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 June 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 August 1, 1997: 51,146,214
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1996
and June 30, 1997 3-4
Consolidated Statements of Operations - Three months
and six months ended June 30, 1996 and 1997 5
Consolidated Statement of Shareholders' Deficit
- Six months ended June 30, 1997 6
Consolidated Statements of Cash Flows - Six
months ended June 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 18-19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
- 2 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, June 30,
ASSETS 1996 1997
------------ --------
Current assets:
Cash and cash equivalents, including
restricted cash of $10,895 and $9,494 ......... $ 114,115 $ 74,579
Accounts and notes receivable .................. 138,538 167,664
Refundable income taxes ........................ 9,267 4,037
Inventories .................................... 232,510 188,544
Prepaid expenses ............................... 4,219 6,120
Deferred income taxes .......................... 1,597 1,358
---------- ----------
Total current assets ....................... 500,246 442,302
---------- ----------
Other assets:
Marketable securities .......................... 23,718 26,745
Investment in joint ventures ................... 181,479 178,245
Prepaid pension cost ........................... 24,821 23,301
Deferred income taxes .......................... 223 222
Other .......................................... 24,825 22,458
---------- ----------
Total other assets ......................... 255,066 250,971
---------- ----------
Property and equipment:
Land ........................................... 21,963 20,827
Buildings ...................................... 165,479 155,727
Machinery and equipment ........................ 660,333 625,548
Mining properties .............................. 95,891 88,662
Construction in progress ....................... 13,231 4,101
---------- ----------
956,897 894,865
Less accumulated depreciation and depletion .... 490,851 466,331
---------- ----------
Net property and equipment ................. 466,046 428,534
---------- ----------
$1,221,358 $1,121,807
========== ==========
- 3 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
December 31, June 30,
LIABILITIES AND SHAREHOLDERS' DEFICIT 1996 1997
------------ -----------
Current liabilities:
Notes payable $ 25,732 $ 23,168
Current maturities of long-term debt 91,946 33,819
Accounts payable and accrued liabilities 153,904 149,586
Payable to affiliates 10,204 10,177
Income taxes 5,664 6,706
Deferred income taxes 2,895 2,582
---------- ----------
Total current liabilities 290,345 226,038
---------- ----------
Noncurrent liabilities:
Long-term debt 737,100 738,774
Deferred income taxes 151,221 140,407
Accrued pension cost 57,941 52,714
Accrued postretirement benefits cost 55,935 53,217
Other 132,048 152,651
---------- ----------
Total noncurrent liabilities 1,134,245 1,137,763
---------- ----------
Minority interest 249 249
Shareholders' deficit:
Common stock 8,355 8,355
Additional paid-in capital 759,281 759,281
Adjustments:
Currency translation (118,629) (126,134)
Pension liabilities (1,822) (1,822)
Marketable securities 1,278 3,245
Accumulated deficit (485,948) (519,414)
Treasury stock (365,996) (365,754)
---------- ----------
Total shareholders' deficit (203,481) (242,243)
---------- ----------
$1,221,358 $1,121,807
========== ==========
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 Six months ended
June 30, June 30,
-------------------- --------------------
1996 1997 1996 1997
-------- -------- -------- --------
Revenues and other income:
Net sales .................. $ 263,162 $ 252,794 $ 503,602 $ 492,270
Other, net ................. 10,329 6,416 20,877 8,658
--------- --------- --------- ---------
273,491 259,210 524,479 500,928
--------- --------- --------- ---------
Costs and expenses:
Cost of sales .............. 194,794 191,623 364,610 376,658
Selling, general and
administrative ............ 43,148 43,136 86,039 114,282
Interest ................... 18,516 19,419 37,655 38,377
--------- --------- --------- ---------
256,458 254,178 488,304 529,317
--------- --------- --------- ---------
Income (loss) before
income taxes and
minority interest ...... 17,033 5,032 36,175 (28,389)
Income tax expense ........... 5,114 2,757 10,854 5,049
--------- --------- --------- ---------
Income (loss) before
minority interest ...... 11,919 2,275 25,321 (33,438)
Minority interest ............ -- 20 (42) 28
--------- --------- --------- ---------
Net income (loss) ....... $ 11,919 $ 2,255 $ 25,363 $ (33,466)
========= ========= ========= =========
Net income (loss) per share
of common stock ............. $ .23 $ .04 $ .49 $ (.65)
========= ========= ========= =========
Weighted average common and
common equivalent shares
outstanding ................. 51,493 51,380 51,499 51,142
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
- 5 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
Six months ended June 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 ................... -- -- -- -- -- (33,466) -- (33,466)
Adjustments ................ -- -- (7,505) -- 1,967 -- -- (5,538)
Treasury stock reissued .... -- -- -- -- -- -- 242 242
------ -------- --------- ------- ------ --------- --------- ---------
Balance at June 30, 1997 ... $8,355 $759,281 $(126,134) $(1,822) $3,245 $(519,414) $(365,754) $(242,243)
====== ======== ========= ======= ====== ========= ========= =========
See accompanying notes to consolidated financial statements.
