SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the quarterly period ended March 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -----
EXCHANGE ACT OF 1934
Commission file number 1-640
NL INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 13-5267260
- -------------------------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
------- -------
Number of shares of common stock outstanding on May 9, 2003: 47,694,784
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - March 31, 2003
and December 31, 2002 3-4
Consolidated Statements of Income - Three months
ended March 31, 2003 and 2002 5
Consolidated Statements of Comprehensive Income
- Three months ended March 31, 2003 and 2002 6
Consolidated Statement of Shareholders' Equity
- Three months ended March 31, 2003 7
Consolidated Statements of Cash Flows - Three
months ended March 31, 2003 and 2002 8-9
Notes to Consolidated Financial Statements 10-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-26
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 26
Item 4. Controls and Procedures 26-27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28-29
Item 6. Exhibits and Reports on Form 8-K 29
- 2 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
ASSETS 2003 2002
---------- ------------
Current assets:
Cash and cash equivalents ........................ $ 46,713 $ 58,091
Restricted cash equivalents ...................... 47,107 52,089
Restricted marketable debt securities ............ 9,715 9,670
Accounts and notes receivable .................... 168,613 136,858
Receivable from affiliates ....................... 156 207
Refundable income taxes .......................... 781 1,782
Inventories ...................................... 195,936 209,882
Prepaid expenses ................................. 5,844 7,207
Deferred income taxes ............................ 10,068 10,511
---------- ----------
Total current assets ......................... 484,933 486,297
---------- ----------
Other assets:
Marketable equity securities ..................... 51,929 40,901
Receivable from affiliate ........................ 18,000 18,000
Investment in TiO2 manufacturing joint venture ... 131,259 130,009
Prepaid pension cost ............................. 17,424 17,572
Restricted marketable debt securities ............ 9,600 9,232
Other ............................................ 26,571 30,671
---------- ----------
Total other assets ........................... 254,783 246,385
---------- ----------
Property and equipment:
Land ............................................. 30,175 29,072
Buildings ........................................ 155,673 150,406
Machinery and equipment .......................... 655,720 640,297
Mining properties ................................ 81,813 84,778
Construction in progress ......................... 9,307 8,702
---------- ----------
932,688 913,255
Less accumulated depreciation and depletion ...... 547,746 534,436
---------- ----------
Net property and equipment ................... 384,942 378,819
---------- ----------
$1,124,658 $1,111,501
========== ==========
-3-
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY March 31, December 31,
2003 2002
----------- ------------
Current liabilities:
Current maturities of long-term debt ....... $ 1,238 $ 1,298
Accounts payable and accrued liabilities ... 137,049 167,574
Payable to affiliates ...................... 10,131 8,027
Accrued environmental costs ................ 50,439 51,307
Income taxes ............................... 5,773 6,624
Deferred income taxes ...................... 1,594 3,219
----------- -----------
Total current liabilities .............. 206,224 238,049
----------- -----------
Noncurrent liabilities:
Long-term debt ............................. 349,021 324,608
Deferred income taxes ...................... 149,416 143,518
Accrued environmental costs ................ 53,296 47,189
Accrued pension cost ....................... 43,094 43,757
Accrued postretirement benefits cost ....... 25,571 26,477
Other ...................................... 14,829 14,060
----------- -----------
Total noncurrent liabilities ........... 635,227 599,609
----------- -----------
Minority interest .............................. 8,551 8,516
----------- -----------
Shareholders' equity:
Common stock ............................... 8,355 8,355
Additional paid-in capital ................. 777,819 777,819
Retained earnings .......................... 101,445 101,554
Accumulated other comprehensive loss ....... (176,860) (186,221)
Treasury stock ............................. (436,103) (436,180)
----------- -----------
Total shareholders' equity ............. 274,656 265,327
----------- -----------
$ 1,124,658 $ 1,111,501
=========== ===========
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, 2003 and 2002
(In thousands, except per share data)
2003 2002
-------- --------
Revenues and other income:
Net sales ............................................ $252,973 $202,357
Other income, net .................................... 2,667 4,995
-------- --------
255,640 207,352
-------- --------
Costs and expenses:
Cost of sales ........................................ 188,417 156,253
Selling, general and administrative .................. 44,694 34,845
Interest ............................................. 7,985 6,535
-------- --------
241,096 197,633
-------- --------
Income before income taxes and minority interest . 14,544 9,719
Income tax expense ....................................... 5,090 3,151
-------- --------
Income before minority interest .................. 9,454 6,568
Minority interest ........................................ 24 184
-------- --------
Net income ........................................... $ 9,430 $ 6,384
======== ========
Basic and diluted net income per share ................... $ .20 $ .13
======== ========
Weighted average shares used in the calculation
of net income per share:
Basic .............................................. 47,693 48,870
Dilutive impact of stock options ................... 51 68
-------- --------
Diluted ............................................ 47,744 48,938
======== ========
See accompanying notes to consolidated financial statements.
- 5 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, 2003 and 2002
(In thousands)
2003 2002
-------- --------
Net income ......................................... $ 9,430 $ 6,384
-------- --------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment:
Unrealized holding gain (loss) arising
during the period ........................ 7,093 (1,523)
Less reclassification adjustment for
realized gain included in net income ..... (1,474) --
-------- --------
5,619 (1,523)
Currency translation adjustment ................ 3,742 (2,609)
-------- --------
Total other comprehensive income (loss) .... 9,361 (4,132)
-------- --------
Comprehensive income ................... $ 18,791 $ 2,252
======== ========
See accompanying notes to consolidated financial statements.
- 6 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three months ended March 31, 2003
(In thousands)
Accumulated other
comprehensive income (loss)
Additional --------------------------------------
Common paid-in Retained Currency Pension Marketable
stock capital earnings translation liabilities securities
--------- ---------- --------- ----------- ----------- ----------
Balance at December 31, 2002 ......... $ 8,355 $ 777,819 $ 101,554 $(170,670) $ (21,447) $ 5,896
Net income ........................... -- -- 9,430 -- -- --
Other comprehensive income, net of tax -- -- -- 3,742 -- 5,619
Dividends ............................ -- -- (9,539) -- -- --
Treasury stock - reissued ............ -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at March 31, 2003 ............ $ 8,355 $ 777,819 $ 101,445 $(166,928) $ (21,447) $ 11,515
========= ========= ========= ========= ========= =========
Treasury
stock Total
---------- ---------
Balance at December 31, 2002 ......... $(436,180) $ 265,327
Net income ........................... -- 9,430
Other comprehensive income, net of tax -- 9,361
Dividends ............................ -- (9,539)
Treasury stock - reissued ............ 77 77
--------- ---------
Balance at March 31, 2003 ............ $(436,103) $ 274,656
========= =========
See accompanying notes to consolidated financial statements.
