SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2006 Commission file number 1-640
------------- -----
NL INDUSTRIES, INC.
-------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New Jersey 13-5267260
------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
-------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972)233-1700
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934). Large accelerated filer Accelerated
filer X Non-accelerated filer ---
--- ---
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes No X
--- ---
Number of shares of the Registrant's common stock outstanding on July 31, 2006:
48,569,034.
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2005;
June 30, 2006 (unaudited) 1
Condensed Consolidated Statements of Income -
Three and six months ended June 30, 2005 and 2006
(unaudited) 3
Condensed Consolidated Statements of Comprehensive Income -
Six months ended June 30, 2005 and 2006
(unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 2005 and 2006
(unaudited) 5
Condensed Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2006 (unaudited) 7
Notes to Condensed Consolidated Financial Statements
(unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 33
Item 4. Controls and Procedures 33
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 1A. Risk Factors 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 6. Exhibits 36
Items 2, 3, and 5 of Part II are omitted because there is no information to
report
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, June 30,
2005 2006
------------ ----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 76,912 $ 51,230
Marketable securities 9,265 9,198
Restricted cash and cash equivalents 4,327 5,850
Accounts and other receivables, net 23,392 24,222
Refundable income taxes 424 1,749
Receivable from affiliates 3,291 3,902
Inventories, net 22,538 23,483
Prepaid expenses 1,718 1,372
Deferred income taxes 7,295 7,073
--------- --------
Total current assets 149,162 128,079
--------- --------
Other assets:
Marketable equity securities 87,120 115,610
Investment in Kronos Worldwide, Inc. 146,774 155,896
Goodwill 27,240 32,327
Deferred income taxes 4 -
Other, net 5,499 7,557
--------- --------
Total other assets 266,637 311,390
--------- --------
Property and equipment:
Land 8,511 9,537
Buildings 28,001 30,166
Equipment 110,917 115,828
Construction in progress 2,015 5,854
--------- --------
149,444 161,385
Less accumulated depreciation and amortization 80,540 89,446
--------- --------
Net property and equipment 68,904 71,939
--------- --------
Total assets $ 484,703 $511,408
========= ========
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30,
2005 2006
------------ ----------
(Unaudited)
Current liabilities:
Current maturities of long-term debt $ 171 $ 54
Accounts payable 11,079 7,959
Accrued liabilities 29,859 28,819
Accrued environmental costs 13,302 10,597
Payable to affiliates 982 391
Income taxes 599 257
--------- ---------
Total current liabilities 55,992 48,077
--------- ---------
Noncurrent liabilities:
Long-term debt 1,425 29
Accrued pension costs 942 -
Accrued postretirement benefits costs 10,141 9,261
Accrued environmental costs 41,645 42,064
Deferred income taxes 107,000 124,270
Other 2,246 1,832
--------- ---------
Total noncurrent liabilities 163,399 177,456
--------- ---------
Minority interest 45,630 45,312
--------- ---------
Stockholders' equity:
Common stock 6,070 6,070
Additional paid-in capital 363,233 360,563
Retained earnings - -
Accumulated other comprehensive income (loss):
Marketable securities 34,084 52,511
Currency translation (141,018) (135,894)
Pension liabilities (42,687) (42,687)
--------- ---------
Total stockholders' equity 219,682 240,563
--------- ---------
Total liabilities and stockholders' equity $ 484,703 $ 511,408
========= =========
Commitments and contingencies (Note 13)
See accompanying Notes to Condensed Consolidated Financial Statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
--------------------- ----------------------
2005 2006 2005 2006
---- ---- ---- ----
(Unaudited)
Net sales $ 45,730 $ 50,143 $ 92,573 $ 97,172
Cost of sales 35,203 37,794 71,763 73,195
-------- -------- -------- --------
Gross margin 10,527 12,349 20,810 23,977
Selling, general and administrative expense 5,808 6,441 11,930 13,159
Other operating income (expense):
Currency transaction gains (losses), net 39 (70) (15) (111)
Disposition of property and equipment - - (4) (73)
Insurance recoveries 1,200 580 1,200 2,816
Other income - (9) 243 4
Corporate expense (4,245) (6,420) (10,060) (10,516)
-------- -------- -------- --------
Income from operations 1,713 (11) 244 2,938
Equity in earnings of Kronos Worldwide, Inc. 11,766 4,858 19,556 10,239
Other income (expense):
Trade interest income 23 62 44 137
Interest and dividend income from affiliates 620 471 1,239 942
Other interest income 794 758 1,660 1,626
Securities transactions, net 118 7 14,696 64
Interest expense (117) (51) (197) (112)
-------- -------- -------- --------
Income from continuing operations before income
taxes and minority interest 14,917 6,094 37,242 15,834
Provision for income taxes 4,247 1,935 11,025 4,431
Minority interest in after-tax earnings 785 1,122 1,516 1,873
-------- -------- -------- --------
Income from continuing operations 9,885 3,037 24,701 9,530
Discontinued operations, net of tax - (177) (326) (177)
-------- -------- -------- --------
Net income $ 9,885 $ 2,860 $ 24,375 $ 9,353
======== ======== ======== ========
Earnings per share:
Basic and diluted net income per share $ .20 $ .06 $ .50 $ .19
======== ======== ======== ========
Weighted-average shares used in the calculation of
net income per share:
Basic 48,553 48,565 48,522 48,564
Dilutive impact of stock options 40 18 55 21
-------- -------- -------- --------
Diluted 48,593 48,583 48,577 48,585
======== ======== ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Six months ended June 30, 2005 and 2006
(In thousands)
2005 2006
---- ----
(Unaudited)
Net income $24,375 $ 9,353
------- -------
Other comprehensive income, net of tax:
Marketable securities adjustment 4,229 18,427
Currency translation adjustment 1,600 5,124
------- -------
Total other comprehensive income 5,829 23,551
------- -------
Comprehensive income $30,204 $32,904
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2005 and 2006
(In thousands)
2005 2006
---- ----
(Unaudited)
Cash flows from operating activities:
Net income $ 24,375 $ 9,353
Depreciation and amortization 5,567 5,752
Deferred income taxes:
Continuing operations (14,683) 3,934
Discontinued operations (187) -
Minority interest:
Continuing operations 1,516 1,873
Discontinued operations (151) (148)
Equity in earnings of Kronos Worldwide, Inc. (19,556) (10,239)
Dividends from Kronos Worldwide, Inc. 8,835 8,758
Securities transactions, net (14,696) (64)
Benefit plan expense less than cash funding:
Defined benefit pension plans (437) (1,041)
Other postretirement benefit plans (633) (881)
Other, net 927 501
Change in assets and liabilities:
Accounts and other receivables (3,542) (1,208)
Inventories 756 1,050
Prepaid expenses (603) 336
Accrued environmental costs (2,918) (2,286)
Accounts payable and accrued liabilities (490) (4,861)
Income taxes (6,837) (1,622)
Accounts with affiliates 3,777 (1,217)
Other, net 867 (1,790)
-------- --------
Net cash provided by (used in) operating activities (18,113) 6,200
-------- --------
Cash flows from investing activities:
Capital expenditures (7,394) (5,393)
Acquisition, net of cash acquired - (9,832)
Collection of note receivable - 1,306
Collection of loans to affiliates 2,000 -
Change in restricted cash equivalents and marketable
debt securities, net 2,381 (1,397)
Proceeds from disposal of:
Business unit 18,094 -
Kronos common stock 19,176 -
Marketable securities 4,363 4,640
Property and equipment 12 37
Purchase of:
CompX common stock (572) (1,834)
Marketable securities (3,626) (4,786)
Cash of disposed business unit (4,006) -
-------- --------
Net cash provided by (used in) investing activities 30,428 (17,259)
-------- --------
See accompanying Notes to Condensed Consolidated Financial Statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six months ended June 30, 2005 and 2006
(In thousands)
2005 2006
---- ----
(Unaudited)
Cash flows from financing activities:
Indebtedness:
Principal payments $ (19) $(1,490)
Deferred financing costs paid (28) (105)
Cash dividends paid (12,139) (12,142)
Distributions to minority interest (1,203) (1,144)
Proceeds from issuance of common stock:
NL common stock 2,693 9
CompX common stock 217 -
-------- --------
Net cash used in financing activities (10,479) (14,872)
-------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing activities 1,836 (25,931)
Currency translation 169 249
Cash and cash equivalents at beginning of period 99,185 76,912
-------- --------
Cash and cash equivalents at end of period $101,190 $ 51,230
======== ========
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized $ 82 $ 181
Income taxes, net 27,764 3,201
Noncash investing activity - note receivable
received upon disposal of business unit $ 4,179 $ -
See accompanying Notes to Condensed Consolidated Financial Statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2006
(In thousands)
Accumulated other
comprehensive income (loss)
Additional ----------------------------------
Common paid-in Retained Marketable Currency Pension
stock capital earnings securities translation liabilities Total
------- ---------- -------- ---------- ----------- ----------- ------
(Unaudited)
Balance at December 31, 2005 $6,070 $363,233 $ - $34,084 $(141,018) $(42,687) $219,682
Net income - - 9,353 - - - 9,353
Issuance of common stock - 80 - - - - 80
Dividends - (2,788) (9,353) - - - (12,141)
Other comprehensive income, net - - - 18,427 5,124 - 23,551
Other - 38 - - - - 38
------ -------- ------- ------- --------- -------- --------
Balance at June 30, 2006 $6,070 $360,563 $ - $52,511 $(135,894) $(42,687) $240,563
====== ======== ======= ======= ========= ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Note 1 - Organization and basis of presentation:
Organization - We are majority-owned by Valhi, Inc. (NYSE: VHI), which owns
approximately 83% of our outstanding common stock at June 30, 2006. Valhi is
majority-owned by Contran Corporation. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of
certain children and grandchildren of Harold C. Simmons (for which Mr. Simmons
is the sole trustee) or is held directly by Mr. Simmons or persons or related
companies to Mr. Simmons. Consequently, Mr. Simmons may be deemed to control
Contran, Valhi and us.