- 6 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1996 and 1997
(In thousands)
1996 1997
-------- --------
Cash flows from operating activities:
Net income (loss) ................................ $ 25,363 $(33,466)
Depreciation, depletion and amortization ......... 20,076 19,291
Noncash interest expense ......................... 10,250 11,338
Deferred income taxes ............................ (3,496) (539)
Change in accounting for environmental
remediation liabilities ......................... -- 30,000
Other, net ....................................... (8,746) (7,702)
-------- --------
43,447 18,922
Change in assets and liabilities:
Accounts and notes receivable .................. (37,852) (38,112)
Inventories .................................... 10,168 29,706
Prepaid expenses ............................... (3,390) (1,952)
Accounts payable and accrued liabilities ....... (13,554) 1,694
Income taxes ................................... 3,620 8,447
Other, net ..................................... (8,033) (4,385)
-------- --------
Net cash provided (used) by operating
activities ................................... (5,594) 14,320
-------- --------
Cash flows from investing activities:
Capital expenditures ............................. (31,358) (16,326)
Purchase of minority interest .................... (5,168) --
Investment in joint ventures, net ................ 1,632 3,507
Proceeds from disposition of property and
equipment ....................................... 110 2,910
-------- --------
Net cash used by investing activities ......... (34,784) (9,909)
-------- --------
- 7 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six months ended June 30, 1996 and 1997
(In thousands)
1996 1997
--------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ....................................... $ 64,712 $ 140,000
Principal payments ............................... (33,112) (178,333)
Deferred financing costs ......................... -- (3,931)
Dividends .......................................... (10,221) --
Other, net ......................................... (202) 240
--------- ---------
Net cash provided (used) by financing
activities .................................... 21,177 (42,024)
--------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities .... (19,201) (37,613)
Currency translation ............................. (2,038) (1,923)
Balance at beginning of period ..................... 141,333 114,115
--------- ---------
Balance at end of period ........................... $ 120,094 $ 74,579
========= =========
Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized ............... $ 27,591 $ 27,049
Income taxes, net .................................. 10,702 (2,739)
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 46% 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 June 30, 1997 and the consolidated statements of
operations, shareholders' deficit and cash flows for the interim periods ended
June 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. 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 Six months ended
June 30, June 30,
---------------------- ----------------------
1996 1997 1996 1997
--------- --------- --------- ---------
(In thousands)
Net sales:
Kronos .......................... $ 228,229 $ 214,354 $ 434,597 $ 418,743
Rheox ........................... 34,933 38,440 69,005 73,527
--------- --------- --------- ---------
$ 263,162 $ 252,794 $ 503,602 $ 492,270
========= ========= ========= =========
Operating income:
Kronos .......................... $ 25,443 $ 16,815 $ 54,915 $ 25,504
Rheox ........................... 10,655 12,207 23,121 22,343
--------- --------- --------- ---------
36,098 29,022 78,036 47,847
General corporate income (expense):
Securities earnings, net ........ 1,134 528 2,441 1,227
Expenses, net ................... (1,683) (5,099) (6,647) (39,086)
Interest expense ................ (18,516) (19,419) (37,655) (38,377)
