SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ----- EXCHANGE ACT OF 1934 - For the quarter ended September 30, 2001 OR - ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-640 NL INDUSTRIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New Jersey 13-5267260 - ------------------------------- -------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 16825 Northchase Drive, Suite 1200, Houston, Texas 77060-2544 - -------------------------------------------------- -------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (281) 423-3300 -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) had been subject to such filing requirements for the past 90 days. Yes X No ------- ------ Number of shares of common stock outstanding on November 9, 2001: 49,399,984
NL INDUSTRIES, INC. AND SUBSIDIARIES INDEX ----- Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 3-4 Consolidated Statements of Income - Three months and nine months ended September 30, 2001 and 2000 5 Consolidated Statements of Comprehensive Income - Three months and nine months ended September 30, 2001 and 2000 6 Consolidated Statement of Shareholders' Equity - Nine months ended September 30, 2001 7 Consolidated Statements of Cash Flows - Nine months ended September 30, 2001 and 2000 8-9 Notes to Consolidated Financial Statements 10-27 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 28-35 PART II. OTHER INFORMATION Item 1. Legal Proceedings 35-36 Item 6. Exhibits and Reports on Form 8-K 36 -2-
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) <TABLE> <CAPTION> ASSETS September 30, December 31, 2001 2000 ------------- ------------ <S> <C> <C> Current assets: Cash and cash equivalents .................... $ 97,000 $ 120,378 Restricted cash equivalents .................. 80,198 69,242 Accounts and notes receivable ................ 145,042 131,540 Receivable from affiliates ................... 21,659 214 Refundable income taxes ...................... 337 12,302 Inventories .................................. 186,793 205,973 Prepaid expenses ............................. 6,977 2,458 Deferred income taxes ........................ 11,829 11,673 ---------- ---------- Total current assets ..................... 549,835 553,780 ---------- ---------- Other assets: Marketable securities ........................ 44,614 47,186 Receivable from affiliate .................... 11,900 -- Investment in TiO2 manufacturing joint venture 144,228 150,002 Prepaid pension cost ......................... 22,516 22,789 Restricted cash equivalents .................. 12,656 17,942 Other ........................................ 5,977 4,707 ---------- ---------- Total other assets ....................... 241,891 242,626 ---------- ---------- Property and equipment: Land ......................................... 24,640 24,978 Buildings .................................... 125,038 129,019 Machinery and equipment ...................... 523,005 530,920 Mining properties ............................ 67,310 67,134 Construction in progress ..................... 27,124 4,586 ---------- ---------- 767,117 756,637 Less accumulated depreciation and depletion .. 442,274 432,255 ---------- ---------- Net property and equipment ............... 324,843 324,382 ---------- ---------- $1,116,569 $1,120,788 ========== ========== </TABLE> -3-
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands) <TABLE> <CAPTION> September 30, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000 ------------- ------------ <S> <C> <C> Current liabilities: Notes payable ............................ $ 47,435 $ 69,970 Current maturities of long-term debt ..... 917 730 Accounts payable and accrued liabilities . 140,275 147,877 Payable to affiliates .................... 9,543 10,634 Accrued environmental costs .............. 64,634 53,307 Income taxes ............................. 13,976 13,616 Deferred income taxes .................... 1,319 1,822 ----------- ----------- Total current liabilities ............ 278,099 297,956 ----------- ----------- Noncurrent liabilities: Long-term debt ........................... 195,920 195,363 Deferred income taxes .................... 151,927 145,673 Accrued environmental costs .............. 41,749 57,133 Accrued pension cost ..................... 17,360 21,220 Accrued postretirement benefits cost ..... 29,680 29,404 Other .................................... 16,813 23,272 ----------- ----------- Total noncurrent liabilities ......... 453,449 472,065 ----------- ----------- Minority interest ............................ 7,211 6,279 ----------- ----------- Shareholders' equity: Common stock ............................. 8,355 8,355 Additional paid-in capital ............... 777,597 777,528 Retained earnings ........................ 191,697 141,073 Accumulated other comprehensive loss ..... (190,009) (181,872) Treasury stock ........................... (409,830) (400,596) ----------- ----------- Total shareholders' equity ........... 377,810 344,488 ----------- ----------- $ 1,116,569 $ 1,120,788 =========== =========== </TABLE> Commitments and contingencies (Note 14) See accompanying notes to consolidated financial statements. - 4 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> Revenues and other income: Net sales ......................... $206,952 $242,309 $653,117 $724,444 Litigation settlement gains, net .. -- -- 10,582 43,000 Insurance recoveries, net ......... 3,900 -- 5,829 -- Other, net ........................ 2,926 4,906 11,144 20,352 -------- -------- -------- -------- 213,778 247,215 680,672 787,796 -------- -------- -------- -------- Costs and expenses: Cost of sales ..................... 145,945 159,021 447,167 482,319 Selling, general and administrative 30,665 33,972 92,323 104,194 Interest .......................... 6,949 7,717 20,812 23,470 -------- -------- -------- -------- 183,559 200,710 560,302 609,983 -------- -------- -------- -------- Income before income taxes and minority interest ........... 30,219 46,505 120,370 177,813 Income tax expense .................... 9,681 14,882 38,896 58,843 -------- -------- -------- -------- Income before minority interest 20,538 31,623 81,474 118,970 Minority interest ..................... -- 1,454 953 1,655 -------- -------- -------- -------- Net income .................... $ 20,538 $ 30,169 $ 80,521 $117,315 ======== ======== ======== ======== Earnings per share: Basic ............................. $ .41 $ .60 $ 1.61 $ 2.32 ======== ======== ======== ======== Diluted ........................... $ .41 $ .60 $ 1.61 $ 2.31 ======== ======== ======== ======== Weighted average shares used in the calculation of earnings per share: Basic ........................... 49,621 50,203 49,876 50,539 Dilutive impact of stock options 84 403 153 330 -------- -------- -------- -------- Diluted ......................... 49,705 50,606 50,029 50,869 ======== ======== ======== ======== </TABLE> See accompanying notes to consolidated financial statements. - 5 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, ---------------------- ---------------------- 2001 2000 2001 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net income ................................ $ 20,538 $ 30,169 $ 80,521 $ 117,315 --------- --------- --------- --------- Other comprehensive income (loss), net of tax: Marketable securities adjustment: Unrealized holding gain (loss) arising during the period ... (5,258) 2,021 (1,669) 2,729 Reclassification adjustment for loss (gain) included in net income ...................... -- (50) 736 (50) --------- --------- --------- --------- (5,258) 1,971 (933) 2,679 Currency translation adjustment ....... 13,161 (18,623) (7,204) (41,219) --------- --------- --------- --------- Total other comprehensive income (loss) ........................ 7,903 (16,652) (8,137) (38,540) --------- --------- --------- --------- Comprehensive income .......... $ 28,441 $ 13,517 $ 72,384 $ 78,775 ========= ========= ========= ========= </TABLE> See accompanying notes to consolidated financial statements. - 6 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Nine months ended September 30, 2001 (In thousands) <TABLE> <CAPTION> Accumulated other comprehensive income (loss) Additional ------------------------- Common paid-in Retained Currency Marketable Treasury stock capital earnings translation securities stock Total --------- --------- --------- ----------- ---------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 2000 ......... $ 8,355 $ 777,528 $ 141,073 $(190,757) $ 8,885 $(400,596) $ 344,488 Net income ........................... -- -- 80,521 -- -- -- 80,521 Other comprehensive income (loss), net -- -- -- (7,204) (933) -- (8,137) Dividends ............................ -- -- (29,897) -- -- -- (29,897) Tax benefit of stock options exercised -- 69 -- -- -- -- 69 Treasury stock: Acquired (677 shares) ............ -- -- -- -- -- (9,853) (9,853) Reissued (37 shares) ............ -- -- -- -- -- 619 619 --------- --------- --------- --------- --------- --------- --------- Balance at September 30, 2001 ........ $ 8,355 $ 777,597 $ 191,697 $(197,961) $ 7,952 $(409,830) $ 377,810 ========= ========= ========= ========= ========= ========= ========= </TABLE> See accompanying notes to consolidated financial statements. - 7 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30, 2001 and 2000 (In thousands) <TABLE> <CAPTION> 2001 2000 --------- --------- <S> <C> <C> Cash flows from operating activities: Net income ................................................ $ 80,521 $ 117,315 Depreciation, depletion and amortization .................. 22,335 22,790 Deferred income taxes ..................................... 7,340 33,301 Distributions from TiO2 manufacturing joint venture ....... 