##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission File No. 001-32342
 
 NALCO HOLDING COMPANY
  Delaware
(State or other jurisdiction of 
Incorporation or Organization)
    
    16-1701300
(I.R.S. Employer
Identification Number)
 1601 West Diehl Road
Naperville, IL 60563-1198
(630) 305-1000
 Not applicable
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



Part I. Financial InformationItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets 
September 30, 2008 and December 31, 2007
    
    
    2Condensed Consolidated Statements of Operations 
Three months and Nine months ended September 30, 2008 and 2007
    
    
    3Condensed Consolidated Statements of Cash Flows 
Nine months ended September 30, 2008 and 2007
    
    
    4Notes to Condensed Consolidated Financial Statements 
September 30, 2008
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    34Part II. Other InformationItem 1. Legal Proceedings
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 6. Exhibits
    
    
    36Signature
    
    
    37Exhibit 31.1Exhibit 31.2Exhibit 32.1
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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
  
  (dollars in millions)
 (Unaudited)September 30, 2008
    
    
    December 31, 2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    101.7
    
    
    $
    119.9Accounts receivable, less allowances of $20.4 in 2008 and
$19.5 in 2007
    
    
    807.3
    
    
    
    805.6Inventories:Finished products
    
    
    338.1
    
    
    
    268.9Materials and work in process
    
    
    109.9
    
    
    
    81.5448.0
    
    
    
    350.4Prepaid expenses, taxes and other current assets
    
    
    101.4
    
    
    
    112.6Total current assets
    
    
    1,458.4
    
    
    
    1,388.5Property, plant, and equipment, net
    
    
    736.8
    
    
    
    762.3Intangible assets:Goodwill
    
    
    2,337.6
    
    
    
    2,459.8Other intangibles, net
    
    
    1,094.8
    
    
    
    1,121.4Other assets
    
    
    207.1
    
    
    
    246.6Total assets
    
    $
    5,834.7
    
    
    $
    5,978.6Liabilities and shareholders equityCurrent liabilities:Accounts payable
    
    $
    347.6
    
    
    $
    316.4Short-term debt
    
    
    85.3
    
    
    
    130.4Other current liabilities
    
    
    347.0
    
    
    
    322.5Total current liabilities
    
    
    779.9
    
    
    
    769.3Other liabilities:Long-term debt
    
    
    3,194.8
    
    
    
    3,193.7Deferred income taxes
    
    
    309.5
    
    
    
    327.5Accrued pension benefits
    
    
    259.7
    
    
    
    314.4Other liabilities
    
    
    223.3
    
    
    
    234.7Minority interest
    
    
    18.3
    
    
    
    21.2Shareholders equity
    
    
    1,049.2
    
    
    
    1,117.8Total liabilities and shareholders equity
    
    $
    5,834.7
    
    
    $
    5,978.6
 See accompanying notes to condensed consolidated financial statements.
  2




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(dollars in millions, except per share amounts)
 Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine Monthsended
    
    
    ended
    
    
    ended
    
    
    endedSeptember 30, 2008
    
    
    September 30, 2007
    
    
    September 30, 2008
    
    
    September 30, 2007Net sales
    
    $
    1,115.5
    
    
    $
    998.2
    
    
    $
    3,181.5
    
    
    $
    2,878.4Operating costs and expenses:Cost of product sold
    
    
    642.8
    
    
    
    549.2
    
    
    
    1,802.1
    
    
    
    1,591.1Selling, administrative, and
research expenses
    
    
    317.2
    
    
    
    295.4
    
    
    
    958.2
    
    
    
    875.1Amortization of intangible assets
    
    
    14.0
    
    
    
    15.6
    
    
    
    43.5
    
    
    
    46.2Business optimization expenses
    
    
    10.4
    
    
    
    7.2
    
    
    
    12.8
    
    
    
    9.5Gain on divestiture
    
    
    (38.1
    )
    
    
    
    
    
    
    (38.1
    )
    
    
    Total operating costs and expenses
    
    
    946.3
    
    
    
    867.4
    
    
    
    2,778.5
    
    
    
    2,521.9Operating earnings
    
    
    169.2
    
    
    
    130.8
    
    
    
    403.0
    
    
    
    356.5Other income (expense), net
    
    
    (5.1
    )
    
    
    (1.9
    )
    
    
    (12.4
    )
    
    
    (2.2
    )Interest income
    
    
    2.3
    
    
    
    2.7
    
    
    
    6.8
    
    
    
    7.2Interest expense
    
    
    (63.7
    )
    
    
    (69.1
    )
    
    
    (195.7
    )
    
    
    (205.6
    )Earnings before income taxes and
minority interests
    
    
    102.7
    
    
    
    62.5
    
    
    
    201.7
    
    
    
    155.9Income tax provision
    
    
    43.9
    
    
    
    24.0
    
    
    
    66.4
    
    
    
    52.4Minority interests
    
    
    (1.4
    )
    
    
    (2.0
    )
    
    
    (4.5
    )
    
