SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the quarter ended September 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-640
NL INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 13-5267260
- ------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16825 Northchase Drive, Suite 1200, Houston, Texas 77060-2544
- -------------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 423-3300
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) had been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of common stock outstanding on October 31, 1997: 51,149,614
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1996
and September 30, 1997 3-4
Consolidated Statements of Operations - Three months
and nine months ended September 30, 1996 and 1997 5
Consolidated Statement of Shareholders' Deficit
- Nine months ended September 30, 1997 6
Consolidated Statements of Cash Flows - Nine
months ended September 30, 1996 and 1997 7-8
Notes to Consolidated Financial Statements 9-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 20
- 2 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, September 30,
ASSETS 1996 1997
------------ -------------
Current assets:
Cash and cash equivalents, including
restricted cash of $10,895 and $9,524 ......... $ 114,115 $ 102,214
Accounts and notes receivable .................. 138,538 160,625
Refundable income taxes ........................ 9,267 4,282
Inventories .................................... 232,510 172,308
Prepaid expenses ............................... 4,219 6,752
Deferred income taxes .......................... 1,597 1,498
---------- ----------
Total current assets ....................... 500,246 447,679
---------- ----------
Other assets:
Marketable securities .......................... 23,718 31,147
Investment in joint ventures ................... 181,479 175,423
Prepaid pension cost ........................... 24,821 24,408
Deferred income taxes .......................... 223 222
Other .......................................... 24,825 20,357
---------- ----------
Total other assets ......................... 255,066 251,557
---------- ----------
Property and equipment:
Land ........................................... 21,963 19,878
Buildings ...................................... 165,479 153,271
Machinery and equipment ........................ 660,333 622,667
Mining properties .............................. 95,891 90,277
Construction in progress ....................... 13,231 8,469
---------- ----------
956,897 894,562
Less accumulated depreciation and depletion .... 490,851 470,636
---------- ----------
Net property and equipment ................. 466,046 423,926
---------- ----------
$1,221,358 $1,123,162
========== ==========
- 3 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
December 31, September 30,
LIABILITIES AND SHAREHOLDERS' DEFICIT 1996 1997
------------ -------------
Current liabilities:
Notes payable ................................ $ 25,732 $ 17,139
Current maturities of long-term debt ......... 91,946 61,534
Accounts payable and accrued liabilities ..... 153,904 165,773
Payable to affiliates ........................ 10,204 10,199
Income taxes ................................. 5,664 6,781
Deferred income taxes ........................ 2,895 2,660
----------- -----------
Total current liabilities ................ 290,345 264,086
----------- -----------
Noncurrent liabilities:
Long-term debt ............................... 737,100 694,606
Deferred income taxes ........................ 151,221 139,484
Accrued pension cost ......................... 57,941 50,588
Accrued postretirement benefits cost ......... 55,935 52,168
Other ........................................ 132,048 150,650
----------- -----------
Total noncurrent liabilities ............. 1,134,245 1,087,496
----------- -----------
Minority interest .............................. 249 253
Shareholders' deficit:
Common stock ................................. 8,355 8,355
Additional paid-in capital ................... 759,281 759,281
Adjustments:
Currency translation ....................... (118,629) (125,199)
Pension liabilities ........................ (1,822) (1,822)
Marketable securities ...................... 1,278 6,107
Accumulated deficit .......................... (485,948) (509,653)
Treasury stock ............................... (365,996) (365,742)
----------- -----------
Total shareholders' deficit .............. (203,481) (228,673)
----------- -----------
$ 1,221,358 $ 1,123,162
=========== ===========
Commitments and contingencies (Note 13)
See accompanying notes to consolidated financial statements.