5,513 7,550 Litigation settlement gain, net included in restricted cash (10,307) (43,000) Pension cost, net ......................................... (2,458) (10,488) Net (gains) losses from securities transactions ........... 1,133 (5,630) Insurance recoveries, net ................................. (5,829) -- Other, net ................................................ (624) 1,357 --------- --------- 97,624 123,195 Change in assets and liabilities: Accounts and notes receivable ......................... (15,494) (37,921) Inventories ........................................... 15,676 27,740 Prepaid expenses ...................................... (3,891) (4,123) Accounts payable and accrued liabilities .............. (7,872) 7,910 Income taxes .......................................... 12,018 6,708 Other, net ............................................ (5,637) (4,347) --------- --------- Net cash provided by operating activities ......... 92,424 119,162 --------- --------- Cash flows from investing activities: Capital expenditures ...................................... (32,391) (19,757) Property damaged by fire: Insurance proceeds .................................... 10,500 -- Other, net ............................................ (2,100) -- Loans to affiliates: Loans ................................................. (33,400) -- Collections ........................................... 500 -- Purchase of Tremont Corporation common stock .............. -- (26,040) Change in restricted cash equivalents, net ................ 700 (102) Other, net ................................................ 84 249 --------- --------- Net cash used by investing activities ................. (56,107) (45,650) --------- --------- </TABLE> - 8 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Nine months ended September 30, 2001 and 2000 (In thousands) <TABLE> <CAPTION> 2001 2000 --------- --------- <S> <C> <C> Cash flows from financing activities: Dividends paid ................................... $ (29,897) $ (22,721) Treasury stock: Purchased .................................... (9,853) (29,180) Reissued ..................................... 619 1,581 Indebtedness: Borrowings ................................... 1,437 -- Principal payments ........................... (22,132) (29,034) Other, net ....................................... (5) (6) --------- --------- Net cash used by financing activities ........ (59,831) (79,360) --------- --------- Cash and cash equivalents: Net change from: Operating, investing and financing activities (23,514) (5,848) Currency translation ......................... 136 (3,312) Balance at beginning of period ................... 120,378 134,224 --------- --------- Balance at end of period ......................... $ 97,000 $ 125,064 ========= ========= Supplemental disclosures - cash paid for: Interest ......................................... $ 14,239 $ 16,428 Income taxes, net ................................ 19,538 18,838 </TABLE> See accompanying notes to consolidated financial statements. - 9 -
NL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Organization and basis of presentation: NL Industries, Inc. conducts its titanium dioxide pigments ("TiO2") operations through its wholly owned subsidiary, Kronos, Inc. At September 30, 2001, Valhi, Inc. and Tremont Corporation, each affiliates of Contran Corporation, held approximately 61% and 21%, respectively, of NL's outstanding common stock. At September 30, 2001, Contran and its subsidiaries held approximately 94% of Valhi's outstanding common stock, and a company 80% owned by Valhi and 20% owned by NL held approximately 80% of Tremont's outstanding common stock. Substantially all of Contran's outstanding voting stock is held by trusts established for the benefit of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons, the Chairman of the Board of NL and the Chairman of the Board and Chief Executive Officer of Contran and Valhi and a director of Tremont, may be deemed to control each of such companies. See Note 6. The consolidated balance sheet of NL Industries, Inc. and Subsidiaries (collectively, the "Company") at December 31, 2000 has been condensed from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at September 30, 2001 and the consolidated statements of income, comprehensive income, shareholders' equity and cash flows for the interim periods ended September 30, 2001 and 2000 have been prepared by the Company without audit. In the opinion of management all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Certain prior-year amounts have been reclassified to conform to the current year presentation. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (the "2000 Annual Report"). The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, effective January 1, 2001. SFAS No. 133 establishes accounting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS No. 133, all derivatives are recognized as either assets or liabilities and measured at fair value. The accounting for changes in fair value of derivatives is dependent upon the intended use of the derivative. As permitted by the transition requirements of SFAS No. 133, as amended, the Company exempted from the scope of SFAS No. 133 all host contracts containing embedded derivatives which were issued or acquired prior to January 1, 1999. The Company is not a party to any significant derivative or hedging instrument covered by SFAS No. 133 at September 30, 2001, and there was no impact on the Company's financial statements from adopting SFAS No. 133. - 10 -
Note 2 - Earnings per share: Basic earnings per share is based on the weighted average number of common shares outstanding during each period. Diluted earnings per share is based on the weighted average number of common shares outstanding and the dilutive impact of outstanding stock options. Note 3 - Business segment information: The Company's operations are conducted by Kronos in one operating business segment - the production and sale of TiO2. <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, ---------------------- ---------------------- 2001 2000 2001 2000 --------- --------- --------- --------- (In thousands) <S> <C> <C> <C> <C> Net sales ................................. $ 206,952 $ 242,309 $ 653,117 $ 724,444 Other income (expense), excluding corporate (337) 1,404 1,673 5,518 --------- --------- --------- --------- 206,615 243,713 654,790 729,962 Cost of sales ............................. 145,945 159,021 447,167 482,319 Selling, general and administrative, excluding corporate ..................... 24,448 27,181 74,315 81,154 --------- --------- --------- --------- Operating income .................. 36,222 57,511 133,308 166,489 Insurance recoveries, net ................. 3,900 -- 5,829 -- --------- --------- --------- --------- Income before corporate items, income taxes and minority interest ........................ 40,122 57,511 139,137 166,489 General corporate income (expense): Securities earnings, net .............. 2,145 2,494 5,937 11,602 Litigation settlement gains, net and other income .................... 1,129 1,008 14,127 46,232 Corporate expenses .................... (6,228) (6,791) (18,019) (23,040) Interest expense ...................... (6,949) (7,717) (20,812) (23,470) --------- --------- --------- --------- Income before income taxes and minority interest ............... $ 30,219 $ 46,505 $ 120,370 $ 177,813 ========= ========= ========= ========= </TABLE> - 11 -
Note 4 - Inventories: <TABLE> <CAPTION> September 30, December 31, 2001 2000 ------------- ------------ (In thousands) <S> <C> <C> Raw materials ............................ $ 40,160 $ 66,061 Work in process .......................... 7,321 7,117 Finished products ........................ 111,879 107,120 Supplies ................................. 27,433 25,675 -------- -------- $186,793 $205,973 ======== ======== </TABLE> Note 5 - Marketable securities: <TABLE> <CAPTION> September 30, December 31, 2001 2000 ------------- ------------ (In thousands) <S> <C> <C> Available-for-sale marketable equity securities: Unrealized gains ........................... $ 15,004 $ 14,912 Unrealized losses .......................... (2,770) (1,244) Cost ....................................... 32,380 33,518 -------- -------- Aggregate fair value ................... $ 44,614 $ 47,186 ======== ======== </TABLE> In June 2001, the Company recognized a $1.1 million noncash securities loss related to an other-than-temporary decline in value of certain available-for-sale securities held by the Company. See Note 11. Note 6 - Receivable from affiliates: A majority-owned subsidiary of the Company, NL Environmental Management Services, Inc. ("EMS"), loaned $13.4 million to Tremont under a reducing revolving loan agreement in the first quarter of 2001. See Note 1. The loan was approved by special committees of the Company's and EMS's Boards of Directors. The loan bears interest at prime plus 2% (8.75% at September 30, 2001), is due March 31, 2003 and is collateralized by 10.2 million shares of NL common stock owned by Tremont. The maximum amount available for borrowing by Tremont reduces by $250,000 per quarter. In each of the second and third quarters of 2001, Tremont repaid $250,000 of the loan. At September 30, 2001, the outstanding loan balance was $12.9 million and no amounts were available for additional borrowings by Tremont. In May 2001, a wholly owned subsidiary of EMS loaned $20 million to the Harold C. Simmons Family Trust #2 (the "Trust"), one of the trusts described in Note 1, under a $25 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 (6.75% at September 30, 2001), 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 Trust. At September 30, 2001, $5 million was available for additional borrowing by the Trust. - 12 -