Basis of presentation - Consolidated in this Quarterly Report are the
results of our majority-owned subsidiary, CompX International, Inc. We also own
36% of Kronos Worldwide, Inc. which we account for by the equity method. CompX
(NYSE: CIX) and Kronos (NYSE: KRO) each file periodic reports with the
Securities and Exchange Commission ("SEC").
Our ownership of CompX is primarily through CompX Group, Inc., our
majority-owned subsidiary. CompX Group's sole asset consists of 83% of the
outstanding common stock of CompX. We also own an additional 2% of CompX
directly. During the first six months of 2006, we purchased approximately
117,000 shares of CompX common stock in market transactions for an aggregate
purchase price of $1.8 million. We accounted for this purchase as a step
acquisition under the purchase method of accounting.
In April 2006, CompX completed an acquisition of a marine component
products business for aggregate cash consideration of $9.8 million, net of cash
acquired. We completed this acquisition to expand the Marine component products
business unit of CompX. We have included the results of operations and cash
flows of the acquired business in our Condensed Consolidated Financial
Statements starting in April 2006. The purchase price has been allocated among
the tangible and intangible net assets acquired based upon an estimate of the
fair value of such net assets. The pro forma effect to us, assuming this
acquisition had been completed as of January 1, 2005, is not material.
The unaudited Condensed Consolidated Financial Statements contained in this
Quarterly Report have been prepared on the same basis as the audited
Consolidated Financial Statements in our Annual Report on Form 10-K for the year
ended December 31, 2005 that we filed with the SEC on March 16, 2006 (the "2005
Annual Report"). In our opinion, we have made all necessary adjustments (which
include only normal recurring adjustments) in order to state fairly, in all
material respects, our consolidated financial position, results of operations
and cash flows as of the dates and for the periods presented. We have condensed
the Consolidated Balance Sheet at December 31, 2005 contained in this Quarterly
Report as compared to our audited Consolidated Financial Statements at that
date, and we have omitted certain information and footnote disclosures
(including those related to the Consolidated Balance Sheet at December 31, 2005)
normally included in financial statements prepared in accordance with accounting
principals generally accepted in the United States of America ("GAAP"). Our
results of operations for the interim periods ended June 30, 2006 may not be
indicative of our operating results for the full year. The Condensed
Consolidated Financial Statements contained in this Quarterly Report should be
read in conjunction with our 2005 Consolidated Financial Statements contained in
our 2005 Annual Report.
Unless otherwise indicated, references in this report to "we", "us" or
"our" refer to NL Industries and its subsidiaries and affiliates, including
Kronos, taken as a whole.
Note 2 - Accounts and other receivables, net:
December 31, June 30,
2005 2006
------------ ----------
(In thousands)
Trade receivables $ 20,921 $ 23,083
Other receivables 2,783 1,493
Allowance for doubtful accounts (312) (354)
-------- --------
Total $ 23,392 $ 24,222
======== ========
Note 3 - Inventories, net:
December 31, June 30,
2005 2006
------------ ----------
(In thousands)
Raw materials $ 7,098 $ 8,439
In process products 9,899 9,642
Finished products 5,541 5,402
-------- --------
Total $ 22,538 $ 23,483
======== ========
Note 4 - Noncurrent marketable equity securities:
At December 31, 2005 and June 30, 2006, we owned approximately 4.7 million
shares of Valhi common stock. At June 30, 2006 the quoted market price was
$24.55 per share, or an aggregate of $115.6 million, and at December 31, 2005
the quoted market price was $18.50 per share, or an aggregate of $87.1 million.
Note 5 - Investment in Kronos:
At June 30, 2006, we held 17.5 million shares of Kronos with a quoted
market price of $29.25 per share, or an aggregate market value of $512 million.
Selected financial information of Kronos is summarized below:
December 31, June 30,
2005 2006
------------ ----------
(In millions)
Current assets $ 525.3 $ 577.3
Property and equipment, net 418.9 433.3
Investment in TiO2 joint venture 115.3 115.6
Other noncurrent assets 239.4 253.8
--------- ---------
Total assets $ 1,298.9 $1,380.0
========= =========
Current liabilities $ 205.1 $ 185.7
Long-term debt 464.4 539.9
Accrued pension and post retirement benefits 150.0 148.4
Other noncurrent liabilities 69.4 70.5
Stockholders' equity 410.0 435.5
--------- ---------
Total liabilities and stockholders' equity $ 1,298.9 $1,380.0
========= =========
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2005 2006 2005 2006
---- ---- ---- ----
(In millions)
Net sales $ 311.7 $ 345.1 $ 603.6 $ 649.4
Cost of sales 217.0 263.1 424.7 492.6
Income from operations 57.7 36.8 104.1 71.1
Net income 32.9 13.6 54.3 28.6
Note 6 - Other noncurrent assets, net:
December 31, June 30,
2005 2006
------------ ----------
(In thousands)
Intangible assets, net $ 3,432 $ 4,423
Prepaid pension cost - 67
Other 2,067 3,067
-------- --------
Total $ 5,499 $ 7,557
======== ========
Note 7 - Current accrued liabilities:
December 31, June 30,
2005 2006
------------ ----------
(In thousands)
Employee benefits $ 10,933 $ 10,176
Professional fees 5,269 4,130
Other 13,657 14,513
-------- --------
Total $ 29,859 $ 28,819
======== ========
Note 8 - Other noncurrent liabilities:
December 31, June 30,
2005 2006
------------ ----------
(In thousands)
Insurance claims and expenses $ 2,224 $ 1,810
Other 22 22
-------- --------
Total $ 2,246 $ 1,832
======== ========
Note 9 - Minority interest:
December 31, June 30,
2005 2006
------------ ----------
(In thousands)
Minority interest in net assets -
CompX International Inc. $ 45,630 $ 45,312
======== ========
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2005 2006 2005 2006
---- ---- ---- ----
(In thousands)
Minority interest in net earnings:
CompX International Inc. $ 753 $1,122 $1,454 $1,873
NL Environmental Management Services, Inc. 32 - 62 -
----- ------ ------ ------
Total $ 785 $1,122 $1,516 $1,873
===== ====== ====== ======
Note 10 - Provision for income taxes:
Six months ended
June 30,
----------------------
2005 2006
---- ----
(In millions)
Expected tax expense $13.0 $ 5.5
Non-U.S. tax rates (.1) (.2)
Incremental placeU.S. tax and rate differences on
equity in earnings (4.6) (1.1)
Nondeductible expenses .2 .1
placeU.S. state income taxes, net .1 .3
Excess of book basis over tax basis of Kronos
common stock sold or distributed 2.4 -
Tax contingency reserve adjustment, net .2 .1
Reduction in Canadian income tax rate - (.2)
Other, net (.2) (.1)
----- -----
Total $11.0 $ 4.4
===== =====
Six months ended
June 30,
----------------------
2005 2006
---- ----
(In millions)
Comprehensive provision (benefit) for
income taxes allocable to:
Income from continuing operations $11.0 $ 4.4
Discontinued operations .3 (.2)
Retained earnings - -
Other comprehensive income:
Marketable securities 2.3 9.9
Currency translation (.1) 3.1
----- -----
Total $13.5 $17.2
===== =====
In June 2006, placeCanada enacted a 2% reduction in the Canadian federal
income tax rate and eliminated the federal surtax. The 2% reduction will be
phased in from 2008 through 2010, and the federal surtax will be eliminated in
2008. As a result, during the second quarter of 2006 we recognized a $.2 million
income tax benefit related to the effect of such reduction on our previously
recorded net deferred income tax liability.
Note 11 - Employee benefit plans:
Defined benefit plans - The components of net periodic defined benefit
pension cost (income) are presented in the table below.
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2005 2006 2005 2006
---- ---- ---- ----
(In thousands)
Interest cost $ 758 $ 718 $ 1,518 $ 1,483
Expected return on plan assets (1,014) (1,348) (2,031) (2,693)
Amortization of net transition obligations (18) (17) (35) (33)
Recognized actuarial losses 98 102 198 201
------- ------- ------- -------
Total $ (176) $ (545) $ (350) $(1,042)
======= ======= ======= =======
Postretirement benefits - The components of net periodic postretirement
benefits cost are presented in the table below.
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2005 2006 2005 2006
---- ---- ---- ----
(In thousands)
Interest cost $ 211 $ 183 $ 422 $ 367
Amortization of prior service credit (71) (28) (143) (56)
------- ------- ------- -------
Total $ 140 $ 155 $ 279 $ 311
======= ======= ======= =======
Contributions - We expect our 2006 contributions for our pension and
postretirement benefit plans to be consistent with the amount disclosed in our
2005 Annual Report.
Note 12 - Accounts with affiliates:
December 31, June 30,
2005 2006
------------ ----------
(In thousands)
Current receivables from affiliates:
Valhi - federal income taxes $ 3,146 $ 3,801
Kronos - trade items 145 101
------- -------
Total $ 3,291 $ 3,902
======= =======
Current payables to affiliates:
Valhi - state income taxes, net $ 771 $ 170
Tremont Corporation - trade items 211 221
------- -------
Total $ 982 $ 391
======= =======
Note 13 - Commitments and contingencies:
Lead pigment litigation
Our former operations included the manufacture of lead pigments for use in
paint and lead-based paint. We, other former manufacturers of lead pigments for
use in paint and lead-based paint (together, the "former pigment
manufacturers"), and the Lead Industries Association ("LIA") (which discontinued
business operations prior to 2005) have been named as defendants in various
legal proceedings seeking damages for personal injury, property damage and
governmental expenditures allegedly caused by the use of lead-based paints.
