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 quarterly period ended June 30, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
Commission file number 1-640
NL INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 13-5267260
- -------------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
- ------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
----- -----
Number of shares of common stock outstanding on July 25, 2003: 47,700,784
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - June 30, 2003
and December 31, 2002 3
Consolidated Statements of Income - Three months and
six months ended June 30, 2003 and 2002 5
Consolidated Statements of Comprehensive Income
- Three months and six months ended June 30, 2003 and 2002 6
Consolidated Statement of Shareholders' Equity
- Six months ended June 30, 2003 7
Consolidated Statements of Cash Flows - Six
months ended June 30, 2003 and 2002 8
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 6. Exhibits and Reports on Form 8-K 32
-2-
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
ASSETS 2003 2002
---------- ------------
Current assets:
Cash and cash equivalents ........................ $ 54,360 $ 58,091
Restricted cash equivalents ...................... 25,349 52,089
Restricted marketable debt securities ............ 10,676 9,670
Accounts and notes receivable .................... 182,196 136,858
Receivable from affiliates ....................... 148 207
Refundable income taxes .......................... 25,607 1,782
Inventories ...................................... 199,760 209,882
Prepaid expenses ................................. 4,518 7,207
Deferred income taxes ............................ 10,929 10,511
---------- ----------
Total current assets ......................... 513,543 486,297
---------- ----------
Other assets:
Marketable equity securities ..................... 45,431 40,901
Receivable from affiliate ........................ 16,000 18,000
Investment in TiO2 manufacturing joint venture ... 129,209 130,009
Prepaid pension cost ............................. 17,209 17,572
Restricted marketable debt securities ............ 3,099 9,232
Other ............................................ 27,320 30,671
---------- ----------
Total other assets ........................... 238,268 246,385
---------- ----------
Property and equipment:
Land ............................................. 31,908 29,072
Buildings ........................................ 165,655 150,406
Machinery and equipment .......................... 694,995 640,297
Mining properties ................................ 82,596 84,778
Construction in progress ......................... 14,600 8,702
---------- ----------
989,754 913,255
Less accumulated depreciation and depletion ...... 585,060 534,436
---------- ----------
Net property and equipment ................... 404,694 378,819
---------- ----------
$1,156,505 $1,111,501
========== ==========
-3-
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY June 30, December 31,
2003 2002
----------- ------------
Current liabilities:
Current maturities of long-term debt ......... $ 781 $ 1,298
Accounts payable and accrued liabilities ..... 150,549 167,574
Payable to affiliates ........................ 10,817 8,027
Accrued environmental costs .................. 21,198 51,307
Income taxes ................................. 6,170 6,624
Deferred income taxes ........................ 1,711 3,219
----------- -----------
Total current liabilities ................ 191,226 238,049
----------- -----------
Noncurrent liabilities:
Long-term debt ............................... 360,444 324,608
Deferred income taxes ........................ 146,324 143,518
Accrued environmental costs .................. 66,636 47,189
Accrued pension cost ......................... 45,835 43,757
Accrued postretirement benefits cost ......... 24,922 26,477
Other ........................................ 13,954 14,060
----------- -----------
Total noncurrent liabilities ............. 658,115 599,609
----------- -----------
Minority interest ................................ 8,713 8,516
----------- -----------
Shareholders' equity:
Common stock ................................. 8,355 8,355
Additional paid-in capital ................... 777,819 777,819
Retained earnings ............................ 120,740 101,554
Accumulated other comprehensive loss ......... (172,458) (186,221)
Treasury stock ............................... (436,005) (436,180)
----------- -----------
Total shareholders' equity ............... 298,451 265,327
----------- -----------
$ 1,156,505 $ 1,111,501
=========== ===========
Commitments and contingencies (Notes 12 and 14)
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,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues and other income:
Net sales ..................... $ 266,631 $ 226,909 $ 519,604 $ 429,266
Other income, net ............. 340 7,906 3,007 12,901
--------- --------- --------- ---------
266,971 234,815 522,611 442,167
--------- --------- --------- ---------
Costs and expenses:
Cost of sales ................. 197,649 176,247 386,066 332,500
Selling, general and
administrative .............. 54,177 32,389 98,871 67,234
Interest ...................... 8,367 8,078 16,352 14,613
--------- --------- --------- ---------
260,193 216,714 501,289 414,347
--------- --------- --------- ---------
Income before income taxes
and minority interest ... 6,778 18,101 21,322 27,820
Income tax benefit (expense) ...... 22,191 (3,867) 17,101 (7,018)
--------- --------- --------- ---------
Income before minority
interest ................ 28,969 14,234 38,423 20,802
Minority interest ................. 134 186 158 370
--------- --------- --------- ---------
Net income ................ $ 28,835 $ 14,048 $ 38,265 $ 20,432
========= ========= ========= =========
Basic and diluted net income per
share ........................... $ .60 $ .29 $ .80 $ .42
========= ========= ========= =========
Weighted average shares used in the
calculation of net income per share:
Basic ....................... 47,698 48,827 47,696 48,848
Dilutive impact of stock
options ................... 57 126 54 98
--------- --------- --------- ---------
Diluted ..................... 47,755 48,953 47,750 48,946
========= ========= ========= =========
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,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income ........................... $ 28,835 $ 14,048 $ 38,265 $ 20,432
-------- -------- -------- --------
Other comprehensive income (loss),
net of tax:
Marketable securities adjustment:
Unrealized holding (loss) gain
arising during the period .. (4,424) 4,652 2,669 3,129
Less reclassification
adjustment for realized gain
included in net income ..... -- -- (1,474) --
-------- -------- -------- --------
(4,424) 4,652 1,195 3,129
Currency translation adjustment .. 8,826 38,965 12,568 36,356
-------- -------- -------- --------
Total other comprehensive
income ..................... 4,402 43,617 13,763 39,485
-------- -------- -------- --------
Comprehensive income ..... $ 33,237 $ 57,665 $ 52,028 $ 59,917
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
-6-
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Six months ended June 30, 2003
(In thousands)
Accumulated other
comprehensive income (loss)
Additional -------------------------------------
Common paid-in Retained Currency Pension Marketable
stock capital earnings translation liabilities securities
--------- ---------- --------- ----------- ----------- ----------
Balance at December 31, 2002 ......... $ 8,355 $ 777,819 $ 101,554 $(170,670) $ (21,447) $ 5,896
Net income ........................... -- -- 38,265 -- -- --
Other comprehensive income, net of tax -- -- -- 12,568 -- 1,195
Dividends ............................ -- -- (19,079) -- -- --
Treasury stock - reissued ............ -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at June 30, 2003 ............. $ 8,355 $ 777,819 $ 120,740 $(158,102) $ (21,447) $ 7,091
========= ========= ========= ========= ========= =========
Treasury
stock Total
--------- ---------
Balance at December 31, 2002 ......... $(436,180) $ 265,327
Net income ........................... -- 38,265
Other comprehensive income, net of tax -- 13,763
Dividends ............................ -- (19,079)
Treasury stock - reissued ............ 175 175
--------- ---------
Balance at June 30, 2003 ............. $(436,005) $ 298,451
========= =========
See accompanying notes to consolidated financial statements.
