NCH Corporation and Subsidiaries - CVR API

NCH Corporation and

Subsidiaries Consolidated Financial Statements as of and for the Years Ended April 30, 2016 and 2015

NCH CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

Page

INDEPENDENT AUDITOR’S REPORT 1

CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE

YEARS ENDED APRIL 30, 2016 AND 2015:

Consolidated Balance Sheets 2-3

Consolidated Statements of Income (Loss) 4

Consolidated Statements of Comprehensive Loss 5

Consolidated Statements of Stockholder’s Equity 6

Consolidated Statements of Cash Flows 7

Notes to Consolidated Financial Statements 8–24

PricewaterhouseCoopers LLP, 2001 Ross Avenue, Suite 1800, Dallas, Texas 75201

T: (214) 999-1400, F: (214) 754-7991, www.pwc.com/us

Independent Auditor's Report

To the Board of Directors of NCH Corporation We have audited the accompanying consolidated financial statements of NCH Corporation and its subsidiaries which comprise the consolidated balance sheets as of April 30, 2016 and 2015, and the related consolidated statements of income (loss), comprehensive loss, stockholder’s equity and cash flows for the years then ended. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on the 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 consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NCH Corporation and its subsidiaries as of April 30, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

August 31, 2016

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CONSOLIDATED BALANCE SHEETS

AS OF APRIL 30, 2016 AND 2015

(Dollars in thousands)

2016 2015

ASSETS

Current assets:

Cash and cash equivalents 10,624$ 9,884$

Accounts receivable, net of allowance for doubtful accounts

of $6,256 in 2016 and $5,867 in 2015 185,371 185,511

Inventories 108,585 118,127

Other current assets 19,977 18,207

Income tax receivable 3,500 2,540

Deferred income taxes 22,081 22,100

Total current assets 350,138 356,369

Property, plant and equipment, net 192,751 198,778


Goodwill 20,154 20,218

Intangible assets, net 9,218 12,031

Loans to related parties 526 425

Cash surrender value of life insurance 54,509 54,028

Other 6,404 7,709

Total assets 642,559$ 651,855$

(Continued)

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CONSOLIDATED BALANCE SHEETS

AS OF APRIL 30, 2016 AND 2015

(Dollars in thousands, except per share data)

2016 2015LIABILITIES AND STOCKHOLDER’S EQUITY

Current liabilities:

Accounts payable 77,724$ 78,123$

Accrued expenses 62,314 65,391

Notes payable and current maturities of long-term debt 1,316 933

Current portion of retirement and deferred compensation plans 3,639 3,729

Related party liabilities 504 633

Income tax payable 1,874 2,190

Deferred income taxes 1,345 683

Other current liabilities 84 141

Total current liabilities 148,800 151,823

Long-term debt, less current maturities 339,839 336,672


Retirement and deferred compensation plans, less current portion 41,867 41,097

Other long-term liabilities 12,939 18,858

Total liabilities 545,256 549,733

Commitments and contingencies

Stockholder’s equity:

Preferred stock, par value $1 per share, authorized 500,000 shares,

no shares issued or outstanding - -

Common stock, par value $0.01 per share, 1,000 shares authorized,

issued and outstanding - -

Retained earnings 146,860 148,512

Accumulated other comprehensive loss (55,048) (52,189)

Total NCH stockholder’s equity 91,812 96,323

Noncontrolling interest 5,491 5,799

Total stockholder’s equity 97,303 102,122

Total liabilities and stockholder’s equity 642,559$ 651,855$

The accompanying notes are an integral part of these consolidated financial statements.

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CONSOLIDATED STATEMENTS OF INCOME (LOSS)

FOR THE YEARS ENDED APRIL 30, 2016 AND 2015


2016 2015

Net sales 996,619$ 1,089,586$

Operating expenses:

Cost of sales, warehousing and commissions (660,729) (716,580)

General and administrative expenses (309,792) (336,346)

Total operating expenses (970,521) (1,052,926)

Operating income 26,098 36,660

Other income (expenses)

Foreign exchange transaction gains and losses (1,292) 2,409

Loss on sale of business (969) -

Interest income 116 100

Interest expense (22,645) (18,509)

Increase in value of insurance policies and other 1,710 1,700

Total other expenses, net (23,080) (14,300)

Income before income taxes 3,018 22,360

Provision for income taxes (2,858) (11,192)

Net income 160 11,168

Less net income attributable to noncontrolling interest (1,812) (1,799)

Net (loss) income attributable to NCH (1,652)$ 9,369$


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CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS



2016 2015

Net income 160$ 11,168$

Other comprehensive loss:

Foreign currency translation adjustments (2,966) (17,439)

Net change in cash flow hedges, net of tax of $33 and $834 (61) (1,549)

Other (81) (13)

Total other comprehensive loss (3,108) (19,001)

Comprehensive loss (2,948) (7,833)

Less comprehensive income attributable to noncontrolling interest (1,563) (1,843)

Comprehensive loss attributable to NCH (4,511)$ (9,676)$


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CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY



Accumulated

Common Other

Stock Common Retained Comprehensive Noncontrolling

Shares Stock Earnings Loss Interest Total

BALANCE, April 30, 2014 1,000 -$ 139,143$ (33,144)$ 5,641$ 111,640$

Comprehensive income:

Net income - - 9,369 - 1,799 11,168

Other comprehensive income (loss), net - - - (19,045) 44 (19,001)

Cash dividends declared - - - - (1,685) (1,685)

BALANCE, April 30, 2015 1,000 - 148,512 (52,189) 5,799 102,122

Comprehensive income:

Net (loss) income - - (1,652) - 1,812 160

Other comprehensive loss, net - - - (2,859) (249) (3,108)

Cash dividends declared - - - - (1,871) (1,871)