Certain of these actions have been filed by or on behalf of states, large
placeU.S. cities or their public housing authorities and school
districts, and certain others have been asserted as class actions. These
lawsuits seek recovery under a variety of theories, including public and private
nuisance, negligent product design, negligent failure to warn, strict liability,
breach of warranty, conspiracy/concert of action, aiding and abetting,
enterprise liability, market share or risk contribution liability, intentional
tort, fraud and misrepresentation, violations of state consumer protection
statutes, supplier negligence and similar claims.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and health concerns associated with the
use of lead-based paints, including damages for personal injury, contribution
and/or indemnification for medical expenses, medical monitoring expenses and
costs for educational programs. A number of cases are inactive or have been
dismissed or withdrawn. Most of the remaining cases are in various pre-trial
stages. Some are on appeal following dismissal or summary judgment rulings in
favor of either the defendants or plaintiffs. In addition, various other cases
are pending (in which we are not a defendant) seeking recovery for injuries
allegedly caused by lead pigment and lead-based paint. Although we are not a
defendant in these cases, the outcome of these cases may have an impact on cases
that might be filed against us in the future.
We believe these actions are without merit, and intend to continue to deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. We have never settled any of these cases, nor have any final adverse
judgments against us been entered. We have not accrued any amounts for pending
lead pigment and lead-based paint litigation. We cannot reasonably estimate
liability, if any, that may result. We cannot assure you that NL will not incur
liability in the future as a result of pending litigation due to the inherent
uncertainties involved in court and jury rulings in pending and possible future
cases. If future liabilities are incurred, it could have a material adverse
effect on our consolidated financial statements, results of operations and
liquidity.
In one of these lead pigment cases (State of Rhode Island v. Lead
Industries Association), a trial before a StateRhode Island state court jury
began in September 2002 on the question of whether lead pigment in paint on
Rhode Island buildings is a public nuisance. In October 2002, the
trial judge declared a mistrial in the case when the jury was unable to reach a
verdict on the question, with the jury reportedly deadlocked 4-2 in defendants'
favor. In November 2005, the State of Rhode Island began a retrial of
the case on the State's claims of public nuisance, indemnity and unjust
enrichment. Following the State's presentation of its case, the trial court
dismissed the State's claims of indemnity and unjust enrichment. The public
nuisance claim was sent to the jury in February 2006, and the jury found that we
and two other defendants substantially contributed to the creation of a public
nuisance as a result of the collective presence of lead pigments in paints and
coatings on buildings in Rhode Island. The jury also found that we and
the two other defendants should be ordered to abate the public nuisance.
Following the jury verdict, the trial court dismissed the State's claim for
punitive damages. The scope of the abatement remedy will be determined by the
judge. The extent, nature and cost of such remedy are not currently known and
will be determined only following additional proceedings before the trial court.
Various matters remain pending before the trial court, including our motion to
dismiss. We intend to appeal any adverse judgment which the trial court may
enter against us.
The Rhode Island case is unique in that this is the first time
that an adverse verdict in the lead pigment litigation has been entered against
us. We believe there are a number of meritorious issues which can be appealed in
this case; therefore we currently believe it is not probable that we will
ultimately be found liable in this matter. In addition, we cannot reasonably
estimate potential liability, if any, with respect to this and the other lead
pigment litigation. However, legal proceedings are subject to inherent
uncertainties, and we cannot assure you that any appeal would be successful.
Therefore it is reasonably possible we could in the near term conclude that it
is probable we have incurred some liability in this Rhode Island
matter that would result in recognizing a loss contingency accrual. The
potential liability could have a material adverse impact on net income for the
interim or annual period during which such liability is recognized, and a
material adverse impact on our financial condition and liquidity. Various other
cases in which we are a defendant are also pending in other jurisdictions, and
new cases could be filed against us, the resolution of which could also result
in recognition of a loss contingency accrual that could have a material adverse
impact on our net income for the interim or annual period during which such
liability is recognized, and a material adverse impact on our financial
condition and liquidity. We cannot reasonably estimate the potential impact on
our results of operations, financial condition or liquidity related to these
matters.
Environmental matters and litigation
Our operations are governed by various environmental laws and regulations.
Certain of our businesses are and have been engaged in the handling, manufacture
or use of substances or compounds that may be considered toxic or hazardous
within the meaning of applicable environmental laws. As with other companies
engaged in similar businesses, certain of our past and current operations and
products have the potential to cause environmental or other damage. We have
implemented and continue to implement various policies and programs in an effort
to minimize these risks. Our policy is to maintain compliance with applicable
environmental laws and regulations at all of our plants and to strive to improve
our environmental performance. From time to time, we may be subject to
environmental regulatory enforcement under U.S. and foreign statutes, the
resolution of which typically involves the establishment of compliance programs.
Future developments, such as stricter requirements of environmental laws and
enforcement policies, could adversely affect our production, handling, use,
storage, transportation, sale or disposal of such substances. We believe all of
our plants are in substantial compliance with applicable environmental laws.
Certain properties and facilities used in our former businesses, including
divested primary and secondary lead smelters and former mining locations, are
the subject of civil litigation, administrative proceedings or investigations
arising under federal and state environmental laws. Additionally, in connection
with past disposal practices, we have been named as a defendant, potentially
responsible party ("PRP") or both, pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act, as amended by the Superfund Amendments
and Reauthorization Act ("CERCLA"), and similar state laws in various
governmental and private actions associated with waste disposal sites, mining
locations, and facilities we or our subsidiaries or their predecessors currently
or previously owned, operated or used, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. These proceedings
seek cleanup costs, damages for personal injury or property damage and/or
damages for injury to natural resources. Certain of these proceedings involve
claims for substantial amounts. Although we may be jointly and severally liable
for such costs, in most cases we are only one of a number of PRPs who may also
be jointly and severally liable.
Environmental obligations are difficult to assess and estimate for numerous
reasons including:
o complexity and differing interpretations of governmental regulations,
o number of PRPs and their ability or willingness to fund such allocation of
costs,
o financial capabilities of the PRPs and the allocation of costs among them,
o solvency of other PRPs,
o multiplicity of possible solutions; and
o number of years of investigatory, remedial and monitoring activity
required.
In addition, the imposition of more stringent standards or requirements
under environmental laws or regulations, new developments or changes respecting
site cleanup costs or allocation of such costs among PRPs, solvency of other
PRPs, the results of future testing and analysis undertaken with respect to
certain sites or a determination that we are potentially responsible for the
release of hazardous substances at other sites, could cause our expenditures to
exceed our current estimates. Because we may be jointly and severally liable for
the total remediation cost at certain sites, the amount we are ultimately liable
for may exceed our accruals due to, among other things, reallocation of costs
among PRPs or the insolvency of one or more PRPs. We cannot assure you that
actual costs will not exceed accrued amounts or the upper end of the range for
sites for which estimates have been made, and no assurance can be given that
costs will not be incurred with respect to sites as to which no estimate
presently can be made, and we cannot assure you that costs will not be incurred
for sites where no estimate presently can be made. Further, additional
environmental matters may arise in the future. If we were to incur any future
liability, this could have a material adverse effect on our consolidated
financial position, results of operations and liquidity.
We record liabilities related to environmental remediation obligations when
estimated future expenditures are probable and reasonably estimable. We adjust
environmental accruals as further information becomes available or circumstances
change. We generally do not discount estimated future expenditures to their
present value due to the uncertainty of the timing of the pay out. We recognize
recoveries of remediation costs from other parties, if any, as assets when their
receipt is deemed probable. At June 30, 2006, there were no receivables for
recoveries.
We do not know and cannot estimate the exact time frame over which we will
make payments for our accrued environmental costs. The timing of payments
depends upon a number of factors including the timing of the actual remediation
process; this in turn depends on factors outside our control. At each balance
sheet date, we estimate the amount of our accrued environmental costs that we
expect to pay within the next 12 months. We classify this estimate as a current
liability, and we classify the remaining accrued environmental costs as a
noncurrent liability on our consolidated balance sheet.
Changes in the accrued environmental costs during the first six months of
2006 are as follows:
Amount
--------------
(In thousands)
Balance at the beginning of the period $54,947
Additions charged to expense, net 854
Payments, net (3,140)
-------
Balance at the end of the period $52,661
=======
Amounts recognized in the balance sheet at the end of the period:
Current liability $10,597
Noncurrent liability 42,064
-------
Total $52,661
=======
On a quarterly basis, we evaluate the potential range of liability at sites
where we have been named as a PRP or defendant. At June 30, 2006, we had accrued
$52.7 million for those environmental matters which we believe are reasonably
estimable. We believe that it is not possible to estimate the range of costs for
certain sites. The upper end of the range of reasonably possible costs to us for
sites for which we believe it is possible to estimate costs is approximately $78
million. We have not discounted these estimates to present value.
At June 30, 2006, there are approximately 20 sites for which we are unable
to estimate a range of costs. For these sites, generally the investigation is in
the early stages, and it is either unknown as to whether we actually had any
association with the site, or if we did have an association with the site, the
nature of our responsibility, if any, for the contamination at the site and the
extent of contamination. We cannot estimate when enough information will become
available to allow us to estimate a range of loss. The timing and availability
of information on these sites is dependent on events outside our control, such
as when the party alleging liability provides information to us. On certain
previously inactive sites, we have received general and special notices of
liability from the EPA alleging that we, along with other PRPs, are liable for
past and future costs of remediating environmental contamination allegedly
caused by former operations conducted at such sites. These notifications may
assert that we, along with other PRPs, are liable for past clean-up costs. These
costs could be material to us if we are ultimately found liable.