- 7 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2003 and 2002
(In thousands)
2003 2002
-------- --------
Cash flows from operating activities:
Net income ............................................. $ 9,430 $ 6,384
Depreciation, depletion and amortization ............... 9,691 7,782
Deferred income taxes .................................. 1,630 687
Distributions from (contributions to) TiO2
manufacturing joint venture .......................... (1,250) 900
Other, net ............................................. (3,968) (578)
-------- --------
15,533 15,175
Change in assets and liabilities:
Accounts and notes receivable ...................... (31,545) (25,282)
Insurance receivable ............................... 2,247 10,909
Inventories ........................................ 18,702 43,049
Prepaid expenses ................................... 1,960 (845)
Accrued environmental costs ........................ 8,678 3,384
Accounts payable and accrued liabilities ........... (33,174) (36,161)
Income taxes ....................................... 339 (629)
Other, net ......................................... 3,569 3,196
-------- --------
Net cash (used) provided by operating activities (13,691) 12,796
-------- --------
Cash flows from investing activities:
Capital expenditures ................................... (6,503) (5,461)
Collection of loans to affiliates ...................... -- 250
Acquisition of business ................................ -- (9,149)
Change in restricted cash equivalents and
restricted marketable debt securities, net ........... 2,050 110
Other, net ............................................. 42 36
-------- --------
Net cash used by investing activities .............. (4,411) (14,214)
-------- --------
- 8 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 2003 and 2002
(In thousands)
2003 2002
--------- ---------
Cash flows from financing activities:
Dividends paid ...................................... $ (9,539) $ (9,764)
Treasury stock:
Purchased ....................................... -- (3,271)
Reissued ........................................ 77 140
Indebtedness:
Borrowings ...................................... 16,106 --
Principal payments .............................. (342) (25,263)
--------- ---------
Net cash provided (used) by financing activities .... 6,302 (38,158)
--------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities ... (11,800) (39,576)
Currency translation ............................ 422 (273)
Acquisition of business ......................... -- 196
--------- ---------
(11,378) (39,653)
Balance at beginning of period ...................... 58,091 116,037
--------- ---------
Balance at end of period ............................ $ 46,713 $ 76,384
========= =========
Supplemental disclosures - cash paid for:
Interest ............................................ $ 674 $ 1,976
Income taxes, net ................................... $ 3,121 $ 3,095
Acquisition of business:
Cash and cash equivalents ....................... $ -- $ 196
Restricted cash ................................. -- 2,685
Goodwill and other intangible assets ............ -- 9,007
Other noncash assets ............................ -- 1,259
Liabilities ..................................... -- (3,998)
--------- ---------
Cash paid ................................... $ -- $ 9,149
========= =========
See accompanying notes to consolidated financial statements
- 9 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
NL Industries, Inc. ("NL") conducts its titanium dioxide pigments
("TiO2") operations through its wholly owned subsidiary, Kronos, Inc. At March
31, 2003, Valhi, Inc., ("Valhi") and its subsidiaries held approximately 85% of
NL's outstanding common stock, and Contran Corporation ("Contran") and its
subsidiaries held approximately 90% of Valhi's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons, the Chairman of the
Board of each of Contran, Valhi and NL, may be deemed to control each of such
companies. See Notes 6 and 7.
The consolidated balance sheet of NL Industries, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2002 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 2003 and the consolidated statements of
income, comprehensive income, shareholders' equity and cash flows for the
interim periods ended March 31, 2003 and 2002 have been prepared by the Company
without audit. In the opinion of management all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows have been made. The
results of operations for the interim periods are not necessarily indicative of
the operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles in the U.S. ("GAAP") have been condensed or omitted. Certain
prior-year amounts have been reclassified to conform to the current year
presentation. The accompanying consolidated financial statements should be read
in conjunction with the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002 (the
"2002 Annual Report").
The Company has elected the disclosure alternative prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," and to account for its
stock-based employee compensation related to stock options in accordance with
Accounting Principles Board Opinion ("APBO") No. 25, "Accounting for Stock
Issued to Employees," and its various interpretations. Under APBO No. 25, no
compensation cost is generally recognized for fixed stock options in which the
exercise price is not less than the market price on the grant date. During the
fourth quarter of 2002, following the cash settlement of certain stock options
held by employees of the Company, the Company commenced accounting for its
remaining stock options using the variable accounting method, which requires the
intrinsic value of all unexercised stock options (including those with an
exercise price at least equal to the market price on the date of grant) to be
accrued as an expense, with subsequent increases (decreases) in the Company's
market price resulting in additional compensation expense (income). Net
compensation income recognized by the Company in accordance with APBO No. 25 in
the first quarter of 2003 was $.5 million and net compensation cost recognized
by the Company in the first quarter of 2002 was nil.
-10-
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation.
Three months ended March 31,
----------------------------
2003 2002
--------- ---------
(In thousands, except per
share amounts)
Net income - as reported ........................... $ 9,430 $ 6,384
Deduct: Stock-based compensation income, net of
tax, included in reported net income ............. (339) --
Deduct: Stock-based compensation cost, net of
tax, determined under fair value based
method for all awards ............................ (120) (271)
--------- ---------
Net income - pro forma ............................. $ 8,971 $ 6,113
========= =========
Net income per basic common share:
As reported .................................... $ .20 $ .13
Pro forma ...................................... $ .19 $ .13
Net income per diluted common share:
As reported .................................... $ .20 $ .13
Pro forma ...................................... $ .19 $ .12
The Company adopted SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective January 1, 2003. Under SFAS No. 143, the fair value of a
liability for an asset retirement obligation covered under the scope of SFAS No.
143 is recognized in the period in which the liability is incurred, with an
offsetting increase in the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its future value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity would either settle the obligation for its recorded amount
or incur a gain or loss upon settlement.
