SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the quarterly period ended September 30, 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 75240-2697
- ------------------------------------------- ------------------------
(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 October 31, 2003: 47,764,084
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - September 30, 2003
and December 31, 2002 3
Consolidated Statements of Income - Three months and
nine months ended September 30, 2003 and 2002 5
Consolidated Statements of Comprehensive Income
- Three months and nine months ended
September 30, 2003 and 2002 6
Consolidated Statement of Shareholders' Equity
- Nine months ended September 30, 2003 7
Consolidated Statements of Cash Flows - Nine
months ended September 30, 2003 and 2002 8
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 4. Controls and Procedures 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 6. Exhibits and Reports on Form 8-K 35
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
ASSETS 2003 2002
------------- ------------
Current assets:
Cash and cash equivalents ........................ $ 59,656 $ 58,091
Restricted cash equivalents ...................... 22,058 52,089
Restricted marketable debt securities ............ 8,212 9,670
Accounts and other receivables ................... 176,010 136,858
Receivable from affiliates ....................... 1,012 207
Refundable income taxes .......................... 591 1,782
Inventories ...................................... 203,321 209,882
Prepaid expenses ................................. 7,882 7,207
Deferred income taxes ............................ 10,543 10,511
---------- ----------
Total current assets ......................... 489,285 486,297
---------- ----------
Other assets:
Marketable equity securities ..................... 53,095 40,901
Receivable from affiliate ........................ 16,000 18,000
Investment in TiO2 manufacturing joint venture ... 127,834 130,009
Prepaid pension cost ............................. 17,249 17,572
Restricted marketable debt securities ............ 3,565 9,232
Other ............................................ 26,738 30,671
---------- ----------
Total other assets ........................... 244,481 246,385
---------- ----------
Property and equipment:
Land ............................................. 30,944 29,072
Buildings ........................................ 164,817 150,406
Machinery and equipment .......................... 702,053 640,297
Mining properties ................................ 84,381 84,778
Construction in progress ......................... 19,210 8,702
---------- ----------
1,001,405 913,255
Less accumulated depreciation and depletion ...... 596,266 534,436
---------- ----------
Net property and equipment ................... 405,139 378,819
---------- ----------
$1,138,905 $1,111,501
========== ==========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY September 30, December 31,
2003 2002
------------- ------------
Current liabilities:
Current maturities of long-term debt ....... $ 476 $ 1,298
Accounts payable and accrued liabilities ... 147,510 167,574
Payable to affiliates ...................... 8,649 8,027
Accrued environmental costs ................ 22,867 51,307
Income taxes ............................... 8,536 6,624
Deferred income taxes ...................... 1,684 3,219
----------- -----------
Total current liabilities .............. 189,722 238,049
----------- -----------
Noncurrent liabilities:
Long-term debt ............................. 327,275 324,608
Deferred income taxes ...................... 152,118 143,518
Accrued environmental costs ................ 64,990 47,189
Accrued pension cost ....................... 43,194 43,757
Accrued postretirement benefits cost ....... 23,916 26,477
Other ...................................... 14,226 14,060
----------- -----------
Total noncurrent liabilities ........... 625,719 599,609
----------- -----------
Minority interest .............................. 8,719 8,516
----------- -----------
Shareholders' equity:
Common stock ............................... 8,355 8,355
Additional paid-in capital ................. 777,819 777,819
Retained earnings .......................... 127,779 101,554
Accumulated other comprehensive loss ....... (163,729) (186,221)
Treasury stock ............................. (435,479) (436,180)
----------- -----------
Total shareholders' equity ............. 314,745 265,327
----------- -----------
$ 1,138,905 $ 1,111,501
=========== ===========
Commitments and contingencies (Notes 11 and 13)
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- ---------- ---------
Net sales .................................. $ 242,931 $ 234,061 $ 762,535 $ 663,327
Cost of sales .............................. 177,432 177,521 563,498 510,021
--------- --------- --------- ---------
Gross margin ........................... 65,499 56,540 199,037 153,306
Selling, general and administrative expense 29,705 28,479 90,059 78,105
Other operating income (expense):
Currency transaction gains (losses), net (458) 648 (4,299) (803)
Disposition of property and equipment .. 7,205 (146) 8,260 451
Noncompete agreement income ............ -- 1,000 333 3,000
Legal settlement gains ................. -- 5 650 2,360
Corporate expense ...................... (9,721) (10,664) (48,238) (28,272)
Other income ........................... 152 321 415 464
Other expense .......................... (24) (8) (76) (125)
--------- --------- --------- ---------
Income from operations ............. 32,948 19,217 66,023 52,276
Other income (expense):
Trade interest income .................. 200 757 561 1,312
Other interest income .................. 786 1,799 2,572 4,359
Securities gains (losses), net ......... (54) (47) 2,398 (59)
Foreign currency transaction gain ...... -- -- -- 6,271
Interest expense ....................... (8,338) (7,554) (24,690) (22,167)
--------- --------- --------- ---------
Income before income taxes and
minority interest ................ 25,542 14,172 46,864 41,992
Income tax expense (benefit) ............... 8,939 4,677 (8,162) 11,695
Minority interest .......................... 18 713 176 1,083
--------- --------- --------- ---------
Net income ......................... $ 16,585 $ 8,782 $ 54,850 $ 29,214
========= ========= ========= =========
Basic and diluted net income per share ..... $ .35 $ .18 $ 1.15 $ .60
========= ========= ========= =========
Weighted-average shares used in the
calculation of net income per share:
Basic .................................... 47,717 48,623 47,702 48,772
Dilutive impact of stock options ......... 61 58 57 85
--------- --------- --------- ---------
Diluted .................................. 47,778 48,681 47,759 48,857
========= ========= ========= =========
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- ---------- ---------
Net income ................................... $ 16,585 $ 8,782 $ 54,850 $29,214
-------- ------- -------- -------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment:
Unrealized holding (loss) gain arising
during the period .................. 5,548 (2,890) 8,217 239
Less reclassification adjustment for
realized gain included in net income -- -- (1,474) --
-------- ------- -------- -------
5,548 (2,890) 6,743 239
Currency translation adjustment .......... 3,181 (4,601) 15,749 31,755
-------- ------- -------- -------
Total other comprehensive
income (loss) ...................... 8,729 (7,491) 22,492 31,994
-------- ------- -------- -------
Comprehensive income ............. $ 25,314 $ 1,291 $ 77,342 $61,208
======== ======= ======== =======
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Nine months ended September 30, 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 - - 54,850 - - - - 54,850
Other comprehensive income,
net of tax - - - 15,749 - 6,743 - 22,492
Dividends - - (28,625) - - - - (28,625)
Treasury stock - reissued - - - - - - 701 701