    
    (5.6
    )Net earnings
    
    $
    57.4
    
    
    $
    36.5
    
    
    $
    130.8
    
    
    $
    97.9Net earnings per share:Basic
    
    $
    0.41
    
    
    $
    0.25
    
    
    $
    0.93
    
    
    $
    0.68Diluted
    
    $
    0.41
    
    
    $
    0.25
    
    
    $
    0.92
    
    
    $
    0.66Weighted-average shares outstanding
(millions):Basic
    
    
    139.9
    
    
    
    143.7
    
    
    
    141.1
    
    
    
    143.9Diluted
    
    
    140.7
    
    
    
    146.6
    
    
    
    141.9
    
    
    
    147.5Cash dividends declared per share
    
    $
    0.035
    
    
    $
    0.035
    
    
    $
    0.105
    
    
    $
    0.105
 See accompanying notes to condensed consolidated financial statements.
  3




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(dollars in millions)
 Nine Months
    
    
    Nine Monthsended
    
    
    endedSeptember 30, 2008
    
    
    September 30, 2007Operating activitiesNet earnings
    
    $
    130.8
    
    
    $
    97.9Adjustments to reconcile net earnings to net cash
provided by operating activities:Depreciation
    
    
    103.8
    
    
    
    97.0Amortization
    
    
    43.5
    
    
    
    46.2Gain on divestiture
    
    
    (38.1
    )
    
    
    Amortization of deferred financing costs
and accretion of senior discount notes
    
    
    35.8
    
    
    
    33.7Other, net
    
    
    (10.3
    )
    
    
    (11.4
    )Changes in operating assets and liabilities
    
    
    (64.2
    )
    
    
    (68.1
    )Net cash provided by operating activities
    
    
    201.3
    
    
    
    195.3Investing activitiesAdditions to property, plant, and equipment, net
    
    
    (99.8
    )
    
    
    (70.3
    )Net proceeds from divestiture
    
    
    74.1
    
    
    
    Other, net
    
    
    (23.8
    )
    
    
    (2.6
    )Net cash used for investing activities
    
    
    (49.5
    )
    
    
    (72.9
    )Financing activitiesCash dividends
    
    
    (14.8
    )
    
    
    (10.1
    )Changes in short-term debt, net
    
    
    (68.7
    )
    
    
    (20.8
    )Proceeds from long-term debt
    
    
    16.0
    
    
    
    50.2Repayments of long-term debt
    
    
    (0.7
    )
    
    
    (24.1
    )Purchases of treasury stock
    
    
    (95.0
    )
    
    
    (37.0
    )Other, net
    
    
    (5.2
    )
    
    
    (4.0
    )Net cash used for financing activities
    
    
    (168.4
    )
    
    
    (45.8
    )Effect of exchange rate changes on cash and cash
equivalents
    
    
    (1.6
    )
    
    
    4.0Increase (decrease) in cash and cash equivalents
    
    
    (18.2
    )
    
    
    80.6Cash and cash equivalents at beginning of period
    
    
    119.9
    
    
    
    37.3Cash and cash equivalents at end of period
    
    $
    101.7
    
    
    $
    117.9
 See accompanying notes to condensed consolidated financial statements.
  4




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1. Description of Business
  2. Basis of Presentation
    3. Recent Accounting Pronouncements
 Fair Value Measurements
  5




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##### Table of Contents



3. Recent Accounting Pronouncements (continued)
 Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106 and 132(R)
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115.
 Business Combinations Business Combinations SFAS No. 141(R) SFAS
No. 141(R). SFAS No. 141(R
  6




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3. Recent Accounting Pronouncements (continued)
 Noncontrolling Interests in Consolidated Financial
Statements  an amendment of ARB No. 51
 Disclosures about Derivative Instruments and Hedging
Activities  an amendment of FASB Statement No. 133 Accounting for Derivative Instruments and Hedging
Activities
  7




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4. Debt
  (dollars in millions)
    
    September 30, 2008
    
    
    December 31, 2007Short-termChecks outstanding and bank overdrafts
    
    $
    25.9
    
    
    $
    14.1Notes payable to banks
    
    
    31.5
    
    
    
    6.1Current maturities of long-term debt
    
    
    27.9
    
    
    
    32.4Unsecured notes, due May 2008
    
    
    
    
    
    
    27.8Revolving credit facility
    
    
    
    
    
    
    50.0$
    85.3
    
    
    $
    130.4Long-termSecuritized trade accounts receivable facility
    
    $
    150.0
    
    
    $
    134.0Term loan A, due November 2009
    
    
    35.7
    
    
    
    64.8Term loan B, due November 2010
    
    
    887.0
    
    
    
    887.0Senior notes, due November 2011
    
    
    950.2
    
    
    
    959.6Senior subordinated notes, due November 2013
    
    
    750.2
    
    
    
    759.6Senior discount notes, due February 2014
    
    
    449.0
    
    
    
    420.6Other
    
    
    0.6
    
    
    
    0.53,222.7
    
    
    
    3,226.1Less: Current portion
    
    
    27.9
    
    
    
    32.4$
    3,194.8
    
    
    $
    3,193.7
 5. Shareholders Equity
  (dollars in millions, except per share amounts)
    