Under the transition provisions of SFAS No. 143, at the date of adoption
on January 1, 2003 the Company recognized (i) an asset retirement cost
capitalized as an increase to the carrying value of its property, plant and
equipment, (ii) accumulated depreciation on such capitalized cost and (iii) a
liability for the asset retirement obligation. Amounts resulting from the
initial application of SFAS No. 143 were measured using information, assumptions
and interest rates all as of January 1, 2003. The amount recognized as the asset
retirement cost was measured as of the date the asset retirement obligation was
incurred. Cumulative accretion on the asset retirement obligation, and
accumulated depreciation on the asset retirement cost, were recognized for the
time period from the date the asset retirement cost and liability would have
been recognized had the provisions of SFAS No. 143 been in effect at the date
the liability was incurred, through January 1, 2003. The difference between the
amounts recognized as described above and the associated amounts recognized in
the Company's balance sheet as of December 31, 2002 was recognized as a
cumulative effect of change in accounting principle as of January 1, 2003. The
effect of adopting SFAS No. 143 as of January 1, 2003, as summarized in the
table below, did not have a material effect on the Company's consolidated
financial position, results of operations or liquidity, and is not separately
recognized in the accompanying statement of income.
-11-
Amount
------------
(In millions)
Increase in carrying value of net property,
plant and equipment:
Cost ................................................................ $ .4
Accumulated depreciation ............................................ (.1)
Decrease in liabilities previously accrued
for closure and post closure activities ............................ .3
Asset retirement obligation recognized .................................. (.6)
----
Net impact ...................................................... $ --
====
At March 31, 2003, the asset retirement obligation was approximately $.6
million and was included in other noncurrent liabilities. Accretion expense on
the asset retirement obligation during the first quarter of 2003, included in
cost of sales, was not material. If the Company had adopted SFAS No. 143 as of
January 1, 2002, the asset retirement obligation would have been approximately
$.5 million at each of January 1, 2002 and March 31, 2002, and the effect on the
Company's reported net income for the three months ended March 31, 2002 would
not have been material.
Note 2 - Earnings per share:
Basic earnings per share is based on the weighted average number of
common shares outstanding during each period. Diluted earnings per share is
based on the weighted average number of common shares outstanding and the
dilutive impact of outstanding stock options.
Note 3 - Business segment information:
The Company's operations are conducted by Kronos in one operating
business segment - the production and sale of TiO2.
Three months ended
March 31,
----------------------
2003 2002
--------- ---------
(In thousands)
Net sales ............................................... $ 252,973 $ 202,357
Other income (expense), excluding corporate ............. (893) 783
--------- ---------
252,080 203,140
Cost of sales ........................................... 188,417 156,253
Selling, general and administrative, excluding corporate 29,379 24,728
--------- ---------
Operating income ................................ 34,284 22,159
General corporate income (expense):
Securities earnings, net ............................ 3,182 1,280
Litigation settlement gains, net and other income .. 378 2,932
Corporate expenses .................................. (15,315) (10,117)
Interest expense .................................... (7,985) (6,535)
--------- ---------
Income before income taxes and minority interest $ 14,544 $ 9,719
========= =========
-12-
Note 4 - Accounts and notes receivable:
March 31, December 31,
2003 2002
--------- ------------
(In thousands)
Trade receivables .............................. $ 161,431 $ 124,044
Insurance claims receivable .................... 311 2,558
Recoverable VAT and other receivables .......... 9,561 12,861
Allowance for doubtful accounts ................ (2,690) (2,605)
--------- ---------
$ 168,613 $ 136,858
========= =========
Note 5 - Inventories:
March 31, December 31,
2003 2002
-------- ------------
(In thousands)
Raw materials ............................ $ 34,046 $ 54,077
Work in process .......................... 18,136 15,936
Finished products ........................ 112,786 109,203
Supplies ................................. 30,968 30,666
-------- --------
$195,936 $209,882
======== ========
Note 6 - Marketable equity securities:
March 31, December 31,
2003 2002
--------- ------------
(In thousands)
Available-for-sale marketable equity securities:
Valhi .............................................. $51,801 $ 9,845
Tremont Group ...................................... -- 30,634
Tremont ............................................ -- 243
Other .............................................. 128 179
------- -------
Aggregate fair value ........................... $51,929 $40,901
======= =======
In February 2003 Valhi completed a series of merger transactions
pursuant to which, among other things, Tremont Group, Inc. ("Tremont Group") and
Tremont Corporation ("Tremont") both became wholly owned subsidiaries of Valhi.
Under these merger transactions, (i) Valhi issued 3.5 million shares of its
common stock to the Company in return for the Company's 20% ownership interest
in Tremont Group and (ii) Valhi issued 3.4 shares of its common stock (plus cash
in lieu of fractional shares) to all Tremont stockholders (other than Valhi and
Tremont Group) in exchange for each share of Tremont common stock held by such
stockholders. The Company received approximately 27,770 shares of Valhi common
stock in the second transaction. The number of shares of Valhi common stock
issued to the Company in exchange for the Company's 20% ownership interest in
Tremont Group was equal to the Company's 20% pro-rata interest in the shares of
Tremont common stock held by Tremont Group, adjusted for the same 3.4 exchange
ratio. The Valhi common stock owned by the Company is restricted under SEC Rule
144. The Company reported a pre-tax securities transaction gain of approximately
-13-
$2.3 million in the first quarter of 2003 which represented the difference
between the market value of the shares of Valhi received and the cost basis of
the Tremont Group and Tremont shares exchanged. Following these transactions,
the Company owns approximately 4.7 million shares of Valhi's outstanding common
stock (approximately 4% of Valhi's outstanding shares). The Company will
continue to account for its shares of Valhi common stock as available-for-sale
marketable equity securities carried at fair value (based on quoted market
prices). The shares of Valhi common stock cannot be voted by the Company under
Delaware Corporation Law, but the Company does receive dividends from Valhi on
these shares, when declared. For financial reporting purposes, Valhi reports its
proportional interest in these shares as treasury stock.
Note 7 - Receivable from affiliates:
In May 2001 a wholly owned subsidiary of the Company's majority-owned
environmental management subsidiary, NL Environmental Management Services, Inc.
("EMS") loaned $20.0 million to the Harold C. Simmons Family Trust No. 2 (the
"Family Trust"), one of the trusts described in Note 1, under a $25.0 million
revolving credit agreement. The loan was approved by special committees of the
Company's and EMS's Boards of Directors. The loan bears interest at prime (4.25%
at March 31, 2003), is due on demand with 60 days notice and is collateralized
by 13,749 shares, or approximately 35%, of Contran's outstanding Class A voting
common stock and 5,000 shares, or 100%, of Contran's Series E Cumulative
preferred stock, both of which are owned by the Family Trust. The value of the
collateral is dependent, in part, on the value of the Company as Contran's
interest in the Company, through its beneficial ownership of Valhi, is one of
Contran's more substantial assets. At March 31, 2003, the outstanding loan
balance was $18.0 million and $7.0 million was available for additional
borrowing by the Family Trust. The loan was classified as noncurrent at March
31, 2003, as the Company does not expect to demand repayment within one year.
