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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the fiscal year ended December 31, 1999
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.
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(Exact name of registrant as specified in its charter)
New Jersey 13-5267260
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16825 Northchase Drive, Suite 1200, Houston, Texas 77060-2544
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 423-3300
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common stock ($.125 par value) New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 16, 2000 approximated $167 million.
There were 50,629,740 shares of common stock outstanding at March 16, 2000.
Documents incorporated by reference:
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
Forward-Looking Information.
The statements contained in this Annual Report on Form 10-K ("Annual
Report") which are not historical facts, including, but not limited to,
statements found (i) under the captions "Industry," "Products and operations,"
"Manufacturing process and raw materials," "Competition," "Patents and
Trademarks," "Foreign Operations," and "Regulatory and Environmental Matters,"
all contained in Item 1. Business; (ii) under the captions "Lead pigment
litigation" and "Environmental matters and litigation," both contained in Item
3. Legal Proceedings; (iii) under the captions "Results of Operations" and
"Liquidity and Capital Resources," both contained in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations; and
(iv) under the captions "Currency exchange rates," "Marketable equity security
prices," and "Other," all contained in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk, 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," "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 that could significantly affect expected results, and actual
future results could differ materially from those described in such
forward-looking statements. Among the factors that could cause actual future
results to differ materially are the risks and uncertainties discussed in this
Annual Report and those described from time to time in the Company's other
filings with the Securities and Exchange Commission. While it is not possible to
identify all factors, the Company continues to face many risks and uncertainties
including, but not limited to, the cyclicality of the titanium dioxide industry,
global economic conditions, global productive capacity, customer inventory
levels, changes in product pricing, competitive technology positions, operating
interruptions (including, but not limited to, leaks, fires, explosions,
unscheduled downtime and transportation interruptions), the ultimate resolution
of pending or possible future lead pigment litigation and legislative
developments related to the lead paint litigation, the outcome of other
litigation, and other risks and uncertainties included 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 assumes no duty to update any
forward-looking statements.
PART I
ITEM 1. BUSINESS
General
NL Industries, Inc., organized as a New Jersey corporation in 1891,
conducts its continuing operations through its principal wholly owned
subsidiary, Kronos, Inc. Kronos is currently the world's fourth largest producer
of titanium dioxide pigments ("TiO2") with an estimated 12% share of worldwide
TiO2 sales volume in 1999. Approximately one-half of Kronos' 1999 sales volume
was in Europe, where Kronos is the second largest producer of TiO2.
NL and its consolidated subsidiaries are sometimes referred to herein
collectively as the "Company."
The Company's primary objective is to maximize total shareholder return.
The Company has taken a number of steps towards achieving its objective,
including (i) increasing its regular quarterly dividend to $.15 per share, (ii)
controlling costs, (iii) investing in certain cost effective debottlenecking
projects to increase TiO2 production capacity and efficiency, and (iv) improving
its capital structure. The Company periodically considers mergers or
acquisitions within the chemical industry and acquisitions of additional TiO2
production capacity to meet its objective.
Industry
Titanium dioxide pigments are chemical products used for imparting
whiteness, brightness and opacity to a wide range of products, including paints,
plastics, paper, fibers and ceramics. TiO2 is considered a "quality-of-life"
product with demand affected by gross domestic product in various regions of the
world.
Pricing within the global TiO2 industry is cyclical, and changes in
industry economic conditions can significantly impact the Company's earnings and
operating cash flows. The Company's average TiO2 selling prices on a billing
currency basis decreased during the first three quarters of 1999, before
increasing 1% in the fourth quarter of 1999 compared to the third quarter of
1999. Industry-wide demand for TiO2 increased in 1999, with second-half 1999
demand higher than first-half 1999 demand as a result of, among other things,
customers buying in advance of anticipated price increases. Kronos' 1999 sales
volume increased 5% from its 1998 sales volume with growth in all major regions.
Kronos expects industry demand in 2000 will be relatively unchanged from 1999,
depending primarily upon global economic conditions. Prices at the end of the
fourth quarter of 1999 were 1% higher than the average for the quarter and the
Company expects to continue to phase in previously announced price increases
during the first quarter of 2000. The Company's expectations as to the future
prospects of the TiO2 industry and prices are based upon a number of factors
beyond the Company's control, including continued worldwide growth of gross
domestic product, competition in the market place, unexpected or
earlier-than-
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expected capacity additions and technological advances. If actual developments
differ from the Company's expectations, industry and Company performance could
be unfavorably affected.
Kronos has an estimated 18% share of European TiO2 sales volume and an
estimated 12% share of North American TiO2 sales volume. Per capita consumption
of TiO2 in the United States and Western Europe far exceeds that in other areas
of the world and these regions are expected to continue to be the largest
consumers of TiO2. Significant regions for TiO2 consumption could emerge in
Eastern Europe, the Far East or China if the economies in these regions develop
to the point that quality-of-life products, including TiO2, are in greater
demand. Kronos believes that, due to its strong presence in Western Europe, it
is well positioned to participate in growth in consumption of TiO2 in Eastern
Europe. Geographic segment information is contained in Note 3 to the
Consolidated Financial Statements.
Products and operations
The Company believes that there are no effective substitutes for TiO2.
However, extenders such as kaolin clays, calcium carbonate and polymeric
opacifiers are used in a number of Kronos' markets. Generally, extenders are
used to reduce to some extent the utilization of higher-cost TiO2. The use of
extenders has not significantly changed TiO2 consumption over the past decade
because, to date, extenders generally have failed to match the performance
characteristics of TiO2. As a result, the Company believes that the use of
extenders will not materially alter the growth of the TiO2 business in the
foreseeable future.
Kronos currently produces over 40 different TiO2 grades, sold under the
Kronos and Titanox trademarks, which provide a variety of performance properties
to meet customers' specific requirements. Kronos' major customers include
domestic and international paint, plastics and paper manufacturers.
Kronos is one of the world's leading producers and marketers of TiO2.
Kronos and its distributors and agents sell and provide technical services for
its products to over 4,000 customers with the majority of sales in Europe and
North America. Kronos' international operations are conducted through Kronos
International, Inc., a Germany-based holding company formed in 1989 to manage
and coordinate the Company's manufacturing operations in Germany, Canada,
Belgium and Norway, and its sales and marketing activities in over 100 countries
worldwide. Kronos and its predecessors have produced and marketed TiO2 in North
America and Europe for 80 years. As a result, Kronos believes that it has
developed considerable expertise and efficiency in the manufacture, sale,
shipment and service of its products in domestic and international markets. By
volume, approximately one-half of Kronos' 1999 TiO2 sales were to Europe, with
37% to North America and the balance to export markets.
Kronos is also engaged in the mining and sale of ilmenite ore (a raw
material used in the sulfate pigment production process described below) and has
estimated ilmenite reserves that are expected to last at least 20 years. Kronos
is also engaged in the manufacture and sale of iron-based water treatment
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chemicals (derived from co-products of the pigment production processes). Water
treatment chemicals are used as treatment and conditioning agents for industrial
effluents and municipal wastewater, and in the manufacture of iron pigments.
Manufacturing process and raw materials
TiO2 is manufactured by Kronos using both the chloride process and the
sulfate process. Approximately two-thirds of Kronos' current production capacity
is based on its chloride process which generates less waste than the sulfate
process. Although most end-use applications can use pigments produced by either
process, chloride-process pigments are generally preferred in certain coatings
and plastics applications, and sulfate-process pigments are generally preferred
for certain paper, fibers and ceramics applications. Due to environmental
factors and customer considerations, the proportion of TiO2 industry sales
represented by chloride-process pigments has increased relative to
sulfate-process pigments and, in 1999, chloride-process production facilities
represented almost 60% of industry capacity.
Kronos produced 411,000 metric tons of TiO2 in 1999, compared to a record
434,000 metric tons produced in 1998 and 408,000 metric tons in 1997. Kronos'
average production capacity utilization rate in 1999 was 93%, down from full
capacity in 1998, primarily due to the Company's decision to manage inventory
levels by curtailing production volume during the first quarter of 1999. Kronos
believes its current annual attainable production capacity is approximately
440,000 metric tons, including its one-half interest in the joint venture-owned
Louisiana plant (see "TiO2 manufacturing joint venture").
The primary raw materials used in the TiO2 chloride production process are
chlorine, coke and titanium-containing feedstock derived from beach sand
ilmenite and natural rutile ore. Chlorine and coke are available from a number
of suppliers. Titanium-containing feedstock suitable for use in the chloride
process is available from a limited number of suppliers around the world,
principally in Australia, South Africa, Canada, India and the United States.
Kronos purchases slag refined from beach sand ilmenite from Richards Bay Iron
and Titanium (Proprietary) Limited (South Africa) under a long-term supply
contract that expires at the end of 2003. Natural rutile ore, another chloride
feedstock, is purchased primarily from Iluka Resources, Inc. (formerly RGC
Mineral Sands Limited)(Australia), a wholly owned subsidiary of Westralian Sands
Limited (Australia), under a long-term supply contract that expires at the end
of 2000. The Company does not expect to encounter difficulties obtaining
long-term extensions to existing supply contracts prior to the expiration of the
contracts. Raw materials purchased under these contracts and extensions thereof
are expected to meet Kronos' chloride feedstock requirements over the next
several years.
The primary raw materials used in the TiO2 sulfate production process are
sulfuric acid and titanium-containing feedstock derived primarily from rock and
beach sand ilmenite. Sulfuric acid is available from a number of suppliers.
Titanium-containing feedstock suitable for use in the sulfate process is
available from a limited number of suppliers around the world. Currently, the
principal active sources are located in Norway, Canada, Australia, India and
South Africa. As one of the few vertically-integrated producers of
sulfate-
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process pigments, Kronos operates a rock ilmenite mine in Norway, which provided
all of Kronos' feedstock for its European sulfate-process pigment plants in
1999. For its Canadian plant, Kronos also purchases sulfate grade slag from Rio
Tinto Iron and Titanium, Inc. (formerly Q.I.T.-Fer et Titane Inc.) under a
long-term supply contract which expires in 2002.
Kronos believes the availability of titanium-containing feedstock for both
the chloride and sulfate processes is adequate for the next several years.
Kronos does not expect to experience any interruptions of its raw material
supplies because of its long-term supply contracts. However, political and
economic instability in certain countries from which the Company purchases its
raw material supplies could adversely affect the availability of such feedstock.
TiO2 manufacturing joint venture
Subsidiaries of Kronos and Huntsman ICI Holdings ("HICI") each own a 50%-
interest in a manufacturing joint venture, Louisiana Pigment Company ("LPC").
LPC owns and operates a chloride-process TiO2 plant located in Lake Charles,
Louisiana. Production from the plant is shared equally by Kronos and HICI (the
"Partners") pursuant to separate offtake agreements.
A supervisory committee, composed of four members, two of whom are
appointed by each Partner, directs the business and affairs of LPC including
production and output decisions. Two general managers, one appointed and
compensated by each Partner, manage the operations of the joint venture acting
under the direction of the supervisory committee.
The manufacturing joint venture operates on a break-even basis and,
accordingly, Kronos' transfer price for its share of TiO2 produced is equal to
its share of the joint venture's production costs and interest expense, if any.
Kronos' share of the production costs are reported as cost of sales as the
related TiO2 acquired from the joint venture is sold, and its share of the joint
venture's interest expense, if any, is reported as a component of interest
expense.
Competition
The TiO2 industry is highly competitive. During the early 1990s, supply of
TiO2 exceeded demand, primarily due to new chloride-process capacity coming
on-stream, which suppressed selling prices. Prices improved in the mid-1990s
with a peak in the first half of 1995. Prices declined until the first quarter
of 1997, when selling prices of TiO2 began to increase as a result of increased
demand, peaking in the fourth quarter of 1998. Kronos' average selling price in
1999 was 1% lower than 1998. Pigment prices declined during the first three
quarters of 1999, but increased in the fourth quarter as a result of price
increases announced by all major producers effective during the fourth quarter.
Such price increases began to be phased in during the fourth quarter of 1999 and
continue to be implemented in the first quarter of 2000. Kronos recently
announced a price increase in Europe effective April 1, 2000. The successful
implementation of the price increase will depend on market conditions. Should
demand in 2000 remain strong, additional price increases could be announced
later
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in 2000. No assurance can be given that demand or price trends will conform to
the Company's expectations. See "Industry" for a description of certain risks
and uncertainties affecting the TiO2 industry.
Kronos' worldwide sales volume in the first half of 1999 was lower than
the first half of the previous year. Demand in the second half of 1999 was
stronger than comparable periods in both 1998 and 1997 although a portion of the
increased demand may be attributed to customers buying in advance of announced
price increases. Kronos' total 1999 worldwide sales volume was 5% higher than
1998. Kronos expects industry demand in 2000 will be relatively unchanged from
the strong overall performance of 1999, but this will depend upon, among other
things, global economic conditions.
Kronos competes primarily on the basis of price, product quality and
technical service, and the availability of high performance pigment grades.
Although certain TiO2 grades are considered specialty pigments, the majority of
Kronos' grades and substantially all of Kronos' production are considered
commodity pigments with price generally being the most significant competitive
factor. During 1999 Kronos had an estimated 12% share of worldwide TiO2 sales
volume, and Kronos believes that it is the leading seller of TiO2 in a number of
countries, including Germany and Canada.
Kronos' principal competitors are E.I. du Pont de Nemours & Co.
("DuPont"); Millennium Chemicals, Inc.; HICI; Kerr-McGee Corporation; Kemira Oy;
and Ishihara Sangyo Kaisha, Ltd. Kronos' six largest competitors have estimated
individual shares of TiO2 production capacity ranging from 23% to 5%, and an
estimated aggregate 74% share of worldwide TiO2 production volume. DuPont has
about one-half of total U.S. TiO2 production capacity and is Kronos' principal
North American competitor.
Effective June 30, 1999, Imperial Chemicals Industries plc ("ICI") sold
its titanium dioxide business, including its 50% ownership interest in LPC, to
HICI, a newly formed company that is 70%-owned by Huntsman Corporation and
30%-owned by ICI. In February 2000 Kerr-McGee announced an agreement to acquire
Kemira's TiO2 business in The Netherlands and the U.S. If this acquisition is
completed, Kronos would become the world's fifth largest producer of TiO2.
Capacity additions that are the result of construction of greenfield
plants in the worldwide TiO2 market require significant capital and substantial
lead time, typically three to five years in the Company's experience. No
greenfield plants have been announced, but industry capacity can be expected to
increase as Kronos and its competitors debottleneck existing plants. Based on
the factors described under the caption "Industry" above, the Company expects
that the average annual increase in industry capacity from announced
debottlenecking projects will be less than the average annual demand growth for
TiO2 during the next three to five years.
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Discontinued operations - Rheox
On January 30, 1998, the Company sold its Rheox specialty chemicals
business to Elementis plc for $465 million, including $20 million attributable
to a five-year agreement by the Company not to compete in the rheological
products business. As a result of the sale, the Company has reported its Rheox
operation as discontinued operations. The majority of the $380 million after-tax
proceeds has been used to reduce the Company's outstanding indebtedness.
Research and Development
The Company's expenditures for research and development and certain
technical support programs, excluding discontinued operations, have averaged
approximately $7 million annually during the past three years. Research and
development activities are conducted principally at the Leverkusen, Germany
facility. Such activities are directed primarily toward improving both the
chloride and sulfate production processes, improving product quality and
strengthening Kronos' competitive position by developing new pigment
applications.
Patents and Trademarks
Patents held for products and production processes are believed to be
important to the Company and to the continuing business activities of Kronos.
The Company continually seeks patent protection for its technical developments,
principally in the United States, Canada and Europe, and from time to time
enters into licensing arrangements with third parties.
The Company's major trademarks, including Kronos and Titanox, are
protected by registration in the United States and elsewhere with respect to
those products it manufactures and sells.
Foreign Operations
The Company's chemical businesses have operated in non-U.S. markets since
the 1920s. Most of Kronos' current production capacity is located in Europe and
Canada. Kronos' European operations include facilities in Germany, Belgium and
Norway. Approximately three-quarters of the Company's 1999 consolidated sales
were to non-U.S. customers, including 11% to customers in areas other than
Europe and Canada. Foreign operations are subject to, among other things,
currency exchange rate fluctuations and the Company's results of operations have
in the past been both favorably and unfavorably affected by fluctuations in
currency exchange rates. Effects of fluctuations in currency exchange rates on
the Company's results of operations are discussed in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Item 7A. "Quantitative and Qualitative Disclosures about Market Risk."
Political and economic uncertainties in certain of the countries in which
the Company operates may expose it to risk of loss. The Company does not believe
that there is currently any likelihood of material loss through political or
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economic instability, seizure, nationalization or similar event. The Company
cannot predict, however, whether events of this type in the future could have a
material effect on its operations. The Company's manufacturing and mining
operations are also subject to extensive and diverse environmental regulation in
each of the foreign countries in which they operate. See "Regulatory and
Environmental Matters."
Customer Base and Seasonality
The Company believes that neither its aggregate sales nor those of any of
its principal product groups are concentrated in or materially dependent upon
any single customer or small group of customers. Neither the Company's business
as a whole nor that of any of its principal product groups is seasonal to any
significant extent. Due in part to the increase in paint production in the
spring to meet the spring and summer painting season demand, TiO2 sales are
generally higher in the second and third calendar quarters than in the first and
fourth calendar quarters.
Employees
As of December 31, 1999, the Company employed approximately 2,500 persons,
excluding the joint venture employees, with approximately 100 employees in the
United States and approximately 2,400 at sites outside the United States. Hourly
employees in production facilities worldwide, including the TiO2 manufacturing
joint venture, are represented by a variety of labor unions, with labor
agreements having various expiration dates. The Company believes its labor
relations are good.
Regulatory and Environmental Matters
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 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.
The Company's U.S. manufacturing operations are governed by federal
environmental and worker health and safety laws and regulations, principally the
Resource Conservation and Recovery Act ("RCRA"), the Occupational Safety and
Health Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act,
the Toxic Substances Control Act and the Comprehensive Environmental Response,
Compensation and Liability Act, as amended by the Superfund Amendments and
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Reauthorization Act ("CERCLA"), as well as the state counterparts of these
statutes. The Company believes the Louisiana plant owned and operated by the
joint venture and a slurry facility owned by the Company are in substantial
compliance with applicable requirements of these laws or compliance orders
issued thereunder. The Company has no other U.S. plants. From time to time, the
Company's facilities may be subject to environmental regulatory enforcement
under such statutes. Resolution of such matters typically involves the
establishment of compliance programs. Occasionally, resolution may result in the
payment of penalties, but to date such penalties have not involved amounts
having a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
The Company's European and Canadian production facilities operate in an
environmental regulatory framework in which governmental authorities typically
are granted broad discretionary powers which allow them to issue operating
permits required for the plants to operate. The Company believes that all its
plants are in substantial compliance with applicable environmental laws.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union (the "EU"). Germany and Belgium are members of the EU and follow
its initiatives. Norway, although not a member, generally patterns its
environmental regulatory actions after the EU. The Company believes that Kronos
is in substantial compliance with agreements reached with European regulatory
authorities and with an EU directive to control the effluents produced by TiO2
production facilities.
The Company has a contract with a third party to treat certain of its
Leverkusen and Nordenham, Germany sulfate-process effluents. Either party may
terminate the contract after giving four years advance notice with regard to the
Nordenham plant. Under certain circumstances, Kronos may terminate the contract
after giving six months notice with respect to treatment of effluents from the
Leverkusen plant.
The Company expects to complete in 2000 an $8 million landfill expansion
for its Belgian plant which will provide the plant with twenty years of storage
space for neutralized chloride process solids. In order to reduce sulfur dioxide
emissions into the atmosphere consistent with applicable environmental
regulations, Kronos completed the installation of off-gas desulfurization
systems in 1997 at its Norwegian and German plants at a cost of $30 million.
The Company's capital expenditures related to its ongoing environmental
protection and improvement programs are currently expected to be approximately
$7 million in 2000 and $11 million in 2001.
The Company has been named as a defendant, potentially responsible party
("PRP"), or both, pursuant to CERCLA and similar state laws in approximately 75
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
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U.S. Environmental Protection Agency's ("U.S. EPA") Superfund National
Priorities List or similar state lists. See Item 3. "Legal Proceedings."
Principal Shareholders
At December 31, 1999, Valhi, Inc. and Tremont Corporation, each affiliates
of Contran Corporation, held approximately 59% and 20%, respectively, of NL's
outstanding common stock. At December 31, 1999, Contran and its subsidiaries
held approximately 93% of Valhi's outstanding common stock, and Valhi and other
entities related to Harold C. Simmons held approximately 55% of Tremont's
outstanding common stock. Substantially all of Contran's outstanding voting
stock is held either by trusts established for the benefit of certain children
and grandchildren of Mr. Simmons, of which Mr. Simmons is the sole trustee, or
by Mr. Simmons directly. Mr. Simmons, the Chairman of the Board of NL and the
Chairman of the Board and Chief Executive Officer of Contran and Valhi and a
director of Tremont, may be deemed to control each of such companies.
ITEM 2. PROPERTIES
Kronos currently operates four TiO2 facilities in Europe (Leverkusen and
Nordenham, Germany; Langerbrugge, Belgium; and Fredrikstad, Norway). In North
America, Kronos has a facility in Varennes, Quebec, Canada and, through the
manufacturing joint venture described above, a one-half interest in a plant in
Lake Charles, Louisiana. The Company also owns a slurry plant in Lake Charles,
Louisiana. The Company's Fredrikstad TiO2 plant has a lien on it that secures a
claim by Norwegian tax authorities, pending resolution of certain tax
litigation. See Notes 10 and 13 to the Consolidated Financial Statements.