Note 7 - Accounts payable and accrued liabilities: <TABLE> <CAPTION> September 30, December 31, 2001 2000 ------------- ------------ (In thousands) <S> <C> <C> Accounts payable ................... $ 54,643 $ 64,553 -------- -------- Accrued liabilities: Employee benefits .............. 29,367 34,160 Interest ....................... 11,241 5,019 Deferred income ................ 4,000 4,000 Other .......................... 41,024 40,145 -------- -------- 85,632 83,324 -------- -------- $140,275 $147,877 ======== ======== </TABLE> Note 8 - Other noncurrent liabilities: <TABLE> <CAPTION> September 30, December 31, 2001 2000 ------------- ------------ (In thousands) <S> <C> <C> Insurance claims and expenses ............ $ 9,592 $10,314 Employee benefits ........................ 3,703 7,721 Deferred income .......................... 1,333 4,333 Other .................................... 2,185 904 ------- ------- $16,813 $23,272 ======= ======= </TABLE> Note 9 - Notes payable and long-term debt: <TABLE> <CAPTION> September 30, December 31, 2001 2000 ------------- ------------ (In thousands) <S> <C> <C> Notes payable - Kronos ..................... $ 47,435 $ 69,970 ======== ======== Long-term debt: NL Industries, Inc. - 11.75% Senior Secured Notes (See Note 13) ........ $194,000 $194,000 Kronos ................................. 2,837 2,093 -------- -------- 196,837 196,093 Less current maturities .................... 917 730 -------- -------- $195,920 $195,363 ======== ======== </TABLE> Notes payable consists of euro 27.2 million and NOK 200 million at September 30, 2001 and euro 51 million and NOK 200 million at December 31, 2000. - 13 -
Note 10 - 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. <TABLE> <CAPTION> Nine months ended September 30, -------------------- 2001 2000 -------- -------- (In thousands) <S> <C> <C> Expected tax expense ...................................... $ 42,130 $ 62,235 Non-U.S. tax rates ........................................ (3,451) (3,917) Incremental tax on income of companies not included in NL's consolidated U.S. federal income tax return ............. 416 1,015 Valuation allowance ....................................... (1,343) (2,116) U.S. state income taxes ................................... 444 691 Other, net ................................................ 700 935 -------- -------- Income tax expense ................................ $ 38,896 $ 58,843 ======== ======== </TABLE> Note 11 - Litigation settlement gains, net and other income, net: Litigation settlement gains, net In the first quarter of 2001 and the second quarter of 2000, the Company recognized litigation settlement gains with former insurance carrier groups of $10.6 million and $43 million, respectively, to settle certain insurance coverage claims related to environmental remediation. A majority of the proceeds from these settlements were transferred to special-purpose trusts established by the insurance carrier groups to pay future remediation and other environmental expenditures of the Company. No further material settlements relating to litigation concerning environmental remediation coverage are expected. Other income, net <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, -------------------- -------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (In thousands) <S> <C> <C> <C> <C> Securities earnings: Interest and dividends ................ $ 2,145 $ 2,417 $ 7,070 $ 5,972 Securities transactions ............... -- 77 (1,133) 5,630 -------- -------- -------- -------- 2,145 2,494 5,937 11,602 Currency transactions, net ................ (1,183) 602 98 4,256 Noncompete agreement income ............... 1,000 1,000 3,000 3,000 Disposition of property and equipment ..... 3 (271) (416) (1,219) Trade interest income ..................... 611 648 1,680 1,475 Other, net ................................ 350 433 845 1,238 -------- -------- -------- -------- $ 2,926 $ 4,906 $ 11,144 $ 20,352 ======== ======== ======== ======== </TABLE> - 14 -
In the second quarter of 2000, the Company recognized a $5.6 million securities gain related to common stock received from the demutualization of an insurance company from which the Company had purchased certain insurance policies. Note 12 - Leverkusen fire and insurance claim: A fire on March 20, 2001 damaged a section of the Company's Leverkusen, Germany 35,000 metric ton sulfate-process TiO2 plant ("Sulfate Plant") and, as a result, production of TiO2 at the Leverkusen facility was halted. The fire did not enter the Company's adjacent 125,000 metric ton chloride-process TiO2 plant ("Chloride Plant"), but did damage certain support equipment necessary to operate that plant. The damage to the support equipment resulted in a temporary shutdown of the Chloride Plant. On April 8, 2001, repairs to the damaged support equipment were substantially completed and full production resumed at the Chloride Plant. The Sulfate Plant became approximately 50% operational in September 2001 and became fully operational in late October 2001. During the third quarter of 2001, the Company's insurance carriers approved payment of $8 million ($6.8 million received as of September 30, 2001) as a partial payment for property damage costs and business interruption losses caused by the Leverkusen fire. Three million dollars of this payment represented partial compensation for business interruption losses which was recorded as a reduction of cost of sales to offset unallocated period costs that resulted from lost production. The remaining $5 million represented property damage recoveries against which the Company recorded $1.1 million of expenses related to clean-up costs, resulting in a net gain of $3.9 million. In the first nine months of 2001, the Company's insurance carriers approved payment of $18.5 million ($17.3 million received as of September 30, 2001) for losses caused by the Leverkusen fire, including the $8 million discussed above. Eight million dollars of this payment was for business interruption losses and the remaining $10.5 million was for property damage losses against which the Company recorded $4.7 million of expenses resulting in a net gain of $5.8 million. In October 2001, the Company reached an agreement in principle with its insurance carriers to settle the coverage claim involving the Leverkusen fire. The Company expects to receive an additional $38 million in insurance recoveries, of which approximately $13 million relates to property damage costs, and approximately $25 million relates to business interruption losses and extra expenses resulting from the fire. The Company expects to report a gain, net of certain expenses, related to this insurance settlement in the fourth quarter of 2001. Note 13 - Condensed consolidating financial information: The Company's 11.75% Senior Secured Notes (the "Notes") are collateralized by a series of intercompany notes to NL (the "Parent Issuer"). The Notes are also collateralized by a first priority lien on the stock of Kronos. A second priority lien on the stock of NL Capital Corporation ("NLCC") collateralized the notes until February 2000, at which time it was merged into KII and became included in the first priority lien on the stock of Kronos. - 15 -
In the event of foreclosure, the holders of the Notes would have access to the consolidated assets, earnings and equity of the Company. The Company believes the collateralization of the Notes, as described above, is the functional economic equivalent of a joint and several, full and unconditional guarantee of the Notes by Kronos and, prior to its merger into KII, NLCC. Management believes that separate financial statements would not provide additional material information that would be useful in assessing the financial position of Kronos and NLCC (the "Guarantor Subsidiaries"). In lieu of providing separate financial statements of the Guarantor Subsidiaries, the Company has included condensed consolidating financial information of the Parent Issuer, Guarantor Subsidiaries and non-guarantor subsidiaries in accordance with Rule 3-10(e) of the SEC's Regulation S-X. The Guarantor Subsidiaries and the non-guarantor subsidiaries comprise all of the direct and indirect subsidiaries of the Parent Issuer. Investments in subsidiaries are accounted for by NL under the equity method, wherein the parent company's share of earnings is included in net income. Elimination entries eliminate (i) the parent's investments in subsidiaries and the equity in earnings of subsidiaries, (ii) intercompany payables and receivables and (iii) other transactions between subsidiaries. - 16 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Balance Sheet September 30, 2001 (In thousands) <TABLE> <CAPTION> NL Combined Industries Non-guarantor Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated ----------- ------------ ------------- ------------ ------------ ASSETS <S> <C> <C> <C> <C> <C> Current assets: Cash and cash equivalents .................... $ 3,088 $ 65,190 $ 28,722 $ -- $ 97,000 Restricted cash equivalents .................. 80,198 -- -- -- 80,198 Accounts and notes receivable ................ 750 144,220 72 -- 145,042 Receivable from affiliates ................... 17,394 -- 21,714 (17,449) 21,659 Refundable income taxes ...................... -- 337 -- -- 337 Inventories .................................. -- 186,793 -- -- 186,793 Prepaid expenses ............................. 510 6,467 -- -- 6,977 Deferred income taxes ........................ 