--------- --------- --------- ---------
$ 17,033 $ 5,032 $ 36,175 $ (28,389)
========= ========= ========= =========
Note 4 - Inventories:
December 31, June 30,
1996 1997
------------ --------
(In thousands)
Raw materials ............................ $ 43,284 $ 36,514
Work in process .......................... 10,356 11,456
Finished products ........................ 142,091 107,585
Supplies ................................. 36,779 32,989
-------- --------
$232,510 $188,544
======== ========
- 10 -
Note 5 - Marketable securities:
December 31, June 30,
1996 1997
------------ --------
(In thousands)
Available-for-sale securities -
noncurrent marketable equity securities:
Unrealized gains ............................... $ 3,516 $ 5,688
Unrealized losses .............................. (1,550) (695)
Cost ........................................... 21,752 21,752
-------- --------
Aggregate market ........................... $ 23,718 $ 26,745
======== ========
Note 6 - Investment in joint ventures:
December 31, June 30,
1996 1997
------------ --------
(In thousands)
TiO2 manufacturing joint venture ............... $179,195 $175,688
Other .......................................... 2,284 2,557
-------- --------
$181,479 $178,245
======== ========
Note 7 - Other noncurrent assets:
December 31, June 30,
1996 1997
------------ --------
(In thousands)
Intangible assets, net ......................... $ 7,939 $ 5,831
Deferred financing costs, net .................. 9,791 11,721
Other .......................................... 7,095 4,906
------- -------
$24,825 $22,458
======= =======
Note 8 - Accounts payable and accrued liabilities:
December 31, June 30,
1996 1997
------------ --------
(In thousands)
Accounts payable ......................... $ 60,648 $ 48,729
-------- --------
Accrued liabilities:
Employee benefits ...................... 34,618 33,926
Environmental costs .................... 6,000 9,000
Interest ............................... 9,429 9,379
Miscellaneous taxes .................... 4,073 5,300
Other .................................. 39,136 43,252
-------- --------
93,256 100,857
-------- --------
$153,904 $149,586
======== ========
- 11 -
Note 9 - Other noncurrent liabilities:
December 31, June 30,
1996 1997
------------ --------
(In thousands)
Environmental costs .......................... $106,849 $128,972
Insurance claims and expenses ................ 11,673 11,469
Employee benefits ............................ 11,960 10,864
Other ........................................ 1,566 1,346
-------- --------
$132,048 $152,651
======== ========
Note 10 - Notes payable and long-term debt:
December 31, June 30,
1996 1997
------------ --------
(In thousands)
Notes payable - Kronos (DM 40,000) ................. $ 25,732 $ 23,168
======== ========
Long-term debt:
NL Industries:
11.75% Senior Secured Notes .................... $250,000 $250,000
13% Senior Secured Discount Notes .............. 149,756 159,490
-------- --------
399,756 409,490
-------- --------
Kronos:
DM bank credit facility (DM 539,971 and
DM 288,322, respectively) ..................... 347,362 166,996
Joint venture term loan ........................ 57,858 50,143
Other .......................................... 9,125 5,753
-------- --------
414,345 222,892
-------- --------
Rheox:
Bank credit facility ........................... 14,659 140,000
Other .......................................... 286 211
-------- --------
14,945 140,211
-------- --------
829,046 772,593
Less current maturities ............................ 91,946 33,819
-------- --------
$737,100 $738,774
======== ========
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 June 30,
1997, the estimated fair value of such agreements was estimated to be a $.1
million receivable. Such fair value represents the amount Rheox would receive
- 12 -
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.
