SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 - For the quarter ended June 30, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
Commission file number 1-640
NL INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 13-5267260
- -------------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16825 Northchase Drive, Suite 1200, Houston, Texas 77060-2544
- -------------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 423-3300
-------------------
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) had been subject to such filing
requirements for the past 90 days.
Yes X No
------- ------
Number of shares of common stock outstanding on August 13, 2002: 48,623,984
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - June 30, 2002
and December 31, 2001 3-4
Consolidated Statements of Income - Three months and six
months ended June 30, 2002 and 2001 5
Consolidated Statements of Comprehensive Income
- Three months and six months ended
June 30, 2002 and 2001 6
Consolidated Statement of Shareholders' Equity
- Six months ended June 30, 2002 7
Consolidated Statements of Cash Flows - Six
months ended June 30, 2002 and 2001 8-9
Notes to Consolidated Financial Statements 10-20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21-29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30-31
Item 6. Exhibits and Reports on Form 8-K 31-32
- 2 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
ASSETS 2002 2001
---------- ------------
Current assets:
Cash and cash equivalents ........................ $ 176,182 $ 116,037
Restricted cash equivalents ...................... 54,405 63,257
Restricted marketable debt securities ............ 7,119 3,583
Accounts and notes receivable .................... 156,353 125,721
Receivable from affiliates ....................... 2,848 3,698
Refundable income taxes .......................... 3,153 1,530
Inventories ...................................... 177,809 231,056
Prepaid expenses ................................. 4,480 3,193
Deferred income taxes ............................ 10,475 11,011
---------- ----------
Total current assets ......................... 592,824 559,086
---------- ----------
Other assets:
Marketable equity securities ..................... 49,754 45,227
Receivable from affiliate ........................ 31,650 31,650
Investment in TiO2 manufacturing joint venture ... 136,178 138,428
Prepaid pension cost ............................. 22,266 18,411
Restricted marketable debt securities ............ 10,860 16,121
Restricted cash equivalents ...................... 2,732 --
Unrecognized net pension obligations ............. 5,901 5,901
Other ............................................ 21,429 6,517
---------- ----------
Total other assets ........................... 280,770 262,255
---------- ----------
Property and equipment:
Land ............................................. 27,308 24,579
Buildings ........................................ 144,845 130,710
Machinery and equipment .......................... 604,724 537,958
Mining properties ................................ 77,551 67,649
Construction in progress ......................... 11,524 5,071
---------- ----------
865,952 765,967
Less accumulated depreciation and depletion ...... 502,508 436,217
---------- ----------
Net property and equipment ................... 363,444 329,750
---------- ----------
$1,237,038 $1,151,091
========== ==========
- 3 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY June 30, December 31,
2002 2001
----------- ------------
Current liabilities:
Notes payable .............................. $ -- $ 46,201
Current maturities of long-term debt ....... 1,225 1,033
Accounts payable and accrued liabilities ... 136,943 176,223
Payable to affiliates ...................... 9,140 6,919
Accrued environmental costs ................ 52,547 59,891
Income taxes ............................... 6,941 7,277
Deferred income taxes ...................... 1,732 1,530
----------- -----------
Total current liabilities .............. 208,528 299,074
----------- -----------
Noncurrent liabilities:
Long-term debt ............................. 323,823 195,465
Deferred income taxes ...................... 153,400 143,256
Accrued environmental costs ................ 49,226 47,589
Accrued pension cost ....................... 26,958 26,985
Accrued postretirement benefits cost ....... 28,738 29,842
Other ...................................... 14,400 14,729
----------- -----------
Total noncurrent liabilities ........... 596,545 457,866
----------- -----------
Minority interest .............................. 7,603 7,208
----------- -----------
Shareholders' equity:
Common stock ............................... 8,355 8,355
Additional paid-in capital ................. 777,638 777,597
Retained earnings .......................... 223,624 222,722
Accumulated other comprehensive loss ....... (166,866) (206,351)
Treasury stock ............................. (418,389) (415,380)
----------- -----------
Total shareholders' equity ............. 424,362 386,943
----------- -----------
$ 1,237,038 $ 1,151,091
=========== ===========
Commitments and contingencies (Note 16)
See accompanying notes to consolidated financial statements.
- 4 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
--------------------- ----------------------
2002 2001 2002 2001
--------- ---------- ---------- --------
Revenues and other income:
Net sales ................ $ 226,909 $ 220,105 $ 429,266 $446,165
Other income, net ........ 7,906 5,298 12,901 20,729
--------- ---------- ---------- --------
234,815 225,403 442,167 466,894
--------- ---------- ---------- --------
Costs and expenses:
Cost of sales ............ 176,247 151,320 332,500 301,222
Selling, general and
administrative .......... 32,389 29,336 67,234 61,658
Interest ................. 8,078 6,887 14,613 13,863
--------- ---------- ---------- --------
216,714 187,543 414,347 376,743
--------- ---------- ---------- --------
Income before income
taxes and minority
interest ............ 18,101 37,860 27,820 90,151
Income tax expense ........... 3,867 12,069 7,018 29,215
--------- ---------- ---------- --------
Income before minority
interest ............ 14,234 25,791 20,802 60,936
Minority interest ............ 186 367 370 953
--------- ---------- ---------- --------
Net income ........... $ 14,048 $ 25,424 $ 20,432 $ 59,983
========= ========== ========== ========
Earnings per share:
Basic .................... $ .29 $ .51 $ .42 $ 1.20
========= ========== ========== ========
Diluted .................. $ .29 $ .51 $ .42 $ 1.20
========= ========== ========== ========
Weighted average shares used
in the calculation of
earnings per share:
Basic .................. 48,827 49,932 48,848 50,005
Dilutive impact of
stock options ......... 126 95 98 183
--------- ---------- ---------- --------
Diluted ................ 48,953 50,027 48,946 50,188
========= ========== ========== ========
See accompanying notes to consolidated financial statements.
- 5 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three months ended Six months ended
June 30, June 30,
------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income ....................... $ 14,048 $ 25,424 $ 20,432 $ 59,983
-------- -------- -------- --------
Other comprehensive income
(loss), net of tax:
Marketable securities
adjustment:
Unrealized holding gains
arising during
the period ................ 4,652 7,391 3,129 3,589
Add: reclassification
adjustment for loss
included in net income .... -- 736 -- 736
-------- -------- -------- --------
4,652 8,127 3,129 4,325
Currency translation
adjustment ................... 38,965 (4,467) 36,356 (20,365)
-------- -------- -------- --------
Total other
comprehensive
income (loss) ............ 43,617 3,660 39,485 (16,040)
-------- -------- -------- --------
Comprehensive income $ 57,665 $ 29,084 $ 59,917 $ 43,943
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
- 6 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Six months ended June 30, 2002
(In thousands)
Accumulated other
comprehensive income (loss)
Additional ------------------------------------
Common paid-in Retained Currency Pension Marketable Treasury
stock capital earnings translation liabilities securities stock Total
------ ---------- -------- ----------- ----------- ---------- -------- --------
Balance at December 31, 2001 ......... $8,355 $777,597 $222,722 $(208,349) $(6,352) $ 8,350 $(415,380) $386,943
Net income ........................... -- -- 20,432 -- -- -- -- 20,432
Other comprehensive income, net of tax -- -- -- 36,356 -- 3,129 -- 39,485
Dividends ............................ -- -- (19,530) -- -- -- -- (19,530)
Tax benefit of stock options exercised -- 41 -- -- -- -- -- 41
Treasury stock:
Acquired (228 shares) ............ -- -- -- -- -- -- (3,271) (3,271)
Reissued (23 shares) ............. -- -- -- -- -- -- 262 262
------ -------- -------- --------- ------- ------- --------- --------
Balance at June 30, 2002 ............. $8,355 $777,638 $223,624 $(171,993) $(6,352) $11,479 $(418,389) $424,362
====== ======== ======== ========= ======= ======= ========= ========
See accompanying notes to consolidated financial statements.
