SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the quarter ended March 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-640
NL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New Jersey 13-5267260
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16825 Northchase Drive, Suite 1200, Houston, Texas 77060-2544
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 423-3300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) had been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of common stock outstanding on May 12, 1998: 51,339,714
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1997
and March 31, 1998 3-4
Consolidated Statements of Income - Three
months ended March 31, 1997 and 1998 5-6
Consolidated Statements of Comprehensive Income
- Three months ended March 31, 1997 and 1998 7
Consolidated Statement of Shareholders' Equity
- Three months ended March 31, 1998 8
Consolidated Statements of Cash Flows - Three
months ended March 31, 1997 and 1998 9-10
Notes to Consolidated Financial Statements 11-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 23
- 2 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, March 31,
ASSETS 1997 1998
------------ ---------
Current assets:
Cash and cash equivalents, including
restricted cash of $9,751 and $5,742 .......... $ 106,145 $ 356,780
Accounts and notes receivable .................. 148,676 164,733
Refundable income taxes ........................ 1,941 6,370
Inventories .................................... 192,780 167,975
Prepaid expenses ............................... 3,348 5,076
Deferred income taxes .......................... 1,642 1,251
---------- ----------
Total current assets ....................... 454,532 702,185
---------- ----------
Other assets:
Marketable securities .......................... 17,270 18,027
Investment in joint ventures ................... 172,721 171,202
Prepaid pension cost ........................... 23,848 24,138
Other .......................................... 18,592 14,537
---------- ----------
Total other assets ......................... 232,431 227,904
---------- ----------
Property and equipment:
Land ........................................... 19,479 18,448
Buildings ...................................... 150,090 137,495
Machinery and equipment ........................ 616,309 553,206
Mining properties .............................. 88,617 82,232
Construction in progress ....................... 2,577 2,219
---------- ----------
877,072 793,600
Less accumulated depreciation and depletion .... 465,843 422,613
---------- ----------
Net property and equipment ................. 411,229 370,987
---------- ----------
$1,098,192 $1,301,076
========== ==========
- 3 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
December 31, March 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1998
------------ ---------
Current liabilities:
Notes payable ................................ $ 13,968 $ 33,233
Current maturities of long-term debt ......... 77,374 22,662
Accounts payable and accrued liabilities ..... 161,730 150,686
Payable to affiliates ........................ 11,512 10,439
Income taxes ................................. 10,910 88,839
Deferred income taxes ........................ 891 599
----------- -----------
Total current liabilities ................ 276,385 306,458
----------- -----------
Noncurrent liabilities:
Long-term debt ............................... 666,779 519,064
Deferred income taxes ........................ 132,797 141,114
Accrued pension cost ......................... 44,389 41,697
Accrued postretirement benefits cost ......... 50,951 46,328
Other ........................................ 148,903 166,291
----------- -----------
Total noncurrent liabilities ............. 1,043,819 914,494
----------- -----------
Minority interest .............................. 257 266
Shareholders' equity:
Common stock ................................. 8,355 8,355
Additional paid-in capital ................... 759,281 759,281
Accumulated other comprehensive loss ......... (129,513) (128,621)
Accumulated deficit .......................... (495,421) (194,406)
Treasury stock ............................... (364,971) (364,751)
----------- -----------
Total shareholders' equity (deficit) ..... (222,269) 79,858
----------- -----------
$ 1,098,192 $ 1,301,076
=========== ===========
Commitments and contingencies (Note 14)
See accompanying notes to consolidated financial statements.