4,748 7,081 -- -- 11,829 ----------- ----------- ----------- ----------- ----------- Total current assets ..................... 106,688 410,088 50,508 (17,449) 549,835 ----------- ----------- ----------- ----------- ----------- Other assets: Investment in subsidiaries ................... 1,044,649 -- 294 (1,044,943) -- Marketable securities ........................ 343 -- 44,271 -- 44,614 Notes receivable from affiliates ............. 194,000 612,183 34,900 (829,183) 11,900 Investment in TiO2 manufacturing joint venture -- 144,228 -- -- 144,228 Prepaid pension cost ......................... 2,228 20,288 -- -- 22,516 Restricted cash equivalents .................. 12,656 -- -- -- 12,656 Other ........................................ 1,368 4,609 -- -- 5,977 ----------- ----------- ----------- ----------- ----------- Total other assets ....................... 1,255,244 781,308 79,465 (1,874,126) 241,891 ----------- ----------- ----------- ----------- ----------- Property and equipment, net ...................... 3,900 320,943 -- -- 324,843 ----------- ----------- ----------- ----------- ----------- $ 1,365,832 $ 1,512,339 $ 129,973 $(1,891,575) $ 1,116,569 =========== =========== =========== =========== =========== </TABLE> - 17 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Balance Sheet, (Continued) September 30, 2001 (In thousands) <TABLE> <CAPTION> NL Combined Industries Non-guarantor Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated ---------- ------------ ------------- ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY <S> <C> <C> <C> <C> <C> Current liabilities: Notes payable .......................... $ -- $ 47,435 $ -- $ -- $ 47,435 Current maturities of long-term debt ... -- 917 -- -- 917 Accounts payable and accrued liabilities 29,199 110,884 192 -- 140,275 Payable to affiliates .................. 13,420 12,918 654 (17,449) 9,543 Accrued environmental costs ............ 7,018 -- 57,616 -- 64,634 Income taxes ........................... 459 13,517 -- -- 13,976 Deferred income taxes .................. -- 1,319 -- -- 1,319 ----------- ----------- ----------- ----------- ----------- Total current liabilities .......... 50,096 186,990 58,462 (17,449) 278,099 ----------- ----------- ----------- ----------- ----------- Noncurrent liabilities: Long-term debt ......................... 194,000 1,920 -- -- 195,920 Notes payable to affiliate ............. 635,183 194,000 -- (829,183) -- Deferred income taxes .................. 73,227 78,573 127 -- 151,927 Accrued environmental costs ............ 8,005 7,442 26,302 -- 41,749 Accrued pension cost ................... 1,464 15,896 -- -- 17,360 Accrued postretirement benefits cost ... 16,352 13,328 -- -- 29,680 Other .................................. 9,695 7,118 -- -- 16,813 ----------- ----------- ----------- ----------- ----------- Total noncurrent liabilities ....... 937,926 318,277 26,429 (829,183) 453,449 ----------- ----------- ----------- ----------- ----------- Minority interest .......................... -- 287 6,924 -- 7,211 ----------- ----------- ----------- ----------- ----------- Shareholders' equity ....................... 377,810 1,006,785 38,158 (1,044,943) 377,810 ----------- ----------- ----------- ----------- ----------- $ 1,365,832 $ 1,512,339 $ 129,973 $(1,891,575) $ 1,116,569 =========== =========== =========== =========== =========== </TABLE> - 18 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Balance Sheet December 31, 2000 (In thousands) <TABLE> <CAPTION> NL Combined Industries Non-guarantor Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated ---------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> Current assets: Cash and cash equivalents .................... $ 3,632 $ 52,979 $ 63,767 $ -- $ 120,378 Restricted cash equivalents .................. 69,242 -- -- -- 69,242 Accounts and notes receivable ................ 172 131,295 73 -- 131,540 Receivable from affiliates ................... 6,189 -- 216 (6,191) 214 Refundable income taxes ...................... 10,512 1,790 -- -- 12,302 Inventories .................................. -- 205,973 -- -- 205,973 Prepaid expenses ............................. 347 2,111 -- -- 2,458 Deferred income taxes ........................ 6,394 5,279 -- -- 11,673 ----------- ----------- ----------- ----------- ----------- Total current assets ..................... 96,488 399,427 64,056 (6,191) 553,780 ----------- ----------- ----------- ----------- ----------- Other assets: Investment in subsidiaries ................... 687,300 -- 285 (687,585) -- Marketable securities ........................ 452 -- 46,734 -- 47,186 Notes receivable from affiliates ............. 194,000 301,695 23,000 (518,695) -- Investment in TiO2 manufacturing joint venture -- 150,002 -- -- 150,002 Prepaid pension cost ......................... 1,772 21,017 -- -- 22,789 Restricted cash equivalents .................. 17,942 -- -- -- 17,942 Other ........................................ 1,739 2,968 -- -- 4,707 ----------- ----------- ----------- ----------- ----------- Total other assets ....................... 903,205 475,682 70,019 (1,206,280) 242,626 ----------- ----------- ----------- ----------- ----------- Property and equipment, net ...................... 4,425 319,957 -- -- 324,382 ----------- ----------- ----------- ----------- ----------- $ 1,004,118 $ 1,195,066 $ 134,075 $(1,212,471) $ 1,120,788 =========== =========== =========== =========== =========== </TABLE> - 19 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Balance Sheet, (Continued) December 31, 2000 (In thousands) <TABLE> <CAPTION> NL Combined Industries Non-guarantor Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated ---------- ------------ ------------- ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY <S> <C> <C> <C> <C> <C> Current liabilities: Notes payable .......................... $ -- $ 69,970 $ -- $ -- $ 69,970 Current maturities of long-term debt ... -- 730 -- -- 730 Accounts payable and accrued liabilities 24,098 123,555 224 -- 147,877 Payable to affiliates .................. 2,140 14,073 612 (6,191) 10,634 Accrued environmental costs ............ 5,046 -- 48,261 -- 53,307 Income taxes ........................... -- 13,604 12 -- 13,616 Deferred income taxes .................. -- 1,822 -- -- 1,822 ----------- ----------- ----------- ----------- ----------- Total current liabilities .......... 31,284 223,754 49,109 (6,191) 297,956 ----------- ----------- ----------- ----------- ----------- Noncurrent liabilities: Long-term debt ......................... 194,000 1,363 -- -- 195,363 Notes payable to affiliate ............. 324,695 194,000 -- (518,695) -- Deferred income taxes .................. 70,985 73,699 989 -- 145,673 Accrued environmental costs ............ 6,729 8,699 41,705 -- 57,133 Accrued pension cost ................... 1,438 19,782 -- -- 21,220 Accrued postretirement benefits cost ... 15,039 14,365 -- -- 29,404 Other .................................. 15,460 7,812 -- -- 23,272 ----------- ----------- ----------- ----------- ----------- Total noncurrent liabilities ....... 628,346 319,720 42,694 (518,695) 472,065 ----------- ----------- ----------- ----------- ----------- Minority interest .......................... -- 299 5,980 -- 6,279 ----------- ----------- ----------- ----------- ----------- Shareholders' equity ....................... 344,488 651,293 36,292 (687,585) 344,488 ----------- ----------- ----------- ----------- ----------- $ 1,004,118 $ 1,195,066 $ 134,075 $(1,212,471) $ 1,120,788 =========== =========== =========== =========== =========== </TABLE> - 20 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Statement of Income Three months ended September 30, 2001 (In thousands) <TABLE> <CAPTION> NL Combined Industries Non-guarantor Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated ---------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> Revenues and other income: Net sales ................................. $ -- $ 206,952 $ -- $ -- $ 206,952 Interest and dividends .................... 6,754 10,131 1,482 (15,611) 2,756 Equity in income of subsidiaries .......... 25,804 -- -- (25,804) -- Insurance recoveries, net ................. -- 3,900 -- -- 3,900 Other income, net ......................... 1,129 (959) (11) 11 170 --------- --------- --------- --------- --------- 33,687 220,024 1,471 (41,404) 213,778 --------- --------- --------- --------- --------- Costs and expenses: Cost of sales ............................. -- 145,945 -- -- 145,945 Selling, general and administrative ....... (1,800) 31,355 1,110 -- 30,665 Interest .................................. 15,689 6,871 -- (15,611) 6,949 --------- --------- --------- --------- --------- 13,889 184,171 1,110 (15,611) 183,559 --------- --------- --------- --------- --------- Income before income taxes and minority interest .......................... 19,798 35,853 361 (25,793) 30,219 Income tax expense (benefit) .................. (740) 10,411 10 -- 9,681 --------- --------- --------- --------- --------- Net income ............................ $ 20,538 $ 25,442 $ 351 $ (25,793) $ 20,538 ========= ========= ========= ========= ========= </TABLE> - 21 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Statement of Income Three months ended September 30, 2000 (In thousands) <TABLE> <CAPTION> NL Combined Combined Industries Guarantor Non-guarantor Inc. Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> Revenues and other income: Net sales .......................................... $ -- $ 242,309 $ -- $ -- $ 242,309 Interest and dividends ............................. 8,326 6,557 1,563 (13,381) 3,065 Equity in income of subsidiaries ................... 39,177 -- -- (39,177) -- Other income, net .................................. 