Note 8 - Other noncurrent assets:
March 31, December 31,
2003 2002
--------- ------------
(In thousands)
Deferred financing costs, net .................... $10,338 $10,550
Goodwill ......................................... 6,406 6,406
Unrecognized net pension obligations ............. 5,561 5,561
Intangible asset, net ............................ 2,168 2,230
Restricted cash equivalents ...................... -- 1,344
Other ............................................ 2,098 4,580
------- -------
$26,571 $30,671
======= =======
-14-
Note 9 - Accounts payable and accrued liabilities:
March 31, December 31,
2003 2002
-------- ------------
(In thousands)
Accounts payable ......................... $ 61,792 $ 97,140
-------- --------
Accrued liabilities:
Employee benefits .................... 31,024 34,349
Interest ............................. 7,057 240
Deferred income ...................... -- 333
Other ................................ 37,176 35,512
-------- --------
75,257 70,434
-------- --------
$137,049 $167,574
======== ========
Note 10 - Other noncurrent liabilities:
March 31, December 31,
2003 2002
-------- ------------
(In thousands)
Insurance claims and expenses .................. $ 7,876 $ 7,674
Employee benefits .............................. 4,131 4,025
Other .......................................... 2,822 2,361
------- -------
$14,829 $14,060
======= =======
Note 11 - Long-term debt:
March 31, December 31,
2003 2002
--------- ------------
(In thousands)
8.875% Senior Secured Notes, (euro)285 million
principal amount ................................. $305,691 $296,942
Revolving credit facility .......................... 43,098 27,077
Other .............................................. 1,470 1,887
-------- --------
350,259 325,906
Less current maturities ............................ 1,238 1,298
-------- --------
$349,021 $324,608
======== ========
In March 2003 the Company borrowed (euro)15.0 million ($16.1 million
when borrowed) under the revolving credit facility. In April 2003 the Company
repaid NOK 80 million (approximately $11 million when repaid) under the
revolving credit facility.
-15-
Note 12 - Income taxes:
The difference between the provision for income tax expense attributable
to income before income taxes and minority interest and the amount that would be
expected using the U.S. federal statutory income tax rate of 35% is presented
below.
Three months ended
March 31,
------------------
2003 2002
------- -------
(In thousands)
Expected tax expense ..................................... $ 5,090 $ 3,402
Non-U.S. tax rates ....................................... (382) (346)
Incremental tax on income of companies not included
in NL's consolidated U.S. federal income tax return .... 915 130
Valuation allowance ...................................... (727) (67)
U.S. state income taxes .................................. 65 (17)
Other, net ............................................... 129 49
------- -------
Income tax expense ............................... $ 5,090 $ 3,151
======= =======
Note 13 - Other income, net:
Three months ended
March 31,
----------------------
2003 2002
------- -------
(In thousands)
Securities earnings:
Interest and dividends ....................... $ 948 $ 1,280
Securities gains, net (see Note 6) ........... 2,234 --
------- -------
3,182 1,280
Currency transactions, net ....................... (1,098) 598
Noncompete agreement income ...................... 333 1,000
Disposition of property and equipment ............ (61) (46)
Trade interest income ............................ 163 222
Litigation settlement gains, net ................. -- 1,920
Other, net ....................................... 148 21
------- -------
$ 2,667 $ 4,995
======= =======
The Company received a $20 million fee as part of the sale of Rheox in
January 1998 in payment for entering into a five-year covenant not to compete in
the rheological products business. The Company amortized the fee to income using
the straight-line method over the five-year noncompete period beginning January
30, 1998. The agreement became fully amortized in January 2003.
In the first quarter of 2002, the Company recognized litigation
settlement gains with former insurance carrier groups of $1.9 million to settle
certain insurance coverage claims related to environmental remediation. No
further material settlements relating to litigation concerning environmental
remediation coverage are expected.
-16-
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 2002
Annual Report.
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended %
March 31, Change
------------------ ------
2003 2002
------ ------
(In millions, except percentages
and metric tons)
Net sales and operating income
Net sales .................................... $253.0 $202.4 +25%
Operating income ............................. $ 34.3 $ 22.2 +55%
Operating income margin percentage ........... 14% 11%
TiO2 operating statistics
Percent change in average selling price (in
billing currencies) ........................ +6%
Sales volume (metric tons in thousands) ...... 118 112 +5%
Production volume (metric tons in thousands) . 117 106 +11%
Kronos' operating income in the first quarter of 2003 increased $12.1
million or 55% from the first quarter of 2002 primarily due to higher average
selling prices and higher sales and production volumes, partially offset by
higher operating costs, particularly energy costs. Compared with the fourth
quarter of 2002, operating income in the first quarter of 2003 increased $14.2
million, or 71%, primarily due to higher sales and production volumes, higher
average selling prices and lower operating costs.
Kronos' average selling price in billing currencies (which excludes the
effects of foreign currency translation) during the first quarter of 2003 was 6%
higher than the first quarter of 2002 and was 1% higher than the fourth quarter
of 2002. Compared with the fourth quarter of 2002, selling prices in billing
currencies increased in all major markets. The average selling price in billing
currencies in March 2003 was comparable to the average selling price for the
first quarter of 2003. The Company expects higher average selling prices in
billing currencies for full-year 2003 compared to full-year 2002. The Company
discloses percentage changes in its average TiO2 selling prices in billing
currencies (which excludes the effects of foreign currency translation), so that
such changes can be analyzed without the impact of changes in foreign currency
exchange rates, thereby facilitating period-to-period comparisons. Generally,
when the U.S. dollar 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. When translated from
billing currencies to U.S. dollars using currency exchange rates prevailing
during the respective periods, Kronos' first-quarter 2003 average selling price
in U.S. dollars was 18% higher than in the first quarter of 2002 and 6% higher
than the fourth quarter of 2002.