    September 30, 2008
    
    
    December 31, 2007Preferred stock, par value $0.01 per share;
authorized 100,000,000 shares; none issued
    
    $
    
    
    
    $
    Common stock, par value $0.0l per share;
authorized 500,000,000 shares; 146,764,030 and
144,377,068 shares issued at September 30,
2008 and December 31, 2007, respectively
    
    
    1.4
    
    
    
    1.4Additional paid-in capital
    
    
    763.6
    
    
    
    749.7Treasury stock, at cost; 9,170,043 shares and
4,588,500 shares at September 30, 2008 and
December 31, 2007, respectively
    
    
    (206.5
    )
    
    
    (108.0
    )Retained earnings
    
    
    215.6
    
    
    
    100.7Accumulated other comprehensive income
    
    
    275.1
    
    
    
    374.0Total shareholders equity
    
    $
    1,049.2
    
    
    $
    1,117.8
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5. Shareholders Equity (continued)
  6. Pension and Other Postretirement Benefit Plans
  Pension BenefitsThree Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine Monthsended
    
    
    ended
    
    
    ended
    
    
    ended(dollars in millions)
    
    September 30, 2008
    
    
    September 30, 2007
    
    
    September 30, 2008
    
    
    September 30, 2007Service cost
    
    $
    6.4
    
    
    $
    7.2
    
    
    $
    19.5
    
    
    $
    21.4Interest cost
    
    
    12.0
    
    
    
    11.4
    
    
    
    36.4
    
    
    
    33.9Expected return on
plan assets
    
    
    (9.2
    )
    
    
    (8.5
    )
    
    
    (28.1
    )
    
    
    (25.3
    )Prior service
(credit) cost
    
    
    (0.6
    )
    
    
    
    
    
    
    (1.7
    )
    
    
    0.1Net actuarial loss
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.4Settlement charge
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Net periodic cost
    
    $
    8.7
    
    
    $
    10.3
    
    
    $
    26.4
    
    
    $
    30.6
 Other Postretirement BenefitsThree Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine Monthsended
    
    
    ended
    
    
    ended
    
    
    ended(dollars in millions)
    
    September 30, 2008
    
    
    September 30, 2007
    
    
    September 30, 2008
    
    
    September 30, 2007Service cost
    
    $
    1.0
    
    
    $
    1.4
    
    
    $
    3.2
    
    
    $
    4.1Interest cost
    
    
    2.3
    
    
    
    2.1
    
    
    
    6.7
    
    
    
    6.2Prior service credit
    
    
    (1.2
    )
    
    
    (1.2
    )
    
    
    (3.6
    )
    
    
    (3.6
    )Net actuarial gain
    
    
    (0.6
    )
    
    
    (0.1
    )
    
    
    (1.9
    )
    
    
    (0.2
    )Net periodic cost
    
    $
    1.5
    
    
    $
    2.2
    
    
    $
    4.4
    
    
    $
    6.5
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7. Business Optimization Expenses
  8. Gain on Divestiture
 after-tax
 9. Summary of Other Income (Expense), Net
  Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine Monthsended
    
    
    ended
    
    
    ended
    
    
    ended(dollars in millions)
    
    September 30, 2008
    
    
    September 30, 2007
    
    
    September 30, 2008
    
    
    September 30, 2007Franchise taxes
    
    $
    (0.4
    )
    
    $
    (0.7
    )
    
    $
    (1.7
    )
    
    $
    (2.3
    )Equity in earnings
of unconsolidated
subsidiaries
    
    
    0.3
    
    
    
    0.1
    
    
    
    1.2
    
    
    
    1.0Foreign currency
exchange adjustments
    
    
    (3.0
    )
    
    
    (1.2
    )
    
    
    (8.4
    )
    
    
    (0.7
    )Other
    
    
    (2.0
    )
    
    
    (0.1
    )
    
    
    (3.5
    )
    
    
    (0.2
    )Other income (expense), net
    
    $
    (5.1
    )
    
    $
    (1.9
    )
    
    $
    (12.4
    )
    
    $
    (2.2
    )
 10. Income Taxes
   10




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10. Income Taxes (continued)
     Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine Monthsended
    
    
    ended
    
    
    ended
    
    
    ended(dollars in millions)
    
    September 30, 2008
    
    
    September 30, 2007
    
    
    September 30, 2008
    
    
    September 30, 2007U.S. statutory tax rate
    
    $
    36.0
    
    
    $
    21.9
    
    
    $
    70.6
    
    
    $
    54.6Foreign tax credits
    
    
    (2.7
    )
    
    
    
    
    
    
    (42.8
    )
    
    
    U.K. valuation allowances
    
    
    3.6
    
    
    
    
    
    
    
    24.0
    
    
    
    Divestiture gain
    
    
    9.9
    
    
    
    
    
    
    
    9.9
    
    
    
    U.S. audit
    
    
    
    
    
    
    
    
    
    
    2.5
    
    
    
    Other
    
    
    (2.9
    )
    
    
    2.1
    
    
    
    2.2
    
    
    
