SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-1
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.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240
- -------------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
------- -------
Number of shares of common stock outstanding on May 9, 2003: 47,694,784
This Amendment No. 1 to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003 of NL Industries, Inc. is filed to revise certain
disclosures, and reclassify the Company's Consolidated Statement of Income, as
requested by the Securities and Exchange Commission. There was no impact on net
income as a result of the reclassification of the Consolidated Statement of
Income. The revised disclosures are primarily contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and the Company's Consolidated Financial
Statements. This Amendment is being filed solely to provide the information
referenced above. For the convenience of the reader, the Company is re-filing
the entire Quarterly Report as clarified. No other modifications have been made
to the Quarterly Report except as described above.
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
-3-
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 other 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
========== ==========
-4-
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 13)
See accompanying notes to consolidated financial statements.
-5-
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
--------- ---------
Net sales ................................................... $ 252,973 $ 202,357
Cost of sales ............................................... 188,417 156,253
--------- ---------
Gross margin ............................................ 64,556 46,104
Selling, general and administrative expenses ................ 29,379 24,728
Other operating income (expense):
Currency transaction gains (losses), net .................. (1,098) 598
Disposition of property and equipment ..................... (61) (46)
Noncompete agreement income ............................... 333 1,000
Litigation settlement gains, net .......................... -- 1,920
Other income .............................................. 148 21
Corporate expense ......................................... (15,315) (10,117)
--------- ---------
Income from operations ................................ 19,184 14,752
Other income (expense):
Trade interest income ..................................... 163 222
Other interest income and dividend income ................. 948 1,280
Securities gains, net ..................................... 2,234 --
Interest expense .......................................... (7,985) (6,535)
--------- ---------
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
========= =========
-6-
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.
-7-
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 Treasury
stock capital earnings translation liabilities securities stock Total
------- ---------- --------- ----------- ----------- ---------- --------- ---------
Balance at December 31, 2002 $ 8,355 $ 777,819 $ 101,554 $(170,670) $(21,447) $ 5,896 $(436,180) $ 265,327
Net income ........................... -- -- 9,430 -- -- -- -- 9,430
Other comprehensive income, net of tax -- -- -- 3,742 -- 5,619 -- 9,361
Dividends ............................ -- -- (9,539) -- -- -- -- (9,539)
Treasury stock - reissued -- -- -- -- -- -- 77 77
------- --------- --------- --------- -------- ------- --------- ---------
Balance at March 31, 2003 ............ $ 8,355 $ 777,819 $ 101,445 $(166,928) $(21,447) $11,515 $(436,103) $ 274,656
======= ========= ========= ========= ======== ======= ========= =========
See accompanying notes to consolidated financial statements.
-8-
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)
Change in assets and liabilities:
Accounts and other 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)
-------- --------
-9-
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.
-10-
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 Worldwide Inc.
(formerly known as 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.
-11-
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.
-12-
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 - Other operations income (expense):
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.
The noncompete agreement income relates to a covenant not to compete
agreement related to the sale of Rheox in 1998. The agreement became fully
amortized in January 2003.
Corporate expense includes environmental, legal and other costs
attributable to formerly owned business units, as well as certain administrative
expenses (primarily legal, finance, accounting and tax). Corporate expense for
the first quarter of 2003 increased 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.
-13-
Note 4 - Accounts and other 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
$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
-14-
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
======= =======
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
======== ========
-15-
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.