- 4 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
--------------------- ----------------------
1996 1997 1996 1997
--------- --------- --------- ---------
Revenues and other income:
Net sales ............... $ 248,462 $ 248,153 $ 752,064 $ 740,423
Other, net .............. 5,013 3,023 25,890 11,681
--------- --------- --------- ---------
253,475 251,176 777,954 752,104
--------- --------- --------- ---------
Costs and expenses:
Cost of sales ........... 193,271 180,784 557,881 557,442
Selling, general and
administrative ......... 45,274 38,448 131,313 152,730
Interest ................ 18,472 19,476 56,127 57,853
--------- --------- --------- ---------
257,017 238,708 745,321 768,025
--------- --------- --------- ---------
Income (loss) before
income taxes and
minority interest ... (3,542) 12,468 32,633 (15,921)
Income tax expense ........ 698 2,700 11,552 7,749
--------- --------- --------- ---------
Income (loss) before
minority interest ... (4,240) 9,768 21,081 (23,670)
Minority interest ......... 9 7 (33) 35
--------- --------- --------- ---------
Net income (loss) .... $ (4,249) $ 9,761 $ 21,114 $ (23,705)
========= ========= ========= =========
Net income (loss) per share
of common stock .......... $ (.08) $ .19 $ .41 $ (.46)
========= ========= ========= =========
Weighted average common and
common equivalent shares
outstanding 51,118 51,585 51,376 51,143
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
- 5 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
Nine months ended September 30, 1997
(In thousands)
Adjustments
Additional ------------------------------------
Common paid-in Currency Pension Marketable Accumulated Treasury
stock capital translation liabilities securities deficit stock Total
--------- ---------- ----------- ----------- ---------- ----------- --------- ---------
Balance at December 31, 1996 $ 8,355 $ 759,281 $(118,629) $ (1,822) $ 1,278 $(485,948) $(365,996) $(203,481)
Net loss .................... -- -- -- -- -- (23,705) -- (23,705)
Adjustments ................. -- -- (6,570) -- 4,829 -- -- (1,741)
Treasury stock reissued ..... -- -- -- -- -- -- 254 254
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1997 $ 8,355 $ 759,281 $(125,199) $ (1,822) $ 6,107 $(509,653) $(365,742) $(228,673)
========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
- 6 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1996 and 1997
(In thousands)
1996 1997
-------- --------
Cash flows from operating activities:
Net income (loss) ................................ $ 21,114 $(23,705)
Depreciation, depletion and amortization ......... 30,154 28,414
Noncash interest expense ......................... 15,500 17,388
Deferred income taxes ............................ (4,864) (2,108)
Change in accounting for environmental
remediation liabilities ......................... -- 30,000
Other, net ....................................... (12,401) (10,729)
-------- --------
49,503 39,260
Change in assets and liabilities:
Accounts and notes receivable .................. (21,289) (32,834)
Inventories .................................... 26,424 44,595
Prepaid expenses ............................... (3,863) (3,085)
Accounts payable and accrued liabilities ....... (1,363) 18,792
Income taxes ................................... (166) 8,217
Other, net ..................................... (10,994) (4,132)
-------- --------
Net cash provided by operating activities ..... 38,252 70,813
-------- --------
Cash flows from investing activities:
Capital expenditures ............................. (52,328) (23,349)
Purchase of minority interest .................... (5,168) --
Investment in joint ventures, net ................ 4,123 5,836
Proceeds from disposition of property and
equipment ....................................... 478 2,922
-------- --------
Net cash used by investing activities ......... (52,895) (14,591)
-------- --------
- 7 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 1996 and 1997
(In thousands)
1996 1997
--------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ....................................... $ 64,712 $ 140,000
Principal payments ............................... (43,359) (203,349)
Deferred financing costs ......................... -- (3,958)
Dividends .......................................... (15,333) --
Other, net ......................................... (202) 252
--------- ---------
Net cash provided (used) by financing
activities .................................... 5,818 (67,055)
--------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities .... (8,825) (10,833)
Currency translation ............................. (2,312) (1,068)
Balance at beginning of period ..................... 141,333 114,115
--------- ---------
Balance at end of period ........................... $ 130,196 $ 102,214
========= =========
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized ............... $ 31,485 $ 35,262
Income taxes, net .................................. 16,652 1,317
See accompanying notes to consolidated financial statements.