- 7 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2002 and 2001
(In thousands)
2002 2001
-------- --------
Cash flows from operating activities:
Net income ....................................... $ 20,432 $ 59,983
Depreciation, depletion and amortization ......... 15,820 14,930
Deferred income taxes ............................ 2,400 5,140
Distributions from TiO2 manufacturing joint
venture ......................................... 2,250 4,950
Litigation settlement gain, net included in
restricted cash ................................. -- (10,307)
Net losses from securities transactions .......... 12 1,133
Insurance recoveries, net ........................ -- (1,929)
Other, net ....................................... (3,572) (2,065)
-------- --------
37,342 71,835
Change in assets and liabilities:
Accounts and notes receivable ................ (29,665) (30,409)
Insurance receivable ......................... 11,053 (718)
Inventories .................................. 68,227 21,463
Prepaid expenses ............................. (796) (2,520)
Accounts payable and accrued liabilities ..... (58,638) (16,310)
Income taxes ................................. (2,878) 4,928
Other, net ................................... 11,856 (3,008)
-------- --------
Net cash provided by operating
activities .............................. 36,501 45,261
-------- --------
Cash flows from investing activities:
Capital expenditures ............................. (12,076) (17,705)
Property damaged by fire:
Insurance proceeds ........................... -- 5,500
Other, net ................................... -- (1,000)
Loans to affiliates:
Loans ........................................ -- (33,400)
Collections .................................. 500 250
Acquisition of business .......................... (9,149) --
Change in restricted cash equivalents and
restricted marketable debt securities, net ...... 595 682
Other, net ....................................... 830 41
-------- --------
Net cash used by investing activities ........ (19,300) (45,632)
-------- --------
- 8 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six months ended June 30, 2002 and 2001
(In thousands)
2002 2001
--------- ---------
Cash flows from financing activities:
Dividends paid ................................... $ (19,530) $ (19,993)
Treasury stock:
Purchased .................................... (3,271) (2,718)
Reissued ..................................... 262 606
Indebtedness:
Borrowings ................................... 319,275 1,437
Principal payments ........................... (247,688) (6,990)
Deferred financing costs ..................... (9,342) --
Other, net ....................................... (11) (5)
--------- ---------
Net cash provided (used) by financing activities . 39,695 (27,663)
--------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities 56,896 (28,034)
Currency translation ......................... 3,053 (3,276)
Acquisition of business ...................... 196 --
--------- ---------
60,145 (31,310)
Balance at beginning of period ................... 116,037 120,378
--------- ---------
Balance at end of period ......................... $ 176,182 $ 89,068
========= =========
Supplemental disclosures - cash paid for:
Interest ......................................... $ 18,599 $ 13,709
Income taxes, net ................................ 7,496 19,147
Acquisition of business:
Cash and cash equivalents .................... $ 196 $ --
Restricted cash .............................. 2,685 --
Goodwill and other intangible assets ......... 9,007 --
Other noncash assets ......................... 1,259 --
Liabilities .................................. (3,998) --
--------- ---------
Cash paid ................................ $ 9,149 $ --
========= =========
See accompanying notes to consolidated financial statements.
- 9 -
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. ("Kronos"). At June
30, 2002, Valhi, Inc. ("Valhi") and Tremont Corporation ("Tremont"), each
affiliates of Contran Corporation, held approximately 62% and 21%, respectively,
of NL's outstanding common stock. At June 30, 2002, Contran and its subsidiaries
held approximately 93% of Valhi's outstanding common stock, and Tremont Group,
Inc. ("Tremont Group"), which is 80% owned by Valhi and 20% owned by NL, held
approximately 80% of Tremont's outstanding common stock. Substantially all of
Contran's outstanding voting stock is held by trusts established for the benefit
of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons
is sole trustee. Mr. Simmons, the Chairman of the Board of NL, Chairman of the
Board and Chief Executive Officer of Contran, the Chairman of the Board of Valhi
and a director of Tremont, may be deemed to control each of such companies. See
Note 8 and Note 18.
The consolidated balance sheet of NL Industries, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2001 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 2002 and the consolidated statements of
income, comprehensive income, shareholders' equity and cash flows for the
interim periods ended June 30, 2002 and 2001 have been prepared by the Company
without audit. In the opinion of management all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows have been made. The
results of operations for the interim periods are not necessarily indicative of
the operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles in the U.S. ("GAAP") have been condensed or omitted. Certain
prior-year and prior-quarter amounts have been reclassified to conform to the
current year presentation. The accompanying consolidated financial statements
should be read in conjunction with the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2001 (the "2001 Annual Report").
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
effective January 1, 2002. Under SFAS No. 142, goodwill, including goodwill
arising from the difference between the cost of an investment accounted for by
the equity method and the amount of the underlying equity in net assets of such
equity method investee ("equity method goodwill"), will not be amortized on a
periodic basis. Instead, goodwill (other than equity method goodwill) will be
subject to an impairment test to be performed at least on an annual basis, and
impairment reviews may result in future periodic write-downs charged to
earnings. Equity method goodwill will not be tested for impairment in accordance
with SFAS No. 142; rather, the overall carrying amount of an equity method
investee will continue to be reviewed for impairment in accordance with existing
GAAP. There is currently no equity method goodwill associated with the Company's
equity method investee. All goodwill arising in a purchase business combination
- 10 -
(including step acquisitions) completed on or after July 1, 2001 would not be
periodically amortized from the date of such combination. The Company had
goodwill of $6.4 million at June 30, 2002. See Note 3.
The Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," effective January 1, 2002. SFAS No. 144 retains
the fundamental provisions of existing GAAP with respect to the recognition and
measurement of long-lived asset impairment contained in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." However, SFAS No. 144 provides new guidance intended to address
certain significant implementation issues associated with SFAS No. 121,
including expanded guidance with respect to appropriate cash flows to be used to
determine whether recognition of any long-lived asset impairment is required,
and if required how to measure the amount of the impairment. SFAS No. 144 also
requires that any net assets to be disposed of by sale to be reported at the
lower of carrying value or fair value less cost to sell, and expands the
reporting of discontinued operations to include any component of an entity with
operations and cash flows that can be clearly distinguished from the rest of the
entity. The adoption of SFAS No. 144 effective January 1, 2002 did not have a
material effect on the Company's consolidated financial position, results of
operations or liquidity.
The Company adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections" effective
April 1, 2002. SFAS No. 145, among other things, eliminated the prior
requirement that all gains and losses from the early extinguishment of debt were
to be classified as an extraordinary item. Upon adoption of SFAS No. 145, gains
and losses from the early extinguishment of debt are now classified as an
extraordinary item only if they meet the "unusual and infrequent" criteria
contained in Accounting Principles Board Opinion ("APBO") No. 30. In addition,
upon adoption of SFAS No. 145, all gains and losses from the early
extinguishment of debt that had previously been classified as an extraordinary
item are to be reassessed to determine if they would have met the "unusual and
infrequent" criteria of APBO No. 30; any such gain or loss that would not have
met the APBO No. 30 criteria are retroactively reclassified and reported as a
component of income before extraordinary item. The Company has concluded that
all of its previously-recognized gains and losses from the early extinguishment
of debt that occurred on or after January 1, 1998 would not have met the APBO
No. 30 criteria for classification as an extraordinary item, and accordingly
such previously-reported gains and losses from the early extinguishment of debt
have been retroactively reclassified and reported as a component of income
before extraordinary item. The effect of adoption for the six months ended June
30, 2002 was a reclassification of a first-quarter 2002 loss of $92,000
($60,000, net of income tax benefit) from extraordinary item to income before
extraordinary item under interest expense.
Note 2 - Earnings per share:
Basic earnings per share is based on the weighted average number of common
shares outstanding during each period. Diluted earnings per share is based on
the weighted average number of common shares outstanding and the dilutive impact
of outstanding stock options.
Note 3 - Business combination
In January 2002, the Company acquired all of the stock and limited
liability company units of EWI RE, Inc. and EWI RE, Ltd. (collectively "EWI"),
respectively, for an aggregate of $9.2 million in cash, including acquisition
costs of $.2 million. An entity controlled by one of Harold C. Simmons'
- 11 -
daughters owned a majority of EWI, and a wholly owned subsidiary of Contran
owned the remainder of EWI. EWI provides reinsurance brokerage services for
insurance policies of the Company, its joint venture and other affiliates of
Contran as well as external third-party customers. In addition, EWI is
attempting to obtain new third-party customers in the future. The purchase was
approved by a special committee of the Company's Board of Directors consisting
of two of its directors unrelated to Contran, and the purchase price was
negotiated by the special committee based upon its consideration of relevant
factors, including but not limited to due diligence performed by independent
consultants and an appraisal of EWI conducted by an independent third party
selected by the special committee.
