NL INDUSTRIES INC - 10-Q Quarterly Report

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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 June 30, 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 July 30, 2004:
48,389,284.

NL INDUSTRIES, INC. AND SUBSIDIARIES

INDEX

Page
number

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets -
December 31, 2003 and June 30, 2004 3

Consolidated Statements of Income -
Three months and six months ended June 30, 2003 and 2004 5

Consolidated Statements of Comprehensive Income -
Six months ended June 30, 2003 and 2004 6

Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2004 7

Consolidated Statements of Cash Flows -
Six months ended June 30, 2003 and 2004 8

Notes to Consolidated Financial Statements 10

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23

Item 4. Controls and Procedures 35

Part II. OTHER INFORMATION

Item 1. Legal Proceedings 36

Item 4. Submission of Matters to a Vote of Security Holders 37

Item 6. Exhibits and Reports on Form 8-K 37

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS December 31, June 30,
2003 2004
------------ ------------

Current assets:

Cash and cash equivalents $ 67,799 $ 115,756
Restricted cash and cash equivalents 19,029 10,961
Restricted marketable debt securities 6,147 9,121
Accounts and other receivables 156,820 202,956
Refundable income taxes 35,336 1,332
Receivable from affiliates 55 139
Inventories 266,020 209,816
Prepaid expenses 5,257 4,433
Deferred income taxes 10,798 10,995
---------- ----------

Total current assets 567,261 565,509
---------- ----------

Other assets:
Marketable equity securities 70,487 53,579
Restricted marketable debt securities 6,870 9,423
Investment in TiO2 manufacturing joint venture 129,011 120,711
Receivable from affiliate 14,000 12,000
Deferred income taxes - 179,588
Other 34,057 35,372
---------- ----------

Total other assets 254,425 410,673
---------- ----------

Property and equipment:
Land 32,981 32,173
Buildings 179,472 174,946
Equipment 765,704 753,417
Mining properties 83,183 82,024
Construction in progress 9,666 11,589
---------- ----------
1,071,006 1,054,149
Less accumulated depreciation and amortization 635,267 640,191
---------- ----------

Net property and equipment 435,739 413,958
---------- ----------

$1,257,425 $1,390,140
========== ==========

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)

LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30,
2003 2004
------------ ------------

Current liabilities:

Current maturities of long-term debt $ 288 $ 148
Accounts payable 103,180 71,181
Accrued liabilities 81,117 84,251
Accrued environmental costs 19,627 15,331
Payable to affiliates 19,537 20,755
Income taxes 12,726 7,177
Deferred income taxes 3,436 23,842
---------- ----------

Total current liabilities 239,911 222,685
---------- ----------

Noncurrent liabilities:
Long-term debt 356,451 346,682
Accrued pension costs 81,180 79,148
Accrued postretirement benefits costs 23,411 22,025
Accrued environmental costs 57,854 57,218
Deferred income taxes 191,460 55,927
Other 19,453 19,184
---------- ----------

Total noncurrent liabilities 729,809 580,184
---------- ----------

Minority interest 86,791 210,852
---------- ----------

Stockholders' equity:
Common stock 8,355 8,355
Additional paid-in capital 777,819 777,819
Retained earnings 16,023 197,415
Accumulated other comprehensive income (loss):
Marketable securities 23,323 12,241
Currency translation (153,955) (157,114)
Pension liabilities (36,209) (36,209)
Treasury stock (434,442) (426,088)
---------- ----------

Total stockholders' equity 200,914 376,419
---------- ----------

$1,257,425 $1,390,140
========== ==========
Commitments and contingencies (Notes 11 and 14)

See accompanying notes to consolidated financial statements.

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 2004 2003 2004
---- ---- ---- ----

Net sales $ 266,631 $ 295,789 $ 519,604 $ 559,056
Cost of sales 197,649 227,505 386,066 429,736
--------- --------- --------- ---------

Gross margin 68,982 68,284 133,538 129,320

Selling, general and administrative expense 30,975 34,970 60,354 70,214
Other operating income (expense):
Currency transaction gains (losses), net (2,743) 302 (3,841) 556
Disposition of property and equipment 1,116 21 1,055 (2)
Noncompete agreement income - - 333 -
Other income 713 6,806 861 6,820
Corporate expense (23,202) (4,625) (38,517) (11,292)
--------- --------- --------- ---------

Income from operations 13,891 35,818 33,075 55,188

Other income (expense):
Trade interest income 198 206 361 412
Other interest income 838 834 1,786 1,604
Securities transactions, net 218 (3) 2,452 (25)
Interest expense (8,367) (8,594) (16,352) (17,811)
--------- --------- --------- ---------

Income before income taxes and minority interest 6,778 28,261 21,322 39,368

Income tax benefit (22,191) (283,817) (17,101) (281,593)

Minority interest in after-tax earnings 134 133,034 158 137,828
--------- --------- --------- ---------

Net income $ 28,835 $ 179,044 $ 38,265 $ 183,133
========= ========= ========= =========

Basic and diluted net income per share $ .60 $ 3.70 $ .80 $ 3.79
========= ========= ========= =========

Weighted-average shares used in the calculation of net
income per share:
Basic 47,698 48,361 47,696 48,251
Dilutive impact of stock options 57 63 54 101
--------- --------- --------- ---------

Diluted 47,755 48,424 47,750 48,352
========= ========= ========= =========

See accompanying notes to consolidated financial statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Six months ended June 30, 2003 and 2004

(In thousands)

2003 2004
---- ----

Net income $ 38,265 $ 183,133
--------- ---------

Other comprehensive income (loss), net of tax:
Marketable securities adjustment:
Unrealized holding gains (losses) arising during the period 2,669 (11,082)
Reclassification for realized net loss included in net income (1,474) -
--------- ---------

1,195 (11,082)

Currency translation adjustment 12,568 (3,159)
--------- ---------

Total other comprehensive income (loss) 13,763 (14,241)
--------- ---------

Comprehensive income $ 52,028 $ 168,892
========= =========

See accompanying notes to consolidated financial statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

Six months ended June 30, 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 - - 183,133 - - - - 183,133

Distribution of shares of
Kronos Worldwide, Inc. common stock - - (1,143) - - - - (1,143)

Income tax on distribution - - (598) - - - - (598)

Other comprehensive loss, net - - - (11,082) (3,159) - - (14,241)

Treasury stock - reissued - - - - - - 8,354 8,354
------ -------- -------- --------- --------- --------- --------- --------