- 4 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 1997 and 1998
(In thousands, except per share data)
1997 1998
--------- ---------
Revenues and other income:
Net sales .......................................... $ 204,389 $ 222,629
Other, net ......................................... 2,423 5,981
--------- ---------
206,812 228,610
--------- ---------
Costs and expenses:
Cost of sales ...................................... 167,175 156,915
Selling, general and administrative ................ 64,033 32,639
Interest ........................................... 16,175 16,399
--------- ---------
247,383 205,953
--------- ---------
Income (loss) from continuing operations
before income taxes and minority interest ..... (40,571) 22,657
Income tax expense (benefit) ......................... (404) 6,342
--------- ---------
Income (loss) from continuing operations
before minority interest ...................... (40,167) 16,315
Minority interest .................................... 13 15
--------- ---------
Income (loss) from continuing operations ....... (40,180) 16,300
Discontinued operations .............................. 4,459 287,060
Extraordinary item - early extinguishment of debt,
net of tax benefit of $1,263 ........................ -- (2,345)
--------- ---------
Net income (loss) .............................. $ (35,721) $ 301,015
========= =========
- 5 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
Three months ended March 31, 1997 and 1998
(In thousands, except per share data)
1997 1998
---------- ----------
Basic earnings per common share:
Continuing operations ............................. $ (.79) $ .32
Discontinued operations ........................... .09 5.60
Extraordinary item ................................ -- (.05)
---------- ----------
Net income (loss) ............................... $ (.70) $ 5.87
========== ==========
Diluted earnings per share:
Continuing operations ............................. $ (.79) $ .31
Discontinued operations ........................... .09 5.54
Extraordinary item ................................ -- (.05)
---------- ----------
Net income (loss) ............................... $ (.70) $ 5.80
========== ==========
Shares used in the calculation of earnings per share:
Basic ............................................. 51,140 51,282
Dilutive impact of stock options .................. -- 570
---------- ----------
Diluted ........................................... 51,140 51,852
========== ==========
See accompanying notes to consolidated financial statements.
- 6 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, 1997 and 1998
(In thousands)
1997 1998
-------- --------
Net income (loss) ............................... $(35,721) $301,015
-------- --------
Other comprehensive income, net of tax:
Marketable securities adjustment .............. 1,026 492
Currency translation adjustment ............... 750 400
-------- --------
Total other comprehensive income ............ 1,776 892
-------- --------
Comprehensive income (loss) ............... $(33,945) $301,907
======== ========
See accompanying notes to consolidated financial statements.
- 7 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three months ended March 31, 1998
(In thousands)
Accumulated other
comprehensive income (loss)
Additional ---------------------------
Common paid-in Currency Marketable Accumulated Treasury
stock capital translation securities deficit stock Total
--------- ---------- ----------- ---------- ----------- --------- ---------
Balance at December 31, 1997 .. $ 8,355 $ 759,281 $(133,810) $ 4,297 $(495,421) $(364,971) $(222,269)
Net income .................... -- -- -- -- 301,015 -- 301,015
Other comprehensive income, net -- -- 400 492 -- -- 892
Treasury stock reissued ....... -- -- -- -- -- 220 220
--------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 1998 ..... $ 8,355 $ 759,281 $(133,410) $ 4,789 $(194,406) $(364,751) $ 79,858
========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
- 8 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 1997 and 1998
(In thousands)
1997 1998
--------- ---------
Cash flows from operating activities:
Net income (loss) ................................ $ (35,721) $ 301,015
Depreciation, depletion and amortization ......... 8,915 8,463
Noncash interest expense ......................... 5,448 5,909
Deferred income taxes ............................ (514) (789)
Change in accounting for environmental
remediation costs ............................... 30,000 --
Discontinued operations:
Net gain from sale of Rheox .................... -- (285,735)
Income from operations of Rheox ................ (4,459) (1,325)
Other, net ....................................... (1,663) (4,518)
--------- ---------
2,006 23,020
Change in assets and liabilities:
Accounts and notes receivable .................. (27,429) (32,685)
Inventories .................................... 27,754 3,552
Prepaid expenses ............................... (1,418) (2,307)
Accounts payable and accrued liabilities ....... (1,953) 873
Income taxes ................................... 5,781 (3,399)
Other, net ..................................... (2,382) 24,088
Rheox, net ....................................... 4,953 (1,193)
--------- ---------
Net cash provided by operating activities .... 7,312 11,949
--------- ---------
Cash flows from investing activities:
Capital expenditures ............................. (8,617) (2,430)
Investment in joint venture, net ................. 2,379 (371)
Proceeds from sale of Rheox ...................... -- 435,080
Rheox, net ....................................... (247) (26)
Other, net ....................................... 60 11
--------- ---------
Net cash provided (used) by investing
activities ................................. (6,425) 432,264
--------- ---------
- 9 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 1997 and 1998
(In thousands)
1997 1998
--------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ....................................... $ -- $ 30,491
Principal payments ............................... (157,880) (98,499)
Deferred financing costs ......................... (2,343) --
Rheox, net ......................................... 124,212 (117,500)
Other, net ......................................... 231 220
--------- ---------
Net cash used by financing activities .......... (35,780) (185,288)
--------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities .... (34,893) 258,925
Currency translation ............................. (1,560) (660)
Sale of Rheox .................................... -- (7,630)
Balance at beginning of period ..................... 114,115 106,145
--------- ---------
Balance at end of period ........................... $ 77,662 $ 356,780
========= =========
Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized ............... $ 7,153 $ 4,322
Income taxes, net .................................. (4,385) 8,830
See accompanying notes to consolidated financial statements.