Kronos' principal German operating subsidiary leases the land under its
Leverkusen TiO2 production facility pursuant to a lease expiring in 2050. The
Leverkusen facility, with about one-third of Kronos' current TiO2 production
capacity, is located within an extensive manufacturing complex owned by Bayer
AG. Kronos is the only unrelated party so situated. Under a separate supplies
and services agreement expiring in 2011, Bayer provides some raw materials,
auxiliary and operating materials and utilities services necessary to operate
the Leverkusen facility. Both the lease and the supplies and services agreement
restrict Kronos' ability to transfer ownership or use of the Leverkusen
facility.
All of Kronos' principal production facilities described above are owned,
except for the land under the Leverkusen facility. Kronos has a governmental
concession with an unlimited term to operate its ilmenite mine in Norway.
The Company has under lease various corporate and administrative offices
located in the U.S. and various sales offices located in the U.S., France,
Holland, Denmark and the U.K.
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ITEM 3. LEGAL PROCEEDINGS
Lead pigment litigation
The Company was formerly involved in the manufacture of lead pigments for
use in paint and lead-based paint. The Company has been named as a defendant or
third party defendant in various legal proceedings alleging that the Company and
other manufacturers are responsible for personal injury, property damage and
governmental expenditures allegedly associated with the use of lead pigments.
The Company is vigorously defending such litigation. Considering the Company's
previous involvement in the lead pigment and lead-based paint businesses, there
can be no assurance that additional litigation, similar to that described below,
will not be filed. 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 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. While no legislation or
regulations have been enacted to date which are expected to have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity, the imposition of market share liability or other
legislation could have such an effect. The Company has not accrued any amounts
for the pending lead pigment and lead-based paint litigation. There is no
assurance that the Company will not incur future liability in respect of this
pending litigation in view of the inherent uncertainties involved in court and
jury rulings in pending and possible future cases. However, based on, among
other things, the results of such litigation to date, the Company believes that
the pending lead pigment and lead-based paint litigation is without merit.
Liability that may result, if any, cannot reasonably be estimated.
In 1989 and 1990 the Housing Authority of New Orleans ("HANO") filed
third-party complaints for indemnity and/or contribution against the Company,
other alleged manufacturers of lead pigment (together with the Company, the
"pigment manufacturers") and the Lead Industries Association (the "LIA") in 14
actions commenced by residents of HANO units seeking compensatory and punitive
damages for injuries allegedly caused by lead pigment. The actions, which were
pending in the Civil District Court for the Parish of Orleans, State of
Louisiana, were dismissed by the district court in 1990. Subsequently, HANO
agreed to consolidate all the cases and appealed. In March 1992 the Louisiana
Court of Appeals, Fourth Circuit, dismissed HANO's appeal as untimely with
respect to three of these cases. With respect to the other cases included in the
appeal, the court of appeals reversed the lower court decision dismissing the
cases. These cases were remanded to the District Court for further proceedings.
In November 1994 the District Court granted defendants' motion for summary
judgment in one of the remaining cases and in June 1995 the District Court
granted defendants' motion for summary judgment in several of the remaining
cases. After such grant, only two cases remain pending and have been inactive
since 1992, Hall
-10-
v. HANO, et al. (No. 89-3552) and Allen V. HANO, et al. (No. 89-427) Civil
District Court for the Parish of Orleans, State of Louisiana.
In June 1989 a complaint was filed in the Supreme Court of the State of
New York, County of New York, against the pigment manufacturers and the LIA.
Plaintiffs seek damages, contribution and/or indemnity in an amount in excess of
$50 million for monitoring and abating alleged lead paint hazards in public and
private residential buildings, diagnosing and treating children allegedly
exposed to lead paint in city buildings, the costs of educating city residents
to the hazards of lead paint, and liability in personal injury actions against
the City and the Housing Authority based on alleged lead poisoning of city
residents (The City of New York, the New York City Housing Authority and the New
York City Health and Hospitals Corp. v. Lead Industries Association, Inc., et
al., No. 89-4617). In December 1991 the court granted the defendants' motion to
dismiss claims alleging negligence and strict liability and denied the remainder
of the motion. In January 1992 defendants appealed the denial. In May 1993 the
Appellate Division of the Supreme Court affirmed the denial of the motion to
dismiss plaintiffs' fraud, restitution and indemnification claims. In May 1994
the trial court granted the defendants' motion to dismiss the plaintiffs'
restitution and indemnification claims, and plaintiffs appealed. In June 1996
the Appellate Division reversed the trial court's dismissal of plaintiffs'
restitution and indemnification claims, reinstating those claims. In December
1998 plaintiffs moved for partial summary judgment on their claims of market
share, alternative liability, enterprise liability, and concert of action. In
February 1999 claims for plaintiffs New York City and New York City Health and
Hospital Corporation dismissed with prejudice all their claims and were no
longer parties to the case. Also in February 1999 the New York City Housing
Authority dismissed with prejudice all of its claims except for claims for
damages relating to two housing projects. In September 1999 the trial court
denied the plaintiffs' motions for summary judgment on market share and
conspiracy issues and denied defendants' April 1999 motion for summary judgment
on statute of limitations grounds. Plaintiffs have appealed the denial of their
motions. Discovery has resumed.
In August 1992 the Company was served with an amended complaint in
Jackson, et al. v. The Glidden Co., et al., Court of Common Pleas, Cuyahoga
County, Cleveland, Ohio (Case No. 236835). Plaintiffs seek compensatory and
punitive damages for personal injury caused by the ingestion of lead, and an
order directing defendants to abate lead-based paint in buildings. Plaintiffs
purport to represent a class of similarly situated persons throughout the State
of Ohio. The amended complaint asserts causes of action under theories of strict
liability, negligence per se, negligence, breach of express and implied
warranty, fraud, nuisance, restitution, and negligent infliction of emotional
distress. The complaint asserts several theories of liability including joint
and several, market share, enterprise and alternative liability. Plaintiffs
moved for class certification in October 1998, and all briefing on the issue was
completed in April 1999. No decision regarding class certification has been
issued by the trial court.
-11-
In November 1993 the Company was served with a complaint in Brenner, et
al. v. American Cyanamid, et al., (No. 12596-93) Supreme Court, State of New
York, Erie County alleging injuries to two children purportedly caused by lead
pigment. The complaint seeks $24 million in compensatory and $10 million in
punitive damages for alleged negligent failure to warn, strict liability, fraud
and misrepresentation, concert of action, civil conspiracy, enterprise
liability, market share liability, and alternative liability. In June 1998
defendants moved for partial summary judgment dismissing plaintiffs' market
share and alternative liability claims. In January 1999 the trial court granted
defendants' summary judgment motion to dismiss the alternative liability and
enterprise liability claims, but denied defendants' motion to dismiss the market
share liability claim. In May 1999 defendants appealed the denial of their
motion to dismiss the market share liability claim. The Fourth Department
intermediate appellate court in December 1999 reversed the trial court and
dismissed the market share claim. The case has been remanded to the trial court
for further proceedings on the remaining claims. Plaintiffs are seeking review
in the Court of Appeals.
In April 1997 the Company was served with a complaint in Parker v. NL
Industries, et al. (Circuit Court, Baltimore City, Maryland, No. 97085060
CC915). Plaintiff, now an adult, and his wife, seek compensatory and punitive
damages from the Company, another former manufacturer of lead paint and a local
paint retailer, based on claims of negligence, strict liability and fraud, for
plaintiff's alleged ingestion of lead paint as a child. In February 1998 the
Court dismissed the fraud claim. In July 1998 the Court granted the Company's
motion for summary judgment on all remaining claims. In September 1999 the
Special Court of Appeals reversed the grant of summary judgment to defendants.
The Court of Appeals denied review of this decision in December 1999. Trial has
been set for May 2000.
In December 1998 the Company was served with a complaint on behalf of four
children and their guardians in 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 purport to represent a class of all persons similarly
situated. The complaint alleges against the Company, the LIA, and other former
manufacturers of lead pigment various causes of action including negligence,
strict products liability, fraud and misrepresentation, concert of action, civil
conspiracy, enterprise liability, market share liability, breach of warranties,
nuisance, and violation of New York State's consumer protection act. The
complaint seeks damages for establishment of property abatement and medical
monitoring funds and compensatory damages for alleged injuries to plaintiffs. In
February 2000 the trial court granted defendants' motions to dismiss the product
defect, express warranty, nuisance and consumer fraud statute claims.
In April 1999 the Company was served with an amended complaint in Sweet,
et al. v. Sheahan, et al., (U.S. District Court, Northern District of New York,
Civil Action No. 97-CV-1666/LEK-DNH), adding the Company and other defendants to
a suit originally filed against plaintiffs' landlord. Plaintiffs, a parent and
child, allege injuries purportedly caused by lead pigment, and seek recovery of
actual and punitive damages from their landlord, alleged former manufacturers of
lead pigment, and the LIA, and purport to allege causes of action against the
-12-
former pigment manufacturers based on negligence, strict products liability,
fraud and misrepresentation, concert of action, civil conspiracy, and market
share liability. In November 1999 the trial court denied defendants' October
1999 motion arguing for dismissal due to absence of Federal jurisdiction. In
January 2000 the court certified for interlocutory review the issue of Federal
jurisdiction. Defendants have requested such review from the U.S. Court of
Appeals for the Second Circuit.
In September 1999 an amended complaint was filed in Thomas v. Lead
Industries Association, et al. (Circuit Court, Milwaukee, Wisconsin, Case No.
99-CV-6411) adding as defendants the Company and seven other companies alleged
to have manufactured lead products in paint to a suit originally filed against
plaintiff's landlords. Plaintiff, a minor, alleges injuries purportedly caused
by lead on the surfaces of premises in homes in which he resided. Plaintiff
seeks compensatory and punitive damages. Plaintiff alleges strict liability,
negligence, negligent misrepresentation and omissions, fraudulent
misrepresentations and omissions, concert of action, civil conspiracy, and
enterprise liability causes of action against the Company, seven other alleged
former manufacturers of lead products contained in paint, and the LIA. In
January 2000 the Company filed an answer denying all wrongdoing and liability,
and all manufacturer defendants filed a motion to dismiss the product defect
claim and to strike the demand for relief under the Wisconsin consumer
protection statute.
In October 1999 the Company was served with a complaint in State of Rhode
Island v. Lead Industries Association, et al. (Superior Court of Rhode Island,
No. 99-5226). Rhode Island, by and through its Attorney General, seeks
compensatory and punitive damages for medical, school, and public and private
building abatement expenses that the State alleges were caused by lead paint,
and for funding of a public education campaign and screening programs. Plaintiff
seeks judgments of joint and several liability against the Company, seven other
companies alleged to have manufactured lead products in paint, and the LIA.
Plaintiffs allege public nuisance, violation of the Rhode Island Unfair Trade
Practices and Consumer Protection Act, strict liability, negligence, negligent
misrepresentation and omissions, fraudulent misrepresentation and omissions,
civil conspiracy, unjust enrichment, indemnity, and equitable relief to protect
children. In January 2000 defendants moved to dismiss all claims. Plaintiffs'
response is not yet due.
In October 1999 the Company was served with a complaint in Cofield, et al.
v. Lead Industries Association, et al. (Circuit Court for Baltimore City,
Maryland, Case No. 24-C-99-004491). Plaintiffs, six homeowners, seek to
represent a class of all owners of nonrental residential properties in Maryland.
Plaintiffs seek compensatory and punitive damages for the existence of
lead-based paint in their homes, including funds for monitoring, detecting and
abating lead-based paint in those residences. Plaintiffs allege that the
Company, fourteen other companies alleged to have manufactured lead pigment,
paint and/or gasoline additives, the LIA, and the National Paint and Coatings
Association are jointly and severally liable for alleged negligent product
design, negligent failure to warn, supplier negligence, strict
liability/defective design, strict liability/failure to warn, nuisance,
indemnification, fraud and deceit,
-13-
conspiracy, concert of action, aiding and abetting, and enterprise liability.
Plaintiffs seek damages in excess of $20,000 per household. In October 1999
defendants removed the case to Maryland federal court. In February 2000
defendants moved to dismiss the design defect, fraud and deceit, indemnification
and nuisance claims.
In October 1999 the Company was served with a complaint in Smith, et al.
v. Lead Industries Association, et al. (Circuit Court for Baltimore City,
Maryland, Case No. 24-C-99-004490). Plaintiffs, six minors, each seek
compensatory damages of $5 million and punitive damages of $10 million.
Plaintiffs allege that the Company, fourteen other companies alleged to have
manufactured lead pigment, paint and/or gasoline additives, the LIA, and the
National Paint and Coatings Association are jointly and severally liable for
alleged negligent product design, negligent failure to warn, supplier
negligence, fraud and deceit, conspiracy, concert of action, aiding and
abetting, strict liability/ failure to warn, and strict liability/defective
design. In October 1999 defendants removed the case to Maryland federal court
and in November 1999 the case was remanded to state court. In February 2000 the
Company answered the complaint and denied all wrongdoing and liability, and all
defendants filed motions to dismiss the product defect and fraud and deceit
claims.
In February 2000 the Company was served with a complaint in 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). The City of
St. Louis seeks compensatory and punitive damages for its expenses discovering
and abating lead, detecting lead poisoning and providing medical care,
educational programs for City residents, and the costs of educating children
suffering injuries due to lead exposure. Plaintiff seeks judgments of joint and
several liability against the Company, eight other companies alleged to have
manufactured lead products for paint, and the LIA. Plaintiff alleges claims of
public nuisance, product liability, negligence, negligent misrepresentation,
fraudulent misrepresentation, civil conspiracy, unjust enrichment, and
indemnity. The Company intends to deny all allegations of wrongdoing and
liability and to defend the case vigorously.
The Company believes that the foregoing lead pigment actions are without
merit and intends to continue to deny all allegations of wrongdoing and
liability and to defend such actions vigorously.
The Company has filed actions seeking declaratory judgment and other
relief against various insurance carriers with respect to costs of defense and
indemnity coverage for certain of its environmental and lead pigment litigation.
NL Industries, Inc. v. Commercial Union Insurance Cos., et al., Nos. 90-2124,
- -2125 (HLS) (District Court of New Jersey). The action relating to lead pigment
litigation defense costs filed in May 1990 against Commercial Union Insurance
Company ("Commercial Union") seeks to recover defense costs incurred in the City
of New York lead pigment case and two other cases which have since been resolved
in the Company's favor. In July 1991 the court granted the Company's motion for
summary judgment and ordered Commercial Union to pay the Company's reasonable
defense costs for such cases. In June 1992 the Company filed an amended
-14-
complaint in the United States District Court for the District of New Jersey
against Commercial Union seeking to recover costs incurred in defending four
additional lead pigment cases which have since been resolved in the Company's
favor. In August 1993 the court granted the Company's motion for summary
judgment and ordered Commercial Union to pay the reasonable costs of defending
those cases. In July 1994 the court entered judgment on the order requiring
Commercial Union to pay previously incurred Company costs in defending those
cases. In September 1995 the U.S. Court of Appeals for the Third Circuit
reversed and remanded for further consideration the decision by the trial court
that Commercial Union was obligated to pay the Company's reasonable defense
costs in certain of the lead pigment cases. The trial court had made its
decision applying New Jersey law; the appeals court concluded that New York and
not New Jersey law applied and remanded the case to the trial court for a
determination under New York law. On remand from the Court of Appeals, the trial
court in April 1996 granted the Company's motion for summary judgment, finding
that Commercial Union had a duty to defend the Company in the four lead paint
cases which were the subject of the Company's second amended complaint. The
court also issued a partial ruling on Commercial Union's motion for summary
judgment in which it sought allocation of defense costs and contribution from
the Company and two other insurance carriers in connection with the three lead
paint actions on which the court had granted the Company summary judgment in
1991. The court ruled that Commercial Union is entitled to receive such
contribution from the Company and the two carriers, but reserved ruling with
respect to the relative contributions to be made by each of the parties,
including contributions by the Company that may be required with respect to
periods in which it was self-insured and contributions from one carrier which
were reinsured by a former subsidiary of the Company, the reinsurance costs of
which the Company may ultimately be required to bear. In June 1997 the Company
reached a settlement in principle with its insurers regarding allocation of
defense costs in the lead pigment cases in which reimbursement of defense costs
had been sought.
Other than granting motions for summary judgment brought by two excess
liability insurance carriers, which contended that their policies contained
absolute pollution exclusion language, and certain summary judgment motions
regarding policy periods and ruling regarding choice of law issues, the Court
has not made any final rulings on defense costs or indemnity coverage with
respect to the Company's pending environmental litigation. Nor has the Court
made any final ruling on indemnity coverage in the lead pigment litigation. No
trial dates have been set. Other than rulings to date, the issue of whether
insurance coverage for defense costs or indemnity or both will be found to exist
depends upon a variety of factors, and there can be no assurance that such
insurance coverage will exist in other cases. The Company has not considered any
potential insurance recoveries for lead pigment or environmental litigation in
determining related accruals.
Environmental matters and litigation
The Company has been named as a defendant, PRP, or both, pursuant to
CERCLA and similar state laws in approximately 75 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
-15-
their predecessors, 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 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 extent of CERCLA liability cannot accurately be determined until the
Remedial Investigation and Feasibility Study ("RIFS") is complete, the U.S. EPA
issues a record of decision and costs are allocated among PRPs. The extent of
liability under analogous state cleanup statutes and for common law equivalents
are subject to similar uncertainties. The Company believes it has provided
adequate accruals for reasonably estimable costs for CERCLA matters and other
environmental liabilities. At December 31, 1999, the Company had accrued $112
million for those environmental matters which are reasonably estimable. The
Company determines the amount of accrual on a quarterly basis by analyzing and
estimating the range of possible costs to the Company. Such costs include, among
other things, expenditures for remedial investigations, monitoring, managing,
studies, certain legal fees, cleanup, removal and remediation. It is not
possible to estimate the range of costs for certain sites. The Company has
estimated that the upper end of the range of reasonably possible costs to the
Company for sites for which it is possible to estimate costs is approximately
$150 million. The Company's estimate of such liability has not been discounted
to present value and the Company has not recognized any potential insurance
recoveries. No assurance can be given that actual costs will not exceed either
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. The imposition
of more stringent standards or requirements under environmental laws or
regulations, new developments or changes with respect to site cleanup costs or
allocation of such costs among 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. Furthermore, there can be no assurance
that additional environmental matters will not arise in the future. More
detailed descriptions of certain legal proceedings relating to environmental
matters are set forth below.
In July 1991 the United States filed an action in the U.S. District Court
for the Southern District of Illinois against the Company and others (United
States of America v. NL Industries, Inc., et al., Civ. No. 91-CV 00578) with
respect to the Granite City, Illinois lead smelter formerly owned by the
Company. The complaint seeks injunctive relief to compel the defendants to
comply with an administrative order issued pursuant to CERCLA, and fines and
treble damages for the alleged failure to comply with the order. The Company and
the other parties did not implement the order, believing that the remedy
selected by the U.S. EPA was invalid, arbitrary, capricious and was not selected
in accordance with law. The complaint also seeks recovery of past costs and a
declaration that the defendants are liable for future costs. Although the action
was filed against the Company and ten other defendants, there are 330 other PRPs
who have been
-16-
notified by the U.S. EPA. Some of those notified were also respondents to the
administrative order. In February 1992 the court entered a case management order
directing that the remedy issues be tried before the liability aspects are
presented. In September 1995 the U.S. EPA released its amended decision
selecting cleanup remedies for the Granite City site. The Company presently is
challenging portions of the U.S. EPA's selection of the remedy. In September
1997 the U.S. EPA informed the Company that past and future cleanup costs are
estimated to total approximately $63.5 million. In 1999 the U.S. EPA and certain
other PRPs entered into a consent decree settling their liability at the site
for approximately 50% of the site costs. The Company and the U.S. EPA reached an
agreement in principle in 1999 to settle the Company's liability at the site for
$31.5 million. The Company and the U.S. EPA are negotiating a consent decree
embodying the terms of this agreement in principle.
At the Pedricktown, New Jersey lead smelter site formerly owned by the
Company the U.S. EPA has divided the site into two operable units. Operable unit
one addresses contaminated ground water, surface water, soils and stream
sediments. In July 1994 the U.S. EPA issued the record of decision for operable
unit one. The U.S. EPA estimates the cost to complete operable unit one is $18.7
million. In May 1996 certain PRPs, but not the Company, entered into an
administrative consent order with the U.S. EPA to perform the remedial design
phase of operable unit one. The U.S. EPA issued an order with respect to
operable unit two in March 1992 to the Company and 30 other PRPs directing
immediate removal activities including the cleanup of waste, surface water and
building surfaces. The Company has complied with the order, and the work with
respect to operable unit two is completed. The Company has paid $2.5 million,
which represents approximately 50% of operable unit two costs. In June 1998 the
Company entered into a consent decree with the U.S. EPA and other PRPs to
perform the remedial action phase of operable unit one. In addition, the Company
reached an agreement with certain PRPs with respect to the Company's liability
at the site to settle this matter within previously accrued amounts.
Having completed the RIFS at the Company's former Portland, Oregon lead
smelter site, the Company conducted predesign studies to explore the viability
of the U.S. EPA's selected remedy pursuant to a June 1989 consent decree
captioned U.S. v. NL Industries, Inc., Civ. No. 89-408, United States District
Court for the District of Oregon. In May 1997 the U.S. EPA issued an Amended
Record of Decision ("ARD") for the soils operable unit changing portions of the
cleanup remedy selected. The ARD requires construction of an onsite containment
facility estimated to cost between $11.5 million and $13.5 million, including
capital costs and operating and maintenance costs. The Company and certain other
PRPs have entered into a consent decree to perform the remedial action in the
ARD. In November 1991 Gould, Inc., the current owner of the site, filed an
action, Gould, Inc. v. NL Industries, Inc., No. 91-1091, United States District
Court for the District of Oregon, against the Company for damages for alleged
fraud in the sale of the smelter, rescission of the sale, past CERCLA response
costs and a declaratory judgment allocating future response costs and punitive
damages. In February 1998 the Company reached an agreement settling the
litigation by agreeing to pay a portion of future costs, which are estimated to
be within previously accrued amounts. The capital construction for the
remediation is expected to be completed during 2000.