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
======= =======
-16-
Note 13 - 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 ...................................... $ 253.0 $ 202.4 +25%
Cost of sales .................................. 188.4 156.3 +20%
-------- --------
Gross margin ................................. 64.6 46.1 +40%
Selling, general and administrative expense .... 29.4 24.7 +19%
Currency transaction gains (losses), net ....... (1.1) .6
Litigation settlement gain ..................... -- 1.9
Noncompete agreement income .................... .3 1.0
Other expense .................................. -- (.1)
Corporate expense .............................. (15.3) (10.1)
-------- --------
Income from operations .................... $ 19.1 $ 14.7 +3%
======== ========
TiO2 operating statistics
Percent change in average selling price:
Using actual foreign currency exchange
rates ................................ +18%
Impact of changes in foreign currency
exchange rates ....................... -12%
-----
In billing currencies .................. +6%
-----
Sales volume (metric tons in thousands) .... 118 112 +5%
Production volume (metric tons in thousands) 117 106 +11%
The Company's sales and gross margin increased $50.6 million (25%) and
$18.5 million (40%), respectively, in the first quarter of 2003 compared to the
first quarter of 2002 due primarily to higher average TiO2 selling prices as
well as higher TiO2 sales and production volumes partially offset by higher
operating costs (particularly energy costs, which increased by approximately
$2.9 million). Excluding the effect of fluctuations in the value of the U.S.
dollar relative to other currencies, the Company's average TiO2 selling price in
billing currencies in the first quarter of 2003 was 6% higher than the first
quarter of 2002. When translated from billing currencies to U.S. dollars using
actual foreign currency exchange rates prevailing during the respective periods,
the Company's average TiO2 selling prices in the first quarter of 2003 increased
18% compared to the first quarter of 2002.
The Company's sales are denominated in various currencies, including the
U.S. dollar, the euro, other major European currencies and the Canadian dollar.
The disclosure of the percentage change in the Company's average TiO2 selling
price in billing currencies (which excludes the effects of fluctuations in the
value of the U.S. dollar relative to other currencies) is considered a
"non-GAAP" financial measure under regulations of the SEC. The disclosure of the
percentage change in the Company's average TiO2 selling prices using actual
foreign currency exchange rates prevailing during the respective periods is
considered the most directly comparable financial measure presented in
accordance with accounting
-18-
principles generally accepted in the United States ("GAAP measure"). The
Company discloses percentage changes in its average TiO2 prices in billing
currencies because the Company believes such disclosure provides useful
information to investors to allow them to analyze such changes without the
impact of changes in foreign currency exchange rates, thereby facilitating
period-to-period comparisons of the relative changes in average selling prices
in the actual various billing currencies. Generally, when the U.S. dollar either
strengthens or weakens against other currencies, the percentage change in
average selling prices in billing currencies will be higher or lower,
respectively, than such percentage changes would be using actual exchange rates
prevailing during the respective periods. The difference between the 18% change
in the Company's average TiO2 selling prices during the first quarter of 2003 as
compared to the first quarter of 2002 using actual foreign currency exchange
rates prevailing during the respective periods (the GAAP measure) and the 6%
percentage change in the Company's average TiO2 selling price in billing
currencies (the non-GAAP measure) during such periods is due to the effect of
changes in foreign currency exchange rates. The above table presents in a
tabular format (i) the percentage change in the Company's average TiO2 selling
prices using actual foreign currency exchange rates prevailing during the
respective periods ( the GAAP measure), (ii) the percentage change in the
Company's average TiO2 selling price in billing currencies (the non-GAAP
measure) and (iii) the percentage change due to changes in foreign currency
exchange rates (or the reconciling item between the non-GAAP measure and the
GAAP measure).
The Company's TiO2 sales volume in the first quarter of 2003 was a
record and was 5% higher than the first quarter of 2002. The Company's TiO2
production volume in the first quarter of 2003, an all-time quarterly record for
NL, was 11% higher than the first quarter of 2002, with operating rates at near
full capacity in 2003 compared to 96% of capacity in 2002. These increases in
TiO2 sales and production volume increased gross margin by $4.6 million and $6.2
million, respectively, while the increase in average TiO2 selling prices
increased gross margin by $10.1 million.
