Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2004 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 Rule 12b-2 of the Securities Exchange Act of 1934). Yes X_ No ___
Number of shares of the Registrant's common stock outstanding on April 30, 2004:
48,352,684.
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 2003 and March 31, 2004 3
Consolidated Statements of Income -
Three months ended March 31, 2003 and 2004 5
Consolidated Statements of Comprehensive Income (Loss) -
Three months ended March 31, 2003 and 2004 6
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 2004 7
Consolidated Statements of Cash Flows -
Three months ended March 31, 2003 and 2004 8
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 4. Controls and Procedures 27
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 30
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, March 31,
2003 2004
Current assets:
Cash and cash equivalents $ 67,799 $ 111,647
Restricted cash and cash equivalents 19,029 15,601
Restricted marketable debt securities 6,147 4,267
Accounts and other receivables 156,820 184,091
Refundable income taxes 35,336 14,428
Receivable from affiliates 55 12
Inventories 266,020 227,530
Prepaid expenses 5,257 5,102
Deferred income taxes 10,798 10,154
---------- ----------
Total current assets 567,261 572,832
---------- ----------
Other assets:
Marketable equity securities 70,487 59,451
Restricted marketable debt securities 6,870 8,782
Investment in TiO2 manufacturing joint venture 129,011 127,211
Receivable from affiliate 14,000 14,000
Other 34,057 33,226
---------- ----------
Total other assets 254,425 242,670
---------- ----------
Property and equipment:
Land 32,981 32,104
Buildings 179,472 175,143
Equipment 765,704 750,576
Mining properties 83,183 80,642
Construction in progress 9,666 9,108
---------- ----------
1,071,006 1,047,573
Less accumulated depreciation and amortization 635,267 629,468
---------- ----------
Net property and equipment 435,739 418,108
---------- ----------
$1,257,425 $1,233,607
========== ==========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, March 31,
2003 2004
Current liabilities:
Current maturities of long-term debt $ 288 $ 279
Accounts payable 103,180 66,779
Accrued liabilities 81,117 86,063
Accrued environmental costs 19,627 17,120
Payable to affiliates 19,537 19,526
Income taxes 12,726 13,050
Deferred income taxes 3,436 1,407
---------- ----------
Total current liabilities 239,911 204,224
---------- ----------
Noncurrent liabilities:
Long-term debt 356,451 377,531
Accrued pension costs 81,180 80,871
Accrued postretirement benefits costs 23,411 22,563
Accrued environmental costs 57,854 57,061
Deferred income taxes 191,460 182,362
Other 19,453 18,976
---------- ----------
Total noncurrent liabilities 729,809 739,364
---------- ----------
Minority interest 86,791 86,528
---------- ----------
Stockholders' equity:
Common stock 8,355 8,355
Additional paid-in capital 777,819 777,819
Retained earnings 16,023 18,371
Accumulated other comprehensive income (loss):
Marketable securities 23,323 16,193
Currency translation (153,955) (154,260)
Pension liabilities (36,209) (36,209)
Treasury stock (434,442) (426,778)
---------- ----------
Total stockholders' equity 200,914 203,491
---------- ----------
$1,257,425 $1,233,607
========== ==========
Commitments and contingencies (Notes 10 and 12)
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2003 and 2004
(In thousands, except per share data)
2003 2004
Net sales $ 252,973 $ 263,267
Cost of sales 188,417 202,231
--------- ---------
Gross margin 64,556 61,036
Selling, general and administrative expense 29,379 35,244
Other operating income (expense):
Currency transaction gains (losses), net (1,098) 254
Disposition of property and equipment (61) (23)
Noncompete agreement income 333 -
Other income 148 14
Corporate expense (15,315) (6,667)
--------- ---------
Income from operations 19,184 19,370
Other income (expense):
Trade interest income 163 206
Other interest income 948 770
Securities transactions, net 2,234 (22)
Interest expense (7,985) (9,217)
--------- ---------
Income before income taxes and minority interest 14,544 11,107
Provision for income taxes 5,090 2,224
Minority interest in after-tax earnings 24 4,794
--------- ---------
Net income $ 9,430 $ 4,089
========= =========
Basic and diluted net income per share $ .20 $ .08
========= =========
Weighted-average shares used in the calculation of net income per share:
Basic 47,693 48,140
Dilutive impact of stock options 51 139
--------- ---------
Diluted 47,744 48,279
========= =========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three months ended March 31, 2003 and 2004
(In thousands)
2003 2004
Net income $ 9,430 $ 4,089
--------- ---------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment:
Unrealized holding gains (losses) arising during the period 7,093 (7,130)
Reclassification for realized net loss included in net income (1,474) -
--------- ---------
5,619 (7,130)
Currency translation adjustment 3,742 (305)
--------- ---------
Total other comprehensive income (loss) 9,361 (7,435)
--------- ---------
Comprehensive income (loss) $ 18,791 $ (3,346)
========= =========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2004
(In thousands)
Accumulated other
comprehensive income (loss)
------------------------------------
Additional ------------------------------------
Common paid-in Retained Marketable Currency Pension Treasury
stock capital earnings securities translation liabilities stock Total
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Balance at December 31, 2003 $8,355 $777,819 $ 16,023 $ 23,323 $(153,955) $ (36,209) $(434,442) $200,914
Net income - - 4,089 - - - - 4,089
Distribution of shares of
Kronos Worldwide, Inc. common stock - - (1,143) - - - - (1,143)
Income tax on distribution - - (598) - - - - (598)
Other comprehensive loss, net - - - (7,130) (305) - - (7,435)
Treasury stock - reissued - - - - - - 7,664 7,664
------ -------- -------- --------- --------- --------- --------- --------
Balance at March 31, 2004 $8,355 $777,819 $ 18,371 $ 16,193 $(154,260) $ (36,209) $(426,778) $203,491
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2003 and 2004
(In thousands)
2003 2004
Cash flows from operating activities:
Net income $ 9,430 $ 4,089
Depreciation and amortization 9,691 11,137
Deferred income taxes 1,630 (1,258)
Minority interest 24 4,794
Other, net (3,992) 1,893
Distributions from (contributions to) TiO2 manufacturing joint venture (1,250) 1,800
Change in assets and liabilities:
Accounts and other receivables (29,298) (30,909)
Inventories 18,702 33,494
Prepaid expenses 1,960 152
Accrued environmental costs 8,678 (3,300)
Accounts payable and accrued liabilities (33,174) (29,115)
Income taxes 339 21,301
Other, net 3,569 (642)
-------- --------
Net cash provided (used) by operating activities (13,691) 13,436
-------- --------
Cash flows from investing activities:
Capital expenditures (6,503) (4,518)
Change in restricted cash equivalents and restricted marketable debt securities, net 2,050 1,689
Other, net 42 30
-------- --------
Net cash used by investing activities (4,411) (2,799)
-------- --------
Cash flows from financing activities:
Indebtedness:
Borrowings 16,106 99,968
Principal payments (342) (67,468)
Cash dividends paid (9,539) -
Distributions to minority interest - (5,974)
Treasury stock reissued 77 7,664
-------- --------
Net cash provided by financing activities 6,302 34,190
-------- --------
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 2003 and 2004
(In thousands)
2003 2004
Cash and cash equivalents - net change from:
Operating, investing and financing activities $(11,800) $ 44,827
Currency translation 422 (979)
Cash and cash equivalents at beginning of period 58,091 67,799
-------- --------
Cash and cash equivalents at end of period $ 46,713 $111,647
======== ========
Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized $ 674 $ 1,085
Income taxes, net 3,121 (16,952)
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
NL Industries, Inc. (NYSE: NL) conducts its titanium dioxide pigments
("TiO2") operations through its 50.5% owned subsidiary, Kronos Worldwide, Inc.