Balance at June 30, 2004 $8,355 $777,819 $197,415 $ 12,241 $(157,114) $ (36,209) $(426,088) $376,419
====== ======== ======== ========= ========= ========= ========= ========

See accompanying notes to consolidated financial statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six months ended June 30, 2003 and 2004

(In thousands)

2003 2004
---- ----
Cash flows from operating activities:

Net income $ 38,265 $ 183,133
Depreciation and amortization 19,681 22,004
Deferred income taxes (3,006) (288,504)
Minority interest 158 137,828
Net (gains) losses from securities transactions (2,452) 50
Other, net (3,680) 1,283
Distributions from TiO2 manufacturing joint venture, net 800 8,300
Change in assets and liabilities:
Accounts and other receivables (37,409) (49,507)
Insurance receivable 2,122 -
Inventories 25,301 51,362
Prepaid expenses 3,036 933
Accrued environmental costs 25,990 (4,932)
Accounts payable and accrued liabilities (29,526) (26,181)
Income taxes (24,008) 24,095
Other, net 3,378 (1,902)
-------- --------

Net cash provided by operating activities 18,650 57,962
-------- --------

Cash flows from investing activities:
Capital expenditures (13,850) (10,854)
Collection of loans to affiliates 2,000 2,000
Change in restricted cash equivalents and restricted
marketable debt securities, net 658 2,470
Other, net 1,538 84
-------- --------

Net cash used in investing activities (9,654) (6,300)
-------- --------

Cash flows from financing activities:
Indebtedness:
Borrowings 16,106 99,968
Principal payments (11,615) (99,994)
Cash dividends paid (19,079) -
Distributions to minority interest - (12,036)
Treasury stock reissued 175 8,286
-------- --------

Net cash used in financing activities (14,413) (3,776)
-------- --------

NL INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Six months ended June 30, 2003 and 2004

(In thousands)

2003 2004
---- ----

Cash and cash equivalents - net change from:

Operating, investing and financing activities $ (5,417) $ 47,886
Currency translation 1,686 71
Cash and cash equivalents at beginning of period 58,091 67,799
-------- --------

Cash and cash equivalents at end of period $ 54,360 $115,756
======== ========

Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized $ 16,347 $ 16,691
Income taxes, net 7,627 (20,603)

See accompanying notes to consolidated financial statements.

NL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization and basis of presentation:

At June 30, 2004, 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 June 30, 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 June 30, 2004, Valhi and a
wholly-owned subsidiary of Valhi also held an additional 43.6% 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 June 30, 2004, and the consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for the interim periods ended June 30, 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
345,000 shares (approximately .7% of Kronos' outstanding common stock) were
distributed to NL stockholders in the form of a pro-rata dividend. 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 for the March 2004
distribution. In accordance with GAAP, the net carrying value of such 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. The Company paid its next regular quarterly
dividend of $.20 per share in July 2004, in which approximately 322,000 Kronos
shares (approximately .7% of Kronos' outstanding common stock) were distributed.
The effect of such distribution will be recognized by the Company in the third
quarter of 2004. After considering the July 2004 distribution, the Company's
ownership of Kronos will be reduced to approximately 49.8% and the Company will
no longer own a majority of Kronos' outstanding common stock. Consequently,
effective in the third quarter of 2004 the Company will cease to consolidate
Kronos' financial position, results of operations and cash flows and instead the
Company will commence accounting for its interest in Kronos by the equity
method.

The Company 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 15.

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 cost recognized by
the Company in accordance with APBO No. 25 was approximately $500,000 and nil in
the second quarter and first six months of 2003, respectively, and net
compensation cost recognized by the Company was nil and $1.1 million in the
second quarter and first six months of 2004, respectively.

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 Six months ended
June 30, June 30,
------------------ --------------------
2003 2004 2003 2004
---- ---- ---- ----
(In millions, except per share amounts)

Net income as reported $28.8 $179.0 $38.3 $183.1

Adjustments, net of applicable income tax effects and
minority interest, of stock-based employee
compensation determined under:
APBO No. 25 .3 - - .5
SFAS No. 123 (.1) - (.3) (.1)
----- ------ ----- ------

Pro forma net income $29.0 $179.0 $38.0 $183.5
===== ====== ===== ======

Basic and diluted net income per share:
As reported $ .60 $ 3.70 $ .80 $ 3.79
Pro forma $ .61 $ 3.70 $ .80 $ 3.80

Note 2 - Accounts and other receivables:

December 31, June 30,
2003 2004
------------ ------------
(In thousands)

Trade receivables $147,029 $192,788
Recoverable VAT and other receivables 12,710 13,017
Allowance for doubtful accounts (2,919) (2,849)
-------- --------

$156,820 $202,956
======== ========

Note 3 - Inventories:

December 31, June 30,
2003 2004
------------ ------------
(In thousands)

Raw materials $ 61,959 $ 35,409
Work in process 19,855 17,078
Finished products 147,270 121,659
Supplies 36,936 35,670
-------- --------

$266,020 $209,816
======== ========

Note 4 - Marketable equity securities:

December 31, June 30,
2003 2004
------------ ------------
(In thousands)

Valhi common stock $ 70,450 $ 53,543
Other 37 36
-------- --------

$ 70,487 $ 53,579
======== ========

At June 30, 2004, the Company owned approximately 4.7 million shares of
Valhi common stock with a quoted market price of $11.37 per share (December 31,
2003 quoted market price - $14.96 per share).

Note 5 - Other noncurrent assets:

December 31, June 30,
2003 2004
------------ ------------
(In thousands)

Deferred financing costs, net $ 10,417 $ 9,100
Goodwill 6,406 6,406
Unrecognized net pension obligations 13,747 13,426
Intangible asset, net 1,859 1,673
Other 1,628 4,767
-------- --------

$ 34,057 $ 35,372
======== ========

Note 6 - Accrued liabilities:

December 31, June 30,
2003 2004
------------ ------------
(In thousands)

Employee benefits $ 38,368 $ 33,038
Interest 206 306
Other 42,543 50,907
-------- --------

$ 81,117 $ 84,251
======== ========

Note 7 - Long-term debt:

December 31, June 30,
2003 2004
------------ ------------
(In thousands)

Kronos International, Inc. and subsidiaries:

Senior Secured Notes $356,136 $346,446
Other 603 384
-------- --------

356,739 346,830
Less current maturities 288 148
-------- --------

$356,451 $346,682
======== ========

During the first quarter of 2004, certain of Kronos International, Inc.'s
("KII") 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%. Such amounts were repaid in the second quarter of 2004.