- 10 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
NL Industries, Inc. conducts its titanium dioxide pigments ("TiO2")
operations primarily through its wholly-owned subsidiary, Kronos, Inc. In
January 1998 the specialty chemicals business of Rheox, Inc., a wholly-owned
subsidiary of NL, was sold. At March 31, 1998 Valhi, Inc. and Tremont
Corporation, each affiliates of Contran Corporation, held approximately 58% and
18%, respectively, of NL's outstanding common stock, and together may be deemed
to control NL. At March 31, 1998 Contran and its subsidiaries and other entities
related to Harold C. Simmons held approximately 93% of Valhi's and 50% of
Tremont's outstanding common stock.
The consolidated balance sheet of NL Industries, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 1997 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 1998 and the consolidated statements of
income, comprehensive income, shareholders' equity and cash flows for the
interim periods ended March 31, 1997 and 1998 have been prepared by the Company,
without audit. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows have been made. The
results of operations for the interim periods are not necessarily indicative of
the operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. Certain prior-year amounts have been
reclassified to conform to the current year presentation, including reporting
the Company's specialty chemicals business as a discontinued operation. The
accompanying consolidated financial statements should be read in conjunction
with the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 (the "1997 Annual
Report").
Note 2 - Earnings per common share:
Basic earnings per share are based on the weighted average number of
common shares outstanding during each period. Diluted earnings per share are
based on the weighted average common shares outstanding and the dilutive impact
of outstanding stock options.
- 11 -
Note 3 - Business segment information:
The Company's continuing operations are conducted by Kronos in one
business segment - TiO2.
Three months ended
March 31,
------------------------
1997 1998
-------- --------
(In thousands)
Operating income - Kronos ...................... $ 8,689 $ 39,399
General corporate income (expense):
Securities earnings, net ..................... 597 3,848
Expenses, net ................................ (33,682) (4,191)
Interest expense ............................. (16,175) (16,399)
-------- --------
$(40,571) $ 22,657
======== ========
Corporate expenses, net decreased in the first quarter of 1998 due to the
$30 million noncash charge taken in the first quarter of 1997 related to the
adoption of a new method of accounting for certain environmental remediation
costs.