First quarter 2003 sales volume of 118,000 metric tons was a record
first quarter for Kronos and increased 5% from the first quarter of 2002 and
increased 16% from the fourth quarter of 2002. Compared to the fourth quarter of
2002, sales volume increased in all major markets with each region up at least
10%. Kronos anticipates its sales volume for full year 2003 will be slightly
higher than full year 2002. Finished goods inventory levels at the end of the
first quarter decreased 2% from December 2002 levels and represented under two
months of sales.
First quarter 2003 production volume of 117,000 metric tons was an
all-time quarterly record for Kronos and was 11% higher than the first quarter
of 2002 and increased 9% from the fourth quarter of 2002 with operating rates
near full capacity in the first quarter of 2003 compared with 96% of capacity in
the first quarter of 2002. Increased production volume in the first quarter of
-18-
2003 compared with fourth quarter 2002 was primarily due to maintenance stops in
the fourth quarter. Kronos anticipates its production volume for full year 2003
will be higher than full year 2002.
The Company currently expects TiO2 industry demand in 2003 to increase
slightly over 2002 levels. Kronos' TiO2 production volume in 2003 is expected to
approximate Kronos' 2003 TiO2 sales volume. In December 2002 and January 2003,
Kronos announced additional price increases in Europe and North America which
averaged approximately 8% in Europe and approximately 7% in North America.
Kronos is hopeful that it will realize additional price increases during the
remainder of 2003, but the extent to which Kronos can realize price increases
will depend on market conditions and global economic recovery. Overall, the
Company expects its TiO2 operating income in 2003 will be higher than 2002,
primarily due to higher average TiO2 selling prices and higher sales and
production volumes. The Company's expectations as to the future prospects of the
Company and the TiO2 industry are based upon a number of factors beyond the
Company's control, including worldwide growth of gross domestic product,
competition in the marketplace, unexpected or earlier-than-expected capacity
additions and technological advances. If actual developments differ from the
Company's expectations, the Company's results of operations could be unfavorably
affected.
Compared to the year-earlier period, cost of sales as a percentage of
net sales decreased in the first quarter of 2003 primarily due to higher average
selling prices in billing currencies and higher production volume, partially
offset by higher energy costs. Excluding the effects of foreign currency
translation, which increased the Company's expenses in the first quarter of 2003
compared to year-earlier period, the Company's selling, general and
administrative expenses, excluding corporate expenses, in the first quarter of
2003 were slightly higher than the first quarter of 2002.
A significant amount of Kronos' sales and operating costs are
denominated in currencies other than the U.S. dollar. Fluctuations in the value
of the U.S. dollar relative to other currencies, primarily a weaker U.S. dollar
compared to the euro in the first quarter of 2003 versus the year-earlier
period, increased the dollar value of sales in the first quarter of 2003 by a
net $26.6 million when compared to the year-earlier period. The effect of the
weaker U.S. dollar on Kronos' operating costs that are not denominated in U.S.
dollars increased operating costs in the first quarter of 2003 compared to the
year-earlier period. In addition, sales to export markets are typically
denominated in U.S. dollars and a weaker U.S. dollar decreases margins on these
sales at the Company's non-U.S. subsidiaries. The unfavorable margin on export
sales tends to offset the favorable effect of translating local currency profits
to U.S. dollars when the dollar is weaker. As a result, the net impact of
currency exchange rate fluctuations was not significant in the first quarter of
2003 when compared to the first quarter of 2002.
-19-
General corporate
The following table sets forth certain information regarding general
corporate income (expense).
Three months ended
March 31, Difference
----------------------- ----------
2003 2002
-------- --------
(In millions)
Securities earnings ............ $ 3.1 $ 1.3 $ 1.8
Corporate income ............... .4 2.9 (2.5)
Corporate expense .............. (15.3) (10.1) (5.2)
Interest expense ............... (8.0) (6.5) (1.5)
------- ------- ------
$ (19.8) $ (12.4) $ (7.4)
======= ======= ======
Securities earnings for the first quarter of 2003 included a $2.3
million noncash securities transaction gain related to the exchange of the
Company's holdings of Tremont Corporation common stock for shares of Valhi, Inc.
common stock as a result of a series of merger transactions Valhi completed in
February 2003. See Note 6 to the Consolidated Financial Statements. In addition,
interest income was lower in the first quarter of 2003 as compared with first
quarter 2002 due to lower levels of available funds invested and lower average
yields. The Company expects interest income to be lower for full-year 2003 than
full-year 2002 due to lower average yields and lower average levels of funds
available for investment.
Corporate income for the first quarter of 2003 and 2002 included $.3
million and $1.0 million, respectively, of fee income related to a covenant not
to compete agreement related to the sale of Rheox in 1998. The agreement became
fully amortized in January 2003. See Note 13 to the Consolidated Financial
Statements. Corporate income for the first quarter of 2002 also included a $1.9
million litigation settlement gain with former insurance carrier groups.
Corporate expense for the first quarter of 2003 was $15.3 million, an
increase of $5.2 million compared with the first quarter of 2002 primarily due
to higher environmental expenses related to remediation of formerly owned
business units. Compared to the fourth quarter of 2002, corporate expense in the
first quarter of 2003 increased $5.6 million primarily due to higher
environmental expenses partially offset by lower legal and stock option
compensation expenses. Corporate expenses are expected to be higher for
full-year 2003 as compared to full-year 2002 due to higher environmental
expenses and higher legal expenses associated with the defense of lead pigment
litigation, including two trials scheduled for 2003.
Interest expense in the first quarter of 2003 was $8.0 million, an
increase of $1.5 million from the first quarter of 2002 primarily due to higher
levels of outstanding debt and associated currency effects, partially offset by
lower interest rates. Assuming no significant change in interest rates, interest
expense for full-year 2003 is expected to be higher than full-year 2002 due to
higher levels of outstanding indebtedness, partially offset by lower average
interest rates.
-20-
Provision for income taxes
The Company reduced its deferred income tax valuation allowance by $.7
million in the first quarter of 2003 and $.1 million in the first quarter of
2002 primarily as a result of utilization of certain tax attributes for which
the benefit had not been previously recognized under the "more-likely-than-not"
recognition criteria.
Other
Minority interest in the first quarter of 2002 primarily related to EMS.
Recently adopted accounting principles
As described in Note 1 in the Consolidated Financial Statements, the
Company adopted Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations," effective January 1, 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows from operating, investing and
financing activities for the three months ended March 31, 2003 and 2002 are
presented below.