Other litigation
We have been named as a defendant in various lawsuits in several
jurisdictions, alleging personal injuries as a result of occupational exposure
primarily to products manufactured by our former operations containing asbestos,
silica and/or mixed dust. Approximately 500 of these types of cases remain
pending, involving a total of approximately 10,600 plaintiffs and their spouses.
We have not accrued any amounts for this litigation because of the uncertainty
of liability and inability to reasonably estimate the liability, if any. To
date, we have not been adjudicated liable in any of these matters. Based on
information available to us, including facts concerning historical operations,
the rate of new claims, the number of claims from which we have been dismissed,
and our prior experience in the defense of these matters, we believe that the
range of reasonably possible outcomes of these matters will be consistent with
our historical costs (which are not material). Furthermore, we do not expect any
reasonably possible outcome would involve amounts material to our consolidated
financial position, results of operations or liquidity. We have and will
continue to vigorously seek dismissal and/or a finding of no liability from each
claim. In addition, from time to time, we have received notices regarding
asbestos or silica claims purporting to be brought against former subsidiaries,
including notices provided to insurers with which we have entered into
settlements extinguishing certain insurance policies. These insurers may seek
indemnification from us.
Murphy, et al. v. NL Industries, Inc., et al. (United States District
Court, District of New Jersey, Case No. 2:06-cv-01535-WHW-SDW). In June 2006,
the plaintiffs filed an amended complaint. In July 2006, defendants filed
motions to disqualify plaintiffs' counsel, compel arbitration, transfer venue to
the Northern District of Texas, to dismiss the claims against the individual
defendants for lack of personal jurisdiction and to dismiss the complaint.
For a discussion of other legal proceedings to which we are a party, refer
to the financial statements included in our 2005 Annual Report and our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006.
In addition to the litigation described above, we and our affiliates are
also involved in various other environmental, contractual, product liability,
patent (or intellectual property), employment and other claims and disputes
incidental to present and former businesses. In certain cases, we have insurance
coverage for these items, although we do not expect additional material
insurance coverage for environmental claims.
We currently believe that the disposition of all claims and disputes,
individually or in the aggregate, should not have a material adverse effect on
our consolidated financial position, results of operations or liquidity beyond
the accruals already provided.
Insurance coverage claims
For a complete discussion of certain litigation involving us and certain of
our former insurance carriers, refer to our 2005 Annual Report and our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006. Additional information
regarding such litigation, or new litigation, is below.
NL Industries, Inc. v. OneBeacon America Insurance Company, et. al.
(District Court for Dallas County, StateTexas, Case No. 05-11347). In June 2006,
the federal court granted our motion to remand the action to placeStateTexas
state court.
The issue of whether insurance coverage for defense costs or indemnity or
both will be found to exist for our lead pigment litigation depends upon a
variety of factors, and there can be no assurance that insurance coverage will
be available. We have not considered any potential insurance recoveries for lead
pigment or environmental litigation matters in determining related accruals.
Income tax matters
Tax authorities are examining certain of our placeU.S. and
non-U.S. tax returns and have or may propose tax deficiencies, including
penalties and interest. For example:
o Kronos received a preliminary tax assessment related to 1993 from the
Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately euro 6 million ($7.2 million at June 30, 2006).
The Belgian tax authorities have filed a lien on Kronos' Belgian TiO2
operation's fixed assets in connection with their assessment. This lien
does not interfere with on-going operations at the facility. Kronos filed a
protest to this assessment and in July 2006, the Belgian tax authorities
withdrew the assessment. We believe the lien will be released by the end of
2006.
o The Norwegian tax authorities have notified Kronos of their intent to
assess tax deficiencies of approximately kroner 12 million ($2.4 million at
June 30, 2006) relating to the years 1998 through 2000. Kronos objected to
this proposed assessment and in May 2006 the Norwegian tax authorities
withdrew the assessment.
Other income tax examinations related to our operations continue, and we
cannot guarantee that these tax matters will be resolved in our favor due to the
inherent uncertainties involved in settlement initiatives and court and tax
proceedings. We believe we have adequate accruals for additional taxes and
related interest expense which could ultimately result from tax examinations. We
believe the ultimate disposition of tax examinations should not have a material
adverse effect on our consolidated financial position, results of operations or
liquidity.
Note 14 - Discontinued operations, net of tax:
Discontinued operations relates to CompX's former Thomas Regout operations
in the placeNetherlands. Prior to December 2004, the Thomas Regout
European operations were classified as held for use. A formal plan of disposal
adopted by CompX's board of directors in December 2004 resulted in the
reclassification of the operations to held for sale. Based upon the estimated
realizable value (or fair value less costs to sell) of the net assets disposed,
we determined that the goodwill associated with the assets held for sale was
partially impaired. In determining the estimated realizable value of the Thomas
Regout operations as of December 31, 2004, when we classified it as held for
sale, we used the sales price inherent in the definitive agreement reached with
the purchaser in January 2005 and our estimate of the related transaction costs
(or costs to sell). In January 2005, we completed the sale of Thomas Regout for
net proceeds that were approximately $864,000 less than previously estimated
(primarily due to higher expenses associated with the sale). These additional
expenses reflect a refinement of our previous estimate of the realizable value
of the Thomas Regout operations and accordingly we recognized a further
impairment of goodwill. As a result, discontinued operations for the first six
months of 2005 includes a charge for the additional expenses ($326,000, net of
income tax benefit and minority interest). Discontinued operations in the second
quarter of 2006 represents an expense of $500,000 ($177,000, net of income tax
benefit and minority interest) for our change in estimate of certain
indemnification obligations we had to the purchaser of the Thomas Regout
operations.
Note 15 - Recent accounting pronouncements:
Inventory costs - Statement of Financial Accounting Standards ("SFAS") No.
151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, became effective
for inventory costs incurred on or after January 1, 2006. SFAS No. 151 requires
that allocation of fixed production overhead costs to inventory be based on
normal capacity of the production facilities, as defined by SFAS No. 151. SFAS
No. 151 also clarifies the accounting for abnormal amounts of idle facility
expense, freight handling costs and wasted material, requiring the recognition
of those items as current period charges. Our existing production cost policies
complied with the requirements of SFAS No. 151, therefore the adoption of SFAS
No. 151 did not affect our Consolidated Financial Statements.
Stock options - We adopted the fair value provisions of SFAS No. 123R,
Share-Based Payment, on January 1, 2006 using the modified prospective
application method. SFAS No. 123R, among other things, requires the cost of
employee compensation paid with equity instruments to be measured based on the
grant date fair value. That cost is then recognized over the vesting period.
Using the modified prospective method, we will apply the provisions of the
standard to all new equity compensation granted after January 1, 2006 and any
existing awards which are modified, repurchased or cancelled after January 1,
2006. The number of non-vested equity awards we or our subsidiaries had issued
as of December 31, 2005 was not material. Before adopting SFAS No. 123R we
accounted for our equity compensation under the variable accounting method
whereby the equity awards were revalued based on the current trading price at
each balance sheet date. We now account for these awards using the liability
method under SFAS No. 123R, which is substantially identical to the variable
accounting method we previously used. Net compensation expense for stock-based
employee compensation was immaterial in both the first six months of 2005 and
2006. If we or our subsidiaries grant a significant number of equity awards or
modify, repurchase or cancel existing equity awards in the future, the amount of
equity compensation expense in our Consolidated Financial Statements could be
material.
Effective January 1, 2006, SFAS No. 123R requires the cash income tax
benefit resulting from the exercise of stock options in excess of the cumulative
income tax benefit previously recognized for GAAP financial reporting purposes
(which for us did not represent a significant amount in the first six months of
2006) to be reflected as a component of cash flows from financing activities in
our Consolidated Financial Statements. SFAS No. 123R also requires certain
expanded disclosures regarding equity compensation, and we provided these
expanded disclosures in our 2005 Annual Report.
Uncertain tax positions - In the second quarter of 2006 the Financial
Accounting Standards Board ("FASB") issued FASB Interpretation No. ("FIN") 48,
Accounting for Uncertain Tax Positions, which will become effective for us on
January 1, 2007. FIN No. 48 clarifies when and how much of a benefit we can
recognize in our Consolidated Financial Statements for certain positions taken
in our income tax returns under SFAS No. 109, Accounting for Income Taxes, and
enhances the disclosure requirements for our income tax policies and reserves.
Among other things, FIN No. 48 will prohibit us from recognizing the benefits of
a tax position unless we believe it is more-likely-than-not our position will
prevail with the applicable tax authorities and limits the amount of the benefit
to the largest amount for which we believe the likelihood of realization is
greater than 50%. FIN No. 48 also requires companies to accrue penalties and
interest on the difference between tax positions taken on their tax returns and
the amount of benefit recognized for financial reporting purposes under the new
Standard. Our current income tax accounting policies comply with this aspect of
the new Standard. We will also be required to reclassify any reserves we have
for uncertain tax positions from deferred income tax liabilities, where they are
currently recognized, to a separate current or noncurrent liability, depending
on the nature of the tax position. We are currently evaluating the impact of FIN
No. 48 on our Consolidated Financial Statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Business and results of operations overview
NL Industries is primarily a holding company. We operate in the component
products industry through our majority-owned subsidiary, CompX International
Inc. We also own a non-controlling interest in Kronos Worldwide, Inc. Both CompX
(NYSE: CIX) and Kronos (NYSE: KRO) file periodic reports with the Securities and
Exchange Commission ("SEC").
CompX is a leading manufacturer of precision ball bearing slides, security
products and ergonomic computer support systems used in office furniture,
transportation, tool storage and a variety of other industries. CompX has also
recently entered the performance marine components industry through the
acquisition of two performance marine manufacturers.