- 8 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
NL Industries, Inc. conducts its operations primarily through its wholly-
owned subsidiaries, Kronos, Inc. (titanium dioxide pigments, or "TiO2") and
Rheox, Inc. (specialty chemicals). Valhi, Inc. and Tremont Corporation, each
affiliates of Contran Corporation, hold approximately 56% and 18%, respectively,
of NL's outstanding common stock, and together may be deemed to control NL.
Contran and its subsidiaries and other entities related to Harold C. Simmons
hold approximately 92% of Valhi's and 47% of Tremont's outstanding common stock.
The consolidated balance sheet of NL Industries, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 1996 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at September 30, 1997 and the consolidated statements
of operations, shareholders' deficit and cash flows for the interim periods
ended September 30, 1996 and 1997, have been prepared by the Company, without
audit. In the opinion of management, all adjustments necessary to present fairly
the consolidated financial position, results of operations and cash flows have
been made. The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. Certain prior-year amounts have been
reclassified to conform to the 1997 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, 1996 (the "1996 Annual Report").
The Company adopted a new method of accounting as required by the AICPA's
Statement of Position ("SOP") No. 96-1, "Environmental Remediation Liabilities,"
in the first quarter of 1997. The SOP, among other things, expands the types of
costs which must be considered in determining environmental remediation
accruals. As a result of adopting the SOP, the Company recognized a noncash
cumulative charge of $30 million in the first quarter of 1997. The charge is not
expected to materially impact the Company's 1997 income tax expense because the
Company believes the resulting deferred income tax asset does not currently
satisfy the more-likely-than-not realization criteria and, accordingly, the
Company has established an offsetting valuation allowance. Such charge is
comprised primarily of estimated future undiscounted expenditures associated
with managing and monitoring existing environmental remediation sites. The
expenditures consist principally of legal and professional fees, but do not
include litigation defense costs with respect to situations in which the Company
asserts that no liability exists. Previously, such expenditures were expensed as
incurred.
- 9 -
Note 2 - Net income (loss) per share of common stock:
Net income (loss) per share of common stock is based on the weighted
average number of common shares and equivalents outstanding. Common stock
equivalents, consisting of nonqualified stock options, are excluded from the
computation when their effect is antidilutive. The Company will retroactively
adopt Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share," effective December 31, 1997. Basic earnings per share pursuant to
SFAS No. 128 will not be materially different from earnings per share presented
herein and diluted earnings per share pursuant to SFAS No. 128 is not expected
to be materially different from basic earnings per share.
Note 3 - Business segment information:
The Company's operations are conducted in two business segments - TiO2
conducted by Kronos and specialty chemicals conducted by Rheox.
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1996 1997 1996 1997
--------- --------- --------- ---------
(In thousands)
Net sales:
Kronos .......................... $ 215,038 $ 210,344 $ 649,635 $ 629,087
Rheox ........................... 33,424 37,809 102,429 111,336
--------- --------- --------- ---------
$ 248,462 $ 248,153 $ 752,064 $ 740,423
========= ========= ========= =========
Operating income:
Kronos .......................... $ 9,640 $ 24,908 $ 64,555 $ 50,412
Rheox ........................... 9,831 12,254 32,952 34,597
--------- --------- --------- ---------
19,471 37,162 97,507 85,009
General corporate income (expense):
Securities earnings, net ........ 1,190 590 3,631 1,817
Expenses, net ................... (5,731) (5,808) (12,378) (44,894)
Interest expense ................ (18,472) (19,476) (56,127) (57,853)
--------- --------- --------- ---------
$ (3,542) $ 12,468 $ 32,633 $ (15,921)
========= ========= ========= =========
Note 4 - Inventories:
December 31, September 30,
1996 1997