1,085 756 -- -- 1,841 --------- --------- --------- --------- --------- 48,588 249,622 1,563 (52,558) 247,215 --------- --------- --------- --------- --------- Costs and expenses: Cost of sales ...................................... -- 159,021 -- -- 159,021 Selling, general and administrative ................ 5,493 29,530 (1,051) -- 33,972 Interest ........................................... 13,531 7,567 -- (13,381) 7,717 --------- --------- --------- --------- --------- 19,024 196,118 (1,051) (13,381) 200,710 --------- --------- --------- --------- --------- Income before income taxes and minority interest 29,564 53,504 2,614 (39,177) 46,505 Income tax expense (benefit) ........................... (605) 15,487 -- -- 14,882 --------- --------- --------- --------- --------- Income before minority interest ................ 30,169 38,017 2,614 (39,177) 31,623 Minority interest ...................................... -- 8 1,446 -- 1,454 --------- --------- --------- --------- --------- Net income ..................................... $ 30,169 $ 38,009 $ 1,168 $ (39,177) $ 30,169 ========= ========= ========= ========= ========= </TABLE> - 22 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Statement of Income Nine months ended September 30, 2001 (In thousands) <TABLE> <CAPTION> NL Combined Industries Non-guarantor Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated --------- ------------ --------------- ------------ ------------ <S> <C> <C> <C> <C> <C> Revenues and other income: Net sales ................................. $ -- $ 653,117 $ -- $ -- $ 653,117 Interest and dividends .................... 20,751 25,590 4,603 (42,194) 8,750 Equity in income of subsidiaries .......... 100,325 -- -- (100,325) -- Litigation settlement gains, net .......... 10,582 -- -- -- 10,582 Insurance recoveries, net ................. -- 5,829 -- -- 5,829 Other income, net ......................... 2,412 (18) (11) 11 2,394 --------- --------- --------- --------- --------- 134,070 684,518 4,592 (142,508) 680,672 --------- --------- --------- --------- --------- Costs and expenses: Cost of sales ............................. -- 447,167 -- -- 447,167 Selling, general and administrative ....... 9,257 82,694 372 -- 92,323 Interest .................................. 42,415 20,591 -- (42,194) 20,812 --------- --------- --------- --------- --------- 51,672 550,452 372 (42,194) 560,302 --------- --------- --------- --------- --------- Income before income taxes and minority interest ............................ 82,398 134,066 4,220 (100,314) 120,370 Income tax expense ............................ 1,877 37,009 10 -- 38,896 --------- --------- --------- --------- --------- Income before minority interest ....... 80,521 97,057 4,210 (100,314) 81,474 Minority interest ............................. -- 9 944 -- 953 --------- --------- --------- --------- --------- Net income ............................ $ 80,521 $ 97,048 $ 3,266 $(100,314) $ 80,521 ========= ========= ========= ========= ========= </TABLE> - 23 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Statement of Income Nine months ended September 30, 2000 (In thousands) <TABLE> <CAPTION> NL Combined Combined Industries Guarantor Non-guarantor Inc. Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> Revenues and other income: Net sales .......................................... $ -- $ 724,444 $ -- $ -- $ 724,444 Interest and dividends ............................. 23,500 18,136 4,365 (38,554) 7,447 Equity in income of subsidiaries ................... 153,635 -- -- (153,635) -- Litigation settlement gains, net ................... 43,000 -- -- -- 43,000 Other income, net .................................. 8,862 4,043 -- -- 12,905 --------- --------- --------- --------- --------- 228,997 746,623 4,365 (192,189) 787,796 --------- --------- --------- --------- --------- Costs and expenses: Cost of sales ...................................... -- 482,319 -- -- 482,319 Selling, general and administrative ................ 19,698 85,012 (516) -- 104,194 Interest ........................................... 38,661 23,363 -- (38,554) 23,470 --------- --------- --------- --------- --------- 58,359 590,694 (516) (38,554) 609,983 --------- --------- --------- --------- --------- Income before income taxes and minority interest 170,638 155,929 4,881 (153,635) 177,813 Income tax expense ..................................... 53,323 5,520 -- -- 58,843 --------- --------- --------- --------- --------- Income before minority interest ................ 117,315 150,409 4,881 (153,635) 118,970 Minority interest ...................................... -- 33 1,622 -- 1,655 --------- --------- --------- --------- --------- Net income ..................................... $ 117,315 $ 150,376 $ 3,259 $(153,635) $ 117,315 ========= ========= ========= ========= ========= </TABLE> - 24 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Statement of Cash Flows Nine months ended September 30, 2001 (In thousands) <TABLE> <CAPTION> NL Combined Industries Non-guarantor Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated --------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> Net cash provided (used) by operating activities .... $ 18,618 $ 99,115 $ (2,133) $ (23,176) $ 92,424 --------- --------- --------- --------- --------- Cash flows from investing activities: Capital expenditures ............................ -- (32,391) -- -- (32,391) Loans to affiliates, net ........................ -- (11,938) (32,900) 11,938 (32,900) Change in restricted cash ....................... 8,024 -- -- (7,324) 700 Other, net ...................................... 7 8,477 (8) 8 8,484 --------- --------- --------- --------- --------- Net cash provided (used) by investing activities ................................ 8,031 (35,852) (32,908) 4,622 (56,107) --------- --------- --------- --------- --------- Cash flows from financing activities: Dividends, net .................................. (29,897) (30,500) -- 30,500 (29,897) Treasury stock: Purchased ................................... (9,853) -- -- -- (9,853) Reissued .................................... 619 -- -- -- 619 Indebtedness: Borrowings .................................. -- 1,437 -- -- 1,437 Principal payments .......................... -- (22,132) -- -- (22,132) Loans from affiliates ........................... 11,938 -- -- (11,938) -- Other, net ...................................... -- 3 -- (8) (5) --------- --------- --------- --------- --------- Net cash provided (used) by financing activities ................................ (27,193) (51,192) -- 18,554 (59,831) --------- --------- --------- --------- --------- Cash and cash equivalents: Net change from: Operating, investing and financing activities (544) 12,071 (35,041) -- (23,514) Currency translation ........................ -- 140 (4) -- 136 --------- --------- --------- --------- --------- (544) 12,211 (35,045) -- (23,378) Balance at beginning of period .................. 3,632 52,979 63,767 -- 120,378 --------- --------- --------- --------- --------- Balance at end of period ........................ $ 3,088 $ 65,190 $ 28,722 $ -- $ 97,000 ========= ========= ========= ========= ========= </TABLE> - 25 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Statement of Cash Flows Nine months ended September 30, 2000 (In thousands) <TABLE> <CAPTION> NL Combined Combined Industries Guarantor Non-guarantor Inc. Subsidiaries Subsidiaries Eliminations Consolidated ---------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> Net cash provided (used) by operating activities .... $ 16,862 $ 145,433 $ (133) $ (43,000) $ 119,162 --------- --------- --------- --------- --------- Cash flows from investing activities: Capital expenditures ............................ (21) (19,736) -- -- (19,757) Purchase of Tremont Corporation common stock .... (9,520) -- (16,520) -- (26,040) Change in restricted cash ....................... (102) -- -- -- (102) Loans to affiliates ............................. -- (35,872) 30,000 5,872 -- Investment in subsidiary ........................ (16,600) -- -- 16,600 -- Other, net ...................................... 181 68 -- -- 249 --------- --------- --------- --------- --------- Net cash provided (used) by investing activities .................................. (26,062) (55,540) 13,480 22,472 (45,650) --------- --------- --------- --------- --------- Cash flows from financing activities: Treasury stock: Purchased ................................... (29,180) -- -- -- (29,180) Reissued .................................... 1,581 -- -- -- 1,581 Dividends, net .................................. (22,721) (43,000) -- 43,000 (22,721) Principal payments on debt ...................... -- (29,034) -- -- (29,034) Loans from affiliates ........................... 48,872 (43,000) -- (5,872) -- Capital contributions ........................... -- -- 16,600 (16,600) -- Other, net ...................................... -- (6) -- -- (6) --------- --------- --------- --------- --------- Net cash provided (used) by financing activities .............................. (1,448) (115,040) 16,600 20,528 (79,360) --------- --------- --------- --------- --------- Cash and cash equivalents: Net change from: Operating, investing and financing activities (10,648) (25,147) 29,947 -- (5,848) Currency translation ........................ -- (3,305) (7) -- (3,312) --------- --------- --------- --------- --------- (10,648) (28,452) 29,940 -- (9,160) Balance at beginning of period .................. 13,415 113,062 7,747 -- 134,224 --------- --------- --------- --------- --------- Balance at end of period ........................ $ 2,767 $ 84,610 $ 37,687 $ -- $ 125,064 ========= ========= ========= ========= ========= </TABLE> - 26 -