(NYSE: KRO) ("Kronos"). At March 31, 2004, Valhi, Inc. and a wholly-owned
subsidiary of Valhi held approximately 83% of NL's outstanding common stock, and
Contran Corporation and its subsidiaries held approximately 90% of Valhi's
outstanding common stock. At March 31, 2004, Valhi and a wholly-owned subsidiary
of Valhi also held an additional 43.3% of Kronos' 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, or is held by Mr. Simmons or
persons or other entities related to Mr. Simmons. Mr. Simmons, the Chairman of
the Board of Valhi, Contran and the Company, may be deemed to control each of
such companies.
The consolidated balance sheet of NL at December 31, 2003 has been
condensed from the Company's audited consolidated financial statements at that
date. The consolidated balance sheet at March 31, 2004, and the consolidated
statements of income, comprehensive income (loss), stockholders' equity and cash
flows for the interim periods ended March 31, 2003 and 2004, have been prepared
by the Company, without audit, in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). 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 normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted, and 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 Company's Annual Report on Form 10-K for the year ended December 31,
2003 (the "2003 Annual Report").
In March 2004, the Company paid its $.20 per share regular quarterly
dividend in the form of shares of Kronos common stock in which approximately
345,100 shares were distributed to NL stockholders in the form of a pro-rata
dividend. Such shares represented approximately .7% of Kronos' outstanding
common stock. The Company's distribution of such shares of Kronos common stock
is taxable to the Company, and the Company is required to recognize a taxable
gain equal to the difference between the fair market value of the shares of
Kronos distributed on the date of distribution and the Company's adjusted tax
basis in such shares at the date of distribution. Pursuant to the Company's tax
sharing agreement with Valhi, the Company is not required to pay taxes on the
tax liability generated for the shares of Kronos distributed to Valhi and its
wholly-owned subsidiary. The Company is required to recognize a tax liability
with respect to the Kronos shares distributed to NL stockholders other than
Valhi and its wholly-owned subsidiary, and such tax liability was approximately
$598,000. In accordance with GAAP, the net carrying value of all of the shares
of Kronos distributed ($1.1 million) and the $598,000 tax liability have been
recognized as a reduction of the Company's stockholders' equity and charged
directly to retained earnings.
As disclosed in the 2003 Annual Report, the Company accounts for
stock-based employee compensation in accordance with Accounting Principles Board
Opinion ("APBO") No. 25, "Accounting for Stock Issued to Employees," and its
various interpretations. Under APBO No. 25, no compensation cost is generally
recognized for fixed stock options in which the exercise price is greater than
or equal to the market price on the grant date. Prior to 2003, the Company
commenced accounting for its stock options using the variable accounting method
of APBO No. 25, which requires the intrinsic value of all unexercised stock
options (including stock options 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 recognition of
additional compensation expense (income). Net compensation income recognized by
the Company in accordance with APBO No. 25 was approximately $500,000 in the
first quarter of 2003, and net compensation cost recognized by the Company was
$1.1 million in the first quarter of 2004.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in the first quarter of 2003 and
2004 if the Company and its subsidiaries and affiliates had each elected to
account for their respective stock-based employee compensation related to stock
options in accordance with the fair value-based recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," for all awards granted
subsequent to January 1, 1995.
Three months
ended March 31,
2003 2004
(In millions, except
per share amounts)
Net income as reported $ 9.4 $ 4.1
Adjustments, net of applicable income
tax effects and minority interest:
Stock-based employee compensation expense
(income) determined under APBO No. 25 (.3) .4
Stock-based employee compensation expense
determined under SFAS No. 123 (.1) -
----- -----
Pro forma net income $ 9.0 $ 4.5
===== =====
Basic and diluted net income per share:
As reported $ .20 $ .08
Pro forma $ .19 $ .09
The Company has complied with the consolidation requirements of FASB
Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51," as amended, as of March 31, 2004. See Note 13.
Note 2 - Accounts and other receivables:
December 31, March 31,
2003 2004
----------- ---------
(In thousands)
Trade receivables $147,029 $176,130
Recoverable VAT and other receivables 12,710 10,856
Allowance for doubtful accounts (2,919) (2,895)
-------- --------
$156,820 $184,091
======== ========
Note 3 - Inventories:
December 31, March 31,
2003 2004
----------- ---------
(In thousands)
Raw materials $ 61,959 $ 31,591
Work in process 19,855 18,135
Finished products 147,270 142,175
Supplies 36,936 35,629
-------- --------
$266,020 $227,530
======== ========
Note 4 - Marketable equity securities:
December 31, March 31,
2003 2004
----------- ---------
(In thousands)
Valhi common stock $ 70,450 $ 59,430
Other 37 21
-------- --------
$ 70,487 $ 59,451
======== ========
At March 31, 2004, the Company owned approximately 4.7 million shares of
Valhi common stock with a quoted market price of $12.62 per share (December 31,
2003 quoted market price - $14.96 per share).