Note 8 - Other noncurrent liabilities:

December 31, June 30,
2003 2004
------------ ------------
(In thousands)

Employee benefits $ 4,849 $ 4,622
Insurance 4,331 3,798
Other 10,273 10,764
-------- --------

$ 19,453 $ 19,184
======== ========

Note 9 - Minority interest:

December 31, June 30,
2003 2004
------------ ------------
(In thousands)

Minority interest in net assets:

Kronos Worldwide, Inc. $ 77,763 $201,217
Other subsidiaries 9,028 9,635
-------- --------

$ 86,791 $210,852
======== ========

Three months ended Six months ended
June 30, June 30,
------------------ --------------------
2003 2004 2003 2004
---- ---- ---- ----
(In thousands)

Minority interest in net earnings:

Kronos Worldwide, Inc. $ - $132,485 $ - $137,271
Other subsidiaries 134 549 158 557
----- -------- ----- --------

$ 134 $133,034 $ 158 $137,828
===== ======== ===== ========

As discussed in Note 1, effective in the third quarter of 2004 the Company
will cease to consolidate Kronos and instead will commence accounting for its
interest in Kronos by the equity method. Accordingly, commencing in the third
quarter of 2004 the Company will cease to report minority interest in Kronos'
net assets and net earnings.

Note 10 - Other income:

Six months ended
June 30,
----------------------
2003 2004
---- ----
(In thousands)

Litigation settlement gains, net $ 650 $ 495
Contract dispute settlement - 6,289
Other 211 36
------ -------

$ 861 $ 6,820
====== =======

The contract dispute settlement relates to Kronos' settlement with a
customer. As part of the settlement, the customer agreed to make payments to
Kronos through 2007 aggregating $7.3 million. The $6.3 million gain recognized
represents the present value of the future payments to be paid by the customer
to Kronos.

Note 11 - Income tax benefit:

Six months ended
June 30,
----------------------
2003 2004
---- ----
(In millions)

Expected tax expense $ 7.5 $ 13.8
Change in deferred income tax valuation
allowance, net - (285.5)
Tax contingency reserve adjustments, net - (12.5)
Refund of prior year income taxes (24.6) (3.1)
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies .1 -
Non-U.S. tax rates (.4) .1
U.S. state income taxes, net .4 -
Other, net (.1) 5.6
------ -------

$(17.1) $(281.6)
====== =======

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's majority-owned subsidiary's, NL Environmental Management
Services, Inc. ("EMS"), 1998 U.S. federal income tax returns are being
examined by the U.S. tax authorities, and NL and EMS have granted
extensions of the statute of limitations for assessments of tax with
respect to their 1998, 1999 and 2000 income tax returns until September 30,
2005. During the course of the examination, the IRS proposed 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 the initiative, a final settlement
with the IRS is to be reached through expedited negotiations and, if
necessary, through a specified arbitration procedure. NL has reached an
agreement with the IRS concerning the settlement of this matter pursuant to
which, among other things, the Company agreed to pay approximately $24
million, including interest, up front as a partial payment of the
settlement amount (which amount is expected to be paid in the next 12
months and is classified as a current liability at June 30, 2004), and NL
will be required to recognize the remaining settlement amount in its
taxable income over the next 15 years beginning in 2004. NL has signed the
settlement agreement that was prepared by the IRS. The IRS will sign the
settlement agreement after certain procedural matters are concluded, which
procedural matters both NL and its outside legal counsel believe are
perfunctory. NL had previously provided accruals to cover its estimated
additional tax liability (and related interest) concerning this matter. As
a result of the settlement, NL has decreased its previous estimate of the
amount of additional income taxes and interest it will be required to pay,
and NL recognized a $12.6 million tax benefit in the second quarter of 2004
related to the revised estimate. In addition, during the second quarter of
2004, the Company recognized a $30.5 million tax benefit related to the
reversal of a deferred income tax asset valuation allowance related to
certain tax attributes of EMS which NL believes now meet the
"more-likely-than-not" recognition criteria. A majority of the deferred
income tax asset valuation allowance relates to net operating loss
carryforwards of EMS. As a result of the settlement agreement, NL (which
previously was not allowed to utilize such net operating loss carryforwards
of EMS) will fully utilize such carryforwards in its 2003 taxable year,
eliminating the need for a valuation allowance related to such
carryforwards. The remainder of the deferred income tax asset valuation
allowance relates to deductible temporary differences associated with
accrued environmental obligations of EMS which NL now believes meet the
"more-likely-than-not" recognition criteria since, as a result of the
settlement agreement, such obligations and the related tax deductions will
be included in NL's taxable income.
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 ($7 million at June 30, 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
June 30, 2004) relating to the years 1998 to 2000. Kronos has objected 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.

At December 31, 2003, Kronos had a significant amount of net operating loss
carryforwards for German corporate and trade tax purposes, all of which have no
expiration date. These net operating loss carryforwards were generated by KII
principally during the 1990's when KII had a significantly higher level of
outstanding indebtedness than is currently outstanding. For financial reporting
purposes, however, the benefit of such net operating loss carryforwards had not
previously been recognized because Kronos did not believe they met the
"more-likely-than-not" recognition criteria, and accordingly Kronos had a
deferred income tax asset valuation allowance offsetting the benefit of such net
operating loss carryforwards and Kronos' other tax attributes in Germany. Prior
to the end of 2003, Kronos believed there was significant uncertainty regarding
its ability to utilize such net operating loss carryforwards under German tax
law and, principally because of this uncertainty, Kronos had concluded the
benefit of the net operating loss carryforwards did not meet the
"more-likely-than-not" criteria. By the end of 2003, and primarily as a result
of a favorable German court ruling in 2003 and the procedures Kronos had
completed during 2003 with respect to the filing of certain amended German tax
returns (as discussed below), Kronos had concluded that the significant
uncertainty regarding its ability to utilize such net operating loss
carryforwards under German tax law had been eliminated. However, at the end of
2003, Kronos believed that it would generate a taxable loss in Germany during
2004. Such expectation was based primarily upon then current levels of prices
for TiO2, and the fact that Kronos was experiencing a downward trend in its TiO2
selling prices and Kronos did not have any indication that the downward trend
would improve. Accordingly, Kronos continued to conclude at the end of 2003 that
the benefit of the German net operating loss carryforwards did not meet the
"more-likely-than-not" criteria. The expectation for a taxable loss in Germany
continued through the end of the first quarter of 2004. By the end of the second
quarter of 2004, however, Kronos' TiO2 selling prices had started to increase,
and Kronos believes its selling prices will continue to increase during the
second half of 2004 after Kronos and its major competitors announced an
additional round of price increases. Consequently, Kronos' revised projections
now reflect taxable income for Germany in 2004 as well as 2005. Accordingly,
based on all available evidence, Kronos concluded that the benefit of the net
operating loss carryforwards and other German tax attributes now meet the
"more-likely-than-not" recognition criteria, and Kronos reversed the deferred
income tax asset valuation allowance related to Germany. Accordingly, in the
first six months of 2004, Kronos recognized a $254.3 million income tax benefit
related to the reversal of such deferred income tax asset valuation allowance
attributable to Kronos' income tax attributes in Germany (principally the net
operating loss carryforwards). Of such $254.3 million, $8.7 million relates
primarily to the utilization of the German net operating loss carryforwards
during the first six months of 2004, the benefit of which had previously not met
the "more-likely-than-not" recognition criteria, and $245.6 million relates to
the German deferred income tax asset valuation allowance attributable to the
remaining German net operating loss carryforwards and other tax attributes as of
June 30, 2004, the benefit of which Kronos has concluded now meet the
"more-likely-than-not" recognition criteria. At June 30, 2004, the net operating
loss carryforwards for German corporate and trade tax purposes aggregated the
equivalent of $594 million and $255 million, respectively, all of which have no
expiration date.