Three months ended
March 31,
------------------
2003 2002
------ ------
(In millions)
Net cash provided (used) by:
Operating activities:
Before changes in assets and liabilities ......... $ 15.5 $ 15.2
Changes in assets and liabilities ................ (29.2) (2.4)
------ ------
(13.7) 12.8
Investing activities ................................. (4.4) (14.2)
Financing activities ................................. 6.3 (38.2)
------ ------
Net cash used by operating, investing,
and financing activities ......................... $(11.8) $(39.6)
====== ======
Operating activities
The TiO2 industry is cyclical and changes in economic conditions within
the industry significantly affect the earnings and operating cash flows of the
Company. Cash flows from operations is the primary source of liquidity for the
Company. Changes in TiO2 pricing, production volume and customer demand, among
other things, could significantly affect the liquidity of the Company. Cash flow
from operations, before changes in assets and liabilities, increased slightly in
the first three months of 2003 from the comparable period in 2002 primarily due
to $12.1 million of higher operating income partially offset by $5.2 million of
higher corporate expenses, $2.5 million of lower corporate income and $2.2
million of lower net distributions from the Company's investment in its TiO2
manufacturing joint venture. The net cash used to fund changes in the Company's
inventories, receivables and payables (excluding the effect of currency
translation) in the first three months of 2003 was significantly higher than the
-21-
first three months of 2002 with higher inventory balances (net of raw material
accruals), insurance proceeds collected in first quarter 2002 and decreases in
accounts payable and accrued liabilities in the first three months of 2003.
Inventories and accounts payable were affected by certain non-cash accruals for
certain titanium ore contracts of $4.9 million and $31.6 million at December 31,
2002 and 2001, respectively. These non-cash accruals were reversed as raw
materials were received under the contracts in the amounts of $4.9 million and
$25.8 million in first quarters 2003 and 2002, respectively.
Investing activities
The Company's capital expenditures were $6.5 million and $5.5 million in
the first three months of 2003 and 2002, respectively. Capital expenditures in
first quarter 2002 included approximately $1.2 million related to reconstruction
of the Company's Leverkusen, Germany sulfate plant damaged in the March 2001
fire.
In January 2002, the Company acquired all of the stock and limited
liability company units of EWI RE, Inc. and EWI RE, Ltd. (collectively "EWI"),
respectively, for an aggregate of $9.2 million in cash, including capitalized
acquisition costs of $.2 million.
Financing activities
In March 2003 the Company borrowed (euro)15.0 million ($16.1 million
when borrowed) under the European Credit Facility. In April 2003 the Company
repaid NOK 80 million (approximately $11 million when repaid) under the European
Credit Facility.
In the first quarter of 2003, the Company paid a regular quarterly
dividend to shareholders of $.20 per share, aggregating $9.5 million.
In the first quarters of 2003 and 2002, the Company repurchased nil and
$3.3 million of treasury stock pursuant to its share repurchase program. The
Company is authorized to repurchase approximately 1.3 million additional shares
at May 9, 2003. The shares may be purchased over an unspecified period of time
and, depending on market conditions, applicable legal requirements, available
cash and other factors, the share repurchase program may be suspended at any
time and could be terminated prior to completion. The repurchased shares are to
be held as treasury shares available for general corporate purposes.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability
At March 31, 2003, the Company had cash and cash equivalents aggregating
$47 million ($22 million held by non-U.S. subsidiaries) and an additional $66
million of restricted cash equivalents and restricted marketable debt securities
held by the Company, of which $10 million was classified as a noncurrent asset.
At March 31, 2003, certain of the Company's subsidiaries had $83 million
available for borrowing with approximately $43 million available under non-U.S.
credit facilities (including $41 million under the European Credit Facility) and
approximately $40 million under the U.S. Credit Facility. At March 31, 2003, the
Company had complied with all financial covenants governing its debt agreements.
-22-
Income tax contingencies
Certain of the Company's tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies, including penalties and interest.
The Company's and EMS' 1998 U.S. federal income tax returns are being
examined by the U.S. Internal Revenue Service ("IRS") and the Company and EMS
have each granted extensions of the statute of limitations for assessment of tax
with respect to their 1998 and 1999 income tax returns until September 30, 2004.
Based upon the course of the examination, the Company anticipated that the IRS
would propose a substantial tax deficiency, including penalties and interest,
related to a restructuring transaction. In an effort to avoid protracted
litigation and minimize the hazards of such litigation, the Company applied to
take part in an IRS settlement initiative applicable to transactions similar to
the restructuring transaction, and in April 2003 the Company received
notification from the IRS that it had been accepted into the settlement
initiative. Under the initiative, no penalties will be assessed and final
settlement with the IRS is to be reached through negotiation and, if necessary,
through a specified arbitration procedure. The Company anticipates that
settlement of the matter will likely occur in 2004, resulting in payments of
federal and state tax and interest ranging from $33 million to $45 million.
Additional payments in later years may be required as part of the settlement.
The Company has provided adequate accruals to cover the currently expected range
of settlement outcomes.
The Company has received preliminary tax assessments for the years 1991
to 1997 from the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately (euro)10.4 million ($11.2 million at March
31, 2003). The Company has filed protests to the assessments for the years 1991
to 1997. The Company is in discussions with the Belgian tax authorities and
believes that a significant portion of the assessments is without merit. In
April 2003 the Company received a notification from the Belgian tax authorities
of their intent to assess a tax deficiency related to 1999. The anticipated
assessment, including interest, is expected to approximate (euro)12 million
($12.9 million at March 31, 2003). The Company believes the proposed assessment
related to 1999 is without merit and in April 2003 filed a written response in
opposition to the notification of intent to assess.
In 2002, the Company received a notification from the Norwegian tax
authorities of their intent to assess tax deficiencies of approximately NOK 12.2
million ($1.7 million at March 31, 2003) relating to 1998 through 2000. The
Company has objected to this proposed assessment in a written response to the
Norwegian tax authorities.
In the first quarter of 2003, the Company was notified by the German
Federal Fiscal Court (the "Court") that the Court had ruled in the Company's
favor concerning a claim for refund suit in which the Company sought refunds of
prior taxes paid during the periods 1990 through 1997. The Company expects to
file amended German tax returns claiming such tax refunds for all years affected
by the Court's decision, which is expected to result in a net refund of taxes
and interest of approximately $30 million. As of March 31, 2003, the Company has
not reflected this tax refund in its consolidated financial statements and
expects to reflect the refund in its consolidated financial statements once
certain procedural requirements are satisfied, including a review of the amended
German tax returns by the German tax authorities.