Six months ended
June 30,
--------------------
1996 1997
-------- --------
(In thousands)
Expected tax expense (benefit) ......................... $ 12,661 $ (9,936)
Non-U.S. tax rates ..................................... (1,954) (440)
Incremental tax on income of companies not included
in NL's consolidated U.S. federal income tax return ... 2,808 1,440
Valuation allowance .................................... (1,098) 12,775
U.S. state income taxes ................................ 1,138 1,050
Other, net ............................................. (2,701) 160
-------- --------
Income tax expense ............................... $ 10,854 $ 5,049
======== ========
Note 12 - Other income, net:
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
1996 1997 1996 1997
-------- -------- -------- --------
(In thousands)
Interest and dividends ........... $ 1,134 $ 528 $ 2,441 $ 1,227
Currency transaction gains, net .. 2,821 2,210 3,867 2,727
Disposition of property and ...... 2,784 2,756
equipment ....................... (405) (919)
Pension curtailment gain ......... -- -- 4,791 --
Technology fee income ............ 2,593 -- 5,674 --
Litigation settlement gain ....... 2,756 -- 2,756 --
Other, net ....................... 1,430 894 2,267 1,948
-------- -------- -------- --------
$ 10,329 $ 6,416 $ 20,877 $ 8,658
======== ======== ======== ========
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 quarter ended March 31, 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 % Six months ended %
June 30, Change June 30, Change
------------------ ------ ------------------ ------
1996 1997 1996 1997
-------- -------- -------- --------
(In millions) (In millions)
Net sales:
Kronos ..................... $ 228.3 $ 214.4 -6% $ 434.6 $ 418.8 -4%
Rheox ...................... 34.9 38.4 +10% 69.0 73.5 +7%
-------- -------- -------- --------
$ 263.2 $ 252.8 -4% $ 503.6 $ 492.3 -2%
======== ======== ======== ========
Operating income:
Kronos ..................... $ 25.4 $ 16.8 -34% $ 54.9 $ 25.5 -54%
Rheox ...................... 10.7 12.2 +14% 23.1 22.3 -3%
-------- -------- -------- --------
$ 36.1 $ 29.0 -20% $ 78.0 $ 47.8 -39%
======== ======== ======== ========
Percent changes in TiO2:
Sales volume ............... +9% +14%
Average selling prices (in
billing currencies) ....... -8% -12%
Kronos' TiO2 operating income in the second quarter and first half of 1997
decreased from the comparable periods in 1996 due to lower average TiO2 selling
prices, partially offset by higher production and sales volumes. Kronos' average
TiO2 selling prices for the second quarter of 1997 were 3% higher than the first
quarter of 1997 and 8% lower than the second quarter of 1996. Selling prices at
the end of the second quarter of 1997 were 1% higher than the average for the
quarter. Kronos achieved record second quarter sales volumes, reflecting
continued strong TiO2 demand. Kronos' second quarter and six months sales
volumes increased 9% and 14%, respectively, from the year-earlier periods with
higher sales volumes worldwide. While Kronos currently expects its full-year
1997 TiO2 sales volumes will be higher than the full-year 1996 volumes, TiO2
sales volumes in the last half of 1997 are expected to be lower than the first
half of 1997. Kronos' operating income in the second quarter of 1997 includes a
$2.7 million gain related to the sale of surplus assets.
Although Kronos expects further increases in its TiO2 selling prices
during the second half of 1997, Kronos expects its full-year 1997 operating
income will be below that of 1996, due to lower anticipated average TiO2 prices
for full-year 1997 compared to 1996. Kronos' cost of sales as a percentage of
net sales increased in the second quarter and first half of 1997 due to lower
average prices in both periods of 1997 compared to 1996. Kronos' selling,
general and administrative expenses decreased in the second quarter and first
half of 1997 due to favorable effects of foreign currency translation, partially
offset by higher distribution expenses associated with higher 1997 sales
volumes.