    (2.2
    )Income tax provision
    
    $
    43.9
    
    
    $
    24.0
    
    
    $
    66.4
    
    
    $
    52.4
  11




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11. Comprehensive Income
  Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine Monthsended
    
    
    ended
    
    
    ended
    
    
    ended(dollars in millions)
    
    September 30, 2008
    
    
    September 30, 2007
    
    
    September 30, 2008
    
    
    September 30, 2007Net earnings
    
    $
    57.4
    
    
    $
    36.5
    
    
    $
    130.8
    
    
    $
    97.9Other comprehensive income,
net of income taxes:Derivatives
    
    
    0.8
    
    
    
    (1.4
    )
    
    
    2.1
    
    
    
    (0.5
    )Net prior service credit
    
    
    (1.1
    )
    
    
    (0.8
    )
    
    
    (3.4
    )
    
    
    (2.3
    )Net actuarial (gain) loss
    
    
    (0.5
    )
    
    
    
    
    
    
    (1.6
    )
    
    
    0.1Foreign currency
translation adjustments
    
    
    (148.9
    )
    
    
    50.4
    
    
    
    (96.0
    )
    
    
    114.9Comprehensive income (loss)
    
    $
    (92.3
    )
    
    $
    84.7
    
    
    $
    31.9
    
    
    $
    210.1
 12. Segment Information
  Industrial and Institutional Services
 Energy Services
 Paper Services
 Other
    12




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12. Segment Information (continued)
  Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine Monthsended
    
    
    ended
    
    
    ended
    
    
    ended(dollars in millions)
    
    September 30, 2008
    
    
    September 30, 2007
    
    
    September 30, 2008
    
    
    September 30, 2007Industrial and
Institutional
Services
    
    $
    488.1
    
    
    $
    449.0
    
    
    $
    1,391.0
    
    
    $
    1,285.9Energy Services
    
    
    395.1
    
    
    
    326.8
    
    
    
    1,104.8
    
    
    
    938.1Paper Services
    
    
    203.3
    
    
    
    195.9
    
    
    
    607.3
    
    
    
    577.4Other
    
    
    29.0
    
    
    
    26.5
    
    
    
    78.4
    
    
    
    77.0Net sales
    
    $
    1,115.5
    
    
    $
    998.2
    
    
    $
    3,181.5
    
    
    $
    2,878.4
  Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine Monthsended
    
    
    ended
    
    
    ended
    
    
    ended(dollars in millions)
    
    September 30, 2008
    
    
    September 30, 2007
    
    
    September 30, 2008
    
    
    September 30, 2007Segment direct contribution:Industrial and Institutional
Services
    
    $
    103.6
    
    
    $
    98.2
    
    
    $
    280.7
    
    
    $
    276.9Energy Services
    
    
    74.1
    
    
    
    71.1
    
    
    
    221.9
    
    
    
    207.6Paper Services
    
    
    22.9
    
    
    
    31.6
    
    
    
    75.5
    
    
    
    89.8Other
    
    
    (18.0
    )
    
    
    (18.3
    )
    
    
    (71.8
    )
    
    
    (68.0
    )Capital charge elimination
    
    
    24.6
    
    
    
    22.0
    
    
    
    72.7
    
    
    
    63.0Total segment direct contribution
    
    
    207.2
    
    
    
    204.6
    
    
    
    579.0
    
    
    
    569.3Expenses not allocated to
segments:Administrative expenses
    
    
    51.7
    
    
    
    51.0
    
    
    
    157.8
    
    
    
    157.1Amortization of intangible
assets
    
    
    14.0
    
    
    
    15.6
    
    
    
    43.5
    
    
    
    46.2Business optimization expenses
    
    
    10.4
    
    
    
    7.2
    
    
    
    12.8
    
    
    
    9.5Gain on divestiture
    
    
    (38.1
    )
    
    
    
    
    
    
    (38.1
    )
    
    
    Operating earnings
    
    
    169.2
    
    
    
    130.8
    
    
    
    403.0
    
    
    
    356.5Other income (expense), net
    
    
    (5.1
    )
    
    
    (1.9
    )
    
    
    (12.4
    )
    
    
    (2.2
    )Interest income
    
    
    2.3
    
    
    
    2.7
    
    
    
    6.8
    
    
    
    7.2Interest expense
    
    
    (63.7
    )
    
    
    (69.1
    )
    
    
    (195.7
    )
    
    
    (205.6
    )Earnings before income taxes and
minority interests
    
    $
    102.7
    
    
    $
    62.5
    
    
    $
    201.7
    
    
    $
    155.9
   13




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##### Table of Contents



13. Earnings Per Share
   Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine Monthsended
    
    
    ended
    
    
    ended
    
    
    ended(in millions)
    
    September 30, 2008
    
    
    September 30, 2007
    
    
    September 30, 2008
    
    
    September 30, 2007Numerator for basic and
diluted earnings per share:Net earnings
    
    $
    57.4
    
    
    $
    36.5
    
    
    $
    130.8
    
    
    $
    97.9Denominator for basic
earnings per share 
weighted average common
shares outstanding
    
    
    139.9
    
    
    