Note 4 - Inventories:
December 31, March 31,
1997 1998
------------ ---------
(In thousands)
Raw materials ................................ $ 45,844 $ 40,416
Work in process .............................. 8,018 7,375
Finished products ............................ 107,427 89,727
Supplies ..................................... 31,491 30,457
-------- --------
$192,780 $167,975
======== ========
Note 5 - Marketable securities:
December 31, March 31,
1997 1998
------------ ---------
(In thousands)
Available-for-sale securities - noncurrent
marketable equity securities:
Unrealized gains ................................. $ 6,939 $ 7,635
Unrealized losses ................................ (328) (267)
Cost ............................................. 10,659 10,659
-------- --------
Aggregate market ............................. $ 17,270 $ 18,027
======== ========
- 12 -
Note 6 - Investment in joint ventures:
December 31, March 31,
1997 1998
------------ ---------
(In thousands)
TiO2 manufacturing joint venture ............... $170,830 $171,202
Other .......................................... 1,891 --
-------- --------
$172,721 $171,202
======== ========
Note 7 - Other noncurrent assets:
December 31, March 31,
1997 1998
------------ ---------
(In thousands)
Deferred financing costs, net .............. $ 9,973 $ 7,614
Intangible assets, net ..................... 4,228 3,507
Other ...................................... 4,391 3,416
------- -------
$18,592 $14,537
======= =======
Note 8 - Accounts payable and accrued liabilities:
December 31, March 31,
1997 1998
------------- ---------
(In thousands)
Accounts payable ......................... $ 64,698 $ 47,475
-------- --------
Accrued liabilities:
Employee benefits ...................... 40,110 34,469
Environmental costs .................... 9,000 9,000
Interest ............................... 6,966 13,822
Other .................................. 40,956 45,920
-------- --------
97,032 103,211
-------- --------
$161,730 $150,686
======== ========
Note 9 - Other noncurrent liabilities:
December 31, March 31,
1997 1998
------------ ---------
(In thousands)
Environmental costs .......................... $125,502 $124,773
Insurance claims and expenses ................ 11,436 11,376
Employee benefits ............................ 10,835 10,512
Deferred income .............................. -- 15,333
Other ........................................ 1,130 4,297
-------- --------
$148,903 $166,291
======== ========
- 13 -
Note 10 - Notes payable and long-term debt:
December 31, March 31,
1997 1998
------------ ---------
(In thousands)
Notes payable - Kronos (DM 25,000 and DM 60,500,
respectively) ....................................... $ 13,968 $ 33,233
======== ========
Long-term debt:
NL Industries:
11.75% Senior Secured Notes ...................... $250,000 $250,000
13% Senior Secured Discount Notes ................ 169,857 164,229
-------- --------
419,857 414,229
-------- --------
Kronos:
DM bank credit facility (DM 288,322 and
DM 227,322, respectively) ....................... 161,085 124,868
Joint venture term loan .......................... 42,429 --
Other ............................................ 3,282 2,629
-------- --------
206,796 127,497
-------- --------
Rheox - bank term loan ............................. 117,500 --
-------- --------
744,153 541,726
Less current maturities .............................. 77,374 22,662
-------- --------
$666,779 $519,064
======== ========
Note 11 - Income taxes:
The difference between the provision for income tax expense attributable
to income from continuing operations before income taxes and minority interest
and the amount that would be expected using the U.S. federal statutory income
tax rate of 35% is presented below.
Three months ended
March 31,
--------------------
1997 1998
-------- --------
(In thousands)
Expected tax expense (benefit) ......................... $(14,200) $ 7,930
Non-U.S. tax rates ..................................... (207) (52)
Incremental tax on income of companies not included
in NL's consolidated U.S. federal income tax return ... 500 1,230
Change in valuation allowance .......................... 12,942 (2,848)
U.S. state income taxes ................................ 171 100
Other, net ............................................. 390 (18)
-------- --------
Income tax expense (benefit) ..................... $ (404) $ 6,342
======== ========
- 14 -
Note 12 - Other income, net:
Three months ended
March 31,
---------------------
1997 1998
------ ------
(In thousands)
Interest and dividends ........................... $ 597 $3,848
Noncompete agreement income ...................... -- 667
Currency transaction gains, net .................. 763 583
Other, net ....................................... 1,063 883
------ ------
$2,423 $5,981
====== ======
Note 13 - Discontinued operations:
The Company sold the net assets of its Rheox specialty chemicals business
for $465 million cash (before fees and expenses) in the first quarter of 1998,
including $20 million attributable to a five-year agreement by the Company not
to compete in the rheological products business. The Company recognized an
after-tax gain of approximately $285 million on the sale of this business
segment. A portion of the after-tax proceeds of about $384 million have been
used to reduce outstanding indebtedness by approximately $171 million.