Note 14 - Commitments and contingencies: For descriptions of certain legal proceedings, income tax and other commitments and contingencies related to the Company, reference is made to (i) Management's Discussion and Analysis of Financial Condition and Results of Operations, (ii) Part II, Item 1 - "Legal Proceedings," (iii) the Company's Quarterly Report on Form 10-Q for the quarters ended March 31, 2001 and June 30, 2001, and (iv) the 2000 Annual Report. Note 15 - Accounting principles not yet adopted: The Company will adopt SFAS No. 143, Accounting for Asset Retirement Obligations, no later than 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 would be 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 would be accreted to its present value, and the capitalized cost would be 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. The Company is still studying this newly-issued standard to determine, among other things, whether it has any asset retirement obligations which are covered under the scope of SFAS No. 143, and the effect, if any, to the Company of adopting this standard has not yet been determined. The Company will adopt SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, no later than January 1, 2002. SFAS No. 144 retains the fundamental provisions of existing generally accepted accounting principles with respect to the recognition and measurement of long-lived asset impairment contained in SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. However, SFAS No. 144 provides new guidance intended to address certain significant implementation issues associated with SFAS No. 121, including expanded guidance with respect to appropriate cash flows to be used to determine whether recognition of any long-lived asset impairment is required, and if required how to measure the amount of the impairment. SFAS No. 144 also requires that any net assets to be disposed of by sale be reported at the lower of carrying value or fair value less cost to sell, and expands the reporting of discontinued operations to include any component of an entity with operations and cash flows that can be clearly distinguished from the rest of the entity. The Company is still studying this newly-issued standard, and the effect, if any, to the Company of adopting SFAS No. 144 has not yet been determined. - 27 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS <TABLE> <CAPTION> Three months ended % Nine months ended % September 30, Change September 30, Change ------------------ ------ ------------------ ------ 2001 2000 2001 2000 -------- -------- ------ ------ (In millions, except percentages and metric tons) <S> <C> <C> <C> <C> <C> <C> Net sales and operating income Net sales .................... $207.0 $242.3 -15% $653.1 $724.4 -10% Operating income ............. $ 36.2 $ 57.5 -37% $133.3 $166.5 -20% Operating income margin percentage ................. 18% 24% 20% 23% TiO2 operating statistics Percent change in average selling price (in billing currencies) ................ -6% n/c Sales volume (metric tons in thousands) ................. 103 113 -9% 311 343 -10% Production volume (metric tons in thousands) .............. 109 113 -4% 315 329 -4% </TABLE> Kronos' operating income in the third quarter of 2001 decreased $21.3 million or 37% from the third quarter of 2000 due to lower average selling prices in billing currencies and lower sales and production volumes. Kronos' operating income in the first nine months of 2001 decreased $33.2 million or 20% from the first nine months of 2000 due to lower sales and production volumes. Kronos' average selling price in billing currencies (which excludes the effects of foreign currency translation) during the third quarter of 2001 was 6% lower than the third quarter of 2000 and 4% lower than the second quarter of 2001. Compared to the second quarter of 2001, prices in billing currencies were lower in all major markets. The average selling price in billing currencies in September was 1% lower than the average selling price during the third quarter as prices continued to trend downward. Kronos' average selling price in billing currencies for the first nine months of 2001 was comparable to the first nine months of 2000. Due to the global economic slowdown, the Company expects its average selling price in billing currencies will continue to trend downward through the end of the year and perhaps into the first quarter of 2002. The Company expects a lower average selling price for full-year 2001 compared to the full-year average selling price in 2000. Kronos' third-quarter 2001 sales volume decreased 9% from the near record third quarter of 2000 and decreased 2% from the second quarter of 2001. Sales volume in the third quarter of 2001 was 17% and 4% lower in Europe and North America, respectively, compared to the third quarter of 2000, while export volume increased moderately. Compared to the second quarter of 2001, sales volume decreased in Europe and North America while sales volume increased moderately in the export markets. Sales volume in the first nine months of 2001 was 10% lower than in the first nine months of 2000. Kronos anticipates its sales volume for full-year 2001 will be lower than that of 2000. Finished goods inventory levels at the end of September represented about two months of sales. Third-quarter 2001 production volume was 4% lower than the comparable 2000 period with operating rates at 95% in the third quarter of 2001 compared to near full capacity in the third quarter of 2000. Kronos' - 28 -
production volume in the first nine months of 2001 was 4% lower than the first nine months of 2000 with operating rates at 94% in the first nine months of 2001 compared to near full capacity in the first nine months of 2000. The lower production volume was primarily related to lost sulfate-process production at the Company's Leverkusen facility due to the previously reported fire in March 2001. See Note 12 to the Consolidated Financial Statements. The Leverkusen sulfate-process plant became approximately 50% operational in September 2001 and became fully operational in late October 2001. Kronos anticipates its production volume for full-year 2001 will be lower than that of 2000. During the third quarter of 2001, the Company's insurance carriers approved payment of $8 million ($6.8 million received as of September 30, 2001) as a partial payment for property damage costs and business interruption losses caused by the Leverkusen fire. Three million dollars of this payment represented partial compensation for business interruption losses which was recorded as a reduction of cost of sales to offset unallocated period costs that resulted from lost production. The remaining $5 million represented property damage recoveries against which the Company recorded $1.1 million of expenses related to clean-up costs, resulting in a net gain of $3.9 million. In the first nine months of 2001, the Company's insurance carriers approved payment of $18.5 million ($17.3 million received as of September 30, 2001) for losses caused by the Leverkusen fire, including the $8 million discussed above. Eight million dollars of this payment was for business interruption losses and the remaining $10.5 million was for property damage losses against which the Company recorded $4.7 million of expenses resulting in a net gain of $5.8 million. In October 2001, the Company reached an agreement in principle with its insurance carriers to settle the coverage claim involving the Leverkusen fire. The Company expects to receive an additional $38 million in insurance recoveries, of which approximately $13 million relates to property damage costs, and approximately $25 million relates to business interruption losses and extra expenses resulting from the fire. The Company expects to report a gain, net of certain expenses, related to this insurance settlement in the fourth quarter of 2001. Kronos expects its full-year 2001 operating income will be significantly lower than 2000 primarily because of lower average selling prices in billing currencies, lower sales and production volumes and higher energy costs. Compared to the year-earlier periods, cost of sales as a percentage of net sales increased in both the third quarter and first nine months of 2001 primarily due to lower production volume. Excluding the effects of foreign currency translation, which decreased the Company's expenses in the third quarter and first nine months of 2001 compared to year-earlier periods, the Company's selling, general and administrative expenses, excluding corporate expenses, in the third quarter and first nine months of 2001 were slightly lower compared to the year-earlier periods. A significant amount of Kronos' sales and operating costs are denominated in currencies other than the U.S. dollar. Fluctuations in the value of the U.S. dollar relative to other currencies, primarily a stronger U.S. dollar compared to the euro in the third quarter and first nine months of 2001 versus the year-earlier periods, decreased the dollar value of sales in the third quarter and first nine months of 2001 by a net $6 million and $24 million, respectively, when compared to the year-earlier periods. When translated from billing currencies to U.S. dollars using currency exchange rates prevailing during the respective periods, Kronos' third-quarter 2001 average selling price in U.S. dollars was 9% lower than in the third quarter of 2000 and 4% lower than the second quarter of 2001. Kronos' average selling price in U.S. dollars for the first nine months of 2001 decreased 4% from the first nine months of 2000. The effect of the stronger U.S. dollar on Kronos' operating - 29 -