-17-
In 1999 the Company and other PRPs entered into an administrative consent
order with the U.S. EPA requiring the performance of a RIFS at two subsites in
Cherokee County, Kansas, where the Company and others formerly mined lead and
zinc. A former subsidiary of the Company mined at the Baxter Springs subsite,
where it is the largest viable PRP. In August 1997 the U.S. EPA issued the
record of decision for the Baxter Springs and Treece subsites. The U.S. EPA has
estimated that the selected remedy will cost an aggregate of approximately $7.1
million for both subsites ($5.4 million for the Baxter Springs subsite). In 1999
the Company entered into a consent decree with the U.S. EPA resolving its
liability at the Baxter Springs subsite, and has reached an agreement in
principle with the other PRPs with respect to allocation of site costs. In
addition, the Company and other PRPs are performing an investigation in four
additional subsites in Cherokee County.
In 1996 the U.S. EPA ordered the Company to perform a removal action at a
formerly owned facility in Chicago, Illinois. The Company is complying with the
order and has completed the on-site work at the facility. Offsite contamination
is being investigated.
Residents in the vicinity of the Company's former Philadelphia lead
chemicals plant commenced a class action allegedly comprised of over 7,500
individuals seeking medical monitoring and damages allegedly caused by emissions
from the plant. Wagner, et al. v. Anzon, Inc. and NL Industries, Inc., No. 87-
4420, Court of Common Pleas, Philadelphia County. The complaint sought
compensatory and punitive damages from the Company and the current owner of the
plant, and alleged causes of action for, among other things, negligence, strict
liability, and nuisance. A class was certified to include persons who resided,
owned or rented property, or who work or have worked within up to approximately
three-quarters of a mile from the plant from 1960 through the present. The
Company answered the complaint, denying liability. In December 1994 the jury
returned a verdict in favor of the Company. Plaintiffs appealed to the
Pennsylvania Superior Court and in September 1996 the Superior Court affirmed
the judgment in favor of the Company. In December 1996 plaintiffs filed a
petition for allowance of appeal to the Pennsylvania Supreme Court, which was
declined. Residents also filed consolidated actions in the United States
District Court for the Eastern District of Pennsylvania, Shinozaki v. Anzon,
Inc. and Wagner and Antczak v. Anzon and NL Industries, Inc. Nos. 87-3441,
87-3502, 87-4137 and 87- 5150. The consolidated action is a putative class
action seeking CERCLA response costs, including cleanup and medical monitoring,
declaratory and injunctive relief and civil penalties for alleged violations of
the RCRA, and also asserting pendent common law claims for strict liability,
trespass, nuisance and punitive damages. The court dismissed the common law
claims without prejudice, dismissed two of the three RCRA claims as against the
Company with prejudice, and stayed the case pending the outcome of the state
court litigation.
At a municipal and industrial waste disposal site in Batavia, New York,
the Company and approximately 75 others have been identified as PRPs. The U.S.
EPA has divided the site into two operable units. Pursuant to an administrative
consent order entered into with the U.S. EPA, the Company conducted a RIFS for
operable unit one, the closure of the industrial waste disposal section of the
landfill. The Company's RIFS costs were approximately $2 million. In June 1995
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the U.S. EPA issued the record of decision for operable unit one, which is
estimated by the U.S. EPA to cost approximately $17.3 million. In September 1995
the U.S. EPA and certain PRPs entered into an administrative order on consent
for the remedial design phase of the remedy for operable unit one and the design
phase is proceeding. The Company and other PRPs entered into an interim cost
sharing arrangement for this phase of work. The Company and the other PRPs have
completed the work comprising operable unit two (the extension of the municipal
water supply) with the exception of annual operation and maintenance. The U.S.
EPA alleges it has incurred approximately $4 million in past costs. The Company
and other PRPs have concluded a nonbinding allocation process, as a result of
which the Company was assigned 30% of future site costs. The Company and other
PRPs currently are negotiating a consent decree based on this allocation.
See Item 1. "Business - Regulatory and Environmental Matters."
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. Various of these actions remain pending.
In March 1997 the Company was served with a complaint in Ernest Hughes, et
al. v. Owens-Corning Fiberglass, Corporation, et al., No. 97-C-051, filed in the
Fifth Judicial District Court of Cass County, Texas, on behalf of approximately
4,000 plaintiffs and their spouses alleging injury due to exposure to asbestos
and seeking compensatory and punitive damages. The Company has filed an answer
denying the material allegations. The case has been stayed, and the plaintiffs
have refiled their cases in Ohio. The Company is a defendant in various asbestos
cases pending in Ohio on behalf of approximately 2,000 personal injury
claimants.
In February 1999 the Company was served with a complaint in Cosey, et al.
v. Bullard, et al., No. 95-0069, filed in the Circuit Court of Jefferson County,
Mississippi, on behalf of approximately 1,600 plaintiffs alleging injury due to
exposure to asbestos and silica and seeking compensatory and punitive damages.
The case was removed to federal court and has been transferred to the eastern
district of Pennsylvania for consolidated proceedings. The Company has filed an
answer denying the material allegations of the complaint.
The Company is also involved in various other environmental, contractual,
product liability and other claims and disputes incidental to its present and
former businesses, and the disposition of past properties and former businesses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1999.
-19-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
NL's common stock is listed and traded on the New York Stock Exchange and
the Pacific Exchange under the symbol "NL." As of March 16, 2000, there were
approximately 7,000 holders of record of NL common stock. The following table
sets forth the high and low sales prices for NL common stock on the New York
Stock Exchange ("NYSE") Composite Tape. On March 16, 2000, the closing price of
NL common stock according to the NYSE Composite Tape was $16-1/4.
Dividends
High Low Declared
--------- --------- ---------
Year ended December 31, 1998:
First quarter $ 19-3/8 $13-11/16 $ -
Second quarter 23 17 .03
Third quarter 27-1/16 19 .03
Fourth quarter 19-3/8 12-3/4 .03
Year ended December 31, 1999:
First quarter $14-15/16 $ 8-3/4 $ .035
Second quarter 13-9/16 9-1/16 .035
Third quarter 13-5/16 11-1/8 .035
Fourth quarter 15-7/16 9-3/4 .035
Year ended December 31, 2000:
First quarter thru March 16, 2000 $ 16-1/4 $13-13/16 $ .15
The Company's Senior Notes generally limit the ability of the Company to
pay dividends to 50% of consolidated net income, as defined in the indenture
governing the Senior Notes, since October 1993. At December 31, 1999, $114
million was available for payment of dividends and acquisition of treasury
shares. The Company reinstated a regular quarterly dividend in June 1998 and
subsequently paid three quarterly $.03 per share cash dividends in 1998. In
February 1999 the Company increased the regular quarterly dividend to $.035 per
share and subsequently paid four quarterly $.035 per share cash dividends in
1999. On February 9, 2000, the Company's Board of Directors increased the
regular quarterly dividend to $.15 per share and declared a dividend to
shareholders of record as of March 16, 2000 to be paid on March 31, 2000. The
declaration and payment of future dividends is discretionary, and the amount, if
any, will be dependent upon the Company's results of operations, financial
condition, contractual restrictions and other factors deemed relevant by the
Company's Board of Directors.
During 1999 the Company's Board of Directors authorized the purchase of up
to 1.5 million shares of NL's common stock over an unspecified period of time,
to be held as treasury shares available for general corporate purposes. Pursuant
to this authorization, the Company purchased 552,000 shares of its common stock
in the open market at an aggregate cost of $7.2 million in 1999 and 575,000
shares at an aggregate cost of $8.3 million in January and February of 2000.
-20-
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with the Consolidated Financial Statements and Notes thereto, and
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations." Certain amounts have been reclassified to conform with the
current year's consolidated financial statement presentation.
Years ended December 31,
-------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(In millions, except per share amounts)
INCOME STATEMENT DATA:
Net sales $ 894.1 $ 851.2 $ 837.2 $ 894.7 $ 908.4
Operating income 161.2 71.6 82.5 171.2 145.7
Income (loss) from continuing
operations 66.5 (11.7) (29.9) 89.9 159.8
Net income (loss) 85.6 10.8 (9.5) 366.7 159.8
Earnings per share:
Basic:
Income (loss) from
continuing operations $ 1.30 $ (.23) $ (.58) $ 1.75 $ 3.09
Net income (loss) 1.68 .21 (.19) 7.13 3.09
Diluted:
Income (loss) from
continuing operations $ 1.29 $ (.23) $ (.58) $ 1.73 $ 3.08
Net income (loss) 1.66 .21 (.19) 7.05 3.08
Cash dividends $ - $ .30 $ - $ .09 $ .14
BALANCE SHEET DATA at
year end:
Cash, cash equivalents,
current marketable
securities and current
restricted cash equivalents $ 141.3 $ 114.1 $ 106.1 $ 163.1 $ 151.8
Current assets 551.1 500.2 454.9 546.8 506.4
Total assets 1,271.7 1,221.4 1,098.5 1,155.6 1,056.2
Current liabilities 302.4 290.3 276.7 310.7 264.8
Long-term debt including
current maturities 783.7 829.0 744.2 357.6 244.5
Shareholders' equity
(deficit) (209.4) (203.5) (222.3) 152.3 271.1
CASH FLOW DATA:
Operating activities $ 71.6 $ 16.5 $ 89.2 $ 45.1 $ 108.3
Investing activities (56.7) (68.4) (11.1) 417.3 (38.4)
Financing activities (3.3) 26.6 (82.6) (396.2) (88.0)
OTHER NON-GAAP FINANCIAL
DATA:
EBITDA (1) $ 170.3 $ 90.7 $ 67.6 $ 187.4 $ 162.5
-21-
Years ended December 31,
-----------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(In millions, except per share amounts)
OTHER DATA:
Net debt at year end (2) $681.6 $740.7 $652.0 $230.9 $149.8
Interest expense, net (3) 69.5 64.6 63.0 43.1 30.3
Cash interest expense,
net (4) 50.9 44.2 39.9 24.8 28.6
Capital expenditures 60.7 64.2 28.2 22.4 35.6
TiO2 sales volumes (metric
tons in thousands) 366 388 427 408 427
Average TiO2 selling
price index (1983=100) 152 138 133 153 152
(1) EBITDA, as presented, represents operating income less corporate expense,
net, plus depreciation, depletion and amortization. EBITDA is presented as
a supplement to the Company's operating income and cash flow from
operations because the Company believes that EBITDA is a widely accepted
financial indicator of cash flows and the ability to service debt. EBITDA
should not be considered as an alternative to, or more meaningful than,
operating income or net income determined under generally accepted
accounting principles ("GAAP") as an indicator of the Company's operating
performance, or cash flows from operating, investing and financing
activities determined under GAAP as a measure of liquidity. EBITDA is not
intended to depict funds available for reinvestment or other discretionary
uses, as the Company has significant debt requirements and other
commitments. Investors should consider certain factors in evaluating the
Company's EBITDA, including interest expense, income taxes, noncash income
and expense items, changes in assets and liabilities, capital
expenditures, investments in joint ventures and other items included in
GAAP cash flows as well as future debt repayment requirements and other
commitments, including those described in Notes 10, 13 and 17 to the
Consolidated Financial Statements. The Company believes that the trend of
its EBITDA is consistent with the trend of its GAAP operating income,
except in 1997 when EBITDA decreased and operating income increased from
1996 amounts due to a $30 million noncash charge related to the Company's
adoption of SOP 96-1, "Environmental Remediation Liabilities." See
"Management's Discussion and Analysis" for a discussion of operating
income and cash flows during the last three years and the Company's
outlook. EBITDA as a measure of a company's performance may not be
comparable to other companies, unless substantially all companies and
analysts determine EBITDA as computed and presented herein.
(2) Net debt represents notes payable and long-term debt less cash, cash
equivalents, current marketable securities and current restricted cash
equivalents.
(3) Interest expense, net represents interest expense less general corporate
interest and dividend income.
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(4) Cash interest expense, net represents interest expense, net less noncash
interest expense (deferred interest expense on the Senior Secured Discount
Notes and amortization of deferred financing costs).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
The Company's continuing operations are conducted by Kronos in the TiO2
business segment. As discussed below, average TiO2 selling prices significantly
increased in 1998 and slightly decreased in 1999 compared to the prior year.
Kronos' operating income increased $88.7 million in 1998 and declined $25.5
million in 1999. Gross profit margins were 22% in 1997, 31% in 1998 and 27% in
1999.
Many factors influence TiO2 pricing levels, including industry capacity,
worldwide demand growth and customer inventory levels and purchasing decisions.
Kronos believes that the TiO2 industry has long-term growth potential, as
discussed in "Item 1. Business - Industry" and "- Competition."
Net sales and operating income
Years ended December 31, % Change
-------------------------- ----------------
1997 1998 1999 1998-97 1999-98
---- ---- ---- ------- -------
(In millions)
Net sales ....................... $837.2 $894.7 $908.4 +7% +2%
Operating income ................ $82.5 $171.2 $145.7 +107% -15%
Percent change in TiO2:
Sales volume .................. -4% +5%
Average selling prices
(in billing currencies)........ +16% -1%
Kronos' operating income in 1999 was lower than 1998, primarily due to
lower average TiO2 selling prices and lower production volume, partially offset
by higher sales volume and a $5.3 million currency exchange transaction gain
related to certain of the Company's short-term intercompany cross-border
financings. Kronos' operating income for 1998 was higher than 1997 due to 16%
higher average TiO2 selling prices, partially offset by lower sales volume and
$12.9 million of 1997 income from refunds of German trade capital taxes,
discussed below.
In billing currency terms, Kronos' 1999 average TiO2 selling prices were
1% lower than in 1998 with higher prices in North America offset by lower prices
in Europe and export markets. European prices at the end of the year (when
expressed in U.S. dollars at year-end exchange rates) were 9% below prices
available in the U.S. as a result of the strong U.S. dollar against major
-23-
European currencies. Pigment prices declined during the first three quarters of
1999, but increased in the fourth quarter as a result of price increases
announced by all major producers effective during the fourth quarter. Such price
increases began to be phased in during the fourth quarter of 1999 and continue
to be implemented in the first quarter of 2000. Kronos recently announced a
price increase in Europe effective April 1, 2000. The successful implementation
of the price increase will depend on market conditions. Average selling prices
in the fourth quarter of 1999 were 3% lower than the fourth quarter of 1998, 1%
lower than the average selling price for full-year 1999 and 1% higher than the
third quarter of 1999. Selling prices at the end of the fourth quarter were 1%
higher than the average for the quarter. Average TiO2 selling prices in 1998
were 16% higher than 1997 with strong increases in all major regions.
Industry-wide demand was strong throughout 1997 and the first half of
1998, before moderating in the second half of 1998 and early 1999. Demand in the
second half of 1999 was stronger than comparable periods in both 1998 and 1997
as a result of, among other things, customers buying in advance of anticipated
price increases. Kronos' sales volume in the fourth quarter of 1999 increased
21% from the fourth quarter of 1998. Sales volume of 427,000 metric tons of TiO2
in 1999 was 5% higher than 1998 with growth in all major regions. Sales volume
in 1998 was 4% lower than 1997, reflecting lower sales in Asia and Latin
America. Approximately one-half of Kronos' 1999 TiO2 sales, by volume, were
attributable to markets in Europe with approximately 37% attributable to North
America, and the balance to other regions.
Kronos expects industry demand in 2000 will be relatively unchanged from
1999, depending primarily upon global economic conditions, and accordingly, the
Company believes 2000 sales volume will approximate 1999 levels. Kronos produced
at or near full capacity in 1997 and 1998, but curtailed production during the
first quarter of 1999 to manage inventory levels. As a result, Kronos reduced
finished goods inventories by approximately 15,000 metric tons. Kronos'
production volume in 1999 was 5% lower than 1998 and capacity utilization in
1999 was 93% compared to full capacity in 1998. Kronos' production volume in
2000 is expected to closely match expected 2000 sales volume. Kronos believes
average TiO2 selling prices in 2000 should continue an upward trend as the
Company expects to continue to phase-in announced price increases during 2000.
Should demand in 2000 remain strong, additional price increases could be
announced later in 2000. The Company believes that average 2000 prices will
exceed average 1999 prices. As a result of anticipated higher average prices and
its continued focus on controlling costs, Kronos expects its 2000 operating
income will be higher than 1999. The extent of this improvement will be
determined primarily by the magnitude of realized price increases.
Excluding the effects of foreign currency translation, which decreased the
Company's expenses in both 1998 and 1999, Kronos' cost of sales in 1999 was
higher than 1998 due to higher sales volume and higher unit costs, which
resulted primarily from lower production levels. Kronos' cost of sales in 1998
was lower than 1997 primarily due to lower sales volume. Cost of sales, as a
percentage of net sales, increased in 1999 primarily due to the impact on net
sales of lower average selling prices and higher unit costs, and decreased in
1998 primarily due to the impact on net sales of increased average selling
prices.
-24-
Excluding the effects of foreign currency translation, which decreased the
Company's expenses in both 1998 and 1999, Kronos' selling, general and
administrative expenses, in absolute dollar amounts, increased in 1999 from the
previous year due to higher distribution expenses associated with higher 1999
sales volumes, while 1998 expenses, in absolute dollar amounts, were lower than
1997 as a result of lower distribution expenses related to lower sales volume.
Selling, general and administrative expenses, as a percentage of net sales, were
14% in 1997 and 12% in both 1998 and 1999.
The $12.9 million of German trade capital tax refunds received in 1997
relates to years prior to 1997 and includes interest. The German tax authorities
were required to remit refunds based on (i) court decisions which reduced the
trade capital tax base and (ii) prior agreements between the Company and the
German tax authorities regarding payment of disputed taxes.
The Company has substantial operations and assets located outside the
United States (principally Germany, Norway, Belgium and Canada). The U.S. dollar
translated value of the Company's foreign sales and operating costs is subject
to currency exchange rate fluctuations which may impact reported earnings and
may affect the comparability of period-to-period revenues and expenses. A
significant amount of the Company's sales are denominated in currencies other
than the U.S. dollar (61% in 1999), principally the euro, other major European
currencies and the Canadian dollar. Certain purchases of raw materials,
primarily titanium-containing feedstocks, are denominated in U.S. dollars, while
labor and other production costs are primarily denominated in local currencies.
Fluctuations in the value of the U.S. dollar relative to other currencies
decreased sales by $24 million and $15 million during 1998 and 1999,
respectively, compared to the year-earlier period. Excluding the 1999 $5.3
million gain described above, fluctuations in the value of the U.S. dollar
relative to other currencies similarly impacted the Company's operating expenses
and the net impact of currency exchange rate fluctuations on operating income
comparisons was not significant in 1998 or 1999.
General corporate
The following table sets forth certain information regarding general
corporate income (expense).
Years ended December 31, Change
------------------------------ ----------------
1997 1998 1999 1998-97 1999-98
-------- ------- ------- ------- -------
(In millions)
Securities earnings ..... $ 5.4 $ 14.9 $ 6.6 $ 9.5 $ (8.3)
Corporate expenses, net . (49.8) (18.3) (16.9) 31.5 1.4
Interest expense ........ (65.8) (58.1) (36.9) 7.7 21.2
-------- ------- ------- ------- -------
$ (110.2) $ (61.5) $ (47.2) $ 48.7 $ 14.3
======== ======= ======= ======= =======
Securities earnings fluctuate in part based upon the amount of funds
invested and yields thereon. Average funds invested in 1999 were lower than 1998
primarily due to the repayment of certain of the Company's debt in the last half
of 1998. Average funds invested in 1998 were higher than 1997 primarily due to
-25-
the net proceeds from the sale of Rheox in January 1998. The Company expects
security earnings in 2000 will be lower than 1999 due to lower average levels of
funds available for investment due to debt reduction made during 1999 and higher
projected expenditures in 2000 for dividends, environmental remediation and
other corporate purposes.
Corporate expenses, net in 1999 were lower than 1998, primarily due to
$3.0 million of expenses in 1998 related to the unsuccessful acquisition of
certain TiO2 businesses and assets. Corporate expenses, net in 1998 were lower
than 1997, primarily due to the $30 million noncash charge taken in 1997 related
to the Company's adoption of SOP 96-1, "Environmental Remediation Liabilities."
See Note 2 to the Consolidated Financial Statements. This charge is included in
selling, general and administrative expense for 1997 in the Company's
Consolidated Statements of Income. Excluding this charge, 1998 corporate
expenses, net were slightly lower than 1997 due to the recognition of $3.7
million of income in 1998 related to the straight-line, five-year amortization
of $20 million of proceeds received in conjunction with the sale of Rheox
attributable to a five-year agreement by the Company not to compete in the
rheological products business, partially offset by the aforementioned $3.0
million expense in 1998. In 1999 the Company recorded $4 million of income
related to the amortization of this deferred income.
Interest expense
Interest expense declined in 1999 and 1998 compared to the respective
prior years due to prepayment of the Deutsche mark-denominated bank credit
facility in 1999 and prepayments of outstanding indebtedness in 1998,
principally the Senior Secured Discount Notes, the joint venture term loan and a
portion of Kronos' DM-denominated debt. Interest expense in 1998 declined
compared to 1997 principally due to prepayments of this outstanding
indebtedness. Assuming no significant change in interest rates, interest expense
in 2000 is expected to be lower compared to 1999 due to lower levels of
outstanding indebtedness and lower margins on variable rate debt.