Condensed income statement data related to discontinued operations for the
interim periods ended March 31, 1997 and 1998 are as follows. Interest expense
has been allocated to discontinued operations based on the amount of debt
specifically attributed to Rheox's operations.
Three months ended
March 31,
----------------------
1997 1998
-------- --------
(In thousands)
Operations:
Net sales ......................................... $ 35,087 $ 12,630
-------- --------
Operating income .................................. 10,013 2,900
Interest and other expenses ....................... 2,863 797
-------- --------
Income before income taxes and minority
interest ..................................... 7,150 2,103
Income tax expense ................................ 2,696 778
Minority interest ................................. (5) --
-------- --------
4,459 1,325
Gain from sale of Rheox, net of tax expense of
$86,222 -- 285,735
-------- --------
Net income .................................... $ 4,459 $287,060
======== ========
- 15 -
Condensed cash flow data for Rheox (excluding dividends paid to,
contributions received from and intercompany loans with NL) is presented below:
Three months ended
March 31,
-----------------------
(In thousands)
1997 1998
--------- ---------
Cash flows from operating activities ............... $ 4,953 $ (1,193)
--------- ---------
Cash flows from investing activities - capital
expenditures and other ............................ (247) (26)
Cash flows from financing activities -
indebtedness, net ................................. 124,212 (117,500)
--------- ---------
$ 128,918 $(118,719)
========= =========
Note 14 - Commitments and contingencies:
For descriptions of certain legal proceedings, income tax and other
commitments and contingencies related to the Company, reference is made to (i)
Management's Discussion and Analysis of Financial Condition and Results of
Operations, (ii) Part II, Item 1 -"Legal Proceedings" and (iii) the 1997 Annual
Report.
- 16 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Three months ended %
March 31, Change
---------------------- ------
1997 1998
-------- --------
(In millions)
Net sales - Kronos .................... $ 204.4 $ 222.6 +9%
Operating income - Kronos ............. $ 8.7 $ 39.4 +353%
Percent changes in TiO2:
Sales volume ........................ +2%
Average selling prices
(in billing currencies)............. +17%
The Company's TiO2 operations are conducted by Kronos. Kronos' operating
income in the first quarter of 1998 increased from the first quarter of 1997 on
higher average selling prices and improved production and sales volumes. Kronos
expects its full-year 1998 operating income will exceed that of 1997, primarily
because of higher average TiO2 selling prices for 1998 compared to 1997.
Average TiO2 selling prices for the first quarter of 1998 were 17% higher
than the first quarter of 1997 and 5% higher than the fourth quarter of 1997.
The Company expects TiO2 prices will increase during the remainder of 1998.
Kronos' first quarter sales volume was 2% higher than the first quarter of
1997 as increased sales volume in Europe more than offset lower sales volume in
other regions. Kronos anticipates its TiO2 sales volume for full-year 1998 will
approximate volumes for calendar year 1997.
Kronos' cost of sales as a percentage of net sales decreased in the first
quarter of 1998 primarily due to higher average selling prices. Kronos' selling,
general and administrative expenses decreased in the first quarter of 1998 due
to favorable effects of foreign currency translation, partially offset by higher
distribution expenses associated with higher first-quarter 1998 sales volume.
A significant amount of sales are denominated in currencies other than the
U.S. dollar, and fluctuations in the value of the U.S. dollar relative to other
currencies decreased the dollar value of sales for the first quarter of 1998 by
$15 million compared to the first quarter of 1997.
- 17 -
The following table sets forth certain information regarding general
corporate income (expense).