BALANCE, April 30, 2016 1,000 -$ 146,860$ (55,048)$ 5,491$ 97,303$


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CONSOLIDATED STATEMENTS OF CASH FLOWS



2016 2015

OPERATING ACTIVITIES:

Net income 160$ 11,168$

Adjustments to reconcile net income to net cash resulting from operating activities:

Depreciation and amortization 46,164 44,581

Gain on sale of assets (897) (2,812)

Deferred income taxes (5,134) 1,178

Other noncash items in income (2,117) (6,854)

Change in assets and liabilities, excluding those from the acquisition of businesses:

Accounts receivable (1,869) (8,013)

Inventories 7,389 (2,691)

Other current assets (1,666) (2,675)

Other noncurrent assets 63 (2,183)

Accounts payable 222 (220)

Accrued expenses (2,015) 1,114

Income taxes payable and other current liabilities (1,497) (157)

Retirement, deferred compensation, and other long-term liabilities (4,485) (1,729)

Net cash resulting from operating activities 34,318 30,707

INVESTING ACTIVITIES:

Purchases of property, plant, and equipment (38,592) (59,820)

Proceeds from sale of assets 2,560 4,003

Net proceeds from life insurance policies 1,239 - Acquisition of businesses and other (218) (1,697)

Net cash resulting from investing activities (35,011) (57,514)

FINANCING ACTIVITIES:

Net borrowings of lines of credit 1,301 21,202

Proceeds from long-term debt 2,415 4,008

Payments of long-term debt (100) (137)

Dividends paid to noncontrolling interest (1,871) (1,749)

Net cash resulting from financing activities 1,745 23,324

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (312) (1,053)

NET CHANGE IN CASH AND CASH EQUIVALENTS 740 (4,536)

CASH AND CASH EQUIVALENTS — Beginning of year 9,884 14,420

CASH AND CASH EQUIVALENTS — End of year 10,624$ 9,884$



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED April 30, 2016 and 2015

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations — The Company markets an extensive line of chemical products to customers

throughout the world, with its sales predominately in industrial cleaning and maintenance, water

treatment and remediation and oil field services, as well as plumbing, pet care, and specialty industrial

supplies. These products are marketed principally through the Company’s sales force.

Principles of Consolidation — The consolidated financial statements include the accounts of NCH

Corporation and its majority owned subsidiaries (the “Company”). All intercompany transactions and

balances have been eliminated in consolidation. Entities in which the Company exhibits control are

consolidated and the reported consolidated balances in these consolidated financial statements include

the amounts related to any such entities as if it was wholly owned, with amounts of net income and

stockholder’s equity attributable to the noncontrolling ownership noted separately.

Use of Estimates in the Consolidated Financial Statements — Preparation of consolidated financial

statements in conformity with accounting principles generally accepted in the United States of America

(“US GAAP”) requires management to make estimates and assumptions that affect the amounts reported

in the consolidated financial statements and accompanying notes. Actual results could differ from those

estimates.

Foreign Currency Translation — All assets and liabilities of operations with functional currencies

other than the United States Dollar are translated into U.S. dollars at period-end exchange rates, and

income and expenses are translated at average rates in each month of the year. Exchange adjustments

resulting from translation are included in stockholder’s equity in the foreign currency translation

adjustment component of accumulated other comprehensive loss. Gains and losses resulting from

foreign currency transactions are recognized as expense or income in the current period.

Cash and Cash Equivalents — 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. The Company maintains cash and cash

equivalents at several financial institutions, which at times may not be federally insured or may exceed

federally insured limits. The Company has not experienced any losses in such accounts and believes it is

not exposed to any significant credit risks on such accounts. As of April 30, 2016 and 2015, the

Company had approximately $10.0 million and $7.8 million, respectively, in foreign bank accounts.

Accounts Receivable — The Company’s accounts receivable are due from various customers

worldwide. Credit is extended based on evaluation of a customer’s financial condition and collateral is

not usually required. Accounts receivable terms vary depending on the country and customer channel,

generally range from 30 to 75 days and are stated at amounts due from customers net of an allowance for

doubtful accounts. Accounts not paid within the stated terms are considered past due. The Company

determines its allowance by considering a number of factors, including the length of time trade accounts

receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its



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obligation to the Company, and the condition of the general economy and the industry as a whole.

Accounts receivable deemed uncollectible are written off.

Inventories — Inventories are stated at the lower of cost or market and include the costs of material and

production related labor and overhead. Cost is determined by using the first-in first-out (FIFO) and

average cost methods (which approximates FIFO). Sales supplies include product samples and other

items used in the sales process.

Property, Plant and Equipment — These assets are recorded at cost less accumulated depreciation.

Depreciation on property, plant and equipment is provided generally using the straight-line method over

the estimated useful lives of the related assets. Upon disposition, 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. If events or changes in

circumstances warrant, the carrying value of property, plant and equipment is evaluated for impairment

using undiscounted future cash flows as the basis of determining if impairment exists. To the extent

impairment is indicated to exist, an impairment loss will be recognized for the excess of the carrying

value over the fair value of the related asset. There were no impairments recorded during the years

ended April 30, 2016 and 2015.

The Company accounts for costs incurred to develop computer software for internal use by capitalizing

costs incurred during the application development stage, which include costs to design the software

configuration and interfaces, coding, installation, and testing. Costs incurred during the preliminary

project along with post-implementation stages of internal use computer software are expensed as

incurred. Capitalized development costs are amortized over various periods up to 13 years. Costs

incurred to maintain existing software are expensed as incurred.