In addition, we account for our 36% non-controlling interest in Kronos by
the equity method. Kronos is a leading global producer and marketer of
value-added titanium dioxide pigments ("TiO2"). TiO2 is used for a variety of
manufacturing applications including plastics, paints, paper and other
industrial products.
Forward-looking information
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Statements in this Quarterly
Report on Form 10-Q that are not historical facts are forward-looking in nature.
Statements found in this report including, but not limited to, the statements
found in Item 2 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations," are forward-looking statements that represent our
beliefs and assumptions based on currently available information. In some cases
you can identify these forward-looking statements by the use of words such as
"believes," "intends," "may," "should," "could," "anticipates," "expected" or
comparable terminology, or by discussions of strategies or trends. Although we
believe the expectations reflected in forward-looking statements are reasonable,
we do not know if these expectations will be correct. Forward-looking statements
by their nature involve substantial risks and uncertainties that could
significantly impact expected results. Actual future results could differ
materially from those predicted. While it is not possible to identify all
factors, we continue to face many risks and uncertainties. Among the factors
that could cause our actual future results to differ materially from those
described herein are the risks and uncertainties discussed in this Quarterly
Report and those described from time to time in our other filings with the SEC
including, but not limited to, the following:
o Future supply and demand for our products,
o The extent of the dependence of certain of our businesses on certain market
sectors,
o The cyclicality of our businesses (such as Kronos' TiO2 operations),
o The impact of certain long-term contracts on certain of our businesses,
o Customer inventory levels (such as the extent to which Kronos' customers
may, from time to time, accelerate purchases of TiO2 in advance of
anticipated price increases or defer purchases of TiO2 in advance of
anticipated price decreases),
o Changes in raw material and other operating costs (such as energy costs),
o The possibility of labor disruptions,
o General global economic and political conditions (such as changes in the
level of gross domestic product in various regions of the world and the
impact of such changes on demand for TiO2),
o Demand for office furniture,
o Competitive products and substitute products, including increased
competition from low-cost manufacturing sources (such as China),
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o Service industry employment levels,
o Possible disruption of our business or increases in the cost of doing
business resulting from terrorist activities or global conflicts,
o The introduction of trade barriers,
o Fluctuations in currency exchange rates (such as changes in the exchange
rate between the U.S. dollar and each of the euro, the Norwegian kroner and
the Canadian dollar),
o Operating interruptions (including, but not limited to, labor disputes,
leaks, natural disasters, fires, explosions, unscheduled or unplanned
downtime and transportation interruptions),
o The timing and amounts of insurance recoveries,
o The ability to renew or refinance credit facilities,
o The extent to which our subsidiaries were to become unable to pay us
dividends,
o Uncertainties associated with new product development,
o The ultimate outcome of income tax audits, tax settlement initiatives or
other tax matters,
o The ultimate ability to utilize income tax attributes, the benefit of which
has been recognized under the "more likely than not" recognition criteria
(such as Kronos' ability to utilize its German net operating loss
carryforwards),
o Environmental matters (such as those requiring compliance with emission and
discharge standards for existing and new facilities, or new developments
regarding environmental remediation at sites related to our former
operations),
o Government laws and regulations and possible changes therein (such as
changes in government regulations which might impose various obligations on
present and former manufacturers, including us, of lead pigment and
lead-based paint, with respect to asserted health concerns associated with
the use of such products),
o The ultimate resolution of pending litigation (such as our lead pigment and
environmental litigation and litigation), and
o Possible future litigation.
Should one or more of these risks materialize or if the consequences of such a
development worsen, or should the underlying assumptions prove incorrect, actual
results could differ materially from those currently forecasted or expected. We
disclaim any intention or obligation to update or revise any forward-looking
statement whether as a result of changes in information, future events or
otherwise.
Results of Operations
Quarter Ended June 30, 2006 Compared to Quarter Ended June 30, 2005 -
Net Income
Our income from continuing operations was $3.0 million, or $.06 per diluted
share, in the second quarter of 2006 compared to income of $9.9 million, or $.20
per diluted share, in the second quarter of 2005.
The decrease in our diluted earnings per share from 2005 to 2006 is due
primarily to the net effects of:
o lower equity in net income of Kronos in 2006,
o higher component products income from operations at CompX in 2006, and
o higher environmental and legal defense costs of NL in 2006.
Our income from continuing operations in 2006 includes:
o a charge included in our equity in earnings of Kronos of $.11 per
diluted share, net of tax benefit, related to Kronos' redemption of
its 8.875% Senior Secured Notes,
o income included in our equity in earnings of Kronos of $.06 per
diluted share, net of income tax, related to Kronos' aggregate income
tax benefit associated with the withdrawal of certain income tax
assessments previously made by the Belgian and Norwegian tax
authorities, favorable developments with certain income tax issues
related to Belgium and the enactment of a reduction in the Canadian
federal income tax rate, and
o Income of $.01 per diluted share related to certain insurance
recoveries we received.
Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005 -
Net Income
Our consolidated income from continuing operations was $9.5 million, or
$.19 per diluted share, in the first six months of 2006 compared to income of
$24.7 million, or $.50 per diluted share, in the first six months of 2005.
The decrease in our diluted earnings per share from 2005 to 2006 is due
primarily to the net effects of:
o lower equity in net income of Kronos in 2006,
o higher component products income from operations at CompX in 2006, and
o certain securities transactions gains in 2005.
We currently believe net income for the full year 2006 will be lower than
2005 primarily due to lower expected equity in earnings of Kronos in 2006 and to
the securities transaction gains we recognized in 2005.
Our income from continuing operations in 2005 includes:
o gains from our sales of shares of Kronos common stock of $.17 per
diluted share, net of income tax,
o income included in our equity in earnings of Kronos of $.03 per
diluted share related to Kronos' sale of its passive interest in a
Norwegian smelting operation.
Our income from continuing operations in 2006 includes:
o a charge included in our equity in earnings of Kronos of $.11 per
diluted share, net of income tax benefit, related to Kronos'
redemption of its 8.875% Senior Secured Notes,
o income included in our equity in earnings of Kronos of $.06 per
diluted share related to Kronos' aggregate income tax benefit
associated with the withdrawal of certain income tax assessments
previously made by the Belgian and Norwegian tax authorities,
favorable developments with certain income tax issues related to
Belgium and Germany and the enactment of a reduction in the Canadian
federal income tax rate, and
o income of $.04 per diluted share related to certain insurance
recoveries we received.
Income from Operations
The following table shows the components of our income from operations.
Three months ended Six months ended
June 30, June 30,
------------------ % ------------------- %
2005 2006 Change 2005 2006 Change
---- ---- ------ ---- ---- ------
(In millions) (In millions)
CompX $ 4.7 $ 5.8 23% $ 8.9 $10.6 19%
Insurance recoveries 1.2 .6 -50% 1.2 2.8 133%
Corporate expense and other, net (4.2) (6.4) 52% (9.9) (10.5) 6%
----- ----- ----- -----
Income from operations $ 1.7 $ - $ .2 $ 2.9
===== ===== ===== =====
Amounts attributable to CompX relate to its components products business,
while the other amounts generally relate to NL. Each of these items is more
fully discussed below.
CompX International Inc.
Three months ended Six months ended
June 30, June 30,
------------------ % ------------------- %
2005 2006 Change 2005 2006 Change
---- ---- ------ ---- ---- ------
(In millions) (In millions)
Net sales $45.7 $50.1 10% $92.6 $97.2 5%
Cost of sales 35.2 37.8 7% 71.8 73.2 2%
----- ----- ----- -----
Gross margin $10.5 $12.3 $20.8 $24.0
===== ===== ===== =====
Income from operations $ 4.7 $ 5.8 23% $ 8.9 $10.6 19%
===== ===== ===== =====
Percentage of net
sales:
Cost of sales 77% 75% 78% 75%
Income from operations 10% 12% 10% 11%
Net sales - Our component product sales increased in the second quarter and
first six months of 2006 as compared to the second quarter and first six months
of 2005 due mainly to the net effects of sales volumes generated from the August
2005 and April 2006 acquisitions of two marine component businesses, a general
increase in sales volume to new and existing security products customers and
lower sales volumes for certain furniture component products resulting from
increased Asian competition and an unfavorable Canadian dollar exchange rate
which has caused operational difficulties for many of CompX's Canadian
customers.
Cost of sales - Our component products cost of goods sold increased in 2006
as compared to 2005, due to a more favorable product mix. As a percentage of
sales, component products cost of goods sold was lower in 2006 as compared to
2005 due primarily to an improved product mix as the decline in lower margin
furniture components sales were offset by increased sales of higher-margin
security and marine component products. Component products gross margin and
income from operations increased in 2006 due primarily to the increase in net
sales and more favorable product mix as well as the favorable impact of a
continuous focus on reducing costs across all product lines, partially offset by
the negative impact of currency exchange rates as discussed below.
Currency - CompX has substantial operations and assets located outside the
United States (in Canada and Taiwan). Sales
generated from CompX's non-U.S. operations are denominated in both the U.S.
dollar and in currencies other than the U.S. dollar, principally the Canadian
dollar and the New Taiwan dollar. Most raw materials, labor and other production
costs for these non-U.S. operations are denominated primarily in local
currencies. Consequently, the translated U.S. dollar values of CompX's foreign
sales and operating results are subject to currency exchange rate fluctuations
which may favorably or unfavorably impact reported earnings and may affect
comparability of period-to-period operating results. Overall, fluctuations in
foreign currency exchange rates had the following effects on sales and income
from operations in 2006 as compared to 2005.
Three months ended Six months ended
June 30, 2006 June 30, 2006
vs. 2005 vs. 2005
------------------ ----------------
(Increase (decrease), in thousands)
Impact on:
Sales $ 496 $744
Income from operations $(709) $(952)
Outlook - The component product markets in which we operate are highly
competitive in terms of product pricing and features. Our strategy is to focus
on areas where we can provide products that have value-added, user-oriented
features which enable our customers to compete more effectively in their
markets. One of the focal points of this strategy is to replace low margin,
commodity type products with higher margin user-oriented feature products.