Note 5 - Other noncurrent assets:
December 31, March 31,
2003 2004
----------- ---------
(In thousands)
Deferred financing costs, net $ 10,417 $ 9,695
Goodwill 6,406 6,406
Unrecognized net pension obligations 13,747 13,747
Intangible asset, net 1,859 1,765
Other 1,628 1,613
-------- --------
$ 34,057 $ 33,226
======== ========
Note 6 - Accrued liabilities:
December 31, March 31,
2003 2004
----------- ---------
(In thousands)
Employee benefits $ 38,368 $ 33,778
Interest 206 8,043
Other 42,543 44,242
-------- --------
$ 81,117 $ 86,063
======== ========
Note 7 - Long-term debt:
December 31, March 31,
2003 2004
----------- ---------
(In thousands)
Kronos International, Inc. and subsidiaries:
Senior Secured Notes $356,136 $345,848
Revolving credit facility - 31,551
Other 603 411
-------- --------
356,739 377,810
Less current maturities 288 279
-------- --------
$356,451 $377,531
======== ========
During the first quarter of 2004, certain of Kronos International's
operating subsidiaries in Europe borrowed a net Euro 26 million ($32 million
when borrowed) under the European revolving credit facility at an interest rate
of 3.8%.
Note 8 - Other noncurrent liabilities:
December 31, March 31,
2003 2004
----------- ---------
(In thousands)
Employee benefits $ 4,849 $ 4,663
Insurance 4,331 4,553
Other 10,273 9,760
-------- --------
$ 19,453 $ 18,976
======== ========
Note 9 - Minority interest:
December 31, March 31,
2003 2004
----------- ---------
(In thousands)
Minority interest in net assets:
Kronos Worldwide, Inc. $ 77,763 $ 77,507
Other subsidiaries 9,028 9,021
-------- --------
$ 86,791 $ 86,528
======== ========
Three months ended
March 31,
------------------------------
2003 2004
----------- ---------
(In thousands)
Minority interest in net earnings:
Kronos Worldwide, Inc. $ - $ 4,786
Other subsidiaries 24 8
-------- --------
$ 24 $ 4,794
======== ========
Note 10 - Provision for income taxes:
Three months ended
March 31,
------------------------------
2003 2004
----------- ---------
(In thousands)
Expected tax expense $ 5.1 $ 3.9
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies .9 (.1)
Non-U.S. tax rates .1 .1
Change in deferred income tax valuation
allowance, net (.7) (3.0)
U.S. state income taxes, net .1 -
Other, net (.4) 1.3
----- -----
$ 5.1 $ 2.2
===== =====
In the first quarter of 2003, Kronos International, Inc. ("KII"), which
conducts Kronos' TiO2 operations in Europe, was notified by the German Federal
Fiscal Court (the "Court") that the Court had ruled in KII's favor concerning a
claim for refund suit in which KII sought refunds of prior taxes paid during the
periods 1990 through 1997. KII and the Company's German operating subsidiary
were required to file amended tax returns with the German tax authorities to
receive refunds for such years, and all of such amended returns were filed
during 2003. Such amended returns reflected an aggregate refund of taxes and
related interest to the Company's German operating subsidiary of Euro 103.2
million ($123.0 million), and an aggregate additional liability of taxes and
related interest to KII of Euro 91.9 million ($109.6 million). Assessments and
refunds will be processed by year as the respective returns are reviewed by the
tax authorities. Certain interest components may also be refunded separately.
The German tax authorities have reviewed and accepted the amended return with
respect to the 1990 tax year. Through April 2004, KII's German operating
subsidiary received net refunds of Euro 16.3 million ($20.3 million when
received). KII believes it will receive the net refunds for the remaining years
during 2004. In addition to the refunds for the 1990 to 1997 periods, the court
ruling also resulted in a refund of 1999 income taxes and interest for which the
Company received Euro 21.5 million ($24.6 million) in 2003. KII has recognized
the aggregate Euro 32.8 million ($38 million) benefit of such net refunds in its
2003 results of operations.
Certain of the Company's U.S. and non-U.S. tax returns are being examined
and tax authorities have or may propose tax deficiencies, including penalties
and interest. For example:
o NL's and NL Environmental Management Services, Inc.'s ("EMS") 1998 U.S.
federal income tax returns are currently being examined by the U.S. tax
authorities, and NL and EMS have granted extensions of the statute of
limitations for assessments until September 30, 2004. Based on the
examination to date, NL anticipated that the U.S. tax authorities would
propose a substantial tax deficiency, including interest, related to a
restructuring transaction. In an effort to avoid protracted litigation and
minimize the hazards of such litigation, NL applied to take part in an IRS
settlement initiative applicable to transactions similar to the
restructuring transaction, and in April 2003 NL received notification from
the IRS that NL had been accepted into such settlement initiative. Under
this initiative, a final settlement with the IRS is to be reached through
expedited negotiations and, if necessary, through a specified expedited
arbitration procedure. NL anticipates that settlement of this 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. NL has provided
adequate accruals to cover the currently expected range of settlement
outcomes.
o Kronos has received a preliminary tax assessment related to 1993 from the
Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately Euro 6 million ($8 million at March 31, 2004).
Kronos has filed a protest to this assessment and believes that a
significant portion of the assessment is without merit. The Belgian tax
authorities have filed a lien on the fixed assets of Kronos' Belgian TiO2
operations in connection with this assessment. In April 2003, Kronos
received a notification from the Belgian tax authorities of their intent to
assess a tax deficiency related to 1999 that, including interest, is
expected to be approximately Euro 13 million ($16 million). Kronos believes
the proposed assessment is substantially without merit, and Kronos has
filed a written response.
o The Norwegian tax authorities have notified Kronos of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million at
March 31, 2004) relating to the years 1998 to 2000. Kronos has filed a
written protest to this proposed assessment.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in settlement
initiatives, 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 its consolidated financial position, results of operations or
liquidity.
Note 11 - Employee benefit plans:
The components of net periodic defined benefit pension cost are presented
in the table below.