--------- --------- ------------ ----------- --------- -------- ----------- ----------
Balance at September 30, 2003 $ 8,355 $ 777,819 $ 127,779 $ (154,921) $ (21,447) $ 12,639 $ (435,479) $ 314,745
========= ========= ============ =========== ========= ======== =========== ==========
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2003 and 2002
(In thousands)
2003 2002
-------- ---------
Cash flows from operating activities:
Net income ............................................ $ 54,850 $ 29,214
Depreciation and amortization ......................... 29,671 24,590
Deferred income taxes ................................. 1,795 3,549
Distributions from TiO2 manufacturing joint
venture, net ........................................ 2,175 6,350
Net (gains) losses from:
Securities transactions ............................. (2,398) 59
Disposition of property and equipment ............... (8,260) (451)
Other, net ............................................ (5,227) (3,895)
Change in assets and liabilities:
Accounts and other receivables .................... (31,216) (33,767)
Insurance receivable .............................. 2,505 11,218
Inventories ....................................... 22,993 72,532
Prepaid expenses .................................. (340) (5,208)
Accounts payable and accrued liabilities .......... (30,461) (49,584)
Income taxes ...................................... 3,161 377
Accrued environmental costs ....................... 28,193 8,255
Other, net ........................................ 405 4,870
-------- --------
Net cash provided by operating activities ..... 67,846 68,109
-------- --------
Cash flows from investing activities:
Capital expenditures .................................. (23,819) (18,070)
Collection of loans to affiliates ..................... 2,000 750
Acquisition of business ............................... -- (9,149)
Change in restricted cash equivalents ................. 1,053 821
Proceeds from the disposition of property and equipment 10,638 848
-------- --------
Net cash used by investing activities ......... (10,128) (24,800)
-------- --------
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 2003 and 2002
(In thousands)
2003 2002
---------- ----------
Cash flows from financing activities:
Dividends paid ......................................... $(28,625) $ (29,214)
Treasury stock:
Purchased .......................................... -- (10,559)
Reissued ........................................... 701 354
Indebtedness:
Borrowings ......................................... 16,106 330,800
Principal payments ................................. (45,868) (271,939)
Deferred financing costs ........................... -- (10,590)
Other, net ............................................. (14) (11)
-------- ---------
Net cash (used) provided by financing activities (57,700) 8,841
-------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities ...... 18 52,150
Currency translation ............................... 1,547 2,455
Acquisition of business ............................ -- 196
-------- ---------
1,565 54,801
Balance at beginning of period ......................... 58,091 116,037
-------- ---------
Balance at end of period ............................... $ 59,656 $ 170,838
======== =========
Supplemental disclosures - cash paid (received) for:
Interest ............................................... $ 15,120 $ 19,354
Income taxes, net ...................................... (12,127) 7,837
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
======== =========
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.
("Kronos"), formerly known as Kronos, Inc. At September 30, 2003, Valhi, Inc.
("Valhi") and its subsidiaries held approximately 84% 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 and Chief Executive
Officer of NL and Kronos, as well as the Chairman of the Board of each of
Contran and Valhi, may be deemed to control each of such companies. See Notes 5
and 6.
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 September 30, 2003 and the consolidated statements
of income, comprehensive income, shareholders' equity and cash flows for the
interim periods ended September 30, 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 accounting principles generally accepted
in the United States of America ("GAAP") have been condensed or omitted in
accordance with the GAAP requirements for interim financial statements,
including the applicable requirements of the Securities and Exchange
Commission's Regulation S-X. 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, as
amended, for the year ended December 31, 2002 (the "2002 Annual Report").
In November 2003, NL announced that its board of directors had formally
approved a plan to distribute approximately 48.7% of the outstanding shares of
Kronos' common stock to NL shareholders in the form of a pro-rata dividend. The
shares of Kronos common stock will be distributed on December 8, 2003 to NL
shareholders of record as of November 17, 2003. Upon completion of the
distribution, NL, Valhi and a wholly-owned subsidiary of Valhi will own an
aggregate of approximately 92.5% of Kronos' common stock, and other NL
shareholders would own the remaining 7.5%. As part of the plan, immediately
prior to such distribution of shares of Kronos common stock, Kronos will pay a
$200 million dividend to NL in the form of a long-term note payable. The $200
million long-term note payable to NL will be unsecured and bear interest at 9%
per annum, with interest payable quarterly and all principal due in 2010. Kronos
has applied to list its shares of common stock on the New York Stock Exchange
under the trading symbol KRO. Completion of the distribution is subject to the
satisfaction or waiver of certain conditions.
As disclosed in the 2002 Annual Report, the Company accounts for
stock-based employee compensation 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 greater than
or equal to 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 because the Company could not overcome the
presumption that it would not similarly cash settle its remaining stock options.
Under the variable accounting method, 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) are accrued as an expense over their vesting
period, 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 was $400,000 in each of
the third quarter and first nine months of 2003, and net compensation expense
(income) recognized by the Company was nil in each of the third quarter and
first nine months of 2002.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in the 2002 and 2003 periods
presented if the Company had elected to account for its stock-based employee
compensation related to stock options in accordance with the fair value-based
recognition provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation, for all awards granted
subsequent to January 1, 1995.
Three months ended Nine months ended
September 30, September 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
--------------- ---------------- --------------- ----------------
(In thousands, except per share amounts)
Net income - as reported $ 16,585 $ 8,782 $ 54,850 $ 29,214
Deduct: Stock-based compensation income,
net of tax, included in reported net income (268) - (268) -
Deduct: Stock-based compensation cost, net
of tax, determined under fair value based
method for all awards (120) (271) (361) (813)
--------------- ---------------- --------------- ----------------
Net income - pro forma $ 16,197 $ 8,511 $ 54,221 $ 28,401
=============== ================ =============== ================
Net income per basic common share:
As reported $ .35 $ .18 $ 1.15 $ .60
Pro forma $ .34 $ .18 $ 1.14 $ .58
Net income per diluted common share:
As reported $ .35 $ .18 $ 1.15 $ .60
Pro forma $ .34 $ .17 $ 1.14 $ .58
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 (in
millions), 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.