Goodwill and Intangible Assets — Goodwill represents the excess of purchase price over the fair

value of identifiable assets acquired in a business combination. Goodwill is tested for impairment

annually or more frequently in the event of an impairment indicator, using a fair value approach at the

“reporting unit” level. A reporting unit is the operating segment, or a business one level below that

operating segment (the “component level”) if discrete financial information is prepared and regularly

reviewed by management at the component level. The Company will recognize an impairment charge

when the carrying amount of a reporting unit exceeds its fair value. There were no impairments recorded

during the years ended April 30, 2016 and 2015.

The Company amortizes the cost of other intangibles over their estimated useful lives unless such lives

are deemed indefinite. Amortizable intangible assets are tested for impairment, if events or changes in

circumstances indicate that the assets might be impaired, based on undiscounted cash flows and, if

impaired, written down to fair value based on their discounted cash flows or appraised values. There

were no impairments recorded during the years ended April 30, 2016 and 2015.

Research and Development — Research and development costs are charged to expense as incurred.

Total research and development costs were approximately $8.8 million and $9.4 million for the years

ended April 30, 2016 and 2015, respectively.

Income Taxes — Deferred income taxes generally result from temporary differences between the

carrying amounts of existing assets and liabilities in the consolidated financial statements and their

respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to



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apply to taxable income in the years in which those temporary differences are expected to be recovered

or settled. A valuation allowance is recorded, if necessary, to reduce deferred tax assets by the amount of

tax benefits that are not expected to be realized based on available evidence.

The Company has adopted the guidance for accounting for uncertainty in income taxes, which clarifies

the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The

guidance prescribes a recognition threshold and measurement attribute for financial statement

recognition and measurement of a tax position taken or expected to be taken in a tax return. It also

provides guidance on derecognition of tax benefits, classification in the balance sheet, interest and

penalties, accounting in interim periods, disclosure, and transition.

Retirement Plans — Nonqualified retirement plans are not funded, but provisions for the net present

value of estimated liabilities arising from these plans have been recorded 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. Gains and

losses resulting from actual experience that is different from assumptions or from changes in

assumptions are recognized in the period they arise. The postretirement health care benefit plan is not

funded.

Revenue Recognition — Sales are recognized when (i) title passes to the customer or as services are

performed, (ii) the price is fixed and determinable and (iii) collectability is reasonably assured. Sales are

recognized net of any discounts, rebates or expected returns. All shipping and handling fees billed to

customers are reported as sales. Shipping and handling costs incurred are reported as cost of sales. All

sales taxes and value added taxes (VAT) billed to customers are excluded from sales.

Advertising Expenses — The Company expenses advertising expenditures as incurred. Total

advertising costs were $2.2 million and $2.9 million for the fiscal years ended April 30, 2016 and 2015,

respectively.

Comprehensive Income (Loss) — Foreign currency translation adjustments and changes in the market

value of qualifying financial derivatives are included in the measure of comprehensive income (loss)

and segregated in stockholder’s equity as accumulated other comprehensive income (loss).

Environmental Obligations — The Company provides for environmental-related obligations when

they are probable and amounts can be reasonably estimated. Where the available information is

sufficient to estimate the amount of liability, that estimate has been used. Where the information is only

sufficient to establish a range of probable liability and no point within the range is more likely than any

other, the lower end of the range has been recorded.

Estimated obligations are reviewed by the Company’s environmental remediation management, as well

as by financial and legal management and, if necessary, adjusted as additional information becomes

available. The estimates can change substantially as additional information becomes available regarding

the nature or extent of site contamination, required remediation methods, and other actions by or against

governmental agencies or private parties.

In calculating and evaluating the adequacy of its environmental reserves, the Company has taken into

account the joint and several liability imposed by the Comprehensive Environmental Response,

Compensation and Liability Act of 1980 (CERCLA) and the analogous state laws on all potentially

responsible parties (PRPs) and has considered the identity and financial condition of each of the other



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PRPs at each site to the extent possible. To ensure the Company is held responsible only for its equitable

share of site remediation costs, the Company initiates legal proceedings for contributions from other

PRPs. However, the identity and financial condition of other third parties from whom recovery is being

pursued, as well as the status of the claims against such parties, and recovery from insurance are not

taken into consideration in estimating reserves.

The Company’s environmental liabilities are principally for costs associated with the remediation and/or

study of sites at which hazardous substances have been released. Such costs principally include, among

other items, site investigations, site remediation, costs of operation and maintenance of the remediation

plan, fees to outside law firms and consultants for work related to the environmental effort, and future

monitoring costs. Estimated site liabilities are determined based upon agreements with regulatory

agencies, existing remediation laws and technologies, specific site consultants’ engineering studies or by

extrapolating experience with environmental issues at comparable sites.

Charges or recoveries for environmental costs are reflected in general and administrative expenses in the

consolidated statements of income. Recorded liabilities are current cost estimates and are discounted.

Fair Value of Financial Instruments — The carrying value of cash and cash equivalents, accounts

receivable, inventory, other current assets, accounts payable, accrued expenses and other current

liabilities approximates fair value due to the short-term maturity of these instruments. In January 2016,

the Financial Accounting Standards Board ("FASB") issued ASU 2016-01, Financial Instruments –

Overall Recognition and Measurement of Financial Assets and Financial Liabilities, which provides

revised guidance for recognition and measurement of certain financial instruments. Changes to the

current GAAP model primarily affect the accounting for equity investments, financial liabilities under

the fair value option, and the presentation and disclosure requirements for financial instruments. In

addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing

deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting

for other financial instruments, such as loans, investments in debt securities, and financial liabilities is

largely unchanged. Entities that are not public entities can elect to early adopt the provision for

permitting the omission of fair value disclosures for financial instruments at amortized cost. The

Company elected to early adopt this provision and not the entire standard.