------------ -------------
(In thousands)
Raw materials ............................ $ 43,284 $ 40,139
Work in process .......................... 10,356 5,767
Finished products ........................ 142,091 94,216
Supplies ................................. 36,779 32,186
-------- --------
$232,510 $172,308
======== ========
- 10 -
Note 5 - Marketable securities:
December 31, September 30,
1996 1997
------------ -------------
(In thousands)
Available-for-sale securities - noncurrent
marketable equity securities:
Unrealized gains ................................ $ 3,516 $ 9,395
Unrealized losses ............................... (1,550) --
Cost ............................................ 21,752 21,752
-------- --------
Aggregate market ............................ $ 23,718 $ 31,147
======== ========
Note 6 - Investment in joint ventures:
December 31, September 30,
1996 1997
------------ -------------
(In thousands)
TiO2 manufacturing joint venture ............... $179,195 $173,359
Other .......................................... 2,284 2,064
-------- --------
$181,479 $175,423
======== ========
Note 7 - Other noncurrent assets:
December 31, September 30,
1996 1997
------------ -------------
(In thousands)
Intangible assets, net ..................... $ 7,939 $ 5,075
Deferred financing costs, net .............. 9,791 10,866
Other ...................................... 7,095 4,416
------- -------
$24,825 $20,357
======= =======
Note 8 - Accounts payable and accrued liabilities:
December 31, September 30,
1996 1997
------------ -------------
(In thousands)
Accounts payable ......................... $ 60,648 $ 58,385
-------- --------
Accrued liabilities:
Employee benefits ...................... 34,618 37,006
Environmental costs .................... 6,000 9,000
Interest ............................... 9,429 14,532
Miscellaneous taxes .................... 4,073 1,100
Other .................................. 39,136 45,750
-------- --------
93,256 107,388
-------- --------
$153,904 $165,773
======== ========
- 11 -
Note 9 - Other noncurrent liabilities:
December 31, September 30,
1996 1997
------------ -------------
(In thousands)
Environmental costs ........................ $106,849 $127,291
Insurance claims and expenses .............. 11,673 11,372
Employee benefits .......................... 11,960 10,747
Other ...................................... 1,566 1,240
-------- --------
$132,048 $150,650
======== ========
Note 10 - Notes payable and long-term debt:
December 31, September 30,
1996 1997
------------ -------------
(In thousands)
Notes payable - Kronos (DM 40,000 and DM 30,000,
respectively) ..................................... $ 25,732 $ 17,139
======== ========
Long-term debt:
NL Industries:
11.75% Senior Secured Notes .................... $250,000 $250,000
13% Senior Secured Discount Notes .............. 149,756 164,535
-------- --------
399,756 414,535
-------- --------
Kronos:
DM bank credit facility (DM 539,971 and
DM 288,322, respectively) ..................... 347,362 164,718
Joint venture term loan ........................ 57,858 46,286
Other .......................................... 9,125 5,266
-------- --------
414,345 216,270
-------- --------
Rheox:
Bank credit facility ........................... 14,659 125,250
Other .......................................... 286 85
-------- --------
14,945 125,335
-------- --------
829,046 756,140
Less current maturities ............................ 91,946 61,534
-------- --------
$737,100 $694,606
======== ========
Rheox has entered into interest rate collar agreements which effectively
set minimum and maximum U.S. LIBOR interest rates of 5.25% and 8%, respectively,
on $50 million principal amount of its variable-rate bank term loan through May
2001. The margin on such borrowings ranges from .75% to 1.75%, depending upon
the level of a certain Rheox financial ratio. Rheox is exposed to interest rate
risk in the event of nonperformance by the other parties to the agreements,
although Rheox does not anticipate nonperformance by such parties. At September
30, 1997, the estimated fair value of such agreements was estimated to be a $.1
million liability. Such fair value represents the amount Rheox would
- 12 -
pay if it terminated the collar agreements at that date, and is based upon
quotes obtained from the counter party financial institutions.
Note 11 - 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.