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 September 30, 2003, the asset retirement obligation was approximately
$700,000 and was included in other noncurrent liabilities. Accretion expense on
the asset retirement obligation during the first nine months of 2003, included
in cost of sales, was nil. If the Company had adopted SFAS No. 143 as of January
1, 2002, the asset retirement obligation would have been approximately $500,000
at January 1, 2002 and $600,000 at September 30, 2002, and the effect on the
Company's reported net income for the nine months ended September 30, 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 - Accounts and other receivables:
September 30, December 31,
2003 2002
------------- ------------
(In thousands)
Trade receivables .............................. $ 164,425 $ 124,044
Insurance claims receivable .................... 53 2,558
Recoverable VAT and other receivables .......... 14,168 12,861
Allowance for doubtful accounts ................ (2,636) (2,605)
--------- ---------
$ 176,010 $ 136,858
========= =========
Note 4 - Inventories:
September 30, December 31,
2003 2002
------------ -------------
(In thousands)
Raw materials ............................ $ 33,049 $ 54,077
Work in process .......................... 17,028 15,936
Finished products ........................ 119,414 109,203
Supplies ................................. 33,830 30,666
-------- --------
$203,321 $209,882
======== ========
Note 5 - Marketable equity securities:
September 30, December 31,
2003 2002
------------- ------------
(In thousands)
Available-for-sale marketable
equity securities:
Valhi ...................................... $53,025 $ 9,845
Tremont Group .............................. -- 30,634
Tremont .................................... -- 243
Other ...................................... 70 179
------- -------
Aggregate fair value ................... $53,095 $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 subject to the
restrictions on resale pursuant to certain provisions of the Securities and
Exchange Commission ("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 owned approximately 4.7 million shares
of Valhi's outstanding common stock (approximately 4% of Valhi's outstanding
shares). The Company will continue to account for its shares of Valhi common
stock as available-for-sale marketable equity securities carried at fair value
(based on quoted market prices). The shares of Valhi common stock cannot be
voted by the Company under Delaware Corporation Law, but the Company does
receive dividends from Valhi on these shares, when declared and paid. For
financial reporting purposes, Valhi reports its proportional interest in these
shares as treasury stock.
Note 6 - 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 (4.0%
at September 30, 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 September 30, 2003, the outstanding
loan balance was $16.0 million and $9.0 million was available for additional
borrowing by the Family Trust. The loan was classified as noncurrent at
September 30, 2003, as the Company does not expect to demand repayment within
one year.
Note 7 - Other noncurrent assets:
September 30, December 31,
2003 2002
------------- ------------
(In thousands)
Deferred financing costs, net .................... $10,008 $10,550
Goodwill ......................................... 6,406 6,406
Unrecognized net pension obligations ............. 6,439 5,561
Intangible asset, net ............................ 1,982 2,230
Restricted cash equivalents ...................... -- 1,344
Other ............................................ 1,903 4,580
------- -------
$26,738 $30,671
======= =======
Note 8 - Accounts payable and accrued liabilities:
September 30, December 31,
2003 2002
------------- ------------
(In thousands)
Accounts payable ......................... $ 62,188 $ 97,140
-------- --------
Accrued liabilities:
Employee benefits .................... 35,073 34,349
Interest ............................. 7,451 240
Deferred income ...................... -- 333
Other ................................ 42,798 35,512
-------- --------
85,322 70,434
-------- --------
$147,510 $167,574
======== ========
Note 9 - Other noncurrent liabilities:
September 30, December 31,
2003 2002
------------- ------------
(In thousands)
Insurance claims and expenses .................. $ 6,870 $ 7,674
Employee benefits .............................. 4,422 4,025
Other .......................................... 2,934 2,361
------- -------
$14,226 $14,060
======= =======
Note 10 - Long-term debt:
September 30, December 31,
2003 2002
------------- ------------
(In thousands)
8.875% Senior Secured Notes,(euro)285 million principal amount $326,924 $296,942
Revolving credit facility .................................... -- 27,077
Other ........................................................ 827 1,887
-------- --------
327,751 325,906
Less current maturities ...................................... 476 1,298
-------- --------
$327,275 $324,608
======== ========
In March 2003 the Company borrowed (euro)15.0 million ($16.1 million when
borrowed), in April 2003 the Company repaid NOK 80 million ($11.0 million when
repaid), and in the third quarter of 2003 the Company repaid (euro)30.0 million
($33.9 million when repaid) under the revolving credit facility.
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,
-----------------------------------
2003 2002
---------------- ----------------
(In thousands)
Expected tax expense $ 16,402 $ 14,697
Non-U.S. tax rates (239) (3,918)
Incremental tax on income of companies
not included in NL's consolidated U.S.
federal income tax return 120 403
Refund of prior year German taxes (24,564) -
Valuation allowance (1,068) (1,828)
U.S. state income taxes 290 38
Tax contingency reserve adjustments, net - 2,214
Other, net 897 89
---------------- ----------------
Income tax (benefit) expense $ (8,162) $ 11,695
================ ================
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 taxes and interest ranging from $33 million to $45 million.
Additional payments in later years may be required as part of the settlement.
The Company believes that it 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)10.1 million ($11.6 million at
September 30, 2003). The Company has filed protests to the assessments with
respect to such years. 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)13.3 million ($15.2 million at September 30, 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.
The Belgian tax authorities have indicated they intend to file a lien on the
fixed assets of the Company's Belgian TiO2 operations.
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 September 30, 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, Kronos was notified by the German Federal
Fiscal Court (the "Court") that the Court had ruled in Kronos' favor concerning
a claim-for-refund suit in which Kronos sought refunds of prior taxes paid
during the periods 1990 through 1997. Kronos has filed certain amended German
tax returns claiming such refunds for all years affected by the Court's
decision, which is expected to result in an estimated refund of taxes and
interest of approximately $40 million. Receipt of the German tax refunds is
subject to satisfaction of various procedural requirements, including a review
and acceptance of the amended German tax returns by the German tax authorities.
Certain of these procedural requirements were satisfied in the second quarter of
2003 with respect to a portion of the refund claim, and in July 2003 the German
tax authorities refunded Kronos a portion of the total anticipated refund. The
portion received in July was (euro)21.5 million ($24.6 million). Kronos has
reflected this tax refund in its second quarter 2003 results of operations. The
Company expects to receive the remaining refunds over the next four to six
months, a portion of which may result in an additional income tax benefit.
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 September 30, 2003, the Company had the equivalent of approximately $452
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 it does not meet the "more-likely-than-not" recognition
criteria. In August 2003, the German federal government proposed new tax law
amendments that would limit the annual utilization of income tax loss
carryforwards, to become effective in 2004. This proposal is similar to a
proposal the German federal government introduced in 2002 that was never
enacted. There can be no assurance that these proposed law amendments will be
enacted, and if enacted, when they would become effective. Such proposal, if
enacted as proposed, would significantly affect the Company's future income tax
expense and cash tax payments.
