $100,000 in fiscal 2000); and (iv) all directors and executive officers of NCH as a group. Also included in the table is the beneficial ownership of NCH's Common Stock as of June 1, 2000 by Mssrs. John I. Levy, Lester A. Levy, Jr., Robert M. Levy and Walter M. Levy, who were each elected to serve as an Executive Vice-President of NCH by the Board of Directors effective as of May 1, 2000. Except as noted below, each person included in the table has sole voting and investment power with respect to the shares that the person beneficially owns.
Name of Amount & Nature Beneficial Owner of Beneficial Ownership Percent of Class ----------------------- ----------------------- ---------------- Robert L. Blumenthal 2,683 * Rawles Fulgham (1) 2,000 * Thomas F. Hetzer 0 - Irvin L. Levy (2)(3) 1,444,576 26.7% Lester A. Levy (2)(4) 1,437,612 26.6% Milton P. Levy, Jr. (2)(5) 44,000 * John I. Levy (6) 84,234 1.6% Lester A. Levy, Jr. (7) 23,942 * Robert M. Levy (8) 69,220 1.3% Walter M. Levy (9) 24,218 * Glen L. Scivally 0 - Ronald G. Steinhart 0 - Jerrold M. Trim (10) 0 - Thomas B. Walker, Jr. 10,000 *
All directors and executive 3,142,485 58.1% officers as a group (14 people)
Dimensional Fund Advisors, Inc.(11) 340,200 6.3% - --------------------
* Less than 1% of class.
(1) Of these shares, 700 are held by a Dallas bank in trust for the retirement plan and benefit of Mr. Fulgham.
(2) The address of Messrs. Irvin, Lester, and Milton Levy is P.O. Box 152170, Irving, Texas 75015. The definition of beneficial ownership under the rules and regulations of the Securities and Exchange Commission requires inclusion of the same 29,000 shares held as cotrustees by Messrs. Irvin, Lester, and Milton Levy for a family trust in the totals listed above for each of Messrs. Irvin, Lester, and Milton Levy.
(3) Irvin L. Levy owns a life estate interest in 1,000,000 shares included in the table over which he has sole voting and investment power, and his children own a remainder interest in such 1,000,000 shares. The table includes 29,000 shares held as cotrustee with his brothers for a family trust over which he shares voting and investment power, the beneficial ownership of which Mr. Levy disclaims.
(4) Lester A. Levy owns a life estate interest in 685,194 shares included in the table over which he has sole voting and investment power, and his children own a remainder interest in such 685,194 shares. The table includes 29,000 shares held as cotrustee with his brothers for a family trust over which he shares voting and investment power, the beneficial ownership of which Mr. Levy disclaims.
(5) The table includes 29,000 shares held by Milton P. Levy, Jr. as cotrustee with his brothers for a family trust over which he shares voting and investment power, the beneficial ownership of which Mr. Levy disclaims.
(6) The table includes 1,353 shares held by the wife of John I. Levy, the beneficial ownership of which Mr. Levy disclaims, and 1,798 shares held by the children of John I. Levy, the beneficial ownership of which Mr. Levy disclaims. The table also includes options held by John I. Levy exercisable within 60 days to acquire 9,220 shares. John I. Levy and a trust for the benefit of Mr. Levy's family additionally hold, in the aggregate, a remainder interest in 500,000 shares held by his father, Irvin L. Levy (see footnote (3) above).
(7) The table includes options held by Lester A. Levy, Jr. exercisable within 60 days to acquire 9,220 shares. Lester A. Levy, Jr. additionally holds a remainder interest in 228,398 shares held by his father, Lester A. Levy (see footnote (4) above).
(8) The table includes options held by Robert M. Levy exercisable within 60 days to acquire 9,220 shares. Robert M. Levy and a trust for the benefit of Mr. Levy's family additionally hold, in the aggregate, a remainder interest in 500,000 shares held by his father, Irvin L. Levy (see footnote (3) above).
(9) The table includes 1,445 shares held by the wife of Walter M. Levy, the beneficial ownership of which Mr. Levy disclaims, and 6,005 shares held by Walter M. Levy as trustee for family trusts for the benefit of his children, the beneficial ownership of which Mr. Levy disclaims. The table also includes options held by Walter M. Levy exercisable within 60 days to acquire 9,220 shares. Walter M. Levy (and entities controlled by Walter M. Levy) additionally holds a remainder interest in 228,398 shares held by his father, Lester A. Levy (see footnote (4) above).
(10) Windsor Association, Inc., of which Mr. Trim is President, has a corporate policy against its employees owning any publicly traded securities.
(11) The table sets forth Dimensional Fund Advisors, Inc.'s stockholding based on its latest Schedule 13G filed with the SEC as of February 3, 2000. Dimensional Fund Advisors, Inc. reports its address as 1299 Ocean Avenue, 11th Floor, Santa Monica, California 90401. It has sole dispositive power over 340,200 shares, shared dispositive power over 0 shares, sole voting power over 340,200 shares, and shared voting power over 0 shares.
INFORMATION WITH RESPECT TO STOCKHOLDER PROPOSAL
William Steiner, 4 Radcliff Drive, Great Neck, New York 11024, a stockholder of NCH , has notified NCH of his intention to introduce the following proposal at the Meeting. Mr. Steiner's proposed resolution and supporting statement, for which the Board of Directors and NCH accept no responsibility, are set forth below. THE BOARD OF DIRECTORS OPPOSES THIS PROPOSAL FOR THE REASONS STATED BELOW.