Three months ended
March 31, Difference
--------------------- ----------
1997 1998
------- -------
(In millions)
Securities earnings .................. $ .6 $ 3.8 $ 3.2
Corporate expenses, net .............. (33.7) (4.2) 29.5
Interest expense ..................... (16.2) (16.4) (.2)
------- ------- -------
$ (49.3) $ (16.8) $ 32.5
======= ======= =======
Securities earnings increased due to higher average balances available for
investment. Corporate expenses, net in the first quarter of 1998 was lower than
the comparable period in 1997 due to the $30 million noncash charge taken in the
first quarter of 1997 related to the Company's adoption of SOP No. 96-1,
"Environmental Remediation Liabilities." This charge is included in selling,
general and administrative expense in the Company's consolidated statements of
income.
The Company sold the net assets of its Rheox specialty chemicals business
in the first quarter of 1998 to Elementis plc for $465 million cash (before fees
and expenses), including $20 million attributable to a five-year agreement by
the Company not to compete in the rheological products business. The Company
recognized an after-tax gain on disposal, included in discontinued operations,
of $285 million on the sale, and will recognize the income associated with the
$20 million noncompete agreement proceeds as a component of general corporate
income ratably over the five-year term of the agreement. In addition to the
gain, discontinued operations include the after-tax income of the operations of
the Company's specialty chemical business through the date of the sale. The
effective income tax rate related to the gain on disposal is lower than the U.S.
federal statutory income tax rate of 35% principally due to the utilization of
certain tax attributes for which the benefit had not been previously recognized.
As discussed below in "Liquidity and Capital Resources," the Company
prepaid certain of its indebtedness with a portion of the proceeds of the sale
of its specialty chemicals business. The Company recognized a $2.3 million
after-tax extraordinary loss associated with the prepayment of such
indebtedness, due to the write-off of deferred financing costs of $1.6 million
(net of tax benefit of $.9 million) related to the prepaid indebtedness and the
payment of market premiums on $11 million accreted value of the Company's 13%
Senior Secured Discount Notes purchased in open market transactions.
- 18 -
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows from operating, investing and
financing activities for the three months ended March 31, 1997 and 1998 are
presented below.
Three months ended
March 31,
-------------------
1997 1998
------- --------
(In millions)
Net cash provided (used) by:
Operating activities .................................... $ 7.3 $ 11.9
Investing activities .................................... (6.4) 432.3
Financing activities .................................... (35.8) (185.3)
------- --------
Net cash provided (used) by operating, investing
and financing activities ........................... $ (34.9) $ 258.9
======= ========
The TiO2 industry is cyclical and changes in economic conditions within
the industry significantly impact the earnings and operating cash flows of the
Company. Cash flow from operations, before changes in assets and liabilities, in
the 1998 period improved from the comparable period in 1997 due to higher
operating income. Changes in the Company's inventories, receivables and payables
(excluding the effect of currency translation) used cash in both the first
quarter of 1997 and 1998; however, the cash used in the first quarter of 1997
was significantly less than the first quarter of 1998 due to cash provided from
reductions in inventory levels in the 1997 period.
A portion of the $465 million proceeds from the sale of the Company's
specialty chemicals business (net proceeds of $380 million after current income
taxes and other expenses) was used to prepay $171 million of outstanding
indebtedness, as described below. The Company plans to use the balance of the
net proceeds to invest in additional TiO2 capacity or further reduce outstanding
indebtedness. The Company currently expects to pay income taxes related to the
gain from the sale of Rheox during the remainder of 1998.
With a portion of the net proceeds, the Company prepaid the remaining $118
million of the Rheox credit facility and the remaining $42 million of Kronos'
share of the LPC joint venture term loan in the first quarter of 1998. In
addition, the Company made $11 million of open-market purchases of the Company's
13% Senior Secured Discount Notes at prices ranging from $101.25 to $102.27 of
their principal amounts in the first quarter of 1998.
In accordance with the provisions of the DM credit agreement and as a
result of higher than expected operating income in 1997 for Kronos
International, Inc., the Company prepaid DM 81 million ($44 million when paid)
of the term loan in March 1998, of which DM 49 million ($27 million when paid)
fully satisfied the September 1998 scheduled term loan payment and the remaining
DM 32 million ($17 million when paid) reduced the March 1999 scheduled term loan
payment. A portion
- 19 -
of the funds for such prepayment of the DM term loan was provided by a DM 35
million ($19 million when borrowed) increase in outstanding borrowings under the
Company's short-term non-U.S. credit facilities.