At September 30, 2003, the Company had net deferred tax liabilities of $143
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 $195
million at September 30, 2003, principally related to Germany, partially
offsetting deferred tax assets that the Company believes do not currently meet
the "more-likely-than-not" recognition criteria.
The Company reduced its deferred income tax valuation allowance by $1.1
million in the first nine months of 2003 and $1.8 million in the first nine
months 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.
Note 12 - Other income (expense):
Operating items
As part of the sale of Rheox in January 1998, the Company received a $20
million fee for entering into a five-year covenant not to compete in the
rheological products business. The Company amortized the fee to income using the
straight-line method over the five-year noncompete period beginning January 30,
1998. The agreement became fully amortized in January 2003.
In both 2002 and 2003, the Company recognized litigation settlement gains
with former insurance carrier groups to settle certain insurance coverage claims
related to environmental remediation. Income related to these litigation
settlement gains is recognized as part of income from operations because the
related environmental remediation expense to which the recovery related is also
recognized as a component of income from operations. No further material
settlements relating to litigation concerning environmental remediation coverage
are expected to be received.
In the first nine months of 2003, the Company disposed of certain real
property and other assets for approximately $10.6 million.
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 nine months of 2003 increased approximately $20 million from the
comparable prior-year period primarily due to higher environmental and legal
expenses.
Nonoperating items
The foreign currency transaction gain of $6.3 million reported in the first
nine months of 2002 related to the second quarter extinguishment of certain
intercompany indebtedness with Kronos International, Inc. ("KII"), a
wholly-owned subsidiary of the Company.
Note 13 - Commitments and contingencies:
Environmental matters and litigation
Some of the Company's current and former facilities, including several
divested secondary lead smelters and former mining locations, are the subject of
civil litigation, administrative proceedings or investigations arising under
federal and state environmental laws. Additionally, in connection with past
disposal practices, the Company has been named as a defendant, potentially
responsible party ("PRP") or both, pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act, as amended by the Superfund Amendments
and Reauthorization Act ("CERCLA"), and similar state laws in approximately 70
governmental and private actions associated with waste disposal sites, mining
locations, and facilities currently or previously owned, operated or used by the
Company or its subsidiaries, or their predecessors, certain of which are on the
U.S. Environmental Protection Agency's ("EPA") Superfund National Priorities
List or similar state lists. These proceedings seek cleanup costs, damages for
personal injury or property damage and/or damages for injury to natural
resources. Certain of these proceedings involve claims for substantial amounts.
Although the Company may be jointly and severally liable for such costs, in most
cases it is only one of a number of PRPs who may also be jointly and severally
liable. In addition, the Company is a party to a number of lawsuits filed in
various jurisdictions alleging CERCLA or other environmental claims.
The imposition of more stringent standards or requirements under
environmental laws or regulations, new developments or changes respecting site
cleanup costs or allocation of such costs among PRPs, solvency of other PRPs, or
a determination that the Company is potentially responsible for the release of
hazardous substances at other sites could result in expenditures in excess of
amounts currently estimated by the Company to be required for such matters. 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 or more PRPs. 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.
Certain of the Company's businesses are and have been engaged in the
handling, manufacture or use of substances or compounds that may be considered
toxic or hazardous within the meaning of applicable environmental laws. As with
other companies engaged in similar businesses, certain past and current
operations and products of the Company have the potential to cause environmental
or other damage. The Company has implemented and continues to implement various
policies and programs in an effort to minimize these risks. The policy of the
Company is to maintain compliance with applicable environmental laws and
regulations at all of its facilities and to strive to improve its environmental
performance. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect the Company's production, handling, use, storage,
transportation, sale or disposal of such substances as well as the Company's
consolidated financial position, results of operations or liquidity.
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. At September
30, 2003, the Company had approximately $88 million accrued for those
environmental matters which are reasonably estimable. 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 which it is possible to
estimate costs is approximately $127 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 other than the settlements
discussed in Note 12.
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 September 30, 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 unknown either 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.
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.
At September 30, 2003, the Company had approximately $21 million in
restricted cash, restricted cash equivalents and restricted marketable debt
securities held by certain trusts, the assets of which can only be used to pay
for certain of the Company's future environmental remediation and other
environmental expenditures. Restricted cash and marketable debt securities
decreased approximately $38 million in the first nine months of 2003 primarily
due to a $30.8 million payment related to the final settlement of the
previously-reported Granite City, Illinois lead smelter site. The Company may
have to pay up to an additional $.7 million related to this site upon completion
of an EPA audit of certain response costs. No further material expenditures are
expected to be made for this site.
Lead pigment litigation
Since 1987 the Company, other former manufacturers of lead pigments for use
in paint and lead-based paint, and the Lead Industries Association have been
named as defendants in various legal proceedings seeking damages for personal
injury and property damage allegedly caused by the use of lead-based paints.
Certain of these actions have been filed by or on behalf of states, large U.S.
cities or their public housing authorities or school districts, and certain
others have been asserted as class actions. These legal proceedings seek
recovery under a variety of theories, including public and private nuisance,
negligent product design, failure to warn, strict liability, breach of warranty,
conspiracy/concert of action, enterprise liability, market share liability,
intentional tort, and fraud and misrepresentation.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and asserted health concerns associated
with the use of lead-based paints, including damages for personal injury,
contribution and/or indemnification for medical expenses, medical monitoring
expenses and costs for educational programs. Several former cases have been
dismissed or withdrawn. Most of the remaining cases are in various pre-trial
stages; some are on appeal following dismissal or summary judgment rulings in
favor of the defendants.
The Company believes that these actions are without merit, intends to
continue to deny all allegations of wrongdoing and liability and to defend all
actions vigorously. The Company has not accrued any amounts for the pending lead
pigment litigation. Liability that may result, if any, cannot reasonably be
estimated.
Various legislation and administrative regulations have, from time to time,
been enacted or proposed that seek to (i) 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 (ii)
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. While no legislation or
regulations have been enacted to date that are expected to have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity, imposition of market share liability or other
legislation could have such an effect.
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.
Considering the Company's previous involvement in the lead pigment and
lead-based paint businesses, 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.
Other litigation
The Company had been named as a defendant in various lawsuits in a variety
of jurisdictions, alleging personal injuries as a result of occupational
exposure to asbestos, silica and/or mixed dust in connection with formerly owned
operations. Approximately 390 of these cases involving a total of approximately
31,500 plaintiffs and their spouses remain pending. The Company has not accrued
any amounts for this litigation because liability that may result to NL, if any,
can not be reasonably estimated. In addition, from time to time, the Company has
received notices regarding asbestos or silica claims purporting to be brought
against former subsidiaries of the Company, including notices provided to
insurers with which the Company has entered into settlements extinguishing
certain insurance policies. These insurers may seek indemnification from the
Company.