    143.7
    
    
    
    141.1
    
    
    
    143.9Effect of dilutive securities:Stock purchase warrant
    
    
    0.6
    
    
    
    2.8
    
    
    
    0.6
    
    
    
    3.5Share-based compensation
plans
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1Denominator for diluted
earnings per share
    
    
    140.7
    
    
    
    146.6
    
    
    
    141.9
    
    
    
    147.5
 14. Contingencies and Litigation
     14




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##### Table of Contents



14. Contingencies and Litigation (continued)
  de minimis
    15




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##### Table of Contents



15. Fair Value Measurements
 SFAS No. 157, Fair Value
Measurements SFAS No. 157
     Balance(dollars in millions)
    
    September 30, 2008
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Foreign exchange forward contracts
    
    $
    2.1
    
    
    $
    
    
    
    $
    2.1
    
    
    $
    Liabilities:Foreign exchange forward contracts
    
    $
    1.4
    
    
    $
    
    
    
    $
    1.4
    
    
    $
    Natural gas forward contracts
    
    
    0.7
    
    
    
    
    
    
    
    0.7
    
    
    
    $
    2.1
    
    
    $
    
    
    
    $
    2.1
    
    
    $
    
  16. Guarantees
    16




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
  
    
    Third quarter 2008 revenues of $1,115.5 million increased 11.8% over third quarter 2007
revenues of $998.2 million. This increase consisted of organic growth of 11.2%, a currency
benefit of 2.9%, less an acquisition/divestiture impact of 2.3%. We define organic growth as
nominal, or actual, sales growth less the impacts of changes in foreign currency translation
rates and acquisitions and divestitures. Hurricane impacts reduced revenues by about $11.0
million in the third quarter 2008.
    
    We experienced increases in product and freight costs approximating $64 million in the
third quarter of 2008 over the prior-year period that were significantly offset with price
increases of about $50 million.
    
    The effective tax rate rose to 42.7% for the third quarter of 2008 from 38.4% for the
year-ago quarter. The increase was attributable to a gain from a divestiture. Excluding the
impacts of that gain, our effective tax rate would have been 32.0%.
    
    Third quarter 2008 net earnings of $57.4 million were up 57% over year-ago net earnings of
$36.5 million, which was mostly attributable to a divestiture gain. Diluted earnings per
share (EPS) of 41 cents were up 16 cents over the 25 cents reported in the third quarter of
2007, of which 11 cents resulted from the divestiture gain.
    
    Adjusted EBITDA, a measure used to determine compliance with our debt covenants, was $192.7
million for the third quarter of 2008, a 2.1% increase over year-ago Adjusted EBITDA of $188.8
million that excludes the waste coal agglomeration (synfuel) business that ended with a
December 31, 2007 tax code expiration. With that synfuel business included, Adjusted EBITDA
was $195.3 million in the third quarter of 2007.
  17




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
 
    
    Free Cash Flow, defined as cash from operating activities less capital expenditures and
minority interest charges, was $28.3 million in the third quarter of 2008, a reduction of
$71.6 million from Free Cash Flow of $99.9 million in the year-ago period. The decrease
primarily resulted from higher net working capital requirements, most notably for inventories
due to accelerated cost increases and additions to support business growth in emerging
geographies, and a $30 million pension contribution (made possible with proceeds from the
divestiture). Net cash provided by operating activities is reconciled to Free Cash Flow as
follows:
 Three Months
    
    
    Three Monthsended
    
    
    ended(dollars in millions)
    
    September 30, 2008
    
    
    September 30, 2007Net cash provided by operating activities
    
    $
    67.6
    
    
    $
    124.6Minority interests
    
    
    (1.4
    )
    
    
    (2.0
    )Additions to property, plant, and equipment, net
    
    
    (37.9
    )
    
    
    (22.7
    )Free cash flow
    
    $
    28.3
    
    
    $
    99.9
 
    
    We monitor our goodwill for impairment indicators on an ongoing basis in addition to
performing an annual goodwill impairment analysis, as required by Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. While we currently do not
see any specific impairment indicators related to the carrying value of our businesses
goodwill or other assets, the current economic environment is impacting our business results
everywhere, most notably in our Paper Services segment. Were this seen to be prolonged,
either from continued raw material cost escalations or declines in end market demand, the
value of the goodwill related to this business could be subject to an impairment charge.
 Outlook
  Results of Operations  Consolidated
 Quarter Ended September 30, 2008 Compared to the Quarter Ended September 30, 2007
 Net sales
  18




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
 Gross profit ,
 Selling, administrative, and research expenses
 Amortization of intangible assets
 Business optimization expenses,
 Gain on divestiture
 Other income (expense), net
 Net interest expense,
  19




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
 The income tax provision
  Minority interest expense
 Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
 Net sales
 Gross profit ,
  20




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
 Selling, administrative, and research expenses
 Amortization of intangible assets
 Business optimization expenses,
 Gain on divestiture
 Other income (expense), net
 Net interest expense,
 The income tax provision
  21