No assurance can be given that the Company's tax matters will be
favorably resolved due to the inherent uncertainties involved in court and tax
proceedings. The Company believes that it has provided adequate accruals for
-23-
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
At March 31, 2003 the Company had the equivalent of approximately $451
million of income tax loss carryforwards in Germany with no expiration date.
However, the Company has provided a deferred tax valuation allowance against
substantially all of these income tax loss carryforwards because the Company
currently believes they do not meet the "more-likely-than-not" recognition
criteria. In 2002, the German federal government proposed certain changes to its
income tax law, including certain changes that would have imposed limitations on
the annual utilization of income tax loss carryforwards. Such proposal, if
enacted, would have significantly affected the Company's 2003 and future income
tax expense and cash tax payments. In April 2003 the German federal government
passed a new tax law which does not contain the provision that would have
restricted the utilization of tax loss carryforwards. Furthermore, the
provisions contained in the new law are not expected to materially impact the
Company's income tax expense or cash tax payments.
At March 31, 2003, the Company had net deferred tax liabilities of $141
million. The Company operates in numerous tax jurisdictions, in certain of which
it has temporary differences that net to deferred tax assets (before valuation
allowance). The Company has provided a deferred tax valuation allowance of $188
million at March 31, 2003, principally related to Germany, partially offsetting
deferred tax assets which the Company believes do not currently meet the
"more-likely-than-not" recognition criteria.
Environmental matters and litigation
The Company has been named as a defendant, potentially responsible party
("PRP"), or both, in a number of legal proceedings associated with environmental
matters, including waste disposal sites, mining locations and facilities
currently or previously owned, operated or used by the Company, certain of which
are on the U.S. Environmental Protection Agency's (the "U.S. EPA") Superfund
National Priorities List or similar state lists. On a quarterly basis, the
Company evaluates the potential range of its liability at sites where it has
been named as a PRP or defendant, including sites for which EMS has
contractually assumed the Company's obligation. The Company believes it has
adequate accruals ($104 million at March 31, 2003) 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, the
allocations of such costs among PRPs, and the financial viability of other 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 $145 million. The Company's
estimates of such liabilities have not been discounted to present value. No
assurance can be given that actual costs will not exceed either accrued amounts
or the upper end of the range for sites for which estimates have been made, and
no assurance can be given that costs will not be incurred with respect to sites
as to which no estimate presently can be made. The imposition of more stringent
standards or requirements under environmental laws or regulations, new
developments or changes with respect to site cleanup costs, or the allocation of
such costs among PRPs, or a determination that the Company is potentially
responsible for the release of hazardous substances at other sites, could result
in expenditures in excess of amounts currently estimated by the Company to be
required for such matters. Furthermore, there can be no assurance that
additional environmental matters will not arise in the future.
At March 31, 2003, the Company had approximately $57 million in cash,
cash equivalents and restricted marketable debt securities held by certain
special purpose trusts, the assets of which can only be used to pay for certain
-24-
of the Company's future environmental remediation and other environmental
expenditures.
Lead pigment litigation
The Company is also a defendant in a number of legal proceedings seeking
damages for personal injury and property damage arising out of the sale of lead
pigments and lead-based paints. There is no assurance that the Company will not
incur future liability in respect of this pending litigation in view of the
inherent uncertainties involved in court and jury rulings in pending and
possible future cases. However, based on, among other things, the results of
such litigation to date, the Company believes that the pending lead pigment and
paint litigation is without merit. The Company has not accrued any amounts for
such pending litigation. Liability that may result, if any, cannot reasonably be
estimated. In addition, various legislation and administrative regulations have,
from time to time, been enacted or proposed that seek to (a) impose various
obligations on present and former manufacturers of lead pigment and lead-based
paint with respect to asserted health concerns associated with the use of such
products and (b) effectively overturn the precedent set by court decisions in
which the Company and other pigment manufacturers have been successful. Examples
of such proposed legislation include bills which would permit civil liability
for damages on the basis of market share, rather than requiring plaintiffs to
prove that the defendant's product caused the alleged damage, and bills which
would revive actions barred by the statute of limitations. The Company currently
believes the disposition of all claims and disputes, individually and in the
aggregate, should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity. The Company
expects that additional lead pigment and lead-based litigation may be filed
against the Company in the future asserting similar or different legal theories
and seeking similar or different types of damages and relief. See Item 1 -
"Legal Proceedings."
Other
The Company periodically evaluates its liquidity requirements,
alternative uses of capital, capital needs and availability of resources in view
of, among other things, its dividend policy, its debt service and capital
expenditure requirements and estimated future operating cash flows. As a result
of this process, the Company in the past has sought, and in the future may seek,
to reduce, refinance, repurchase or restructure indebtedness; raise additional
capital; repurchase shares of its common stock; modify its dividend policy;
restructure ownership interests; sell interests in subsidiaries or other assets;
or take a combination of such steps or other steps to manage its liquidity and
capital resources. In the normal course of its business, the Company may review
opportunities for the acquisition, divestiture, joint venture or other business
combinations in the chemicals or other industries, as well as the acquisition of
interests in, and loans to, related companies. In the event of any acquisition
or joint venture transaction, the Company may consider using available cash,
issuing equity securities or increasing its indebtedness to the extent permitted
by the agreements governing the Company's existing debt.
Special note regarding forward-looking statements
The statements contained in this Report on Form 10-Q ("Quarterly
Report") which are not historical facts, including, but not limited to,
statements found under the captions "Results of Operations" and "Liquidity and
Capital Resources" above, are forward-looking statements that represent
management's beliefs and assumptions based on currently available information.
-25-
Forward-looking statements can be identified by the use of words such as
"believes," "intends," "may," "will," "should," "could," "anticipates,"
"expects," or comparable terminology or by discussions of strategy or trends.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it cannot give any assurances that
these expectations will prove to be correct. Such statements by their nature
involve risks and uncertainties, including, but not limited to, the cyclicality
of the titanium dioxide industry, global economic and political conditions,
global productive capacity, customer inventory levels, changes in product
pricing, changes in product costing, changes in foreign currency exchange rates,
competitive technology positions, operating interruptions (including, but not
limited to, labor disputes, leaks, fires, explosions, unscheduled downtime,
transportation interruptions, war and terrorist activities), the ultimate
resolution of pending or possible future lead pigment litigation and legislative
developments related to the lead paint litigation, the outcome of other
litigation and tax controversies, and other risks and uncertainties included in
this Quarterly Report and in the 2002 Annual Report, and the uncertainties set
forth from time to time in the Company's filings with the Securities and
Exchange Commission. Should one or more of these risks materialize (or the
consequences of such a development worsen), or should the underlying assumptions
prove incorrect, actual results could differ materially from those forecasted or
expected. The Company disclaims any intention or obligation to update publicly
or revise such statements whether as a result of new information, future events
or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's market risks, refer to the caption
"Quantitative and Qualitative Disclosures About Market Risk" in the 2002 Annual
Report. There have been no material changes to the information provided that
would require additional information with respect to the quarter ended March 31,
2003.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures.