Rheox's operating income for the second quarter of 1997 increased 14%
compared to the second quarter of 1996 on higher sales volumes and slightly
higher selling prices. As a result, Rheox's operating income in the first half
- 14 -
of 1997 was $1.9 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 in the
second quarter and first half of 1997 were comparable to the respective 1996
periods. Selling, general and administrative expenses increased in the second
quarter and first half of 1997 compared to the 1996 periods primarily due to
higher selling and distribution expenses associated with higher 1997 sales
volumes and higher variable compensation expense.
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 second quarter and first half of
1997 by $13 million and $22 million, respectively, compared to the comparable
1996 periods. In addition, a portion of the net sales generated from the
Company's non-U.S. operations are billed in U.S. dollars, and exchange rate
fluctuations do not impact such net sales. Operating margins on such net sales
improved compared to 1996 as operating costs are lower in U.S. dollar terms due
to exchange rate fluctuations. Consequently, fluctuations in the value of the
U.S. dollar relative to other currencies increased operating income in the
second quarter and first half of 1997 compared with the same periods in 1996.
The following table sets forth certain information regarding general
corporate income (expense).
Three months ended Six months ended
June 30, Difference June 30, Difference
------------------ ---------- ----------------- ----------
1996 1997 1996 1997
------- ------- ------- -------
Securities earnings ... $ 1.1 $ .5 $ (.6) $ 2.4 $ 1.2 $ (1.2)
Corporate expenses, net (1.7) (5.1) (3.4) (6.6) (39.1) (32.5)
Interest expense ...... (18.5) (19.4) (.9) (37.7) (38.4) (.7)
------- ------- ------- ------- ------- -------
$ (19.1) $ (24.0) $ (4.9) $ (41.9) $ (76.3) $ (34.4)
======= ======= ======= ======= ======= =======
Securities earnings declined due to lower average balances available for
investment. Corporate expenses, net was higher in the second quarter of 1997
compared to the same period in 1996 primarily due to a $2.8 million gain
recognized in the second quarter of 1996 related to the settlement of certain
litigation in which the Company was a plaintiff. Corporate expenses, net in the
first half of 1997 was 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 second quarter and first half 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 six months ended June 30, 1996 and 1997 are
presented below.
Six months ended
June 30,
-------------------
1996 1997
------ ------
(In millions)
Net cash provided (used) by:
Operating activities ............................... $(5.6) $14.3
Investing activities ............................... (34.8) (9.9)
Financing activities ............................... 21.2 (42.0)
------ ------
Net cash used by operating, investing .......... $(19.2) $(37.6)
and financing activities ...................... ====== ======
The TiO2 industry is cyclical and changes in economic conditions within
the industry significantly impact the earnings and operating cash flows of the
Company. Cash flows from operations before change in assets and liabilities in
the first six 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) used cash in both the first half of 1996 and 1997;
however, the cash used in the first half of 1997 was significantly less than the
first half of 1996 due to cash provided from 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 ($75
million), including interest, for years through 1996 and expects to receive tax
assessments for an additional DM 20 million ($12 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, which
the Company anticipates may take approximately two to five years. Although the
Company believes that it will ultimately prevail, the Company has granted a DM
100 million ($58 million at June 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 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.
- 16 -
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 its 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 June 30, 1997, the
Company was in compliance with all financial covenants governing its debt
agreements.
In addition to the above refinancing and prepayment, the Company repaid
$7.8 million of the joint venture term loan in the first six months of 1997.
At June 30, 1997, the Company had cash and cash equivalents aggregating
$75 million (36% held by non-U.S. subsidiaries) including restricted cash and
cash equivalents of $9 million. The Company's subsidiaries had $9 million and
$92 million available for borrowing at June 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
($138 million at June 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 $185
million. The Company's estimates of such liabilities have not been discounted to
present value, and the Company has not recognized any potential insurance
recoveries. No assurance can be given that actual costs will not exceed accrued
amounts or the upper end of the range for sites for which estimates have been
made, and no assurance can be given that costs will not be incurred with respect
to sites as to which no estimate presently can be made. Further, there can be no
assurance that additional environmental matters will not arise in the future.