Three months ended
March 31,
------------------------------
2003 2004
----------- ---------
(In thousands)
Service cost benefits $ 1,298 $ 1,669
Interest cost on projected benefit obligations 4,404 5,031
Expected return on plan assets (4,903) (4,722)
Amortization of prior service cost 87 141
Amortization of net transition obligations 172 143
Recognized actuarial losses 446 962
------- -------
$ 1,504 $ 3,224
======= =======
The components of net periodic postretirement benefits other than pensions
("OPEB") cost are presented in the table below.
Three months ended
March 31,
------------------------------
2003 2004
----------- ---------
Service cost $ 35 $ 57
Interest cost 511 471
Amortization of prior service credit (519) (255)
Recognized actuarial losses 46 71
------- -------
$ 73 $ 344
======= =======
Note 12 - Commitments and contingencies:
Lead pigment litigation. The Company's former operations included the
manufacture of lead pigments for use in paint and lead-based paint. Since 1987,
NL, other former manufacturers of lead pigments for use in paint, and lead-based
paint, and the Lead Industries Association (which discontinued business
operations in 2002) have been named as defendants in various legal proceedings
seeking damages for personal injury, property damage and governmental
expenditures allegedly caused by the use of lead-based paints. Certain of these
actions have been filed by or on behalf of states, large U.S. cities or their
public housing authorities and school districts, and certain others have been
asserted as class actions. These lawsuits seek recovery under a variety of
theories, including public and private nuisance, negligent product design,
negligent failure to warn, strict liability, breach of warranty,
conspiracy/concert of action, aiding and abetting, enterprise liability, market
share liability, intentional tort, fraud and misrepresentation violations of
state consumer protection statutes, supplier negligence and similar claims.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and 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. Several former cases have been
dismissed or withdrawn. Most of the remaining cases are in various pre-trial
stages. Some are on appeal following dismissal or summary judgment rulings in
favor of the defendants. In addition, various other cases are pending (in which
the Company is not a defendant) seeking recovery for injury allegedly caused by
lead pigment and lead-based paint. Although the Company is not a defendant in
these cases, the outcome of these cases may have an impact on additional cases
being filed against the Company.
The Company believes these actions are without merit, intends to continue
to deny all allegations of wrongdoing and liability and to defend against all
actions vigorously. The Company has neither lost nor settled any of these cases.
The Company has not accrued any amounts for the pending lead pigment and
lead-based paint litigation. Liability that may result, if any, cannot
reasonably be estimated. There can be 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.
Environmental matters and litigation. The Company's operations are governed
by various federal, state, local and foreign environmental laws and regulations.
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 Company's policy is to
comply with environmental laws and regulations at all of its plants and to
continually strive to improve environmental performance in association with
applicable industry initiatives. The Company believes that its operations are in
substantial compliance with applicable requirements of environmental laws. From
time to time, the Company may be subject to environmental regulatory enforcement
under various statutes, resolution of which typically involves the establishment
of compliance programs. It is possible that future developments, such as
stricter requirements of environmental laws and enforcement policies thereunder,
could adversely affect the Company's production, handling, use, storage,
transportation, sale or disposal of such substances.
The Company's production facilities operate within an environmental
regulatory framework in which governmental authorities typically are granted
broad discretionary powers that allow them to issue operating permits under
which the plants must operate. The Company believes all of its plants are in
substantial compliance with applicable environmental laws. With respect to the
Company's plants, neither the Company nor any of its subsidiaries have been
notified of any environmental claim in the United States or any foreign
jurisdiction by the U.S. Environmental Protection Agency ("EPA") or any
applicable foreign authority or any state, provincial or local authority.
Some of the Company's current and former facilities, including divested
primary and secondary lead smelters and former mining locations, are the subject
of civil litigation, administrative proceedings or investigations arising under
federal and state environmental laws. Additionally, in connection with past
disposal practices, the Company has been named as a defendant, potentially
responsible party ("PRP") or both, pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act, as amended by the Superfund Amendments
and Reauthorization Act ("CERCLA") and similar state laws in approximately 60
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. EPA's Superfund National Priorities List or similar state lists. These
proceedings seek cleanup costs, damages for personal injury or property damage
and/or damages for injury to natural resources. Certain of these proceedings
involve claims for substantial amounts. Although the Company may be jointly and
severally liable for such costs, in most cases it is only one of a number of
PRPs who may also be jointly and severally liable.
Environmental obligations are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of governmental
regulations, the number of PRPs and the PRPs' ability or willingness to fund
such allocation of costs, their financial capabilities and the allocation of
costs among PRPs, the solvency of other PRPs, the multiplicity of possible
solutions, and the years of investigatory, remedial and monitoring activity
required. In addition, the imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs or allocation of such costs among PRPs,
solvency of other PRPs, the results of future testing and analysis undertaken
with respect to certain sites or a determination that the Company is potentially
responsible for the release of hazardous substances at other sites, could result
in expenditures in excess of amounts currently estimated by the Company to be
required for such matters. In addition, with respect to other PRPs and the fact
that the Company may be jointly and severally liable for the total remediation
cost at certain sites, the Company could ultimately be liable for amounts in
excess of its accruals due to, among other things, reallocation of costs among
PRPs or the insolvency of one or more PRPs. No assurance can be given that
actual costs will not exceed accrued amounts or the upper end of the range for
sites for which estimates have been made and no assurance can be given that
costs will not be incurred with respect to sites as to which no estimate
presently can be made. Further, there can be no assurance that additional
environmental matters will not arise in the future.
A summary of the activity in the Company's accrued environmental costs
during the first quarter of 2004 is presented in the table below.
Amount
--------------
(In thousands)
Balance at the beginning of the period $ 77,481
Additions charged to expense 330
Payments (3,630)
--------
Balance at the end of the period $ 74,181
========
The Company records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are generally not
discounted to their present value. Recoveries of remediation costs from other
parties, if any, are recognized as assets when their receipt is deemed probable.
At March 31, 2004, no receivables for recovery had been recognized.
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 NL's obligation. At March 31,
2004, the Company had accrued $74 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 for which it is possible to estimate costs is approximately
$108 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 in 2004.
The exact time frame over which the Company makes payments with respect to
its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process which in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs which
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
is classified as a noncurrent liability.
At March 31, 2004, there are approximately 15 sites for which the Company
is unable to estimate a range of costs. For these sites, generally the
investigation is in the early stages, and it is either unknown as to whether or
not the Company actually had any association with the site, or if the Company
had association with the site, the nature of its responsibility, if any, for the
contamination at the site and the extent of contamination. The timing on when
information would become available to the Company to allow the Company to
estimate a range of loss is unknown and dependent on events outside the control
of the Company, such as when the party alleging liability provides information
to the Company.