Additionally, we believe that our focus on collaborating with customers to
identify solutions and our ability to provide a high level of customer service
enable us to compete effectively. In response to competitive pricing pressure,
we continually focus on reducing production cost through product reengineering,
improvement in manufacturing processes or moving production to lower cost
facilities.
Raw material prices, especially steel, zinc and copper continue to be
volatile putting pressure on our component products margins. We actively seek to
mitigate the margin impact by entering into raw material supply agreements in
order to stabilize the cost for a period of time, execute larger volume tactical
spot purchases at prices that are expected to be favorable compared to future
prices and, if necessary, pass on the cost increases to our customers through
surcharges and price increases.
Equity in earnings of Kronos Worldwide, Inc.
Three months ended Six months ended
June 30, June 30,
------------------ % ------------------- %
2005 2006 Change 2005 2006 Change
---- ---- ------ ---- ---- ------
(In millions) (In millions)
Kronos historical:
Net sales $311.7 $345.1 11% $603.5 $649.4 8%
Cost of sales 217.1 263.1 21% 424.7 492.6 16%
------ ------ ------ ------
Gross margin $ 94.6 $ 82.0 $178.8 $156.8
====== ====== ====== ======
Income from operations $ 57.7 $ 36.8 -36% $104.1 $ 71.1 -32%
Other general corporate, net 5.9 1.3 6.3 1.9
Loss on prepayment of debt - (22.3) - (22.3)
Interest expense (11.6) (13.1) (23.4) (23.8)
------ ------ ------ ------
52.0 2.7 87.0 26.9
Income tax expense (benefit) 19.1 (10.9) 32.8 (1.7)
------ ------ ------ ------
Net income $ 32.9 $ 13.6 $ 54.2 $ 28.6
====== ====== ====== ======
Percentage of net sales:
Cost of sales 70% 76% 70% 76%
Income from operations 18% 11% 18% 11%
Equity in earnings of Kronos
Worldwide, Inc. $ 11.8 $ 4.9 $ 19.5 $ 10.2
====== ====== ====== ======
TiO2 operating statistics:
Sales volumes* 122 139 14% 237 264 11%
Production volumes* 127 130 2% 249 257 3%
Change in Ti02 net sales:
Ti02 product pricing -1% 1%
Ti02 sales volume 14% 11%
Ti02 product mix -1% -1%
Changes in currency exchange rates -1% -3%
--- ---
Total 11% 8%
=== ===
_______________________________
* Thousands of metric tons
The key performance indicators for Kronos are TiO2 average selling prices
and TiO2 sales and production volumes.
Net sales - Kronos' sales increased $33.4 million (11%) in the second
quarter of 2006 compared to the second quarter of 2005 due principally to the
net effects of (i) a 14% increase in TiO2 sales volumes, (ii) a 1% decrease in
average TiO2 selling prices and (iii) the unfavorable effect of fluctuations in
foreign currency exchange rates, which decreased sales by approximately $4
million, or 1%. Kronos' sales increased $45.9 million (8%) in the six months
ended June 30, 2006 compared to the six months ended June 30, 2005 due
principally to an 11% increase in TiO2 sales volumes, somewhat offset by the
unfavorable effect of changes in currency exchange rates, which decreased sales
by approximately $19 million, or 3%. We expect selling prices will remain stable
or decrease slightly in the second half of 2006 as compared to the first half of
the year.
Kronos' increase in TiO2 sales volumes in 2006 was due primarily to higher
sales volumes in the United States, Europe and in export markets,
which were somewhat offset by lower sales volumes in Canada. We believe sales
volumes in Canada have decreased as customer demand has been affected by the
effects of the weakened Canadian dollar. Kronos' sales volumes in the first half
of 2006 were a new record for Kronos. Because we believe our relative share of
the worldwide TiO2 market did not change significantly during the first six
months of 2006, we believe the strong TiO2 sales volume achieved in the first
half of 2006 is due in part to relative changes in customer inventory levels. We
expect demand will continue to remain high for the remainder of the year.
Cost of sales - Kronos' cost of sales increased in 2006 due primarily to
the impact of higher sales volumes and higher operating costs. Cost of sales as
a percentage of sales increased in 2006 primarily due to increases in raw
material and other operating costs (including energy costs). The negative impact
of the increase in raw materials and energy costs on Kronos' gross margin and
income from operations comparisons was somewhat offset by higher TiO2 production
volumes. Kronos' production volumes in the first half of 2006 were also a new
record for Kronos.
Kronos continued to gain operational efficiencies at their existing
production facilities by debottlenecking production to meet long-term demand.
Such debottlenecking efforts include, among other things, the addition of
finishing capacity in the German chloride process facility and equipment
upgrades and enhancements in several locations to allow for reduced downtime for
maintenance activities. Our production capacity has increased by approximately
30% over the past ten years with only moderate capital expenditures. We believe
our annual attainable production capacity for 2006 is approximately 510,000
metric tons, with some additional capacity expected to be available in 2007
through its continued debottlenecking efforts.
Currency - Kronos has substantial operations and assets located outside the
United States (primarily in Germany, Belgium, Norway and placeCanada). The
majority of our sales generated from non-U.S. operations are denominated in
currencies other than the U.S. dollar, principally the euro, other major
European currencies and the Canadian dollar. A portion of our sales generated
from non-U.S. operations are denominated in the U.S. dollar. Certain raw
materials, primarily titanium-containing feedstocks, are purchased in U.S.
dollars, while labor and other production costs are denominated primarily in
local currencies. Consequently, the translated U.S. dollar value of our foreign
sales and operating results are subject to currency exchange rate fluctuations
which may favorably or adversely impact reported earnings and may affect the
comparability of period-to-period operating results. Overall, fluctuations in
foreign currency exchange rates had the following effects on Kronos' sales and
income from operations in 2006 as compared to 2005.
Three months ended Six months ended
June 30, 2006 June 30, 2006
vs. 2005 vs. 2005
------------------ ----------------
(Increase (decrease), in millions)
Impact on:
Sales $ (4) $(19)
Income from operations $(11) $(16)
Interest expense - On May 11, 2006, Kronos International, Inc. ("KII"), a
wholly-owned subsidiary of Kronos, redeemed its 8.875% Senior Secured Notes at
104.437% of their aggregate principal amount of euro 375 million (an aggregate
of $470.5 million). Funds for the redemption were provided by KII's April 2006
issuance of an aggregate euro 400 million principal amount of new 6.5% Senior
Secured Notes due April 2013. Kronos recognized a $22.3 million pre-tax charge
in the second quarter of 2006 related to the early extinguishment of the 8.875%
Senior Secured Notes, consisting of the call premium on the Notes and the net
write-off of deferred financing costs and unamortized premium related to the
Notes.
Kronos' interest expense in the second quarter of 2006 was higher than the
same period in 2005 because the 8.875% Senior Secured Notes and the 6.5% Senior
Secured Notes were both outstanding for 30 days during the quarter. This
additional interest expense was partially offset by changes in currency exchange
rates in 2006 compared to 2005.
Income taxes - Kronos recognized an income tax benefit of $10.9 million in
the second quarter of 2006 compared to expense of $19.1 million in the second
quarter of 2005. For the first six months of 2006,Kronos recognized an income
tax benefit of $1.7 million compared to an income tax expense of $32.8 million
in the same period last year. The income tax benefits in the second quarter and
first six months of 2006 are primarily due to a $9.5 million reduction in our
tax contingency reserves related to favorable developments with income tax
audits for our Belgian and Norwegian operations, a $2 million benefit ($1
million in the second quarter) associated with favorable developments with
certain income tax issues related to our Belgium and German operations and a
$1.1 million second quarter benefit resulting from the enactment of a reduction
in Canadian income tax rates.
Other - On September 22, 2005, the chloride-process TiO2 facility operated
by Kronos' 50%-owned joint venture, Louisiana Pigment Company ("LPC"),
temporarily halted production due to Hurricane Rita. Although there was minimal
storm damage to core processing facilities, a variety of factors, including loss
of utilities, limited access and availability of employees and raw materials,
prevented the resumption of partial operations until October 9, 2005 and full
operations until late 2005. LPC expects the majority of its property damage and
unabsorbed fixed costs for periods in which normal production levels were not
achieved will be covered by insurance, and we believe insurance will cover its
lost profits (subject to applicable deductibles) resulting from its share of the
lost production at LPC. Both Kronos and LPC have filed claims with their
insurers. We expect to recover their losses through the insurer in the second
half of 2006, although the amount and timing of the insurance recovery is not
yet known. Accordingly, Kronos has not accrued a receivable for the amount of
the insurance claim and will not record the claim until negotiations with their
insurer are finalized. The effect on our financial results will depend on the
timing and amount of insurance recoveries.
Outlook - Kronos expects its income from operations in 2006 will continue
to be somewhat lower than 2005. Kronos' expectations as to the future prospects
of Kronos and the TiO2 industry are based upon a number of factors beyond
Kronos' control, including worldwide growth of gross domestic product,
competition in the marketplace, unexpected or earlier-than-expected capacity
additions and technological advances. If actual developments differ from Kronos'
expectations, Kronos' results of operations could be unfavorably affected.
Insurance Recoveries, Corporate Expense, Interest Expense, Provision for
Income Taxes, Minority Interest and Discontinued Operations - 2006 Compared to
2005
Insurance recoveries - We have reached an agreement with a former insurance
carrier in which the carrier will reimburse us for a portion of our past and
future lead pigment litigation defense costs. We received approximately $1.1
million during the first six months of 2006 under the agreement (including
$300,000 in the second quarter). We are not able to determine how much we will
ultimately recover from the carrier for the past defense costs we incurred
because the carrier has certain discretion regarding which past defense costs
qualify for reimbursement.