-7-
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2003 and 2002
(In thousands)
2003 2002
-------- --------
Cash flows from operating activities:
Net income ......................................... $ 38,265 $ 20,432
Depreciation, depletion and amortization ........... 19,681 15,820
Deferred income taxes .............................. (3,006) 2,400
Distributions from TiO2 manufacturing joint
venture, net ..................................... 800 2,250
Net (gains) losses from securities transactions .... (2,452) 12
Other, net ......................................... (3,522) (3,572)
-------- --------
49,766 37,342
Change in assets and liabilities:
Accounts and notes receivable .................. (37,409) (29,665)
Insurance receivable ........................... 2,122 11,053
Inventories .................................... 25,301 68,227
Prepaid expenses ............................... 3,036 (796)
Accounts payable and accrued liabilities ....... (29,526) (58,638)
Income taxes ................................... (24,008) (2,878)
Accrued environmental costs .................... 25,990 8,913
Other, net ..................................... 3,378 2,943
-------- --------
Net cash provided by operating activities .. 18,650 36,501
-------- --------
Cash flows from investing activities:
Capital expenditures ............................... (13,850) (12,076)
Collection of loans to affiliates .................. 2,000 500
Acquisition of business ............................ -- (9,149)
Change in restricted cash equivalents and restricted
marketable debt securities, net .................. 658 595
Other, net ......................................... 1,538 830
-------- --------
Net cash used by investing activities .......... (9,654) (19,300)
-------- --------
-8-
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six months ended June 30, 2003 and 2002
(In thousands)
2003 2002
--------- ---------
Cash flows from financing activities:
Dividends paid ................................... $ (19,079) $ (19,530)
Treasury stock:
Purchased .................................... -- (3,271)
Reissued ..................................... 175 262
Indebtedness:
Borrowings ................................... 16,106 319,275
Principal payments ........................... (11,615) (247,688)
Deferred financing costs ..................... -- (9,342)
Other, net ....................................... -- (11)
--------- ---------
Net cash (used) provided by financing activities . (14,413) 39,695
--------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities (5,417) 56,896
Currency translation ......................... 1,686 3,053
Acquisition of business ...................... -- 196
--------- ---------
(3,731) 60,145
Balance at beginning of period ................... 58,091 116,037
--------- ---------
Balance at end of period ......................... $ 54,360 $ 176,182
========= =========
Supplemental disclosures - cash paid for:
Interest ......................................... $ 16,347 $ 18,599
Income taxes, net ................................ 7,627 7,496
Acquisition of business:
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. ("NL") conducts its titanium dioxide pigments
("TiO2") operations through its wholly owned subsidiary, Kronos, Inc. At June
30, 2003, Valhi, Inc., ("Valhi") and its subsidiaries held approximately 85% of
NL's outstanding common stock, and Contran Corporation ("Contran") and its
subsidiaries held approximately 90% of Valhi's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons, the Chairman of the
Board and Chief Executive Officer of NL and the Chairman of the Board of each of
Contran and Valhi, may be deemed to control each of such companies. See Notes 6
and 7.
The consolidated balance sheet of NL Industries, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2002 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 2003 and the consolidated statements of
income, comprehensive income, shareholders' equity and cash flows for the
interim periods ended June 30, 2003 and 2002 have been prepared by the Company
without audit. In the opinion of management all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows have been made. The
results of operations for the interim periods are not necessarily indicative of
the operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles in the U.S. ("GAAP") have been condensed or omitted. Certain
prior-year amounts have been reclassified to conform to the current year
presentation. The accompanying consolidated financial statements should be read
in conjunction with the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002 (the
"2002 Annual Report").
The Company has elected the disclosure alternative prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," and to account for its
stock-based employee compensation related to stock options in accordance with
Accounting Principles Board Opinion ("APBO") No. 25, "Accounting for Stock
Issued to Employees," and its various interpretations. Under APBO No. 25, no
compensation cost is generally recognized for fixed stock options in which the
exercise price is not less than the market price on the grant date. During the
fourth quarter of 2002, following the cash settlement of certain stock options
held by employees of the Company, the Company commenced accounting for its
remaining stock options using the variable accounting method, which requires the
intrinsic value of all unexercised stock options (including those with an
exercise price at least equal to the market price on the date of grant) to be
accrued as an expense, with subsequent increases (decreases) in the Company's
market price resulting in additional compensation expense (income). Net
compensation expense recognized by the Company in accordance with APBO No. 25 in
the three and six months ended June 30, 2003 was $.5 million and nil,
-10-
respectively, and net compensation expense (income) recognized by the Company in
the three and six months ended June 30, 2002 was nil for both periods.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation.
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
Net income - as reported ................ $ 28,835 $ 14,048 $ 38,265 $ 20,432
Add: Stock-based compensation cost, net
of tax, included in reported net income 339 -- -- --
Deduct: Stock-based compensation cost,
net of tax, determined under fair value
based method for all awards ........... (121) (271) (241) (542)
---------- ---------- ---------- ----------
Net income - pro forma .................. $ 29,053 $ 13,777 $ 38,024 $ 19,890
========== ========== ========== ==========
Net income per basic common share:
As reported ......................... $ .60 $ .29 $ .80 $ .42
Pro forma ........................... $ .61 $ .28 $ .80 $ .41
Net income per diluted common share:
As reported ......................... $ .60 $ .29 $ .80 $ .42
Pro forma ........................... $ .61 $ .28 $ .80 $ .41
The Company adopted SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective January 1, 2003. Under SFAS No. 143, the fair value of a
liability for an asset retirement obligation covered under the scope of SFAS No.
143 is recognized in the period in which the liability is incurred, with an
offsetting increase in the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its future value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity would either settle the obligation for its recorded amount
or incur a gain or loss upon settlement.
Under the transition provisions of SFAS No. 143, at the date of adoption
on January 1, 2003 the Company recognized (i) an asset retirement cost
capitalized as an increase to the carrying value of its property, plant and
equipment, (ii) accumulated depreciation on such capitalized cost and (iii) a
liability for the asset retirement obligation. Amounts resulting from the
initial application of SFAS No. 143 were measured using information, assumptions
and interest rates all as of January 1, 2003. The amount recognized as the asset
retirement cost was measured as of the date the asset retirement obligation was
incurred. Cumulative accretion on the asset retirement obligation, and
accumulated depreciation on the asset retirement cost, were recognized for the
time period from the date the asset retirement cost and liability would have
been recognized had the provisions of SFAS No. 143 been in effect at the date
the liability was incurred, through January 1, 2003. The difference between the
amounts recognized as described above and the associated amounts recognized in
the Company's balance sheet as of December 31, 2002 was recognized as a
cumulative effect of change in accounting principle as of January 1, 2003. The
effect of adopting SFAS No. 143 as of January 1, 2003, as summarized in the
table below, did not have a material effect on the Company's consolidated
financial position, results of operations or liquidity, and is not separately
recognized in the accompanying statement of income.
-11-
Amount
-------------
(In millions)
Increase in carrying value of net property,
plant and equipment:
Cost ................................................................ $ .4
Accumulated depreciation ............................................ (.1)
Decrease in liabilities previously accrued
for closure and post closure activities ........................... .3
Asset retirement obligation recognized .................................. (.6)
----
Net impact ...................................................... $ --
====
At June 30, 2003, the asset retirement obligation was approximately $.7
million and was included in other noncurrent liabilities. Accretion expense on
the asset retirement obligation during the first six months of 2003, included in
cost of sales, was nil. If the Company had adopted SFAS No. 143 as of January 1,
2002, the asset retirement obligation would have been approximately $.5 million
at January 1, 2002 and $.6 million at June 30, 2002, and the effect on the
Company's reported net income for the six months ended June 30, 2002 would not
have been material.
Note 2 - Earnings per share:
Basic earnings per share is based on the weighted average number of
common shares outstanding during each period. Diluted earnings per share is
based on the weighted average number of common shares outstanding and the
dilutive impact of outstanding stock options.