Provision for income taxes
The principal reasons for the difference between the U.S. federal
statutory income tax rates and the Company's effective income tax rates are
explained in Note 13 to the Consolidated Financial Statements. The Company's
operations are conducted on a worldwide basis and the geographic mix of income
can significantly impact the Company's effective income tax rate. In 1998 and
1999 the Company's effective tax rate varied from the normally expected rate due
predominantly to the recognition of certain deductible tax attributes which
previously did not meet the "more-likely-than-not" recognition criteria. Also in
1998 and 1999, the Company recognized certain one-time benefits related to
German tax settlements. In 1997 the geographic mix of income, including losses
in certain jurisdictions for which no current refund was available and
recognition of a deferred tax asset was not considered appropriate, contributed
to the Company's effective tax rate varying from a normally expected rate.
-26-
The Company's contingencies related to income taxes at December 31, 1999
are discussed in "Liquidity and Capital Resources."
Other
Minority interest in 1999 relates to the Company's majority-owned
environmental management subsidiary, NL Environmental Management Services, Inc.
("EMS"). EMS was established in 1998, at which time EMS contractually assumed
certain of the Company's environmental liabilities. EMS' earnings are based, in
part, upon its ability to favorably resolve these liabilities on an aggregate
basis. The shareholders of EMS, other than the Company, actively manage the
environmental liabilities and share in 39% of EMS' cumulative earnings. The
Company continues to consolidate EMS and provides accruals for the reasonably
estimable costs for the settlement of EMS' environmental liabilities, as
discussed below.
Discontinued operations in 1998 represent the Company's former specialty
chemicals operations which were sold in January 1998. The extraordinary item in
1998 resulted from early extinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows provided by operating, investing and
financing activities for each of the past three years are presented below.
Years ended December 31,
-------------------------
1997 1998 1999
------ ------ ------
(In millions)
Net cash provided (used) by:
Operating activities:
Before changes in assets and liabilities
and Rheox, net ............................... $38.1 $137.0 $115.7
Changes in assets and liabilities and
Rheox, net ................................... 51.1 (91.9) (7.4)
------ ------ ------
89.2 45.1 108.3
Investing activities ............................ (11.1) 417.3 (38.4)
Financing activities ............................ (82.6) (396.2) (88.0)
------ ------ ------
Net cash provided (used) by operating,
investing and financing activities ............... $(4.5) $66.2 $(18.1)
====== ====== ======
Operating cash flows
The TiO2 industry is cyclical and changes in economic conditions within
the industry significantly impact the earnings and operating cash flows of the
Company. Cash flow from operations, before changes in assets and liabilities and
Rheox, net, declined in 1999 from the prior year primarily due to lower
operating income, partially offset by $13.7 million of cash distributions from
the Company's TiO2 manufacturing joint venture, and improved in 1998 from the
prior year primarily due to higher operating income.
Changes in the Company's assets and liabilities (excluding the effect of
currency translation and Rheox, net) provided cash in 1997 and used cash in 1998
-27-
and 1999 primarily due to reductions in inventory levels in 1997, increases in
inventory levels in 1998 and increases in receivable levels in 1999 due to high
year-end demand. Rheox, net in 1998, primarily income tax payments made as a
result of the gain on sale of Rheox, significantly decreased cash flows from
operating activities.
Investing cash flows
The Company's capital expenditures were $28 million, $22 million and $36
million in 1997, 1998 and 1999. The increase in capital expenditures in 1999 is
partially due to $6 million of expenditures for a landfill expansion for the
Company's Belgian facility. Capital expenditures in 1997 included $7 million
related to a 20,000 metric ton debottlenecking project. Capital expenditures of
the manufacturing joint venture and the Company's discontinued operations are
not included in the Company's capital expenditures.
The Company's capital expenditures during the past three years include an
aggregate of $22 million ($10 million in 1999) for the Company's ongoing
environmental protection and compliance programs. The Company's estimated 2000
and 2001 capital expenditures are $37 million and $35 million, respectively, and
include $7 million and $11 million, respectively, in the area of environmental
protection and compliance.
The Company sold the net assets of its Rheox specialty chemicals business
to Elementis plc in January 1998 for $465 million cash (before fees and
expenses), including $20 million attributable to a five-year agreement by the
Company not to compete in the rheological products business. The Company
recognized an after-tax gain of approximately $286 million on the sale of this
business segment.
Financing cash flows
The Company prepaid its DM 107 million ($60 million when paid) term loan
in full in the first quarter of 1999, principally by drawing DM 100 million ($56
million when drawn) on its DM revolving credit facility. In the second and third
quarters of 1999, the Company repaid DM 60 million ($33 million when paid) of
the DM revolving credit facility with cash provided from operations. The
revolver's outstanding balance of DM 120 million was further reduced in October
1999 by DM 20 million ($11 million when paid). In December 1999 the Company
borrowed $26 million of short-term unsecured euro-denominated bank debt and used
the proceeds along with cash on hand to prepay the remaining balance of DM 100
million ($52 million when paid) under its Deutsche mark-denominated bank credit
agreement. The DM facility was then terminated, which released collateral and
eliminated certain restrictive loan covenants.
Borrowings in 1998 included DM 35 million ($19 million when borrowed)
under the Company's short-term non-U.S. credit facilities and DM 20 million ($11
million when borrowed) under the Company's DM revolving credit facility.
-28-
Repayments in 1998 included DM 40 million ($23 million when paid) of the DM
revolving credit facility and DM 81 million ($44 million when paid) of its DM
term loan. In 1997 the Company prepaid DM 207 million ($127 million when paid)
of its DM term loan, repaid DM 43 million ($26 million when paid) of its DM
revolving credit facility, repaid $15 million of its joint venture term loan and
repaid DM 15 million ($9 million when paid) of its short-term DM-denominated
notes payable. The Company's borrowings and principal repayments excludes
activity related to the Company's discontinued operations.
With a majority of the $380 million after-tax net proceeds from the sale
of Rheox, the Company (i) prepaid $118 million of the Rheox term loan (included
as Rheox, net on the Company's Consolidated Statements of Cash Flows), (ii)
prepaid $42 million of Kronos' tranche of the LPC joint venture term loan, (iii)
made $65 million of open-market purchases of the Company's 13% Senior Secured
Discount Notes at prices ranging from $101.25 to $105.19 per $100 of their
principal amounts, (iv) purchased $6 million of the Senior Secured Notes and $61
thousand of the Senior Secured Discount Notes at a price of $100 and $96.03 per
$100 of their principal amounts, respectively, pursuant to a June 1998 pro rata
tender offer to Note holders as required under the terms of the indenture, and
(v) redeemed $121 million of 13% Senior Secured Discount Notes outstanding on
October 15, 1998 at the redemption price of 106% of the principal amount, in
accordance with the terms of the Senior Secured Discount Notes indenture.
Dividends paid during 1998 and 1999 totaled $4.6 million and $7.2 million,
respectively. No dividends were paid in 1997. At December 31, 1999, the Company
had $114 million available for payment of dividends and acquisition of treasury
shares pursuant to the Senior Notes indenture. On February 9, 2000, the
Company's Board of Directors increased the regular quarterly dividend from $.035
per share to $.15 per share and declared a dividend to shareholders of record as
of March 16, 2000 to be paid on March 31, 2000.
During 1999 the Company's Board of Directors authorized the purchase of up
to 1.5 million shares of NL's common stock over an unspecified period of time,
to be held as treasury shares available for general corporate purposes. Pursuant
to this authorization, the Company purchased 552,000 shares of its common stock
in the open market at an aggregate cost of $7.2 million in 1999 and 575,000
shares at an aggregate cost of $8.3 million in January and February of 2000. In
March 2000 the Company purchased 500,000 shares of Tremont's common stock in the
open market for $10 million. Tremont owns 10.2 million shares, or 20%, of NL's
outstanding common stock.
In 1998 as a result of the settlement of a shareholder derivative lawsuit
on behalf of the Company, Valhi transferred $14.4 million in cash to the
Company, and the Company paid plaintiffs' attorneys' fees and expenses of $3.2
million.
Cash, cash equivalents, restricted cash and borrowing availability
At December 31, 1999, the Company had cash and cash equivalents
aggregating $134 million (54% held by non-U.S. subsidiaries) and $18 million of
restricted cash equivalents. At December 31, 1999, the Company's subsidiaries
had $19 million available for borrowing under non-U.S. credit facilities. At
December 31, 1999, the Company had complied with all financial covenants
governing its debt agreements.
-29-
Based upon the Company's expectations for the TiO2 industry and
anticipated demands on the Company's cash resources as discussed herein, the
Company expects to have sufficient liquidity to meet its near-term obligations
including operations, capital expenditures and debt service. To the extent that
actual developments differ from Company's expectations, the Company's liquidity
could be adversely affected.
Income tax contingencies
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 non-income tax related items and interest.
Certain significant German tax contingencies aggregating an estimated DM 188
million ($100 million when resolved) through 1998 were resolved in the Company's
favor in 1999. See Note 13 to the Consolidated Financial Statements.
During 1999 the German government enacted certain income tax law changes
that were retroactively effective as of January 1, 1999. Based on these changes,
the Company's ongoing current (cash) income tax rate in Germany increased in
1999.
During 1997 the Company received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($6 million at December
31, 1999) relating to 1994. The Company appealed this assessment and, in
February 2000, the Fredrikstad City Court ruled in favor of the Norwegian tax
authorities on the primary issue, but asserted that such tax authorities'
assessment was overstated by NOK 34 million ($4 million at December 31, 1999).
The tax authorities' response to the Court's assertion is expected by the end of
March 2000. The Company is considering its appeals options. During 1998 the
Company was informed by the Norwegian tax authorities that additional tax
deficiencies of NOK 39 million ($5 million at December 31, 1999) will likely be
proposed for the year 1996 on an issue similar to the aforementioned 1994 case.
The outcome of the 1996 case is dependent on the eventual outcome of the 1994
case. Although the Company believes that it will ultimately prevail, the Company
has granted a lien for the 1994 tax assessment on its Fredrikstad, Norway TiO2
plant in favor of the Norwegian tax authorities and will be required to grant
security on the 1996 assessment when received.
No assurance can be given that the Company's tax matters will be favorably
resolved due to the inherent uncertainties involved in court 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 December 31, 1999, the Company had net deferred tax liabilities of $97
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 $234
million at December 31, 1999, principally related to Germany, partially
-30-
offsetting deferred tax assets which the Company believes do not currently meet
the "more-likely-than-not" recognition criteria.
Environmental matters and litigation
In addition to the chemicals business conducted through Kronos, the
Company also has certain interests and associated liabilities relating to
certain discontinued or divested businesses, and holdings of marketable equity
securities including securities issued by Valhi and other Contran subsidiaries.
The Company has been named as a defendant, PRP, or both, in a number of
legal proceedings associated with environmental matters, including waste
disposal sites, mining locations and facilities currently or previously owned,
operated or used by the Company, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. On a quarterly basis,
the Company evaluates the potential range of its liability at sites where it has
been named as a PRP or defendant, including sites for which EMS has
contractually assumed the Company's obligation. The Company believes it has
adequate accruals for reasonably estimable costs of such matters, but the
Company's ultimate liability may be affected by a number of factors, including
changes in remedial alternatives and costs and the allocation of such costs
among PRPs. The Company is also a defendant in a number of legal proceedings
seeking damages for personal injury and property damage arising out of the sale
of lead pigments and lead-based paints. There is no assurance that the Company
will not incur future liability in respect of this pending litigation in view of
the inherent uncertainties involved in court and jury rulings in pending and
possible future cases. However, based on, among other things, the results of
such litigation to date, the Company believes that the pending lead pigment and
paint litigation is without merit. The Company has not accrued any amounts for
such pending litigation. Liability that may result, if any, cannot reasonably be
estimated. 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. There can be no assurance that additional matters of these types
will not arise in the future. See Item 3. "Legal Proceedings" and Note 17 to the
Consolidated Financial Statements.
Foreign operations
As discussed above, the Company has substantial operations located outside
the United States for which the functional currency is not the U.S. dollar. As a
result, the reported amount of the Company's assets and liabilities related to
its non-U.S. operations, and therefore the Company's consolidated net assets,
will fluctuate based upon changes in currency exchange rates. At December 31,
1999, the Company had substantial net assets denominated in the Canadian dollar
and Norwegian kroner, partially offset by a euro-denominated net liability.
Year 2000 Issue
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, certain computer programs that
-31-
had date-sensitive software may have recognized a date using "00" as the year
1900 rather than the year 2000. This could have resulted in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in normal business activities. This is generally referred to as the "Year 2000
Issue."
Over the past few years, the Company spent time, effort and money in order
to address the Year 2000 Issue in an attempt to ensure that computer systems,
both information technology ("IT") systems and non-IT systems involving embedded
chip technology, and software applications would function properly after
December 31, 1999. This process included, among other things, the identification
of all systems and applications potentially affected by the Year 2000 Issue, the
determination of which systems and applications required remediation and the
completion thereof and the testing of systems and applications following
remediation for Year 2000 compliance. In addition, the Company requested
confirmation from its major software and hardware vendors, suppliers and
customers that they were developing and implementing plans to become, or that
they had become, Year 2000 compliant. Contingency plans were also developed to
address potential Year 2000 Issues related to business interruption in the event
one or more of the Company's internal systems or the systems of third parties
upon which it relies ultimately proved not to be Year 2000 compliant. As part of
these contingency plans, the Company temporarily idled its manufacturing
facilities shortly before the end of 1999 as an added safeguard against
unexpected loss of utility service; all of such facilities resumed production
shortly after midnight of year-end 1999. After all of the efforts described
above, the Company believed that its key systems were Year 2000 compliant prior
to December 31, 1999.
As part of its normal business operations, the Company had already
installed upgraded information systems at certain locations which addressed the
Year 2000 Issue. Excluding the cost of the ongoing system upgrades, the amount
spent to address the Year 2000 Issue was $2 million ($1.1 million in 1999).
To date in 2000, none of the Company's manufacturing facilities have
suffered any downtime due to noncompliant systems, nor have any significant
problems associated with the Year 2000 Issue been identified in any systems. The
Company will continue to monitor its major systems in order to ensure that such
systems continue to be Year 2000 compliant. However, based primarily upon
success to date, the Company does not currently expect to experience any
significant Year 2000 Issues.
Euro currency
Beginning January 1, 1999, eleven of the fifteen members of the European
Union ("EU"), including Germany, Belgium, the Netherlands and France, adopted a
new European currency unit (the "euro") as their common legal currency.
Following the introduction of the euro, the participating countries' national
currencies remain legal tender as denominations of the euro from January 1, 1999
through January 1, 2002, and the exchange rates between the euro and such
national currency units are fixed.
-32-
The Company conducts substantial operations in Europe. The functional
currency of the Company's German, Belgian, Dutch and French operations will
convert to the euro from their respective national currencies over a two-year
period beginning in 1999. The Company has assessed and evaluated the impact of
the euro conversion on its business and made the necessary system conversions.
The euro conversion may impact the Company's operations including, among other
things, changes in product pricing decisions necessitated by cross-border price
transparencies. Such changes in product pricing decisions could impact both
selling prices and purchasing costs and, consequently, favorably or unfavorably
impact results of operations, financial condition or liquidity.
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 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; issue
additional securities; 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. 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.
See Note 10 to the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
The Company is exposed to market risk from changes in currency exchange
rates, interest rates and equity security prices. In the past, the Company has
periodically entered into interest rate swaps or other types of contracts in
order to manage a portion of its interest rate market risk. Otherwise, the
Company has not generally entered into forward or option contracts to manage
such market risks, nor has the Company entered into any such contract or other
type of derivative instrument for trading purposes. The Company was not a party
to any forward or derivative option contracts related to currency exchange
rates, interest rates or equity security prices at December 31, 1998 or 1999.
See Notes 2 and 8 to the Consolidated Financial Statements.
Interest rates
The Company is exposed to market risk from changes in interest rates,
primarily related to indebtedness.
-33-
At December 31, 1999, the Company's aggregate indebtedness was split
between 81% of fixed-rate instruments and 19% of variable-rate borrowings (1998
- - 62% fixed-rate and 38% variable-rate). The large percentage of fixed-rate debt
instruments minimizes earnings volatility which would result from changes in
interest rates. The following table presents principal amounts and weighted
average interest rates, by contractual maturity dates, for the Company's
aggregate indebtedness at December 31, 1998 and 1999. At December 31, 1998 and
1999, all outstanding fixed-rate indebtedness was denominated in U.S. dollars,
and all outstanding variable-rate indebtedness was denominated in euros in 1999
and Deutsche marks in 1998. Information shown below for such euro-denominated
indebtedness is presented in its U.S. dollar equivalent at December 31, 1999
using that date's exchange rate of .99 euro per U.S. dollar (1998 - 1.66 DM per
U.S. dollar).
Fair Value
Contractual Maturity Date December 31,
----------------------------------------- ------------
December 31, 1999: N/A 2000 2001 2002 2003 Total 1999
--- ---- ---- ---- ---- ----- ----
(In millions)
Fixed-rate debt (U.S.
dollar-denominated):
Principal amount $ - $ - $ - $244.0 $244.0 $253.2
Weighted-average
interest rate - - - 11.75% 11.75%
Variable rate debt (euro-
denominated):
Principal amount $57.1 $ - $ - $ - $ 57.1 $ 57.1
Weighted-average interest
rate 3.6% - - - 3.6%
December 31, 1998: 1999 2000 2001 2002 2003 Total 1998
---- ---- ---- ---- ---- ----- ------
(In millions)
Fixed-rate debt (U.S.
dollar-denominated):
Principal amount $ - $ - $ - $ - $244.0 $244.0 $253.1
Weighted-average interest
rate - - - - 11.75% 11.75%
Variable rate debt (DM-
denominated):
Principal amount $100.9 $48.2 $ - $ - $ - $149.1 $149.1
Weighted-average interest
rate 5.4% 6.1% - - - 5.6%
Currency exchange rates
The Company is exposed to market risk arising from changes in currency
exchange rates as a result of manufacturing and selling its products worldwide.
Earnings are primarily affected by fluctuations in the value of the U.S. dollar
relative to the European Union euro, Canadian dollar, Norwegian krone and the
United Kingdom pound sterling. See Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for a discussion of risks and
uncertainties related to the conversion of certain of these currencies to the
euro.
As described above, at December 31, 1999, the Company had $58 million of
indebtedness denominated in euros (1998 - $149 million outstanding denominated
in Deutsche marks.) The potential increase in the U.S. dollar equivalent of the
-34-
principal amount outstanding resulting from a hypothetical 10% adverse change in
exchange rates would be approximately $6 million (1998 - $15 million).
Marketable equity security prices
The Company is exposed to market risk due to changes in prices of the
marketable securities which are owned. The fair value of such equity securities
at December 31, 1998 and 1999 was $18 million and $15 million, respectively. The
potential change in the aggregate fair value of these investments, assuming a
10% change in prices, would be $1.8 million and $1.5 million, respectively.
Other
The Company believes there are certain shortcomings in the sensitivity
analyses presented above, which analyses are required under the Securities and
Exchange Commission's regulations. For example, the hypothetical effect of
changes in interest rates discussed above ignores the potential effect on other
variables which affect the Company's results of operations and cash flows, such
as demand for the Company's products, sales volumes and selling prices and
operating expenses. Contrary to the above assumptions, changes in interest rates
rarely result in simultaneous parallel shifts along the yield curve.
Accordingly, the amounts presented above are not necessarily an accurate
reflection of the potential losses the Company would incur assuming the
hypothetical changes in market prices were actually to occur.
The above discussion and estimated sensitivity analysis amounts include
forward-looking statements of market risk which assume hypothetical changes in
market prices. Actual future market conditions will likely differ materially
from such assumptions. Accordingly, such forward-looking statements should not
be considered to be projections by the Company of future events, gains or
losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of
the fiscal year covered by this report (the "NL Proxy Statement").
-35-
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
NL Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
NL Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
NL Proxy Statement. See also Note 16 to the Consolidated Financial Statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
The consolidated financial statements and schedules listed by the
Registrant on the accompanying Index of Financial Statements and
Schedules (see page F-1) are filed as part of this Annual Report.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended December 31, 1999 and
thereafter through the date of this report.
October 20, 1999 - reported Items 5 and 7.
October 28, 1999 - reported Items 5 and 7.
November 19, 1999 - reported Items 5 and 7.
January 26, 2000 - reported Items 5 and 7.
February 9, 2000 - reported Items 5 and 7.
(c) Exhibits
Included as exhibits are the items listed in the Exhibit Index.
NL will furnish a copy of any of the exhibits listed below upon
payment of $4.00 per exhibit to cover the costs to NL of
furnishing the exhibits. Instruments defining the rights of
holders of debt issues which do not exceed 10% of consolidated
total assets will be furnished to the Securities and Exchange
Commission upon request.
-36-
Item No. Exhibit Index
3.1 By-Laws, as amended on June 28, 1990 - incorporated by reference to
Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1990.
3.2 Certificate of Amended and Restated Certificate of Incorporation
dated June 28, 1990 - incorporated by reference to Exhibit 1 to the
Registrant's Proxy Statement on Schedule 14A for the annual meeting
held on June 28, 1990.
4.1 Registration Rights Agreement dated October 30, 1991, by and between
the Registrant and Tremont Corporation - incorporated by reference
to Exhibit 4.3 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.
4.2 Indenture dated October 20, 1993 governing the Registrant's 11.75%
Senior Secured Notes due 2003, including form of Senior Note
incorporated by reference to Exhibit 4.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
4.3 Senior Mirror Notes dated October 20, 1993 - incorporated by
reference to Exhibit 4.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
4.4 Senior Note Subsidiary Pledge Agreement dated October 20, 1993
between Registrant and Kronos, Inc. - incorporated by reference to
Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993.
4.5 Third Party Pledge and Intercreditor Agreement dated October 20,
1993 between Registrant, Chase Manhattan Bank (National Association)
and Chemical Bank - incorporated by reference to Exhibit 4.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.1 Lease Contract dated June 21, 1952, between Farbenfabrieken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung
(German language version and English translation thereof)
incorporated by reference to Exhibit 10.14 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1985.