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
  Minority interest expense
 Results of Operations  Segment Reporting
 Quarter Ended September 30, 2008 Compared to the Quarter Ended September 30, 2007
 Net sales
 Attributable to Changesin the Following FactorsThree Months Ended
    
    
    
    
    
    
    Currency
    
    
    Acquisitions/(dollars in millions)
    
    September 30, 2008
    
    
    September 30, 2007
    
    
    % Change
    
    
    Translation
    
    
    Divestitures
    
    
    OrganicIndustrial &
Institutional
Services
    
    $
    488.1
    
    
    $
    449.0
    
    
    
    8.7
    %
    
    
    3.6
    %
    
    
    (3.5
    )%
    
    
    8.6
    %Energy Services
    
    
    395.1
    
    
    
    326.8
    
    
    
    20.9
    %
    
    
    1.6
    %
    
    
    (2.1
    )%
    
    
    21.4
    %Paper Services
    
    
    203.3
    
    
    
    195.9
    
    
    
    3.7
    %
    
    
    3.0
    %
    
    
    
    
    
    
    0.7
    %Other
    
    
    29.0
    
    
    
    26.5
    
    
    
    9.5
    %
    
    
    4.0
    %
    
    
    
    
    
    
    5.5
    %Net sales
    
    $
    1,115.5
    
    
    $
    998.2
    
    
    
    11.8
    %
    
    
    2.9
    %
    
    
    (2.3
    )%
    
    
    11.2
    %
   22




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
    Direct contribution
 Attributable to Changesin the Following FactorsThree Months Ended
    
    
    
    
    
    
    Currency
    
    
    Acquisitions/(dollars in millions)
    
    September 30, 2008
    
    
    September 30, 2007
    
    
    % Change
    
    
    Translation
    
    
    Divestitures
    
    
    OrganicIndustrial &
Institutional
Services
    
    $
    103.6
    
    
    $
    98.2
    
    
    
    5.5
    %
    
    
    4.3
    %
    
    
    (7.9
    )%
    
    
    9.1
    %Energy Services
    
    
    74.1
    
    
    
    71.1
    
    
    
    4.3
    %
    
    
    1.7
    %
    
    
    (2.6
    )%
    
    
    5.2
    %Paper Services
    
    
    22.9
    
    
    
    31.6
    
    
    
    (27.5
    )%
    
    
    1.5
    %
    
    
    
    
    
    
    (29.0
    )%Other
    
    
    (18.0
    )
    
    
    (18.3
    )
    
    
    1.7
    %
    
    
    (0.1
    )%
    
    
    (0.3
    )%
    
    
    2.1
    %
    23




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
   Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
 Net sales
 Attributable to Changesin the Following FactorsNine Months Ended
    
    
    
    
    
    
    Currency
    
    
    Acquisitions/(dollars in millions)
    
    September 30, 2008
    
    
    September 30, 2007
    
    
    % Change
    
    
    Translation
    
    
    Divestitures
    
    
    OrganicIndustrial &
Institutional
Services
    
    $
    1,391.0
    
    
    $
    1,285.9
    
    
    
    8.2
    %
    
    
    5.6
    %
    
    
    (3.2
    )%
    
    
    5.8
    %Energy Services
    
    
    1,104.8
    
    
    
    938.1
    
    
    
    17.8
    %
    
    
    3.1
    %
    
    
    (0.7
    )%
    
    
    15.4
    %Paper Services
    
    
    607.3
    
    
    
    577.4
    
    
    
    5.2
    %
    
    
    5.1
    %
    
    
    
    
    
    
    0.1
    %Other
    
    
    78.4
    
    
    
    77.0
    
    
    
    1.9
    %
    
    
    5.9
    %
    
    
    
    
    
    
    (4.0
    )%Net sales
    
    $
    3,181.5
    
    
    $
    2,878.4
    
    
    
    10.5
    %
    
    
    4.6
    %
    
    
    (1.6
    )%
    
    
    7.5
    %
     24




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
  Direct contribution
 Attributable to Changesin the Following FactorsNine Months Ended
    
    
    
    
    
    
    Currency
    
    
    Acquisitions/(dollars in millions)
    
    September 30, 2008
    
    
    September 30, 2007
    
    
    % Change
    
    
    Translation
    
    
    Divestitures
    
    
    OrganicIndustrial &
Institutional
Services
    
    $
    280.7
    
    
    $
    276.9
    
    
    
    1.4
    %
    
    
    6.0
    %
    
    
    (7.4
    )%
    
    
    2.8
    %Energy Services
    
    
    221.9
    
    
    
    207.6
    
    
    
    6.9
    %
    
    
    3.3
    %
    
    
    (0.9
    )%
    
    
    4.5
    %Paper Services
    
    
    75.5
    
    
    
    89.8
    
    
    
    (16.0
    )%
    
    
    4.3
    %
    
    
    
    
    
    
    (20.3
    )%Other
    
    
    (71.8
    )
    
    
    (68.0
    )
    
    
    (5.5
    )%
    
    
    (2.7
    )%
    
    
    (0.1
    )%
    
    
    (2.7
    )%
      25




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
 Liquidity and Capital Resources
 Operating activities.
 Investing activities.
  Financing activities .
   Senior credit facilities 
    26