-12-
Note 3 - Business segment information:
The Company's operations are conducted by Kronos in one operating
business segment - activities associated with the production and sale of TiO2.
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(In thousands)
Net sales ............................. $ 266,631 $ 226,909 $ 519,604 $ 429,266
Other expense, excluding corporate .... (2,519) (1,099) (3,412) (316)
--------- --------- --------- ---------
264,112 225,810 516,192 428,950
Cost of sales ......................... 197,649 176,247 386,066 332,500
Selling, general and administrative,
excluding corporate ................. 30,975 24,898 60,354 49,626
--------- --------- --------- ---------
Operating income .............. 35,488 24,665 69,772 46,824
General corporate income (expense):
Securities earnings, net .......... 1,056 1,268 4,238 2,548
Other income and litigation
settlement gains, net ........... 1,803 1,466 2,181 4,398
Currency transaction gains ........ -- 6,271 -- 6,271
Corporate expenses ................ (23,202) (7,491) (38,517) (17,608)
Interest expense .................. (8,367) (8,078) (16,352) (14,613)
--------- --------- --------- ---------
Income before income taxes and
minority interest ........... $ 6,778 $ 18,101 $ 21,322 $ 27,820
========= ========= ========= =========
Note 4 - Accounts and notes receivable:
June 30, December 31,
2003 2002
--------- ------------
(In thousands)
Trade receivables .............................. $ 174,914 $ 124,044
Insurance claims receivable .................... 436 2,558
Recoverable VAT and other receivables .......... 9,437 12,861
Allowance for doubtful accounts ................ (2,591) (2,605)
--------- ---------
$ 182,196 $ 136,858
========= =========
-13-
Note 5 - Inventories:
June 30, December 31,
2003 2002
-------- ------------
(In thousands)
Raw materials ............................ $ 34,641 $ 54,077
Work in process .......................... 16,980 15,936
Finished products ........................ 114,731 109,203
Supplies ................................. 33,408 30,666
-------- --------
$199,760 $209,882
======== ========
Note 6 - Marketable equity securities:
June 30, December 31,
2003 2002
-------- ------------
(In thousands)
Available-for-sale marketable equity securities:
Valhi .............................................. $45,302 $ 9,845
Tremont Group ...................................... -- 30,634
Tremont ............................................ -- 243
Other .............................................. 129 179
------- -------
Aggregate fair value ........................... $45,431 $40,901
======= =======
In February 2003 Valhi completed a series of merger transactions
pursuant to which, among other things, Tremont Group, Inc. ("Tremont Group") and
Tremont Corporation ("Tremont") both became wholly owned subsidiaries of Valhi.
Under these merger transactions, (i) Valhi issued 3.5 million shares of its
common stock to the Company in return for the Company's 20% ownership interest
in Tremont Group and (ii) Valhi issued 3.4 shares of its common stock (plus cash
in lieu of fractional shares) to all Tremont stockholders (other than Valhi and
Tremont Group) in exchange for each share of Tremont common stock held by such
stockholders. The Company received approximately 27,770 shares of Valhi common
stock in the second transaction. The number of shares of Valhi common stock
issued to the Company in exchange for the Company's 20% ownership interest in
Tremont Group was equal to the Company's 20% pro-rata interest in the shares of
Tremont common stock held by Tremont Group, adjusted for the same 3.4 exchange
ratio. The Valhi common stock owned by the Company is subject to the
restrictions on resale pursuant to certain provisions of SEC Rule 144. The
Company reported a pre-tax securities transaction gain of approximately $2.3
million in the first quarter of 2003 which represented the difference between
the market value of the shares of Valhi received and the cost basis of the
Tremont Group and Tremont shares exchanged. Following these transactions, the
Company owned approximately 4.7 million shares of Valhi's outstanding common
stock (approximately 4% of Valhi's outstanding shares). The Company will
continue to account for its shares of Valhi common stock as available-for-sale
marketable equity securities carried at fair value (based on quoted market
prices). The shares of Valhi common stock cannot be voted by the Company under
Delaware Corporation Law, but the Company does receive dividends from Valhi on
these shares, when declared and paid. For financial reporting purposes, Valhi
reports its proportional interest in these shares as treasury stock.
-14-
Note 7 - Receivable from affiliates:
In May 2001 a wholly owned subsidiary of the Company's majority-owned
environmental management subsidiary, NL Environmental Management Services, Inc.
("EMS") loaned $20.0 million to the Harold C. Simmons Family Trust No. 2 (the
"Family Trust"), one of the trusts described in Note 1, under a $25.0 million
revolving credit agreement. The loan was approved by special committees of the
Company's and EMS's Boards of Directors. The loan bears interest at prime (4.0%
at June 30, 2003), is due on demand with 60 days notice and is collateralized by
13,749 shares, or approximately 35%, of Contran's outstanding Class A voting
common stock and 5,000 shares, or 100%, of Contran's Series E Cumulative
preferred stock, both of which are owned by the Family Trust. The value of the
collateral is dependent, in part, on the value of the Company as Contran's
interest in the Company, through its beneficial ownership of Valhi, is one of
Contran's more substantial assets. At June 30, 2003, the outstanding loan
balance was $16.0 million and $9.0 million was available for additional
borrowing by the Family Trust. The loan was classified as noncurrent at June 30,
2003, as the Company does not expect to demand repayment within one year.
Note 8 - Other noncurrent assets:
June 30, December 31,
2003 2002
-------- ------------
(In thousands)
Deferred financing costs, net .................... $10,446 $10,550
Goodwill ......................................... 6,406 6,406
Unrecognized net pension obligations ............. 6,439 5,561
Intangible asset, net ............................ 2,075 2,230
Restricted cash equivalents ...................... -- 1,344
Other ............................................ 1,954 4,580
------- -------
$27,320 $30,671
======= =======
Note 9 - Accounts payable and accrued liabilities:
June 30, December 31,
2003 2002
-------- ------------
(In thousands)
Accounts payable ................................. $ 76,365 $ 97,140
-------- --------
Accrued liabilities:
Employee benefits ............................ 32,513 34,349
Interest ..................................... 243 240
Deferred income .............................. -- 333
Other ........................................ 41,428 35,512
-------- --------
74,184 70,434
-------- --------
$150,549 $167,574
======== ========
-15-
Note 10 - Other noncurrent liabilities:
June 30, December 31,
2003 2002
-------- ------------
(In thousands)
Insurance claims and expenses .................. $ 6,621 $ 7,674
Employee benefits .............................. 4,399 4,025
Other .......................................... 2,934 2,361
------- -------
$13,954 $14,060
======= =======
Note 11 - Long-term debt:
June 30, December 31,
2003 2002
-------- ------------
(In thousands)
8.875% Senior Secured Notes,(euro)285 million
principal amount ................................... $325,784 $296,942
Revolving credit facility ............................ 34,293 27,077
Other ................................................ 1,148 1,887
-------- --------
361,225 325,906
Less current maturities .............................. 781 1,298
-------- --------
$360,444 $324,608
======== ========
In March 2003 the Company borrowed (euro)15.0 million ($16.1 million
when borrowed) and in April 2003 the Company repaid NOK 80 million ($11.0
million when repaid) under the revolving credit facility.
Note 12 - Income taxes:
The difference between the provision for income tax expense attributable
to income before income taxes and minority interest and the amount that would be
expected using the U.S. federal statutory income tax rate of 35% is presented
below.