At March 31, 2004, the Company had $19 million in restricted cash,
restricted cash equivalents and restricted marketable debt securities held by
special purpose trusts, the assets of which can only be used to pay for certain
of the Company's future environmental remediation and other environmental
expenditures (December 31, 2003 - $24 million). Use of such restricted balances
does not affect the Company's Consolidated Statements of Cash Flows.
Other litigation. In May 2004, the court ruled and, among other things,
imposed a fine of euro 200,000 against the Company and fines ranging from euro
1,000 to euro 25,000 against various employees of the Company, the liability of
which has been undertaken by the Company, in the previously-reported matter
concerning fatalities at the Company's Belgian facility. The Company plans to
appeal the ruling.
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 465 of these cases involving a total of approximately
30,000 plaintiffs and their spouses remain pending. Of these plaintiffs,
approximately 18,400 are represented by 8 cases pending in Mississippi state
court. The Company has not accrued any amounts for this litigation because
liability that might result to the Company, if any, cannot be reasonably
estimated. 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.
In addition to the litigation described above, the Company is also involved
in various other environmental, contractual, product liability, patent (or other
intellectual property), employment and other claims and disputes incidental to
its present and former businesses. In certain cases, the Company has insurance
coverage for such items. The Company currently believes the disposition of all
claims and disputes individually or in the aggregate, should not have a material
adverse effect on the Company's consolidated financial condition, results of
operations or liquidity.
Note 13 - Accounting principle newly adopted in 2004:
The Company complied with the consolidation requirements of FIN No. 46R,
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,"
as amended, as of March 31, 2004. The Company does not have any involvement with
any variable interest entity (as that term is defined in FIN No. 46R) covered by
the scope of FIN No. 46R, and therefore the impact to the Company of adopting
the consolidation requirements of FIN No. 46R was not material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Executive summary
The Company conducts operations for the manufacture and sales of TiO2, its
principal product, through its subsidiary, Kronos. Relative changes in the
Company's sales and income from operations related to its TiO2 business during
the first three months of 2003 and 2004 are primarily due to (i) relative
changes in TiO2 average selling prices and (ii) relative changes in foreign
currency exchange rates. Selling prices were generally increasing during the
first quarter of 2003, were generally flat during the second quarter of 2003 and
were generally decreasing during the third and fourth quarters of 2003 and the
first quarter of 2004.
Forward-looking information
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
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,"
"should," "could," "anticipates," "expects" or comparable terminology, or by
discussions of strategies 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 substantial risks and uncertainties that
could significantly impact expected results, and actual future results could
differ materially from those described in such forward-looking statements. While
it is not possible to identify all factors, the Company continues to face many
risks and uncertainties. Among the factors that could cause actual future
results to differ materially are the risks and uncertainties discussed in this
Quarterly Report and those described from time to time in the Company's other
filings with the Securities and Exchange Commission ("SEC") including, but not
limited to, the following:
o Future supply and demand for the Company's products,
o The cyclicality of the Company's businesses,
o Customer inventory levels (such as the extent to which Kronos' customers
may, from time to time, accelerate purchases of TiO2 in advance of
anticipated price increases or defer purchases of TiO2 in advance of
anticipated price decreases),
o Changes in raw material and other operating costs (such as energy costs),
o The possibility of labor disruptions,
o General global economic and political conditions (such as changes in the
level of gross domestic product in various regions of the world and the
impact of such changes on demand for TiO2),
o Competitive products and substitute products,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o Fluctuations in currency exchange rates (such as changes in the exchange
rate between the U.S. dollar and each of the euro, the Norwegian kroner and
the Canadian dollar),
o Operating interruptions (including, but not limited to, labor disputes,
leaks, fires, explosions, unscheduled or unplanned downtime and
transportation interruptions),
o The ability of the Company to renew or refinance credit facilities,
o The ultimate outcome of income tax audits, tax settlement initiatives or
other tax matters,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government laws and regulations and possible changes therein (such as
changes in government regulations which might impose various obligations on
present and former manufacturers of lead pigment and lead-based paint,
including NL, with respect to asserted health concerns associated with the
use of such products),
o The ultimate resolution of pending litigation (such as NL's lead pigment
litigation and litigation surrounding environmental matters) and
o Possible future litigation.
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 or revise any
forward-looking statement whether as a result of new information, future events
or otherwise.
Three months ended
March 31,
----------------------- %
2003 2004 Change
(In millions, except percentages and
volumes)
Net sales $253.0 $263.3 +4%
Cost of sales 188.4 202.3 +7%
Gross margin 64.6 61.0 -6%
Selling, general and administrative expense (29.4) (35.2) +20%
Currency transaction gains (losses), net (1.1) .2
Noncompete agreement income .3 -
Other income .1 -
Corporate expense (15.3) (6.6)
------ ------
Income from operations $ 19.2 $ 19.4 +1%
====== ======
TiO2 data:
Percent change in average selling prices:
Using actual foreign currency exchange rates +4%
Impact of changes in foreign currency exchange rates -8%
----
In billing currencies -4%
====
Sales volumes* 118 118
Production volumes* 117 117
________________________________
* Thousands of metric tons
Kronos' sales increased $10.3 million (4%) in the first quarter of 2004
compared to the first quarter of 2003, as the favorable effect of fluctuations
in foreign currency exchange rates, which increased sales by approximately $21
million (as more fully discussed below), more than offset the impact of lower
average TiO2 selling prices. Excluding the effect of fluctuations in the value
of the U.S. dollar relative to other currencies, Kronos' average TiO2 selling
prices in billing currencies in the first quarter of 2004 were 4% lower than the
first quarter of 2003. When translated from billing currencies into U.S. dollars
using actual foreign currency exchange rates prevailing during the respective
periods, Kronos' average TiO2 selling prices in the first quarter of 2004 were
4% higher compared to the first quarter of 2003. Kronos' TiO2 sales volumes in
the first quarter of 2004 approximated Kronos' TiO2 sales volumes in the first
quarter of 2003.