10.2 Contract on Supplies and Services among Bayer AG, Kronos Titan-GmbH
and Kronos International, Inc. dated June 30, 1995 (English
translation from German language document) - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995.
10.3** Richards Bay Slag Sales Agreement dated May 1, 1995 between Richards
Bay Iron and Titanium (Proprietary) Limited and Kronos, Inc. -
-37-
incorporated by reference to Exhibit 10.17 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995.
10.4** Amendment to Richards Bay Slag Sales Agreement dated May 1, 1999
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc.
10.5 Formation Agreement dated as of October 18, 1993 among Tioxide
Americas Inc., Kronos Louisiana, Inc. and Louisiana Pigment Company,
L.P. - incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.6 Joint Venture Agreement dated as of October 18, 1993 between Tioxide
Americas Inc. and Kronos Louisiana, Inc. - incorporated by reference
to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993.
10.7 Kronos Offtake Agreement dated as of October 18, 1993 between Kronos
Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated
by reference to Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
10.8 Amendment No. 1 to Kronos Offtake Agreement dated as of December 20,
1995 between Kronos Louisiana, Inc. and Louisiana Pigment Company,
L.P. - incorporated by reference to Exhibit 10.22 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.9 Tioxide Americas Offtake Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Louisiana Pigment Company, L.P. -
incorporated by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.10 Amendment No. 1 to Tioxide Americas Offtake Agreement dated as of
December 20, 1995 between Tioxide Americas Inc. and Louisiana
Pigment Company, L.P. - incorporated by reference to Exhibit 10.24
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.11 TCI/KCI Output Purchase Agreement dated as of October 18, 1993
between Tioxide Canada Inc. and Kronos Canada, Inc. - incorporated
by reference to Exhibit 10.6 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
10.12 TAI/KLA Output Purchase Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Kronos Louisiana, Inc.
incorporated by reference to Exhibit 10.7 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
-38-
10.13 Master Technology Exchange Agreement dated as of October 18, 1993
among Kronos, Inc., Kronos Louisiana, Inc., Kronos International,
Inc., Tioxide Group Limited and Tioxide Group Services Limited
incorporated by reference to Exhibit 10.8 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.14 Parents' Undertaking dated as of October 18, 1993 between ICI
American Holdings Inc. and Kronos, Inc. - incorporated by reference
to Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993.
10.15 Allocation Agreement dated as of October 18, 1993 between Tioxide
Americas Inc., ICI American Holdings, Inc., Kronos, Inc. and Kronos
Louisiana, Inc. - incorporated by reference to Exhibit 10.10 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.16 Form of Director's Indemnity Agreement between NL and the
independent members of the Board of Directors of NL - incorporated
by reference to Exhibit 10.20 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1987.
10.17* 1989 Long Term Performance Incentive Plan of NL Industries, Inc. -
incorporated by reference to Exhibit B to the Registrant's Proxy
Statement on Schedule 14A for the annual meeting of shareholders
held on May 8, 1996.
10.18* NL Industries, Inc. Variable Compensation Plan - incorporated by
reference to Exhibit A to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held on May 8,
1996.
10.19* NL Industries, Inc. Retirement Savings Plan, as amended and restated
effective April 1, 1996 - incorporated by reference to Exhibit 10.38
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996.
10.20* NL Industries, Inc. 1992 Non-Employee Director Stock Option Plan, as
adopted by the Board of Directors on February 13, 1992 incorporated
by reference to Appendix A to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held April 30,
1992.
10.21* NL Industries, Inc. 1998 Long-Term Incentive Plan - incorporated by
reference to Appendix A to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held on May 6,
1998.
10.22 Intercorporate Services Agreement by and between Valhi, Inc. and the
Registrant effective as of January 1, 1999 - incorporated by
-39-
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999.
10.23 Intercorporate Services Agreement by and between Contran Corporation
and the Registrant effective as of January 1, 1999 - incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999.
10.24 Intercorporate Services Agreement by and between Tremont Corporation
and the Registrant effective as of January 1, 1999 - incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999.
10.25 Intercorporate Service Agreement by and between Titanium Metals
Corporation and the Registrant effective January 1, 1999
incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
10.26 Intercorporate Services Agreement by and between CompX International
Inc. and the Registrant effective as of January 1, 1999 incorporated
by reference to Exhibit 10.1 to the Registrant's Quarterly Report of
Form 10-Q for the quarter ended June 30, 1999.
10.27 Insurance Sharing Agreement, effective January 1, 1990, by and
between the Registrant, NL Insurance, Ltd. (an indirect subsidiary
of Tremont Corporation) and Baroid Corporation - incorporated by
reference to Exhibit 10.20 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1991.
10.28* Executive severance agreement effective as of March 9, 1995 by and
between the Registrant and Lawrence A. Wigdor - incorporated by
reference to Exhibit 10.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996.
10.29* Executive severance agreement effective as of July 24, 1996 by and
between the Registrant and J. Landis Martin - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997.
10.30* Supplemental Executive Retirement Plan for Executives and Officers
of NL Industries, Inc. effective as of January 1, 1991 incorporated
by reference to Exhibit 10.26 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992.
10.31* Agreement to Defer Bonus Payment dated February 20, 1998 between the
Registrant and Lawrence A. Wigdor and related trust agreement
incorporated by reference to Exhibit 10.48 to the Registrant's
Annual Report of Form 10-K for the year ended December 31, 1997.
10.32* Agreement to Defer Bonus Payment dated February 20, 1998 between the
Registrant and J. Landis Martin and related trust agreement -
-40-
incorporated by reference to Exhibit 10.49 to the Registrant's
Annual Report of Form 10-K for the year ended December 31, 1997.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule for the year ended December 31, 1999.
99.1 Annual Report of NL Industries, Inc. Retirement Savings Plan (Form
11-K) to be filed under Form 10-K/A to the Registrant's Annual
Report on Form 10-K within 180 days after December 31, 1999.
* Management contract, compensatory plan or arrangement.
** Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
-41-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By /s/ J. Landis Martin
--------------------------------
J. Landis Martin, March 16, 2000
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
/s/ J. Landis Martin /s/ Harold C. Simmons
- -------------------------------------- -----------------------------------------
J. Landis Martin, March 16, 2000 Harold C. Simmons, March 16, 2000
Director, President and Chairman of the Board
Chief Executive Officer
/s/ Glenn R. Simmons /s/ Joseph S. Compofelice
- -------------------------------------- -----------------------------------------
Glenn R. Simmons, March 16, 2000 Joseph S. Compofelice, March 16, 2000
Director Director
/s/ Kenneth R. Peak /s/ Dr. Lawrence A. Wigdor
- -------------------------------------- ----------------------------------------
Kenneth R. Peak, March 16, 2000 Dr. Lawrence A. Wigdor, March 16, 2000
Director Director, President and Chief
Executive Officer of Kronos
/s/ Thomas P. Stafford /s/ Susan E. Alderton
- -------------------------------------- ----------------------------------------
Thomas P. Stafford, March 16, 2000 Susan E. Alderton, March 16, 2000
Director Vice President and Chief Financial
Officer
(Principal Financial Officer)
/s/ Robert D. Hardy
- --------------------------------------
Robert D. Hardy, March 16, 2000
Vice President and Controller
(Principal Accounting Officer)
-42-
NL INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
Items 8, 14(a) and 14(d)
Index of Financial Statements and Schedules
Financial Statements Pages
Report of Independent Accountants F-2
Consolidated Balance Sheets - December 31, 1998 and 1999 F-3 / F-4
Consolidated Statements of Income - Years ended
December 31, 1997, 1998 and 1999 F-5 / F-6
Consolidated Statements of Comprehensive Income - Years
ended December 31, 1997, 1998 and 1999 F-7
Consolidated Statements of Shareholders' Equity - Years
ended December 31, 1997, 1998 and 1999 F-8
Consolidated Statements of Cash Flows - Years ended
December 31, 1997, 1998 and 1999 F-9 / F-11
Notes to Consolidated Financial Statements F-12 / F-42
Financial Statement Schedules
Report of Independent Accountants S-1
Schedule I - Condensed Financial Information of Registrant S-2 / S-7
Schedule II - Valuation and qualifying accounts S-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of NL Industries, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, shareholders'
equity and cash flows present fairly, in all material respects, the consolidated
financial position of NL Industries, Inc. at December 31, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for environmental remediation costs in
1997 in accordance with Statement of Position No. 96-1.
PricewaterhouseCoopers LLP
Houston, Texas
February 29, 2000
F-2
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
(In thousands, except per share data)
ASSETS
1998 1999
---------- ----------
Current assets:
Cash and cash equivalents ........................ $ 154,953 $ 134,224
Restricted cash equivalents ...................... 8,164 17,565
Accounts and notes receivable, less
allowance of $2,377 and $2,075 .................. 133,769 143,768
Receivable from affiliates ....................... 692 747
Refundable income taxes .......................... 15,919 4,473
Inventories ...................................... 228,611 191,184
Prepaid expenses ................................. 2,724 2,492
Deferred income taxes ............................ 1,955 11,974
---------- ----------
Total current assets ......................... 546,787 506,427
---------- ----------
Other assets:
Marketable securities ............................ 17,580 15,055
Investment in TiO2 manufacturing joint venture ... 171,202 157,552
Prepaid pension cost ............................. 23,990 23,271
Other ............................................ 13,927 5,410
---------- ----------
Total other assets ........................... 226,699 201,288
---------- ----------
Property and equipment:
Land ............................................. 19,626 23,678
Buildings ........................................ 144,228 133,682
Machinery and equipment .......................... 586,400 550,842
Mining properties ................................ 84,015 71,952
Construction in progress ......................... 4,385 6,805
---------- ----------
838,654 786,959
Less accumulated depreciation and depletion ...... 456,495 438,501
---------- ----------
Net property and equipment ................... 382,159 348,458
---------- ----------
$1,155,645 $1,056,173
========== ==========
F-3
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1998 and 1999
(In thousands, except per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1999
----------- -----------
Current liabilities:
Notes payable .................................. $ 36,391 $ 57,076
Current maturities of long-term debt ........... 64,826 212
Accounts payable and accrued liabilities ....... 187,661 190,360
Payable to affiliates .......................... 11,317 11,240
Income taxes ................................... 9,224 5,605
Deferred income taxes .......................... 1,236 326
----------- -----------
Total current liabilities .................. 310,655 264,819
----------- -----------
Noncurrent liabilities:
Long-term debt ................................. 292,803 244,266
Deferred income taxes .......................... 196,180 108,226
Accrued pension cost ........................... 44,649 32,946
Accrued postretirement benefits cost ........... 41,659 37,105
Other .......................................... 116,732 93,821
----------- -----------
Total noncurrent liabilities ............... 692,023 516,364
----------- -----------
Minority interest ................................ 633 3,903
----------- -----------
Shareholders' equity:
Preferred stock - 5,000 shares authorized,
no shares issued or outstanding ............... -- --
Common stock - $.125 par value; 150,000
shares authorized; 66,839 shares issued ....... 8,355 8,355
Additional paid-in capital ..................... 774,288 774,304
Retained earnings (deficit) .................... (133,379) 19,150
Accumulated other comprehensive income (loss):
Currency translation ......................... (133,440) (160,022)
Marketable securities ........................ 4,498 2,857
Pension liabilities .......................... (3,187) (1,756)
Treasury stock, at cost (15,028 and 15,555
shares) ....................................... (364,801) (371,801)
----------- -----------
Total shareholders' equity ................. 152,334 271,087
----------- -----------
$ 1,155,645 $ 1,056,173
=========== ===========
Commitments and contingencies (Notes 13 and 17)
See accompanying notes to consolidated financial statements.
F-4
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1998 and 1999
(In thousands, except per share data)
1997 1998 1999
--------- --------- ---------
Revenues and other income:
Net sales .............................. $ 837,240 $ 894,724 $ 908,387
Other, net ............................. 19,367 25,453 23,646
--------- --------- ---------
856,607 920,177 932,033
--------- --------- ---------
Costs and expenses:
Cost of sales .......................... 649,945 618,447 662,315
Selling, general and administrative .... 168,592 133,970 134,342
Interest ............................... 65,759 58,070 36,884
--------- --------- ---------
884,296 810,487 833,541
--------- --------- ---------
Income (loss) from continuing
operations before income
taxes and minority interest ......... (27,689) 109,690 98,492
Income tax benefit (expense) ............. (2,244) (19,788) 64,601
--------- --------- ---------
Income (loss) from continuing
operations before minority
interest ............................ (29,933) 89,902 163,093
Minority interest ........................ (58) 40 3,322
--------- --------- ---------
Income (loss) from continuing
operations .......................... (29,875) 89,862 159,771
Discontinued operations .................. 20,402 287,396 --
Extraordinary item - early
extinguishment of debt, net of tax
benefit of $5,698 ....................... -- (10,580) --
--------- --------- ---------
Net income (loss) .................... $ (9,473) $ 366,678 $ 159,771
========= ========= =========
F-5
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
Years ended December 31, 1997, 1998 and 1999
(In thousands, except per share data)
1997 1998 1999
---------- ---------- ----------
Basic earnings per share:
Continuing operations ............... $ (.58) $ 1.75 $ 3.09
Discontinued operations ............. .39 5.59 --
Extraordinary item .................. -- (.21) --
---------- ---------- ----------
Net income (loss) ................. $ (.19) $ 7.13 $ 3.09
========== ========== ==========
Diluted earnings per share:
Continuing operations ............... $ (.58) $ 1.73 $ 3.08
Discontinued operations ............. .39 5.52 --
Extraordinary item .................. -- (.20) --
---------- ---------- ----------
Net income (loss) ................. $ (.19) $ 7.05 $ 3.08
========== ========== ==========
Shares used in the calculation of
earnings per share:
Basic ............................... 51,152 51,460 51,774
Dilutive impact of stock options .... -- 540 93
---------- ---------- ----------
Diluted ............................. 51,152 52,000 51,867
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-6
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
--------- --------- ---------
Net income (loss) ............................ $ (9,473) $ 366,678 $ 159,771
--------- --------- ---------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment ........... 3,019 201 (1,641)
Minimum pension liabilities
adjustment ................................ 1,822 (3,187) 1,431
Currency translation adjustment ............ (15,181) 370 (26,582)
--------- --------- ---------
Total other comprehensive loss ........... (10,340) (2,616) (26,792)
--------- --------- ---------
Comprehensive income (loss) ................ $ (19,813) $ 364,062 $ 132,979
========= ========= =========
See accompanying notes to consolidated financial statements.
F-7
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1998 and 1999
(In thousands)
Accumulated other
comprehensive income (loss)
Additional Retained -----------------------------------
Common paid-in earnings Currency Pension Marketable Treasury
stock capital (deficit) translation liabilities securities stock Total
------ ---------- ----------- ----------- ----------- ---------- -------- ---------
Balance at December 31, 1996 ..... $8,355 $759,281 $(485,948) $(118,629) $(1,822) $ 1,278 $(365,996) $(203,481)
Net loss ......................... -- -- (9,473) -- -- -- -- (9,473)
Other comprehensive income (loss),
net of tax ...................... -- -- -- (15,181) 1,822 3,019 -- (10,340)
Treasury stock reissued .......... -- -- -- -- -- -- 1,025 1,025
------ -------- --------- --------- ------- -------- --------- ---------
Balance at December 31, 1997 ..... 8,355 759,281 (495,421) (133,810) -- 4,297 (364,971) (222,269)
Net income ....................... -- -- 366,678 -- -- -- -- 366,678
Other comprehensive income (loss),
net of tax ...................... -- -- -- 370 (3,187) 201 -- (2,616)
Common dividends declared -
$.09 per share .................. -- -- (4,636) -- -- -- -- (4,636)
Cash received upon settlement of
shareholder derivative lawsuit,
net of $3,198 in legal fees and
expenses ........................ -- 11,211 -- -- -- -- -- 11,211
Tax benefit of stock options
exercised ....................... -- 3,796 -- -- -- -- -- 3,796
Treasury stock reissued .......... -- -- -- -- -- -- 170 170
------ -------- --------- --------- ------- -------- --------- ---------
Balance at December 31, 1998 ..... 8,355 774,288 (133,379) (133,440) (3,187) 4,498 (364,801) 152,334
Net income ....................... -- -- 159,771 -- -- -- -- 159,771
Other comprehensive income (loss),
net of tax ...................... -- -- -- (26,582) 1,431 (1,641) -- (26,792)
Common dividends declared -
$.14 per share .................. -- -- (7,242) -- -- -- -- (7,242)
Tax benefit of stock options
exercised ....................... -- 16 -- -- -- -- -- 16
Treasury stock:
Acquired ....................... -- -- -- -- -- -- (7,210) (7,210)
Reissued ....................... -- -- -- -- -- -- 210 210
------ -------- --------- --------- ------- -------- --------- ---------
Balance at December 31, 1999 ..... $8,355 $774,304 $ 19,150 $(160,022) $(1,756) $ 2,857 $(371,801) $ 271,087
====== ======== ========= ========= ======= ======== ========= =========
See accompanying notes to consolidated financial statements.
F-8
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) ..................... $ (9,473) $ 366,678 $ 159,771
Depreciation, depletion and
amortization ......................... 34,887 34,545 33,730
Noncash interest expense .............. 23,092 18,393 1,682
Deferred income taxes ................. (5,627) 4,988 (86,772)
Minority interest ..................... (58) 40 3,322
Net (gains) losses from:
Securities transactions ............. (2,657) -- --
Disposition of property and
equipment .......................... (1,735) 768 429
Pension cost, net ..................... (5,112) (5,566) (4,702)
Other postretirement benefits, net .... (4,799) (6,299) (5,459)
Distribution from TiO2 manufacturing
joint venture ........................ -- -- 13,650
Change in accounting for environmental
remediation costs .................... 30,000 -- --
Discontinued operations:
Net gain from sale of Rheox ......... -- (286,071) --
Income from operations of Rheox ..... (20,402) (1,325) --
Extraordinary item .................... -- 10,580 --
Other, net ............................ -- 317 --
--------- --------- ---------
38,116 137,048 115,651
Rheox, net ............................ 31,506 (30,587) --
Change in assets and liabilities:
Accounts and notes receivable ....... (14,925) (2,012) (22,289)
Inventories ......................... 22,872 (49,839) 20,663
Prepaid expenses .................... 96 436 (463)
Accounts payable and accrued
liabilities ........................ 9,347 (2,741) 7,315
Income taxes ........................ 12,978 (12,976) 6,729
Accounts with affiliates ............ (3,915) 2,286 (3,572)
Other noncurrent assets ............. (269) (178) 1,090
Other noncurrent liabilities ........ (6,640) 3,650 (16,816)
--------- --------- ---------
Net cash provided by operating
activities ..................... 89,166 45,087 108,308
--------- --------- ---------
F-9
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures .................. $ (28,220) $ (22,392) $ (35,559)
Change in restricted cash
equivalents, net ..................... 1,144 (2,638) (5,176)
Proceeds from disposition of
property and equipment ............... 3,049 769 2,344
Proceeds from disposition of
marketable securities ................ 6,875 6,875 --
Investment in joint venture, net ...... 8,364 (372) --
Proceeds from sale of Rheox ........... -- 435,080 --
Rheox, net ............................ (2,314) (26) --
--------- --------- ---------
Net cash provided (used) by
investing activities ............. (11,102) 417,296 (38,391)
--------- --------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings .......................... -- 30,491 82,038
Principal payments .................. (182,215) (315,892) (155,787)
Deferred financing costs ............ (2,343) -- --
Dividends paid ........................ -- (4,636) (7,242)
Treasury stock purchased .............. -- -- (7,210)
Settlement of shareholder derivative
lawsuit, net ......................... -- 11,211 --
Rheox, net ............................ 100,940 (117,500) --
Other, net ............................ 1,023 168 204
--------- --------- ---------
Net cash used by financing
activities ....................... (82,595) (396,158) (87,997)
--------- --------- ---------
Net change during the year from
operating, investing and
financing activities ............. $ (4,531) $ 66,225 $ (18,080)
========= ========= =========
F-10
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
--------- --------- ---------
Cash and cash equivalents:
Net change during the year from:
Operating, investing and financing
activities ......................... $ (4,531) $ 66,225 $ (18,080)
Currency translation ................ (2,295) (36) (2,649)
Sale of Rheox ....................... -- (7,630) --
--------- --------- ---------
(6,826) 58,559 (20,729)
Balance at beginning of year .......... 103,220 96,394 154,953
--------- --------- ---------
Balance at end of year ................ $ 96,394 $ 154,953 $ 134,224
========= ========= =========
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized. $ 55,908 $ 37,965 $ 35,540
Income taxes ........................ 6,875 54,230 14,963
Noncash investing activities -
marketable securities exchanged
for a note receivable ................ $ 6,875 $ -- $ --
See accompanying notes to consolidated financial statements.
F-11
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
NL Industries, Inc. conducts its titanium dioxide pigments ("TiO2")
operations through its wholly owned subsidiary, Kronos, Inc. At December 31,
1999, Valhi, Inc. and Tremont Corporation, each affiliates of Contran
Corporation, held approximately 59% and 20%, respectively, of NL's outstanding
common stock. At December 31, 1999, Contran and its subsidiaries held
approximately 93% of Valhi's outstanding common stock, and Valhi and other
entities related to Harold C. Simmons held approximately 55% of Tremont's
outstanding common stock. Substantially all of Contran's outstanding voting
stock is held either by trusts established for the benefit of certain children
and grandchildren of Mr. Simmons, of which Mr. Simmons is the sole trustee, or
by Mr. Simmons directly. Mr. Simmons, the Chairman of the Board of NL and the
Chairman of the Board and Chief Executive Officer of Contran and Valhi and a
director of Tremont, may be deemed to control each of such companies.