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
  Senior discount notes, senior notes and senior subordinated notes. 3 4  3 4 7 8 
    
    
    incur additional indebtedness;
    
    pay dividends on or make other distributions or repurchase certain capital stock;
    
    make certain investments;
    
    enter into certain types of transactions with affiliates;
    
    limit dividends or other payments by our restricted subsidiaries;
    
    use assets as security in other transactions; and
    
    sell certain assets or merge with or into other companies.
   27




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
 Covenant compliance.
    Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine Monthsended
    
    
    ended
    
    
    ended
    
    
    ended(dollars in millions)
    
    September 30, 2008
    
    
    September 30, 2007
    
    
    September 30, 2008
    
    
    September 30, 2007Net earnings
    
    $
    57.4
    
    
    $
    36.5
    
    
    $
    130.8
    
    
    $
    97.9Interest, net
    
    
    61.4
    
    
    
    66.4
    
    
    
    188.9
    
    
    
    198.4Income tax provision
    
    
    43.9
    
    
    
    24.0
    
    
    
    66.4
    
    
    
    52.4Depreciation
    
    
    33.9
    
    
    
    33.0
    
    
    
    103.8
    
    
    
    97.0Amortization
    
    
    14.0
    
    
    
    15.6
    
    
    
    43.5
    
    
    
    46.2EBITDA
    
    
    210.6
    
    
    
    175.5
    
    
    
    533.4
    
    
    
    491.9Non-cash charges (1)
    
    
    10.0
    
    
    
    12.5
    
    
    
    24.9
    
    
    
    26.0Business
optimization
expenses (2)
    
    
    10.4
    
    
    
    7.2
    
    
    
    12.8
    
    
    
    9.5Unusual items (3)
    
    
    (36.2
    )
    
    
    1.6
    
    
    
    (30.6
    )
    
    
    10.9Other adjustments (4)
    
    
    (2.1
    )
    
    
    (1.5
    )
    
    
    (6.5
    )
    
    
    (5.1
    )Adjusted EBITDA
    
    $
    192.7
    
    
    $
    195.3
    
    
    $
    534.0
    
    
    $
    533.2
 (1)
    
    Non-cash charges are further detailed on the following table: Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine Monthsended
    
    
    ended
    
    
    ended
    
    
    ended(dollars in millions)
    
    September 30, 2008
    
    
    September 30, 2007
    
    
    September 30, 2008
    
    
    September 30, 2007Profit sharing and
401(k) expense
funded by Suez
    
    $
    7.3
    
    
    $
    7.3
    
    
    $
    22.2
    
    
    $
    20.5Other
    
    
    2.7
    
    
    
    5.2
    
    
    
    2.7
    
    
    
    5.5Non-cash charges
    
    $
    10.0
    
    
    $
    12.5
    
    
    $
    24.9
    
    
    $
    26.0
  28




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
 Profit Sharing and 401(k) Expense Funded by SuezIn conjunction with the Acquisition, defined as the November 2003 acquisition of Ondeo Nalco
Group, comprised of Nalco Company and Nalco International SAS Subsidiaries, by our subsidiary,
Nalco Holdings LLC, from Suez S.A. (Suez), we entered into an agreement with Suez whereby
Suez will reimburse us for certain profit-sharing and 401(k) matching contributions made by us
to the Profit-Sharing Trust.OtherOther non-cash charges include the non-cash impact on earnings of our equity investments and
minority interests. Non-cash charges also includes the non-cash portion of rent expense under
the sublease that we entered into with Suez in conjunction with the Acquisition.(2)
    
    Business optimization expenses include costs associated with the redesign and optimization of
work processes. See Note 7 to Item 1 for more information.(3)
    
    Unusual items are further detailed on the following table: Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine Monthsended
    
    
    ended
    
    
    ended
    
    
    ended(dollars in millions)
    
    September 30, 2008
    
    
    September 30, 2007
    
    
    September 30, 2008
    
    
    September 30, 2007Pension settlement
    
    $
    
    
    
    $
    0.1
    
    
    $
    
    
    
    $
    0.1Loss (gain) on
sales, net of
expenses
    
    
    (38.2
    )
    
    
    (0.4
    )
    
    
    (37.3
    )
    
    
    0.9Other unusual items
    
    
    2.0
    
    
    
    1.9
    
    
    
    6.7
    
    
    
    9.9Unusual items
    
    $
    (36.2
    )
    
    $
    1.6
    
    
    $
    (30.6
    )
    
    $
    10.9
 Gain on sales, net of expenses, for the three months and nine months ended September 30, 2008
was mostly comprised of a $38.1 million gain on divestiture. See Note 8 to Item 1 for more
information.(4)
    
    We are required to make adjustments to EBITDA for franchise taxes and 401(k) matching
contributions.  29




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
  September 30, 2008Required
    
    
    ActualSenior credit facility(1)Minimum Adjusted EBITDA to cash interest ratio
    
    
    1.85
    x
    
    
    3.55
    xMaximum net debt to Adjusted EBITDA ratio
    
    
    5.25
    x
    
    
    3.74
    xIndentures(2)Minimum Adjusted EBITDA to fixed charge ratio
required to incur additional debt pursuant to
ratio provisions
    