U.S. GAAP establishes a hierarchy for fair value measurements, such that Level 1 measurements include

unadjusted quoted market prices for identical assets or liabilities in an active market; Level 2

measurements include quoted market prices for similar assets or liabilities, or inputs other than quoted

market price; and Level 3 measurements include those that are unobservable and of a highly subjective

nature.

The Company’s interest rate contracts are measured at fair value on a recurring basis using Level 2

inputs. The fair value is based on forward market interest rates through the terms of the agreements as

compared to the fixed rates the Company pays.



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2. INCOME TAXES

The provision (benefit) for income taxes for the years ended April 30 is as follows (in thousands):

2016 2015

U.S. Federal:

Current 258$ -$

Deferred (4,734) 735

Foreign:

Current 7,152 9,517

Deferred (332) 376

State:

Current 582 497

Deferred (68) 67

2,858$ 11,192$

The components of deferred tax assets and liabilities as of April 30 are as follows (in

thousands):2016 2015

Deferred tax liabilities

Insurance (22)$ (663)$

Depreciation and amortization (26,530) (35,124) Other (896) (837)

Deferred tax liabilities (27,448) (36,624)

Deferred tax assets

Allowance for doubtful accounts 1,785 1,885

Inventory 4,126 4,898

Accrued expenses 13,505 13,199

Retirement and deferred compensation plans 17,140 19,365

Other 1,807 2,597

Foreign tax credit carryforwards 1,062 1,336

Other credits 2,869 2,222

Foreign net operating loss carryforwards 26,563 27,590

Domestic net operating loss carryforwards 15,125 17,445

Deferred tax assets 83,982 90,537

Less valuation allowances (28,750) (31,482)

Net deferred tax assets 27,784$ 22,431$



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A reconciliation of the difference between the U.S. statutory income tax rate and the effective tax rate

for the years ended April 30 is as follows:

2016 2015

U.S. statutory rate 35.0 % 35.0 %

Change in valuation allowance 77.8 15.0

Permanent differences and other 12.0 13.5

Foreign tax rate differential from U.S. statutory rate (42.5) (22.1)

Foreign tax credit and other credits (17.8) (2.3)

Net U.S. tax on foreign earnings 10.5 8.8

State income taxes — net 19.7 2.2

Effective tax rate 94.7 % 50.1 %

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 foreign subsidiaries have net operating loss carryforwards totaling approximately

$9.5 million, which will expire between 2017 and 2032, and net operating loss carryforwards totaling

approximately $99.6 million inclusive of U.S. foreign branches and partnerships that have no expiration

date. As of April 30, 2016, the Company does not believe it is more likely than not, that sufficient levels

of taxable income will be generated to utilize foreign net operating loss carryforwards in certain foreign

jurisdictions. Therefore, as of April 30, 2016, the Company has a valuation allowance of approximately

$26.7 million for foreign net operating loss carryforwards.

As of April 30, 2016, the Company has $34.2 million in U.S. federal net operating losses which will

expire between 2031 and 2036 for which no valuation allowance was provided since the Company

believes that it is more likely than not that benefit will be utilized. The Company also has approximately

$4.8 million in deferred state income taxes representing state net operating losses of which $3.7 million

of deferred state income taxes has not been benefited since management believes it is more likely than

not that the Company will not generate sufficient income to allow for utilization before expiration.

Valuation allowances decreased during 2016 primarily due to utilization of certain foreign and state

losses in the current year. As of April 30, 2016, the Company has $1.1 million in U.S. foreign tax

credits for which a valuation allowance was provided since the Company believes that it is more likely

than not that benefit will not be utilized. As of April 30, 2016, the Company has U.S. charitable

contribution carryovers which will expire between 2017 and 2021 for which no valuation allowance was

provided since the Company believes that it is more likely than not that benefit will be utilized.

The accumulated undistributed retained earnings of international subsidiaries not included in the US

federal income tax return approximated $114 million as of April 30, 2016. No provision is made in the

accompanying consolidated financial statements for the estimated taxes that would result on distribution

of those accumulated undistributed earnings that the Company intends to invest indefinitely in the

operations of these subsidiaries, and it would be impractical to calculate the additional tax that would be

due. For 2016 and 2015, worldwide income tax payments amounted to approximately $9.4 million and

$10.2 million, respectively.



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The Company has adopted the guidance for uncertainty in income taxes, which clarifies the accounting

for uncertainty in income taxes recognized in an enterprise’s financial statements. As a result of its

implementation, the Company had no change in its liability for uncertain tax positions. No interest or

penalties were recognized in the consolidated statements of income or consolidated balance sheets

relative to uncertain tax positions. The Company has elected to record future penalties and interest

within income tax expense. The Company does not anticipate that any unrecognized tax benefits will

significantly increase or decrease within the next 12 months.

The company is subject to routine income tax audits from US federal, state, and foreign tax authorities.

The periods subject to income tax audit generally includes years beginning after April 30, 2012 for US

federal and state jurisdictions and April 30, 2010 for foreign jurisdictions. Beginning with tax year

ended April 30, 2012, the Company participates in the Internal Revenue Service’s (IRS) Compliance

Assurance Process “CAP”. This program submits the Company to a concurrent audit by the IRS

whereby the tax return is reviewed prior to filing. In December of 2013, the company was accepted into

“CAP” Maintenance for years following April 30, 2014. IRS examinations have been completed for

periods through April 30, 2013.