The Company's Belgian subsidiary and various of its Belgian employees are
the subject of civil and criminal proceedings relating to an accident that
resulted in two fatalities at the Company's Langerbrugge, Belgium facility in
October 2000. The investigation stage of these proceedings was completed in
2002. In May 2003 the Belgian authorities referred the proceedings against the
Company's Belgian subsidiary and certain of its Belgian employees to the
criminal court for trial. Trial briefs have been submitted to the criminal court
by the parties and a final hearing and determination by the court is scheduled
for January 2004.
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.
For descriptions of certain other legal proceedings, environmental, income
tax and other commitments and contingencies related to the Company, reference is
made to (i) the Company's 2002 Annual Report, (ii) the Company's Quarterly
Reports on Form 10-Q, as amended, for the quarters ended March 31, 2003 and June
30, 2003, and (iii) Note 11.
Note 14 - Accounting principle not yet adopted:
The Company is required to comply with the consolidation requirements of
FASB Interpretation ("FIN") No. 46, Consolidation of Variable Interest Entities,
an interpretation of ARB No. 51, as amended, at December 31, 2003. The Company
is still studying this newly-issued interpretation. While the Company currently
does not believe it has any involvement with any variable interest entity (as
that term is defined in FIN No 46), the interpretation is complex, and the staff
of the FASB continues to provide implementation guidance, and therefore, the
impact of adopting the consolidation requirements of FIN No. 46 has not yet been
determined.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended Nine Months ended
September 30, September 30,
---------------------------------------- ----------------------------------------
% %
2003 2002 Change 2003 2002 Change
------------ ------------ ------------- ------------ ------------ -------------
(In millions, except percentages and metric tons)
Net sales and operating
income
Net sales $ 242.9 $ 234.1 +4% $ 762.5 $ 663.3 +15%
Cost of sales 177.4 177.5 * 563.5 510.0 +10%
------------ ------------ ------------ ------------
Gross margin 65.5 56.6 +16% 199.0 153.3 +30%
Selling, general and
administrative expense 29.8 28.5 +4% 90.1 78.2 +15%
Other operating income
(expense):
Currency transaction gains
(losses), net (.4) .7 (4.3) (.8)
Disposition of property and
equipment 7.2 (.2) 8.3 .5
Noncompete agreement
income - 1.0 .3 3.0
Legal settlement gains - - .7 2.3
Corporate expense (9.7) (10.6) (48.2) (28.2)
Other income .1 .3 .4 .5
Other expense - - (.1) (.1)
------------ ------------ ------------ ------------
Income from operations $ 32.9 $ 19.3 +70% $ 66.0 $ 52.3 +26%
============ ============ ============ ============
TiO2 operating statistics Percent change in average selling price:
Using actual foreign
currency exchange rates +10% +15%
Impact of changes in
foreign currency
exchange rates -8% -10%
------------- -------------
In billing currencies +2% +5%
Sales volume (metric tons in
thousands) 110.9 117.4 -6% 350.3 352.4 -1%
Production volume (metric
tons in thousands) 117.5 116.0 +1% 354.2 334.9 +6%
- ------------------------------------
* less than 1%
Comparison of three months ended September 30, 2003 and 2002 - Sales, cost of
sales, gross margin and selling, general and administrative expenses
The Company's sales and gross margin increased $8.8 million (4%) and $8.9
million (16%), respectively, in the third quarter of 2003 compared to the third
quarter of 2002 due primarily to higher average TiO2 selling prices partially
offset by lower TiO2 sales volumes. Excluding the effect of fluctuations in the
value of the U.S. dollar relative to other currencies, the Company's average
TiO2 selling prices in billing currencies in the third quarter of 2003 were 2%
higher than the third quarter of 2002, with the greatest improvement in European
and export markets. 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 third quarter of 2003
increased 10% compared to the third 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 were 1% lower in the third quarter of 2003 as compared to the second
quarter of the year.
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
prices 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 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 10% changes in the Company's average TiO2 selling prices during the third
quarter of 2003 as compared to the same period in 2002 using actual foreign
currency exchange rates prevailing during the respective periods (the GAAP
measure) and the 2% change in the Company's average TiO2 selling prices in
billing currencies (the non-GAAP measure) during such period 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 prices 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 third quarter of 2003 was 6% lower
than the third quarter of 2002, with substantially all of the decrease occurring
in export markets. The Company's TiO2 production volume in the third quarter of
2003 was 1% higher than the third quarter of 2002, with operating rates at near
full capacity in both the third quarter of 2003 and 2002.
The increase in average TiO2 selling prices increased gross margin by $5.5
million, while the lower TiO2 sales volume decreased gross margin by $5.4
million. The effect of the increase in TiO2 production volumes during the third
quarter of 2003 as compared to the third quarter of 2002 was not material.
The Company's cost of sales in the third quarter of 2003 was comparable to
the third quarter of 2002. The Company's cost of sales as a percentage of net
sales decreased from 76% in the third quarter of 2002 to 73% in the third
quarter of 2003 primarily due to the higher average selling prices and higher
production volumes.
The increase in the Company's gross margin, quantified above, is due to the
net effects of the changes in sales and cost of sales during such periods.
The Company's selling, general and administrative expenses in the third
quarter of 2003 were approximately $1.3 million (4%) higher than the third
quarter of 2002 primarily due to the effects of foreign currency translation,
which increased the Company's expenses in the third quarter of 2003 as compared
to the same period in 2002. Offsetting the effect of changes in foreign currency
exchange rates, distribution and selling expenses associated with the lower
sales volume were approximately $600,000 (3%) lower in the third quarter of 2003
as compared to the same period in 2002. The Company's selling, general and
administrative expenses were approximately 12% of sales in both the third
quarter of 2003 and 2002.
The Company has substantial operations and assets located outside the
United States (primarily in Germany, Belgium, Norway and Canada). 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. 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 third
quarter of 2003 by a net $16.6 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 third quarter of
2003 compared to the same period in 2002. Overall, the net impact of currency
exchange rate fluctuations slightly increased the Company's income from
operations in the third quarter of 2003 as compared to the third quarter of
2002.
Comparison of nine months ended September 30, 2003 and 2002 - Sales, cost of
sales, gross margin and selling, general and administrative expenses
The Company's sales and gross margin increased $99.2 million (15%) and
$45.7 million (30%), respectively, in the first nine months of 2003 compared to
the first nine months of 2002 due primarily to higher average TiO2 selling
prices and higher TiO2 production volume, partially offset by slightly lower
TiO2 sales volume and higher operating costs (particularly energy costs, which
increased by approximately $8 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 nine months of 2003 was 5%
higher than the first nine months 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 nine months of 2003 increased 15% compared to the first nine
months of 2002.