EWI's results of operations and cash flows are included in the Company's
consolidated results of operations and cash flows beginning January 2002. The
pro forma effect on the Company's results of operations in the first six months
of 2001, assuming the acquisition of EWI had occurred as of January 1, 2001, is
not material. The aggregate cash purchase price of $9.2 million (including
acquisition costs of $.2 million) has been allocated to the assets acquired and
liabilities assumed, consisting of a definite-lived, customer list intangible
asset of $2.6 million and goodwill of $6.4 million, based upon preliminary
estimates of fair value. Such identifiable intangible asset and goodwill were
included in other noncurrent assets at June 30, 2002. The actual allocation may
be different from the preliminary allocation due to refinements in the estimates
of fair values of the net assets acquired. The identifiable intangible asset
will be amortized on a straight-line basis over a period of 7 years
(approximately 6.5 years remaining at June 30, 2002) with no assumed residual
value. Goodwill will not be amortized on a periodic basis but instead will
subject to periodic impairment tests in accordance with the requirements of SFAS
No. 142. See Note 1.
- 12 -
Note 4 - Business segment information:
The Company's operations are conducted by Kronos in one operating business
segment - the production and sale of TiO2.
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(In thousands)
Net sales ......................... $ 226,909 $ 220,105 $ 429,266 $ 446,165
Other income (expense)
excluding corporate .............. (1,099) 768 (316) 2,010
--------- --------- --------- ---------
225,810 220,873 428,950 448,175
Cost of sales ..................... 176,247 151,320 332,500 301,222
Selling, general and
administrative, excluding
corporate ........................ 24,898 24,383 49,626 49,867
--------- --------- --------- ---------
Operating income .......... 24,665 45,170 46,824 97,086
Insurance recoveries, net ......... -- 1,929 -- 1,929
--------- --------- --------- ---------
Income before corporate
items, income taxes and
minority interest ........ 24,665 47,099 46,824 99,015
General corporate income (expense):
Securities earnings, net ...... 1,268 1,186 2,548 3,792
Litigation settlement gains,
net and other income ......... 1,466 1,415 4,398 12,998
Currency transaction gains
(see Note 14) ................ 6,271 -- 6,271 --
Corporate expenses ............ (7,491) (4,953) (17,608) (11,791)
Interest expense .............. (8,078) (6,887) (14,613) (13,863)
--------- --------- --------- ---------
Income before income taxes
and minority interest
minority interest ....... $ 18,101 $ 37,860 $ 27,820 $ 90,151
========= ========= ========= =========
Note 5 - Accounts and notes receivable:
June 30, December 31,
2002 2001
--------- -----------
(In thousands)
Trade receivables .............................. $ 147,034 $ 99,989
Insurance claims receivable .................... 452 11,505
Recoverable VAT and other receivables .......... 11,503 16,585
Allowance for doubtful accounts ................ (2,636) (2,358)
--------- ---------
$ 156,353 $ 125,721
========= =========
- 13 -
Note 6 - Inventories:
June 30, December 31,
2002 2001
-------- -------------
(In thousands)
Raw materials ............................ $ 34,856 $ 79,162
Work in process .......................... 10,431 9,675
Finished products ........................ 103,465 117,201
Supplies ................................. 29,057 25,018
-------- --------
$177,809 $231,056
======== ========
Note 7 - Marketable equity securities:
June 30, December 31,
2002 2001
-------- -----------
(In thousands)
Available-for-sale marketable equity
securities (see Note 18):
Unrealized gains ........................... $ 18,994 $ 14,917
Unrealized losses .......................... (1,620) (2,070)
Cost ....................................... 32,380 32,380
-------- --------
Aggregate fair value ................... $ 49,754 $ 45,227
======== ========
Available-for-sale marketable equity securities are comprised
substantially of affiliate equity securities. At June 30, 2002, the Company
indirectly owned 1,036,000 shares of Tremont with an aggregate fair value of
approximately $30.9 million. Further, the Company also held 1,186,200 shares of
Valhi with an aggregate fair value of approximately $18.5 million at June 30,
2002. See Note 6 in the 2001 Annual Report.
Note 8 - Receivable from affiliates:
A majority-owned subsidiary of the Company, NL Environmental Management
Services, Inc. ("EMS"), loaned $13.4 million to Tremont, a related party, under
a reducing revolving loan agreement in the first quarter of 2001. See Note 1.
The loan was approved by special committees of the Company's and EMS' Boards of
Directors. The loan bears interest at prime plus 2% (6.75% at June 30, 2002), is
due March 31, 2003 and is collateralized by 10.2 million shares of NL common
stock owned by Tremont. The creditworthiness of Tremont is dependent in part on
the value of the Company as Tremont's interest in the Company is one of
Tremont's more substantial assets. The maximum amount available for borrowing by
Tremont reduces by $250,000 per quarter. In each of the first and second
quarters of 2002, Tremont repaid $250,000 of the loan. At June 30, 2002, the
outstanding loan balance was $12.2 million, and no amounts were available for
additional borrowings by Tremont. Tremont has requested an amendment of the
terms of the revolving loan agreement and seeks, among other things, an
extension of the maturity date and in increase in the amount of borrowings
available to Tremont in order for Tremont to meet its projected near term
obligations and continue the payment of dividends at the present quarterly rate.
The merits of Tremont's proposal will be considered by special committees of the
Company's and EMS' Boards of Directors. If the loan is extended, the Company
does not expect a material impact on its liquidity. The current loan receivable
- 14 -
balance of $.5 million was included in receivable from affiliates at June 30,
2002. This represents quarterly payments from Tremont through December 31, 2002
as further quarterly repayments may be subject to renegotiation. The remaining
loan balance of $11.7 million was classified as noncurrent at June 30, 2002 as
the Company does not expect repayment within one year.
In May 2001, a wholly owned subsidiary of EMS loaned $20 million to the
Harold C. Simmons Family Trust No. 2 ("Family Trust"), one of the trusts
described in Note 1, under a $25 million revolving credit agreement. The loan
was approved by special committees of the Company's and EMS' Boards of
Directors. The loan bears interest at prime (4.75% at June 30, 2002), is due on
demand with sixty days notice and is collateralized by 13,749 shares, or
approximately 35%, of Contran's outstanding Class A voting common stock and
5,000 shares, or 100%, of Contran's Series E Cumulative preferred stock, both of
which are owned by the Family Trust. The value of this collateral is dependent
in part on the value of the Company as Contran's interest in the Company,
through its beneficial ownership of Valhi, is one of Contran's more substantial
assets. At June 30, 2002, $5 million was available for additional borrowing by
the Family Trust. The loan was classified as noncurrent at June 30, 2002, as the
Company does not expect to demand repayment within one year.
Note 9 - Other noncurrent assets:
June 30, December 31,
2002 2001
--------- ------------
(In thousands)
Deferred financing costs (see Note 12) ............. $ 9,343 $ 848
Goodwill (see Note 3) .............................. 6,406 --
Intangible asset, net (see Note 3) ................. 2,416 --
Other .............................................. 3,264 5,669
------- -------
$21,429 $ 6,517
======= =======
Note 10 - Accounts payable and accrued liabilities:
June 30, December 31,
2002 2001
-------- ------------
(In thousands)
Accounts payable ......................... $ 59,133 $ 99,358
-------- --------
Accrued liabilities:
Employee benefits .................... 27,783 29,722
Interest ............................. 221 4,980
Deferred income ...................... 2,333 4,000
Other ................................ 47,473 38,163
-------- --------
77,810 76,865
-------- --------
$136,943 $176,223
======== ========
- 15 -
Note 11 - Other noncurrent liabilities:
June 30, December 31,
2002 2001
---------- ------------
(In thousands)
Insurance claims and expenses .................. $ 8,221 $ 8,789
Employee benefits .............................. 3,842 3,476
Deferred income ................................ -- 333
Other .......................................... 2,337 2,131
------- -------
$14,400 $14,729
======= =======
Note 12 - Notes payable and long-term debt:
June 30, December 31,
2002 2001
--------- ------------
(In thousands)
Notes payable - Kronos International, Inc. and
subsidiaries ........................................ $ -- $ 46,201
======== ========
Long-term debt:
NL Industries, Inc.:
11.75% Senior Secured Notes .................. $ -- $194,000
Kronos International, Inc. and subsidiaries:
8.875% Senior Secured Notes .................. 283,005 --
Revolving credit facility .................... 39,649 --
Other ........................................ 2,394 2,498
-------- --------
325,048 196,498
Less current maturities .............................. 1,225 1,033
-------- --------
$323,823 $195,465
======== ========
Notes payable at December 31, 2001, consisted of (euro)27 million ($24.0
million) and NOK 200 million ($22.2 million). Notes payable totaling $53.2
million were repaid on June 28, 2002 with proceeds from the revolving credit
facility and available cash and the agreements were terminated. See description
of revolving credit facility below.
