NL INDUSTRIES, INC.
Form 10-Q
For the quarter ended June 30, 2003
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-1
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the quarterly period ended June 30, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
Number of shares of common stock outstanding on July 25, 2003: 47,700,784
This Amendment No. 1 to the Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003 of NL Industries, Inc. is filed to revise certain disclosures, and
reclassify the Company's Consolidated Statement of Income, as requested by the
Securities and Exchange Commission. There was no impact on net income as a
result of the reclassification of the Consolidated Statement of Income. The
revised disclosures are primarily contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and the Company's Consolidated Financial Statements. This
Amendment is being filed solely to provide the information referenced above. For
the convenience of the reader, the Company is re-filing the entire Quarterly
Report as clarified. No other modifications have been made to the Quarterly
Report except as described above.
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - June 30, 2003
and December 31, 2002 3
Consolidated Statements of Income - Three months and
six months ended June 30, 2003 and 2002 5
Consolidated Statements of Comprehensive Income
- Three months and six months ended
June 30, 2003 and 2002 6
Consolidated Statement of Shareholders' Equity
- Six months ended June 30, 2003 7
Consolidated Statements of Cash Flows - Six
months ended June 30, 2003 and 2002 8
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 28
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 6. Exhibits and Reports on Form 8-K 32
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
ASSETS 2003 2002
-------------------- -------------------
Current assets:
Cash and cash equivalents $ 54,360 $ 58,091
Restricted cash equivalents 25,349 52,089
Restricted marketable debt securities 10,676 9,670
Accounts and other receivable 182,196 136,858
Receivable from affiliates 148 207
Refundable income taxes 25,607 1,782
Inventories 199,760 209,882
Prepaid expenses 4,518 7,207
Deferred income taxes 10,929 10,511
-------------------- -------------------
Total current assets 513,543 486,297
-------------------- -------------------
Other assets:
Marketable equity securities 45,431 40,901
Receivable from affiliate 16,000 18,000
Investment in TiO2 manufacturing joint venture 129,209 130,009
Prepaid pension cost 17,209 17,572
Restricted marketable debt securities 3,099 9,232
Other 27,320 30,671
-------------------- -------------------
Total other assets 238,268 246,385
-------------------- -------------------
Property and equipment:
Land 31,908 29,072
Buildings 165,655 150,406
Machinery and equipment 694,995 640,297
Mining properties 82,596 84,778
Construction in progress 14,600 8,702
-------------------- -------------------
989,754 913,255
Less accumulated depreciation and depletion 585,060 534,436
-------------------- -------------------
Net property and equipment 404,694 378,819
-------------------- -------------------
$ 1,156,505 $ 1,111,501
==================== ===================
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY June 30, December 31,
2003 2002
------------------- -------------------
Current liabilities:
Current maturities of long-term debt $ 781 $ 1,298
Accounts payable and accrued liabilities 150,549 167,574
Payable to affiliates 10,817 8,027
Accrued environmental costs 21,198 51,307
Income taxes 6,170 6,624
Deferred income taxes 1,711 3,219
------------------- -------------------
Total current liabilities 191,226 238,049
------------------- -------------------
Noncurrent liabilities:
Long-term debt 360,444 324,608
Deferred income taxes 146,324 143,518
Accrued environmental costs 66,636 47,189
Accrued pension cost 45,835 43,757
Accrued postretirement benefits cost 24,922 26,477
Other 13,954 14,060
------------------- -------------------
Total noncurrent liabilities 658,115 599,609
------------------- -------------------
Minority interest 8,713 8,516
------------------- -------------------
Shareholders' equity:
Common stock 8,355 8,355
Additional paid-in capital 777,819 777,819
Retained earnings 120,740 101,554
Accumulated other comprehensive loss (172,458) (186,221)
Treasury stock (436,005) (436,180)
------------------- -------------------
Total shareholders' equity 298,451 265,327
------------------- -------------------
$ 1,156,505 $ 1,111,501
=================== ===================
Commitments and contingencies (Notes 12 and 13)
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
-------------------------------- -----------------------------------
2003 2002 2003 2002
-------------- ----------------- ----------------- -----------------
Revenues and other income:
Net sales $ 266,631 $ 226,909 $519,604 $ 429,266
Cost of sales 197,649 176,247 386,066 332,500
-------------- ----------------- ----------------- -----------------
Gross margin 68,982 50,662 133,538 96,766
Selling, general and administrative
expense 30,975 24,898 60,354 49,626
Other operating income (expense):
Currency transaction gains (losses), net (2,743) (2,049) (3,841) (1,451)
Disposition of property and equipment 1,116 643 1,055 597
Noncompete agreement income - 1,000 333 2,000
Litigation settlement gains, net 650 435 650 2,355
Corporate expense (23,202) (7,491) (38,517) (17,608)
Other income 63 5 211 26
-------------- ----------------- ----------------- -----------------
Income from operations 13,891 18,307 33,075 33,059
Other income (expense):
Trade interest income 198 333 361 555
Other interest and dividend income 838 1,280 1,786 2,560
Securities gains (losses), net 218 (12) 2,452 (12)
Currency transaction gain - 6,271 - 6,271
Interest expense (8,367) (8,078) (16,352) (14,613)
-------------- ----------------- ----------------- -----------------
Income before income taxes and
minority interest 6,778 18,101 21,322 27,820
Income tax benefit (expense) 22,191 (3,867) 17,101 (7,018)
-------------- ----------------- ----------------- -----------------
Income before minority interest 28,969 14,234 38,423 20,802
Minority interest 134 186 158 370
-------------- ----------------- ----------------- -----------------
Net income $ 28,835 $ 14,048 $ 38,265 $ 20,432
============== ================= ================= =================
.29 .80 .42
Basic and diluted net income per share $ .60 $ $ $
============== ================= ================= =================
Weighted average shares used in the
calculation of net income per share:
Basic 47,698 48,827 47,696 48,848
Dilutive impact of stock options 57 126 54 98
-------------- ----------------- ----------------- -----------------
Diluted 47,755 48,953 47,750 48,946
============== ================= ================= =================
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three months ended Six months ended
June 30, June 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
Net income $ 28,835 $ 14,048 $ 38,265 $ 20,432
---------------- ---------------- ---------------- ----------------
Other comprehensive income (loss), net of
tax:
Marketable securities adjustment:
Unrealized holding (loss) gain arising
during the period (4,424) 4,652 2,669 3,129
Less reclassification adjustment for
realized gain included in net income - - (1,474) -
---------------- ---------------- ---------------- ----------------
(4,424) 4,652 1,195 3,129
Currency translation adjustment 8,826 38,965 12,568 36,356
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
Total other comprehensive income 4,402 43,617 13,763 39,485
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
Comprehensive income $ 33,237 $ 57,665 $ 52,028 $ 59,917
================ ================ ================ ================
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Six months ended June 30, 2003
(In thousands)
Accumulated other
comprehensive income (loss)
Additional ----------------------------------
Common paid-in Retained Currency Pension Marketable Treasury
stock capital earnings translation liabilities securities stock Total
--------- --------- -------- ----------- ----------- ---------- --------- ------
Balance at December 31, 2002 $ 8,355 $ 777,819 $101,554 $(170,670) $(21,447) $5,896 $(436,180) $265,327
Net income - - 38,265 - - - - 38,265
Other comprehensive income, net of tax - - - 12,568 - 1,195 - 13,763
Dividends - - (19,079) - - - - (19,079)
Treasury stock - reissued - - - - - - 175 175
--------- --------- -------- --------- -------- ------ --------- --------
Balance at June 30, 2003 $ 8,355 $ 777,819 $120,740 $(158,102) $(21,447) $7,091 $(436,005) $298,451
========= ========= ======== ========= ======== ====== ========= ========
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2003 and 2002
(In thousands)
2003 2002
---------------- ----------------
Cash flows from operating activities:
Net income $ 38,265 $ 20,432
Depreciation, depletion and amortization 19,681 15,820
Deferred income taxes (3,006) 2,400
Distributions from TiO2 manufacturing joint
venture, net 800 2,250
Net (gains) losses from securities transactions (2,452) 12
Other, net (3,522) (3,572)
Change in assets and liabilities:
Accounts and other receivable (37,409) (29,665)
Insurance receivable 2,122 11,053