In the first quarter of 2003, KII was notified by the German Federal Fiscal
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 KII'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 net refund of taxes and related interest to KII and its
German operating subsidiary of euro 26.9 million ($32.1 million), and the
Company recognized the benefit for these net refunds in its 2003 results of
operations. During the first six months of 2004, the Company recognized a
benefit of euro 2.5 million ($3.1 million) related to additional net interest
which has accrued on the outstanding refund amounts. 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 returns with
respect to the 1990 and 1991 tax years. Through June 2004, KII's German
operating subsidiary had received net refunds of euro 24.5 million ($28.4
million when received). KII believes it will receive the remainder of the net
refunds of taxes and related interest during the remainder of 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 KII received euro 21.5
million ($24.6 million) in 2003, and the Company recognized the benefit of the
refund in the second quarter of 2003.

Note 12 - Employee benefit plans:

The components of net periodic defined benefit pension cost are presented
in the table below.

Three months ended Six months ended
June 30, June 30,
------------------ --------------------
2003 2004 2003 2004
---- ---- ---- ----
(In thousands)

Service cost benefits $1,335 $1,459 $2,633 $ 3,128
Interest cost on projected benefit obligations 4,547 4,989 8,951 10,020
Expected return on plan assets (4,470) (4,678) (9,373) (9,400)
Amortization of prior service cost 88 140 175 281
Amortization of net transition obligations 183 147 355 290
Recognized actuarial losses 449 966 895 1,928
------ ------ ------ -------

$2,132 $3,023 $3,636 $ 6,247
====== ====== ====== =======

The components of net periodic postretirement benefits other than pensions
("OPEB") cost are presented in the table below.

Three months ended Six months ended
June 30, June 30,
------------------ --------------------
2003 2004 2003 2004
---- ---- ---- ----
(In thousands)

Service cost $ 38 $ 56 $ 73 $ 113
Interest cost 515 469 1,026 940
Amortization of prior service credit (519) (256) (1,038) (511)
Recognized actuarial losses 48 70 94 141
------ ------ ------ -------

$ 82 $ 339 $ 155 $ 683
====== ====== ====== ======

The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the "Medicare 2003 Act") introduced a prescription drug benefit under Medicare
(Medicare Part D) as well as a federal subsidy to sponsors of retiree health
care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. Detailed regulations necessary to implement the
Medicare 2003 Act have not been issued, including those that would specify the
manner in which actuarial equivalency would be determined, the evidence required
to demonstrate actuarial equivalence and the documentation requirements
necessary to receive the subsidy. Until such definitive regulations are issued,
the Company is unable to determine whether the prescription drug benefit offered
under its postretirement benefit plans is at least actuarially equivalent to
Medicare Part D. Accordingly, the Company's accumulated postretirement benefit
obligation and net periodic postretirement benefit cost, as reflected in the
accompanying consolidated financial statements, do not reflect any effect of the
federal subsidy. When such definitive regulations are issued or at such other
time that the Company can determine whether the prescription drug benefit
offered under its postretirement benefit plans is at least actuarially
equivalent to Medicare Part D, the Company would account for the effect of the
federal subsidy, if any, prospectively from that date, as permitted by and in
accordance with FASB Staff Position No. 106-2.

Note 13 - Accounts with affiliates:

December 31, June 30,
2003 2004
------------ ------------
(In thousands)

Current receivables from affiliates:

TIMET $ 50 $ -
Other 5 139
-------- --------

$ 55 $ 139
-------- --------

Noncurrent receivable from affiliate -
loan to Contran family trust $ 14,000 $ 12,000
======== ========

Current payables to affiliates:
Louisiana Pigment Company $ 8,560 $ 9,030
Income taxes payable to Valhi 10,512 11,315
Other 465 410
-------- --------

$ 19,537 $ 20,755
======== ========

Note 14 - 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.

NL believes these actions are without merit, intends to continue to deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. NL has neither lost nor settled any of these cases. NL 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 NL 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 six months of 2004 is presented in the table below. The Company
recognized a net reduction in its accrued environmental costs credited to income
during the first six months of 2004 due primarily to the $1.5 million recovery
discussed below. The amount shown in the table below for payments against the
Company's accrued environmental costs is net of such $1.5 million recovery.

Amount
--------------
(In thousands)

Balance at the beginning of the period $ 77,481
Net reductions credited to income (67)
Payments, net (4,865)
--------

Balance at the end of the period $ 72,549
========

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 June 30, 2004, NL had recognized a $1.5 million receivable from other PRPs at
one site for recovery of remediation costs previously expended by NL pursuant to
an agreement entered into by NL and such other PRPs. NL expects to receive the
$1.5 million recovery during the third quarter of 2004.

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 June 30, 2004,
the Company had accrued $73 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
$101 million. The Company's estimates of such liabilities have not been
discounted to present value.