costs that are not denominated in U.S. dollars reduced operating costs in the third quarter and first nine months of 2001 compared to the year-earlier periods. In addition, sales to export markets are typically denominated in U.S. dollars and a stronger U.S. dollar improves margins on these sales at the Company's non-U.S. subsidiaries. The favorable margin on export sales tends to offset the unfavorable effect of translating local currency profits to U.S. dollars when the dollar is stronger. As a result, the net impact of currency exchange rate fluctuations on operating income in the third quarter and first nine months of 2001 was not significant when compared to the year-earlier periods. General corporate The following table sets forth certain information regarding general corporate income (expense). <TABLE> <CAPTION> Three months ended Nine months ended September 30, Difference September 30, Difference ------------------- ---------- ------------------- ---------- 2001 2000 2001 2000 ------- ------- ------- ------- (In millions) <S> <C> <C> <C> <C> <C> <C> Securities earnings ...... $ 2.1 $ 2.5 $ (.4) $ 6.0 $ 11.6 $ (5.6) Corporate income ......... 1.1 1.0 .1 14.1 46.2 (32.1) Corporate expense ........ (6.2) (6.8) .6 (18.0) (23.0) 5.0 Interest expense ......... (6.9) (7.7) .8 (20.8) (23.5) 2.7 ------- ------- ------- ------- ------- ------- $ (9.9) $ (11.0) $ 1.1 $ (18.7) $ 11.3 $ (30.0) ======= ======= ======= ======= ======= ======= </TABLE> Securities earnings in the first nine months of 2001 declined from the comparable period in 2000 primarily due to a $5.6 million second-quarter 2000 securities gain related to common stock received from the demutualization of an insurance company from which the Company had purchased certain insurance policies. Corporate income in the first quarter of 2001 and the second quarter of 2000 includes litigation settlement gains with former insurance carrier groups of $10.6 million and $43 million, respectively. See Note 11 to the Consolidated Financial Statements. No further material settlements relating to litigation concerning environmental remediation coverage are expected. Corporate expense in the first nine months of 2001 was lower than the year-earlier period, primarily due to lower environmental remediation accruals and lower legal fees. Interest expense in the third quarter and first nine months of 2001 decreased 10% and 11%, respectively, from the comparable periods in 2000 primarily due to lower average interest rates as a result of the December 2000 refinancing of $50 million of the Company's fixed-rate public debt with lower variable-rate bank debt, and lower levels of outstanding debt. In the second and third quarters of 2001, the Company repaid $6.5 million and $14.9 million, respectively, of its euro-denominated short-term debt with excess cash flow from operations. The Company expects its full-year 2001 interest expense will be lower than full-year 2000. - 30 -
Provision for income taxes The Company reduced its deferred income tax valuation allowance by $1.3 million in the first nine months of 2001 and $2.1 million in the first nine months of 2000 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. Accounting principles not yet adopted See Note 15 to the Consolidated Financial Statements. Other Minority interest primarily relates to the Company's majority-owned environmental management subsidiary, NL Environmental Management Services, Inc. ("EMS"). LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated cash flows from operating, investing and financing activities for the nine months ended September 30, 2001 and 2000 are presented below. <TABLE> <CAPTION> Nine months ended September 30, ------------------ 2001 2000 -------- -------- (In millions) <S> <C> <C> Net cash provided (used) by: Operating activities: Before changes in assets and liabilities .................... $ 97.2 $ 123.2 Changes in assets and liabilities ........................... (4.8) (4.0) -------- -------- 92.4 119.2 Investing activities ............................................ (56.1) (45.6) Financing activities ............................................ (59.8) (79.4) -------- -------- Net cash used by operating, investing, and financing activities $ (23.5) $ (5.8) ======== ======== </TABLE> 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 flow from operations, before changes in assets and liabilities, in the first nine months of 2001 decreased from the comparable period in 2000 primarily due to lower operating income. The net cash used to fund changes in the Company's inventories, receivables and payables (excluding the effect of currency translation) in the first nine months of 2001 was comparable to the first nine months of 2000 with higher inventory balances and decreases in accounts payable and accrued liabilities offset by decreases in accounts and notes receivable balances in the first nine months of 2001. - 31 -
Investing activities In February 2001, EMS loaned $13.4 million to Tremont under a reducing revolving loan agreement. See Note 1 to the Consolidated Financial Statements. The loan was approved by special committees of the Company's and EMS's Boards of Directors. The loan bears interest at prime plus 2% (8.75% at September 30, 2001), is due March 31, 2003 and is collateralized by 10.2 million shares of NL common stock owned by Tremont. The maximum amount available for borrowing by Tremont reduces by $250,000 per quarter. In each of the second and third quarters of 2001, Tremont repaid $250,000 of the loan. At September 30, 2001, the outstanding loan balance was $12.9 million and no amounts were available for additional borrowings by Tremont. In May 2001, a wholly owned subsidiary of EMS loaned $20 million to the Harold C. Simmons Family Trust #2 (the "Trust"), one of the trusts described in Note 1 to the Consolidated Financial Statements, under a $25 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 (6.75% at September 30, 2001), 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 Trust. At September 30, 2001, $5 million was available for additional borrowing by the Trust. In the second and third quarters of 2001, the Company's capital expenditures include an aggregate of $11.7 million for the rebuilding of its Leverkusen sulfate plant. In the second and third quarters of 2001, the Company received $5.5 million and $5 million, respectively, of insurance proceeds for property damage resulting from the Leverkusen fire and paid $1 million and $1.1 million, respectively, of expenses related to repairs and clean-up costs. Financing activities In the second and third quarters of 2001, the Company repaid euro 7.6 million ($6.5 million when paid) and euro 16.4 million ($14.9 million when paid), respectively, of its euro-denominated short-term debt with excess cash flow from operations. In the third quarter of 2001, the Company paid a regular quarterly dividend to shareholders of $.20 per share, aggregating $9.9 million. Dividends paid during the first nine months of 2001 totaled $.60 per share or $29.9 million. On October 24, 2001, the Company's Board of Directors declared a regular quarterly dividend of $.20 per share to shareholders of record as of December 10, 2001 to be paid on December 24, 2001. Pursuant to its share repurchase program, the Company purchased 465,000 shares of its common stock at an aggregate cost of $7.1 million in the third quarter of 2001 and 677,000 shares at an aggregate cost of $9.9 million in the first nine months of 2001. In October 2001, the Company's Board of Directors authorized the purchase of up to an additional 1.5 million shares. An additional 13,000 shares at an aggregate cost of $.2 million were purchased in October 2001, with 1,576,000 shares remaining for purchase under the repurchase program. - 32 -
Cash, cash equivalents, restricted cash equivalents and borrowing availability At September 30, 2001, the Company had cash and cash equivalents aggregating $97 million ($59 million held by non-U.S. subsidiaries) and an additional $93 million of restricted cash equivalents held by U.S. subsidiaries, of which $13 million was classified as a noncurrent asset. The Company's subsidiaries had $25 million available for borrowing at September 30, 2001 under existing non-U.S. credit facilities. Income tax contingencies Certain of the Company's tax returns in various U.S. and non-U.S. jurisdictions are being examined and tax authorities have proposed or may propose tax deficiencies, including interest. The Company received tax assessments from the Norwegian tax authorities proposing tax deficiencies, including related interest, of NOK 39.3 million pertaining to 1994 and 1996. The Company was unsuccessful in appealing the tax assessments and in June 2001 paid NOK 39.3 million ($4.3 million when paid) to the Norwegian tax authorities. The Company was adequately reserved for this contingency. The lien on the Company's Fredrikstad, Norway TiO2 plant in favor of the Norwegian tax authorities has been released. The Company has received preliminary tax assessments for the years 1991 to 1998 from the Belgian tax authorities proposing tax deficiencies, including related interest, of approximately euro 13.6 million ($12.5 million at September 30, 2001). The Company has filed protests to the assessments for the years 1991 to 1997 and expects to file a protest for 1998. The Company is in discussions with the Belgian tax authorities and believes that a significant portion of the assessments is without merit. 