In June 2002 Kronos International, Inc. ("KII"), issued (euro)285 million
($280 million when issued and $283 million at June 30, 2002) principal amount of
8.875% Senior Secured Notes (the "Notes") due 2009. The Notes are collateralized
by first priority liens on 65% of the common stock or other equity interests of
certain of KII's first-tier subsidiaries. The Notes are issued pursuant to an
indenture which contains a number of covenants and restrictions which, among
other things, restricts the ability of KII and its subsidiaries to incur debt,
incur liens, pay dividends or merge or consolidate with, or sell or transfer all
or substantially all of their assets to, another entity. The Notes are
redeemable, at KII's option, on or after December 30, 2005 at redemption prices
ranging from 104.437% of the principal amount, declining to 100% on or after
December 30, 2008. In addition, on or before June 30, 2005, KII may redeem up to
35% of its Notes with the net proceeds of a qualified public equity offering at
108.875% of the principal amount. In the event of a change of control of KII, as
defined, KII would be required to make an offer to purchase its Notes at 101% of
- 16 -
the principal amount. KII would also be required to make an offer to purchase a
specified portion of its Notes at par value in the event KII generates a certain
amount of net proceeds from the sale of assets outside the ordinary course of
business, and such net proceeds are not otherwise used for specified purposes
within a specified time period. At June 30, 2002, KII was in compliance with all
the covenants. The Notes require cash interest payments on June 30 and December
30, commencing on December 30, 2002. KII has agreed to make an offer to exchange
the Notes for registered publicly traded notes that have substantially identical
terms as the Notes. In the event that KII does not (i) file a registration
statement regarding such an exchange offer with the Securities and Exchange
Commission, (ii) cause the registration statement to be declared effective, and
(iii) complete the exchange offer to exchange the Notes within specified time
limits, the interest rate on the Notes would increase by up to .75% per year.
In March 2002 the Company redeemed $25 million principal amount of its
11.75% Senior Secured Notes due October 2003 at par value, using available cash
on hand. In addition, the Company used a portion of the net proceeds from the
issuance of the Notes to redeem in full the remaining $169 million principal
amount of the Company's 11.75% Senior Secured Notes. In accordance with the
terms of the indenture governing the 11.75% Senior Secured Notes, on June 28,
2002, the Company irrevocably placed on deposit with the trustee funds in an
amount sufficient to pay in full the redemption price plus all accrued and
unpaid interest due on the July 28, 2002 redemption date. Immediately
thereafter, the Company was released from its obligations under such indenture,
the indenture was discharged and all collateral was released to the Company.
Because the Company had been released as being the primary obligor under the
indenture as of June 30, 2002, the 11.75% Senior Secured Notes were derecognized
as of that date along with the funds placed on deposit with the trustee to
effect the July 28, 2002 redemption. The Company recognized a loss on the early
extinguishment of debt of approximately $2 million in the second quarter of
2002, consisting primarily of the interest on the 11.75% Senior Secured Notes
for the period from July 1 to July 28, 2002. Such loss was recognized as a
component of interest expense.
In June 2002 KII's operating subsidiaries in Germany, Belgium and Norway,
entered into a three-year (euro)80 million secured revolving credit facility
("Credit Facility"). The Credit Facility is available in multiple currencies,
including U.S. dollars, euros and Norwegian kroner. As of June 30, 2002,
(euro)13 million ($13 million) and NOK 200 million ($26 million) was borrowed at
closing, and along with available cash, was used to repay and terminate KII's
short term notes payable. At June 30, 2002, (euro)40 million was available for
future working capital requirements and general corporate purposes of the
borrowers. Borrowings bear interest at the applicable interbank market rate plus
1.75%. As of June 30, 2002, the interest rate was 5.15% and 8.80% on the euro
and Norwegian kroner borrowings, respectively, and the weighted average interest
rate was 7.61%.
The Credit Facility is collateralized by accounts receivable and inventory
of the borrowers, plus a limited pledge of certain other assets of the Belgian
borrower. The Credit Facility contains, among others, various restrictive
covenants, including restrictions on incurring liens, asset sales, additional
financial indebtedness, mergers, investments and acquisitions, transactions with
affiliates and dividends. The Company has a (euro)5 million sub-limit for
issuing letters of credit with no letters of credit issued at June 30, 2002. The
borrowers were in compliance with all the covenants as of June 30, 2002.
Deferred financing costs of $9.3 million for the Notes and the Credit
Facility are being amortized over the life of the respective agreements and are
included in other noncurrent assets as of June 30, 2002.
- 17 -
Unused lines of credit available for borrowing under the Company's
non-U.S. credit facilities approximated $42 million at June 30, 2002 (including
$40 million under the Credit Facility).
Note 13 - Income taxes:
The difference between the provision for income tax expense attributable
to income before income taxes and minority interest and the amount that would be
expected using the U.S. federal statutory income tax rate of 35% is presented
below.
Six months ended
June 30,
--------------------
2002 2001
-------- --------
(In thousands)
Expected tax expense ................................... $ 9,737 $ 31,553
Non-U.S. tax rates ..................................... (708) (2,722)
Incremental tax on income of companies not included
in NL's consolidated U.S. federal income tax return .. 202 300
Valuation allowance .................................... (3,027) (1,113)
U.S. state income taxes ................................ 61 234
Other, net ............................................. 753 963
-------- --------
Income tax expense ............................. $ 7,018 $ 29,215
======== ========
Note 14 - Other income, net:
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
(In thousands)
Securities earnings:
Interest and dividends .......... $ 1,280 $ 2,319 $ 2,560 $ 4,925
Securities transactions ......... (12) (1,133) (12) (1,133)
-------- -------- -------- --------
1,268 1,186 2,548 3,792
Litigation settlement gains, net .... 435 -- 2,355 10,582
Insurance recoveries, net ........... -- 1,929 -- 1,929
Currency transactions, net .......... 4,222 214 4,820 1,281
Noncompete agreement income ......... 1,000 1,000 2,000 2,000
Disposition of property and equipment 643 (58) 597 (419)
Trade interest income ............... 333 476 555 1,069
Other, net .......................... 5 551 26 495
-------- -------- -------- --------
$ 7,906 $ 5,298 $ 12,901 $ 20,729
======== ======== ======== ========
Litigation settlement gains, net
In the first half of 2002 and 2001, the Company recognized litigation
settlement gains with former insurance carrier groups of $2.4 million and $10.6
million, respectively, to settle certain insurance coverage claims related to
- 18 -
environmental remediation. A majority of the proceeds from the 2001 settlement
was transferred to special-purpose trusts established by the insurance carrier
group to pay future remediation and other environmental expenditures of the
Company.
Currency transactions, net
Included in currency transactions, net, as a result of the debt
refinancing described in Note 12, the Company recognized a foreign currency
transaction gain of $6.3 million in the second quarter of 2002 related to the
extinguishment of certain intercompany indebtedness with KII.
Note 15 - Leverkusen fire and insurance claim:
A fire on March 20, 2001 damaged a section of the Company's Leverkusen,
Germany 35,000 metric ton sulfate-process TiO2 plant ("Sulfate Plant") and, as a
result, production of TiO2 at the Leverkusen facility was halted. The fire did
not enter the Company's adjacent 125,000 metric ton chloride-process TiO2 plant
("Chloride Plant"), but did damage certain support equipment necessary to
operate that plant. The damage to the support equipment resulted in a temporary
shutdown of the Chloride Plant. The Chloride Plant became fully operational in
April 2001 and the Sulfate Plant became approximately 50% operational in
September 2001 and fully operational in late October 2001.