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 June 30, 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
did have 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 June 30, 2004, the Company had $17 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. 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 485 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 eight 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
of these 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 15 - 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 which had not already been consolidated under prior
applicable GAAP, 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

At June 30, 2004, 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 second quarter and first six months of 2003 and 2004 are
primarily due to (i) relative changes in average TiO2 selling prices, (ii)
relative changes in TiO2 sales volumes and (iii) 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,
were generally decreasing during the third and fourth quarters of 2003 and the
first quarter of 2004 and were generally flat during the second quarter of 2004.

The Company reported net income of $179.0 million, or $3.70 per diluted
share, in the second quarter of 2004 compared to net income of $28.8 million, or
$.60 per diluted share, in the second quarter of 2003. For the first six months
of 2004, the Company reported net income of $183.1 million, or $3.79 per diluted
share, compared to net income of $38.3 million, or $.80 per diluted share, in
the first six months of 2003. The increase in the Company's diluted earnings per
share from the first quarter and first six months of 2003 to the same periods in
2004 is due primarily to the net effects of (i) significantly higher tax benefit
generated from the reversal of Kronos' German deferred income tax asset
valuation allowance and tax benefits related to EMS, (ii) lower gross margins
generated at Kronos, (iii) higher selling, general and administrative expenses
at Kronos, (iv) income from a contract dispute settlement with a Kronos
customer, (iv) lower environmental remediation and legal expenses of NL and (v)
higher minority interest in Kronos. Overall, the Company believes its net income
in 2004 will be higher than 2003 as the impact of the reversal of Kronos' and
EMS' deferred income tax asset valuation allowances are expected to more than
offset the effect of Kronos' expected lower income from operations.

The Company believes the analysis presented in the following table is
useful in understanding the comparability of its results of operations for the
2003 and 2004 periods presented. Each of these items are more fully discussed
below in the applicable sections of this "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Results of Operations" or in
the 2003 Annual Report.

Net income - diluted earnings per share
-------------------------------------------------
Three months ended Six months ended
June 30, June 30,
------------------ --------------------
2003 2004 2003 2004
---- ---- ---- ----

German valuation allowance adjustments(1) $ - $ 2.57 $ - $ 2.57
Tax benefits related to EMS(2) - .89 - .89
Contract dispute settlement(3) - .04 - .04
Refund of prior year
German income taxes(4) .52 - .52 -
Operations and other, net .08 .20 .28 .29
----- ------ ------ ------

$ .60 $ 3.70 $ .80 $ 3.79
===== ====== ====== ======

_______________________________

(1) Kronos' reversal of its German deferred income tax asset valuation
allowance as of June 30, 2004.
(2) Reversal of the deferred income tax asset valuation allowance related to
EMS and adjustment of estimated tax due upon IRS settlement.
(3) Kronos' income from settlement of customer contract.
(4) Refund of prior year German income taxes received.

As discussed in Note 1 to the Consolidated Financial Statements, in July
2004 the Company paid its regular quarterly dividend of $.20 per share in the
form of shares of Kronos common stock in which approximately 322,000 shares were
distributed. After considering such 2004 distribution, the Company's ownership
of Kronos will be reduced from 50.5% to approximately 49.8%, and the Company
will no longer own a majority of Kronos' outstanding common stock. Consequently,
effective in the third quarter of 2004 the Company will cease to consolidate
Kronos' financial position, results of operations and cash flows and instead the
Company will commence accounting for its interest in Kronos by the equity
method.

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 The ultimate ability to utilize income tax attributes, the benefit of which
has been recognized under the "more-likely-than-not" recognition criteria,
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.

Net sales and income from operations

Three months ended Six months ended
June 30, June 30,
---------------------------------- ------------------------------------
2003 2004 % Change 2003 2004 % Change
---- ---- -------- ---- ---- --------
(In millions, except percentages and volumes)

Net sales $266.6 $295.8 +11% $519.6 $559.1 +8%
Cost of sales 197.6 227.5 +15% 386.1 429.8 +11%
------ ------ ------ ------

Gross margin 69.0 68.3 -1% 133.5 129.3 -3%

Selling, general and administrative
expense (31.0) (35.0) % (60.4) (70.2)
Currency transaction gains (losses), net (2.7) .3 (3.8) .6
Noncompete agreement income - - .3 -
Contract dispute settlement - 6.3 - 6.3
Other income 1.1 - 1.3 -
Litigation settlement gains, net .7 .5 .7 .5
Corporate expense (23.2) (4.6) (38.5) (11.3)
------ ------ ------ ------

Income from operations $ 13.9 $ 35.8 +158% $ 33.1 $ 55.2 +67%
====== ====== ====== ======

TiO2 data:

Percent change in average selling prices:
Using actual foreign currency **% +2%
exchange rates
Impact of changes in foreign currency
exchange rates -5% -7%
----- -----

In billing currencies -5% -5%
===== =====

Sales volumes* 121 137 240 255
Production volumes* 120 123 237 240
________________________________

* Thousands of metric tons
** Less than 1% decrease

Kronos' sales increased $29.2 million (11%) in the second quarter of 2004
compared to the second quarter of 2003 and increased $39.5 million (8%) in the
first six months of 2004 compared to the same period in 2003, as the favorable
effect of fluctuations in foreign currency exchange rates, which increased sales
by approximately $13 million and $35 million, respectively, (as more fully
discussed below) and increased sales volumes, 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 second quarter of 2004 were 5% lower
than the second quarter of 2003 and in the first six months of 2004 were 5%
lower than the first six months 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 second
quarter of 2004 were comparable to the second quarter of 2003 and increased 2%
in the year to date period. Kronos' TiO2 sales volumes in the second quarter and
first six months of 2004 increased 13% and 6%, respectively, compared to the
same periods of 2003, as higher volumes in European and export markets more than
offset lower volumes in Canada. Kronos' TiO2 sales volumes in the first six
months of 2004 were a new record for Kronos.

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 less than 1% decrease and 2% increase in
Kronos' average TiO2 selling prices during the second quarter and first six
months of 2004, respectively, as compared to the same periods in 2003 using
actual foreign currency exchange rates prevailing during the respective periods
(the GAAP measure) and the 5% decrease in Kronos' average TiO2 selling price in
billing currencies (the non-GAAP measure) during each of such periods is due to
the effect of changes in foreign currency exchange rates. The above table
presents (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 $29.9 million (15%) in the second quarter
of 2004 compared to the second quarter of 2003, and increased $43.7 million
(11%) in the year-to-date period largely due to the higher sales volumes and 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 each of the second quarter and the first six months of 2003 to 77% in
each of the second quarter and the first six months of 2004. Kronos' TiO2
production volumes in the second quarter of 2004 increased 3% compared to the
second quarter of 2003, and increased 1% in the first six months of 2004, with
operating rates near full capacity in those periods. Kronos' TiO2 production
volumes in the first six months of 2004 were also a new record for Kronos.