3. INVENTORIES

Inventories as of April 30 consist of the following (in thousands):

2016 2015

Raw materials 28,091$ 28,048$

Finished goods 79,821 89,418

Sales supplies 673 661

108,585$ 118,127$

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of April 30 consist of the following (in thousands):

2016 2015

Land and improvements 10,763$ 10,547$

Buildings and leasehold improvements 82,510 80,107

Software 116,079 107,236

Equipment 287,921 276,276

497,273 474,166

Accumulated depreciation and amortization (304,522) (275,388)

Property, plant and equipment, net 192,751$ 198,778$



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Depreciation and amortization expense was approximately $43.8 million and $42.2 million for the years

ended April 30, 2016 and 2015, respectively. The estimated useful life of buildings is 25–40 years;

software is 5–15 years; equipment is 1–10 years; and leasehold improvements are amortized over the

lesser of the useful life or lease term, generally five years. The Company capitalizes internally developed

software and the unamortized costs were $71.2 million and $71.1 million as of April 30, 2016 and 2015,

respectively. Depreciation expense associated with capitalized software costs was $8.9 million and

$7.7 million for the years ended April 30, 2016 and 2015, respectively.

5. INTANGIBLE ASSETS

Intangible assets as of April 30 consist of the following (dollars in thousands):

Gross Gross Gross

Life Carrying Accumulated Carrying Accumulated

(Years) Value Amortization Net Value Amortization Net

Intangible assets subject to amortization:

Customer relationships 5–15 14,220$ 9,799$ 4,421$ 16,282$ 9,519$ 6,763$

Noncompete agreements 5–15 3,171 2,347 824 3,488 2,373 1,115

Trademarks 15 5,347 4,274 1,073 5,111 4,115 996

Patents 15–17 5,498 2,598 2,900 5,601 2,444 3,157

28,236 19,018 9,218 30,482 18,451 12,031

Intangible assets not subject to

amortization — goodwill 20,154 - 20,154 20,218 - 20,218

Total intangibles 48,390$ 19,018$ 29,372$ 50,700$ 18,451$ 32,249$

2016 2015

Amortization expense totaled approximately $2.3 million for each of the years ended April 30, 2016 and

2015.

Changes in the carrying amount of goodwill for the years ended April 30 are as follows (in thousands):

2016 2015

Beginning balance 20,218$ 20,386$

Translation adjustment (64) (168)

Ending balance 20,154$ 20,218$

Estimated future amortization expense of existing intangible balances, for each of the years ending

April 30 is as follows (in thousands):

2017 2,146$

2018 1,804$

2019 1,502$

2020 1,081$

2021 571$

Thereafter 2,114$

Total 9,218$



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6. LONG-TERM DEBT AND LINES OF CREDIT

Long-term debt as of April 30 consists of the following (dollars in thousands):

2016 2015

Borrowed by domestic companies:

Revolving credit agreement (2.44% to 4.04%) 163,200$ 161,800$

Senior subordinated debt (9.63%) 126,000 126,000

Bank of America term loan (3.07% to 4.95%) 50,532 48,191

Capitalized lease obligations (4.43% to 41.71%), principal

and interest payable monthly through 2021 116 120

Borrowed by international companies:

Lines of credit (2.12% to 13.25%) 1,250 838

NCH Canada, Inc. debt facility (4.00%) - 573

Other international obligations 57 83

341,155 337,605

Less current maturities (1,316) (933)

Long-term debt — less current maturities 339,839$ 336,672$

Scheduled future maturities of long-term debt as of April 30, 2016, are as follows (in thousands):

2017 1,316$

2018 45

2019 289,239

2020 22

2021 50,533

Thereafter -

Total 341,155$

The Company’s revolving credit agreement with a syndication of financial institutions provides for a

revolving line of credit of $200.0 million, including both direct loans and letters of credit (limited to

$25.0 million) and matures on July 31, 2018. As of April 30, 2016, the outstanding obligations pursuant

to the credit agreement were $163.2 million in loans and $3.7 million of letters of credit. Amounts are

borrowed as either base rate loans, with interest charged at prime minus an applicable margin or London

InterBank Offered Rate (LIBOR) borrowings at an interest rate of LIBOR, plus an applicable margin, as

defined in the agreement. Obligations require interest to be paid quarterly for base rate loans and upon

maturity of individual LIBOR borrowings. The Company is required to pay a fee of 0.40% per annum

on the unused portion of the total facility depending on the actual senior leverage ratio as defined in the

credit agreement. These fees are expensed as incurred. The weighted-average interest rate on

outstanding loans was 3.54% and 3.55% as of April 30, 2016 and 2015, respectively, inclusive of

amounts due under terms of interest rate swap agreements described in Note 8. The current agreement

has no collateral, but contains certain financial covenants, including but not limited to, the maintenance



- 17 -

of certain senior leverage, fixed charge coverage and asset coverage ratios and a limitation on dividends.

As of April 30, 2016, the Company was in compliance with all debt covenants. In June 2015, the

Company amended its Revolving Credit Agreement to exclude from interest expense for covenant

calculations all accrued but unpaid interest on its Senior Subordinated Notes.

The Company’s Senior Subordinated Notes (the “Notes”) with an aggregate principal amount of

$126.0 million were issued in 2008 and mature on September 16, 2018. The Notes were sold to the

Company’s sole stockholder, Ranger Holding, LLC and carry a fixed interest rate of 9.625% per annum.

Interest is payable quarterly, in arrears on December 31, March 31, June 30 and September 30 of each

year. The Notes are unsecured, fully subordinated to the revolving credit agreement, guaranteed by the

Company’s current and future material subsidiaries that guarantee the Company’s senior obligations and

contain certain restrictive covenants, with which the Company is in compliance.

In March 2016, the Company reached an agreement with Ranger Holdings LLC, the sole holder of its

$126,000,000 Senior Subordinated Notes, which provides for the potential suspension of scheduled

interest payments up to but not including June 30, 2017 in order to maintain covenant compliance with

its Revolving Credit Agreement. During periods when any scheduled interest has not been paid, interest

will accrue at the penalty rate of 11.625%. Penalty interest expensed and paid during the year ended

April 30, 2016 was $1.9 million and $1.0 million, respectively. Under the terms of the agreement, the

company did not pay its scheduled interest payment on March 31 or June 30, 2016.