Six months ended
June 30,
---------------------
2003 2002
-------- --------
(In thousands)
Expected tax expense ................................... $ 7,463 $ 9,737
Non-U.S. tax rates ..................................... (385) (708)
Incremental tax on income of companies not included
in NL's consolidated U.S. federal income tax return .. 71 202
Refund of prior-year German taxes ...................... (24,564) --
Valuation allowance .................................... (386) (3,027)
U.S. state income taxes ................................ 407 61
Other, net ............................................. 293 753
-------- --------
Income tax (benefit) expense ................... $(17,101) $ 7,018
======== ========
-16-
Certain of the Company's tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies, including penalties and interest.
The Company's and EMS' 1998 U.S. federal income tax returns are being
examined by the U.S. Internal Revenue Service ("IRS") and the Company and EMS
have each granted extensions of the statute of limitations for assessment of tax
with respect to their 1998 and 1999 income tax returns until September 30, 2004.
Based upon the course of the examination, the Company anticipated that the IRS
would propose a substantial tax deficiency, including penalties and interest,
related to a restructuring transaction. In an effort to avoid protracted
litigation and minimize the hazards of such litigation, the Company applied to
take part in an IRS settlement initiative applicable to transactions similar to
the restructuring transaction, and in April 2003 the Company received
notification from the IRS that it had been accepted into the settlement
initiative. Under the initiative, no penalties will be assessed and final
settlement with the IRS is to be reached through negotiation and, if necessary,
through a specified arbitration procedure. The Company anticipates that
settlement of the matter will likely occur in 2004, resulting in payments of
federal and state tax and interest ranging from $33 million to $45 million.
Additional payments in later years may be required as part of the settlement.
The Company believes that it has provided adequate accruals to cover the
currently expected range of settlement outcomes.
The Company has received preliminary tax assessments for the years 1991
to 1997 from the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately (euro)10.1 million ($11.6 million at June 30,
2003). The Company has filed protests to the assessments with respect to such
years. The Company is in discussions with the Belgian tax authorities and
believes that a significant portion of the assessments is without merit. In
April 2003 the Company received a notification from the Belgian tax authorities
of their intent to assess a tax deficiency related to 1999. The anticipated
assessment, including interest, is expected to approximate (euro)13.1 million
($15.0 million at June 30, 2003). The Company believes the proposed assessment
related to 1999 is without merit and in April 2003 filed a written response in
opposition to the notification of intent to assess.
In 2002, the Company received a notification from the Norwegian tax
authorities of their intent to assess tax deficiencies of approximately NOK 12.2
million ($1.7 million at June 30, 2003) relating to 1998 through 2000. The
Company has objected to this proposed assessment in a written response to the
Norwegian tax authorities.
In the first quarter of 2003, Kronos was notified by the German Federal
Fiscal Court (the "Court") that the Court had ruled in Kronos' favor concerning
a claim for refund suit in which Kronos sought refunds of prior taxes paid
during the periods 1990 through 1997. Kronos has filed certain amended German
tax returns and expects to file additional amended German tax returns claiming
such refunds for all years affected by the Court's decision, which is expected
to result in an estimated refund of taxes and interest of approximately $40
million. Receipt of the German tax refunds is subject to satisfaction of various
procedural requirements, including a review and acceptance of the amended German
tax returns by the German tax authorities. Certain of these procedural
requirements were satisfied in the second quarter of 2003 with respect to a
portion of the refund claim, and in July 2003 the German tax authorities
refunded Kronos a portion of the total anticipated refund. The portion received
in July was (euro)21.5 million ($24.6 million using June 30, 2003 exchange
rates). Kronos has reflected this tax refund in its second quarter 2003 results
of operations. The Company expects to receive the remaining refunds over the
next six to nine months, a portion of which may result in an additional income
tax benefit.
-17-
No assurance can be given that the Company's tax matters will be
favorably resolved due to the inherent uncertainties involved in court and tax
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
At June 30, 2003 the Company had the equivalent of approximately $470
million of income tax loss carryforwards in Germany with no expiration date.
However, the Company has provided a deferred tax valuation allowance against
substantially all of these income tax loss carryforwards because the Company
currently believes they do not meet the "more-likely-than-not" recognition
criteria. In 2002, the German federal government proposed certain changes to its
income tax law, including certain changes that would have imposed limitations on
the annual utilization of income tax loss carryforwards. Such proposal, if
enacted, would have significantly affected the Company's 2003 and future income
tax expense and cash tax payments. In April 2003 the German federal government
passed a new tax law which does not contain the provision that would have
restricted the utilization of tax loss carryforwards. Furthermore, the
provisions contained in the new law are not expected to materially impact the
Company's income tax expense or cash tax payments.
At June 30, 2003, the Company had net deferred tax liabilities of $137
million. The Company operates in numerous tax jurisdictions, in certain of which
it has temporary differences that net to deferred tax assets (before valuation
allowance). The Company has provided a deferred tax valuation allowance of $197
million at June 30, 2003, principally related to Germany, partially offsetting
deferred tax assets which the Company believes do not currently meet the
"more-likely-than-not" recognition criteria.
Note 13 - Other income, net:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands)
Securities earnings:
Interest and dividends .......... $ 838 $ 1,280 $ 1,786 $ 2,560
Securities gains (losses), net
(see Note 6) .................. 218 (12) 2,452 (12)
-------- -------- -------- --------
1,056 1,268 4,238 2,548
Currency transactions, net .......... (2,743) 4,222 (3,841) 4,820
Noncompete agreement income ......... -- 1,000 333 2,000
Disposition of property and equipment 1,116 643 1,055 597
Trade interest income ............... 198 333 361 555
Litigation settlement gains, net .... 650 435 650 2,355
Other, net .......................... 63 5 211 26
-------- -------- -------- --------
$ 340 $ 7,906 $ 3,007 $ 12,901
======== ======== ======== ========
Included in currency transactions, net, in the second quarter of 2002
was a foreign currency transaction gain of $6.3 million related to the
extinguishment of certain intercompany indebtedness with Kronos International,
Inc. ("KII").
-18-
The Company received a $20 million fee as part of the sale of Rheox in
January 1998 in payment for entering into a five-year covenant not to compete in
the rheological products business. The Company amortized the fee to income using
the straight-line method over the five-year noncompete period beginning January
30, 1998. The agreement became fully amortized in January 2003.
In all periods presented, the Company recognized litigation settlement
gains with former insurance carrier groups to settle certain insurance coverage
claims related to environmental remediation. No material settlements relating to
litigation concerning environmental remediation coverage are expected to be
received.
Note 14 - Commitments and contingencies:
Environmental matters and litigation
Some of the Company's current and former facilities, including several
divested secondary lead smelters and former mining locations, are the subject of
civil litigation, administrative proceedings or investigations arising under
federal and state environmental laws. Additionally, in connection with past
disposal practices, the Company has been named as a defendant, potential
responsible party ("PRP") or both, pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act, as amended by the Superfund Amendments
and Reauthorization Act ("CERCLA"), and similar state laws in approximately 70
governmental and private actions associated with waste disposal sites, mining
locations, and facilities currently or previously owned, operated or used by the
Company or its subsidiaries, or their predecessors, certain of which are on the
U.S. Environmental Protection Agency's Superfund National Priorities List or
similar state lists. These proceedings seek cleanup costs, damages for personal
injury or property damage and/or damages for injury to natural resources.
Certain of these proceedings involve claims for substantial amounts. Although
the Company may be jointly and severally liable for such costs, in most cases it
is only one of a number of PRPs who may also be jointly and severally liable.