Nine months ended
September 30,
1996 1997
-------- --------
(In thousands)
Expected tax expense (benefit) ......................... $ 11,422 $ (5,573)
Non-U.S. tax rates ..................................... (273) (462)
Incremental tax on income of companies not included
in NL's consolidated U.S. federal income tax return ... 2,559 2,171
Valuation allowance .................................... (1,150) 10,459
U.S. state income taxes ................................ 1,350 1,432
Other, net ............................................. (2,356) (278)
-------- --------
Income tax expense ............................... $ 11,552 $ 7,749
======== ========
Note 12 - Other income, net:
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1996 1997 1996 1997
-------- -------- -------- --------
(In thousands)
Interest and dividends ......... $ 1,190 $ 590 $ 3,631 $ 1,817
Currency transaction gains ..... 4,491
(losses), net ................. 624 (57) 2,670
Disposition of property and .... (304 2,452
equipment ..................... (758) ) (1,677)
Pension curtailment gain ....... -- -- 4,791 --
Technology fee income .......... 2,606 -- 8,280 --
Litigation settlement gain ..... -- -- 2,756 --
Other, net ..................... 1,351 2,794 3,618 4,742
-------- -------- -------- --------
$ 5,013 $ 3,023 $ 25,890 $ 11,681
======== ======== ======== ========
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," (iii) the Company's
Quarterly Report on Form 10-Q for the quarters ended March 31, 1997 and June 30,
1997, and (iv) the 1996 Annual Report.
- 13 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The Company's chemical operations are conducted in two business segments -
TiO2 conducted by Kronos and specialty chemicals conducted by Rheox.
Three months ended % Nine months ended %
September 30, Change September 30, Change
1996 1997 1996 1997
(In millions) (In millions)
Net sales:
Kronos .................... $215.1 $210.4 -2% $649.7 $629.2 -3%
Rheox ..................... 33.4 37.8 +13% 102.4 111.3 +9%
------ ------ ------ ------ ------
$248.5 $248.2 NC $752.1 $740.5 -2%
====== ====== ====== ======
Operating income:
Kronos .................... $ 9.7 $ 24.9 +157% $ 64.6 $ 50.4 -22%
Rheox ..................... 9.8 12.3 +26% 32.9 34.6 +5%
------ ------ ------ ------
$ 19.5 $ 37.2 +91% $ 97.5 $ 85.0 -13%
====== ====== ====== ======
Percent changes in TiO2:
Sales volume .............. +7% +12%
Average selling prices (in
billing currencies)....... +1% -8%
Kronos' TiO2 operating income in the third quarter of 1997 increased from
the comparable period in 1996 due to higher production and sales volumes, 1%
higher average TiO2 selling prices and $9.7 million of income resulting from
refunds of German trade capital taxes. Kronos' operating income in the nine
months ended September 30, 1997 declined from the 1996 period due to 8% lower
average selling prices, partially offset by higher sales and production volumes.
Kronos' average TiO2 selling prices for the third quarter of 1997 were 3% higher
than the second quarter of 1997 and 6% higher than the first quarter of 1997.
Selling prices at the end of the third quarter of 1997 were 2% higher than the
average for the quarter. Kronos achieved record third quarter sales volumes
reflecting continued strong TiO2 demand, particularly in Europe. Kronos' third
quarter and nine months sales volumes increased 7% and 12%, respectively, from
the year-earlier periods.
Kronos' operating income for the third quarter included income of $9.7
million resulting from German trade capital tax refunds related to prior years,
including interest. The German tax authorities were required to remit refunds
based on (i) recent court decisions which resulted in reducing the trade capital
tax base and (ii) prior agreements between the Company and the German tax
authorities regarding payment of disputed taxes.
Kronos expects further increases in its TiO2 selling prices during the
fourth quarter of 1997 and expects its full-year 1997 operating income will
exceed that of 1996. Kronos' cost of sales as a percentage of net sales compared
to 1996 decreased in the third quarter of 1997 and increased in the first nine
months of 1997 due to higher average prices in the third quarter of 1997 and
lower average prices in the first nine months of 1997. Kronos' selling, general
and administrative expenses in the third quarter and the first nine months of
- 14 -
1997 were lower than the 1996 periods due to favorable effects of foreign
currency translation and German trade capital tax refunds, partially offset by
higher distribution expenses associated with higher 1997 sales volumes.
Rheox's operating income for the third quarter of 1997 increased $2.5
million compared to the third quarter of 1996 on higher sales and production
volumes. Rheox's operating income in the first nine months of 1997 was $4.4
million higher than the 1996 period, excluding a first-quarter 1996 $2.7 million
gain related to the curtailment of certain U.S. employee pension benefits.