Note 2 - Summary of significant accounting policies:
Principles of consolidation and management's estimates
The accompanying consolidated financial statements include the accounts of
NL and its majority-owned subsidiaries (collectively, the "Company"). All
material intercompany accounts and balances have been eliminated. Certain
prior-year amounts have been reclassified to conform to the current year
presentation. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Ultimate actual results may in some instances differ from
previously estimated amounts.
Translation of foreign currencies
Assets and liabilities of subsidiaries whose functional currency is other
than the U.S. dollar are translated at year-end rates of exchange and revenues
and expenses are translated at weighted average exchange rates prevailing during
the year. Resulting translation adjustments are included in other comprehensive
income (loss), net of related income taxes. Currency transaction gains and
losses are recognized in income currently.
Cash equivalents
Cash equivalents include U.S. Treasury securities purchased under
short-term agreements to resell and bank deposits with original maturities of
three months or less.
F-12
Restricted cash equivalents
At December 31, 1999, restricted cash equivalents of approximately $18
million collateralized undrawn letters of credit. At December 31, 1998,
restricted cash equivalents of approximately $5 million collateralized undrawn
letters of credit, and restricted cash equivalents of approximately $7 million
collateralized certain environmental remediation obligations of the Company, of
which $4 million was classified as a noncurrent asset.
Marketable securities and securities transactions
Marketable securities are classified as "available-for-sale" and are
carried at market based on quoted market prices. Unrealized gains and losses on
available-for-sale securities are included in other comprehensive income (loss),
net of related deferred income taxes. See Note 4. Gains and losses on
available-for-sale securities are recognized in income upon realization and are
computed based on specific identification of the securities sold.
Inventories
Inventories are stated at the lower of cost (principally average cost) or
market. Amounts are removed from inventories at average cost.
Investment in joint venture
Investment in a 50%-owned joint venture is accounted for by the equity
method.
Property, equipment, depreciation and depletion
Property and equipment are stated at cost. Interest costs related to
major, long-term capital projects are capitalized as a component of construction
costs. Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of ten to forty years for buildings and three to twenty
years for machinery and equipment. Depletion of mining properties is computed by
the unit-of-production and straight-line methods.
Long-term debt
Long-term debt is stated net of unamortized original issue discount
("OID"). OID is amortized over the period during which cash interest payments
are not required and deferred financing costs are amortized over the term of the
applicable issue, both by the interest method.
F-13
Employee benefit plans
Accounting and funding policies for retirement plans and postretirement
benefits other than pensions ("OPEB") are described in Note 11.
The Company accounts for stock-based employee compensation 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. Compensation
cost recognized by the Company in accordance with APBO No. 25 was nil in each of
the past three years.
Environmental remediation costs
Environmental remediation costs are accrued when estimated future
expenditures are probable and reasonably estimable. The estimated future
expenditures generally are not discounted to present value. Recoveries of
remediation costs from other parties, if any, are reported as receivables when
their receipt is deemed probable. At December 31, 1998 and 1999, no receivables
for recoveries have been recognized.
The Company adopted a new method of accounting as required by the AICPA's
Statement of Position ("SOP") No. 96-1, "Environmental Remediation Liabilities,"
in 1997. The SOP, among other things, expanded the types of costs which must be
considered in determining environmental remediation accruals. As a result of
adopting the SOP, the Company recognized a noncash cumulative charge of $30
million in 1997. The charge did not impact the Company's 1997 income tax expense
because the Company believed the resulting deferred income tax asset did not
then satisfy the "more-likely-than-not" recognition criteria and, accordingly,
the Company established an offsetting valuation allowance.
Net sales
Sales are recognized as products are shipped.
Income taxes
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
investments in subsidiaries and unconsolidated affiliates not included in the
Company's U.S. tax group (the "NL Tax Group"). The Company periodically
evaluates its deferred tax assets and adjusts any related valuation allowance.
The Company's valuation allowance is equal to the amount of deferred tax assets
which the Company believes do not meet the "more-likely-than-not" recognition
criteria.
F-14
Interest rate swaps and contracts
The Company periodically uses interest rate swaps and contracts (such as
caps and floors) to manage interest rate risk with respect to financial assets
or liabilities. The Company has not entered into these contracts for speculative
purposes in the past, nor does it currently anticipate doing so in the future.
Any cost associated with the swap or contract designated as a hedge of assets or
liabilities is deferred and amortized over the life of the agreement as an
adjustment to interest income or expense. If the swap or contract is terminated,
the resulting gain or loss is deferred and amortized over the remaining life of
the underlying asset or liability. If the hedged instrument is disposed of, the
swap or contract agreement is marked to market with any resulting gain or loss
included with the gain or loss from the disposition. The Company held no
derivative financial instruments at December 31, 1998 or 1999.
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 common shares outstanding and the dilutive impact of
outstanding stock options. The weighted average number of outstanding stock
options which were excluded from the calculation of diluted earnings per share
because their impact would have been antidilutive aggregated 2,709,000,
1,942,000 and 2,185,000 in 1997, 1998 and 1999, respectively. There were no
adjustments to income (loss) from continuing operations or net income (loss) in
the computation of earnings per share.
New accounting principles not yet adopted
The Company will adopt Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, no later than the first quarter of 2001. SFAS No. 133 establishes
accounting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Under SFAS
No. 133, all derivatives will be recognized as either assets or liabilities and
measured at fair value. The accounting for changes in fair value of derivatives
will depend upon the intended use of the derivative. The impact of adopting SFAS
No. 133, if any, has not been determined but will be dependent upon the extent
to which the Company is then a party to derivative contracts or engaged in
hedging activities, including derivatives embedded in non-derivative host
contracts.
Note 3 - Business and geographic segments:
The Company's operations are conducted by Kronos in one operating business
segment - the production and sale of TiO2. Titanium dioxide pigments are used to
impart whiteness, brightness and opacity to a wide variety of products,
including paints, plastics, paper, fibers and ceramics. Discontinued operations
consists of the Company's specialty chemicals business owned by Rheox which was
sold in January 1998. See Note 20. At December 31, 1998 and 1999, the net
F-15
assets of non-U.S. subsidiaries included in consolidated net assets approximated
$310 million and $375 million, respectively.
The Company evaluates segment performance based on segment operating
income, which is defined as income before income taxes and interest expense,
exclusive of certain nonrecurring items and certain general corporate income and
expense items (including securities transactions gains and interest and dividend
income) which are not attributable to the operations of the reportable operating
segment. The accounting policies of the reportable operating segment are the
same as those described in Note 1. Interest income included in the calculation
of segment operating income is disclosed in Note 14 as "Trade interest income."
Segment assets are comprised of all assets attributable to the reportable
operating segment. The Company's investment in the TiO2 manufacturing joint
venture (see Note 6) is included in TiO2 business segment assets. Corporate
assets are not attributable to the reportable operating segment and consist
principally of cash, cash equivalents, restricted cash equivalents and
marketable securities. For geographic information, net sales are attributed to
the place of manufacture (point of origin) and the location of the customer
(point of destination); property and equipment are attributed to their physical
location.
Years ended December 31,
-----------------------------------
1997 1998 1999
--------- --------- ---------
(In thousands)
Business segment - TiO2
Net sales ............................. $ 837,240 $ 894,724 $ 908,387
Other income, excluding corporate ..... 12,339 6,110 12,484
--------- --------- ---------
849,579 900,834 920,871
Cost of sales ......................... 649,945 618,447 662,315
Selling, general and administrative,
excluding corporate .................. 117,133 111,206 112,888
--------- --------- ---------
Operating income .................... 82,501 171,181 145,668
General corporate income (expense):
Securities earnings, net ............ 5,393 14,921 6,597
Expenses, net ....................... (49,824) (18,342) (16,889)
Interest expense .................... (65,759) (58,070) (36,884)
--------- --------- ---------
$ (27,689) $ 109,690 $ 98,492
========= ========= =========
Capital expenditures:
Kronos .............................. $ 28,193 $ 22,310 $ 32,703
General corporate ................... 27 82 2,856
--------- --------- ---------
$ 28,220 $ 22,392 $ 35,559
========= ========= =========
Depreciation, depletion and
amortization:
Kronos .............................. $ 34,684 $ 34,341 $ 33,047
General corporate ................... 203 204 683
--------- --------- ---------
$ 34,887 $ 34,545 $ 33,730
========= ========= =========
F-16
Years ended December 31,
-----------------------------------
1997 1998 1999
--------- --------- ---------
(In thousands)
Geographic areas
Net sales - point of origin:
Germany ............................. $ 439,926 $ 451,061 $ 459,467
United States ....................... 250,798 289,701 299,520
Canada .............................. 145,160 158,967 162,746
Belgium ............................. 122,784 159,558 138,671
Norway .............................. 96,448 91,112 88,277
Other ............................... 88,030 96,912 90,442
Eliminations ........................ (305,906) (352,587) (330,736)
--------- --------- ---------
$ 837,240 $ 894,724 $ 908,387
========= ========= =========
Net sales - point of destination:
Europe .............................. $ 442,043 $ 493,942 $ 478,652
United States ....................... 230,923 246,209 268,037
Canada .............................. 58,231 66,843 60,834
Latin America ....................... 43,078 35,281 35,308
Asia ................................ 41,328 21,042 41,612
Other ............................... 21,637 31,407 23,944
--------- --------- ---------
$ 837,240 $ 894,724 $ 908,387
========= ========= =========
December 31,
----------------------------------------
1997 1998 1999
---------- ---------- ----------
(In thousands)
Identifiable assets
Net property and equipment:
Germany ....................... $ 213,762 $ 223,605 $ 190,292
Canada ........................ 67,247 60,574 62,334
Belgium ....................... 50,783 51,683 49,146
Norway ........................ 44,841 42,336 39,845
Other ......................... 4,289 3,961 6,841
Discontinued operations ....... 30,307 -- --
---------- ---------- ----------
$ 411,229 $ 382,159 $ 348,458
========== ========== ==========
Total assets:
Kronos ........................ $ 961,635 $ 997,893 $ 972,549
General corporate ............. 47,922 157,752 83,624
Discontinued operations ....... 88,635 -- --
---------- ---------- ----------
$1,098,192 $1,155,645 $1,056,173
========== ========== ==========
F-17
Note 4 - Marketable securities and securities transactions:
December 31,
----------------------
1998 1999
-------- --------
(In thousands)
Available-for-sale securities - noncurrent
marketable equity securities:
Unrealized gains ................................. $ 8,512 $ 6,700
Unrealized losses ................................ (1,591) (2,304)
Cost ............................................. 10,659 10,659
-------- --------
Aggregate market ............................. $ 17,580 $ 15,055
======== ========
In 1997 securities transactions gains of $2.7 million were realized on
sales of available-for-sale securities.
Note 5 - Inventories:
December 31,
----------------------
1998 1999
-------- --------
(In thousands)
Raw materials $ 46,114 $ 54,861
Work in process 11,530 8,065
Finished products 136,225 100,824
Supplies 34,742 27,434
-------- --------
$228,611 $191,184
======== ========
Note 6 - Investment in TiO2 manufacturing joint venture:
Kronos Louisiana, Inc. ("KLA"), a wholly owned subsidiary of Kronos, owns
a 50% interest in Louisiana Pigment Company, L.P. ("LPC"). LPC is a
manufacturing joint venture that is also 50%-owned by Tioxide Americas Inc.
("Tioxide"). Effective June 30, 1999, Imperial Chemicals Industries plc ("ICI")
sold its titanium dioxide business, including Tioxide and its 50% ownership
interest in LPC, to Huntsman ICI Holdings, a newly formed company that is 70%-
owned by Huntsman Corporation and 30%-owned by ICI. LPC owns and operates a
chloride-process TiO2 plant in Lake Charles, Louisiana.
KLA is required to purchase one-half of the TiO2 produced by LPC. LPC
operates on a break-even basis and, accordingly, Kronos' cost for its share of
the TiO2 produced is equal to its share of LPC's production costs and interest
expense. Kronos' share of the production costs is reported as cost of sales as
the related TiO2 acquired from LPC is sold, and its share of the interest
expense, if any, is reported as a component of interest expense.
During 1999 LPC made cash distributions of $27.3 million, equally split
between the partners.
F-18
Summary balance sheets of LPC are shown below.
December 31,
-----------------------
1998 1999
-------- --------
(In thousands)
ASSETS
Current assets ................................... $ 60,686 $ 55,999
Property and equipment, net ...................... 294,906 279,567
-------- --------
$355,592 $335,566
======== ========
LIABILITIES AND PARTNERS' EQUITY
Other liabilities, primarily current ............. $ 10,960 $ 18,234
Partners' equity ................................. 344,632 317,332
-------- --------
$355,592 $335,566
======== ========
Summary income statements of LPC are shown below.
Years ended December 31,
------------------------------------
1997 1998 1999
-------- -------- --------
(In thousands)
Revenues and other income:
Kronos ............................. $ 82,171 $ 90,392 $ 85,304
Tioxide ............................ 80,512 89,879 86,309
Interest income .................... 636 753 569
-------- -------- --------
163,319 181,024 172,182
-------- -------- --------
Cost and expenses:
Cost of sales ...................... 156,811 178,803 171,829
General and administrative ......... 355 348 353
Interest ........................... 6,153 1,873 --
-------- -------- --------
163,319 181,024 172,182
-------- -------- --------
Net income ....................... $ -- $ -- $ --
======== ======== ========
Note 7 - Other noncurrent assets:
December 31,
---------------------
1998 1999
------- ------
(In thousands)
Deferred financing costs, net ..................... $ 4,124 $2,278
Intangible assets, net of accumulated
amortization of $23,704 and $22,095 .............. 1,985 120
Restricted cash equivalents ....................... 4,225 --
Deferred income taxes ............................. -- 41
Other ............................................. 3,593 2,971
------- ------
$13,927 $5,410
======= ======
F-19
Note 8 - Accounts payable and accrued liabilities:
December 31,
---------------------------
1998 1999
-------- --------
(In thousands)
Accounts payable ......................... $ 55,270 $ 56,597
-------- --------
Accrued liabilities:
Employee benefits ...................... 37,399 35,243
Environmental costs .................... 44,122 47,228
Interest ............................... 7,346 6,761
Deferred income ........................ 4,000 4,000
Other .................................. 39,524 40,531
-------- --------
132,391 133,763
-------- --------
$187,661 $190,360
======== ========
Note 9 - Other noncurrent liabilities:
December 31,
-------------------------
1998 1999
-------- -------
(In thousands)
Environmental costs ......................... $ 81,454 $64,491
Insurance claims expense .................... 10,872 11,688
Employee benefits ........................... 9,778 7,816
Deferred income ............................. 12,333 8,333
Other ....................................... 2,295 1,493
-------- -------
$116,732 $93,821
======== =======
Note 10 - Notes payable and long-term debt:
December 31,
---------------------
1998 1999
-------- --------
(In thousands)
Notes payable ........................................ $ 36,391 $ 57,076
======== ========
Long-term debt:
NL Industries - 11.75% Senior Secured Notes ........ $244,000 $244,000
-------- --------
Kronos:
DM bank credit facility (DM 187,322) ............. 112,674 --
Other ............................................ 955 478
-------- --------
113,629 478
-------- --------
357,629 244,478
Less current maturities ............................ 64,826 212
-------- --------
$292,803 $244,266
======== ========
F-20
The Company's $244 million of 11.75% Senior Secured Notes due 2003 (the
"Notes") are collateralized by a series of intercompany notes from Kronos
International, Inc. ("KII"), a wholly owned subsidiary of Kronos, to NL, the
interest rate and payment terms of which mirror those of the respective Notes
(the "Mirror Notes"). The Notes are also collateralized by a first priority lien
on the stock of Kronos and a second priority lien on the stock of another wholly
owned subsidiary of the Company.
In the event of foreclosure, the holders of the Notes would have access to
the consolidated assets, earnings and equity of the Company. The Company
believes the collateralization of the Notes, as described above, is the
functional economic equivalent of a full, unconditional and joint and several
guarantee of the Notes by Kronos and the other subsidiary, whose net assets
aggregated $559 million at December 31, 1999.
The Notes are redeemable, at the Company's option, starting in October
2000 at a redemption price of 101.5% of the principal amount and declining to
100% after October 2001. In the event of a Change of Control as defined in the
indenture, the Company would be required to make an offer to purchase the Notes
at 101% of the principal amount of the Notes. The Notes are issued pursuant to
an indenture which contains a number of covenants and restrictions which, among
other things, restrict the ability of the Company and its subsidiaries to incur
debt, incur liens, pay dividends, merge or consolidate with, or sell or transfer
all or substantially all of their assets to another entity. At December 31,
1999, $114 million was available for payment of dividends pursuant to the terms
of the indenture. The quoted market price of the Senior Secured Notes per $100
principal amount was $103.73 and $103.75 at December 31, 1998 and 1999,
respectively.
The Company prepaid in full its DM 107 million ($60 million when paid)
term loan in the first quarter of 1999, principally by drawing DM 100 million
($56 million when drawn) on its DM revolving credit facility. In the second and
third quarters of 1999, the Company repaid DM 60 million ($33 million when paid)
of the DM revolving credit facility with cash provided from operations. The
revolver's outstanding balance of DM 120 million was further reduced in October
1999 by DM 20 million ($11 million when paid). In December 1999 the Company
borrowed $26 million of short-term unsecured euro-denominated bank debt and used
the proceeds along with cash on hand to prepay the remaining balance of DM 100
million ($52 million when paid). The DM facility was then terminated, releasing
collateral and eliminating all related loan covenants.
Unused lines of credit available for borrowing under the Company's
non-U.S. credit facilities approximated $19 million at December 31, 1999.
Notes payable at December 31, 1998 and 1999 consist of DM 61 million ($36
million at December 31, 1998) and euro 57 million ($57 million at December 31,
1999), respectively, of short-term borrowings due within one year from non-U.S.
banks with interest rates ranging from 3.75% to 4.60% at December 31, 1998 and
from 3.03% to 4.30% at December 31, 1999.
F-21
During 1998 the Company redeemed (i) $6 million principal amount of its
Senior Secured Notes at par value pursuant to a tender offer; and (ii) the
entire issue of its 13% Senior Secured Discount Notes ($187.5 million principal
amount at maturity) with premiums ranging between 1.25% and 6% in market
transactions or pursuant to a tender offer.
The aggregate maturities of long-term debt at December 31, 1999 are shown
in the table below.
Years ending December 31, Amount
- ------------------------- --------------
(In thousands)
2000 $ 212
2001 133
2002 133
2003 244,000
--------
$244,478
========
Note 11 - Employee benefit plans:
Company-sponsored pension plans
The Company maintains various defined benefit and defined contribution
pension plans covering substantially all employees. Non-U.S. employees are
covered by plans in their respective countries and a majority of U.S. employees
are eligible to participate in a contributory savings plan.
The Company contributes to each employee's account an amount equal to
approximately 3% of the employee's annual eligible earnings and partially
matches employee contributions to the Plan. The Company also has an unfunded,
nonqualified defined contribution plan covering certain executives, and
contributions are based on a formula involving eligible earnings. The Company's
expense related to these plans included in continuing operations was $.7 million
in 1997, $1.3 million in 1998 and $1.1 million in 1999. Expense related to these
plans included in discontinued operations was $.5 million in 1997 and nil in
1998.
Certain actuarial assumptions used in measuring the defined benefit
pension assets, liabilities and expenses are presented below.
Years ended December 31,
-----------------------------------------
1997 1998 1999
---- ---- ----
(Percentages)
Discount rate 6.0 to 8.5 5.5 to 8.5 5.8 to 7.5
Rate of increase in future
compensation levels 3.0 to 6.0 2.5 to 6.0 2.5 to 4.5
Long-term rate of return on
plan assets 6.0 to 9.0 6.0 to 9.0 6.0 to 9.0
During 1998 the Company curtailed certain U.S. employee pension benefits
and recognized a gain of $1.5 million, which is included in discontinued
operations. Plan assets are comprised primarily of investments in U.S. and
F-22
non-U.S. corporate equity and debt securities, short-term investments, mutual
funds and group annuity contracts.
SFAS No. 87, "Employers' Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit obligation exceeds the unfunded accrued pension liability. Variances
from actuarially assumed rates will change accrued pension liabilities, pension
expense and funding requirements in future periods.
The components of the net periodic defined benefit pension cost, excluding
curtailment (gain) loss and discontinued operations, are set forth below.
Years ended December 31,
--------------------------------
1997 1998 1999
---- ---- ----
(In thousands)
Net periodic pension cost:
Service cost benefits .................... $ 4,067 $ 3,835 $ 3,942
Interest cost on projected benefit
obligation ("PBO") ...................... 15,335 15,669 16,170
Expected return on plan assets ........... (13,271) (15,172) (15,567)
Amortization of prior service cost ....... 344 332 267
Amortization of net transition
obligation .............................. 255 173 578
Recognized actuarial losses (gains) ...... (2,653) 385 1,144
-------- -------- --------
$ 4,077 $ 5,222 $ 6,534
======== ======== ========
The funded status of the Company's defined benefit pension plans is set
forth below.