Despite the increase in net sales, Kronos' gross margins for the second
quarter of 2004 decreased $700,000 (1%) from the second quarter of 2003 and
decreased $4.2 million (3%) from the first half of 2003 as compared to the first
half of 2004, 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.

Reflecting the impact of partial implementation of prior price increase
announcements, Kronos' average TiO2 selling prices in the second quarter of 2004
were generally flat as compared to the first quarter of 2004. Kronos has also
recently announced additional price increases of 4 cents per pound in the U.S.,
Canadian 6 cents per pound in Canada and euro 120 per metric ton in Europe, all
of which are targeted to be implemented later in 2004. The extent to which all
of such price increase announcements will be realized will depend on, among
other things, economic factors.

Selling, general and administrative expenses increased $4.0 million (13%)
and $9.8 million (16%), respectively, in the second quarter and first six months
of 2004 as compared to the corresponding periods in 2003. These increases are
largely attributable to the higher sales volumes as well as the impact of
translating foreign currencies (primarily the euro) into U.S. dollars.

Kronos' income from operations in the second quarter of 2004 also includes
$6.3 million of income related to the settlement of a certain contract dispute
with a customer. As part of the settlement, the customer agreed to make payments
to Kronos through 2007 aggregating $7.3 million. The $6.3 million recognized
gain represents the present value of the future payments to be paid by the
customer to Kronos.

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 second quarter of 2004 by
approximately $13 million compared to the same period in 2003 and increased TiO2
sales in the first six months of 2004 by approximately $35 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 second quarter and
first six months of 2004 compared to the second quarter and first six months of
2003. Overall, currency exchange rate fluctuations resulted in net increases in
Kronos' income from operations of approximately $6 million and $8 million in the
second quarter and first six months of 2004, respectively, as compared to the
same periods in 2003.

Corporate expense for the second quarter of 2004 decreased 80% to $4.6
million as compared to the second quarter of 2003 and decreased 71% to $11.3
million for the first six months of 2004 as compared to the comparable period in
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 14 to the Consolidated Financial Statements.

Outlook

The Company expects Kronos' TiO2 sales and production volumes in calendar
2004 will be higher as compared to 2003. Kronos' average Ti02 selling price,
which declined during the second half of 2003 and first quarter of 2004,
commenced to begin to rise during the second quarter of 2004, and should
continue to rise during the remainder of the year. Nevertheless, Kronos expects
its average TiO2 selling prices, in billing currencies, will be lower in
calendar 2004 as compared to 2003 and 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 Six months ended
June 30, June 30,
---------------------------------- -----------------------------------
2003 2004 Difference 2003 2004 Difference
---- ---- ---------- ---- ---- ----------
(In millions)

Securities transactions, net $ .2 $ - $ (.2) $ 2.4 $ - $ (2.4)
Other interest income .8 .8 - 1.8 1.6 (.2)
Trade interest income .2 .2 - .4 .4 -
Interest expense (8.3) (8.6) (.3) (16.4) (17.8) (1.4)
------ ------ ------ ------ ------ ------

$ (7.1) $ (7.6) $ (.5) $(11.8) $(15.8) $ (4.0)
====== ====== ====== ====== ====== ======

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 second quarter of
2004 was $8.6 million, an increase of $300,000 from the second quarter of 2003.
Interest expense in the first six months of 2004 was $17.8 million, an increase
of $1.4 million from the first six months of 2003. The increases were 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 $600,000 in the second quarter of 2004 as
compared to the first quarter of 2003 and $1.7 million in the first six months
of 2004 as compared to the first six months 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 11 to the Consolidated Financial Statements.

At June 30, 2004, Kronos had the equivalent of $594 million and $255
million, respectively, of net operating loss carryforwards for German corporate
and trade tax purposes, all of which have no expiration date. As more fully
described in Note 11 to the Consolidated Financial Statements, Kronos had
previously provided a deferred income tax asset valuation allowance against
substantially all of these tax loss carryforwards and other deductible temporary
differences in Germany because Kronos did not believe they met the
"more-likely-than-not" recognition criteria. During the first six months of
2004, Kronos reduced its deferred income tax asset valuation allowance by
approximately $8.7 million, primarily as a result of utilization of these German
net operating loss carryforwards, the benefit of which had not previously been
recognized. At June 30, 2004, after considering all available evidence, Kronos
concluded that these German tax loss carryforwards and other deductible
temporary differences now meet the "more-likely-than-not" recognition criteria.
Accordingly, as of June 30, 2004, Kronos reversed the remaining $245.6 million
valuation allowance related to such items. Because the benefit of such net
operating loss carryforwards and other deductible temporary differences in
Germany has now been recognized, the Company's future effective income tax rate
will be higher than what it would have otherwise been, although its future cash
income tax rate would not be affected.

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 to 60% of taxable income after the first euro 1
million of taxable income. The new law will have a significant effect on Kronos'
cash tax payments in Germany going forward, the extent of which will be
dependent 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.
Subsequent to the payment of the Company's July 2004 quarterly dividend in the
form of shares of Kronos common stock in which approximately 322,000 shares of
Kronos were distributed, the Company's ownership of Kronos will be reduced from
50.5% to approximately 49.8%, and the Company will no longer own a majority of
Kronos' outstanding common stock. Consequently, effective in the third quarter
of 2004 the Company will cease to consolidate Kronos and instead the Company
will commence accounting for its interest in Kronos by the equity method, at
which time the Company will no longer report minority interest in Kronos.

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 15 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 six months ended June 30, 2003 and 2004 are
presented below:

Six months ended
June 30,
-------------------------
2003 2004
---- ----
(In millions)

Net cash provided (used) by:

Operating activities $ 18.7 $ 58.0
Investing activities (9.7) (6.3)
Financing activities (14.4) (3.8)
------ ------

Net cash provided (used) by operating, investing
and financing activities $ (5.4) $ 47.9
====== ======

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.
Trends in cash flows from operating activities (excluding the impact of
significant asset dispositions and relative changes in assets and liabilities)
are generally similar to trends in the Company's earnings. However, certain
items included in the determination of net income are non-cash, and therefore
such items have no impact on cash flows from operating activities. Non-cash
items included in the determination of net income include depreciation and
amortization expense, deferred income taxes and non-cash interest expense.
Non-cash interest expense relates principally to Kronos and consists of
amortization of deferred financing costs.

Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, the amount of periodic defined benefit pension plan expense
and periodic OPEB expense depends upon a number of factors, including certain
actuarial assumptions, and changes in such actuarial assumptions will result in
a change in the reported expense. The amount of such periodic expense generally
differs from the outflows of cash required to be currently paid for such
benefits.

Relative changes in assets and liabilities generally result from the timing
of production, sales, purchases and income tax payments. Such relative changes
can significantly impact the comparability of cash flow from operations from
period to period, as the income statement impact of such items may occur in a
different period from when the underlying cash transaction occurs. For example,
raw materials may be purchased in one period, but the payment for such raw
materials may occur in a subsequent period. Similarly, inventory may be sold in
one period, but the cash collection of the receivable may occur in a subsequent
period.

Cash flows from operating activities increased from $18.7 million provided
by operating activities in the first six months of 2003 to $58.0 million of cash
provided by operating activities in the first six months of 2004. This $39.3
million increase was due primarily to the net effects of (i) higher net income
of $144.9 million, (ii) higher depreciation expense of $2.3 million, (iii) lower
deferred income taxes of $285.5 million, (iv) higher minority interest in
earnings of $137.7 million, (v) higher net distributions from the TiO2
manufacturing joint venture of $8.3 million in the first half of 2004 compared
to an $800,000 distribution in the first half of 2003, (vi) a higher amount of
net cash used from relative changes in the Company's inventories, receivables,
payables and accruals of $15.7 million in the first six months of 2004 as
compared to the first six months of 2003 and (vii) lower cash paid for income
taxes of $28.2 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 volumes and sales volumes. 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.

NL does not have complete access to the cash flows of its subsidiaries and
affiliates, in part due to limitations contained in certain credit agreements as
well as the fact that certain of such subsidiaries and affiliates are not 100%
owned by NL. A detail of NL's consolidated cash flows from operating activities
is presented in the table below. Eliminations consist of intercompany dividends
(most of which are paid by Kronos to NL).

Six months ended
June 30,
-------------------------
2003 2004
---- ----
(In millions)

Cash provided (used) by operating activities:

Kronos $ 29.3 $ 67.5
NL Parent (15.6) 3.8
Other 12.0 (.9)
Eliminations (7.0) (12.4)
------ ------

$ 18.7 $ 58.0
====== ======

Investing and financing activities

The Company's capital expenditures were $13.9 million and $10.9 million in
the first six months of 2003 and 2004, respectively, the majority of which
relate to Kronos.

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%. Such
amounts were repaid in the second quarter of 2004.

In each of the first two quarters of 2004, Kronos paid a regular quarterly
cash dividend to its stockholders of $.25 per share, of which $12.0 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.

At June 30, 2004, unused credit available under Kronos' existing credit
facilities approximated $150 million, which was comprised of: $95 million under
its European revolving credit facility, $11 million under its Canadian credit
facility, $40 million under its U.S. credit facility and $4 million under other
non-US facilities. At June 30, 2004, KII had approximately $220 million
available for payment of dividends and other restrictive payments as defined in
the Senior Secured Notes indenture.

Provisions contained in certain of Kronos' credit agreements could result
in the acceleration of the applicable indebtedness prior to its stated maturity
for reasons other than defaults from failing to comply with typical financial
covenants. For example, certain credit agreements allow the lender to accelerate
the maturity of the indebtedness upon a change of control (as defined) of the
borrower. In addition, certain credit agreements could result in the
acceleration of all or a portion of the indebtedness following a sale of assets
outside the ordinary course of business. Other than operating leases discussed
in the 2003 Annual Report, neither NL nor any of its subsidiaries or affiliates
are parties to any off-balance sheet financing arrangements.

Kronos Worldwide, Inc.

At June 30, 2004, Kronos had cash, cash equivalents and marketable debt
securities of $92.0 million, including restricted balances of $3.5 million, and
Kronos had $150 million available for borrowing under its U.S. and non-U.S.
credit facilities.

At June 30, 2004, Kronos' outstanding debt was comprised of (i) $346.4
million related to KII's Senior Secured Notes and (ii) approximately $400,000 of
other indebtedness. In addition, Kronos had a $200 million long-term note
payable to NL due in 2010, which is eliminated in the Company's consolidated
financial statements.

Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions significantly impact Kronos' earnings and operating cash
flows. Cash flows from operations is considered the primary source of liquidity
for Kronos. Changes in TiO2 pricing, production volume and customer demand,
among other things, could significantly affect the liquidity of Kronos.

See Note 11 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of Kronos' income tax
returns in various U.S. and non-U.S. jurisdictions, and see Note 14 to the
Consolidated Financial Statements with respect to certain legal proceedings with
respect to Kronos.

Kronos 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, Kronos has in the past and may in the future 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, Kronos may review opportunities for
acquisitions, divestitures, joint ventures or other business combinations in the
chemicals or other industries, as well as the acquisition of interests in, and
loans to, related entities. In the event of any such transaction, Kronos may
consider using its available cash, issuing its equity securities or increasing
its indebtedness to the extent permitted by the agreements governing Kronos'
existing debt.

Kronos has substantial operations located outside the United States for
which the functional currency is not the U.S. dollar. As a result, the reported
amounts of Kronos' assets and liabilities related to its non-U.S. operations,
and therefore Kronos' and the Company's consolidated net assets, will fluctuate
based upon changes in currency exchange rates.

NL Industries

At June 30, 2004, NL, exclusive of Kronos and its subsidiaries had (i)
current cash and cash equivalents aggregating $27.3 million, (ii) current
restricted cash equivalents of $9.9 million, (iii) current restricted marketable
debt securities of $9.1 million and (iv) noncurrent restricted marketable debt
securities of $6.9 million. Of such restricted balances, $17 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.

See Note 11 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of NL's income tax
returns, and see Note 14 to the Consolidated Financial Statements and Part II,
Item 1, "Legal Proceedings" with respect to certain legal proceedings and
environmental matters with respect to NL.