The imposition of more stringent standards or requirements under
environmental laws or regulations, new developments or changes respecting site
cleanup costs or allocation of such costs among PRPs, solvency of other PRPs, or
a determination that the Company is potentially responsible for the release of
hazardous substances at other sites could result in expenditures in excess of
amounts currently estimated by the Company to be required for such matters. 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
-19-
requirements of environmental laws and enforcement policies thereunder, could
adversely affect the Company's production, handling, use, storage,
transportation, sale or disposal of such substances as well as the Company's
consolidated financial position, results of operations or liquidity.
At June 30, 2003, the Company had accrued approximately $88 million for
those environmental matters which are reasonably estimable. It is not possible
to estimate the range of costs for certain sites. The upper end of the range of
reasonably possible costs to the Company for sites which it is possible to
estimate costs is approximately $125 million. The Company's estimates of such
liabilities have not been discounted to present value, and the Company has not
recognized any potential insurance recoveries other than the settlements
discussed in Note 13.
The Company currently believes the disposition of all claims and
disputes, individually and in the aggregate, should not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity.
At June 30, 2003, the Company had approximately $24 million in
restricted cash, restricted cash equivalents and restricted marketable debt
securities held by certain trusts, the assets of which can only be used to pay
for certain of the Company's future environmental remediation and other
environmental expenditures. Restricted cash decreased approximately $28 million
in the second quarter of 2003 primarily due to a $30.8 million payment related
to the final settlement of the previously-reported Granite City, Illinois lead
smelter site. The Company may have to pay up to an additional $.7 million
related to this site upon completion of an EPA audit of certain response costs.
No further material expenditures are expected to be made for this site.
Lead pigment litigation
Since 1987 the Company, other former manufacturers of lead pigments for
use in paint and lead-based paint, and the Lead Industries Association have been
named as defendants in various legal proceedings seeking damages for personal
injury and property damage allegedly caused by the use of lead-based paints.
Certain of these actions have been filed by or on behalf of states, large U.S.
cities or their public housing authorities, school districts and certain others
have been asserted as class actions. These legal proceedings seek recovery under
a variety of theories, including public and private nuisance, negligent product
design, failure to warn, strict liability, breach of warranty,
conspiracy/concert of action, enterprise liability, market share liability,
intentional tort, and fraud and misrepresentation.
The plaintiffs in these actions generally seek to impose on the
defendants responsibility for lead paint abatement and asserted health concerns
associated with the use of lead-based paints, including damages for personal
injury, contribution and/or indemnification for medical expenses, medical
monitoring expenses and costs for educational programs. Most of these legal
proceedings are in various pre-trial stages; some are on appeal following
dismissal or summary judgment rulings in favor of the defendants.
The Company believes that these actions are without merit, intends to
continue to deny all allegations of wrongdoing and liability and to defend all
actions vigorously. The Company has not accrued any amounts for the pending lead
pigment litigation. Liability that may result, if any, cannot reasonably be
estimated. In addition, various legislation and administrative regulations have,
from time to time, been enacted or proposed that seek to (a) impose various
obligations on present and former manufacturers of lead pigment and lead-based
paint with respect to asserted health concerns associated with the use of such
-20-
products and (b) effectively overturn the precedent set by court decisions in
which the Company and other pigment manufacturers have been successful. Examples
of such proposed legislation include bills which would permit civil liability
for damages on the basis of market share, rather than requiring plaintiffs to
prove that the defendant's product caused the alleged damage, and bills which
would revive actions barred by the statute of limitations. The Company currently
believes the disposition of all claims and disputes, individually and in the
aggregate, should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity. Considering
the Company's previous involvement in the lead pigment and lead-based paint
businesses, the Company expects that additional lead pigment and lead-based
paint litigation may be filed against the Company in the future, asserting
similar or different legal theories and seeking similar or different types of
damages and relief .
Other litigation
The Company has been named as a defendant in various lawsuits in a
variety of jurisdictions, alleging personal injuries as a result of occupational
exposure to asbestos, silica and/or mixed dust in connection with formerly owned
operations. Approximately 380 of these cases involving a total of approximately
30,825 plaintiffs and their spouses remain pending, including the Rhines case
described below. The Company has not accrued any amounts for this litigation. In
addition, from time to time, the Company has received notices regarding asbestos
or silica claims purporting to be brought against former subsidiaries of the
Company, including notices provided to insurers with which the Company has
entered into settlements extinguishing certain insurance policies. These
insurers may seek indemnification from the Company.
Rhines, et al. v. A.O. Smith, et al. (Circuit Court of Covington County,
Mississippi, Civil Action No. 2002-191C). In June 2003, the Company was served
with a complaint in this case brought on behalf of approximately 3,593
plaintiffs against approximately 265 defendants, alleging injury as a result of
exposure to asbestos.
The Company's Belgian subsidiary and various of its Belgian employees
are the subject of an investigation by Belgian authorities relating to an
accident resulting in two fatalities that occurred in its Langerbrugge, Belgium
facility in October 2000. The investigation stage, which could ultimately result
in civil and criminal sanctions against the Company, was completed in 2002. In
May 2003 the Belgian authorities referred the proceedings against the Company's
Belgian subsidiary and certain of its Belgian employees to the criminal court
for trial. The matter has been set for trial in October 2003.
The Company currently believes the disposition of all claims and
disputes, individually and in the aggregate, should not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity.
For descriptions of certain other legal proceedings, environmental,
income tax and other commitments and contingencies related to the Company,
reference is made to (i) the 2002 Annual Report, (ii) the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003, and (iii) Note 12.
-21-
ITEM 2. 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
------------------ ------ ----------------- ------
2003 2002 2003 2002
-------- -------- -------- --------
(In millions, except percentages and metric tons)
Net sales and operating
income
Net sales ............... $266.6 $226.9 +17% $519.6 $429.3 +21%
Operating income ........ $ 35.5 $ 24.7 +44% $ 69.8 $ 46.8 +49%
Operating income margin
percentage ............ 13% 11% 13% 11%
TiO2 operating statistics
Percent change in
average selling price
(in billing currencies) +7% +6%
Sales volume (metric tons in
thousands) ............ 121.0 122.6 -1% 239.5 235.0 +2%
Production volume
(metric tons in
thousands) ............ 119.5 113.0 +6% 236.7 218.9 +8%
Kronos' operating income in the second quarter of 2003 increased $10.8
million or 44% from the second quarter of 2002 primarily due to higher average
selling prices and higher production volume, partially offset by higher
operating costs, particularly energy costs. Compared with the first quarter of
2003, operating income in the second quarter of 2003 increased $1.2 million, or
3%.
Operating income in the first half of 2003 increased 49% to $69.8
million, compared with $46.8 million in the first half of 2002 due to 6% higher
average selling prices in billing currencies (which excludes the effects of
foreign currency translation), 2% higher sales volume and 8% higher production
volume, partially offset by higher operating costs, particularly energy costs.
Kronos' average selling price in billing currencies during the second
quarter of 2003 was 7% higher than the second quarter of 2002 with the greatest
improvement being realized in the European and export markets. Compared with the
first quarter of 2003, selling prices in billing currencies were flat. The
average selling price in billing currencies in June 2003 was comparable to the
average selling price in billing currencies for the second quarter of 2003. The
Company expects higher average selling prices in billing currencies for
full-year 2003 compared to full-year 2002. The Company discloses percentage
changes in its average TiO2 selling prices in billing currencies so that such
changes can be analyzed without the impact of changes in foreign currency
exchange rates, thereby facilitating period-to-period comparisons. Generally,
when the U.S. dollar strengthens or weakens against other currencies, the
percentage change in average selling prices in billing currencies will be higher
or lower, respectively, than such percentage changes would be using actual
exchange rates prevailing during the respective periods. When translated from
billing currencies to U.S. dollars using currency exchange rates prevailing
during the respective periods, Kronos' second-quarter 2003 average selling price
in U.S. dollars was 19% higher than in the second quarter of 2002 and 2% higher
-22-
than the first quarter of 2003. The average selling price expressed in U.S.
dollars in June 2003 was 3% higher than the average selling price for the second
quarter of 2003. Average selling prices expressed in U.S. dollars increased 18%
in the first half of 2003 compared with the first half of 2002.