Inventories 25,301 68,227
Prepaid expenses 3,036 (796)
Accounts payable and accrued liabilities (29,526) (58,638)
Income taxes (24,008) (2,878)
Accrued environmental costs 25,990 8,913
Other, net 3,378 2,943
---------------- ----------------
Net cash provided by operating activities 18,650 36,501
---------------- ----------------
Cash flows from investing activities:
Capital expenditures (13,850) (12,076)
Collection of loans to affiliates 2,000 500
Acquisition of business - (9,149)
Change in restricted cash equivalents and restricted marketable
debt securities, net 658 595
Other, net 1,538 830
---------------- ----------------
Net cash used by investing activities (9,654) (19,300)
---------------- ----------------
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six months ended June 30, 2003 and 2002
(In thousands)
2003 2002
----------------- -----------------
Cash flows from financing activities:
Dividends paid $ (19,079) $ (19,530)
Treasury stock:
Purchased - (3,271)
Reissued 175 262
Indebtedness:
Borrowings 16,106 319,275
Principal payments (11,615) (247,688)
Deferred financing costs - (9,342)
Other, net - (11)
----------------- -----------------
Net cash (used) provided by financing activities (14,413) 39,695
----------------- -----------------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities (5,417) 56,896
Currency translation 1,686 3,053
Acquisition of business - 196
----------------- -----------------
(3,731) 60,145
Balance at beginning of period 58,091 116,037
----------------- -----------------
Balance at end of period $ 54,360 $ 176,182
================= =================
Supplemental disclosures - cash paid for:
Interest $ 16,347 $ 18,599
Income taxes, net 7,627 7,496
Acquisition of business:
196
Cash and cash equivalents $ - $
Restricted cash - 2,685
Goodwill and other intangible assets - 9,007
Other noncash assets - 1,259
Liabilities - (3,998)
----------------- -----------------
Cash paid $ - $ 9,149
================= =================
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
NL Industries, Inc. ("NL") conducts its titanium dioxide pigments ("TiO2")
operations through its wholly owned subsidiary, Kronos Worldwide, Inc. (formerly
known as Kronos, Inc.) At June 30, 2003, Valhi, Inc., ("Valhi") and its
subsidiaries held approximately 85% of NL's outstanding common stock, and
Contran Corporation ("Contran") and its subsidiaries held approximately 90% of
Valhi's outstanding common stock. 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, of which Mr. Simmons is sole trustee.
Mr. Simmons, the Chairman of the Board and Chief Executive Officer of NL and the
Chairman of the Board of each of Contran and Valhi, may be deemed to control
each of such companies. See Notes 6 and 7.
The consolidated balance sheet of NL Industries, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2002 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 2003 and the consolidated statements of
income, comprehensive income, shareholders' equity and cash flows for the
interim periods ended June 30, 2003 and 2002 have been prepared by the Company
without audit. In the opinion of management all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows have been made. The
results of operations for the interim periods are not necessarily indicative of
the operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
in the U.S. ("GAAP") have been condensed or omitted. Certain prior-year amounts
have been reclassified to conform to the current year presentation. The
accompanying consolidated financial statements should be read in conjunction
with the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002 (the "2002 Annual
Report").
The Company has elected the disclosure alternative prescribed by Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," and to account for its stock-based
employee compensation related to stock options in accordance with Accounting
Principles Board Opinion ("APBO") No. 25, "Accounting for Stock Issued to
Employees," and its various interpretations. Under APBO No. 25, no compensation
cost is generally recognized for fixed stock options in which the exercise price
is not less than the market price on the grant date. During the fourth quarter
of 2002, following the cash settlement of certain stock options held by
employees of the Company, the Company commenced accounting for its remaining
stock options using the variable accounting method, which requires the intrinsic
value of all unexercised stock options (including those with an exercise price
at least equal to the market price on the date of grant) to be accrued as an
expense, with subsequent increases (decreases) in the Company's market price
resulting in additional compensation expense (income). Net compensation expense
recognized by the Company in accordance with APBO No. 25 in the three and six
months ended June 30, 2003 was $.5 million and nil, respectively, and net
compensation expense (income) recognized by the Company in the three and six
months ended June 30, 2002 was nil for both periods.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation.
Three months ended Six months ended
June 30, June 30,
--------------- ---------------- --------------------------------
2003 2002 2003 2002
--------------- ---------------- --------------- ----------------
(In thousands, except per share amounts)
Net income - as reported $ 28,835 $ 14,048 $ 38,265 $ 20,432
Add: Stock-based compensation cost, net of
tax, included in reported net income 339 - - -
Deduct: Stock-based compensation cost, net
of tax, determined under fair value based
method for all awards (121) (271) (241) (542)
--------------- ---------------- --------------- ----------------
Net income - pro forma $ 29,053 $ 13,777 $ 38,024 $ 19,890
=============== ================ =============== ================
Net income per basic common share:
As reported $ .60 $ .29 $ .80 $ .42
Pro forma $ .61 .28 $ .80 $ .41
Net income per diluted common share:
As reported $ .60 $ .29 $ .80 $ .42
Pro forma $ .61 $ .28 $ .80 $ .41
The Company adopted SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective January 1, 2003. Under SFAS No. 143, the fair value of a
liability for an asset retirement obligation covered under the scope of SFAS No.
143 is recognized in the period in which the liability is incurred, with an
offsetting increase in the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its future value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity would either settle the obligation for its recorded amount
or incur a gain or loss upon settlement.
Under the transition provisions of SFAS No. 143, at the date of adoption on
January 1, 2003 the Company recognized (i) an asset retirement cost capitalized
as an increase to the carrying value of its property, plant and equipment, (ii)
accumulated depreciation on such capitalized cost and (iii) a liability for the
asset retirement obligation. Amounts resulting from the initial application of
SFAS No. 143 were measured using information, assumptions and interest rates all
as of January 1, 2003. The amount recognized as the asset retirement cost was
measured as of the date the asset retirement obligation was incurred. Cumulative
accretion on the asset retirement obligation, and accumulated depreciation on
the asset retirement cost, were recognized for the time period from the date the
asset retirement cost and liability would have been recognized had the
provisions of SFAS No. 143 been in effect at the date the liability was
incurred, through January 1, 2003. The difference between the amounts recognized
as described above and the associated amounts recognized in the Company's
balance sheet as of December 31, 2002 was recognized as a cumulative effect of
change in accounting principle as of January 1, 2003. The effect of adopting
SFAS No. 143 as of January 1, 2003, as summarized in the table below, did not
have a material effect on the Company's consolidated financial position, results
of operations or liquidity, and is not separately recognized in the accompanying
statement of income.
Amount
-------------------
(In millions)
Increase in carrying value of net property, plant and equipment:
Cost $ .4
Accumulated depreciation (.1)
Decrease in liabilities previously accrued for closure and post closure activities .3
Asset retirement obligation recognized (.6)
-------------------
Net impact $ -
===================
At June 30, 2003, the asset retirement obligation was approximately $.7
million and was included in other noncurrent liabilities. Accretion expense on
the asset retirement obligation during the first six months of 2003, included in
cost of sales, was nil. If the Company had adopted SFAS No. 143 as of January 1,
2002, the asset retirement obligation would have been approximately $.5 million
at January 1, 2002 and $.6 million at June 30, 2002, and the effect on the
Company's reported net income for the six months ended June 30, 2002 would not
have been material.
Note 2 - Earnings per share:
Basic earnings per share is based on the weighted average number of common
shares outstanding during each period. Diluted earnings per share is based on
the weighted average number of common shares outstanding and the dilutive impact
of outstanding stock options.