During the second quarter of 2001, the Company's insurance carriers
approved a partial payment of $10.5 million ($9 million received as of June 30,
2001) for property damage costs and business interruption losses caused by the
Leverkusen fire. Five million dollars of this payment represented partial
compensation for business interruption losses which was recorded as a reduction
of cost of sales to offset unallocated period costs that resulted from lost
production. The remaining $5.5 million represented property damage recoveries
against clean-up costs, resulting in a net gain of $1.9 million. The Company
settled its insurance claim involving the Leverkusen fire for $56.4 million
during the fourth quarter of 2001 of which $27.3 million related to business
interruption (which included the $5 million partial payment described above) and
$29.1 million related to property damages, clean-up costs and other extra
expenses. In the fourth quarter of 2001, $19.3 million of the $27.3 million of
business interruption proceeds was recognized as a component of operating
income, of which $16.6 million was attributable to recovery of unallocated
period costs and lost margin related to the first, second and third quarters of
2001. No additional insurance recoveries related to the Leverkusen fire are
expected to be received in 2002.
Note 16 - Commitments and contingencies:
For descriptions of certain legal proceedings, income tax and other
commitments and contingencies related to the Company, reference is made to (i)
Management's Discussion and Analysis of Financial Condition and Results of
Operations, (ii) Part II, Item 1 - "Legal Proceedings," and (iii) the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, and (iv) the
2001 Annual Report.
- 19 -
Note 17 - Accounting principles not yet adopted:
The Company will adopt SFAS No. 143, Accounting for Asset Retirement
Obligations, no later than January 1, 2003. Under SFAS No. 143, the fair value
of a liability for an asset retirement obligation covered under the scope of
SFAS No. 143 would be recognized in the period in which the liability is
incurred, with an offsetting increase in the carrying amount of the related
long-lived asset. Over time, the liability would be accreted to its present
value, and the capitalized cost would be depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity would either settle
the obligation for its recorded amount or incur a gain or loss upon settlement.
The Company is studying this newly-issued standard to determine, among other
things, whether it has any asset retirement obligations which are covered under
the scope of SFAS No. 143, and the effect, if any, to the Company of adopting
this standard has not yet been determined.
The Company will adopt SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, no later than January 1, 2003 for exit or disposal
activities initiated on or after the date of adoption. Under SFAS No. 146, costs
associated with exit activities, as defined, that are covered by the scope of
SFAS No. 146 will be recognized and measured initially at fair value, generally
in the period in which the liability is incurred. Costs covered by the scope of
SFAS No. 146 include termination benefits provided to employees, costs to
consolidate facilities or relocate employees, and costs to terminate contracts
(other than a capital lease). Under existing GAAP, a liability for such an exit
cost is recognized at the date an exit plan is adopted, which may or may not be
the date at which the liability has been incurred.
Note 18 - Subsequent events:
In July 2002 Valhi proposed a merger of Tremont and Valhi pursuant to
which stockholders of Tremont, other than Valhi (but including the Company to
the extent of the Company's ownership interest in the Tremont shares held by
Tremont Group), would receive between 2 and 2.5 shares of Valhi common stock for
each Tremont share held. Tremont has formed a special committee of its board of
directors consisting of members unrelated to Valhi to review the proposal. There
can be no assurance that any such merger will be completed or completed under
the proposed terms.
- 20 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Three months ended % Six months ended %
June 30, Change June 30, Change
------------------ ------- ---------------- ------
2002 2001 2002 2001
------ ------ ------ --------
(In millions, except percentages and metric tons)
Net sales and operating income
Net sales ......................$226.9 $220.1 +3% $429.3 $ 446.2 -4%
Operating income ...............$ 24.7 $ 45.2 -45% $ 46.8 $ 97.1 -52%
Operating income
margin percentage ............ 11% 21% 11% 22%
TiO2 operating statistics
Percent change in average
selling price (in
billing currencies) .......... -14% -15%
Sales volume(metric
tons in thousands) ........... 123 105 +17% 235 208 +13%
Production volume (metric tons
in thousands) ................ 113 99 +14% 219 207 +6%
Kronos' operating income in the second quarter of 2002 decreased $20.5
million or 45% from the second quarter of 2001 due to lower average selling
prices, partially offset by higher sales and production volumes. Kronos'
operating income in the second quarter of 2001 included $5.0 million of business
interruption insurance proceeds related to the fire at the Company's Leverkusen,
Germany plant in 2001 described below. Compared to the first quarter of 2002,
operating income in the second quarter of 2002 increased 11% on higher sales and
production volumes.
Operating income in the first half of 2002 was $46.8 million compared with
$97.1 million in the first half of 2001 due to 15% lower average selling prices,
partially offset by 13% higher sales volume and 6% higher production volume.
Kronos' average selling price in billing currencies (which excludes the
effects of foreign currency translation) during the second quarter of 2002 was
14% lower than the second quarter of 2001 and was flat compared with the first
quarter of 2002. Compared with the first quarter of 2002, selling prices in
billing currencies increased in the European and export markets and decreased in
the North American market. The average selling price in billing currencies in
June 2002 was flat compared with the average selling price for the second
quarter. June 2002 selling prices were 1% higher than March 2002 selling prices
and the Company expects third-quarter prices to be higher than second quarter
prices as previously announced price increases continue to be implemented. The
Company expects a lower average selling price for full-year 2002 compared to
full-year 2001.
Kronos' second quarter 2002 average selling price expressed in U.S.
dollars (computed using actual foreign currency exchange rates prevailing during
the respective periods) was 13% lower than the second quarter of 2001 and 2%
higher than the first quarter of 2002. June's average selling price expressed in
- 21 -
U.S. dollars was 2% higher than the average selling price for the second quarter
reflecting the strengthening of the euro against the U.S. dollar that occurred
primarily during June. Average selling prices expressed in U.S. dollars
decreased 15% in the first half of 2002 compared with the first half of 2001.
Second-quarter 2002 sales volume of 123,000 metric tons represented the
highest quarter in Kronos' history. Second-quarter 2002 sales volume increased
17% from the second quarter of 2001 and increased 9% from the first quarter of
2002 reflecting sustained demand in all major regions. European, North American
and export volumes each increased over 14% from the second quarter of 2001.
Compared with the first quarter of 2002, sales volume increased 12% and 19% in
the North American and export markets, respectively, while European sales volume
increased moderately. Sales volume in the first half of 2002 was 27,000 metric
tons higher, or 13%, than the first half of 2001. Kronos believes that the sales
volume increase in the second quarter of 2002 was attributable to improving
economic conditions, some seasonality and customer restocking inventory levels
ahead of previously announced price increases. Kronos expects sales volume in
the second half of 2002 to be lower than the first half of 2002. Kronos' sales
volume for full-year 2002 should be higher than full-year 2001, due in part to
the Leverkusen fire.
Second-quarter 2002 production volume was 14% higher than the second
quarter of 2001 and increased 7% from the first quarter of 2002 with operating
rates at near full capacity in the second quarter of 2002. The increase from the
prior year period was due in part to lost sulfate-process production in 2001 as
a result of the Leverkusen fire. Production volume in the first half of 2002
increased 6% compared with the first half of 2001. Finished goods inventory
levels at the end of the second quarter decreased 12% from March 2002 levels and
represented approximately two months of sales. Kronos anticipates its production
volume for full-year 2002 will be higher than that of full-year 2001, due in
part to the Leverkusen fire.
A fire on March 20, 2001 damaged a section of the Company's Leverkusen,
Germany 35,000 metric ton sulfate-process TiO2 plant ("Sulfate Plant") and, as a
result, production of TiO2 at the Leverkusen facility was halted. The fire did
not enter the Company's adjacent 125,000 metric ton chloride-process TiO2 plant
("Chloride Plant"), but did damage certain support equipment necessary to
operate that plant. The damage to the support equipment resulted in a temporary
shutdown of the Chloride Plant. The Chloride Plant became fully operational in
April 2001 and the Sulfate Plant became approximately 50% operational in
September 2001 and fully operational in late October 2001.