The Company's cost of sales increased $32.2 million (21%) in the first
quarter of 2003 compared to the first quarter of 2002. The Company's cost of
sales as a percentage of net sales decreased 3% in the first quarter of 2003
primarily due to the higher average selling prices and higher production volume,
partially offset by the higher energy costs. The Company's selling, general and
administrative expenses in the first quarter of 2003 increased $4.7 million
(19%) as compared to the first quarter of 2002 due to higher distribution
expenses in the first quarter of 2003 of $2.3 million associated with the higher
sales volume, as well as the impact of relative changes in foreign currency
exchange rates which increased the Company's expenses in the 2003 period as
compared to the same period in 2002. The Company's selling, general and
administrative expenses were approximately 12% of sales in both the first
quarter of 2003 and the first quarter of 2002.
The increase in the Company's gross margin quantified above is due to
the net effect of the changes in sales and cost of sales during such period.
The Company has substantial operations and assets located outside the
United States (primarily in Germany, Belgium, Norway and Canada). As discussed
above, a significant amount of the Company's sales generated from its non-U.S.
operations are denominated in currencies other than the U.S. dollar, principally
the euro, other major European currencies and the Canadian dollar. In addition,
a portion of the Company's sales generated from its non-U.S. operations are
denominated in the U.S. dollar. Certain raw materials, primarily
titanium-containing feedstocks, are purchased in U.S. dollars, while labor and
other production costs are denominated primarily in local currencies.
Consequently, the translated U.S. dollar value of the Company's foreign sales
and operating results are subject to currency exchange rate fluctuations which
may favorably or adversely impact reported earnings and may affect the
comparability of period-to-period operating results. Overall, fluctuations in
the value of the U.S. dollar relative to other currencies, primarily the euro,
increased the Company's sales in the first quarter of 2003 by a net $26.6
million compared to the same period in 2002. Fluctuations in the value of the
U.S. dollar relative to other currencies similarly impacted the Company's
foreign currency-denominated operating expenses. The Company's operating costs
that are not denominated in the U.S. dollar, when translated into U.S. dollars,
were higher in the first six quarter of 2003 compared to the first quarter of
2002. Overall, the net impact of currency exchange rate fluctuations decreased
the Company's gross margin by $1.8 million in the first quarter of 2003 when
compared to the year-earlier period.
The noncompete agreement income relates to a covenant not to compete
agreement related to the sale of Rheox in 1998. The agreement became fully
amortized in January 2003. The $1.9 million litigation settlement gain in the
-19-
first quarter of 2002 relates to a settlement with former insurance carrier
groups. No further material settlements relating to litigation concerning
environmental remediation coverage are expected.
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. 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.
The Company currently expects TiO2 industry demand in 2003 to increase
slightly over 2002 levels. The Company currently expects its sales and
production volumes for the full year of 2003 will be slightly higher than the
full year of 2002. The Company's TiO2 production volume in 2003 is expected to
approximate the Company's 2003 TiO2 sales volume. In December 2002 and January
2003, the Company announced additional price increases in Europe and North
America which averaged approximately 8% in Europe and approximately 7% in North
America. The Company is hopeful that it will realize additional price increases
during the remainder of 2003, but the extent to which the Company can realize
price increases will depend on market conditions and global economic recovery.
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.
As a net result of the items discussed above, the Company's income from
operations increased 30% from $14.8 million in the first quarter of 2002 to
$19.2 million in the first quarter of 2003.
Other income (expense):
Three months ended
March 31, Difference
-------------------- ----------
2003 2002
------ ------
(In millions)
Securities gains, net ................... $ 2.2 $-- $ 2.2
Interest and dividend income ............ .9 1.3 (.4)
Other corporate income .................. .1 -- .1
Interest expense ........................ (8.0) (6.5) (1.5)
------ ------ ------
$ (4.8) $ (5.2) $ .4
====== ====== ======
-20-
Securities gains for the first quarter of 2003 represents 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. Interest and dividend
income was lower by $400,000 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.
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.
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.