Note 3 - Other (income) expense:
Operating items
The Company received a $20 million fee as part of the sale of Rheox in
January 1998 in payment for entering into a five-year covenant not to compete in
the rheological products business. The Company amortized the fee to income using
the straight-line method over the five-year noncompete period beginning January
30, 1998. The agreement became fully amortized in January 2003.
In all periods presented, the Company recognized litigation settlement
gains with former insurance carrier groups to settle certain insurance coverage
claims related to environmental remediation. Income related to these litigation
settlement gains are recognized as part of income from operations because the
related environmental remediation expense to which the recovery related are also
recognized as a component of income from operations. No further material
settlements relating to litigation concerning environmental remediation coverage
are expected to be received.
Corporate expense include environmental, legal and other costs attributable
to formerly owned business units, as well as certain administative expenses
(primarily legal, finance, accounting and tax). Corporate expense for the second
quarter and first half of 2003 increased $15.7 million and $20.9 million,
respectively, from comparable prior-year periods primarily due to higher
environmental and legal expenses.
Nonoperating items
Currency transaction gains in the second quarter of 2002 was a foreign
currency transaction gain of $6.3 million related to the extinguishment of
certain intercompany indebtedness with Kronos International, Inc. ("KII"), a
wholly-owned subsidiary of the Company.
Note 4 - Accounts and other receivable:
June 30, December 31,
2003 2002
------------------ ------------------
(In thousands)
Trade receivables $ 174,914 $ 124,044
Insurance claims receivable 436 2,558
Recoverable VAT and other receivables 9,437 12,861
Allowance for doubtful accounts (2,591) (2,605)
------------------ ------------------
$ 182,196 $ 136,858
================== ==================
Note 5 - Inventories:
June 30, December 31,
2003 2002
----------------- ------------------
(In thousands)
Raw materials $ 34,641 $ 54,077
Work in process 16,980 15,936
Finished products 114,731 109,203
Supplies 33,408 30,666
----------------- ------------------
$ 199,760 $ 209,882
================= ==================
Note 6 - Marketable equity securities:
June 30, December 31,
2003 2002
----------------- ------------------
(In thousands)
Available-for-sale marketable equity securities:
Valhi $ 45,302 $ 9,845
Tremont Group - 30,634
Tremont - 243
Other 129 179
----------------- ------------------
Aggregate fair value $ 45,431 $ 40,901
================= ==================
In February 2003 Valhi completed a series of merger transactions pursuant
to which, among other things, Tremont Group, Inc. ("Tremont Group") and Tremont
Corporation ("Tremont") both became wholly owned subsidiaries of Valhi. Under
these merger transactions, (i) Valhi issued 3.5 million shares of its common
stock to the Company in return for the Company's 20% ownership interest in
Tremont Group and (ii) Valhi issued 3.4 shares of its common stock (plus cash in
lieu of fractional shares) to all Tremont stockholders (other than Valhi and
Tremont Group) in exchange for each share of Tremont common stock held by such
stockholders. The Company received approximately 27,770 shares of Valhi common
stock in the second transaction. The number of shares of Valhi common stock
issued to the Company in exchange for the Company's 20% ownership interest in
Tremont Group was equal to the Company's 20% pro-rata interest in the shares of
Tremont common stock held by Tremont Group, adjusted for the same 3.4 exchange
ratio. The Valhi common stock owned by the Company is subject to the
restrictions on resale pursuant to certain provisions of SEC Rule 144. The
Company reported a pre-tax securities transaction gain of approximately $2.3
million in the first quarter of 2003 which represented the difference between
the market value of the shares of Valhi received and the cost basis of the
Tremont Group and Tremont shares exchanged. Following these transactions, the
Company owned approximately 4.7 million shares of Valhi's outstanding common
stock (approximately 4% of Valhi's outstanding shares). The Company will
continue to account for its shares of Valhi common stock as available-for-sale
marketable equity securities carried at fair value (based on quoted market
prices). The shares of Valhi common stock cannot be voted by the Company under
Delaware Corporation Law, but the Company does receive dividends from Valhi on
these shares, when declared and paid. For financial reporting purposes, Valhi
reports its proportional interest in these shares as treasury stock.
Note 7 - Receivable from affiliates:
In May 2001 a wholly owned subsidiary of the Company's majority-owned
environmental management subsidiary, NL Environmental Management Services, Inc.
("EMS") loaned $20.0 million to the Harold C. Simmons Family Trust No. 2 (the
"Family Trust"), one of the trusts described in Note 1, under a $25.0 million
revolving credit agreement. The loan was approved by special committees of the
Company's and EMS's Boards of Directors. The loan bears interest at prime (4.0%
at June 30, 2003), is due on demand with 60 days notice and is collateralized by
13,749 shares, or approximately 35%, of Contran's outstanding Class A voting
common stock and 5,000 shares, or 100%, of Contran's Series E Cumulative
preferred stock, both of which are owned by the Family Trust. The value of the
collateral is dependent, in part, on the value of the Company as Contran's
interest in the Company, through its beneficial ownership of Valhi, is one of
Contran's more substantial assets. At June 30, 2003, the outstanding loan
balance was $16.0 million and $9.0 million was available for additional
borrowing by the Family Trust. The loan was classified as noncurrent at June 30,
2003, as the Company does not expect to demand repayment within one year.
Note 8 - Other noncurrent assets:
June 30, December 31,
2003 2002
------------------- ------------------
(In thousands)
Deferred financing costs, net $ 10,446 $ 10,550
Goodwill 6,406 6,406
Unrecognized net pension obligations 6,439 5,561
Intangible asset, net 2,075 2,230
Restricted cash equivalents - 1,344
Other 1,954 4,580
------------------- ------------------
$ 27,320 $ 30,671
=================== ==================
Note 9 - Accounts payable and accrued liabilities:
June 30, December 31,
2003 2002
------------------- -----------------
(In thousands)
Accounts payable $ 76,365 $ 97,140
------------------- -----------------
Accrued liabilities:
Employee benefits 32,513 34,349
Interest 243 240
Deferred income - 333
Other 41,428 35,512
------------------- -----------------
74,184 70,434
------------------- -----------------
$ 150,549 $ 167,574
=================== =================
Note 10 - Other noncurrent liabilities:
June 30, December 31,
2003 2002
------------------- ------------------
(In thousands)
Insurance claims and expenses $ 6,621 $ 7,674
Employee benefits 4,399 4,025
Other 2,934 2,361
------------------- ------------------
$ 13,954 $ 14,060
=================== ==================
Note 11 - Long-term debt:
June 30, December 31,
2003 2002
----------------- ------------------
(In thousands)
8.875% Senior Secured Notes,(euro)285 million principal amount $ 325,784 $ 296,942
Revolving credit facility 34,293 27,077
Other 1,148 1,887
----------------- ------------------
361,225 325,906
Less current maturities 781 1,298
----------------- ------------------
$ 360,444 $ 324,608
================= ==================
In March 2003 the Company borrowed (euro)15.0 million ($16.1 million when
borrowed) and in April 2003 the Company repaid NOK 80 million ($11.0 million
when repaid) under the revolving credit facility.
Note 12 - Income taxes:
The difference between the provision for income tax expense attributable to
income before income taxes and minority interest and the amount that would be
expected using the U.S. federal statutory income tax rate of 35% is presented
below.
Six months ended
June 30,
-----------------------------------
2003 2002
---------------- ----------------
(In thousands)
Expected tax expense $ 7,463 $ 9,737
Non-U.S. tax rates (385) (708)
Incremental tax on income of companies not included in NL's
consolidated U.S. federal income tax return 71 202
Refund of prior-year German taxes (24,564) -
Valuation allowance (386) (3,027)
U.S. state income taxes 407 61
Other, net 293 753
---------------- ----------------
Income tax (benefit) expense $ (17,101) $ 7,018
================ ================
Certain of the Company's tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies, including penalties and interest.