During the second quarter of 2001, the Company's insurance carriers
approved a partial payment of $10.5 million ($9 million received as of June 30,
2001) for property damage costs and business interruption losses caused by the
Leverkusen fire. Five million dollars of this payment represented partial
compensation for business interruption losses which was recorded as a reduction
of cost of sales to offset unallocated period costs that resulted from lost
production. The remaining $5.5 million represented property damage recoveries
against clean-up costs, resulting in a net gain of $1.9 million. The Company
settled its insurance claim involving the Leverkusen fire for $56.4 million
during the fourth quarter of 2001 of which $27.3 million related to business
interruption (which included the $5 million partial payment described above) and
$29.1 million related to property damages, clean-up costs and other extra
expenses. $19.3 million of the $27.3 million of business interruption proceeds
was recognized as a component of operating income in the fourth quarter of 2001
of which $16.6 million was attributable to recovery of unallocated period costs
- 22 -
and lost margin related to the first, second and third quarters of 2001. No
additional insurance recoveries related to the Leverkusen fire are expected to
be received in 2002.
The Company believes TiO2 industry demand in the second half of 2002
should be better than TiO2 industry demand in the second half of 2001 due to
worldwide economic conditions. Kronos' TiO2 production volume in 2002 is
expected to approximate Kronos' 2002 TiO2 sales volume. In January 2002, Kronos
announced price increases in all major markets of approximately 5% to 8% above
existing December 2001 prices, a portion of which was realized in the second
quarter with additional increases expected to be realized in the third quarter
of 2002. In May 2002, Kronos announced a second round of price increases in all
major markets of approximately 7% to 11% above June 2002 prices. Kronos is
hopeful that it will realize a portion of the announced May 2002 price increases
during the fourth quarter of 2002, but the extent to which Kronos can realize
any price increases during 2002 will depend on improving market conditions.
Second half 2002 prices are expected to be higher than the first half of 2002.
However, because TiO2 prices were declining in 2001 and the first quarter of
2002, the Company believes that its average 2002 prices will be significantly
below its average 2001 prices. Overall, the Company expects its TiO2 operating
income in 2002 will be significantly lower than 2001, primarily due to lower
average TiO2 selling prices. The Company's expectations as to the future
prospects of the Company and the TiO2 industry are based upon a number of
factors beyond the Company's control, including worldwide growth of gross
domestic product, competition in the marketplace, unexpected or
earlier-than-expected capacity additions and technological advances. If actual
developments differ from the Company's expectations, the Company's results of
operations could be unfavorably affected.
Compared to the year-earlier periods, cost of sales as a percentage of net
sales increased in both the second quarter and first half of 2002 primarily due
to lower average selling prices in billing currencies, partially offset by
higher production volume. Excluding the effects of foreign currency translation,
which increased the Company's expenses in the second quarter of 2002 compared to
the second quarter of 2001 and decreased expenses in the first half of 2002
compared to the first half of 2001, the Company's selling, general and
administrative expenses, excluding corporate expenses, in the second quarter of
2002 and first half were comparable to the year-earlier periods.
A significant amount of Kronos' sales and operating costs are denominated
in currencies other than the U.S. dollar. Fluctuations in the value of the U.S.
dollar relative to other currencies, primarily a slightly stronger euro, on
average, compared to the U.S. dollar in the second quarter of 2002 versus the
year-earlier period, slightly increased the dollar value of sales in the second
quarter of 2002 when compared to the year-earlier period. On a first half of
2002 compared to a first half of 2001 basis, fluctuations in the value of the
U.S. dollar relative to other currencies slightly decreased net sales. Sales to
export markets are typically denominated in U.S. dollars and a weaker U.S.
dollar decreases margins on these sales at the Company's non-U.S. subsidiaries.
The effect of the stronger euro on Kronos' operating costs that are not
denominated in U.S. dollars increased operating costs in the second quarter of
2002 compared to the year-earlier period. In addition, Kronos revalued certain
export trade receivables and certain monetary assets held by its subsidiaries
whose functional currency is not the U.S. dollar and based on the weaker U.S.
dollar reported a revaluation loss in the second quarter of 2002. As a result,
the net impact of currency exchange rate fluctuations decreased operating income
by $3.6 million and $2.5 million, respectively, in the second quarter of 2002
and first half of 2002 when compared to the year-earlier periods.
- 23 -
General corporate
The following table sets forth certain information regarding general
corporate income (expense).
Three months ended Six months ended
June 30, Difference June 30, Difference
------------------ ---------- ------------------ ----------
2002 2001 2002 2001
------ ------ ------- -------
(In millions)
Securities earnings .. $ 1.3 $ 1.2 $ .1 $ 2.6 $ 3.8 $ (1.2)
Litigation settlement
gains, net and other
income ............. 1.4 1.4 -- 4.4 13.0 (8.6)
Currency transaction
gains .............. 6.3 -- 6.3 6.3 -- 6.3
Corporate expense .... (7.5) (4.9) (2.6) (17.7) (11.7) (6.0)
Interest expense ..... (8.1) (6.9) (1.2) (14.6) (13.9) (.7)
------ ------ ------- ------- ------- -------
$ (6.6) $ (9.2) $ 2.6 $ (19.0) $ (8.8) $ (10.2)
====== ====== ======= ======= ======= =======
Securities earnings in the second quarter of 2002 were comparable to the
second quarter of 2001, while securities earnings for the first half of 2002
were $1.2 million lower compared with the first half of 2001, primarily due to
lower interest rates and lower outstanding cash balances in the first half of
2002. The Company expects security earnings to be lower in 2002 compared to 2001
due primarily to lower average yields.
In the first half of 2002 and 2001, the Company recognized litigation
settlement gains with former insurance carrier groups of $2.4 million and $10.6
million, respectively, to settle certain insurance coverage claims related to
environmental remediation. A majority of the proceeds from the 2001 settlement
was transferred to special-purpose trusts established by the insurance carrier
group to pay future remediation and other environmental expenditures of the
Company.
In June 2002 Kronos International, Inc. ("KII") completed a private
placement offering of (euro)285 million 8.875% Senior Secured Notes (the
"Notes") due 2009. KII used the net proceeds of the Notes offering to repay
certain intercompany indebtedness owed to the Company, a portion of which the
Company used to redeem at par all of its outstanding 11.75% Senior Secured Notes
due 2003, plus accrued interest. As a result of the refinancing, the Company
recognized a foreign currency transaction gain of $6.3 million in the second
quarter of 2002 related to the extinguishment of certain intercompany
indebtedness. See Note 12 to the Consolidated Financial Statements.
Corporate expense in the second quarter and first half of 2002 increased
$2.6 million and $6.0 million, respectively, from comparable 2001 periods,
primarily due to higher environmental expenses and higher legal expenses.
Compared to the first quarter of this year, corporate expense in the second
quarter of 2002 decreased 26% primarily due to lower environmental expense. The
Company expects corporate expense in 2002 to be higher than the full year 2001.
Interest expense in the second quarter of 2002 included $2.0 million
related to the early extinguishment of the Company's 11.75% Senior Secured
Notes, as the amount paid to extinguish the debt in June 2002 included interest
for the month of July 2002. Excluding this unusual item, interest expense in the
second quarter of 2002 was $6.1 million, down 12% compared with second quarter
- 24 -
2001 primarily due to reduced levels of outstanding debt. See Note 12 to the
Consolidated Financial Statements.
Provision for income taxes
The Company reduced its deferred income tax valuation allowance by $3.0
million in the first half of 2002 and $1.1 million in the first half of 2001
primarily as a result of utilization of certain tax attributes for which the
benefit had not been previously recognized under the "more-likely-than-not"
recognition criteria.
Accounting principles not yet adopted
See Note 17 to the Consolidated Financial Statements.
Other
Minority interest primarily relates to the Company's majority-owned
environmental management subsidiary, NL Environmental Management Services, Inc.
("EMS").
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows from operating, investing and
financing activities for the six months ended June 30, 2002 and 2001 are
presented below.