We also received $1.7 million in insurance recoveries in the first six
months of 2006 in settlements with certain of our former insurance carriers
(including approximately $300,000 in the second quarter). These settlements, as
well as similar settlements we reached in the past few years (including $1.2
million in the second quarter of 2005), resolved court proceedings in which we
sought reimbursement from carriers for legal defense costs and indemnity
coverage for certain of our environmental remediation expenditures. We do not
expect to receive any further material insurance settlements relating to
litigation concerning environmental remediation coverages.
While we continue to seek additional insurance recoveries, we do not know
if we will be successful in obtaining reimbursement for either defense costs or
indemnity. We have not considered any additional potential insurance recoveries
in determining accruals for lead pigment litigation matters. Any additional
insurance recoveries would be recognized when the receipt is probable and the
amount is determinable.
Corporate expense - Corporate expenses were $6.4 million in the second
quarter of 2006, $2.2 million or 51% higher than in the second quarter of 2005
primarily due to higher litigation and related expenses and higher environmental
remediation expenses. Corporate expenses were $10.5 million, 5% higher, in the
first six months of 2006 compared to the first six months of 2005 due mainly to
the higher litigation and related expenses, partially offset by lower
environmental remediation expenses. We expect corporate expenses in 2006 to be
higher than in 2005, in part due to higher expected litigation and related
expenses. However, obligations for environmental remediation obligations are
difficult to assess and estimate, and it is possible that actual costs for
environmental remediation will exceed accrued amounts or that costs will be
incurred in the future for sites in which we cannot currently estimate our
liability. See Note 13 to the Condensed Consolidated Financial Statements.
Interest expense - Substantially all of our interest expense relates to
CompX. Interest expense declined in the first quarter and the first six months
of 2006 compared to 2005 due primarily to lower average debt levels.
Provision for income taxes - See Note 10 to the Condensed Consolidated
Financial Statements for a tabular reconciliation of our statutory tax expense
to our actual tax benefit.
In accordance with GAAP, we recognize deferred income taxes on our
undistributed equity in earnings of Kronos. We do not recognize, and we are not
required to pay, income taxes to the extent we receive dividends from Kronos.
Because we and Kronos are part of the same placeU.S. federal income tax group,
we are entitled to a 100% dividends received deduction on the dividends we
receive from Kronos. Therefore, our effective income tax rate will generally be
lower than the placeU.S. federal statutory income tax rate.
Our provision for income taxes in the second quarter of 2006 includes a
$159,000 income tax benefit related to the effect of the reduction in the
Canadian federal income tax rate on our net deferred income tax liability we
have recognized with respect to CompX's Canadian operations.
Minority interest - Minority interest in earnings increased slightly in the
first six months of 2006 to $1.9 million from $1.5 million in 2005, primarily
due to higher income of CompX, partially offset by the increase in our ownership
of CompX. See Note 9 to the Condensed Consolidated Financial Statements.
Discontinued operations - See Note 14 to the Condensed Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash flows
Operating activities
Trends in cash flows from operating activities (excluding the impact of
significant securities transactions and relative changes in assets and
liabilities) are generally similar to trends in our earnings. However, certain
items included in the determination of net income are non-cash, and therefore
have no impact on cash flows from operating activities. Non-cash items included
in the determination of net income include equity in Kronos' earnings,
depreciation and amortization expense and deferred income taxes.
Cash flows from operating activities increased from $18.1 million used in
operating activities in the first six months of 2005 to $6.2 million of cash
provided by operating activities in the first six months of 2006. This $24.3
million increase was primarily due to a lower amount of cash paid for income
taxes in 2006 as compared to 2005. Cash paid for income taxes was $24.6 million
lower in 2006, primarily due to a $21 million tax payment we made in 2005 to
settle a previously-reported income tax audit in the placeU.S.
Relative changes in working capital (primarily in accounts receivable,
payables, and inventories) can have a significant effect on our cash flows from
operating activities. Our average days sales outstanding ("DSO") related to
continuing operations increased from 40 days at December 31, 2005 to 41 days at
June 30, 2006, due to the timing of collections on our slightly higher accounts
receivable balance at the end of June. For comparative purposes, our average DSO
increased from 38 days at December 31, 2004 to 42 days at June 30, 2005. Our
average number of days in inventory ("DII") was 59 days at December 31, 2005 and
57 days at June 30, 2006. The decrease in days in inventory is primarily due to
a lower commodity raw materials balance at June 30, 2006. We held a higher than
normal commodity raw material inventory balance in the latter part of 2005 as
part of our strategy to mitigate the significant volatility in commodity prices.
For comparative purposes, our average DII was 52 days at December 31, 2004 and
June 30, 2005 primarily as a result of lower commodity raw materials balances
held in the first six months of 2005.
We do not have complete access to CompX's cash flows in part because we do
not own 100% of CompX. A detail of our consolidated cash flows from operating
activities is presented in the table below. Intercompany dividends have been
eliminated.
Six months ended
June 30,
-----------------------
2005 2006
---- ----
(In millions)
Cash provided (used) by operating activities:
CompX $ 8.7 $ 11.3
NL Parent and wholly-owned subsidiaries (24.2) (2.4)
Eliminations (2.6) (2.7)
------ ------
$(18.1) $ 6.2
====== ======
Investing and financing activities
Substantially all of our consolidated capital expenditures relate to CompX.
During the first six months of 2006:
o CompX completed an acquisition of a Marine component products company
for $8.8 million, net of cash acquired,
o We purchased approximately 117,000 shares of CompX common stock in
market transactions for $1.8 million,
o CompX prepaid $1.5 million of indebtedness assumed in prior business
acquisitions, and
o We paid aggregate cash dividends of $12.1 million ($.125 per share per
quarter).
Distributions to minority interests consist of CompX dividends paid to
shareholders other than us. Other cash flows from financing activities relate
primarily to proceeds from the issuance of NL and CompX common stock upon
exercise of stock options.
At June 30, 2006, there were no amounts outstanding under CompX's $50
million revolving credit facility that matures in January 2009. We do not expect
to use any cash flow from operating activities generated during 2006 to repay
indebtedness.
Provisions contained in certain of CompX's and Kronos' credit agreements
could result in the acceleration of the applicable indebtedness prior to its
stated maturity for reasons other than defaults from failing to comply with
typical financial covenants. For example, certain credit agreements allow the
lender to accelerate the maturity of the indebtedness upon a change of control
(as defined) of the borrower. In addition, certain credit agreements could
result in the acceleration of all or a portion of the indebtedness following a
sale of assets outside the ordinary course of business.
Future cash requirements
Our primary source of liquidity on an ongoing basis is our cash flow from
operating activities, including the dividends Kronos pays to us. We generally
use these amounts to (i) fund capital expenditures, (ii) pay ongoing
environmental remediation and legal expenses and (iii) provide for the payment
of dividends.
At June 30, 2006, we had an aggregate of $66.3 million of restricted and
unrestricted cash, cash equivalents and debt securities. A detail by entity is
presented in the table below.
CompX $22.8
NL Parent and wholly-owned subsidiaries 43.5
-----
$66.3
=====
Because our operations are conducted primarily through subsidiaries and
affiliates, our long-term ability to meet parent company level corporate
obligations is largely dependent on the receipt of dividends or other
distributions from our subsidiaries and affiliates. Kronos currently pays a
regular quarterly cash dividend of $.25 per share. At that rate, and based on
the 17.5 million shares of Kronos we held at June 30, 2006, we would receive
annual dividends from Kronos of $17.5 million. CompX currently pays a regular
quarterly dividend of $.125 per share rate. At that rate, and based on the 10.7
million shares of CompX we held directly or indirectly June 30, 2006, we would
receive annual dividends from CompX of $5.4 million. If our subsidiaries and
affiliates were to become unable to make sufficient cash dividends or other
distributions, our ability to service our liabilities and pay dividends on
common stock could be adversely affected. In addition, a significant portion of
our assets consists of ownership interests in our subsidiaries and affiliates.
If we were required to liquidate securities in order to generate funds to
satisfy our liabilities, we may be required to sell such securities on the open
market and may not be able to realize the book value of the assets.
We have in the past, and may in the future, purchase the securities of our
subsidiaries and affiliates or third-parties in market or privately-negotiated
transactions. We base our purchase decision on a variety of factors, including
an analysis of the optimal use of our capital, taking into account the market
value of the securities and the relative value of expected returns on
alternative investments. In connection with these activities, we may consider
issuing additional equity securities or increasing our indebtedness. We may also
evaluate the restructuring of ownership interests of our businesses among our
subsidiaries and related companies.
We routinely compare our liquidity requirements and alternative uses of
capital against the estimated future cash flows we expect to receive from our
subsidiaries and affiliates. As a result of this process, we have in the past
and may in the future seek to raise additional capital, incur debt, repurchase
indebtedness in the market or otherwise, modify our dividend policies, consider
the sale of our interests in our subsidiaries, affiliates, business units,
marketable securities or other assets, or take a combination of these and other
steps, to increase liquidity, reduce indebtedness and fund future activities.
Such activities have in the past and may in the future involve related
companies.
We periodically evaluate acquisitions of interests in or combinations with
companies (including related companies) perceived by management to be
undervalued in the marketplace. These companies may or may not be engaged in
businesses related to our current businesses. We intend to consider such
acquisition activities in the future and, in connection with this activity, may
consider issuing additional equity securities and increasing indebtedness. From
time to time, we also evaluate the restructuring of ownership interests among
our respective subsidiaries and related companies.