Second quarter 2003 sales volume of 121,000 metric tons decreased 1%
from the record second quarter of 2002 and increased 2% from the first quarter
of 2003. Sales volume in the first half of 2003 was a Kronos record 239,500
metric tons. Kronos expects sales volume in the second half of 2003 to be lower
than the first half of 2003. Kronos' sales volume for full year 2003 should be
slightly higher than full year 2002.
Second quarter 2003 production volume of 119,500 metric tons represented
an all-time quarterly record for Kronos and was 6% higher than the second
quarter of 2002 and was 2% higher than the first quarter of 2003 with operating
rates at near full capacity in all periods presented. Production volume for the
first half of 2003 was 236,700 metric tons and represented an all-time first
half record. Kronos anticipates its production volume for full year 2003 will be
higher than full year 2002. Finished goods inventory levels at the end of the
second quarter decreased 2% from March 2003 levels and represented under two
months of sales.
The Company expects its TiO2 operating income in 2003 will be higher
than 2002, primarily due to higher average TiO2 selling prices in billing
currencies, slightly higher sales volume and higher production volume, partially
offset by higher operating costs, particularly energy costs. Kronos' TiO2
production volume in 2003 is expected to be higher than Kronos' 2003 TiO2 sales
volume with finished goods inventories rising modestly. 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 decreased in the second quarter and first half of 2003 primarily due
to higher average selling prices in billing currencies and higher production
volume, partially offset by higher energy costs. Excluding the effects of
foreign currency translation, which increased the Company's expenses in the
second quarter and first half of 2003 compared to year-earlier periods, the
Company's selling, general and administrative expenses, excluding corporate
expenses, in the second quarter and first half of 2003 were slightly higher than
the second quarter and first half of 2002.
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 weaker U.S. dollar
compared to the euro and Canadian dollar in the second quarter and first half of
2003 versus the year-earlier periods, increased the dollar value of sales by a
net $27.7 million and $54.4 million, respectively, when compared to the
year-earlier periods. 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 weaker U.S. dollar on Kronos'
operating costs that are not denominated in U.S. dollars increased operating
costs in the second quarter and first half of 2003 compared to the year-earlier
periods. 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
-23-
loss in the second quarter and first half of 2003. As a result, the net impact
of currency exchange rate fluctuations decreased operating income by $.6 million
and $2.4 million, respectively, in the second quarter and first half of 2003
when compared to the year-earlier periods.
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
------------------ ---------- ----------------- ----------
2003 2002 2003 2002
------ ------ ------ ------
(In millions)
Securities earnings ... $ 1.0 $ 1.3 $ (.3) $ 4.3 $ 2.6 $ 1.7
Other income and
litigation settlement
gains, net .......... 1.8 1.4 .4 2.2 4.4 (2.2)
Currency transaction
gains ............... -- 6.3 (6.3) -- 6.3 (6.3)
Corporate expense ..... (23.1) (7.5) (15.6) (38.6) (17.7) (20.9)
Interest expense ...... (8.4) (8.1) (.3) (16.4) (14.6) (1.8)
------ ------ ------ ------ ------ ------
$(28.7) $(6.6) $(22.1) $(48.5) $(19.0) $(29.5)
====== ====== ====== ====== ====== ======
Securities earnings for the first half of 2003 were higher than the
first half of 2002 primarily due to a $2.3 million noncash securities
transaction gain related to the exchange of the Company's holdings of Tremont
Corporation common stock for shares of Valhi, Inc. common stock as a result of a
series of merger transactions Valhi completed in February 2003. See Note 6 to
the Consolidated Financial Statements. In addition, interest income was lower in
the second quarter and the first half of 2003 as compared to the year earlier
periods due to lower levels of available funds invested and lower average
yields. The Company expects interest income to be lower for full-year 2003 than
full-year 2002 due to lower average yields and lower average levels of funds
available for investment.
Other corporate income for the first half of 2002 included a $1.9
million litigation settlement gain with former insurance carrier groups and $2.0
million in fee income related to a covenant not to compete agreement involving a
formerly owned business unit which became fully amortized in January 2003. See
Note 13 to the Consolidated Financial Statements. No further material
settlements relating to litigation concerning environmental remediation coverage
are expected.
Foreign currency transaction gains in the second quarter of 2002 related
to the extinguishment of certain intercompany indebtedness with Kronos
International, Inc. ("KII"). See Note 13 to the Consolidated Financial
Statements.
Corporate expense for the second quarter and first half of 2003
increased $15.6 million and $20.9 million, respectively, from comparable
prior-year periods primarily due to higher environmental expenses related to
remediation of formerly owned business units and higher legal expenses. Compared
to the first quarter of 2003, corporate expense in the second quarter of 2003
increased $7.8 million primarily due to higher environmental expenses. Corporate
expenses are expected to be higher for full-year 2003 as compared to full-year
-24-
2002 due to higher environmental expenses and slightly higher legal expenses
associated with the defense of lead pigment litigation.
Interest expense in the second quarter and first half of 2003 increased
$.3 million and $1.8 million from the comparable prior-year periods, primarily
due to higher levels of outstanding debt and associated currency effects,
partially offset by lower interest rates. Interest expense in the second quarter
of 2002 included $2.0 million related to the early extinguishment of the
Company's 11.75% Senior Secured Notes. Assuming no significant change in
interest rates, interest expense for full-year 2003 is expected to be higher
than full-year 2002 due to higher levels of outstanding indebtedness, partially
offset by lower average interest rates.
Provision for income taxes
The Company reduced its deferred income tax valuation allowance by $.4
million in the first half of 2003 and $3.0 million in the first half of 2002
primarily as a result of utilization of certain tax attributes for which the
benefit had not been previously recognized under the "more-likely-than-not"
recognition criteria.
Other
Minority interest in all presented periods primarily related to NL
Environmental Services, Inc.
Recently adopted accounting principles
As described in Note 1 in the Consolidated Financial Statements, the
Company adopted Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations," effective January 1, 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows from operating, investing and
financing activities for the six months ended June 30, 2003 and 2002 are
presented below.
Six months ended
June 30,
--------------------
2003 2002
------- -------
(In millions)
Net cash provided (used) by:
Operating activities:
Before changes in assets and liabilities ......... $ 49.8 $ 37.3
Changes in assets and liabilities ................ (31.1) (.8)
------- -------
18.7 36.5
Investing activities ................................. (9.7) (19.3)
Financing activities ................................. (14.4) 39.7
------- -------
Net cash used by operating, investing, and
financing activities ............................. $ (5.4) $ 56.9
======= =======
-25-
Operating activities
The TiO2 industry is cyclical and changes in economic conditions within
the industry significantly affect the earnings and operating cash flows of the
Company. Cash flows from operations is the primary source of liquidity for the
Company. Changes in TiO2 pricing, production volume and customer demand, among
other things, could significantly affect the liquidity of the Company. Cash flow
from operations, before changes in assets and liabilities, increased in the
first six months of 2003 from the comparable period in 2002 primarily due to
$22.9 million of higher operating income, $18.7 million of higher current income
tax benefits, net (see Note 12 to the Consolidated Financial Statements),
partially offset by $20.9 million of higher corporate expenses. Cash flow from
operations, before changes in assets and liabilities, in the first half of 2002
included a $6.3 million foreign currency transaction gain related to the
extinguishment of certain intercompany indebtedness with KII.