The difference between the 15% change in the Company's average TiO2 selling
prices during the first nine months of 2003 as compared to the same period in
2002 using actual foreign currency exchange rates prevailing during the
respective periods (the GAAP measure) and the 5% change in the Company's average
TiO2 selling prices in billing currencies (the non-GAAP measure) during such
period 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 prices 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 volumes in the first nine months of 2003 were 1%
lower than the first nine months of 2002. The Company's TiO2 production volumes
in the first nine months of 2003 were 6% higher than the first nine months of
2002, with operating rates at near full capacity in both the first nine months
of 2003 and 2002.
The increase in average TiO2 selling prices and higher TiO2 production
volumes increased gross margin by $28.8 million and $9.1 million, respectively.
The effect of the decrease in TiO2 sales volumes during the first nine months of
2003 as compared to the same period in 2002 was not material.
The Company's cost of sales increased $53.5 million (10%) in the first nine
months of 2003 compared to the first nine months of 2002. The Company's cost of
sales as a percentage of net sales decreased from 77% in the first nine months
of 2002 to 74% in the first nine months of 2003 primarily due to the higher
average selling prices and higher production volume, partially offset by the
higher operating costs.
The increase in the Company's gross margin, quantified above, is due to the
net effects of the changes in sales and cost of sales during such periods.
The Company's selling, general and administrative expenses increased $11.9
million (15%) in the first nine months of 2003 as compared to the first nine
months of 2002 primarily due to the effects of foreign currency translation,
which increased the Company's expenses in the first nine months of 2003 as
compared to the same period in 2002. The Company's selling, general and
administrative expenses were approximately 12% of sales in the first nine months
of both 2003 and 2002.
As discussed above, the Company has substantial operations and assets
located outside the United States (primarily in Germany, Belgium, Norway and
Canada). 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 nine
months of 2003 by a net $71.0 million compared to the same period in 2002, and
decreased the Company's income from operations by $2.3 million.
Other operating income (expense)
The noncompete agreement income relates to a covenant not to compete
related to the sale of Rheox in 1998. The agreement became fully amortized in
January 2003. The litigation settlement gains in all periods relate to a
settlement with former insurance carrier groups. No further material settlements
relating to litigation concerning environmental remediation coverage are
expected. The gain on disposal of fixed assets in 2003 related primarily to the
disposal of certain real property not associated with the Company's TiO2
operations.
Corporate expense for the first nine months of 2003 increased $20.0 million
from the comparable prior-year period primarily due to higher environmental
expenses related to remediation of formerly owned business units of NL
(principally related to one formerly owned site for which the remediation
process is expected to occur over the next several years) and higher legal
expenses of NL. Corporate expenses are expected to be higher for full-year 2003
as compared to full-year 2002 due to higher environmental expenses and slightly
higher legal expenses associated with the defense of lead pigment litigation.
As a net result of the items discussed above, the Company's income from
operations increased 70% from $19.3 million in the third quarter of 2002 to
$32.9 million in the third quarter of 2003. For the first nine months of 2003,
the Company's income from operations increased 26% from $52.3 million in the
first nine months of 2002 to $66.0 million in the first nine months of 2003.
Outlook
The Company expects that its gross margin in 2003 will be higher than in
2002 primarily due to higher average TiO2 selling prices and higher sales and
production volumes, partially offset by higher operating costs (particularly
energy costs). The Company's TiO2 production volume in 2003 is expected to be
higher than the Company's 2003 TiO2 sales volume, with finished goods
inventories rising modestly. The Company's expectations as to the future
prospects for 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 market place, unexpected or
earlier-than-expected capacity additions by competitors and technological
advances. If actual developments differ from the Company's expectations, the
Company's results of operations could be unfavorably affected.
Other Income (Expense) Items
The following table sets forth certain information regarding general
corporate income (expense).
Three months ended Nine months ended
September 30, September 30,
----------------------------------------- ------------------------------------------
2003 2002 Difference 2003 2002 Difference
------------- ------------- ------------- ------------- ------------- -------------
(In millions)
Trade interest income $ .2 $ .7 $ (.5) $ .6 $ 1.3 $ (.7)
Other interest
Income .8 1.8 (1.0) 2.6 4.4 (1.8)
Securities gains (losses),
net (.1) - (.1) 2.4 (.1) 2.5
Foreign currency
transaction gain - - - - 6.3 (6.3)
Interest expense (8.3) (7.6) (.7) (24.7) (22.2) (2.5)
------------- ------------- ------------- ------------- ------------- -------------
$ (7.4) $ (5.1) $ (2.3) $ (19.1) $ (10.3) $ (8.8)
============= ============= ============= ============= ============= =============
Interest income was lower in the third quarter and the first nine months of
2003 as compared to the year earlier periods 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. Securities gains for the
first nine months of 2003 were higher than the first nine months of 2002
primarily due to 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 completed in February 2003. See Note 5 to the Consolidated
Financial Statements.
The foreign currency transaction gain in the first nine months of 2002
related to the extinguishment of certain intercompany indebtedness with KII.
Interest expense in the third quarter and first nine months of 2003
increased $.7 million and $2.5 million, respectively, from the comparable
prior-year periods, primarily due to higher levels of outstanding debt and
associated currency effects, partially offset by lower interest rates. Interest
expense in the first nine months of 2002 included $2.0 million related to the
early extinguishment of the Company's 11.75% Senior Secured Notes. 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
See Note 11 to the Consolidated Financial Statements.
Other
Minority interest in all periods presented primarily relates to EMS.
Recently adopted accounting principle
As described in Note 1 to the Consolidated Financial Statements, the
Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations,"
effective January 1, 2003.
Accounting principle not yet adopted
See Note 14 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows from operating, investing and
financing activities for the nine months ended September 30, 2003 and 2002 are
presented below.
Nine months ended
September 30,
-------------------------------
2003 2002
-------------- --------------
(In millions)
Net cash provided (used) by:
Operating activities $ 67.8 $ 68.1
Investing activities (10.1) (24.8)
Financing activities (57.7) 8.8
-------------- --------------
Net cash provided by operating,
investing, and financing activities $ - $ 52.1
============== ==============
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 statement of income 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 $68.1 million in the
first nine months of 2002 to $67.8 million in the first nine months of 2003.