Six months ended
June 30,
-----------------
2002 2001
------- -------
(In millions)
Net cash provided (used) by:
Operating activities:
Before changes in assets and liabilities ........... $ 37.3 $ 71.8
Changes in assets and liabilities .................. (.8) (26.5)
------- -------
36.5 45.3
Investing activities ................................... (19.3) (45.6)
Financing activities ................................... 39.7 (27.7)
------- -------
Net cash provided (used) by operating, investing,
and financing activities ........................... $ 56.9 $ (28.0)
======= =======
Operating activities
The TiO2 industry is cyclical and changes in economic conditions
significantly affect the earnings and operating cash flows of the Company. Cash
flow from operations is considered the primary source of liquidity for the
Company. Changes in TiO2 pricing, production volume and customer demand, among
other things, could significantly affect the liquidity of the Company. Cash flow
from operations, before changes in assets and liabilities, in the first half of
2002 decreased from the comparable period in 2001 primarily due to $50.3 million
of lower operating income partially offset by a $6.3 million foreign currency
transaction gain in the first half of 2002 related to the extinguishment of
certain intercompany indebtedness with KII. The net cash used to fund changes in
the Company's inventories, receivables and payables (excluding the effect of
- 25 -
currency translation) in the first half of 2002 was significantly less than the
first half of 2001 with $30 million lower inventory balances (net of raw
material accruals) and the collection of $11.1 million of insurance proceeds,
offset by decreases in accounts payable and accrued liabilities in the first
half of 2002. Inventories and accounts payable were affected by certain non-cash
accruals for certain titanium ore contracts of $31.6 million and $15.3 million
at December 31, 2001 and 2000, respectively. These non-cash accruals were
reversed as raw materials were received under the contracts in the first half of
2002 and 2001, respectively.
Investing activities
Capital expenditures of $12.1 million in the first half of 2002 included
approximately $2.2 million related to ongoing reconstruction of the Leverkusen,
Germany sulfate plant. The Company expects to complete all reconstruction by
December 31, 2002. In the second quarter of 2001, the Company received $5.5
million of insurance proceeds for property damage resulting from the Leverkusen
fire and paid $1 million of expenses related to repairs and clean-up costs.
In January 2002, the Company acquired all of the stock and limited
liability company units of EWI RE, Inc. and EWI RE, Ltd. (collectively "EWI"),
respectively, for an aggregate of $9.2 million in cash, including capitalized
acquisition costs of $.2 million. See Note 3 to the Consolidated Financial
Statements.
In the first quarter of 2001, a majority-owned subsidiary of the Company,
EMS, loaned $13.4 million to Tremont Corporation under a reducing revolving loan
agreement. See Notes 1 and 8 to the Consolidated Financial Statements.
In May 2001, a wholly owned subsidiary of EMS loaned $20 million to the
Harold C. Simmons Family Trust #2 ("Family Trust"), one of the trusts described
in Note 1 to the Consolidated Financial Statements, under a new $25 million
revolving credit agreement. See Note 8 to the Consolidated Financial Statements.
Financing activities
In March 2002, the Company redeemed $25 million principal amount of its
11.75% Senior Secured Notes using available cash on hand, and in June 2002 the
Company redeemed the remaining $169 million principal amount of such 11.75%
Senior Secured Notes using a portion of the proceeds from the June 2002 issuance
of the (euro)285 million principal amount of the KII 8.875% Senior Secured Notes
($280 million when issued). Also in June 2002, KII's operating subsidiaries in
Germany, Belgium and Norway entered into a new three-year (euro)80 million
secured revolving credit facility and borrowed (euro)13 million ($13 million)
and NOK 200 million ($26 million) which, along with available cash, was used to
repay and terminate KII's short term notes payable ($53.2 million when repaid).
See Note 12 to the Consolidated Financial Statements.
Deferred financing costs of $9.3 million for the Notes and the Credit
Facility are being amortized over the life of the respective agreements and are
included in other noncurrent assets as of June 30, 2002.
- 26 -
In the second quarter of 2002, the Company paid a regular quarterly
dividend to shareholders of $.20 per share, aggregating $9.8 million. Dividends
paid during the first half of 2002 totaled $.40 per share, or $19.5 million. On
July 30, 2002, the Company's Board of Directors declared a regular quarterly
dividend of $.20 per share to shareholders of record as of September 10, 2002 to
be paid on September 24, 2002.
Pursuant to its share repurchase program, the Company purchased
approximately 228,000 shares of its common stock in the open market at an
aggregate cost of $3.3 million in the first half of 2002 (none in second quarter
of 2002). Approximately 979,000 additional shares are available for purchase
under the Company's repurchase program through June 30, 2002. Through August 12,
2002, the Company purchased 214,000 shares of its common stock in the open
market at an aggregate cost of $3.2 million. The available shares may be
purchased over an unspecified period of time and are to be held as treasury
shares available for general corporate purposes.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability
At June 30, 2002, the Company had cash and cash equivalents aggregating
$176 million ($22 million held by non-U.S. subsidiaries) and an additional $75
million of restricted cash equivalents and restricted marketable debt securities
held by the Company, of which $14 million was classified as a noncurrent asset.
Certain of the Company's subsidiaries had $42 million available for borrowing at
June 30, 2002 under non-U.S. credit facilities (including $40 million under the
Credit Facility).
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 penalties and interest.
The Company's 1998 U.S. federal income tax return is currently being
examined by the U.S. Internal Revenue Service ("IRS"), and the Company has
granted an extension of the statute of limitations for assessment of such return
until September 30, 2003. While EMS' 1998 U.S. federal income tax return is not
currently being examined by the IRS, EMS, at the request of the IRS, has also
granted an extension of the statute of limitations for assessment of such return
until September 30, 2003. Based upon the course of the examination to date, the
Company anticipates that the IRS may propose a substantial tax deficiency.
The Company has received preliminary tax assessments for the years 1991 to
1997 from the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately (euro)10.4 million ($10.3 million at June 30,
2002). The Company has filed protests to the assessments for the years 1991 to
1997. The Company is in discussions with the Belgian tax authorities and
believes that a significant portion of the assessments is without merit.
No assurance can be given that the Company's tax matters will be favorably
resolved due to the inherent uncertainties involved in court and tax
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
- 27 -
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
At June 30, 2002, the Company had net deferred tax liabilities of $144
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 $175
million at June 30, 2002, principally related to Germany, partially offsetting
deferred tax assets which the Company believes do not currently meet the
"more-likely-than-not" recognition criteria.
Environmental matters and litigation
The Company has been named as a defendant, potentially responsible party
("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. Environmental Protection Agency's (the "U.S. EPA") 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 ($102 million at June 30, 2002) 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
allocations of such costs among PRPs. 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 for which it is possible to estimate costs is
approximately $150 million. The Company's estimates of such liabilities have not
been discounted to present value. 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 the 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, in view of the Company's historical operations, the Company expects
that additional environmental matters will arise in the future.
Lead pigment litigation
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. In addition, various legislation and administrative regulations have,
from time to time, been enacted or proposed that seek to (a) impose various
obligations on present and former manufacturers of lead pigment and lead-based
paint with respect to asserted health concerns associated with the use of such
products and (b) effectively overturn the precedent set by court decisions in
which the Company and other pigment manufacturers have been successful. Examples
of such proposed legislation include bills which would permit civil liability
- 28 -
for damages on the basis of market share, rather than requiring plaintiffs to
prove that the defendant's product caused the alleged damage, and bills which
would revive actions barred by the statute of limitations. The Company currently
believes the disposition of all claims and disputes, individually and in the
aggregate, should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity. The Company
expects that additional lead pigment and lead-based paint litigation may be
filed against the Company in the future asserting similar or different legal
theories and seeking similar or different types of damages and relief. See Item
1 - "Legal Proceedings."
Other
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and availability of resources in view of, among
other things, its debt service and capital expenditure requirements and
estimated future operating cash flows. As a result of this process, the Company
in the past has sought, and in the future may seek, to reduce, refinance,
repurchase or restructure indebtedness; raise additional capital; repurchase
shares of its common stock; modify its dividend policy; restructure ownership
interests; sell interests in subsidiaries or other assets; or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, the Company may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals or other industries, as well as the acquisition of interests in, and
loans to, related companies. In the event of any acquisition or joint venture
transaction, the Company may consider using available cash, issuing equity
securities or increasing its indebtedness to the extent permitted by the
agreements governing the Company's existing debt.