In December 2003, NL completed the distribution of approximately 48.8% of
Kronos' outstanding common stock to its shareholders under which NL shareholders
received one share of Kronos' common stock for every two shares of NL common
stock held. Approximately 23.9 million shares of Kronos common stock were
distributed. Immediately prior to the distribution of shares of Kronos common
stock, Kronos distributed a $200 million promissory note payable by Kronos to
NL. In March 2004, NL paid its $.20 per share regular quarterly dividend in the
form of shares of Kronos common stock. Approximately 345,100 shares, or
approximately .7% of Kronos' outstanding common stock, were distributed. NL's
second quarter dividend of $.20 per share, also paid in the form of shares of
Kronos common stock, was paid in July 2004. Approximately 322,000 shares of
Kronos, or approximately .7% of Kronos' outstanding common stock, were
distributed in this distribution. Following this distribution, NL no longer owns
a majority of Kronos' outstanding common stock, and accordingly NL will cease to
consolidate Kronos as of July 1, 2004.

NL 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, NL has in the past and may in the future 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, NL may review opportunities for acquisitions,
divestitures, joint ventures or other business combinations in the chemicals or
other industries, as well as the acquisition of interests in, and loans to,
related entities. In the event of any such transaction, NL may consider using
its available cash, issuing its equity securities or increasing its indebtedness
to the extent permitted by the agreements governing NL'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 and
Chief Financial Officer, have evaluated the Company's disclosure controls and
procedures as of June 30, 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 June 30, 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 14 to the Consolidated Financial Statements, the
2003 Annual Report and the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004 for descriptions of certain previously reported
legal proceedings.

Sabater, et al. v. Lead Industries Association, et al. (Supreme Court of
the State of New York, County of Bronx, Index No. 25533/98). In June 2004, at
plaintiffs' request, the trial court dismissed the case with prejudice as to the
adult plaintiffs and without prejudice as to the minor plaintiffs.

Thomas v. Lead Industries Association, et al. (Circuit Court, Milwaukee,
Wisconsin, Case No. 99-CV-6411). In June 2004, the appellate court affirmed the
trial court's dismissal of all of plaintiff's claims. In July 2004, plaintiff
filed a petition for review with the Wisconsin Supreme Court.

State of Rhode Island v. Lead Industries Association, et al. (Superior
Court of Rhode Island, No. 99-5226). In July 2004, the Rhode Island Supreme
Court dismissed plaintiff's appeal of, and denied plaintiff's petition to
review, the trial court's decision that the case must be tried to a jury.

Smith, et al. v. Lead Industries Association, et al. (Circuit Court for
Baltimore City, Maryland, Case No. 24-C-99-004490). In May 2004, the appellate
court reversed and remanded the trial court's dismissal of plaintiffs' design
defect claim and other claims, but affirmed the trial court's dismissal of
plaintiffs' fraud claim and failure to warn claim. In July 2004, plaintiffs
filed a petition for review with the Maryland Court of Appeals.

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).
Defendants' renewed motion to dismiss and motion for summary judgment were
denied by the trial court in March 2004, but the trial court limited plaintiff's
complaint to monetary damages from 1990 to 2000, specifically excluding future
damages. In April 2004, the court set a trial date of July 2005.

Spring Branch Independent School District v. Lead Industries Association,
et al. (District Court of Harris County, Texas, No. 2000-31175). In June 2004,
the appellate court affirmed the trial court's order granting defendants' motion
for summary judgment. The time for plaintiff's appeal has not run.

Lewis et al. v. Lead Industries Association, et al. (Circuit Court of Cook
County, Illinois, County Department, Chancery Division, Case No. 00CH09800). In
May 2004, the trial court denied defendants' motion for summary judgment on
plaintiffs' conspiracy count. In May 2004, defendants filed another motion for
summary judgment on plaintiffs' conspiracy count, arguing that plaintiffs cannot
show that all manufacturers of lead pigment were members of a conspiracy.

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 May 2004, the
Mississippi Supreme Court remanded the case to the trial court in Holmes County
and instructed the court to transfer the plaintiffs to their appropriate venues.
With respect to the eight plaintiffs remaining in Jefferson County, in July 2004
the Mississippi Supreme Court denied plaintiffs' motion to add additional
defendants.

Russell v. NL Industries, Inc., et al. (Circuit Court of LeFlore County,
Mississippi, No.2002-0235-CICI). In May 2004, four of the six plaintiffs
voluntarily dismissed their claims.

Jones v. NL Industries, Inc., et al. (Circuit Court of LeFlore County,
Mississippi, Civil Action No. 2002-0241-CICI). In June 2004, the court set a
trial date of February 2006.

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). In
April 2004, the plaintiffs filed an amended complaint adding claims under the
Resource Conservation Recovery Act ("RCRA") and the Comprehensive Environmental
Response, Compensation and Liability Act, and the Company moved to dismiss those
claims. In June 2004, the trial court dismissed the plaintiffs' claims for
unjust enrichment and fraud as well as one plaintiff's claims arising under
RCRA.

Evans v. Asarco (United States District Court, Northern District of
Oklahoma, Case No. 04-CV-94EA(M)). The trial court has stayed the proceedings in
this case pending the outcome of a class certification decision in Cole, et al.
v. ASARCO Incorporated et al. (U.S. District Court for the Northern District of
Oklahoma, Case No. 03C V327 EA (J)) case, from which the Company has been
dismissed with prejudice.

Item 4. Submission of Matters to a Vote of Security Holders

The Company's 2004 Annual Meeting of Shareholders was held on May 20, 2004.
C.H. Moore, Jr., Glenn R. Simmons, Harold C. Simmons, Thomas P. Stafford, Steven
L. Watson and Terry N. Worrell were elected as directors, each receiving votes
"For" their election from at least 94.1% of the 48.3 million common shares
eligible to vote at the Annual Meeting.

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. The Company will also
furnish, without charge, a copy of its Code of Business Conduct and
Ethics, its Audit Committee Charter and its Corporate Governance
Guidelines, each as approved by the Company's board of directors and
each of which are also available at the Company's website at
www.nl-ind.com, upon request. Such requests should be directed to the
attention of the Company's corporate secretary at the Company's
corporate offices located at 5430 LBJ Freeway, Suite 1700, Dallas,
Texas 75240.

31.1 - Certification

31.2 - Certification

32.1 - Certification

(b) Reports on Form 8-K Reports on Form 8-K for the quarter ended June 30,
2004.

May 6, 2004 - Reported Item 9.
May 21, 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 August 5, 2004 By /s/ Gregory M. Swalwell
---------------- ---------------------------
Gregory M. Swalwell
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)

Date August 5, 2004 By /s/ James W. Brown
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James W. Brown
Vice President and Controller
(Principal Accounting Officer)