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. Environmental matters and litigation The Company has been named as a defendant, potentially responsible party ("PRP"), or both, in a number of legal proceedings associated with environmental matters, including waste disposal sites, mining locations and facilities currently or previously owned, operated or used by the Company, certain of which are on the U.S. Environmental Protection Agency's (the "U.S. EPA") Superfund National Priorities List or similar state lists. On a quarterly basis, the Company evaluates the potential range of its liability at sites where it has been named as a PRP or defendant, including sites for which EMS has contractually assumed the Company's obligation. The Company believes it has adequate accruals ($106 million at September 30, 2001) for reasonably estimable costs of such matters, but the Company's ultimate liability may be affected by a number of factors, including changes in remedial alternatives and costs and the allocations of such costs among PRPs. It is not possible to estimate the range of costs for certain sites. The upper end of the range of reasonably possible costs to the Company for sites for which it is possible to estimate costs is approximately $170 million. The Company's estimates of such liabilities have not been discounted to present value. No assurance can be given that actual costs will not exceed either accrued amounts or the upper end of the range for sites for which estimates have been made, and no assurance can be given that costs will not be incurred with respect to sites as to which no estimate presently can be made. The imposition of more stringent standards or requirements - 33 -
under environmental laws or regulations, new developments or changes with respect to site cleanup costs or allocation of such costs among PRPs, or a determination that the Company is potentially responsible for the release of hazardous substances at other sites, could result in expenditures in excess of amounts currently estimated by the Company to be required for such matters. Furthermore, there can be no assurance that additional environmental matters will not arise in the future. Lead pigment litigation The Company is also a defendant in a number of legal proceedings seeking damages for personal injury and property damage arising out of the sale of lead pigments and lead-based paints. There is no assurance that the Company will not incur future liability in respect of this pending litigation in view of the inherent uncertainties involved in court and jury rulings in pending and possible future cases. However, based on, among other things, the results of such litigation to date, the Company believes that the pending lead pigment and paint litigation is without merit. The Company has not accrued any amounts for such pending litigation. Liability that may result, if any, cannot reasonably be estimated. In addition, various legislation and administrative regulations have, from time to time, been enacted or proposed that seek to (a) impose various obligations on present and former manufacturers of lead pigment and lead-based paint with respect to asserted health concerns associated with the use of such products and (b) effectively overturn court decisions in which the Company and other pigment manufacturers have been successful. Examples of such proposed legislation include bills which would permit civil liability for damages on the basis of market share, rather than requiring plaintiffs to prove that the defendant's product caused the alleged damage, and bills which would revive actions barred by the statute of limitations. The Company currently believes the disposition of all claims and disputes, individually and in the aggregate, should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. There can be no assurance that additional matters of these types will not arise in the future. See Item 1 - "Legal Proceedings." Other The Company periodically evaluates its liquidity requirements, alternative uses of capital, capital needs and availability of resources in view of, among other things, its debt service and capital expenditure requirements and estimated future operating cash flows. As a result of this process, the Company in the past has sought, and in the future may seek, to reduce, refinance, repurchase or restructure indebtedness; raise additional capital; issue additional securities; repurchase shares of its common stock; modify its dividend policy; restructure ownership interests; sell interests in subsidiaries or other assets; or take a combination of such steps or other steps to manage its liquidity and capital resources. In the normal course of its business, the Company may review opportunities for the acquisition, divestiture, joint venture or other business combinations in the chemicals or other industries, as well as the acquisition of interests in, and loans to, related companies. In the event of any acquisition or joint venture transaction, the Company may consider using available cash, issuing equity securities or increasing its indebtedness to the extent permitted by the agreements governing the Company's existing debt. Special note regarding forward-looking statements The statements contained in this Report on Form 10-Q ("Quarterly Report") which are not historical facts, including, but not limited to, statements found under the captions "Results of Operations" and "Liquidity and Capital Resources" above, are forward-looking statements that represent management's beliefs and assumptions based on currently available information. Forward-looking statements can be identified by the use - 34 -
of words such as "believes," "intends," "may," "will," "should," "anticipates," "expects," or comparable terminology or by discussions of strategy or trends. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it cannot give any assurances that these expectations will prove to be correct. Such statements by their nature involve risks and uncertainties, including, but not limited to, the cyclicality of the titanium dioxide industry, global economic and political conditions, global productive capacity, customer inventory levels, changes in product pricing, changes in product costing, changes in foreign currency exchange rates, competitive technology positions, operating interruptions (including, but not limited to, labor disputes, leaks, fires, explosions, unscheduled downtime, transportation interruptions, war and terrorist activities), recoveries from insurance claims and the timing thereof, the ultimate resolution of pending or possible future lead pigment litigation and legislative developments related to the lead paint litigation, the outcome of other litigation, and other risks and uncertainties included in this Quarterly Report and in the 2000 Annual Report, and the uncertainties set forth from time to time in the Company's other public reports and filings. Should one or more of these risks materialize (or the consequences of such a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those forecasted or expected. The Company disclaims any intention or obligation to update publicly or revise such statements whether as a result of new information, future events or otherwise. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to the 2000 Annual Report and the Company's Quarterly Report on Form 10-Q for the quarters ended March 31, 2001 and June 30, 2001 for descriptions of certain previously reported legal proceedings. Brenner, et al. v. American Cyanamid, et al. (No. 12596-93). In November 2001, the Fourth Department intermediate appellate court unanimously affirmed the dismissal of plaintiff's complaint by the trial court. County of Santa Clara v. Atlantic Richfield Company, et al. (No. CV788657). In September 2001, the trial judge dismissed without leave to amend plaintiffs' nuisance claim and their product liabilities claims for properties not owned by plaintiffs. Sabater, et al. v. Lead Industries Association, et al. (No. 25533/98). In September 2001, the Federal Court dismissed the Federal Home Loan Mortgage Corporation and remanded the case to state court. City of Milwaukee v. NL Industries, Inc. and Mautz Paint (No. 01CV003066). In October 2001, the trial court denied the Company's motion to dismiss plaintiff's conspiracy claim for lack of particularity. Jefferson County School District v. Lead Industries Association, et al. (No. 2001-69). In July 2001, plaintiff filed a motion to remand the case to state court. - 35 -
It is possible that other governmental entities or other plaintiffs may file claims related to lead pigment and paint similar to those described above and in the 2000 Annual Report. Since the filing of the 2000 Annual Report, the Company has been named as a defendant in asbestos cases in various jurisdictions on behalf of approximately 2,000 additional personal injury claimants. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Revolving Loan Note dated May 4, 2001 with Harold C. Simmons Family Trust No. 2 and EMS Financial, Inc. 10.2 Security Agreement dated May 4, 2001 by and between Harold C. Simmons Family Trust No. 2 and EMS Financial, Inc. (b) Reports on Form 8-K There were no Reports on Form 8-K filed during the quarter ended September 30, 2001 and through the date of this report. - 36 -
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 9, 2001 By /s/ Susan E. Alderton - ----------------------- -------------------------------- Susan E. Alderton Vice President and Chief Financial Officer (Principal Financial Officer) Date: November 9, 2001 By /s/ Robert D. Hardy - ----------------------- -------------------------------- Robert D. Hardy Vice President and Controller (Principal Accounting Officer) - 37 -