The Company's and EMS' 1998 U.S. federal income tax returns are being
examined by the U.S. Internal Revenue Service ("IRS") and the Company and EMS
have each granted extensions of the statute of limitations for assessment of tax
with respect to their 1998 and 1999 income tax returns until September 30, 2004.
Based upon the course of the examination, the Company anticipated that the IRS
would propose a substantial tax deficiency, including penalties and interest,
related to a restructuring transaction. In an effort to avoid protracted
litigation and minimize the hazards of such litigation, the Company applied to
take part in an IRS settlement initiative applicable to transactions similar to
the restructuring transaction, and in April 2003 the Company received
notification from the IRS that it had been accepted into the settlement
initiative. Under the initiative, no penalties will be assessed and final
settlement with the IRS is to be reached through negotiation and, if necessary,
through a specified arbitration procedure. The Company anticipates that
settlement of the matter will likely occur in 2004, resulting in payments of
federal and state tax and interest ranging from $33 million to $45 million.
Additional payments in later years may be required as part of the settlement.
The Company believes that it has provided adequate accruals to cover the
currently expected range of settlement outcomes.
The Company has received preliminary tax assessments for the years 1991 to
1997 from the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately (euro)10.1 million ($11.6 million at June 30,
2003). The Company has filed protests to the assessments with respect to such
years. The Company is in discussions with the Belgian tax authorities and
believes that a significant portion of the assessments is without merit. In
April 2003 the Company received a notification from the Belgian tax authorities
of their intent to assess a tax deficiency related to 1999. The anticipated
assessment, including interest, is expected to approximate (euro)13.1 million
($15.0 million at June 30, 2003). The Company believes the proposed assessment
related to 1999 is without merit and in April 2003 filed a written response in
opposition to the notification of intent to assess.
In 2002, the Company received a notification from the Norwegian tax
authorities of their intent to assess tax deficiencies of approximately NOK 12.2
million ($1.7 million at June 30, 2003) relating to 1998 through 2000. The
Company has objected to this proposed assessment in a written response to the
Norwegian tax authorities.
In the first quarter of 2003, Kronos was notified by the German Federal
Fiscal Court (the "Court") that the Court had ruled in Kronos' favor concerning
a claim for refund suit in which Kronos sought refunds of prior taxes paid
during the periods 1990 through 1997. Kronos has filed certain amended German
tax returns and expects to file additional amended German tax returns claiming
such refunds for all years affected by the Court's decision, which is expected
to result in an estimated refund of taxes and interest of approximately $40
million. Receipt of the German tax refunds is subject to satisfaction of various
procedural requirements, including a review and acceptance of the amended German
tax returns by the German tax authorities. Certain of these procedural
requirements were satisfied in the second quarter of 2003 with respect to a
portion of the refund claim, and in July 2003 the German tax authorities
refunded Kronos a portion of the total anticipated refund. The portion received
in July was (euro)21.5 million ($24.6 million using June 30, 2003 exchange
rates). Kronos has reflected this tax refund in its second quarter 2003 results
of operations. The Company expects to receive the remaining refunds over the
next six to nine months, a portion of which may result in an additional income
tax benefit. No assurance can be given that the Company's tax matters will be
favorably resolved due to the inherent uncertainties involved in court and tax
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
At June 30, 2003 the Company had the equivalent of approximately $470
million of income tax loss carryforwards in Germany with no expiration date.
However, the Company has provided a deferred tax valuation allowance against
substantially all of these income tax loss carryforwards because the Company
currently believes they do not meet the "more-likely-than-not" recognition
criteria. In 2002, the German federal government proposed certain changes to its
income tax law, including certain changes that would have imposed limitations on
the annual utilization of income tax loss carryforwards. Such proposal, if
enacted, would have significantly affected the Company's 2003 and future income
tax expense and cash tax payments. In April 2003 the German federal government
passed a new tax law which does not contain the provision that would have
restricted the utilization of tax loss carryforwards. Furthermore, the
provisions contained in the new law are not expected to materially impact the
Company's income tax expense or cash tax payments.
At June 30, 2003, the Company had net deferred tax liabilities of $137
million. The Company operates in numerous tax jurisdictions, in certain of which
it has temporary differences that net to deferred tax assets (before valuation
allowance). The Company has provided a deferred tax valuation allowance of $197
million at June 30, 2003, principally related to Germany, partially offsetting
deferred tax assets which the Company believes do not currently meet the
"more-likely-than-not" recognition criteria.
Note 13 - Commitments and contingencies:
Environmental matters and litigation
Some of the Company's current and former facilities, including several
divested 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, the Company has been named as a defendant, potential
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 approximately 70
governmental and private actions associated with waste disposal sites, mining
locations, and facilities currently or previously owned, operated or used by the
Company or its subsidiaries, or their predecessors, certain of which are on the
U.S. Environmental Protection Agency'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
the Company may be jointly and severally liable for such costs, in most cases it
is only one of a number of PRPs who may also be jointly and severally liable.
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, or
a determination that the Company is potentially responsible for the release of
hazardous substances at other sites could result in expenditures in excess of
amounts currently estimated by the Company to be required for such matters. In
addition, with respect to other PRPs and the fact that the Company may be
jointly and severally liable for the total remediation cost at certain sites,
the Company could ultimately be liable for amounts in excess of its accruals due
to, among other things, reallocation of costs among PRPs or the insolvency of
one of more PRPs. No assurance can be given 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. Further, there
can be no assurance that additional environmental matters will not arise in the
future.
Certain of the Company's 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 past and current
operations and products of the Company have the potential to cause environmental
or other damage. The Company has implemented and continues to implement various
policies and programs in an effort to minimize these risks. The policy of the
Company is to maintain compliance with applicable environmental laws and
regulations at all of its facilities and to strive to improve its environmental
performance. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect the Company's production, handling, use, storage,
transportation, sale or disposal of such substances as well as the Company's
consolidated financial position, results of operations or liquidity.
At June 30, 2003, the Company had accrued approximately $88 million for
those environmental matters which are reasonably estimable. It is not possible
to estimate the range of costs for certain sites. The upper end of the range of
reasonably possible costs to the Company for sites which it is possible to
estimate costs is approximately $125 million. The Company's estimates of such
liabilities have not been discounted to present value, and the Company has not
recognized any potential insurance recoveries other than the settlements
discussed in Note 3.
The exact time frame over which the Company makes payments with respect to
its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process which in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs which
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
are classified as a noncurrent liability.
At June 30, 2003, there are approximately 15 sites for which the Company is
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 or
not the Company actually had any association with the site, or if the Company
had association with the site, the nature of its responsibility, if any, for the
contamination at the site and the extent of contamination. The timing on when
information would become available to the Company to allow the Company to
estimate a range of loss is unknown and dependent on events outside the control
of the Company, such as when the party alleging liability provides information
to the Company.
The Company currently believes the disposition of all claims and disputes,
individually and in the aggregate, should not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
At June 30, 2003, the Company had approximately $24 million in restricted
cash, restricted cash equivalents and restricted marketable debt securities held
by certain trusts, the assets of which can only be used to pay for certain of
the Company's future environmental remediation and other environmental
expenditures. Restricted cash decreased approximately $28 million in the second
quarter of 2003 primarily due to a $30.8 million payment related to the final
settlement of the previously-reported Granite City, Illinois lead smelter site.
The Company may have to pay up to an additional $.7 million related to this site
upon completion of an EPA audit of certain response costs. No further material
expenditures are expected to be made for this site.
Lead pigment litigation
Since 1987 the Company, other former manufacturers of lead pigments for use
in paint and lead-based paint, and the Lead Industries Association have been
named as defendants in various legal proceedings seeking damages for personal
injury and property damage allegedly caused by the use of lead-based paints.
Certain of these actions have been filed by or on behalf of states, large U.S.
cities or their public housing authorities, school districts and certain others
have been asserted as class actions. These legal proceedings seek recovery under
a variety of theories, including public and private nuisance, negligent product
design, failure to warn, strict liability, breach of warranty,
conspiracy/concert of action, enterprise liability, market share liability,
intentional tort, and fraud and misrepresentation.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and asserted 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. Most of these legal proceedings are
in various pre-trial stages; some are on appeal following dismissal or summary
judgment rulings in favor of the defendants.