At March 31, 1998 the Company had cash and cash equivalents aggregating
$357 million (10% held by non-U.S. subsidiaries), including restricted cash and
cash equivalents of $6 million. The Company's subsidiaries had $74 million
available for borrowing at March 31, 1998 under existing non-U.S. credit
facilities. On May 6, 1998 the Company announced the resumption of a regular
quarterly dividend by declaring a $.03 per share cash dividend to be paid to
shareholders of record on June 1, 1998.
Certain of the Company's tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies. The Company previously reached an agreement with the
German tax authorities and paid certain tax deficiencies of approximately DM 44
million ($28 million when paid), including interest, which resolved significant
tax contingencies for years through 1990. During 1997 the Company reached a
tentative agreement with the German tax authorities regarding the years 1991
through 1994, and expects to pay DM 9 million ($5 million at March 31, 1998)
during the second half of 1998 in settlement of certain tax issues. Certain
other significant German tax contingencies remain outstanding for the years 1990
through 1996 and will continue to be litigated. With respect to these
contingencies, the Company has received certain revised tax assessments
aggregating DM 119 million ($65 million at March 31, 1998), including non-income
tax related items and interest, for years through 1996. The Company expects to
receive tax assessments for an additional DM 20 million ($11 million at March
31, 1998), including non-income tax related items and interest, for the years
1991 through 1994. No payments of tax or interest deficiencies related to these
assessments are expected until the litigation is resolved.
During 1997 a German tax court proceeding involving a tax issue
substantially the same as that involved in the Company's primary remaining tax
contingency was decided in favor of the taxpayer. The German tax authorities
have appealed that decision to the German Supreme Court; the Company believes
that the decision by the German Supreme Court will be rendered within two years
and will become a legal precedent which will likely determine the outcome of the
Company's primary dispute with the German tax authorities, which assessments,
including non-income tax related items and interest, aggregate DM 121 million.
Although the Company believes that it will ultimately prevail, the Company has
granted a DM 94 million ($52 million at March 31, 1998) lien on its Nordenham,
Germany TiO2 plant in favor of the City of Leverkusen, and a DM 5 million ($3
million at March 31, 1998) lien in favor of the German federal tax authorities.
During 1997 the Company received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at March
31, 1998) relating to 1994. The Company has appealed this assessment and expects
to litigate this issue.
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 court
- 20 -
proceedings. The Company believes that it has adequately provided accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
The Company has been named as a defendant, potentially responsible party
("PRP"), or both, in a number of legal proceedings associated with environmental
matters, including waste disposal sites, mining locations and facilities
currently or previously owned, operated or used by the Company, certain of which
are on the U.S. Environmental Protection Agency's (the "U.S. EPA") Superfund
National Priorities List or similar state lists. On a quarterly basis, the
Company evaluates the potential range of its liability at sites where it has
been named as a PRP or defendant. The Company believes it has adequate accruals
($134 million at March 31, 1998) for reasonably estimable costs of such matters,
but the Company's ultimate liability may be affected by a number of factors,
including changes in remedial alternatives and costs and the allocations of such
costs among PRPs. It is not possible to estimate the range of costs for certain
sites. The upper end of the range of reasonably possible costs to the Company
for sites for which it is possible to estimate costs is approximately $175
million. The Company's estimates of such liabilities have not been discounted to
present value, and the Company has not recognized any potential insurance
recoveries. 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.