Kronos' sales are denominated in various currencies, including the U.S.
dollar, the euro, other major European currencies and the Canadian dollar. The
disclosure of the percentage change in Kronos' average TiO2 selling prices in
billing currencies (which excludes the effects of fluctuations in the value of
the U.S. dollar relative to other currencies) is considered a "non-GAAP"
financial measure under regulations of the SEC. The disclosure of the percentage
change in Kronos' average TiO2 selling prices using actual foreign currency
exchange rates prevailing during the respective periods is considered the most
directly comparable financial measure presented in accordance with accounting
principles generally accepted in the United States ("GAAP measure"). Kronos
discloses percentage changes in its average TiO2 prices in billing currencies
because Kronos believes such disclosure provides useful information to investors
to allow them to analyze such changes without the impact of changes in foreign
currency exchange rates, thereby facilitating period-to-period comparisons of
the relative changes in average selling prices in the actual various billing
currencies. Generally, when the U.S. dollar either strengthens or weakens
against other currencies, the percentage change in average selling prices in
billing currencies will be higher or lower, respectively, than such percentage
changes would be using actual exchange rates prevailing during the respective
periods. The difference between the 4% increase in Kronos' average TiO2 selling
prices during the first quarter 2004 as compared to the same period in 2003
using actual foreign currency exchange rates prevailing during the respective
periods (the GAAP measure) and the 4% decrease in Kronos' average TiO2 selling
price in billing currencies (the non-GAAP measure) during such periods is due to
the effect of changes in foreign currency exchange rates. The above table
presents in a tabular format (i) the percentage change in Kronos' average TiO2
selling prices using actual foreign currency exchange rates prevailing during
the respective periods (the GAAP measure), (ii) the percentage change in Kronos'
average TiO2 selling prices in billing currencies (the non-GAAP measure) and
(iii) the percentage change due to changes in foreign currency exchange rates
(or the reconciling item between the non-GAAP measure and the GAAP measure).
Kronos' cost of sales increased $13.9 million (7%) in the first quarter of
2004 compared to the first quarter of 2003 largely due to the effects of
translating foreign currencies (primarily the euro) into U.S. dollars. As a
result of the lower average TiO2 selling prices in billing currencies, Kronos'
cost of sales, as a percentage of net sales, increased from 74% in the first
quarter of 2003 to 77% in the first quarter of 2004. Kronos' TiO2 production
volumes in the first quarter of 2004 approximated Kronos' TiO2 production
volumes in the first quarter of 2003, with operating rates near full capacity in
both periods.
Kronos' gross margins for the first quarter of 2004 decreased $3.6 million
(6%) from the first quarter of 2003 as the unfavorable effect of lower average
TiO2 selling prices more than offset the favorable effect on gross margin
resulting from relative changes in foreign currency exchange rates.
Selling, general and administrative expenses increased $5.9 million (20%)
in the first quarter of 2004 as compared to the corresponding period in 2003.
This increase is largely attributable to the impact of translating foreign
currencies (primarily the euro) into U.S. dollars as well as increased
compensation costs associated with options to purchase NL common stock held by
employees.
Kronos has substantial operations and assets located outside the United
States (particularly in Germany, Belgium, Norway and Canada). A significant
amount of Kronos' sales generated from its non-U.S. operations are denominated
in currencies other than the U.S. dollar, primarily the euro, other major
European currencies and the Canadian dollar. In addition, a portion of Kronos'
sales generated from its non-U.S. operations are denominated in the U.S. dollar.
Certain raw materials, primarily titanium-containing feedstocks, are purchased
in U.S. dollars, while labor and other production costs are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
Kronos' foreign sales and operating results are subject to currency exchange
rate fluctuations which may favorably or adversely impact reported earnings and
may affect the comparability of period-to-period operating results. Overall,
fluctuations in the value of the U.S. dollar relative to other currencies,
primarily the euro, increased TiO2 sales in the first quarter of 2004 by
approximately $21 million compared to the same period in 2003. Fluctuations in
the value of the U.S. dollar relative to other currencies similarly impacted
Kronos' foreign currency-denominated operating expenses. Kronos' operating costs
that are not denominated in the U.S. dollar, when translated into U.S. dollars,
were higher in the first quarter of 2004 compared to the first quarter of 2003.
Overall, the net impact of currency exchange rate fluctuations on Kronos'
operating income comparisons was not significant in the first quarter of 2004 as
compared to the same period in 2003.
Corporate expense for the first quarter of 2004 decreased 56% to $6.7
million as compared to the first quarter of 2003 primarily due to lower
environmental remediation and legal expenses. Corporate expenses are expected to
continue to be lower for the full-year 2004 as compared to full-year 2003.
However, obligations for environmental remediation are difficult to assess and
estimate, and no assurance can be given that actual costs will not exceed
accrued amounts or that costs will not be incurred with respect to sites for
which no estimate of liability can presently be made. See Note 12 to the
Consolidated Financial Statements.
Outlook
The Company expects Kronos' TiO2 sales and production volumes to be higher
for the full year 2004 as compared to 2003. Kronos' average Ti02 selling price,
which declined during the second half of 2003 and the first quarter of 2004, is
expected to cease to decline sometime during the second quarter of 2004 and
should rise thereafter. Nevertheless, Kronos expects its average TiO2 selling
prices, in billing currencies, to be lower in 2004 as compared to 2003. Overall,
Kronos expects its gross margin in 2004 to be lower than 2003. The Company's
expectations as to the future prospects of the Company and the TiO2 industry are
based upon a number of factors beyond its control, including worldwide growth of
gross domestic product, competition in the marketplace, unexpected or
earlier-than-expected capacity additions and technological advances. If actual
developments differ from the Company's expectations, the Company's results of
operations could be unfavorably affected.
Other income (expense)
Three months ended
March 31
---------------------
2003 2004 Difference
(In millions)
Securities transactions, net $ 2.2 $ - $ (2.2)
Other interest income .9 .7 (.2)
Trade interest income .2 .2 -
Interest expense (8.0) (9.2) (1.2)
------ ------ ------
$ (4.7) $ (8.3) $ (3.6)
====== ====== ======
Kronos has a significant amount of outstanding indebtedness denominated in
the euro, including KII's Euro 285 million Senior Secured Notes. Accordingly,
the reported amount of interest expense will vary depending on relative changes
in foreign currency exchange rates. Interest expense in the first quarter of
2004 was $9.2 million, an increase of $1.2 million from the first quarter of
2003. The increase was due primarily to relative changes in foreign currency
exchange rates, which increased the U.S. dollar equivalent of interest expense
on the KII Senior Secured Notes by approximately $1.1 million in the first
quarter of 2004 as compared to the first quarter of 2003. Assuming no
significant change in interest rates or foreign currency exchange rates,
interest expense for the full-year 2004 is expected to be slightly higher than
amounts for the same period in 2003.