The Company believes that these actions are without merit, intends to
continue to deny all allegations of wrongdoing and liability and to defend all
actions vigorously. The Company has not accrued any amounts for the pending lead
pigment litigation. Liability that may result, if any, cannot reasonably be
estimated. In addition, various legislation and administrative regulations have,
from time to time, been enacted or proposed that seek to (a) impose various
obligations on present and former manufacturers of lead pigment and lead-based
paint with respect to asserted health concerns associated with the use of such
products and (b) effectively overturn the precedent set by court decisions in
which the Company 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. The Company currently
believes the disposition of all claims and disputes, individually and in the
aggregate, should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity. Considering
the Company's previous involvement in the lead pigment and lead-based paint
businesses, the Company expects that additional lead pigment and lead-based
paint litigation may be filed against the Company in the future, asserting
similar or different legal theories and seeking similar or different types of
damages and relief .
Other litigation
The Company has been named as a defendant in various lawsuits in a variety
of jurisdictions, alleging personal injuries as a result of occupational
exposure to asbestos, silica and/or mixed dust in connection with formerly owned
operations. Approximately 380 of these cases involving a total of approximately
30,825 plaintiffs and their spouses remain pending, including the Rhines case
described below. The Company has not accrued any amounts for this litigation. In
addition, from time to time, the Company has received notices regarding asbestos
or silica claims purporting to be brought against former subsidiaries of the
Company, including notices provided to insurers with which the Company has
entered into settlements extinguishing certain insurance policies. These
insurers may seek indemnification from the Company.
Rhines, et al. v. A.O. Smith, et al. (Circuit Court of Covington County,
Mississippi, Civil Action No. 2002-191C). In June 2003, the Company was served
with a complaint in this case brought on behalf of approximately 3,593
plaintiffs against approximately 265 defendants, alleging injury as a result of
exposure to asbestos.
The Company's Belgian subsidiary and various of its Belgian employees are
the subject of an investigation by Belgian authorities relating to an accident
resulting in two fatalities that occurred in its Langerbrugge, Belgium facility
in October 2000. The investigation stage, which could ultimately result in civil
and criminal sanctions against the Company, was completed in 2002. In May 2003
the Belgian authorities referred the proceedings against the Company's Belgian
subsidiary and certain of its Belgian employees to the criminal court for trial.
The matter has been set for trial in October 2003.
The Company currently believes the disposition of all claims and disputes,
individually and in the aggregate, should not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
For descriptions of certain other legal proceedings, environmental, income
tax and other commitments and contingencies related to the Company, reference is
made to (i) the 2002 Annual Report, (ii) the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003, and (iii) Note 12.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS[this has been revised/reformatted]
Three months ended % Six months ended %
June 30, Change June 30, Change
-------------------------- ------------- -------------------------- -------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(In millions, except percentages and metric tons)
Net sales $266.6 $226.9 +17% $519.6 $429.3 +21%
Cost of sales 197.6 176.2 +12% 386.1 332.5 +16%
------ ------ ------ ------
Gross margin 69.0 50.7 +36% 133.5 96.8 +38%
Selling, general and
administrative expense 31.0 24.9 +24% 60.4 49.6 +22%
Litigation settlement gains, net .7 .4 .7 2.4
Currency transaction gains
(losses), net (2.7) (2.0) (3.8) (1.5)
Disposition of property and
Equipment 1.1 .6 1.1 .6
Noncompete agreement
Income - 1.0 .3 2.0
Corporate expense (23.2) (7.5) (38.5) (17.6)
Other operating income - - .2 -
------ ------ ------ ------
Income from operations $13.9 $18.3 -24% $33.1 $33.1 N/C
====== ====== ====== ======
TiO2 operating statistics
Percent change in average
selling prices:
Using actual foreign
currency exchange rates +19% +18%
Impact of changes in
foreign currency exchange
rates -12% -12%
In billing currencies +7% +6%
Sales volume (metric tons in
thousands) 121.0 122.6 -1% 239.5 235.0 +2%
Production volume (metric
Tons in thousands) 119.5 113.0 +6% 236.7 218.9 +8%
The Company's sales and gross margin increased $39.7 million (17%) and
$18.3 million (36%), respectively, in the second quarter of 2003 compared to the
second quarter of 2002, and increased $90.3 million (21%) and $36.7 million
(38%), respectively, in the first six months of 2003 compared to the same period
in 2002, due primarily to higher average TiO2 selling prices as well as higher
TiO2 sales and production volumes partially offset by higher operating costs
(particularly energy costs, which increased by approximately $5.3 million in the
year-to-date period). Excluding the effect of fluctuations in the value of the
U.S. dollar relative to other currencies, the Company's average TiO2 selling
price in billing currencies in the second quarter of 2003 was 7% higher than the
second quarter of 2002, with the greatest improvement in European and export
markets. the Company's average TiO2 selling prices in billing currencies were 6%
higher in the first six months of 2003 compared to the first six months of 2002.
When translated from billing currencies to U.S. dollars using actual foreign
currency exchange rates prevailing during the respective periods, the Company's
average TiO2 selling prices in the second quarter of 2003 increased 19% compared
to the second quarter of 2002, and increased 18% in the year-to-date period.
The Company's sales are denominated in various currencies, including the
U.S. dollar, the euro, other major European currencies and the Canadian dollar.
The disclosure of the percentage change in the Company average TiO2 selling
price in billing currencies (which excludes the effects of fluctuations in the
value of the U.S. dollar relative to other currencies) is considered a
"non-GAAP" financial measure under regulations of the SEC. The disclosure of the
percentage change in the Company's average TiO2 selling prices using actual
foreign currency exchange rates prevailing during the respective periods is
considered the most directly comparable financial measure presented in
accordance with accounting principles generally accepted in the United States
("GAAP measure"). The Company discloses percentage changes in its average TiO2
prices in billing currencies because the Company believes such disclosure
provides useful information to investors to allow them to analyze such changes
without the impact of changes in foreign currency exchange rates, thereby
facilitating period-to-period comparisons of the relative changes in average
selling prices in the actual various billing currencies. Generally, when the
U.S. dollar either strengthens or weakens against other currencies, the
percentage change in average selling prices in billing currencies will be higher
or lower, respectively, than such percentage changes would be using actual
exchange rates prevailing during the respective periods. The difference between
the 19% and 18% changes in the Company's average TiO2 selling prices during the
second quarter and first six months of 2003 as compared to the same periods in
2002 using actual foreign currency exchange rates prevailing during the
respective periods (the GAAP measure) and the 7% and 6%, respectively,
percentage changes in the Company's average TiO2 selling price in billing
currencies (the non-GAAP measure) during such periods is due to the effect of
changes in foreign currency exchange rates. The above table presents in a
tabular format (i) the percentage change in the Company's average TiO2 selling
prices using actual foreign currency exchange rates prevailing during the
respective periods ( the GAAP measure), (ii) the percentage change in Kronos
average TiO2 selling price in billing currencies (the non-GAAP measure) and
(iii) the percentage change due to changes in foreign currency exchange rates
(or the reconciling item between the non-GAAP measure and the GAAP measure).
The Company's TiO2 sales volume in the second quarter of 2003 decreased 1%
from the record second quarter of 2002. Sales volume in the first six months of
2003, a Kronos record, increased 2% from the same period in 2002. The Company
expects sales volumes in the second half of 2003 will be lower than the first
half of 2003. The Company's sales volumes for the full year 2003 should be
slightly higher than the full year of 2002. The Company's TiO2 production volume
in the second quarter of 2003, an all-time quarterly record for NL, was 6%
higher than the second quarter of 2002, with operating rates at near full
capacity in all periods presented. Production volume for the first half of 2003,
also an all-time record for the Company, increased 8% compared to the first six
months of 2002. These increases in TiO2 sales and production volume increased
gross margin by $1.9 million and $3.9 million, respectively, in the second
quarter of 2003 compared to the second quarter of 2002, while the increase in
average TiO2 selling prices increased gross margin by $10.5 million
(year-to-date impacts of $6.5 million, $10.1 million and $20.6 million,
respectively). Finished goods inventories at the end of the second quarter of
2002 represented less than two months of sales.