The Company is also a defendant in a number of legal proceedings seeking
damages for personal injury and property damage arising from the sale of lead
pigments and lead-based paints. There is no assurance that the Company will not
incur future liability in respect of this pending litigation in view of the
inherent uncertainties involved in court and jury rulings in pending and
possible future cases. However, based on, among other things, the results of
such litigation to date, the Company believes that the pending lead pigment and
paint litigation is without merit. The Company has not accrued any amounts for
such pending litigation. Liability that may result, if any, cannot be reasonably
estimated. In addition, various legislation and administrative regulations have,
from time to time, been enacted or proposed that seek to impose various
obligations on present and former manufacturers of lead pigment and lead-based
paint with respect to asserted health concerns associated with the use of such
products and to effectively overturn court decisions in which the Company and
other pigment manufacturers have been successful. Examples of such proposed
legislation include bills which would permit civil liability for damages on the
basis of market share, rather than requiring plaintiffs to prove that the
defendant's product caused the alleged damage. The Company currently believes
the disposition of all claims and disputes, individually and in the aggregate,
should not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity. There can be no
assurance that additional matters of these types will not arise in the future.
- 21 -
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and availability of resources in view of, among
other things, its debt service and capital expenditure requirements and
estimated future operating cash flows. As a result of this process, the Company
in the past has sought, and in the future may seek, to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, issue
additional securities, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, the Company may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals industry. In the event of any acquisition or joint venture
transaction, the Company may consider using available cash, issuing equity
securities or increasing its indebtedness to the extent permitted by the
agreements governing the Company's existing debt.
The statements contained in this Report on Form 10-Q ("Quarterly Report")
which are not historical facts, including, but not limited to, statements found
under the captions "Results of Operations" and "Liquidity and Capital Resources"
above, are forward-looking statements that involve a number of risks and
uncertainties. The actual results of the future events described in such
forward-looking statements in this Quarterly Report could differ materially from
those stated in such forward-looking statements. Among the factors that could
cause actual results to differ materially are the risks and uncertainties
discussed in this Quarterly Report and in the 1997 Annual Report, including,
without limitation, the portions of such reports under the captions referenced
above, and the uncertainties set forth from time to time in the Company's other
public reports and filings and public statements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the 1997 Annual Report for descriptions of certain
previously-reported legal proceedings.
Adams v. NL Industries, Inc., et al. (No. A9701785). In March 1998 the
plaintiffs dismissed this case without prejudice.
Batavia, New York Superfund Site. In April 1998 the U.S. EPA indicated
that its claim for past costs from the PRPs was approximately $2.4 million.
De Leon vs. Exide Corp. and NL Industries, Inc. (No. DV98-02669-B). In
April 1998 the Company was served with a complaint on behalf of 47 homeowners
and their spouses seeking damages for alleged loss of property value, repair
costs, mental anguish, environmental monitoring, punitive damages and injunctive
relief in connection with property allegedly contaminated by a secondary lead
smelter formerly owned by the Company. The time for defendants to file their
answer or other response to the complaint has not yet expired. The Company
intends to defend the action vigorously.
- 22 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 - Financial Data Schedule for the three-month period ended
March 31, 1998.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended March 31, 1998 and
through the date of this report:
January 23, 1998 - reported Items 5 and 7.
January 30, 1998 - reported Items 5 and 7.
January 30, 1998 - reported Items 2 and 7.
February 17, 1998 - reported Item 5.
February 26, 1998 - reported Items 5 and 7.
February 26, 1998 - reported Item 5.
April 17, 1998 - reported Items 5 and 7.
May 6, 1998 - reported Items 5 and 7.
- 23 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NL INDUSTRIES, INC.
(Registrant)
Date: May 12, 1998 By /s/ Susan E. Alderton
- ------------------- ---------------------------------
Susan E. Alderton
Vice President and
Chief Financial Officer
Date: May 12, 1998 By /s/ Dennis G. Newkirk
- ------------------- ---------------------------------
Dennis G. Newkirk
Vice President and Controller
(Principal Accounting Officer)
- 24 -
5
1,000
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
356,780
0
147,842
2,602
167,975
702,185
793,600
422,613
1,301,076
306,458
519,064
0
0
8,355
71,503
1,301,076
222,629
228,610
156,915
156,915
0
48
16,399
22,657
6,342
16,300
287,060
(2,345)
0
301,015
5.87
5.80