Rheox's cost of sales as a percentage of net sales decreased in the third
quarter and first nine months of 1997 due to higher production volumes in both
periods of 1997 compared to 1996. Selling, general and administrative expenses
increased in the third quarter and first nine months of 1997 compared to the
1996 periods primarily due to higher selling and distribution expenses
associated with higher 1997 sales volumes.
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, and
fluctuations in the value of the U.S. dollar relative to other currencies
decreased the dollar value of sales for the third quarter and first nine months
of 1997 by $23 million and $46 million, respectively, compared to the respective
1996 periods. Although exchange rate fluctuations resulted in an unfavorable
impact on operating income for the third quarter of 1997, the impact was nominal
for the first nine months of 1997 compared with the same periods in 1996.
The following table sets forth certain information regarding general
corporate income (expense).
Three months ended Nine months ended
September 30, Difference September 30, Difference
------------------- ---------- --------------------- ----------
1996 1997 1996 1997
------- ------- -------- --------
Securities earnings ... $ 1.2 $ .6 $ (.6) $ 3.6 $ 1.8 $ (1.8)
Corporate expenses, net (5.7) (5.8) (.1) (12.4) (44.8) (32.4)
Interest expense ...... (18.5) (19.5) (1.0) (56.1) (57.9) (1.8)
------- ------- ------- -------- -------- -------
$ (23.0) $ (24.7) $ (1.7) $ (64.9) $ (100.9) $ (36.0)
======= ======= ======= ======== ======== =======
Securities earnings declined due to lower average cash equivalent balances
available for investment. Corporate expenses, net in the first nine months of
1997 were higher than the comparable period in 1996 due to the $30 million
noncash charge related to the Company's adoption of SOP No. 96-1, "Environmental
Remediation Liabilities." See Note 1 to the Consolidated Financial Statements.
This charge is included in selling, general and administrative expense in the
Company's Consolidated Statements of Operations. Interest expense was higher in
the third quarter and first nine months of 1997 primarily due to higher variable
interest rates and higher average principal balances.
- 15 -
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows from operating, investing and
financing activities for the nine months ended September 30, 1996 and 1997 are
presented below.
Nine months ended
September 30,
-------------------
1996 1997
----- -----
(In millions)
Net cash provided (used) by:
Operating activities ............................... $ 38.3 $ 70.8
Investing activities ............................... (52.9) (14.6)
Financing activities ............................... 5.8 (67.0)
------ ------
Net cash used by operating, investing
and financing activities .......... $ (8.8) $(10.8)
====== ======
The TiO2 industry is cyclical and changes in economic conditions within
the industry significantly impact the earnings and operating cash flows of the
Company. Cash flows from operations before change in assets and liabilities in
the first nine months of 1997 declined from the comparable period in 1996
primarily due to lower operating income. In the aggregate, changes in the
Company's inventories, receivables and payables (excluding the effect of
currency translation) provided cash in both the first nine months of 1996 and
1997; however, the cash provided in the first nine months of 1997 was
significantly higher than the first nine months of 1996 primarily due to greater
reductions in inventory levels in the 1997 period.
Certain of the Company's income tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies. The Company has previously reached an agreement with
the German tax authorities, and paid certain tax deficiencies of approximately
DM 44 million ($28 million when paid), including interest, which resolved
significant tax contingencies for years through 1990. Certain other significant
German tax contingencies remain outstanding and will continue to be litigated.
The Company has received certain tax assessments aggregating DM 130 million ($74
million), including interest, for years through 1996 and may receive tax
assessments for an additional DM 20 million ($11 million) related to these
remaining tax contingencies. No payments of tax or interest deficiencies related
to these assessments will be required until the litigation is resolved. A recent
German tax court proceeding involving a tax issue substantially the same as that
involved in the Company's primary remaining income tax contingency was decided
in favor of the taxpayer. The German tax authorities have appealed the decision
to the German Supreme Court and the Company believes that the decision by the
German Supreme Court will be rendered within two years and will become a legal
precedent which will likely determine the outcome of the Company's primary
dispute with the German tax authorities. Although the Company believes that it
will ultimately prevail, the Company has granted a DM 100 million ($57 million
at September 30, 1997) lien on its Nordenham, Germany TiO2 plant in favor of the
German tax authorities. No assurance can be given that this litigation will be
resolved in the Company's favor in view of the inherent uncertainties involved
in court proceedings. The Company believes that it has adequately provided
- 16 -
accruals for additional income 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.