The Company's cost of sales increased $21.4 million (12%) in the second
quarter of 2003 compared to the second quarter of 2002, and increased $53.6
million (16%) in the year-to-date period. Kronos' cost of sales as a percentage
of net sales decreased from 78% in the second quarter and first six months of
2002 to 74% in the same periods in 2003 primarily due to the higher average
selling prices and higher production volume, partially offset by the higher
energy costs.
The increase in the Company's gross margin, quantified above, is due to the
net effects of the changes in sales and cost of sales during such periods.
The Company's selling, general and administrative expenses in the second
quarter of 2003 increased $6.1 million (24%) as compared to the second quarter
of 2002 (and increased $10.7 million, or 22%, in the year-to-date period) due to
higher distribution expenses in the second quarter and first six months of 2003
of $400,000 and $2.7 million, respectively, associated with the higher sales
volume, as well as the impact of relative changes in foreign currency exchange
rates which increased the Company's expenses in the 2003 periods as compared to
the same periods in 2002. The Company's selling, general and administrative
expenses were approximately 11% to 12% of sales in both the 2002 and 2003
periods.
The Company has substantial operations and assets located outside the
United States (primarily in Germany, Belgium, Norway and Canada). As discussed
above, a significant amount of the Company's sales generated from its 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. In addition,
a portion of Company's sales generated from its 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 the Company's 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
the value of the U.S. dollar relative to other currencies, primarily the euro,
increased the Company's sales in the second quarter and first six months of 2003
by a net $27.7 million and $54.4 million, respectively, compared to the same
periods in 2002. Fluctuations in the value of the U.S. dollar relative to other
currencies similarly impacted Kronos' foreign currency-denominated operating
expenses. The Company's operating costs that are not denominated in the U.S.
dollar, when translated into U.S. dollars, were higher in the second quarter and
first six months of 2003 as compared to the same periods of 2002. Overall, the
net impact of currency exchange rate fluctuations decreased the Company's income
from operations by $600,000 and $2.4 million in the second quarter and first six
months of 2003 when compared to the year-earlier periods.
The noncompete agreement income relates to a covenant not to compete
agreement related to the sale of Rheox in 1998. The agreement became fully
amortized in January 2003. The litigation settlement gains in all periods
relates to a settlement with former insurance carrier groups. No further
material settlements relating to litigation concerning environmental remediation
coverage are expected.
Corporate expense for the second quarter and first half of 2003 increased
$15.7 million and $20.9 million, respectively, from comparable prior-year
periods primarily due to higher environmental expenses related to remediation of
formerly owned business units and higher legal expenses. Corporate expenses are
expected to be higher for full-year 2003 as compared to full-year 2002 due to
higher environmental expenses and slightly higher legal expenses associated with
the defense of lead pigment litigation.
As a net result of the items discussed above, the Company's income from
operations decreased 24% from $18.3 million in the second quarter of 2002 to
$13.9 million in the second quarter of 2003. For the first six months of 2003,
the Company's income from operations was comparable to the $33.1 million in the
first six months of 2002.
The Company expects its average TiO2 selling prices in 2003 will be higher
than 2002. The Company expects sales volume in the second half of 2003 to be
lower than the first half of 2003. The Company's sales volume for full year 2003
should be slightly higher than full year 2002. The Company anticipates its
production volume for full year 2003 will be higher than full year 2002. The
Company's TiO2 production volume in 2003 is expected to be higher than the
Company's 2003 TiO2 sales volume with finished goods inventories rising
modestly. Operating costs in 2003 are expected to be higher than in 2002. The
Company's expectations as to the future prospects of the Company and the TiO2
industry are based upon a number of factors beyond the Company's 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 the Company's
expectations, the Company's results of operations could be unfavorably affected.
Other Income (Expense)
The following table sets forth certain information regarding general
corporate income (expense).
Three months ended Six months ended
June 30, Difference June 30, Difference
--------------------------- ------------- --------------------------- -------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
(In millions)
Securities gains, net $ .2 $ - $ .2 $ 2.5 $ - $ 2.5
Trade Interest income .2 .3 (.1) .4 .6 (.2)
Other interest and dividend
Income .8 1.3 (.5) 1.8 2.6 (.8)
Currency transaction gains - 6.3 (6.3) - 6.3 (6.3)
Interest expense (8.4) (8.1) (.3) (16.4) (14.6) (1.8)
------------- ------------- ------------- ------------- ------------- -------------
$ (7.2) $ (.2) $ (7.0) $ (11.7) $ (5.1) $ (6.6)
============= ============= ============= ============= ============= =============
Securities gains for the first half of 2003 were higher than the first half
of 2002 primarily due to a $2.3 million first quarter 2003 noncash securities
transaction gain related to the exchange of the Company's holdings of Tremont
Corporation common stock for shares of Valhi, Inc. common stock as a result of a
series of merger transactions Valhi completed in February 2003. See Note 6 to
the Consolidated Financial Statements. Interest income was lower in the second
quarter and the first half of 2003 as compared to the year earlier periods due
to lower levels of available funds invested and lower average yields. The
Company expects interest income to be lower for full-year 2003 than full-year
2002 due to lower average yields and lower average levels of funds available for
investment.
Foreign currency transaction gains in the second quarter of 2002 related to
the extinguishment of certain intercompany indebtedness with Kronos
International, Inc. ("KII").
Interest expense in the second quarter and first half of 2003 increased $.3
million and $1.8 million from the comparable prior-year periods, primarily due
to higher levels of outstanding debt and associated currency effects, partially
offset by lower interest rates. Interest expense in the second quarter of 2002
included $2.0 million related to the early extinguishment of the Company's
11.75% Senior Secured Notes. Assuming no significant change in interest rates,
interest expense for full-year 2003 is expected to be higher than full-year 2002
due to higher levels of outstanding indebtedness, partially offset by lower
average interest rates.
Provision for income taxes
The Company reduced its deferred income tax valuation allowance by $.4
million in the first half of 2003 and $3.0 million in the first half of 2002
primarily as a result of utilization of certain tax attributes for which the
benefit had not been previously recognized under the "more-likely-than-not"
recognition criteria.
Other
Minority interest in all presented periods primarily related to NL
Environmental Services, Inc.
Recently adopted accounting principles
As described in Note 1 in the Consolidated Financial Statements, the
Company adopted Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations," effective January 1, 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows from operating, investing and
financing activities for the six months ended June 30, 2003 and 2002 are
presented below.
Six months ended
June 30,
-------------------------------
2003 2002
-------------- --------------
(In millions)
Net cash provided (used) by: [deleted subtotal on the table]
Operating activities 18.7 36.5
Investing activities (9.7) (19.3)
Financing activities (14.4) 39.7
-------------- --------------
Net cash used by operating, investing, and financing activities $ (5.4) $ 56.9
============== ==============
Operating activities
The TiO2 industry is cyclical and changes in economic conditions within the
industry significantly affect the earnings and operating cash flows of the
Company. Certain items included in the determination of net income do not
represent current inflows or outflows of cash. For example, certain items
included in the determination of net income have an impact on cash flows from
operating activities, but the impact of such items on cash will differ from
their impact on net income. For example, the amount of income or expense
recorded for pension and OPEB assets and obligations (which depend upon a number
of factors, including actuarial assumptions used to value obligations) will
generally differ from the outflows of cash for such benefits. Similarly the
amount of expense recorded for environmental matters will generally differ from
the outflows of cash for such matters.