The Company is also a defendant in a number of legal proceedings seeking
damages for personal injury and property damage arising from the sale of lead
pigments and lead-based paints. There is no assurance that the Company will not
incur future liability in respect of this pending litigation in view of the
inherent uncertainties involved in court and jury rulings in pending and
possible future cases. However, based on, among other things, the results of
such litigation to date, the Company believes that the pending lead pigment and
paint
- 17 -
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.
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 quarter ended March 31, 1997 for descriptions of
certain previously-reported legal proceedings.
Gould Inc. v. NL Industries, Inc. ("Gould Superfund Site"), (No.
91-1091). In May 1997 the U.S. EPA issued an Amended Record of Decision
- 18 -
("ARD") for the Gould Superfund Site soils operable unit. The ARD requires
construction of an onsite containment facility estimated to cost between $10.5
million and $12 million, including capital costs and operating and maintenance
costs.
German, et al. v. Federal Home Mortgage Loan Corp., et al. (No. 93 Civ.
6941). In May 1997 plaintiffs moved for class certification and defendants moved
for summary judgment. In June 1997 the Court stayed all further activity in the
case pending reconsideration of its 1995 decision permitting filing of the
complaint against the manufacturer defendants and joinder of the new complaint
with the pre-existing complaint against New York City and other landlords.
NL Industries, Inc. v. Commercial Union, et al. (No. 90-2124). In June
1997 the Company reached a settlement in principle with its insurers regarding
allocation of defense costs in the lead pigment cases in which reimbursement of
defense costs had been sought.
Parker v. NL Industries, et al. (No. 97085060 CC915). In June 1997
plaintiffs moved to remand to state court and the Company answered the complaint
denying liability. Trial is scheduled to begin in July 1998.
Ritchie v. NL Industries, et al. (No. 5:96-CV-166). In July 1997
defendants filed a second notice of removal to federal court.
The City of New York, et al. v. Lead Industries Association, Inc., et
al. (No. 89-4617). In July 1997 the trial court's denials of defendants' two
summary judgment motions on the fraud claim were affirmed by the Appellate
Division.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 7, 1997. All
the nominees for director were elected with the voting results for each as
follows:
Director Shares For Shares Withheld
---------- ---------------
Joseph S. Compofelice ................... 48,823,898 445,657
J. Landis Martin ........................ 48,814,783 454,772
Kenneth R. Peak ......................... 48,823,484 446,071
Glenn R. Simmons ........................ 48,814,210 455,345
Harold C. Simmons ....................... 48,812,068 457,487
Lawrence A. Wigdor ...................... 48,822,997 446,558
Admiral Elmo R. Zumwalt, Jr ............. 48,821,656 447,899
- 19-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 - Financial Data Schedule for the six-month period ended
June 30, 1997.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended June 30, 1997 and
through the date of this report:
April 22, 1997 - reported Items 5 and 7.
July 22, 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: August 1, 1997 By /s/ Joseph S. Compofelice
- --------------------- -------------------------
Joseph S. Compofelice
Vice President and
Chief Financial Officer
Date: August 1, 1997 By /s/ Dennis G. Newkirk
- --------------------- ---------------------
Dennis G. Newkirk
Vice President and Controller
(Principal Accounting Officer)
- 21 -
5
1,000
6-MOS
DEC-31-1997
JAN-01-1997
JUN-30-1997
74,579
0
157,691
2,711
188,544
442,302
894,865
466,331
1,121,807
226,038
738,774
0
0
8,355
(250,598)
1,121,807
492,270
500,928
376,658
376,658
0
0
38,377
(28,389)
5,049
(33,466)
0
0
0
(33,466)
(0.65)
(0.65)