This $300,000 decrease was due primarily to the net effect of (i) higher net
income of $25.6 million, (ii) higher depreciation expense of $5.1 million, (iii)
$7.8 million of higher gains on disposition of property and equipment in the
first nine months of 2003, (iv) lower distributions from the manufacturing joint
venture of $4.2 million and (v) a higher amount of net cash used to fund changes
in the Company' inventories, receivables, payables and accrued environmental of
$16.6 million in the first nine months 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,
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. Relative changes
in accrued environmental costs are affected by, among other things, the period
in which recognition of the environmental accrual is recognized and the period
in which the remediation expenditure is actually made.
Investing activities
The Company's capital expenditures were $23.8 million and $18.1 million in
the first nine months of 2003 and 2002, respectively. Capital expenditures in
the first nine months of 2002 included approximately $2.6 million related to
reconstruction of the Company's Leverkusen, Germany sulfate plant damaged in the
March 2001 fire.
In May 2003 the Family Trust repaid $2 million principal amount on the
revolving credit agreement. See Note 6 to the Consolidated Financial Statements.
In the first nine months of 2003, the Company disposed of certain real
property and other assets for approximately $10.6 million.
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 2002, the Company redeemed $25 million principal amount of its
11.75% Senior Secured Notes using available cash on hand, and in June 2002 the
Company redeemed the remaining $169 million principal amount of such 11.75%
Senior Secured Notes using a portion of the proceeds from the June 2002 issuance
of the (euro)285 million principal amount of the KII 8.875% Senior Secured Notes
($280 million when issued). Also in June 2002, KII's operating subsidiaries in
Germany, Belgium and Norway entered into a new three-year (euro)80 million
secured revolving credit facility ("European Credit Facility") and borrowed
(euro)13 million ($13 million when borrowed) and NOK 200 million ($26 million
when borrowed) which, along with available cash, was used to repay and terminate
KII's short term notes payable ($53.2 million when repaid). In the third quarter
of 2002, the Company repaid a net euro-equivalent 12.7 million ($12.4 million
when repaid) of the European Credit Facility. See Note 10 to the Consolidated
Financial Statements.
In March 2003 the Company borrowed (euro)15 million ($16.1 million when
borrowed), in April 2003 the Company repaid NOK 80 million ($11.0 million when
repaid) and in the third quarter of 2003 the Company repaid (euro)30.0 million
($33.9 million when repaid) under the European Credit Facility.
In September 2002 the Company's U.S. operating subsidiaries entered into a
three-year $50 million asset-based revolving credit facility ("U.S. Credit
Facility").
Deferred financing costs of $10.6 million for the KII 8.875% Senior Secured
Notes, the European Credit Facility and the U.S. Credit Facility are being
amortized over the life of the respective agreements and are included in other
noncurrent assets as of September 30, 2003.
In the third quarter of 2003, the Company paid a regular quarterly dividend
to shareholders of $.20 per share, aggregating $9.5 million. Dividends paid
during the first nine months of 2003 and 2002 totaled $.60 per share, or $28.6
million and $29.2 million, respectively. On October 21, 2003, the Company's
Board of Directors declared a regular quarterly dividend of $.20 per share to
shareholders of record as of December 12, 2003 to be paid on December 29, 2003.
In the first nine months of 2003 the Company made no repurchases of common
stock. During the first nine months of 2002, the Company purchased approximately
719,000 shares of its common stock in the open market at an aggregate cost of
approximately $10.6 million.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability
At September 30, 2003, the Company had cash and cash equivalents
aggregating $59.7 million, current restricted cash equivalents of $22.1 million,
current restricted marketable debt securities of $8.2 million and noncurrent
restricted marketable debt securities of $3.6 million. Of such aggregate $93.6
million amount, $21.9 million was held by non-U.S. subsidiaries. Restricted cash
equivalents and restricted marketable debt securities decreased approximately
$38 million in the first nine months of 2003 primarily due to a $30.8 million
payment in the second quarter of 2003 related to the final settlement of the
previously-reported Granite City, Illinois lead smelter site. The Company may
have to pay up to an additional $.7 million related to this site upon completion
of an EPA audit of certain response costs. No further material expenditures are
expected to be made for this site. At September 30, 2003, certain of the
Company's subsidiaries had approximately $136 million available for borrowing
with approximately $92 million available under non-U.S. credit facilities
(including approximately $89 million under the European Credit Facility) and
approximately $44 million under the U.S. Credit Facility. At September 30, 2003,
the Company had complied with all financial covenants governing its debt
agreements.
Based upon the Company's expectations for the TiO2 industry and anticipated
demands on the Company's cash resources as discussed herein, the Company expects
to have sufficient liquidity to meet its near-term obligations, including
operations, capital expenditures, debt service and current dividend policy. To
the extent actual developments differ from the Company's expectations, the
Company could be adversely affected.
Income tax contingencies
See Note 11 to the Consolidated Financial Statements.
Lead pigment litigation, environmental matters and other litigation
See Note 13 to the Consolidated Financial Statements and Part II, Item 1.
"Legal Proceedings."
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.
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 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.
Other
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and availability of resources in view of, among
other things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, the Company in the past has sought, and in the future may seek, to
reduce, refinance, repurchase or restructure indebtedness; raise additional
capital; repurchase shares of its common stock; modify its dividend policy;
restructure ownership interests; sell interests in subsidiaries or other assets;
or take a combination of such steps or other steps to manage its liquidity and
capital resources. In the normal course of its business, the Company may review
opportunities for the acquisition, divestiture, joint venture or other business
combinations in the chemicals or other industries, as well as the acquisition of
interests in, and loans to, related companies. In the event of any acquisition
or joint venture transaction, the Company may consider using available cash,
issuing equity securities or increasing its indebtedness to the extent permitted
by the agreements governing the Company's existing debt.