Cash flows from operations is the primary source of liquidity for the
Company. Changes in TiO2 pricing, production volume and customer demand, among
other things, could significantly affect the liquidity of the Company. Relative
changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments. Such relative changes can
significantly impact the comparability of cash flow from operations from period
to period, as the income statement impact of such items may occur in a different
period from when the underlying cash transaction occurs. For example, raw
materials may be purchased in one period, but the payment for such raw materials
may occur in a subsequent period. Similarly, inventory may be sold in one
period, but the cash collection of the receivable may occur in a subsequent
period.
Cash flows from operating activities decreased from $36.5 million in the
first six months of 2002 to $18.7 million in the first six months of 2003. This
$17.8 million decrease was due primarily to the net effect of (i) higher net
income of $17.8 million, (ii) higher depreciation expense of $3.9 million, (iii)
$21.1 million of higher refundable income taxes in the first six months of 2003
and (iv) a higher amount of net cash used to fund changes in Kronos'
inventories, receivables, payables and accrued environmental of $13.4 million in
the first six months of 2003. Relative changes in accounts receivable are
affected by, among other things, the timing of sales and the collection of the
resulting receivable. Relative changes in inventories and accounts payable and
accrued liabilities and accrued environmental are affected by, among other
things, the timing of raw material purchases and the payment for such purchases
and the relative difference between production volume and sales volume.
Investing activities
The Company's capital expenditures were $13.9 million and $12.1 million in
the first half of 2003 and 2002, respectively. Capital expenditures in first
half of 2002 included approximately $2.2 million related to reconstruction of
the Company's Leverkusen, Germany sulfate plant damaged in the March 2001 fire.
In May 2003 the Harold C. Simmons Family Trust No. 2 (the "Family Trust")
repaid $2 million principal amount on the revolving credit agreement. See Note 7
to the Consolidated Financial Statements.
In January 2002, the Company acquired all of the stock and limited
liability company units of EWI RE, Inc. and EWI RE, Ltd. (collectively "EWI"),
respectively, for an aggregate of $9.2 million in cash, including capitalized
acquisition costs of $.2 million.
Financing activities
In March 2003 the Company borrowed (euro)15 million ($16.1 million when
borrowed) and in April 2003 the Company repaid NOK 80 million ($11.0 million
when repaid) under the revolving credit facility.
In March 2002, the Company redeemed $25 million principal amount of its
11.75% Senior Secured Notes using available cash on hand, and in June 2002 the
Company redeemed the remaining $169 million principal amount of such 11.75%
Senior Secured Notes using a portion of the proceeds from the June 2002 issuance
of the (euro)285 million principal amount of the KII 8.875% Senior Secured Notes
($280 million when issued). Also in June 2002, KII's operating subsidiaries in
Germany, Belgium and Norway entered into a new three-year (euro)80 million
secured revolving credit facility and borrowed (euro)13 million ($13 million)
and NOK 200 million ($26 million) which, along with available cash, was used to
repay and terminate KII's short term notes payable ($53.2 million when repaid).
Deferred financing costs of $9.3 million for the KII 8.875% Senior Secured
Notes and the European credit facility are being amortized over the life of the
respective agreements and are included in other noncurrent assets as of June 30,
2002.
In the second quarter of 2003, the Company paid a regular quarterly
dividend to shareholders of $.20 per share, aggregating $9.5 million. Dividends
paid during the first half of 2003 totaled $.40 per share, or $19.1 million.
In the first half of 2003 and the second quarter of 2002, the Company made
no repurchases of common stock. During the first quarter of 2002, the Company
purchased approximately 228,000 shares of its common stock in the open market at
an aggregate cost of approximately $3.3 million. The Company is authorized to
repurchase approximately 1.3 million additional shares at July 25, 2003. The
shares may be purchased over an unspecified period of time and, depending on
market conditions, applicable legal requirements, available cash and other
factors, the share repurchase program may be suspended at any time and could be
terminated prior to completion. The repurchased shares are to be held as
treasury shares available for general corporate purposes.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability
At June 30, 2003, the Company had cash and cash equivalents aggregating
$54.4 million, current restricted cash equivalents of $25.3 million, current
restricted marketable debt securities of $10.7 million and noncurrent restricted
marketable debt securities of $3.1 million. Of such aggregate $93.5 million
amount, $18 million was held by non-U.S. subsidiaries. Restricted cash decreased
approximately $28 million in the second quarter of 2003 primarily due to a $30.8
million payment related to the final settlement of the previously-reported
Granite City, Illinois lead smelter site. The Company may have to pay up to an
additional $.7 million related to this site upon completion of an EPA audit of
certain response costs. No further material expenditures are expected to be made
for this site. At June 30, 2003, certain of the Company's subsidiaries had $102
million available for borrowing with approximately $57 million available under
non-U.S. credit facilities (including $55 million under the European Credit
Facility) and approximately $45 million under the U.S. Credit Facility. At June
30, 2003, the Company had complied with all financial covenants governing its
debt agreements.
Income tax contingencies
See Note 12 to the Consolidated Financial Statements.
Lead pigment litigation, environmental matters and other litigation
See Note 14 to the Consolidated Financial Statements and Part II, Item 1.
"Legal Proceedings."
Other
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and availability of resources in view of, among
other things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, the Company in the past has sought, and in the future may seek, to
reduce, refinance, repurchase or restructure indebtedness; raise additional
capital; repurchase shares of its common stock; modify its dividend policy;
restructure ownership interests; sell interests in subsidiaries or other assets;
or take a combination of such steps or other steps to manage its liquidity and
capital resources. In the normal course of its business, the Company may review
opportunities for the acquisition, divestiture, joint venture or other business
combinations in the chemicals or other industries, as well as the acquisition of
interests in, and loans to, related companies. In the event of any acquisition
or joint venture transaction, the Company may consider using available cash,
issuing equity securities or increasing its indebtedness to the extent permitted
by the agreements governing the Company's existing debt.
Non-GAAP Financial Measures
In an effort to provide investors with additional information regarding the
Company's results as determined by GAAP, the Company has disclosed certain
non-GAAP information which the Company believes provides useful information to
investors:
As discussed above, the Company discloses percentage changes in its average
TiO2 prices in billing currencies, which excludes the effects of foreign
currency translation. Such disclosure of the percentage change in the Company's
average TiO2 selling price in billing currencies is considered a "non-GAAP"
financial measure under regulations of the SEC. The disclosure of the percentage
change in the Company's average TiO2 selling prices using actual foreign
currency exchange rates prevailing during the respective periods is considered
the most directly comparable GAAP measure. The Company discloses percentage
changes in its average TiO2 prices in billing currencies because the Company
believes such disclosure provides useful information to investors to allow them
to analyze such changes without the impact of changes in foreign currency
exchange rates, thereby facilitating period-to-period comparisons of the
relative changes in average selling prices in the actual various billing
currencies. Generally, when the U.S. dollar either strengthens or weakens
against other currencies, the percentage change in average selling prices in
billing currencies will be higher or lower, respectively, than such percentage
changes would be using actual exchange rates prevailing during the respective
periods.
Special note regarding forward-looking statements
The statements contained in this Report on Form 10-Q ("Quarterly Report")
which are not historical facts, including, but not limited to, statements found
under the captions "Results of Operations" and "Liquidity and Capital Resources"
above, are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"will," "should," "could," "anticipates," "expects," or comparable terminology
or by discussions of strategy or trends. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve risks and uncertainties, including, but
not limited to, the cyclicality of the titanium dioxide industry, global
economic and political conditions, global productive capacity, customer
inventory levels, changes in product pricing, changes in product costing,
changes in foreign currency exchange rates, competitive technology positions,
operating interruptions (including, but not limited to, labor disputes, leaks,
fires, explosions, unscheduled downtime, transportation interruptions, war and
terrorist activities), the ultimate resolution of pending or possible future
lead pigment litigation and legislative developments related to the lead pigment
litigation, the outcome of other litigation and tax controversies, and other
risks and uncertainties included in this Quarterly Report and in the 2002 Annual
Report, and the uncertainties set forth from time to time in the Company's
filings with the Securities and Exchange Commission. Should one or more of these
risks materialize (or the consequences of such a development worsen), or should
the underlying assumptions prove incorrect, actual results could differ
materially from those forecasted or expected. The Company disclaims any
intention or obligation to update publicly or revise such statements whether as
a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's market risks, refer to the caption
"Quantitative and Qualitative Disclosures About Market Risk" in the 2002 Annual
Report. There have been no material changes to the information provided that
would require additional information with respect to the quarter ended June 30,
2003.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the
Securities and Exchange Commission ("SEC"), means controls and other procedures
that are designed to ensure that information required to be disclosed in the
reports that the Company files or submits 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 required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its 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, the Company's
Chief Executive Officer, and Gregory M. Swalwell, the Company's Vice President,
Finance, have evaluated the Company's disclosure controls and procedures as of
June 30, 2003. Based upon their evaluation, these executive officers have
concluded that the Company's disclosure controls and procedures are effective as
of the date of such evaluation.