December 31,
--------------------------
1998 1999
--------- ---------
(In thousands)
Change in PBO:
Beginning of year .......................... $ 251,372 $ 296,013
Service cost ............................... 3,835 3,942
Interest ................................... 15,669 16,170
Participant contributions .................. 1,228 939
Actuarial (gain) loss ...................... 30,768 (14,303)
Curtailment gain ........................... (1,513) --
Benefits paid .............................. (15,748) (16,345)
Change in currency exchange rates .......... 10,402 (26,230)
--------- ---------
End of year .............................. 296,013 260,186
--------- ---------
F-23
December 31,
------------------------
1998 1999
--------- ---------
(In thousands)
Change in fair value of plan assets:
Beginning of year .............................. $ 199,371 $ 221,035
Actual return on plan assets ................... 20,951 21,444
Employer contributions ......................... 10,788 11,236
Participant contributions ...................... 1,228 939
Benefits paid .................................. (15,748) (16,345)
Change in currency exchange rates .............. 4,445 (19,367)
--------- ---------
End of year .................................. 221,035 218,942
--------- ---------
Funded status at year end:
Plan assets less than PBO ...................... (74,978) (41,244)
Unrecognized actuarial loss .................... 44,945 21,603
Unrecognized prior service cost ................ 3,341 2,137
Unrecognized net transition obligation ......... 1,215 514
--------- ---------
$ (25,477) $ (16,990)
========= =========
Amounts recognized in the balance sheet:
Prepaid pension cost ........................... $ 23,990 $ 23,271
Accrued pension cost:
Current ...................................... (8,005) (9,071)
Noncurrent ................................... (44,649) (32,946)
Accumulated other comprehensive income ......... 3,187 1,756
--------- ---------
$ (25,477) $ (16,990)
========= =========
Selected information related to the Company's defined benefit pension
plans that have accumulated benefit obligations in excess of fair value of plan
assets is presented below. At December 31, 1999, 75% of the projected benefit
obligations of such plans relate to non-U.S. plans (1998 - 83%).
December 31,
-------------------------
1998 1999
-------- --------
(In thousands)
Projected benefit obligation ................. $231,860 $194,204
Accumulated benefit obligation ............... 200,269 164,262
Fair value of plan assets .................... 148,682 146,435
Incentive bonus programs
The Company has incentive bonus programs for certain employees providing
for annual payments, which may be in the form of NL common stock, based on
formulas involving the profitability of Kronos in relation to the annual
operating plan and, for most of these employees, individual performance.
F-24
Postretirement benefits other than pensions
In addition to providing pension benefits, the Company currently provides
certain health care and life insurance benefits for eligible retired employees.
Certain of the Company's Canadian employees may become eligible for such
postretirement health care and life insurance benefits if they reach retirement
age while working for the Company. In 1989 the Company began phasing out such
benefits for currently active U.S. employees over a ten-year period and U.S.
employees retiring after 1998 are not entitled to any such benefits. The
majority of all retirees are required to contribute a portion of the cost of
their benefits and certain current and future retirees are eligible for reduced
health care benefits at age 65. The Company's policy is to fund medical claims
as they are incurred, net of any contributions by the retirees.
For measuring the OPEB liability at December 31, 1999, the expected rate
of increase in health care costs is 9% in 2000 decreasing to 5.5% in 2007. Other
weighted-average assumptions used to measure the liability and expense are
presented below.
Years ended December 31,
------------------------
1997 1998 1999
---- ---- ----
(Percentages)
Discount rate ....................................... 7.0 6.5 7.5
Long-term rate for compensation increases ........... 6.0 6.0 6.0
Long-term rate of return on plan assets ............. 9.0 9.0 9.0
Variances from actuarially assumed rates will change accrued OPEB
liabilities, net periodic OPEB expense and funding requirements in future
periods. If the health care cost trend rate was increased (decreased) by one
percentage point for each year, postretirement benefit expense would have
increased approximately $.1 million (decreased by $.1 million) in 1999, and the
projected benefit obligation at December 31, 1999 would have increased by
approximately $1.6 million (decreased by $1.4 million). During 1998, as a result
of the sale of Rheox, the Company settled certain U.S. employee OPEB benefits
and recognized a $3.2 million gain, all of which is included in discontinued
operations.
The components of the Company's net periodic postretirement benefit cost,
excluding curtailment and settlement gains and discontinued operations, are set
forth below. The net periodic postretirement benefit costs included in
discontinued operations excluding the settlement gain was $.2 million in 1997
and nil in 1998.
F-25
Years ended December 31,
-------------------------------
1997 1998 1999
------- ------- -------
(In thousands)
Net periodic OPEB cost (benefit):
Service cost benefits .................... $ 39 $ 43 $ 40
Interest cost on PBO ..................... 2,972 2,393 2,069
Expected return on plan assets ........... (584) (583) (526)
Amortization of prior service cost ....... (2,075) (2,075) (2,075)
Recognized actuarial gains ............... (305) (811) (573)
------- ------- -------
$ 47 $(1,033) $(1,065)
======= ======= =======
December 31,
----------------------
1998 1999
-------- --------
(In thousands)
Change in PBO:
Beginning of year ................................ $ 36,994 $ 33,812
Service cost ..................................... 43 40
Interest cost .................................... 2,393 2,069
Actuarial losses ................................. 2,117 5,714
Discontinued operations - settlement gain ........ (2,354) --
Benefits paid from:
Company funds .................................. (4,179) (3,316)
Plan assets .................................... (1,087) (1,078)
Change in currency exchange rates ................ (115) 113
-------- --------
End of year .................................. 33,812 37,354
-------- --------
Change in fair value of plan assets:
Beginning of year ................................ 6,527 6,365
Actual return on plan assets ..................... 450 206
Employer contributions ........................... 475 475
Benefits paid .................................... (1,087) (1,078)
-------- --------
End of year .................................. 6,365 5,968
-------- --------
Funded status at year end:
Plan assets less than PBO ........................ (27,447) (31,386)
Unrecognized actuarial loss ...................... (7,447) (575)
Unrecognized prior service cost .................. (12,008) (9,933)
-------- --------
$(46,902) $(41,894)
======== ========
Amounts recognized in the balance sheet:
Current .......................................... $ (5,243) $ (4,789)
Noncurrent ....................................... (41,659) (37,105)
-------- --------
$(46,902) $(41,894)
======== ========
F-26
Note 12 - Shareholders' equity:
Common stock
Shares of common stock
-----------------------------------
Treasury
Issued stock Outstanding
------ -------- -----------
(In thousands)
Balance at December 31, 1996 ........... 66,839 15,721 51,118
Treasury shares reissued ............. -- (149) 149
------ ------- -------
Balance at December 31, 1997 ........... 66,839 15,572 51,267
Treasury shares reissued ............. -- (544) 544
------ ------- -------
Balance at December 31, 1998 ........... 66,839 15,028 51,811
Treasury shares acquired ............. -- 552 (552)
Treasury shares reissued ............. -- (25) 25
------ ------- -------
Balance at December 31, 1999 ........... 66,839 15,555 51,284
====== ======= =======
During 1999 the Company's Board of Directors authorized the purchase of up
to 1.5 million shares of NL's common stock over an unspecified period of time,
to be held as treasury shares available for general corporate purposes. Pursuant
to this authorization, the Company purchased 552,000 shares of its common stock
in the open market at an aggregate cost of $7.2 million in 1999 and 575,000
shares at an aggregate cost of $8.3 million in January and February 2000.
The Company reinstated a regular quarterly dividend in June 1998 and
subsequently paid three quarterly $.03 per share cash dividends in 1998. In
February 1999 the Company increased the regular quarterly dividend to $.035 per
share and subsequently paid four quarterly $.035 per share cash dividends in
1999. On February 9, 2000, the Company's Board of Directors increased the
regular quarterly dividend to $.15 per share and declared a dividend to
shareholders of record as of March 16, 2000 to be paid on March 31, 2000.
Common stock options
The NL Industries, Inc. 1998 Long-Term Incentive Plan (the "NL Option
Plan") provides for the discretionary grant of restricted common stock, stock
options, stock appreciation rights ("SARs") and other incentive compensation to
officers and other key employees of the Company. Although certain stock options
granted pursuant to a similar plan which preceded the NL Option Plan ("the
Predecessor Option Plan") remain outstanding at December 31, 1999, no additional
options may be granted under the Predecessor Option Plan.
Up to five million shares of NL common stock may be issued pursuant to the
NL Option Plan and, at December 31, 1999, 4,588,000 shares were available for
future grants. The NL Option Plan provides for the grant of options that qualify
as incentive options and for options which are not so qualified. Generally,
stock options and SARs (collectively, "options") are granted at a price equal to
or greater than 100% of the market price at the date of grant, vest over a five
year period and expire ten years from the date of grant. Restricted stock,
forfeitable unless certain periods of employment are completed, is held in
escrow
F-27
in the name of the grantee until the restriction period expires. No SARs have
been granted under the NL Option Plan.
In addition to the NL Option Plan, the Company had a stock option plan for
its nonemployee directors that expired in 1998. At December 31, 1999, there were
options to acquire 6,000 shares of common stock outstanding under this plan, all
of which were fully vested. Future grants to directors are expected to be
granted from the NL Option Plan.
Changes in outstanding options granted pursuant to the NL Option Plan, the
Predecessor Option Plan and the nonemployee director plan are summarized in the
table below.
Exercise price Amount
per share payable
--------------------- upon
Shares Low High exercise
------ --- ---- --------
(In thousands, except per share amounts)
Outstanding at December 31, 1996 ....... 2,573 $ 4.81 $ 24.19 $ 30,278
Granted .............................. 442 11.88 14.88 5,792
Exercised ............................ (149) 4.81 11.81 (1,025)
Forfeited ............................ (21) 5.00 22.29 (284)
----- -------- -------- --------
Outstanding at December 31, 1997 ....... 2,845 4.81 24.19 34,761
Granted .............................. 474 17.97 21.97 9,334
Exercised ............................ (960) 4.81 17.25 (8,740)
Forfeited ............................ (240) 5.00 19.97 (4,336)
----- -------- -------- --------
Outstanding at December 31, 1998 ....... 2,119 5.00 24.19 31,019
Granted .............................. 410 11.28 15.19 5,377
Exercised ............................ (25) 5.00 11.81 (209)
Forfeited ............................ (67) 8.69 22.63 (1,244)
----- -------- -------- --------
Outstanding at December 31, 1999 ....... 2,437 $ 5.00 $ 24.19 $ 34,943
===== ======== ======== ========
At December 31, 1997, 1998 and 1999 options to purchase 1,801,955, 957,861
and 1,255,901 shares, respectively, were exercisable and options to purchase
305,200 shares become exercisable in 2000. Of the exercisable options at
December 31, 1999, options to purchase 977,141 shares had exercise prices less
than the Company's December 31, 1999 quoted market price of $15.06 per share.
Outstanding options at December 31, 1999 expire at various dates through 2009,
with a weighted-average remaining life of six years.
The pro forma information required by SFAS No. 123, "Accounting for
Stock-Based Compensation," is based on an estimation of the fair value of
options issued subsequent to January 1, 1995. The weighted-average fair values
of options granted during 1997, 1998 and 1999 were $6.35, $9.78 and $6.94 per
share, respectively. The fair values of employee stock options were calculated
using the Black-Scholes stock option valuation model with the following weighted
average assumptions for grants in 1997, 1998 and 1999: stock price volatility
F-28
of 37%, 51% and 50% in 1997, 1998 and 1999, respectively; risk-free rate of
return of 5% in 1997, 4% in 1998 and 6% in 1999; no dividend yield in 1997, and
a dividend yield of .9% in 1998 and 1.2% in 1999; and an expected term of 9
years in 1997, 8 years in 1998 and 9 years in 1999. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period.
The Company's pro forma net income (loss) and basic net income (loss) per
common share were as follows. The pro forma impact on earnings per common share
for 1997, 1998 and 1999 is not necessarily indicative of future effects on
earnings per share.
Years ended December 31,
-----------------------------------------
1997 1998 1999
---- ---- ----
(In thousands except per share amounts)
Net income (loss)- as reported ....... $ (9,473) $ 366,678 $ 159,771
Net income (loss)- pro forma ......... $ (11,057) $ 363,843 $ 156,868
Net income (loss) per basic common
share - as reported ................. $ (.19) $ 7.13 $ 3.09
Net income (loss) per basic common
share - pro forma ................... $ (.22) $ 7.07 $ 3.03
Preferred stock
The Company is authorized to issue a total of five million shares of
preferred stock. The rights of preferred stock as to dividends, redemption,
liquidation and conversion are determined upon issuance.
Note 13 - Income taxes:
The components of (i) income (loss) from continuing operations before
income taxes and minority interest ("pretax income (loss)"), (ii) the difference
between the provision for income taxes attributable to pretax income (loss) and
the amounts that would be expected using the U.S. federal statutory income tax
rate of 35%, (iii) the provision for income taxes and (iv) the comprehensive tax
provision are presented below.
Years ended December 31,
---------------------------------------
1997 1998 1999
--------- -------- -------
(In thousands)
Pretax income (loss):
U.S ............................ $ (9,308) $ 57,638 $23,642
Non-U.S ........................ (18,381) 52,052 74,850
--------- -------- -------
$ (27,689) $109,690 $98,492
========= ======== =======
F-29
Years ended December 31,
--------------------------------
1997 1998 1999
-------- -------- --------
(In thousands)
Expected tax benefit (expense) ............. $ 9,692 $(38,391) $(34,472)
Non-U.S. tax rates ......................... 784 (339) 541
German solidarity and trade income
taxes ..................................... (3,597) (2,168) (6,660)
Resolution of German income tax audits ..... -- -- 36,490
Change in valuation allowance:
Corporate restructuring in Germany
and other ............................... -- -- 77,580
Change in German income tax law .......... -- -- (24,070)
Recognition of certain deductible tax
attributes which previously did not
meet the "more-likely-than-not"
recognition criteria .................... -- 19,143 15,807
Increase in certain deductible tax
attributes which previously did not
meet the "more-likely-than-not"
recognition criteria .................... (5,107) -- --
Incremental tax on income of companies
not included in the NL Tax Group .......... (3,886) (4,277) (2,747)
Refund of prior-year German dividend
withholding taxes ......................... -- 8,219 --
U.S. state income taxes .................... (231) (307) 680
Other, net ................................. 101 (1,668) 1,452
-------- -------- --------
Income tax benefit (expense) ........... $ (2,244) $(19,788) $ 64,601
======== ======== ========
Provision for income taxes:
Current income tax benefit (expense):
U.S. federal ........................... $ 6,881 $ (850) $ (193)
U.S. state ............................. (681) (307) 2,489
Non-U.S ................................ (14,071) (13,643) (24,467)
-------- -------- --------
(7,871) (14,800) (22,171)
-------- -------- --------
Deferred income tax benefit (expense):
U.S. federal ........................... (1,224) (2,112) 47,426
U.S. state ............................. 450 -- (1,809)
Non-U.S ................................ 6,401 (2,876) 41,155
-------- -------- --------
5,627 (4,988) 86,772
-------- -------- --------
$ (2,244) $(19,788) $ 64,601
======== ======== ========
Comprehensive benefit (provision) for
income taxes allocable to:
Pretax income (loss) ..................... $ (2,244) $(19,788) $ 64,601
Discontinued operations .................. (12,475) (87,000) --
Extraordinary item ....................... -- 5,698 --
Additional paid-in capital ............... -- 3,796 16
Other comprehensive income:
Marketable securities .................. (1,626) (108) 883
Currency translation ................... (410) -- --
-------- -------- --------
$(16,755) $(97,402) $ 65,500
======== ======== ========
F-30
The components of the net deferred tax liability are summarized below:
December 31,
--------------------------------------------------
1998 1999
---- ----
Deferred tax Deferred tax
------------------------ ------------------------
Assets Liabilities Assets Liabilities
--------- ----------- --------- -----------
(In thousands)
Tax effect of temporary
differences relating to:
Inventories .............. $ 3,359 $ (3,858) $ 4,025 $ (2,086)
Property and equipment ... -- (110,189) 96,548 (53,313)
Accrued postretirement
benefits cost ........... 16,434 -- 14,575 --
Accrued (prepaid)
pension cost ............ 5,341 (18,921) 6,288 (24,830)
Accrued environmental
costs ................... 42,666 -- 37,439 --
Noncompete agreement ..... 5,717 -- 4,317 --
Other accrued
liabilities and
deductible
differences ............. 17,094 -- 16,878 --
Other taxable
differences ............. -- (135,487) -- (87,041)
Tax on unremitted
earnings of
non-U.S. subsidiaries ..... -- (21,351) -- (20,727)
Tax loss and tax credit
carryforwards ............. 138,211 -- 144,985 --
Valuation allowance ........ (134,477) -- (233,595) --
--------- --------- --------- ---------
Gross deferred tax
assets (liabilities) .... 94,345 (289,806) 91,460 (187,997)
Reclassification,
principally netting by
tax jurisdiction .......... (92,390) 92,390 (79,445) 79,445
--------- --------- --------- ---------
Net total deferred tax
assets (liabilities) .... 1,955 (197,416) 12,015 (108,552)
Net current deferred
tax assets
(liabilities) ........... 1,955 (1,236) 11,974 (326)
--------- --------- --------- ---------
Net noncurrent deferred
tax assets
(liabilities) ........... $ -- $(196,180) $ 41 $(108,226)
========= ========= ========= =========
F-31
Changes in the Company's deferred income tax valuation allowance are
summarized below. The deductible temporary differences in 1998 include items
that have been reported as discontinued operations.
Years ended December 31,
-----------------------------------
1997 1998 1999
--------- --------- ---------
(In thousands)
Balance at the beginning of year ........ $ 207,117 $ 188,585 $ 134,477
Recognition of certain deductible tax
attributes which previously did not
meet the "more-likely-than-not"
recognition criteria ................. (11,106) (64,274) (70,946)
Increase in certain deductible
temporary differences which the
Company believes do not meet the
"more-likely-than-not" recognition
criteria ............................. 16,213 6,964 1,629
Offset to the change in gross deferred
income tax assets due principally to
redeterminations of certain tax
attributes and implementation of
certain tax planning
strategies ........................... (11,300) (3,734) 183,150
Foreign currency translation .......... (12,339) 6,936 (14,715)
--------- --------- ---------
Balance at the end of year .............. $ 188,585 $ 134,477 $ 233,595
========= ========= =========
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 non-income tax related items and interest.
Certain significant German tax contingencies aggregating an estimated DM 188
million ($100 million when resolved) through 1998 were resolved in the Company's
favor in 1999.
The Company recognized a $90 million noncash income tax benefit in 1999
related to (i) a favorable resolution of the Company's previously reported tax
contingency in Germany ($36 million) and (ii) a net reduction in the Company's
deferred income tax valuation allowance due to a change in estimate of the
Company's ability to utilize certain income tax attributes under the
"more-likely-than-not" recognition criteria ($54 million).
With respect to the favorable resolution of the German tax contingency,
the German government has conceded substantially all of its income tax claims
against the Company and has released a DM 94 million ($50 million) lien on the
Company's Nordenham, Germany TiO2 plant that secured the government's claim.
The $54 million net reduction in the Company's deferred income tax
valuation allowance is comprised of (i) a $78 million decrease in the valuation
allowance to recognize the benefit of certain deductible income tax attributes
which the Company now believes meets the recognition criteria as a result of,
among other things, a corporate restructuring of the Company's German
subsidiaries offset by (ii) a $24 million increase in the valuation allowance to
F-32
reduce the previously recognized benefit of certain other deductible income tax
attributes which the Company now believes do not meet the recognition criteria
due to a change in German tax law.
During 1999 the German government enacted certain income tax law changes
that were retroactively effective as of January 1, 1999. Based on these changes,
the Company's ongoing current (cash) income tax rate in Germany increased in
1999.
During 1997 the Company received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($6 million at December
31, 1999) relating to 1994. The Company appealed this assessment and, in
February 2000, the Fredrikstad City Court ruled in favor of the Norwegian tax
authorities on the primary issue, but asserted that such tax authorities'
assessment was overstated by NOK 34 million ($4 million at December 31, 1999).
The tax authorities' response to the Court's assertion is expected by the end of
March 2000. The Company is considering its appeals options. During 1998 the
Company was informed by the Norwegian tax authorities that additional tax
deficiencies of NOK 39 million ($5 million at December 31, 1999) will likely be
proposed for the year 1996 on an issue similar to the aforementioned 1994 case.
The outcome of the 1996 case is dependent on the eventual outcome of the 1994
case. Although the Company believes that it will ultimately prevail, the Company
has granted a lien for the 1994 tax assessment on its Fredrikstad, Norway TiO2
plant in favor of the Norwegian tax authorities and will be required to grant
security on the 1996 assessment when received.
No assurance can be given that the Company's tax matters will be favorably
resolved due to the inherent uncertainties involved in court 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.
In 1997 the Company utilized foreign tax credit carryforwards of $17
million and U.S. net operating loss carryforwards of $20 million to reduce U.S.
federal income tax expense. In 1998 the Company utilized $13 million of
alternative minimum tax credit carryforwards (the benefit of which was
recognized in discontinued operations) to reduce U.S. federal income tax
expense. Unutilized foreign tax credit carryovers of $6 million and $2 million
expired in 1998 and 1999, respectively. The Company also has approximately $370
million of income tax loss carryforwards in Germany with no expiration date.
F-33
Note 14 - Other income, net:
Years ended December 31,
---------------------------------
1997 1998 1999
-------- -------- --------
(In thousands)
Securities earnings:
Interest and dividends ................. $ 2,736 $ 14,921 $ 6,597
Securities transactions ................ 2,657 -- --
-------- -------- --------
5,393 14,921 6,597
Currency transaction gains, net .......... 5,919 4,157 10,161
Noncompete agreement income .............. -- 3,667 4,000
Trade interest income .................... 2,983 2,115 2,365
Disposition of property and equipment .... 1,735 (768) (429)
Other, net ............................... 3,337 1,361 952
-------- -------- --------
$ 19,367 $ 25,453 $ 23,646
======== ======== ========
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 is amortizing the fee to income
using the straight-line method over the five-year noncompete period beginning
January 30, 1998.
Note 15 - Other items:
Advertising expense included in continuing operations is expensed as
incurred and was $1 million in each of 1997, 1998 and 1999.
Research, development and certain sales technical support costs included
in continuing operations is expensed as incurred and approximated $7 million in
each of 1997, 1998 and 1999.