Special note regarding forward-looking statements
The statements contained in this Report on Form 10-Q ("Quarterly Report")
which are not historical facts, including, but not limited to, statements found
under the captions "Results of Operations" and "Liquidity and Capital Resources"
above, are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"will," "should," "could," "anticipates," "expects," or comparable terminology
or by discussions of strategy or trends. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve risks and uncertainties, including, but
not limited to, the cyclicality of the titanium dioxide industry, global
economic and political conditions, global productive capacity, customer
inventory levels, changes in product pricing, changes in product costing,
changes in foreign currency exchange rates, competitive technology positions,
operating interruptions (including, but not limited to, labor disputes, leaks,
fires, explosions, unscheduled downtime, transportation interruptions, war and
terrorist activities), the ultimate resolution of pending or possible future
lead pigment litigation and legislative developments related to the lead paint
litigation, the outcome of other litigation, and other risks and uncertainties
included in this Quarterly Report and in the 2001 Annual Report, and the
uncertainties set forth from time to time in the Company's filings with the
Securities and Exchange Commission. Should one or more of these risks
materialize (or the consequences of such a development worsen), or should the
underlying assumptions prove incorrect, actual results could differ materially
from those forecasted or expected. The Company disclaims any intention or
obligation to update publicly or revise such statements whether as a result of
new information, future events or otherwise.
- 29 -
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the 2001 Annual Report and the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002 for descriptions of
certain previously reported legal proceedings.
In re: Lead Paint Litigation (Superior Court of New Jersey, Middlesex
County, Case Code 702). Two additional municipalities have filed suit in this
previously reported case. The Company has moved to dismiss all claims of all 25
municipalities.
Brownsville Independent School District v. Lead Industries Association, et
al. (District Court of Cameron County, Texas, No. 2002-052081 B). In May 2002,
the Company was served with a complaint seeking compensatory and punitive
damages jointly and severally from the former lead pigment manufacturers and LIA
for property damage. The Company has denied all allegations of liability.
Spring Branch Independent School District v. Lead Industries Association,
et al. (District Court of Harris County, Texas, No. 2000-31175). In June 2002,
the trial court granted the Company's motion for summary judgment. The time for
appeal has not yet expired.
City of Milwaukee v. NL Industries, Inc., and Mautz Paint (Circuit Court,
Civil Division, Milwaukee County, Wisconsin, Case No. 01CV003066). A trial date
of Oct. 27, 2003, has been set.
Smith, et al. v. Lead Industries Association, et al. (Circuit Court for
Baltimore City, Maryland, Case No. 24-C-99-004490). A trial date of July 7,
2003, for the first of the four plaintiff families has been set.
Quitman County School District v. Lead Industries Association, et al.,
(Circuit Court of Quitman County, Mississippi, Case No. 2001-0106). Defendants
removed this case to federal court. In July 2002 the United States District
Court for the Northern District of Mississippi denied plaintiff's motion to
remand the case to state court, and the case will remain pending in that federal
court as case number 2:02CV004-P-B.
El Paso Independent School District v. Lead Industries Association, et
al., (District Court of El Paso County, Texas (No. 2002-2675)). In August 2002
the Company was served with a complaint seeking compensatory and exemplary
damages from the Company and twelve other former lead pigment and/or paint
manufacturers for alleged property damages due to the presence of lead paint in
the school district's buildings. The complaint alleges product liability, strict
liability, negligence, fraudulent misrepresentation, breach of warranties,
statutory deceptive trade practices, conspiracy, fraud, concert of action,
exemplary damages, and indemnity causes of action. The time for the Company to
answer the complaint has not yet expired.
The parties in the previously-reported Brownsville Independent School
District, Liberty Independent School District, Houston Independent School
District, and Harris County, Texas cases have reached an agreement in principle
to abate, or stay, those cases pending appellate review of the trial court's
dismissal of the Spring Branch Independent School District case or certain other
events. The agreement is subject to completion and to approval by the various
courts involved.
The Company expects that additional lead pigment and lead-based paint
litigation may be filed against the Company in the future asserting similar or
different legal theories and seeking similar or different types of damages and
relief.
- 30 -
Pulliam v. NL (Superior Court, Marion County, Indiana, No.
49F12-0104-CT-001301). In May 2002, the court granted the Company's motion to
strike the plaintiffs' allegations that the case should be certified as a class
action.
Dew, et al. v. Bill Richardson, et al. (U.S. District Court for the
Western District of Kentucky, No. 5:00CV-221-M). The Company and NLO answered
the complaint in this previously-reported case in May 2002, denying all
allegations of wrongdoing and liability. Pre-trial proceedings and discovery
continue.
United States of America v. NL Industries, Inc. et al., (U.S. District
Court for the Southern District of Illinois, No. 91-CV00578). In July 2002, the
Company executed a consent decree with the United States in this previously
reported matter and is awaiting the execution of the consent decree by the
United States. The decree embodies the previously reported agreement in
principle with the United States, pursuant to which the Company will pay
approximately $31.5 million, including $1 million in penalties, to settle its
liabilities at this site.
The Company has received a request from the U.S. EPA with respect to the
on-site portion of the previously reported clean-up at the Company's formerly
owned facility in Chicago, Illinois, requesting that the Company perform
additional work. The Company intends to discuss the request with the U.S. EPA.
Since the filing of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002, the Company has been named as a defendant in
asbestos and/or silica cases in various jurisdictions brought on behalf of
approximately 3,700 additional personal injury claimants. Included in the
foregoing total is one case in Mississippi state court involving approximately
3,005 plaintiffs (Lawrence Graves, et al. vs. Monstanto Company, et al., Circuit
Court, Second Judicial District, Jones County, Mississippi, Civil Action No.
2002-141-CV4). The Company anticipates that various of these cases will be set
for trial from time-to-time for the foreseeable future.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Indenture governing the 8.875% Senior Secured Notes due 2009,
dated June 28, 2002, between Kronos International, Inc. and The Bank
of New York, as Trustee.
4.2 Form of certificate of 8.875% Senior Secured Notes due 2009 of
Kronos International, Inc. (included as Exhibit A to Exhibit 4.1).
4.3 Form of certificate of 8.875% Senior Secured Notes due 2009 of
Kronos International, Inc. (included as Exhibit B to Exhibit 4.1).
4.4 Purchase Agreement, dated June 19, 2002, among Kronos
International, Inc., Deutsche Bank AG London, Dresdner Bank AG
London Branch and Commerzbank Aktiengesellschaft, London Branch.
4.5 Registration Rights Agreement, dated June 28, 2002, among Kronos
International, Inc., Deutsche Bank AG London, Dresdner Bank AG
London and Commerzbank Adtiengesellschaft, London Branch.
4.6 Collateral Agency Agreement, dated June 28, 2002, among The Bank
of New York, U.S. Bank, N.A. and Kronos International, Inc.
- 31 -
4.7 Security Over Shares Agreement, dated June 28, 2002, between
Kronos International, Inc. and The Bank of New York.
4.8 Pledge of Shares (shares in Kronos Denmark ApS), dated June 28,
2002, between Kronos International, Inc. and U.S. Bank, N.A.
4.9 Pledge Agreement (shares in Societe Industrielle du Titane
S.A.), dated June 28, 2002, between Kronos International, Inc. and
U.S. Bank, N.A.
4.10 Partnership Interest Pledge Agreement (relating to fixed
capital contribution in Kronos Titan GmbH & Co.), dated June 28,
2002, between Kronos International, Inc. and U.S. Bank, N.A.
4.11 Deposit Agreement, dated June 28, 2002, among NL Industries,
Inc. and JP Morgan Chase Bank, as trustee.
4.12 Satisfaction and Discharge of Indenture, Release, Assignment
and Transfer, dated June 28, 2002, made by JP Morgan Chase Bank
pursuant to the Indenture for NL Industries, Inc.'s 11 3/4% Senior
Secured Notes due 2003.
10.1 (euro)80,000,000 Facility Agreement, dated June 25, 2002, among
Kronos Titan GmbH & Co. OHG, Kronos Europe S.A./N.V., Kronos Titan
A/S and Titania A/S, as borrowers, Kronos Titan GmbH & Co. OHG,
Kronos Europe S.A./N.V. and Kronos Norge AS, as guarantors, Kronos
Denmark ApS, as security provider, Deutsche Bank AG, as mandated
lead arranger, Deutsche Bank Luxembourg S.A., as agent and security
agent, and KBC Bank NV, as fronting bank, and the financial
institutions listed in Schedule 1 thereto, as lenders.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended June 30, 2002 through the
date of this report:
June 28, 2002 - reported items 5 and 7.
- 32 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NL INDUSTRIES, INC.
--------------------------------------------
(Registrant)
Date: August 13, 2002 By /s/ Robert D. Hardy
- ---------------------- --------------------------------------------
Robert D. Hardy
Principal Financial and Accounting Officer
- 33 -