Provision for income taxes
The principal reasons for the difference between the Company's effective
income tax rate and the U.S. federal statutory income tax rates are explained in
Note 10 to the Consolidated Financial Statements.
During the first quarter of 2004, the Company reduced its deferred income
tax asset valuation allowance by approximately $3 million primarily as a result
of utilization of certain income tax attributes for which the benefit had not
previously been recognized.
At March 31, 2004, Kronos had the equivalent of $606 million of German
income tax loss carryforwards with no expiration date. However, Kronos has
provided a deferred income tax asset valuation allowance against substantially
all of this loss carryforward because Kronos does not currently believe it meets
the "more-likely-than-not" recognition criteria. Kronos periodically evaluates
the "more-likely-than-not" recognition criteria with respect to such tax loss
carryforwards, and it is possible that in the future Kronos may conclude such
carryforwards do meet the recognition criteria, at which time Kronos would
reverse all or a portion of such deferred tax asset valuation allowance.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforwards
effective January 1, 2004. While the new law did not significantly affect the
Company's income tax expense and cash tax payments in the first quarter of 2004,
it could have a significant effect in the future depending on the level of
income earned in Germany..
Minority interest
See Note 9 to the Consolidated Financial Statements. The Company commenced
recognizing minority interest in Kronos following the Company's December 2003
distribution of a portion of the shares of Kronos common stock to the Company's
shareholders. Because of such distribution, the Company expects to report a
higher amount of minority interest in earnings in 2004 as compared to 2003.
Minority interest in NL's subsidiaries also relates to the Company's
majority-owned environmental management subsidiary, EMS. EMS was established in
1998, at which time EMS contractually assumed certain of the Company's
environmental liabilities. EMS' earnings are based, in part, upon its ability to
favorably resolve these liabilities on an aggregate basis. The shareholders of
EMS, other than the Company, actively manage the environmental liabilities and
share in 39% of EMS' cumulative earnings. The Company continues to consolidate
EMS and provides accruals for the reasonably estimable costs for the settlement
of EMS' environmental liabilities, as discussed below.
Recently adopted accounting principle
See Note 13 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Consolidated cash flows
The Company's consolidated cash flows from operating, investing and
financing activities for the three months ended March 31, 2003 and 2004 are
presented below:
Three months ended
March 31,
------------------------------
2003 2004
----------- ---------
(In millions)
Net cash provided (used) by:
Operating activities $(13.7) $ 13.4
Investing activities (4.4) (2.8)
Financing activities 6.3 34.2
------- -------
Net cash provided (used) by operating, investing and financing activities $ (11.8) $ 44.8
======= =======
Operating activities
The TiO2 industry is cyclical and changes in economic conditions within the
industry significantly impact the earnings and operating cash flows of the
Company. Cash flow from operations 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.
Relative changes in assets and liabilities generally result from the timing
of production, sales, purchases and income tax payments. Such relative changes
can significantly impact the comparability of cash flow from operations from
period to period, as the income statement impact of such items may occur in a
different period from when the underlying cash transaction occurs. For example,
raw materials may be purchased in one period, but the payment for such raw
materials may occur in a subsequent period. Similarly, inventory may be sold in
one period, but the cash collection of the receivable may occur in a subsequent
period.
Cash flows for operating activities increased from $13.7 million used in
the first quarter of 2003 to $13.4 million of cash provided by operating
activities in the first quarter of 2004. This $27.1 million increase was due
primarily to the net effects of (i) lower net income of $5.3 million, (ii)
higher depreciation expense of $1.4 million, (iii) higher minority interest in
earnings of $4.8 million, (iv) higher net distributions from the TiO2
manufacturing joint venture of $1.8 million in the first quarter of 2004
compared to a $1.3 million contribution in the first quarter of 2003, (v) a
lower amount of net cash used from relative changes in the Company's
inventories, receivables, payables and accruals of $5.3 million in the first
quarter of 2004 as compared to the first quarter of 2003 and (vi) lower cash
paid for income taxes of $20.1 million. Relative changes in accounts receivable
are affected by, among other things, the timing of sales and the collection of
the resulting receivables. Relative changes in inventories and accounts payable
and accrued liabilities are affected by, among other things, the timing of raw
material purchases and the payment for such purchases and the relative
difference between production volume and sales volume. Relative changes in
accrued environmental costs are affected by, among other things, the period in
which recognition of the environmental accrual is recognized and the period in
which the remediation expenditure is actually made.
Investing and financing activities
The Company's capital expenditures were $6.5 million and $4.5 million in
the first three months of 2003 and 2004, respectively.
In the first quarter of 2004 KII's operating subsidiaries in Germany,
Belgium and Norway borrowed a net Euro 26 million ($32 million when borrowed)
under the European revolving credit facility at an interest rate of 3.8%.
In the first quarter of 2004, the Company paid its regular quarterly
dividend to stockholders of $.20 per share in the form of approximately 345,100
shares of common stock of Kronos. Also in the first quarter of 2004, Kronos paid
a regular quarterly cash dividend to its stockholders of $.25 per share, of
which $6.0 million was paid to Kronos shareholders other than NL and is
reflected as a distribution to minority interest on NL's Consolidated Statements
of Cash Flows.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability
At March 31, 2004, Kronos and its subsidiaries had (i) current cash and
cash equivalents aggregating $90.4 million ($40.4 million held by non-U.S.
subsidiaries), (ii) current restricted cash equivalents of $800,000 and (iii)
noncurrent restricted marketable debt securities of $2.5 million. At March 31,
2004, certain of Kronos's subsidiaries had approximately $121 million available
for borrowing with approximately $76 million available under non-U.S. credit
facilities (including approximately $63 million under the European revolving
credit facility and $9.7 million under Kronos' Canadian bank credit facility)
and approximately $45 million available under the U.S. Credit Facility. At March
31, 2004, KII had approximately $12 million available for payment of dividends
and other restricted payments as defined in the Senior Secured Notes indenture.