The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's 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 accounting
principles generally accepted in the United States of America ("GAAP)", and
includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company,
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and
directors of the Company, and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the Company's consolidated
financial statements.
There has been no change to the Company's system of internal controls over
financial reporting during the quarter ended June 30, 2003 that has materially
affected, or is reasonably likely to materially affect, the Company's system of
internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 14 to the Consolidated Financial Statements, and
for descriptions of certain previously reported legal proceedings, reference is
made to the 2002 Annual Report and the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2003.
County of Santa Clara v. Atlantic Richfield Company, et al. (Superior Court
of the State of California, County of Santa Clara, Case No. CV788657). In July
2003, the trial court granted defendants' motion to dismiss all remaining claims
in this previously-described case. The time for appeal has not yet run.
State of Rhode Island v. Lead Industries Association, et al. (Superior
Court of Rhode Island, No. 99-5226). In June 2003, the court set April 5, 2004
as the date for the retrial of Phase I of this previously-described case.
Lewis et al. v. Lead Industries Association, et al. (Circuit Court of Cook
County, Illinois, County Department, Chancery Division, Case No. 00CH09800). In
June 2003, the appellate court affirmed the dismissal of five of the six counts
of plaintiffs' complaint in this previously-described case, but reversed the
dismissal of the conspiracy count. The time for appeal has not yet run.
Borden, et al. v. The Sherwin-Williams Company, et al. (Circuit Court of
Jefferson County, Mississippi, Civil Action No. 2000-587). In June 2003,
plaintiffs and defendants jointly moved the court to vacate the
previously-described October 2003 trial date.
Quitman County School District v. Lead Industries Association, et al.
(Circuit Court of Quitman County, Mississippi, Case No. 2001-0106). In June
2003, the Court set a trial date of September 13, 2004 in this
previously-described case.
Thomas v. Lead Industries Association, et al. (Circuit Court, Milwaukee,
Wisconsin, Case No. 99-CV-6411). In June 2003, plaintiff appealed the trial
court's grant of summary judgment for defendants in this previously-described
case.
City of St. Louis v. Lead Industries Association, et al. (Missouri Circuit
Court 22nd Judicial Circuit, St. Louis City, Cause No. 002-245, Division 1). In
May 2003, plaintiffs filed an amended complaint alleging only a nuisance claim
in this previously-described case. Defendants' renewed motion to dismiss and
motion for summary judgment are pending. Plaintiffs have moved the Court to set
an October 2003 trial date.
City of Milwaukee v. NL Industries, Inc. and Mautz Paint (Circuit Court,
Civil Division, Milwaukee County, Wisconsin, Case No. 01CV0030066). In May 2003,
the court vacated the previously-described October 2003 trial date. No new trial
date has been set. Defendants' motion for summary judgment is pending.
Justice et al. v Sherwin-Williams, et al. (Superior Court of California,
County of San Francisco, No. 314686). This previously-described case has been
voluntarily dismissed without prejudice by plaintiffs.
Sabater, et al. v. Lead Industries Association, et al. (Supreme Court of
the State of New York, County of Bronx, Index No. 25533/98). Plaintiffs' motion
for class certification is pending in this previously-described case.
The Company expects that additional lead pigment litigation and lead-based
paint litigation may be filed against the Company in the future asserting
similar or different legal theories and seeking similar or different types of
damages and relief.
Herd v. ASARCO, et al. (Case No. CJ-2001-443), Reeves v. ASARCO, et al.
(Case No. CJ-02-8), Carr v. ASARCO, et al. (Case No. CJ-02-59), Edens v. ASARCO
et al. (Case No. CJ-02-245, and Koger v. ASARCO et al. (Case No. CJ-02-284). In
May 2003, the Company was voluntarily dismissed with prejudice by plaintiffs
from these previously-described cases.
Cole, et al. v. ASARCO Incorporated et al. (U.S. District Court for the
Northern District of Oklahoma, Case No. 03C V327 EA (J)). In June 2003, the
Company was served with a complaint in this purported class action on behalf of
two classes of persons living in the Picher/Cardin, Oklahoma, area: (1) a
medical monitoring class of persons who have lived in the area since 1994; and
(2) a property owner class of residential, commercial and government property
owners. Plaintiffs are nine individuals and, in their official capacities, the
Mayor of Picher and the Chairman of the Picher/Cardin School Board. Plaintiffs
allege causes of action in trespass and nuisance and seek a medical monitoring
program, a relocation program, property damages, and punitive damages.
Crawford, et al. v. ASARCO, Incorporated, et al. (Case No. CJ-03-304);
Barr, et al. v. ASARCO Incorporated, et al. (Case No. CJ-03-305); Brewer, et al.
v. ASARCO Incorporated, et al. (Case No. CJ-03-306); Kloer, et al. v. ASARCO,
Incorporated, et al. (Case No. CJ-03-307); Rhoten, et al. v. Asarco
Incorporated, et al. (Case No. CJ-03-308) (all in the District Court in and for
Ottawa County, State of Oklahoma). In July 2003, the Company was served with
complaints in these five cases asserting personal injuries due to exposure to
lead from mining waste on behalf of, respectively, two, four, two, three, and
four children. Each complaint alleges causes of action in negligence, strict
liability, nuisance, and attractive nuisance; and each seeks $20 million in
compensatory and $20 million in punitive damages. The Company intends to answer
each complaint denying all liability and to defend itself vigorously.
United States of America v. NL Industries, Inc., et al., (United States
District Court for the Southern District of Illinois, Civ. No. 91-CV 00578). In
May 2003, the court entered the previously-described consent decree between the
United States and the Company. Pursuant to the consent decree, the Company in
June 2003 paid $30.8 million to the United States, and will pay up to an
additional $.7 million upon completion of an EPA audit of certain response
costs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 20, 2003. All
the nominees for director were elected with the voting results for each as
follows:
Director Shares For Shares Withheld
--------------------------------- ----------------------- ------------------------
Mr. J. Landis Martin 46,641,822 190,018
Mr. George E. Poston 46,425,918 405,922
Mr. Glenn R. Simmons 46,641,816 190,024
Mr. Harold C. Simmons 46,640,586 191,254
General Thomas P. Stafford 46,660,008 171,832
Dr. R. Gerald Turner 46,653,138 178,702
Mr. Steven L. Watson 45,118,497 1,713,343
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Company has retained a signed original of any exhibit listed below
that contains signatures, and the Company will provide any such
exhibit to the SEC or its staff upon request.
10.1 - Intercorporate Services Agreement by and between Contran Corporation
and the Registrant effective as of January 1, 2003.
10.2 - Intercorporate Services Agreement by and between Titanium Metals
Corporation and the Registrant effective as of January 1, 2003.
99.1 - Certification.
99.2 - Certification.
99.3 - Certification.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended June 30, 2003 through the
date of this report:
July 14, 2003 - Reported Items 7 and 9.
July 25, 2003 - Reported Items 7 and 9.
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: October 31, 2003 By /s/ Gregory M. Swalwell
Gregory M. Swalwell
Principal Financial and Accounting Officer