Changes to the Company's assets and liabilities, excluding the effect of
currency translation, in the first half of 2003 compared with the first half of
2002, were negatively affected primarily by $21.1 million of higher refundable
income taxes and $8.9 million of lower insurance proceeds collected. Further,
the net cash used to fund changes in the Company's inventories, accounts and
notes receivable, accounts payable and accrued liabilities, and accrued
environmental costs (excluding the effect of currency translation) in the first
six months of 2003 was comparable to the first six months of 2002. Inventories
and accounts payable were affected by certain non-cash accruals for certain
titanium ore contracts of $4.9 million and $31.6 million at December 31, 2002
and 2001, respectively. These non-cash accruals were reversed as purchases of
raw materials were received under the contracts in the first half of 2003 and
2002, respectively.
Investing activities
The Company's capital expenditures were $13.9 million and $12.1 million
in the first half of 2003 and 2002, respectively. Capital expenditures in first
half of 2002 included approximately $2.2 million related to reconstruction of
the Company's Leverkusen, Germany sulfate plant damaged in the March 2001 fire.
In May 2003 the Harold C. Simmons Family Trust No. 2 (the "Family
Trust") repaid $2 million principal amount on the revolving credit agreement.
See Note 7 to the Consolidated Financial Statements.
In January 2002, the Company acquired all of the stock and limited
liability company units of EWI RE, Inc. and EWI RE, Ltd. (collectively "EWI"),
respectively, for an aggregate of $9.2 million in cash, including capitalized
acquisition costs of $.2 million.
Financing activities
In March 2003 the Company borrowed (euro)15 million ($16.1 million when
borrowed) and in April 2003 the Company repaid NOK 80 million ($11.0 million
when repaid) under the revolving credit facility.
In March 2002, the Company redeemed $25 million principal amount of its
11.75% Senior Secured Notes using available cash on hand, and in June 2002 the
Company redeemed the remaining $169 million principal amount of such 11.75%
-26-
Senior Secured Notes using a portion of the proceeds from the June 2002 issuance
of the (euro)285 million principal amount of the KII 8.875% Senior Secured Notes
($280 million when issued). Also in June 2002, KII's operating subsidiaries in
Germany, Belgium and Norway entered into a new three-year (euro)80 million
secured revolving credit facility and borrowed (euro)13 million ($13 million)
and NOK 200 million ($26 million) which, along with available cash, was used to
repay and terminate KII's short term notes payable ($53.2 million when repaid).
Deferred financing costs of $9.3 million for the KII 8.875% Senior
Secured Notes and the European credit facility are being amortized over the life
of the respective agreements and are included in other noncurrent assets as of
June 30, 2002.
In the second quarter of 2003, the Company paid a regular quarterly
dividend to shareholders of $.20 per share, aggregating $9.5 million. Dividends
paid during the first half of 2003 totaled $.40 per share, or $19.1 million.
In the first half of 2003 and the second quarter of 2002, the Company
made no repurchases of common stock. During the first quarter of 2002, the
Company purchased approximately 228,000 shares of its common stock in the open
market at an aggregate cost of approximately $3.3 million. The Company is
authorized to repurchase approximately 1.3 million additional shares at July 25,
2003. The shares may be purchased over an unspecified period of time and,
depending on market conditions, applicable legal requirements, available cash
and other factors, the share repurchase program may be suspended at any time and
could be terminated prior to completion. The repurchased shares are to be held
as treasury shares available for general corporate purposes.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability
At June 30, 2003, the Company had cash and cash equivalents aggregating
$55 million ($18 million held by non-U.S. subsidiaries) and an additional $38
million of restricted cash equivalents and restricted marketable debt securities
held by the Company, of which $3 million was classified as a noncurrent asset.
Restricted cash decreased approximately $28 million in the second quarter of
2003 primarily due to a $30.8 million payment related to the final settlement of
the previously-reported Granite City, Illinois lead smelter site. The Company
may have to pay up to an additional $.7 million related to this site upon
completion of an EPA audit of certain response costs. No further material
expenditures are expected to be made for this site. At June 30, 2003, certain of
the Company's subsidiaries had $102 million available for borrowing with
approximately $57 million available under non-U.S. credit facilities (including
$55 million under the European Credit Facility) and approximately $45 million
under the U.S. Credit Facility. At June 30, 2003, the Company had complied with
all financial covenants governing its debt agreements.
Income tax contingencies
See Note 12 to the Consolidated Financial Statements.
Lead pigment litigation, environmental matters and other litigation
See Note 14 to the Consolidated Financial Statements and Part II, Item
1. "Legal Proceedings."
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Other
The Company periodically evaluates its liquidity requirements,
alternative uses of capital, capital needs and availability of resources in view
of, among other things, its dividend policy, its debt service and capital
expenditure requirements and estimated future operating cash flows. As a result
of this process, the Company in the past has sought, and in the future may seek,
to reduce, refinance, repurchase or restructure indebtedness; raise additional
capital; repurchase shares of its common stock; modify its dividend policy;
restructure ownership interests; sell interests in subsidiaries or other assets;
or take a combination of such steps or other steps to manage its liquidity and
capital resources. In the normal course of its business, the Company may review
opportunities for the acquisition, divestiture, joint venture or other business
combinations in the chemicals or other industries, as well as the acquisition of
interests in, and loans to, related companies. In the event of any acquisition
or joint venture transaction, the Company may consider using available cash,
issuing equity securities or increasing its indebtedness to the extent permitted
by the agreements governing the Company's existing debt.
Special note regarding forward-looking statements
The statements contained in this Report on Form 10-Q ("Quarterly
Report") which are not historical facts, including, but not limited to,
statements found under the captions "Results of Operations" and "Liquidity and
Capital Resources" above, are forward-looking statements that represent
management's beliefs and assumptions based on currently available information.
Forward-looking statements can be identified by the use of words such as
"believes," "intends," "may," "will," "should," "could," "anticipates,"
"expects," or comparable terminology or by discussions of strategy or trends.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it cannot give any assurances that
these expectations will prove to be correct. Such statements by their nature
involve risks and uncertainties, including, but not limited to, the cyclicality
of the titanium dioxide industry, global economic and political conditions,
global productive capacity, customer inventory levels, changes in product
pricing, changes in product costing, changes in foreign currency exchange rates,
competitive technology positions, operating interruptions (including, but not
limited to, labor disputes, leaks, fires, explosions, unscheduled downtime,
transportation interruptions, war and terrorist activities), the ultimate
resolution of pending or possible future lead pigment litigation and legislative
developments related to the lead pigment litigation, the outcome of other
litigation and tax controversies, and other risks and uncertainties included in
this Quarterly Report and in the 2002 Annual Report, and the uncertainties set
forth from time to time in the Company's filings with the Securities and
Exchange Commission. Should one or more of these risks materialize (or the
consequences of such a development worsen), or should the underlying assumptions
prove incorrect, actual results could differ materially from those forecasted or
expected. The Company disclaims any intention or obligation to update publicly
or revise such statements whether as a result of new information, future events
or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's market risks, refer to the caption
"Quantitative and Qualitative Disclosures About Market Risk" in the 2002 Annual
Report. There have been no material changes to the information provided that
would require additional information with respect to the quarter ended June 30,
2003.
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ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures.