In 2010, the Company entered into a term loan agreement with Bank of America. Borrowings are

secured by the cash surrender value of certain insurance policies reflected in other noncurrent assets in

the consolidated balance sheets. The agreement as amended, matures on August 20, 2020 and

borrowings are not to exceed 95% of the cash surrender value of those insurance policies. As of

April 30, 2016, the maximum loan available was $51.7 million and the outstanding loan amount was

$50.5 million. Amounts are borrowed as either base rate loans, with interest charged at prime minus an

applicable margin, plus 0.95% or LIBOR borrowing at an interest rate of LIBOR, plus an applicable

margin, as defined in the agreement. Obligations require interest to be paid quarterly for base rate loans

and upon maturity of individual LIBOR borrowings. The weighted-average interest rate on outstanding

loans was 3.08% and 2.71% as of April 30, 2016 and 2015, respectively.

The Company has multicurrency cash pooling structure and overdraft arrangement in Europe with Bank

of America. The Euro 10 million overdraft arrangement is used to fund the day-to-day working capital

requirements of the Company’s European subsidiaries. An additional $3.0 million is available to cover

the subsidiaries’ guarantee obligations. The arrangement has no term and interest is payable monthly. As

of April 30, 2016 and 2015, borrowings equivalent to approximately $1.2 million and $0.2 million were

outstanding, respectively. The weighted-average interest rate on overdraft borrowings was 3.03% and

2.80% as of April 30, 2016 and 2015, respectively.

In 2010, NCH Canada, Inc., a subsidiary of the Company, entered into a revolving credit agreement with

JP Morgan Chase Bank. The credit agreement provides for a 5.0 million Canadian Dollar line of credit

to be used as an overdraft facility for day-to-day working capital requirements and to fund acquisitions.

The agreement, as amended, provides for the option to borrow either at the Canadian floating prime rate,

minus an applicable margin or the Canadian Deposit Offered Rate (CDOR) fixed rate, plus an applicable

margin and matures on July 31, 2018. Interest is payable monthly on floating rate borrowings and upon

maturity of the individual CDOR borrowings. As of April 30, 2016, there were no borrowings

outstanding against this facility. At April 30, 2015 the outstanding borrowing was $0.6 million with a

weighted average interest rate of 3.50%.



- 18 -

The Company has regional overdraft arrangements of $4.0 million for Asia and $1.0 million for Latin

America with Bank of America, in order to establish more efficient liquidity structures for the regions.

These facilities have no term and interest is payable monthly at rates agreed to on a country-by-country

basis. As of April 30, 2016, there was approximately $0.03 million of outstanding borrowings under

these regional arrangements with a weighted-average interest rate of 3.21%.

Total interest paid on long-term debt and lines of credit for the years ended April 30, 2016 and 2015,

was approximately $18.2 million and $18.4 million, respectively.

7. EMPLOYEE BENEFITS

The Company’s retirement plan liabilities as of April 30 consist of the following (in thousands):

2016 2015

Retirement and deferred compensation plans 38,518$ 38,227$

Domestic postretirement plans other than pensions 6,988 6,599

45,506 44,826

Less current portion (3,639) (3,729)

Total long-term 41,867$ 41,097$

Retirement and Deferred Compensation Plans — The Company sponsors various retirement plans

covering substantially all domestic and various international employees. Total retirement and deferred

compensation payments were approximately $9.7 million and $12.3 million for the years ended

April 30, 2016 and 2015, respectively.

Expenses for all retirement plans were $10.2 million and $10.1 million for the years ended April 30,

2016 and 2015, respectively (including $6.0 million in 2016 and $5.9 million in 2015 for domestic

401(k) and other defined contribution plans).

Amounts owed to members of the Board of Directors for retirement plan obligations were $1.0 million

and $1.1 million as of April 30, 2016 and 2015, respectively.

Domestic 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 their

health care expenses. The amount of the contribution is based on years of service with the Company at

retirement. Retired employees meeting the age and service requirements for early retirement are eligible

for continued coverage under the active employee health care plan until they are eligible for Medicare or

other health care, on the same terms and conditions as the Company’s active employees. The plan is not

funded; payments to or for retiree’s and any eligible dependent’s benefits are made as covered expenses

are incurred. Provision has been made in the accompanying consolidated financial statements for the net

postretirement benefit expense of this plan.



- 19 -

The benefit obligation was determined by an independent actuary. Net postretirement benefit expenses

for the years ended April 30 are as follows (in thousands):

2016 2015

Service cost 58$ 64$

Interest cost 263 276

Actuarial (gains) losses 384 52

Net postretirement benefit expense 705$ 392$

The reconciliation of changes in the benefit obligation for the years ended April 30 is as follows (in

thousands):

2016 2015

Postretirement benefit obligation — beginning of period 6,599$ 6,725$

Service cost 58 64

Interest cost 263 276

Actuarial (gains) losses 384 52

Benefits paid (316) (518)

Postretirement benefit obligation — year-end 6,988$ 6,599$

Expected future benefit payments in each of the next five years and the five years thereafter are as

follows (in thousands):

2017 393$

2018 426

2019 438

2020 425

2021 422

2022-2026 2,269

Measurement of the accumulated postretirement benefit obligation (APBO) is based on an assumed

discount rate of 3.75% in 2016 and 4.0% in 2015. Health care costs changes could have an impact on

plan costs. In determining the postretirement benefit obligation as of April 30, 2016, the Company

assumed a 5.0% annual increase in the per capita cost of covered medical benefits for early retirees. A

one-percentage-point change in the assumed health care cost trend rate would have the following effects

(in thousands):

Trend + 1% Trend - 1%

Effect on service cost and interest cost components -$ -$

Effect on APBO at April 30, 2016 2 (2)



- 20 -

Certain of the Company’s non-U.S. subsidiaries have health care and retirement plans for retirees;

although many retirees outside of the United States are covered by government sponsored and

administered programs.