In order to improve its near-term liquidity, the Company refinanced its
Rheox subsidiary during January 1997, obtaining a net $125 million of new
long-term financing. The net proceeds, along with other available funds, were
used to prepay DM 207 million ($127 million when paid) of the Company's DM term
loan and to repay DM 43 million ($26 million when paid) of the Company's DM
revolving credit facility. As a result of the refinancing and prepayment, the
Company's aggregate scheduled debt payments for 1997 and 1998 decreased by $103
million ($64 million in 1997 and $39 million in 1998). Additionally, total debt
was reduced by $28 million as part of the refinancing. In connection with the
prepayment, the Company and its lenders modified certain financial covenants of
the DM credit agreement and NL guaranteed the facility. At September 30, 1997,
the Company was in compliance with all financial covenants governing its debt
agreements.
In the first nine months of 1997, in addition to the above refinancing and
prepayment, the Company repaid $12 million of the joint venture term loan, $11
million of Rheox's revolving credit facility, $4 million of Rheox's term loan
and DM 10 million ($6 million when paid) of short-term notes payable.
At September 30, 1997, the Company had cash and cash equivalents
aggregating $102 million (54% held by non-U.S. subsidiaries) including
restricted cash and cash equivalents of $10 million. The Company's subsidiaries
had $21 million and $88 million available for borrowing at September 30, 1997
under existing U.S. and non-U.S. credit facilities, respectively.
The Company has been named as a defendant, potentially responsible party
("PRP"), or both, in a number of legal proceedings associated with environmental
matters, including waste disposal sites, mining locations and facilities
currently or previously owned, operated or used by the Company, certain of which
are on the U.S. Environmental Protection Agency's (the "U.S. EPA") Superfund
National Priorities List or similar state lists. On a quarterly basis, the
Company evaluates the potential range of its liability at sites where it has
been named as a PRP or defendant. The Company believes it has adequate accruals
($136 million at September 30, 1997) for reasonably estimable costs of such
matters, but the Company's ultimate liability may be affected by a number of
factors, including changes in remedial alternatives and costs and the
allocations of such costs among PRPs. It is not possible to estimate the range
of costs for certain sites. The upper end of the range of reasonably possible
costs to the Company for sites for which it is possible to estimate costs is
approximately $180 million. The Company's estimates of such liabilities have not
been discounted to present value, and the Company has not recognized any
potential insurance recoveries. No assurance can be given that actual costs will
not exceed accrued amounts or the upper end of the range for sites for which
estimates have been made, and no assurance can be given that costs will not be
incurred with respect to sites as to which no estimate presently can be made.
Further, there can be no assurance that additional environmental matters will
not arise in the future.
- 17 -
The Company is also a defendant in a number of legal proceedings seeking
damages for personal injury and property damage arising from the sale of lead
pigments and lead-based paints. There is no assurance that the Company will not
incur future liability in respect of this pending litigation in view of the
inherent uncertainties involved in court and jury rulings in pending and
possible future cases. However, based on, among other things, the results of
such litigation to date, the Company believes that the pending lead pigment and
paint litigation is without merit. The Company has not accrued any amounts for
such pending litigation. Liability that may result, if any, cannot be reasonably
estimated. In addition, various legislation and administrative regulations have,
from time to time, been enacted or proposed that seek to impose various
obligations on present and former manufacturers of lead pigment and lead-based
paint with respect to asserted health concerns associated with the use of such
products and to effectively overturn court decisions in which the Company and
other pigment manufacturers have been successful. The Company currently believes
the disposition of all claims and disputes, individually and in the aggregate,
should not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity. There can be no
assurance that additional matters of these types will not arise in the future.