Based upon our expectations of our operating performance, and the
anticipated demands on our cash resources we expect to have sufficient liquidity
to meet our short-term obligations (defined as the twelve-month period ending
June 30, 2007) and our long-term obligations (defined as the five-year period
ending December 31, 2010, our time period for long-term budgeting). If actual
developments differ from our expectations, our liquidity could be adversely
affected.
There have been no material changes in our contractual obligations since we
filed our 2005 Annual Report, and we refer you to the report for a complete
description of these commitments.
Off-balance sheet financing arrangements
We do not have any off-balance sheet financing agreements other than the
operating leases discussed in our 2005 Annual Report.
Commitments and Contingencies
We are subject to certain commitments and contingencies, as more fully
described in Note 13 to the Consolidated Financial Statements or in Part II,
Item 1 of this report. In addition to those legal proceedings described in Note
13 to the Consolidated Financial Statements, various legislation and
administrative regulations have, from time to time, been proposed that seek to
(i) impose various obligations on present and former manufacturers of lead
pigment and lead-based paint (including NL) with respect to asserted health
concerns associated with the use of such products and (ii) effectively overturn
court decisions in which we and other pigment manufacturers have been
successful. Examples of such proposed legislation include bills which would
permit civil liability for damages on the basis of market share, rather than
requiring plaintiffs to prove that the defendant's product caused the alleged
damage, and bills which would revive actions barred by the statute of
limitations. While no legislation or regulations have been enacted to date that
are expected to have a material adverse effect on our consolidated financial
position, results of operations or liquidity, enactment of such legislation
could have such an effect.
Recent Accounting Pronouncements
See Note 15 to the Condensed Consolidated Financial Statements.
Critical Accounting Policies
For a discussion of our critical accounting policies, refer to Part I, Item
7 - "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our 2005 Annual Report. There have been no changes in our
critical accounting policies during the first six months of 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk, including foreign currency exchange rates,
interest rates and security prices. For a discussion of such market risk items,
refer to Part I, Item 7A. - "Quantitative and Qualitative Disclosure About
Market Risk" in our 2005 Annual Report. There have been no material changes in
these market risks during the first six months of 2006.
Certain of CompX's sales generated by our foreign operations are
denominated in U.S. dollars. CompX periodically uses currency forward contracts
to manage a portion of currency exchange rate market risk associated with
receivables, or similar exchange rate risk associated with future sales,
denominated in a currency other than the holder's functional currency. CompX has
not entered into these contracts for trading or speculative purposes in the
past, nor do they anticipate entering into such contracts for trading or
speculative purposes in the future. A majority of the currency forward contracts
CompX enters into meet the criteria for hedge accounting under GAAP and are
designated as cash flow hedges. For these currency forward contracts, gains and
losses representing the effective portion of the hedges are deferred as a
component of accumulated other comprehensive income, and are subsequently
recognized in earnings at the time the hedged item affects earnings.
Occasionally CompX enters into currency forward contracts for specific
transactions which do not meet the criteria for hedge accounting, CompX
marks-to-market the estimated fair value of such contracts at each balance sheet
date, with any resulting gain or loss recognized in income currently as part of
net currency transactions. At June 30, 2006, CompX held a series of contracts to
manage exchange rate risk to exchange an aggregate of U.S. $2.8 million for
Canadian dollars at an exchange rate of Cdn. $1.12 per U.S. dollar. These
contracts qualify for hedge accounting and mature through August 2006. The
exchange rate was Cdn. $1.12 per U.S. dollar at June 30, 2006. The estimated
fair value of the contracts is not material at June 30, 2006.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures - We maintain a system of
disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by regulations of the SEC, means controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports we file or submit to the SEC under the Securities Exchange Act of
1934, as amended (the "Act"), is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information we are required to disclose in the reports
we file or submit to the SEC under the Act is accumulated and communicated to
our management, including our principal executive officer and our principal
financial officer, or persons performing similar functions, as appropriate to
allow timely decisions to be made regarding required disclosure. Each of Harold
C. Simmons, our Chief Executive Officer, and Gregory M. Swalwell, our Vice
President, Finance and Chief Financial Officer, have evaluated the Company's
disclosure controls and procedures as of June 30, 2006. Based upon their
evaluation, these executive officers have concluded that the Company's
disclosure controls and procedures are effective as of June 30, 2006.
Internal Control Over Financial Reporting - We also maintain internal
control over financial reporting. The term "internal control over financial
reporting," as defined by SEC regulations, means a process designed by, or under
the supervision of, our principal executive and principal financial officers, or
persons performing similar functions, and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP, and includes those policies and
procedures that:
o Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect our transactions and dispositions of our assets,
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that our receipts and expenditures are made only in accordance with
authorizations of our management and directors, and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on our Condensed Consolidated Financial Statements.
As permitted by the SEC, our assessment of internal control over financial
reporting excludes (i) internal control over financial reporting of our equity
method investees and (ii) internal control over the preparation of our financial
statement schedules required by Article 12 of Regulation S-X. However, our
assessment of internal control over financial reporting with respect to our
equity method investees did include our controls over the recording of amounts
related to our investment that are recorded in our Condensed Consolidated
Financial Statements, including controls over the selection of accounting
methods for our investments, the recognition of equity method earnings and
losses and the determination, valuation and recording of our investment account
balances.
Changes in Internal Control Over Financial Reporting - There has been no
change to our internal control over financial reporting during the quarter ended
June 30, 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In addition to the matters discussed below, refer to Note 13 to the
Condensed Consolidated Financial Statements and to our 2005 Annual Report and
our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.
Lewis, et al. v. Lead Industries Association, et al. (Circuit Court of Cook
County, StateIllinois, County Department, Chancery Division, Case No.00CH09800).
In May 2006, defendants' petition seeking review of the appellate court's ruling
was denied by the Illinois Supreme Court.
Jones v. NL Industries, Inc., et al. (Circuit Court of LeFlore County,
StateMississippi, Civil Action No. 2002-0241-CICI). In May 2006, the court
granted defendants' summary judgment motion with respect to the failure to warn
and fraudulent concealment claims, but denied the rest of the motion. Trial
began before a Mississippi federal court jury in July 2006, and in August 2006
the jury returned a verdict in favor of the defendants on all counts.
Terry, et al. v. NL Industries, Inc., et al. (United States District Court,
Southern District of Mississippi, Case No. 4:04 CV 269 PB). Following
plaintiffs' re-pleading the fraud claim, defendants answered the non-fraud
counts of the complaint and moved to dismiss the fraud claim for lack of
sufficiency; however, the court has stayed the case pending trial in the Jones
case.
Evans v. Atlantic Richfield Company, et. al. (Circuit Court, Milwaukee,
Wisconsin, Case No. 05-CV-9281). In April 2006, the court allowed plaintiff to
amend the complaint to avoid defendants' motion to dismiss. Plaintiff amended
the complaint; however, in July 2006, defendants renewed their motion to dismiss
the defective product claims.
Hess, et. al. v. NL Industries, Inc., et al. (StateMissouri Circuit Court
22nd Judicial Circuit, placePlaceNameSt. Louis PlaceTypeCity, Cause No.
052-11799). In May 2006, plaintiffs moved to remand the case back to state
court, and in June 2006, the court remanded the case.
In July 2006, we began work on an additional removal action with respect to
ponds located within a residential area at the site of a formerly owned lead
smelting facility located in Collinsville, Illinois. We anticipate that the
removal action will be completed in the fourth quarter of 2006.
Brown et. al. v. NL Industries, Inc. et. al. (Circuit Court Wayne County,
Michigan, Case No. 06-602096 CZ). In April 2006, defendants filed a motion to
dismiss the plaintiffs' claims for trespass and violations of certain
placeStateMichigan state laws.
In June 2006, we and several other PRPs received a Unilateral
Administrative Order from the U.S. EPA regarding a formerly owned mine and
smelting facility located in Park Hills, StateMissouri. The Doe Run Company is
the current owner of the site, and its predecessor purchased the site from us in
approximately 1948. Doe Run is also named in the Order. We intend to comply with
the Order and are negotiating with Doe Run an appropriate allocation of costs
for the remediation.
In June 2006, we were served with a complaint in Donnelly and Donnelly v.
NL Industries, Inc. (State of StateNew York Supreme Court, placePlaceTypeCounty
of placeRensselaer, Cause No. 218149). The plaintiff, a man who claims to have
worked near one of our former sites in placeNew York, and his wife allege that
he suffered injuries (which are not described in the complaint) as a result of
exposure to harmful levels of toxic substances as a result of NL's conduct.
Plaintiffs claim damages for negligence, product liability and derivative losses
on the part of the wife. We believe that these claims are without merit and
intend to deny all of the allegations and to defend against all of the claims
vigorously.
Item 1A. Risk Factors
For a discussion of the risk factors related to our businesses, refer to
Part I, Item 1A., "Risk Factors," in our 2005 Annual report. There have been no
material changes to such risk factors during the six months ended June 30, 2006.
Item 4. Submission of Matters to a Vote of Security Holders
Our 2006 Annual Meeting of Shareholders was held on May 24, 2006. Cecil H.
Moore, Jr., Glenn R. Simmons, Harold C. Simmons, Thomas P. Stafford, Steven L.
Watson and Terry N. Worrell were elected as directors, each receiving votes
"For" their election from at least 95.8% of the 48.6 million common shares
eligible to vote at the Annual Meeting.
Item 6. Exhibits
31.1 - Certification
31.2 - Certification
32.1 - Certification
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NL INDUSTRIES, INC.
-------------------------------
(Registrant)
Date August 4, 2006 By /s/ Gregory M. Swalwell
-------------- -------------------------
Gregory M. Swalwell
Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
Date August4, 2006 By /s/ Tim C. Hafer
-------------- -------------------------
Tim C. Hafer
Vice President and Controller
(Principal Accounting Officer)