8. INTEREST COSTS

During the years ended April 30, 2016 and 2015, interest costs were $22.6 million and $18.5 million,

respectively, and interest payments were $18.4million and $18.7 million, respectively, both of which are

net of capitalized interest of approximately $0.3 million and $0.4 million respectively.

On March 6, 2012, the Company entered into two five-year interest rate swap agreements, effective in

March 2014, with JPMorgan Chase Bank and Bank of America in order to minimize the risks and costs

associated with financing activities. The notional amount was $20.0 million each with the Company

receiving amounts equivalent to LIBOR and paying 2.01%. Interest is fixed and settled monthly with the

banks. As of April 30, 2016, the fair value of the swap agreement was a liability of $0.7 million for the

Chase swap and $0.7 million for the Bank of America swap. The fair value is an estimated amount the

company would pay to terminate the agreements as of the reporting date. The Company has designated

these swaps as cash flow hedges. As of April 30, 2016, the fair value of both swaps is reflected in

current and other long-term liabilities with an offsetting unrealized loss in accumulated other

comprehensive income of $1.0million (net of taxes of $0.4 million), in the Company’s consolidated

balance sheet. There was no ineffectiveness recorded in earnings during the year ended April 30, 2016.

On January 31, 2013, the Company entered into two five-year interest rate swap agreements, effective in

April 2015, with JPMorgan Chase Bank and Bank of America in order to minimize the risks and costs

associated with financing activities. The notional amount was $30.0 million each with the Company

receiving amounts equivalent to LIBOR and paying 2.04%. Interest is fixed and settled monthly with the

banks. As of April 30, 2016, the fair value of the swap agreement was a liability of $1.3 million for the

Chase swap and $1.3 million for the Bank of America swap. The fair value is an estimated amount the

company would be paid to terminate the agreements as of the reporting date. The Company has

designated these swaps as cash flow hedges. As of April 30, 2016, the fair value of both swaps is

reflected in other long-term liability with an offsetting unrealized gain in accumulated other

comprehensive income of $1.6 million (net of taxes of $1.0 million), in the Company’s consolidated

balance sheet. There was no significant ineffectiveness recorded in earnings during the year ended

April 30, 2016.

The actual settlement amounts associated with the Company’s interest rate swap agreements at each

future settlement date will determine the amounts that are reclassified from other comprehensive income

to interest expense. The estimated amount of settlements that will occur in the next fiscal year, based on

rates existing as of April 30, 2016 is $1.5 million of the total amount of recorded liabilities. This amount

has been included in other current liabilities in the accompanying consolidated balance sheet.

9. COMMITMENTS AND CONTINGENCIES

Leases — As of April 30, 2016, the Company and its subsidiaries had a number of noncancelable leases

for various office and warehouse facilities. These agreements expire at various times 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 the years ended April 30, 2016 and 2015

(including operating leases on data processing equipment, trucks and trailers, and office equipment), was

approximately $19.0 million and $19.6 million, respectively.



- 21 -

The minimum aggregate rentals under the terms of noncancelable operating leases for future years are

(in thousands):

2017 8,803$

2018 7,294

2019 4,302

2020 2,558

2021 818

Thereafter 1,623

Litigation — The Company and its subsidiaries are engaged in a variety of legal proceedings arising in

the ordinary course of business. Accruals have been recorded for contingent liabilities where the

likelihood of an unfavorable outcome is probable and the amount of the liability is estimable. The

likelihood of a material change in these estimates is dependent on new claims that may arise, changes in

circumstances used to estimate liabilities and favorable or unfavorable settlements. As additional

information becomes available, the Company uses this information for new or existing claims and

revises its estimates. Revisions to estimates in future periods could be material. In the opinion of the

Company’s management, the ultimate obligations resulting from the resolution of contingent liabilities

will not have a material adverse effect on the Company’s financial position or operating results.

Environmental Matters — The Company’s operations are subject to various federal, state, local, and

foreign environmental laws and regulations that govern emissions of air pollutants; discharges of water

pollutants; the generation, storage, handling, and disposal of hazardous wastes and other toxic materials;

and remediation of contaminated sites. The Company is also subject to liabilities arising under CERCLA

and similar state laws that impose responsibility on persons who arranged for the disposal of hazardous

substances, and on current and previous owners and operators of a facility for the cleanup of hazardous

substances released from the facility into the environment. The Company is also subject to liabilities

under the Resource Conservation and Recovery Act of 1976 and analogous state laws that require

owners and operators of facilities that generate hazardous waste to follow certain waste management

practices and to clean up releases of hazardous waste into the environment associated with past or

present practices. When deemed appropriate, the Company enters into voluntary remediation agreements

at certain sites to clean up releases of hazardous substances into the environment associated with past or

present practices.

The Company has been named a PRP at one site on the federal government’s National Priority List in

New Jersey. The Company negotiated a settlement with the Environmental Protection Agency regarding

this New Jersey site, whereby the Company is assuming ongoing remediation at the site. In addition, the

Company was named as a responsible party under state authority for a site in California. In cooperation

with appropriate government agencies, the Company is currently participating in ongoing active

remediation at the California site. The Company is currently investigating and remediating

environmental conditions at its production facility in New Jersey pursuant to New Jersey environmental

requirements. Based on current information, the Company believes that no significant additional costs in

excess of recorded liabilities will be incurred by the Company.