MAXIMIZE VALUE RESOLUTION
Resolved that the shareholders of NCH Corporation urge the NCH Corporation Board of Directors to arrange for the prompt sale of NCH Corporation to the highest bidder.
The purpose of the Maximize Value Resolution is to give all NCH Corporation shareholders the opportunity to send a message to the NCH Corporation Board that they support the prompt sale of the NCH Corporation to the highest bidder. A strong and or majority vote by the shareholders would indicate to the board the displeasure felt by the shareholders of the shareholder returns over many years and the drastic action that should be taken. Even if it is approved by the majority of the NCH Corporation shares represented and entitled to vote at the annual meeting, the Maximize Value Resolution will not be binding on NCH Corporation Board. The proponent, however, believes that if this resolution receives substantial support from the shareholders, the board may choose to carry out the request set forth in the resolution:
The prompt auction of NCH Corporation should be accomplished by any appropriate process the board chooses to adopt including a sale to the highest bidder whether in cash, stock, or a combination of both. It is expected that the board will uphold its fiduciary duties to the utmost during the process.
The proponent further believes that if the resolution is adopted, the management and the board will interpret such adoption as a message from the company's stockholders that it is no longer acceptable for the board to continue with its current management plan and strategies.
I URGE YOUR SUPPORT. VOTE FOR THIS RESOLUTION. ----------------------------------------------
The Board of Directors recommends a vote against this proposal. In the judgement of the directors, the proposed action would not be timely nor in the best interest of all of the stockholders.
SELECTION OF AUDITORS
The Board of Directors has appointed KPMG LLP, Certified Public Accountants, to continue to be the principal independent auditors of NCH, subject to stockholder ratification at the Meeting. A representative of that firm has been requested to be present at the Meeting and will have an opportunity to make a statement if the representative desires to do so and to respond to appropriate questions.
PROPOSALS OF STOCKHOLDERS
Stockholders of NCH who intend to present a proposal for action at the 2001 Annual Meeting of Stockholders of NCH must notify NCH's management of such intention by notice received at NCH's principal executive offices not less than 120 days in advance of June 27, 2001, for such proposal to be included in NCH's proxy statement and form of proxy relating to such meeting.
ANNUAL REPORT
The Annual Report for the year ended April 30, 2000, is being mailed to stockholders with this Proxy Statement. The Annual Report is not to be regarded as proxy soliciting material. NCH will provide without charge to each stockholder to whom this Proxy Statement and the accompanying form of proxy are sent, on the written request of such person, a copy of NCH's annual report on Form 10-K for the fiscal year ended April 30, 2000, including the financial statements and the financial statement schedules, required to be filed with the Securities and Exchange Commission. Requests should be directed to NCH Corporation, Attention: Secretary, P. O. Box 152170, Irving, Texas 75015.
Irvin L. Levy, President
Irving, Texas Dated: June 27, 2000
PROXY CARD
NCH CORPORATION
ANNUAL MEETING OF STOCKHOLDERS-JULY 27, 2000 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, revoking all prior proxies, hereby appoints James H. Stone, Tom Hetzer, and Joe Cleveland, and any one or more of them, proxy or proxies, with full power of substitution in each, and hereby authorizes them to vote for the undersigned and in the undersigned's name, all shares of common stock of NCH Corporation (the "Company") standing in the name of the undersigned on June 1, 2000, as if the undersigned were personally present and voting at the Company's annual meeting of stockholders to be held on July 27, 2000, in Dallas, Texas, and at any adjournment thereof, upon the matters set forth on the reverse side hereof.
This proxy when properly executed will be voted in the manner directed herein by the undersigned stockholder. IF NO DIRECTION IS MADE, THEN THIS PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2 AND AGAINST PROPOSAL 3, AND IN THE PROXIES' DISCRETION ON ALL OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE ANNUAL MEETING, INCLUDING MATTERS INCIDENT TO THE CONDUCT OF SUCH MEETING.
(Continued and to be signed on reverse side)
FOR WITHHOLD AUTHORITY 1. Election of Directors / / / /
Nominees: Jerrold M. Trim, Irvin L. Levy, Walter M. Levy, and Ronald G. Steinhart
--------------------------------------------------------------------- Instruction: To withhold authority to vote for all nominees, mark the Withhold Authority box. To withhold authority to vote for any individual nominees, write the nominee's name on the line above.
2. Proposal to ratify the appointment of KPMG LP as independent auditors of NCH Corporation.
FOR / / AGAINST / / ABSTAIN / /
3. Proposal submitted by a stockholder.
FOR / / AGAINST / / ABSTAIN / /
4. In their discretion, the proxies are authorized to vote upon any other matters that may properly come before the meeting or any adjournment thereof, subject to the limitations set forth in the applicable regulations under the Securities Exchange Act of 1934.
Dated: , 2000 -------------------------------------------
------------------------------------------- Signature
------------------------------------------- Signature if held jointly
NOTE: Please sign exactly as name appears hereon. Joint owner should each sign. When signing as attorney, executor, administrator, trustee, guardian, officer or partner, please indicate full title and capacity.