The term "disclosure controls and procedures," as defined by regulations of the
Securities and Exchange Commission ("SEC"), means controls and other procedures
that are designed to ensure that information required to be disclosed in the
reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, as appropriate
to allow timely decisions to be made regarding required disclosure. Each of J.
Landis Martin, the Company's Chief Executive Officer, and Robert D. Hardy, the
Company's Chief Financial Officer, have evaluated the Company's disclosure
controls and procedures as of a date within 90 days of the filing date of this
Form 10-Q. 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.
-26-
The Company also maintains a system of internal controls. The term
"internal controls," as defined by the American Institute of Certified Public
Accountants' Codification of Statement on Auditing Standards, AU Section 319,
means controls and other procedures designed to provide reasonable assurance
regarding the achievement of objectives in the reliability of the Company's
financial reporting, the effectiveness and efficiency of the Company's
operations and the Company's compliance with applicable laws and regulations.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date of their last evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
-27-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the 2002 Annual Report for descriptions of
certain previously reported legal proceedings.
State of Rhode Island v. Lead Industries Association, et al. (Superior
Court of Rhode Island, No. 99-5226). In March 2003 the court denied motions by
plaintiffs and defendants for judgment notwithstanding the previously-described
mistrial in this case in October 2002. A hearing to determine the scope and
timing of a new trial is scheduled for May 2003.
City of Milwaukee v. NL Industries, Inc. and Mautz Paint (Circuit Court,
Civil Division, Milwaukee County, Wisconsin, Case No. 01CV0030066). In April
2003 defendants filed a motion for summary judgment in this previously-described
case. The court has not yet ruled on the motion. The case is scheduled for trial
in October 2003.
Smith, et al. v. Lead Industries Association, et al. (Circuit Court for
Baltimore City, Maryland, Case No. 24-C-99-004490). In April, 2003, the court of
appeals denied defendants' motion to dismiss plaintiffs' appeal as
interlocutory, allowing the appeal in this previously-described case to proceed
on behalf of the four plaintiff families.
Quitman County School District v. Lead Industries Association, et al.
(Circuit Court of Quitman County, Mississippi, Case No. 2001-0106). In April
2003 the court denied defendants' motion for summary judgment in this
previously-described case.
Russell v. NL Industries, Inc., et al. (Circuit Court of LeFlore County,
Mississippi, Civil Action No. 2002-0235-CICI). In April 2003 the Company was
served with the complaint in this previously-described case. The case has been
removed to federal court.
Jones v. NL Industries, Inc., et al. (Circuit Court of LeFlore County,
Mississippi, Civil Action No. 2002-0241-CICI). In April 2003 the Company was
served with the complaint in this previously-described case. The case has been
removed to federal court.
Stewart v. NL Industries, Inc., et al. (Circuit Court of LeFlore County,
Mississippi, Civil Action No. 2002-0266-CICI). In March, 2003 plaintiff
requested court approval to dismiss this previously-described case voluntarily.
The Company expects that additional lead pigment and lead-based paint
litigation may be filed against the Company in the future asserting similar or
different legal theories and seeking similar or different types of damages and
relief.
Herd v. ASARCO, et al. (District Court in and for Ottawa County,
Oklahoma, Case No. CJ-2001-443). Plaintiffs have moved that the claims in this
previously-described case, involving alleged personal injury resulting from
defendants' mining waste piles in and around Picher, Oklahoma, be consolidated
for trial with four other similar cases (Reeves v. ASARCO et al., Case No.
CJ-02-8; Carr v. ASARCO et al., Case No. CJ-02-59; Edens v. ASARCO et al., Case
No. CJ-02-245; and Koger v. ASARCO et al., Case No. CJ-02-284). The Herd case
-28-
had previously been consolidated for discovery with those four cases. Trial in
the Herd case is scheduled for August 2003. Plaintiffs have moved to dismiss
their negligence claims. Defendants have moved for summary judgment. The Company
understands that plaintiffs' counsel may file claims on behalf of additional
plaintiffs.
Pulliam, et al. v. NL Industries, Inc., et al, (Superior Court, Marion
County, Indiana, No. 49F12-0104-CT-001301). In April 2003 the court dismissed
this previously-described case with prejudice. The time for plaintiffs to appeal
has not yet expired.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended March 31, 2003
through the date of this report:
April 30, 2003 - Reported Items 7 and 9.
-29-
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 9, 2003 By /s/ Robert D. Hardy
- ------------------ --------------------------
Robert D. Hardy
Principal Financial and
Accounting Officer
-30-
CERTIFICATIONS
--------------
I, J. Landis Martin, the Chief Executive Officer of NL Industries, Inc., certify
that:
1) I have reviewed this quarterly report on Form 10-Q of NL Industries, Inc.
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003
/s/ J. Landis Martin
- -----------------------
J. Landis Martin
Chief Executive Officer
-31-
CERTIFICATIONS
I, Robert D. Hardy, the Chief Financial Officer of NL Industries, Inc., certify
that:
1) I have reviewed this quarterly report on Form 10-Q of NL Industries, Inc.
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003
/s/ Robert D. Hardy
- -----------------------
Robert D. Hardy
Chief Financial Officer
-32-
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of NL Industries, Inc. (the Company) on
Form 10-Q for the period ended March 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the Report), I, J. Landis Martin, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ J. Landis Martin
-----------------------
J. Landis Martin
Chief Executive Officer
May 9, 2003
A signed original of this written statement required by Section 906 has been
provided to NL Industries, Inc, and will be retained by NL Industries, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of NL Industries, Inc. (the Company) on
Form 10-Q for the period ended March 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the Report), I, Robert D. Hardy, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Robert D. Hardy
-----------------------
Robert D. Hardy
Chief Financial Officer
May 9, 2003
A signed original of this written statement required by Section 906 has been
provided to NL Industries, Inc, and will be retained by NL Industries, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.