The Company has provided accruals for potential environmental obligations that it considers probable

and for which a reasonable estimate of the obligation could be made. Accordingly, approximately $10.4

million and $11.0 million were recorded primarily as other long-term liabilities as of April 30, 2016 and

2015, respectively. Environmental expense for the years ended April 30, 2016 and 2015, was



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approximately $0.1 million and $0.2 million, respectively in general and administrative expenses. The

liability for potential environmental obligations as of April 30, 2016, was measured on a discounted

present value basis using a discount rate of 4.125% applied to undiscounted amounts of approximately

$11.7 million expected to be paid in the next 14 years.

Sales Promotion Practices — In February of 2011, corporate management became aware of

information about certain sales promotional programs in Australia, which indicated that Company policy

had been violated. The Company immediately reviewed and investigated those promotional programs,

determined that such promotional programs violated the Company’s policies and, two days after

receiving the initial information, instructed Australian management to conform the programs to

Company policy.

The Company engaged outside counsel to conduct an investigation into its global promotional practices.

That investigation has found documents and information suggesting problematic practices in several

countries which the Company believes, in some instances, raise concerns under the U.S. Foreign Corrupt

Practices Act. Specifically, for several years, certain of the Company’s foreign subsidiaries ran

promotional programs in which customers could earn promotional items based on the size and nature of

their order. The programs did not properly distinguish between private and government accounts.

Certain government accounts earned promotional items that were not noted on the invoice to the

governmental customer and some of the items may have been delivered to the governmental employee,

instead of the government account.

Accordingly, the Company made voluntary disclosure to the United States Department of Justice (DOJ)

on September 13, 2012 regarding the initial results of this investigation. The Company continued to

investigate and self-disclose the issues that were found. The Company completed its investigation of its

global promotion practices and submitted a report of its findings to the DOJ on June 4, 2014.

In connection with the submission of the report, the Company recorded a reserve of $3.4 million. As of

April 30, 2016, the Company has reduced its estimated reserve for settlement to $0.4 million in

anticipation of settlement in the near future.

10. RELATED PARTY TRANSACTIONS

The Company has licensed the intangible assets and the related manufacturing, marketing, and

distribution rights to two pet care product lines from legal entities (LLCs) that are owned by parties also

having stockholder interests in the Company, for which the Company pays varying royalties based on a

percentage of sales. Total royalty expense associated with these agreements was $3.0 million in 2016

and $2.4 million in 2015, with $.5 million and $0.6 million unpaid as of April 30, 2016 and 2015,

respectively.

In April 2012, the Company entered into a lease agreement with one of the LLCs for a building. Lease

payments are made monthly over the eight-year term of the lease. Annual lease payments are $152,000

during the first five years and $160,000 thereafter.

The Company has support services agreements with certain of the LLCs, including cash management

services and the collecting and holding of LLC cash. The Company pays the LLCs a rate equivalent to

the month-end money market rate as published by Bank of America, minus 1% on any balances held by

the Company. No amounts were due to the LLCs as of April 30, 2016 or 2015. The interest expense

associated with these arrangements was nil in 2016 and in 2015. The Company provides certain

administrative services to the LLCs for a fee of approximately $77,000 per year.



- 23 -

The Company pays a commission on international sales to an entity owned by parties having stockholder

interests in the Company. Commission expense associated with this agreement was approximately

$396,000 and $453,000 in 2016 and 2015, respectively, with approximately$43,000 and $34,000 unpaid

as of April 30, 2016 and 2015.

The Company’s joint venture in China paid dividends of approximately $1,871,000 and $1,749,000 to

the noncontrolling owners in 2016 and 2015, respectively

The Company has a loan to an executive officer bearing an interest rate equal to 0.25% above the

monthly interest rate paid by the Company for its domestic revolving credit borrowings, and with

outstanding balances of $350,000 and $400,000 at April 30, 2016 and 2015, respectively. Recorded

interest on the loan was approximately $8,800 in 2016 and $9,000 in 2015.

For a description of the Senior Subordinated debt issued to the Company’s sole stockholder, see Note 6.

Long-Term Debt and Lines of Credit.

11. SUPPLEMENTAL CASH FLOW DISCLOSURES (IN MILLIONS)

2016 2015

Cash paid during the year for:

Interest 18.4$ 18.7$

Income taxes 9.4 10.2

Noncash operating and investing activities — purchases of property,

plant and equipment included in accounts payable 1.6 1.7



- 24 -

12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The changes in accumulated other comprehensive income (loss) by component for the years ended

April 30 is as follows (all amounts in thousands and after-tax):

Unrealized

Foreign Losses on

Currency Cash Flow

Translation Hedges Other Total

Balance — April 30, 2014 (32,156)$ (976)$ (12)$ (33,144)$

Other comprehensive income (loss) before reclassification (17,483) (2,558) (13) (20,054)

Amounts reclassified from accumulated other comprehensive loss - 1,009 - 1,009

Net comprehensive income (loss) (17,483) (1,549) (13) (19,045)

Balance — April 30, 2015 (49,639) (2,525) (25) (52,189)

Other comprehensive income (loss) before reclassification (2,717) (1,646) (46) (4,409)

Amounts reclassified from accumulated other comprehensive loss - 1,585 (35) 1,550

Net comprehensive income (loss) (2,717) (61) (81) (2,859)

Balance — April 30, 2016 (52,356)$ (2,586)$ (106)$ (55,048)$

Component

Based on market conditions existing on April 30, 2016, the amount of existing losses that are reported in

accumulated other comprehensive losses at April 30, 2016, that would be expected to be reclassified into

earnings within the next 12 months is a loss of $1.0 million (net of tax of $0.5 million).

13. SUBSEQUENT EVENTS

The Company has performed an evaluation of subsequent events through August 31, 2016,

which is the date the financial statements were issued. The company is not aware of any

subsequent events that would require recognition or disclosure in the financial statements.

* * * * * *

NCH Corporation and Subsidiaries - CVR API

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