-21-
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 ................................. $ (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.
Relative changes in assets and liabilities generally result from the
timing of production, sales, purchases and income tax payments. Such relative
changes can significantly impact the comparability of cash flow from operations
from period to period, as the income statement impact of such items may occur in
a different period from when the underlying cash transaction occurs. For
example, raw materials may be purchased in one period, but the payment for such
raw materials may occur in a subsequent period. Similarly, inventory may be sold
in one period, but the cash collection of the receivable may occur in a
subsequent period.
Cash flows from operating activities decreased from a net generation of
cash of $12.8 million in the first quarter of 2002 to a net use of cash of $13.7
million in the first quarter of 2003. This $26.5 million decrease was due
primarily to the net effect of (i) higher net income of $3.0 million, (ii)
higher depreciation expense of $1.9 million and (iii) a higher amount of net
cash used to fund changes in the Company's inventories, receivables and payables
of $31.0 million in the first quarter of 2003. Relative changes in accounts
receivable are affected by, among other things, the timing of sales and the
collection of the resulting receivable. Relative changes in inventories and
accounts payable and accrued liabilities are affected by, among other things,
the timing of raw material purchases and the payment for such purchases and the
relative difference between production volume and sales volume.
-22-
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 March 2002, the Company redeemed $25.0 million principal amount of
the 11.75% Senior Secured Notes due October 2003 at par.
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 2002 and 2003, the Company paid a regular
quarterly dividend to shareholders of $.20 per share, aggregating $9.8 million
and $9.5 million, respectively.
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
$46.7 million, current restricted cash equivalents of $47.1 million, current
restricted marketable debt securities of $9.7 million and noncurrent restricted
marketable debt securities of $9.6 million. Of such aggregate $113.1 million
amount,$22 million was held by non-U.S. subsidiaries. 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.
-23-
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.
-24-
No assurance can be given that the Company's tax matters will be
favorably resolved due to the inherent uncertainties involved in court and tax
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
At 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
-25-
in expenditures in excess of amounts currently estimated by the Company to be
required for such matters. In addition, with respect to other PRPs and the fact
that the Company may be jointly and severally liable for the total remediation
cost at certain sites, the Company could ultimately be liable for amounts in
excess of its accruals due to, among other things, reallocation of costs among
PRPs or the insolvency of one of more PRPs. Furthermore, there can be no
assurance that additional environmental matters will not arise in the future.
The exact time frame over which the Company makes payments with respect
to its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process which in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs which
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
are classified as a noncurrent liability.
At March 31, 2003, there are approximately 15 sites for which the
Company is unable to estimate a range of costs. For these sites, generally the
investigation is in the early stages, and it is either unknown as to whether or
not the Company actually had any association with the site, or if the Company
had association with the site, the nature of its responsibility, if any, for the
contamination at the site and the extent of contamination. The timing on when
information would become available to the Company to allow the Company to
estimate a range of loss is unknown and dependent on events outside the control
of the Company, such as when the party alleging liability provides information
to the Company.
At March 31, 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
of the Company's future environmental remediation and other environmental
expenditures.
-26-
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.
Non-GAAP Financial Measures
In an effort to provide investors with additional information regarding
the Company's results as determined by GAAP, the Company has disclosed certain
non-GAAP information which the Company believes provides useful information to
investors:
o As discussed above, the Company discloses percentage changes in its
average TiO2 prices in billing currencies, which excludes the effects of
foreign currency translation. Such disclosure of the percentage change
in the Company's average TiO2 selling price in billing currencies is
considered a "non-GAAP" financial measure under regulations of the SEC.