Interest capitalized related to continuing operations in connection with
long-term capital projects was $2 million in 1997, $1 million in 1998 and nil in
1999.
Note 16 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly held minority equity interest in another related party. While no
transactions of the type
F-34
described above are planned or proposed with respect to the Company other than
as set forth in this Annual Report on Form 10-K, the Company from time to time
considers, reviews and evaluates and understands that Contran, Valhi and related
entities consider, review and evaluate, such transactions. Depending upon the
business, tax and other objectives then relevant, and restrictions under the
indentures and other agreements, it is possible that the Company might be a
party to one or more such transactions in the future.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
The Company is a party to an intercorporate services agreement with
Contran (the "Contran ISA") whereby Contran provides certain management services
to the Company on a fee basis. Management services fee expense related to the
Contran ISA was $.5 million in 1997 and $1.0 million in each of 1998 and 1999.
The Company is a party to an intercorporate services agreement with Valhi
(the "Valhi ISA") whereby Valhi and the Company provide certain management,
financial and administrative services to each other on a fee basis. Net
management services fee expense (income) related to the Valhi ISA was $(.1)
million in 1997, nil in 1998 and $.1 million in 1999.
The Company is party to an intercorporate services agreement with Tremont
(the "Tremont ISA"). Under the terms of the contract, the Company provides
certain management and financial services to Tremont on a fee basis. Management
services fee income related to the Tremont ISA was $.2 million in 1997 and $.1
million in each of 1998 and 1999.
The Company is party to an intercorporate services agreement (the "Timet
ISA") with Titanium Metals Corporation ("Timet"), approximately 47% of the
outstanding common stock of which is currently held by Tremont and another
entity related to Harold C. Simmons. Under the terms of the contract, the
Company provides certain management and financial services to Timet on a fee
basis. Management services fee income related to the Timet ISA was $.3 million
in each of 1997, 1998 and 1999.
The Company is party to an intercorporate services agreement (the "CompX
ISA") with CompX International, Inc. ("CompX"). Under the terms of the contract,
the Company provides certain management and administrative services to CompX on
a fee basis. Management services fee income related to the CompX ISA was $.1
million in each of 1998 and 1999.
Purchases of TiO2 from LPC were $78.1 million in 1997, $89.0 million in
1998 and $85.3 million in 1999.
F-35
The Company and NL Insurance, Ltd. of Vermont ("NLIV"), a wholly owned
subsidiary of Tremont, are parties to an Insurance Sharing Agreement with
respect to certain loss payments and reserves established by NLIV that (i) arise
out of claims against other entities for which the Company is responsible and
(ii) are subject to payment by NLIV under certain reinsurance contracts. Also,
NLIV will credit the Company with respect to certain underwriting profits or
credit recoveries that NLIV receives from independent reinsurers that relate to
retained liabilities. At December 31, 1999, the Company has $9.7 million of
restricted cash that collateralizes certain of NLIV's outstanding letters of
credit.
EWI RE, Inc. ("EWI") arranges for and brokers certain of the Company's
insurance policies and those of the Company's 50%-owned joint venture. Parties
related to Contran own 90% of the outstanding common stock of EWI, and a
son-in-law of Harold C. Simmons manages the operations of EWI. Consistent with
insurance industry practices, EWI receives a commission from the insurance
underwriters for the policies that it arranges or brokers. The Company and its
joint venture paid an aggregate of approximately $3.0 million and $3.7 million
for such policies in 1998 and 1999, respectively, which amount principally
included payments for reinsurance premiums paid to third parties, but also
included commissions paid to EWI.
Amounts receivable from and payable to affiliates are summarized in the
following table.
December 31,
------------------------
1998 1999
------- -------
(In thousands)
Receivable from affiliates:
Timet ...................................... $ 428 $ 310
CompX ...................................... 142 176
Other ...................................... 122 261
------- -------
$ 692 $ 747
======= =======
Payable to affiliates:
Tremont Corporation ........................ $ 3,053 $ 2,859
LPC ........................................ 8,264 8,381
------- -------
$11,317 $11,240
======= =======
Amounts payable to LPC are generally for the purchase of TiO2 (see Note
6), and amounts payable to Tremont principally relate to the Company's Insurance
Sharing Agreement described above.
F-36
Note 17 - Commitments and contingencies:
Leases
The Company leases, pursuant to operating leases, various manufacturing
and office space and transportation equipment. Most of the leases contain
purchase and/or various term renewal options at fair market and fair rental
values, respectively. In most cases management expects that, in the normal
course of business, leases will be renewed or replaced by other leases.
Kronos' principal German operating subsidiary leases the land under its
Leverkusen TiO2 production facility pursuant to a lease expiring in 2050. The
Leverkusen facility, with approximately one-third of Kronos' current TiO2
production capacity, is located within the lessor's extensive manufacturing
complex, and Kronos is the only unrelated party so situated. Under a separate
supplies and services agreement expiring in 2011, the lessor provides some raw
materials, auxiliary and operating materials and utilities services necessary to
operate the Leverkusen facility. Both the lease and the supplies and services
agreements restrict the Company's ability to transfer ownership or use of the
Leverkusen facility.
Net rent expense included in continuing operations aggregated $7 million
in each of 1997 and 1998 and $9 million in 1999. At December 31, 1999, minimum
rental commitments under the terms of noncancellable operating leases, excluding
discontinued operations, were as follows:
Years ending December 31, Real Estate Equipment
- ------------------------- ----------- ---------
(In thousands)
2000 $ 2,191 $1,503
2001 1,988 815
2002 1,791 433
2003 1,603 193
2004 1,533 122
2005 and thereafter 20,971 1
------- ------
$30,077 $3,067
======= ======
Capital expenditures
At December 31, 1999, the estimated cost to complete capital projects in
process approximated $11 million, including $2 million to complete a landfill
expansion for the Company's Belgian facility.
Purchase commitments
The Company has long-term supply contracts that provide for the Company's
chloride feedstock requirements through 2003. The agreements require the Company
to purchase certain minimum quantities of feedstock with average minimum annual
purchase commitments aggregating approximately $114 million.
F-37
Legal proceedings
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 United States cities or their public housing
authorities and certain others have been asserted as class actions. These legal
proceedings seek recovery under a variety of theories, including 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.
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. Considering the Company's previous involvement in the lead
and lead pigment businesses, there can be no assurance that additional
litigation similar to that currently pending will not be filed.
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 a potential responsible party ("PRP") pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act, as amended by the
Superfund Amendments and Reauthorization Act ("CERCLA") in approximately 75
governmental and private actions associated with hazardous waste sites and
former mining locations, certain of which are on the U.S. Environmental
Protection Agency's Superfund National Priorities List. These actions seek
cleanup costs, damages for personal injury or property damage and/or damages for
injury to natural resources. While the Company may be jointly and severally
liable for such costs, in most cases it is only one of a number of PRPs who are
also jointly and severally liable. In addition, the Company is a party to a
number of lawsuits filed in various jurisdictions alleging CERCLA or other
environmental claims.
At December 31, 1999, the Company had accrued $112 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 $150 million. The Company's estimates of such
F-38
liabilities have not been discounted to present value, and the Company has not
recognized any potential insurance recoveries.
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, 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. 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.
Other litigation. The Company is also involved in various other
environmental, contractual, product liability and other claims and disputes
incidental to its present and former businesses.
The Company currently believes the disposition of all claims and disputes
individually or in the aggregate, should not have a material adverse effect on
the Company's consolidated financial condition, results of operations or
liquidity.
Concentrations of credit risk
Sales of TiO2 accounted for more than 90% of net sales from continuing
operations during each of the past three years. The remaining sales result from
the mining and sale of ilmenite ore (a raw material used in the sulfate pigment
production process), and the manufacture and sale of iron-based water treatment
chemicals (derived from co-products of the TiO2 production processes). TiO2 is
generally sold to the paint, plastics and paper industries. Such markets are
generally considered "quality-of-life" markets whose demand for TiO2 is
influenced by the relative economic well-being of the various geographic
regions. TiO2 is sold to over 4,000 customers, none of which represents a
significant portion of net sales. Approximately one-half of the Company's TiO2
sales by
F-39
volume were to Europe in each of the past three years and approximately 36% in
1997 and 37% in each of 1998 and 1999 of sales were attributable to North
America.
Consolidated cash, cash equivalents and restricted cash equivalents
includes $136 million and $78 million invested in U.S. Treasury securities
purchased under short-term agreements to resell at December 31, 1998 and 1999,
respectively, of which $126 million and $58 million, respectively, of such
securities are held in trust for the Company by a single U.S. bank.
Note 18 - Financial instruments:
Summarized below is the estimated fair value and related net carrying
value of the Company's financial instruments.
December 31, December 31,
1998 1999
----------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
(In millions)
Cash, cash equivalents and current
restricted cash equivalents ............... $ 163.1 $ 163.1 $ 151.8 $ 151.8
Marketable securities - classified as
available-for-sale ........................ 17.6 17.6 15.1 15.1
Notes payable and long-term debt:
Fixed rate with market quotes -
Senior Secured Notes .................... $ 244.0 253.1 $ 244.0 $ 253.2
Variable rate debt ....................... 150.0 150.0 57.6 57.6
Common shareholders' equity ................ $ 152.3 $ 735.1 $ 271.1 $ 774.1
Fair value of the Company's marketable securities and Notes are based upon
quoted market prices and the fair value of the Company's common shareholder's
equity is based upon quoted market prices for NL's common stock at the end of
the year. The Company held no derivative financial instruments at December 31,
1998 or 1999.
F-40
Note 19 - Quarterly financial data (unaudited):
Quarter ended
-----------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In thousands, except per share amounts)
Year ended December 31, 1998:
Net sales ........................ $222,629 $241,645 $221,520 $208,930
Cost of sales .................... 156,915 167,329 151,782 142,421
Operating income ................. 39,399 46,725 45,024 40,033
Income from continuing
operations ...................... 16,300 23,414 31,359 18,789
Net income ....................... 301,015 23,729 28,959 12,975
Earnings per share:
Basic:
Income from continuing
operations .................. $ .32 $ .46 $ .61 $ .36
======== ======== ======== ========
Net income ................... $ 5.87 $ .46 $ .56 $ .25
======== ======== ======== ========
Diluted:
Income from continuing
operations .................. $ .31 $ .45 $ .60 $ .36
======== ======== ======== ========
Net income ................... $ 5.80 $ .46 $ .55 $ .25
======== ======== ======== ========
Weighted average common
shares and potential
common shares outstanding:
Basic .......................... 51,282 51,341 51,444 51,805
Diluted ........................ 51,852 52,030 52,194 52,014
Year ended December 31, 1999:
Net sales ........................ $201,569 $232,658 $242,621 $231,629
Cost of sales .................... 147,040 167,779 181,745 165,751
Operating income ................. 30,961 44,136 34,759 35,812
Net income ....................... 13,940 111,823 17,146 16,862
Earnings per share - net
income:
Basic .......................... $ .27 $ 2.16 $ .33 $ .33
======== ======== ======== ========
Diluted ........................ $ .27 $ 2.16 $ .33 $ .33
======== ======== ======== ========
Weighted average common
shares and potential
common shares outstanding:
Basic .......................... 51,819 51,826 51,835 51,614
Diluted ........................ 51,870 51,883 51,943 51,758
Note 20 - Discontinued operations:
The Company sold the net assets of its Rheox specialty chemical business
to Elementis plc for $465 million cash (before fees and expenses) in January
1998, including $20 million attributable to a five-year agreement by the Company
not to compete in the rheological products business. The Company recognized an
after-tax gain of approximately $286 million on the sale of this business
segment. As a result of the sale, the Company has presented the results of this
business segment as discontinued operations for all periods presented.
F-41
Condensed income statements related to discontinued operations for the
year ended December 31, 1997 and the month ended January 31, 1998 are as
follows. Interest expense has been allocated to discontinued operations based on
the amount of debt specifically attributed to Rheox's operations.
Year ended Month ended
December 31, January 31,
1997 1998
------------ -----------
(In thousands)
Net sales .................................... $ 147,199 $ 12,630
Other expense, net ........................... (200) (50)
--------- ---------
146,999 12,580
--------- ---------
Cost of sales ................................ 73,583 6,969
Selling, general and administrative .......... 29,231 2,737
Interest expense ............................. 11,207 771
--------- ---------
114,021 10,477
--------- ---------
Income before income taxes and
minority interest ....................... 32,978 2,103
Income tax expense ........................... 12,475 778
Minority interest ............................ 101 --
--------- ---------
20,402 1,325
Gain from sale of Rheox, net of tax
expense of $86,222 .......................... -- 286,071
--------- ---------
$ 20,402 $ 287,396
========= =========
Condensed cash flow data for Rheox (excluding dividends paid to,
contributions received from and intercompany loans with NL) is presented below.
Year ended Month ended
December 31, January 31,
1997 1998
------------ -----------
(In thousands)
Cash flows from operating activities ........... $ 31,506 $ (30,587)
--------- ---------
Cash flows from investing activities:
Capital expenditures ......................... (2,330) (26)
Other, net ................................... 16 --
--------- ---------
(2,314) (26)
--------- ---------
Cash flows from financing activities -
indebtedness, net ............................. 100,940 (117,500)
--------- ---------
Net change from operating,
investing and financing
activities ................................ $ 130,132 $(148,113)
========= =========
F-42
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of NL Industries, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated February 29, 2000 appearing on page F-2 of the 1999 Annual Report
on Form 10-K of NL Industries, Inc. also included an audit of the financial
statement schedules listed in Item 14(a) and (d) of this Form 10-K. In our
opinion, these financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for environmental remediation costs in
1997 in accordance with Statement of Position No. 96-1.
PricewaterhouseCoopers LLP
Houston, Texas
February 29, 2000
S-1
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31, 1998 and 1999
(In thousands)
1998 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 13,853 $ 13,415
Restricted cash equivalents ........................ 5,500 17,565
Accounts and notes receivable ...................... 29 61
Receivable from subsidiaries ....................... 8,482 11,668
Refundable income taxes ............................ 5,713 317
Prepaid expenses ................................... 162 227
Deferred income taxes .............................. 115 5,774
-------- --------
Total current assets ........................... 33,854 49,027
-------- --------
Other assets:
Marketable securities .............................. 4,087 2,600
Notes receivable from subsidiary ................... 419,164 244,000
Investment in subsidiaries ......................... 312,764 558,898
Deferred income taxes .............................. -- 3,992
Other .............................................. 3,223 2,620
-------- --------
Total other assets ............................. 739,238 812,110
-------- --------
Property and equipment, net .......................... 3,011 5,174
-------- --------
$776,103 $866,311
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ........... $ 28,873 $ 30,397
Payable to affiliates .............................. 3,777 3,444
Income taxes ....................................... -- 1,470
-------- --------
Total current liabilities ...................... 32,650 35,311
-------- --------
Noncurrent liabilities:
Long-term debt ..................................... 244,000 244,000
Notes payable to affiliates ........................ 265,838 263,839
Deferred income taxes .............................. 8,940 --
Accrued pension cost ............................... 12,351 8,410
Accrued postretirement benefits cost ............... 25,655 21,625
Other .............................................. 34,335 22,039
-------- --------
Total noncurrent liabilities ................... 591,119 559,913
-------- --------
Shareholders' equity ................................. 152,334 271,087
-------- --------
$776,103 $866,311
======== ========
Contingencies (Note 4)
S-2
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed Statements of Income
Years ended December 31, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
--------- --------- --------
Revenues and other income:
Equity in income (loss) from
continuing operations of
subsidiaries ........................... $ (1,019) $ 73,839 $154,625
Interest and dividends .................. 1,246 1,812 1,184
Interest income from subsidiaries:
Continuing ............................ 57,851 56,089 29,659
Discontinued .......................... 1,189 -- --
Securities transactions ................. 2,657 5,635 --
Other income, net ....................... 523 4,421 4,565
--------- --------- --------
62,447 141,796 190,033
--------- --------- --------
Costs and expenses:
General and administrative .............. 49,502 10,756 16,037
Interest ................................ 50,319 55,078 49,872
--------- --------- --------
99,821 65,834 65,909
--------- --------- --------
Income (loss) from continuing
operations before income taxes ..... (37,374) 75,962 124,124
Income tax benefit ........................ 7,499 13,900 35,647
--------- --------- --------
Income (loss) from continuing
operations ......................... (29,875) 89,862 159,771
Discontinued operations ................... 20,402 287,396 --
Extraordinary item ........................ -- (10,580) --
--------- --------- --------
Net income (loss) ................... $ (9,473) $ 366,678 $159,771
========= ========= ========
S-3
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed Statements of Cash Flows
Years ended December 31, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
-------- --------- ---------
Cash flows from operating activities:
Net income (loss) ....................... $ (9,473) $ 366,678 $ 159,771
Equity in (income) loss of subsidiaries:
Continuing ............................ 1,019 (73,839) (154,625)
Discontinued .......................... (20,402) (287,396) --
Distributions from subsidiaries:
Continuing ............................ 35,000 15,000 50,000
Discontinued .......................... 30,000 -- --
Noncash interest expense ................ (7,523) (8,660) (390)
Deferred income taxes ................... 1,224 (3,862) (18,071)
Securities transactions ................. (2,657) (3,711) --
Change in accounting for environmental
remediation costs ...................... 30,000 -- --
Other, net .............................. (2,544) (3,382) (3,164)
-------- --------- ---------
54,644 828 33,521
Change in assets and liabilities, net ... 789 92,018 (4,779)
-------- --------- ---------
Net cash provided by operating
activities ......................... 55,433 92,846 28,742
-------- --------- ---------
Cash flows from investing activities:
Change in restricted cash equivalents,
net .................................... (101) (566) (12,065)
Capital expenditures .................... (15) (82) (2,856)
Investments in and loans to subsidiaries (58,900) -- (27)
Proceeds from disposition of securities . 6,875 6,875 --
Other, net .............................. (12) 87 10
-------- --------- ---------
Net cash provided (used) by investing
activities ......................... (52,153) 6,314 (14,938)
-------- --------- ---------
S-4
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed Statements of Cash Flows (Continued)
Years ended December 31, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
------- --------- --------
Cash flows from financing activities:
Dividends ................................. $ -- $ (4,636) $ (7,242)
Treasury stock:
Purchased ............................... -- -- (7,210)
Reissued ................................ 1,025 170 210
Indebtedness - principal payments ......... -- (193,498) --
Borrowings from affiliates ................ -- 89,839 --
Settlement of shareholder derivative
lawsuit, net ............................. -- 11,211 --
------- --------- --------
Net cash provided (used) by
financing activities ................. 1,025 (96,914) (14,242)
------- --------- --------
Net change from operating, investing
and financing activities ................. 4,305 2,246 (438)
Balance at beginning of year .............. 7,302 11,607 13,853
------- --------- --------
Balance at end of year .................... $11,607 $ 13,853 $ 13,415
======= ========= ========
S-5
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Notes to Condensed Financial Information
Note 1 - Basis of presentation:
The Consolidated Financial Statements of NL Industries, Inc. (the
"Company") and the related Notes to Consolidated Financial Statements are
incorporated herein by reference. In 1997 the Company adopted a new method of
accounting for environmental remediation costs. See Note 2 to the Consolidated
Financial Statements.
Note 2 - Net receivable from (payable to) subsidiaries and affiliates:
December 31,
---------------------------
1998 1999
--------- ---------
(In thousands)
Current:
Receivable from:
Kronos and NLCC:
Income taxes ......................... $ 1,099 $ 3,790
Other, net ........................... 5,873 6,507
Timet .................................. 428 310
CompX .................................. 142 176
Other .................................. 940 885
--------- ---------
$ 8,482 $ 11,668
========= =========
Payable to:
Tremont Corporation .................... $ (3,053) $ (2,859)
NLEMS .................................. (520) (562)
Other .................................. (204) (23)
--------- ---------
$ (3,777) $ (3,444)
========= =========
Noncurrent:
Notes receivable from Kronos ............. $ 419,164 $ 244,000
========= =========
Notes payable to:
NLCC ................................... $(185,838) $(185,839)
NLEMS .................................. (80,000) (78,000)
--------- ---------
$(265,838) $(263,839)
========= =========
S-6
Note 3 - Long-term debt:
See Note 10 of the Consolidated Financial Statements for a description of
the Notes. The Company's $244 million of Senior Secured Notes at December 31,
1999 are due October 2003. The Company has guaranteed Kronos' euro-denominated
notes payable of $57 million.
Note 4 - Contingencies:
See Legal proceedings in Note 17 to the Consolidated Financial Statements.
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NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
(In thousands)
Charges
(credits)
Balance at to costs Currency
beginning and translation Balance at
Description of year expenses Deductions adjustments end of year
----------- ---------- -------- ---------- ----------- -----------
Year ended December 31, 1999:
Allowance for doubtful accounts and notes
receivable ............................. $ 2,377 $ 140 $ (180)(a) $ (262) $ 2,075
======= ======= ======== ======= =======
Amortization of intangibles ............. $23,704 $ 1,851 $ -- $(3,460) $22,095
======= ======= ======== ======= =======
Year ended December 31, 1998:
Allowance for doubtful accounts and notes
receivable ............................. $ 2,828 $ (208) $ (363)(a)(b) $ 120 $ 2,377
======= ======= ======== ======= =======
Amortization of intangibles ............. $22,366 $ 2,438 $ (2,757)(b) $ 1,657 $23,704
======= ======= ======== ======= =======
Year ended December 31, 1997:
Allowance for doubtful accounts and notes
receivable ............................. $ 3,813 $ 382 $ (1,153)(a) $ (214) $ 2,828
======= ======= ======== ======= =======
Amortization of intangibles ............. $22,207 $ 2,862 $ -- $(2,703) $22,366
======= ======= ======== ======= =======
(a) Amounts written off, less recoveries.
(b) Sale of Rheox's assets.
S-8