The term "disclosure controls and procedures," as defined by regulations of the
Securities and Exchange Commission ("SEC"), means controls and other procedures
that are designed to ensure that information required to be disclosed in the
reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of Harold C. Simmons, the Company's
Chief Executive Officer, and Robert D. Hardy, the Company's Chief Financial
Officer, have evaluated the Company's disclosure controls and procedures as of
June 30, 2003. Based upon their evaluation, these executive officers have
concluded that the Company's disclosure controls and procedures are effective as
of the date of such evaluation.
The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America ("GAAP)", and
includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company,
o Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with GAAP,
and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the
Company, and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets
that could have a material effect on the Company's consolidated
financial statements.
There has been no change to the Company's system of internal controls over
financial reporting during the quarter ended June 30, 2003 that has materially
affected, or is reasonably likely to materially affect, the Company's system of
internal controls over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 14 to the Consolidated Financial
Statements, and for descriptions of certain previously reported legal
proceedings, reference is made to the 2002 Annual Report and the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
County of Santa Clara v. Atlantic Richfield Company, et al. (Superior
Court of the State of California, County of Santa Clara, Case No. CV788657). In
July 2003, the trial court granted defendants' motion to dismiss all remaining
claims in this previously-described case. The time for appeal has not yet run.
State of Rhode Island v. Lead Industries Association, et al. (Superior
Court of Rhode Island, No. 99-5226). In June 2003, the court set April 5, 2004
as the date for the retrial of Phase I of this previously-described case.
Lewis et al. v. Lead Industries Association, et al. (Circuit Court of
Cook County, Illinois, County Department, Chancery Division, Case No.
00CH09800). In June 2003, the appellate court affirmed the dismissal of five of
the six counts of plaintiffs' complaint in this previously-described case, but
reversed the dismissal of the conspiracy count. The time for appeal has not yet
run.
Borden, et al. v. The Sherwin-Williams Company, et al. (Circuit Court of
Jefferson County, Mississippi, Civil Action No. 2000-587). In June 2003,
plaintiffs and defendants jointly moved the court to vacate the
previously-described October 2003 trial date.
Quitman County School District v. Lead Industries Association, et al.
(Circuit Court of Quitman County, Mississippi, Case No. 2001-0106). In June
2003, the Court set a trial date of September 13, 2004 in this
previously-described case.
Thomas v. Lead Industries Association, et al. (Circuit Court, Milwaukee,
Wisconsin, Case No. 99-CV-6411). In June 2003, plaintiff appealed the trial
court's grant of summary judgment for defendants in this previously-described
case.
City of St. Louis v. Lead Industries Association, et al. (Missouri
Circuit Court 22nd Judicial Circuit, St. Louis City, Cause No. 002-245, Division
1). In May 2003, plaintiffs filed an amended complaint alleging only a nuisance
claim in this previously-described case. Defendants' renewed motion to dismiss
and motion for summary judgment are pending. Plaintiffs have moved the Court to
set an October 2003 trial date.
City of Milwaukee v. NL Industries, Inc. and Mautz Paint (Circuit Court,
Civil Division, Milwaukee County, Wisconsin, Case No. 01CV0030066). In May 2003,
the court vacated the previously-described October 2003 trial date. No new trial
date has been set. Defendants' motion for summary judgment is pending.
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Justice et al. v Sherwin-Williams, et al. (Superior Court of California,
County of San Francisco, No. 314686). This previously-described case has been
voluntarily dismissed without prejudice by plaintiffs.
Sabater, et al. v. Lead Industries Association, et al. (Supreme Court of
the State of New York, County of Bronx, Index No. 25533/98). Plaintiffs' motion
for class certification is pending in this previously-described case.
The Company expects that additional lead pigment litigation and
lead-based paint litigation may be filed against the Company in the future
asserting similar or different legal theories and seeking similar or different
types of damages and relief.
Herd v. ASARCO, et al. (Case No. CJ-2001-443), Reeves v. ASARCO, et al.
(Case No. CJ-02-8), Carr v. ASARCO, et al. (Case No. CJ-02-59), Edens v. ASARCO
et al. (Case No. CJ-02-245, and Koger v. ASARCO et al. (Case No. CJ-02-284). In
May 2003, the Company was voluntarily dismissed with prejudice by plaintiffs
from these previously-described cases.
Cole, et al. v. ASARCO Incorporated et al. (U.S. District Court for the
Northern District of Oklahoma, Case No. 03C V327 EA (J)). In June 2003, the
Company was served with a complaint in this purported class action on behalf of
two classes of persons living in the Picher/Cardin, Oklahoma, area: (1) a
medical monitoring class of persons who have lived in the area since 1994; and
(2) a property owner class of residential, commercial and government property
owners. Plaintiffs are nine individuals and, in their official capacities, the
Mayor of Picher and the Chairman of the Picher/Cardin School Board. Plaintiffs
allege causes of action in trespass and nuisance and seek a medical monitoring
program, a relocation program, property damages, and punitive damages.
Crawford, et al. v. ASARCO, Incorporated, et al. (Case No. CJ-03-304);
Barr, et al. v. ASARCO Incorporated, et al. (Case No. CJ-03-305); Brewer, et al.
v. ASARCO Incorporated, et al. (Case No. CJ-03-306); Kloer, et al. v. ASARCO,
Incorporated, et al. (Case No. CJ-03-307); Rhoten, et al. v. Asarco
Incorporated, et al. (Case No. CJ-03-308) (all in the District Court in and for
Ottawa County, State of Oklahoma). In July 2003, the Company was served with
complaints in these five cases asserting personal injuries due to exposure to
lead from mining waste on behalf of, respectively, two, four, two, three, and
four children. Each complaint alleges causes of action in negligence, strict
liability, nuisance, and attractive nuisance; and each seeks $20 million in
compensatory and $20 million in punitive damages. The Company intends to answer
each complaint denying all liability and to defend itself vigorously.
United States of America v. NL Industries, Inc., et al., (United States
District Court for the Southern District of Illinois, Civ. No. 91-CV 00578). In
May 2003, the court entered the previously-described consent decree between the
United States and the Company. Pursuant to the consent decree, the Company in
June 2003 paid $30.8 million to the United States, and will pay up to an
additional $.7 million upon completion of an EPA audit of certain response
costs.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 20, 2003. All
the nominees for director were elected with the voting results for each as
follows:
Director Shares For Shares Withheld
- --------------------------- ---------- ---------------
Mr. J. Landis Martin 46,641,822 190,018
Mr. George E. Poston 46,425,918 405,922
Mr. Glenn R. Simmons 46,641,816 190,024
Mr. Harold C. Simmons 46,640,586 191,254
General Thomas P. Stafford 46,660,008 171,832
Dr. R. Gerald Turner 46,653,138 178,702
Mr. Steven L. Watson 45,118,497 1,713,343
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Company has retained a signed original of any exhibit
listed below that contains signatures, and the Company
will provide any such exhibit to the SEC or its staff upon
request.
10.1 - Intercorporate Services Agreement by and between
Contran Corporation and the Registrant effective as of
January 1, 2003.
10.2 - Intercorporate Services Agreement by and between
Titanium Metals Corporation and the Registrant effective
as of January 1, 2003.
99.1 - Certification.
99.2 - Certification.
99.3 - Certification.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended June 30, 2003
through the date of this report:
July 14, 2003 - Reported Items 7 and 9.
July 25, 2003 - Reported Items 7 and 9.
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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: July 25, 2003 By /s/ Robert D. Hardy
- -------------------- --------------------------------------------
Robert D. Hardy
Principal Financial and Accounting Officer
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