The disclosure of the percentage change in the Company's average TiO2
selling prices using actual foreign currency exchange rates prevailing
-27-
during the respective periods is considered the most directly comparable
GAAP measure. The Company discloses percentage changes in its average
TiO2 prices in billing currencies because the Company believes such
disclosure provides useful information to investors to allow them to
analyze such changes without the impact of changes in foreign currency
exchange rates, thereby facilitating period-to-period comparisons of the
relative changes in average selling prices in the actual various billing
currencies. Generally, when the U.S. dollar either strengthens or
weakens against other currencies, the percentage change in average
selling prices in billing currencies will be higher or lower,
respectively, than such percentage changes would be using actual
exchange rates prevailing during the respective periods.
Special note regarding forward-looking statements
The statements contained in this Report on Form 10-Q ("Quarterly
Report") which are not historical facts, including, but not limited to,
statements found under the captions "Results of Operations" and "Liquidity and
Capital Resources" above, are forward-looking statements that represent
management's beliefs and assumptions based on currently available information.
Forward-looking statements can be identified by the use of words such as
"believes," "intends," "may," "will," "should," "could," "anticipates,"
"expects," or comparable terminology or by discussions of strategy or trends.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it cannot give any assurances that
these expectations will prove to be correct. Such statements by their nature
involve risks and uncertainties, including, but not limited to, the cyclicality
of the titanium dioxide industry, global economic and political conditions,
global productive capacity, customer inventory levels, changes in product
pricing, changes in product costing, changes in foreign currency exchange rates,
competitive technology positions, operating interruptions (including, but not
limited to, labor disputes, leaks, fires, explosions, unscheduled downtime,
transportation interruptions, war and terrorist activities), the ultimate
resolution of pending or possible future lead pigment litigation and legislative
developments related to the lead 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.
-28-
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures.
The term "disclosure controls and procedures," as defined by regulations of the
Securities and Exchange Commission ("SEC"), means controls and other procedures
that are designed to ensure that information required to be disclosed in the
reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of Harold C. Simmons, the Company's
Chief Executive Officer, and Gregory M. Swalwell, the Company's Vice President,
Finance, have evaluated the Company's disclosure controls and procedures as of
March 31, 2003. Based upon their evaluation, these executive officers have
concluded that the Company's disclosure controls and procedures are effective as
of the date of such evaluation.
The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America ("GAAP)", and
includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company,
o Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with GAAP,
and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the
Company, and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets
that could have a material effect on the Company's consolidated
financial statements.
There has been no change to the Company's system of internal controls over
financial reporting during the quarter ended March 31, 2003 that has materially
affected, or is reasonably likely to materially affect, the Company's system of
internal controls over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to 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
-30-
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
31.1 Certification
31.2 Certification
32.1 Certification
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended March 31, 2003
through the date of this report:
April 30, 2003 - Reported Items 7 and 9.
-31-
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: October 31, 2003 By /s/ Gregory M. Swalwell
- ------------------------- -------------------------------------
Gregory M. Swalwell
Principal Financial and Accounting Officer
-32-
Exhibit 31.1
I, Harold C. Simmons, 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 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 report;
3) Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
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
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: October 31, 2003
/s/ Harold C. Simmons
Harold C. Simmons
Chief Executive Officer
Exhibit 31.2
I, Gregory M. Swalwell, the Vice President, Finance 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 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 report;
3) Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
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
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: October 31, 2003
/s/ Gregory M. Swalwell
Gregory M. Swalwell
Vice President, Finance
EXHIBIT 32.1
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"), we, Harold C.
Simmons, Chief Executive Officer of the Company, and Gregory M. Swalwell, Vice
President, Finance 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 result of operations of the
Company.
/s/ Harold C. Simmons /s/ Gregory M. Swalwell
- ---------------------- ------------------------
Harold C.Simmons Gregory M. Swalwell
Chief Executive Officer Vice President, Finance
October 31, 2003 October 31, 2003
Note: The certification the registrant furnishes in this exhibit is not deemed
"filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liabilities of that Section. Registration
Statements or other documents filed with the Securities and Exchange Commission
shall not incorporate this exhibit by reference, except as otherwise expressly
stated in such filing.