    
    2.00
    x
    
    
    3.00
    x
 (1)
    
    During 2008, our senior credit facility requires us to maintain an Adjusted
EBITDA to cash interest ratio at a minimum of 1.85x and a net debt to Adjusted EBITDA
ratio at a maximum of 5.25x, in each case for the most recent four quarter period.
Failure to satisfy these ratio requirements would constitute a default under the senior
credit agreement. If our lenders failed to waive any such default, our repayment
obligations under the senior credit agreement could be accelerated, which would also
constitute a default under our indentures.(2)
    
    Our ability to incur additional debt and make certain restricted payments under
our indentures, subject to specified exceptions, is tied to an Adjusted EBITDA to fixed
charge ratio of at least 2.0 to 1, except that we may incur certain debt and make
certain restricted payments and certain permitted investments without regard to the
ratio, such as up to an aggregate principal amount of $1,950 million (including $922.7
million that was outstanding under our term loan facilities as of September 30, 2008)
and investments in similar business and other investments equal to 6% of Nalco Holding
Company consolidated assets. Local lines of credit.
 Receivables facility.
  30




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
   Recent Accounting Pronouncements
  Safe Harbor Statement Under Private Securities Litigation Reform Act of 1995
   31




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
  
    
    our substantial leverage, particularly in view of current troubled conditions in
global debt markets;
    
    limitations on flexibility in operating our business contained in our debt agreements;
    
    increases in interest rates as a result of our variable rate indebtedness;
    
    pricing pressure from our customers;
    
    our ability to respond to the changing needs of a particular industry and develop new
offerings;
    
    technological change and innovation;
    
    risks associated with our non-U.S. operations;
    
    fluctuations in currency exchange rates;
    
    high competition in the markets in which we operate;
    
    adverse changes to environmental, health and safety regulations;
    
    operating hazards in our production facilities;
    
    inability to achieve expected cost savings;
    
    difficulties in securing the raw materials we use;
    
    significant increases in the costs of raw materials we use and our ability to pass any
future raw material price increases through to our customers;
    
    our significant pension benefit obligations and the current underfunding of our
pension plans;
    
    our ability to realize the full value of our intangible assets;
    
    our ability to attract and retain skilled employees, particularly research scientists,
technical sales professionals and engineers; and
    
    our ability to protect our intellectual property rights.
   Use of Non-GAAP Financial Measures
   32




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(continued)
     33




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 (a)
    
    Evaluation of disclosure controls and procedures.Our chief executive officer and chief financial officer, after evaluating the effectiveness
of our disclosure controls and procedures (as defined in the Securities Exchange Act of
1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period, have concluded that our
disclosure controls and procedures were effective as of September 30, 2008.(b)
    
    Changes in internal controls over financial reporting.There were no changes in our internal controls over financial reporting that occurred
during the third quarter of 2008 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
  34




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##### Table of Contents



Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 non-employees
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  (d)(c)
    
    
    ApproximateTotal Number of
    
    
    Dollar Value of(a)
    
    
    
    
    
    
    Shares Purchased
    
    
    Shares that MayTotal Number
    
    
    (b)
    
    
    as Part of Publicly
    
    
    Yet Be Purchasedof Shares
    
    
    Average Price
    
    
    Announced Plans
    
    
    Under the PlansPurchased
    
    
    Paid per Share
    
    
    or Programs (1)
    
    
    or Programs (1)(2)July 1, 2008 
July 31, 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    161,585,078August 1, 2008 
August 31, 2008
    
    
    1,213,930
    
    
    $
    22.13
    
    
    
    1,213,930
    
    
    $
    134,723,347September 1, 2008
 September 30,
2008
    
    
    1,978,613
    
    
    $
    20.85
    
    
    
    1,978,613
    
    
    $
    93,464,216Total
    
    
    3,192,543
    
    
    $
    21.34
    
    
    
    3,192,543
    
    
    $
    93,464,216
 (1)
    
    On July 31, 2007, our Board of Directors authorized a $300 million share repurchase program,
and gave our management discretion in determining the conditions under which shares may be
purchased from time to time. We intend to repurchase all shares under this authorization in
open market transactions. There is no set timetable for share repurchases, and the program
has no stated expiration date.(2)
    
    For the quarter ended September 30, 2008, we expended $73.3 million in cash for the
repurchase of shares, which included $8.7 million that was reported as a payable on the
balance sheet at June 30, 2008 for share repurchases executed in June 2008 and settled in July
2008. At September 30, 2008, $3.5 million was reported as a payable on the balance sheet for
share repurchases executed in September 2008 and settling in October 2008.  35




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Item 6. Exhibits
 (a)
    
    The following are included herein:
     36




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SIGNATURE
  NALCO HOLDING COMPANY/s/ BRADLEY J. BELLName:
    Bradley J. BellTitle:
    Executive Vice President and
Chief Financial Officer   37




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EXHIBIT INDEX
     38