Special note regarding forward-looking statements
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
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,"
"should," "could," "anticipates," "expected" or comparable terminology, or by
discussions of strategies 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 substantial risks and uncertainties that
could significantly impact expected results, and actual future results could
differ materially from those described in such forward-looking statements. While
it is not possible to identify all factors, the Company continues to face many
risks and uncertainties. Among the factors that could cause future results to
differ materially from those described herein are the risks and uncertainties
discussed in this Quarterly Report and those described from time to time in the
Company's other filings with the SEC including, but not limited to, the
following:
o Future supply and demand for the Company's products,
o The cyclicality of the Company's TiO2 business,
o Customer inventory levels (such as the extent to which the Company's
customers may, from time to time, accelerate purchases of TiO2 in advance
of anticipated price increases or defer purchases of TiO2 in advance of
anticipated price decreases),
o Changes in raw material and other operating costs (such as energy costs),
o The possibility of labor disruptions,
o General global economic and political conditions (such as changes in the
level of gross domestic product in various regions of the world and the
impact of such changes on demand for, among other things, TiO2),
o Competitive products and substitute products,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o Fluctuations in currency exchange rates (such as changes in the exchange
rate between the U.S. dollar and each of the euro, the Norwegian kroner and
the Canadian dollar),
o Operating interruptions (including, but not limited to, labor disputes,
leaks, fires, explosions, unscheduled or unplanned downtime and
transportation interruptions),
o Recoveries from insurance claims and the timing thereof,
o The ability of the Company to renew or refinance credit facilities,
o Government laws and regulations and possible changes therein (such as
changes in government regulations which might impose various obligations on
present and former manufacturers of lead pigment and lead-based paint,
including the Company, with respect to asserted health concerns associated
with the use of such products),
o The ultimate outcome of income tax audits, tax settlement initiatives or
other tax matters,
o The ultimate resolution of pending litigation (such as the Company's lead
pigment litigation and litigation surrounding environmental matters of the
Company), and
o Possible future litigation.
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 or revise any
forward-looking statement whether as a result of new information, future events
or otherwise.
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 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 September 30, 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 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 September 30, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
system of internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 13 to the Consolidated Financial Statements, and
for descriptions of certain previously reported legal proceedings, reference is
made to the 2002 Annual Report and the Company's Quarterly Reports on Form 10-Q
for the quarters ended March 31, 2003 and June 30, 2003.
Barker, et al. v. The Sherwin-Williams Company, et al. (Circuit Court of
Jefferson County, Mississippi, Civil Action No. 2000-587) (formerly known as
Borden et al. vs. The Sherwin-Williams Company, et al.) In October 2003, the
court set June 24, 2004 as the trial date.
Quitman County School District v. Lead Industries Association, et al.
(Circuit Court of Quitman County, Mississippi, Case No. 2001-0106). In August
2003, the trial court granted the plaintiff's motion to dismiss the Company with
prejudice.
Jackson et al., v. Phillips Building Supply of Laurel, et al. (Circuit
Court of Jones County, Mississippi, Case No. 2002-10-CV1). In August 2003, the
court set a trial date of June 1, 2004.
City of Chicago v. American Cyanamid, et al. (Circuit Court of Cook County,
Illinois, No. 02CH16212). In October 2003, the trial court granted defendants'
motion to dismiss. The time for appeal has not yet run.
City of Milwaukee v. NL Industries, Inc. and Mautz Paint (Circuit Court,
Civil Division, Milwaukee County, Wisconsin, Case No. 01CV0030066). In July
2004, Defendants' motion for summary judgment was granted by the trial court,
and the plaintiff has appealed.
Cole, et al. v. ASARCO Incorporated et al. (U.S. District Court for the
Northern District of Oklahoma, Case No. 03C V327 EA (J)). The Company has
answered the complaint and denied all of the plaintiffs' allegations.
Crawford, et al. v. ASARCO, Incorporated, et al. (Case No. CJ-03-304);
Barr, et al. v. ASARCO Incorporated, et al. (Case No. CJ-03-305); Brewer, et al.
v. ASARCO Incorporated, et al. (Case No. CJ-03-306); Kloer, et al. v. ASARCO,
Incorporated, et al. (Case No. CJ-03-307); Rhoten, et al. v. Asarco
Incorporated, et al. (Case No. CJ-03-308) (all in the District Court in and for
Ottawa County, State of Oklahoma). The Company removed the cases to the United
States District Court for the Northern District of Oklahoma. The Company has
answered the complaint and has denied all of the plaintiffs' allegations.
In November 2003, the Company was served with a complaint in Lauren Brown
v. NL Industries, Inc., et al. (Circuit Court of Cook County, Illinois, County
Department, Law Division, Case No. 03L 012425). The complaint seeks damages
against the Company and two local property owners on behalf of a minor for
injuries alleged to be due to exposure to lead paint contained in the minor's
residence. The Company intends to deny all allegations of liability.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Company has retained a signed original of any exhibit listed below
that contains signatures, and the Company will provide any such
exhibit to the SEC or its staff upon request.
2.1 - Form of Distribution Agreement between NL Industries, Inc. and
Kronos Worldwide, Inc. - incorporated by reference to Exhibit 2.1
to the Kronos Worldwide, Inc. Registration Statement on Form 10
(File No. 001-31763).
10.1 - Form of Tax Agreement between Valhi, Inc. and Kronos Worldwide,
Inc. - incorporated by reference to Exhibit 10.1 to the Kronos
Worldwide, Inc. Registration Statement on Form 10 (File No.
001-31763).
10.2 - Form of Intercorporate Services Agreement between Contran
Corporation and Kronos Worldwide, Inc. - incorporated by
reference to Exhibit 10.2 to the Kronos Worldwide, Inc.
Registration Statement on Form 10 (File No. 001-31763).
10.3 - Form of Kronos Worldwide, Inc. Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.4 to the Kronos
Worldwide, Inc. Registration Statement on Form 10 (File No.
001-31763).
10.4 - Amendment dated August 11, 2003 to the Contract on Supplies and
Services among Bayer AG, Kronos Titan-GmbH & Co. OHG and Kronos
International (English translation of German language document) -
incorporated by reference to Exhibit 10.32 to the Kronos
Worldwide, Inc. Registration Statement on Form 10 (File No.
001-31763).
31.1 - Certification.
31.2 - Certification.
32.1 - Certification.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended September 30, 2003:
July 31, 2003 - Reported Items 7 and 9.
August 8, 2003 - Reported Items 7 and 9.
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: November 11, 2003 By /s/ Gregory M. Swalwell
- ------------------------ -----------------------------------
Gregory M. Swalwell
Vice President, Finance
(Principal Financial Officer and
Accounting Officer)
EXHIBIT 31.1
CERTIFICATION
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: November 11, 2003
/s/ Harold C. Simmons
---------------------------------------
Harold C. Simmons
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Gregory M. Swalwell, the Chief Financial Officer of NL Industries, Inc.,
certify that:
1) I have reviewed this quarterly report on Form 10-Q of NL Industries, Inc.;
2) Based on my knowledge, this 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: November 11, 2003
/s/ Gregory M. Swalwell
----------------------------------------
Gregory M. Swalwell
Chief Financial Officer
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 September 30, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the Report), I, Harold C. Simmons,
Chief Executive Officer of the Company, and I, Gregory M. Swalwell, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Harold C. Simmons
---------------------------------------
Harold C. Simmons
Chief Executive Officer
/s/ Gregory M. Swalwell
---------------------------------------
Gregory M. Swalwell
Chief Financial Officer
November 11, 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.