At March 31, 2004, NL, exclusive of Kronos and its subsidiaries had (i)
current cash and cash equivalents aggregating $21.2 million, (ii) current
restricted cash equivalents of $14.8 million, (iii) current restricted
marketable debt securities of $4.3 million and (iv)noncurrent restricted
marketable debt securities of $6.3 million. Of such restricted balances, $19
million was held by special purpose trusts, the assets of which can only be used
to pay for certain of NL's future environmental remediation and other
environmental expenditures. NL also has a $200 million long-term note receivable
from Kronos due in 2010, which is eliminated in the Company's consolidated
financial statements.
Income tax contingencies
See Note 10 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of the Company's income
tax returns in various U.S. and non-U.S. jurisdictions.
Litigation and environmental matters
See Note 12 to the Consolidated Financial Statements and Part II, Item 1,
"Legal Proceedings."
Other
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, its dividend policy, capital needs and availability of
resources in view of, among other things, its dividend policy, debt service and
capital expenditure requirements and estimated future operating cash flows. As a
result of this process, the Company has in the past and may in the future seek
to reduce, refinance, repurchase or restructure indebtedness, raise additional
capital, issue additional securities, repurchase shares of its common stock,
modify its dividend policy, restructure ownership interests, sell interests in
subsidiaries or other assets, or take a combination of such steps or other steps
to manage its liquidity and capital resources. In the normal course of its
business, the Company may review opportunities for the acquisition, divestiture,
joint venture or other business combinations in the chemicals industry or other
industries, as well as the acquisition of interests in related entities. In the
event of any such transaction, the Company may consider using its available
cash, issuing its equity securities or increasing its indebtedness to the extent
permitted by the agreements governing the Company's existing debt.
Non-GAAP financial measures
In an effort to provide investors with additional information regarding the
Company's results of operations as determined by GAAP, the Company has disclosed
certain non-GAAP information which the Company believes provides useful
information to investors.
o The Company discloses percentage changes in Kronos' average TiO2 selling
prices in billing currencies, which excludes the effects of foreign
currency translation. The Company believes disclosure of such percentage
changes allows investors to analyze such changes without the impact of
changes in foreign currency exchange rates, thereby facilitating
period-to-period comparisons of the relative changes in average selling
prices in the actual various billing currencies. Generally, when the U.S.
dollar either strengthens or weakens against other currencies, the
percentage change in average selling prices in billing currencies will be
higher or lower, respectively, than such percentage changes would be using
actual exchange rates prevailing during the respective periods.
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 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, as appropriate to allow timely decisions to be made regarding
required disclosure. Each of Harold C. Simmons, the Company's Chief Executive
Officer, and Gregory M. Swalwell, the Company's Vice President, Finance, have
evaluated the Company's disclosure controls and procedures as of March 31, 2004.
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 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 March 31, 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's system of
internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 12 to the Consolidated Financial Statements and
to the 2003 Annual Report for descriptions of certain previously reported legal
proceedings.
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
March 2004, the court denied defendants' renewed motion to dismiss and motion
for summary judgment.
Barker, et al. v. The Sherwin-Williams Company, et al. (Circuit Court of
Jefferson County, Mississippi, Civil Action No. 2000-587). With respect to the
ten plaintiffs transferred by the trial court to Holmes County, in April 2004
the parties jointly petitioned the Mississippi Supreme Court to transfer the
plaintiffs to their appropriate venues. The October 2004 trial date in Jefferson
County has been stayed pending plaintiffs' appeal to the Mississippi Supreme
Court of the denial of their motion to add additional defendants.
Jackson, et al., v. Phillips Building Supply of Laurel, et al. (Circuit
Court of Jones County, Mississippi, Dkt. Co. 2002-10-CV1). In March 2004,
defendants filed a motion to sever one of the plaintiffs. In March 2004, the
court stayed the case, thus delaying the June 2004 trial date, pending a
decision on the motion to sever, which is on appeal to the Mississippi Supreme
Court.
Walters v. NL Industries, et al. (Kings County Supreme Court, New York, No.
28087/2002). In March 2004, the Company filed a motion to dismiss based on
plaintiffs' failure to provide discovery.
Jones v. NL Industries, Inc., et al. (Circuit Court of LeFlore County,
Mississippi, Civil Action No. 2002-0241-CICI). In March 2004, plaintiffs dropped
their motion to remand.
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 April 2004, the
plaintiffs voluntarily dismissed the Company with prejudice from this case.
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; and Nowlin, et al. v. ASARCO
Incorporated, et al. (Case No. CJ-2003-342)(all in the District Court in and for
Ottawa County, State of Oklahoma). In April 2004, the plaintiffs voluntarily
dismissed the Company with prejudice from these cases.
The Quapaw Tribe of Oklahoma et al. v. ASARCO Incorporated et al. (United
States District Court, Northern District of Oklahoma, Case No. 03C-V846 H). The
Company has answered the complaint and denied all of the plaintiffs'
allegations.
Evans v. Asarco (United States District Court, Northern District of
Oklahoma, Case No. 04-CV-94EA(M)). The Company has answered the complaint and
denied all of the plaintiffs' allegations.
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,
2004
10.2 - Summary of Consulting Arrangement beginning August 1,
2003, as amended, between Lawrence A. Wigdor and Kronos
Worldwide, Inc. - incorporated by reference to Exhibit 10.2
to the Kronos Worldwide, Inc. Quarterly Report on Form 10-Q
for the period ended March 31, 2004 (management contract,
compensatory plan or arrangement)
10.3 - Intercorporate Services Agreement by and between Contran
Corporation and Kronos Worldwide, Inc. - incorporated by
reference to Exhibit 10.1 to the Kronos Worldwide, Inc.
Quarterly Report on Form 10-Q for the period ended March 31,
2004
31.1 - Certification
31.2 - Certification
32.1 - Certification
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended March 31, 2004.
February 20, 2004 - Reported Item 9.
February 24, 2004 - Reported Item 9.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NL INDUSTRIES, INC.
-----------------------------
(Registrant)
Date May 5, 2004 By /s/ Gregory M. Swalwell
----------------------------
Gregory M. Swalwell
Vice President, Finance
(Principal Financial Officer)
Date May 5, 2004 By /s/ James W. Brown
---------------------------
James W. Brown
Vice President and Controller
(Principal Accounting Officer)