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and availability of resources in view of, among
other things, its debt service and capital expenditure requirements and
estimated future operating cash flows. As a result of this process, the Company
in the past has sought, and in the future may seek, to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, issue
additional securities, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, the Company may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals industry. In the event of any such transactions, the Company may
consider using available cash, issuing equity securities or refinancing or
increasing its indebtedness to the extent permitted by the agreements governing
the Company's existing debt.
The statements contained in this Report on Form 10-Q ("Quarterly Report")
which are not historical facts, including, but not limited to, statements found
under the captions "Results of Operations" and "Liquidity and Capital Resources"
above, are forward-looking statements that involve a number of risks and
uncertainties. The actual results of the future events described in such
forward-looking statements in this Quarterly Report could differ materially from
those stated in such forward-looking statements. Among the factors that could
cause actual results to differ materially are the risks and uncertainties
discussed in this Quarterly Report and in the 1996 Annual Report, including,
without limitation, the portions of such reports under the captions referenced
above, and the uncertainties set forth from time to time in the Company's other
public reports and filings and public statements.
- 18 -
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the 1996 Annual Report and the Company's Quarterly
Report on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997 for
descriptions of certain previously-reported legal proceedings.
Wright v. Lead Industries, et al., (Nos. 94 363042 and 363043). In
October 1997 the Maryland court of appeals affirmed the previously-reported
summary judgment in defendants' favor. The time in which plaintiffs' may seek to
review the court of appeals decision has not yet expired.
Gates v. American Cyanamid Co., et al., (No. I1996-2114). In October
1997 plaintiffs indicated that they intend to dismiss this case with prejudice
as to all defendants.
Ritchie v. NL Industries, et al., (No. 5:96-CV-166). In August 1997
plaintiffs dismissed the complaint with prejudice against all defendants.
Gould v. NL Industries, Inc., (No. 91-1091) ("Gould Superfund Site,"
Portland, Oregon). The U.S. EPA, the Company and other PRPs are negotiating the
terms of a consent decree to perform the remedial action selected in the amended
record of decision. Trial in the action for contribution among the PRPs,
previously set for September 1997, has been rescheduled for January 1998.
Granite City Superfund Site. In September 1997 the U.S. EPA informed
the Company that past and future cleanup costs are estimated to total
approximately $63.5 million.
Cherokee County Sites. In August 1997 the U.S. EPA issued the record of
decision for the Baxter Springs and Treece subsites. The U.S. EPA has estimated
that the selected remedy will cost approximately $7.1 million.
State of Illinois vs. NL Industries. Inc. et al., (No. 88-CH-11618). In
August 1997 the trial court dismissed the case. The State has filed a notice of
appeal.
Flacke v. NL Industries, Inc., (No. 1842-80). The case has been settled
within previously accrued amounts.
Rhodes, et al. v. ACF Industries, Inc., et al., (No. 95-C-261). An
agreement in principle has been reached settling this matter, with the Company
being indemnified by another party.
- 19 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 - Financial Data Schedule for the nine-month period ended
September 30, 1997.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended September 30, 1997 and
through the date of this report:
July 22, 1997 - reported Items 5 and 7.
October 17, 1997 - reported Items 5 and 7.
- 20 -
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, 1997 By /s/ Joseph S. Compofelice
- ----------------------- -------------------------
Joseph S. Compofelice
Vice President and
Chief Financial Officer
Date: October 31, 1997 By /s/ Dennis G. Newkirk
- ----------------------- ---------------------
Dennis G. Newkirk
Vice President and Controller
(Principal Accounting Officer)
- 21 -
5
1,000
9-MOS
DEC-31-1997
JAN-01-1997
SEP-30-1997
102,214
0
150,498
2,750
172,308
447,679
894,562
470,636
1,123,162
264,086
694,606
0
0
8,355
(237,028)
1,123,162
740,423
752,104
557,442
557,442
0
0
57,853
(15,921)
7,749
(23,705)
0
0
0
(23,705)
(0.46)
(0.46)
