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 March 31, 2002 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 May 13, 2002: 48,824,884
NL INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Balance Sheets - March 31, 2002 and December 31, 2001 3-4 Consolidated Statements of Income - Three months ended March 31, 2002 and 2001 5 Consolidated Statements of Comprehensive Income - Three months ended March 31, 2002 and 2001 6 Consolidated Statement of Shareholders' Equity - Three months ended March 31, 2002 7 Consolidated Statements of Cash Flows - Three months ended March 31, 2002 and 2001 8-9 Notes to Consolidated Financial Statements 10-26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 27-34 PART II. OTHER INFORMATION Item 1. Legal Proceedings 35 Item 4. Submission of Matters to a Vote of Security Holders 36 Item 6. Exhibits and Reports on Form 8-K 36
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) <TABLE> <CAPTION> ASSETS March 31, December 31, 2002 2001 ---------- ------------ <S> <C> <C> Current assets: Cash and cash equivalents ........................ $ 76,384 $ 116,037 Restricted cash equivalents ...................... 54,771 63,257 Restricted marketable debt securities ............ 8,663 3,583 Accounts and notes receivable .................... 139,238 125,721 Receivable from affiliates ....................... 3,301 3,698 Refundable income taxes .......................... 1,181 1,530 Inventories ...................................... 187,209 231,056 Prepaid expenses ................................. 4,144 3,193 Deferred income taxes ............................ 10,601 11,011 ---------- ---------- Total current assets ......................... 485,492 559,086 ---------- ---------- Other assets: Marketable equity securities ..................... 42,705 45,227 Receivable from affiliate ........................ 31,400 31,650 Investment in TiO2 manufacturing joint venture ... 137,528 138,428 Prepaid pension cost ............................. 18,384 18,411 Restricted marketable debt securities ............ 11,219 16,121 Restricted cash equivalents ...................... 5,640 -- Unrecognized net pension obligations ............. 5,901 5,901 Other ............................................ 13,781 6,517 ---------- ---------- Total other assets ........................... 266,558 262,255 ---------- ---------- Property and equipment: Land ............................................. 24,355 24,579 Buildings ........................................ 129,968 130,710 Machinery and equipment .......................... 536,238 537,958 Mining properties ................................ 68,691 67,649 Construction in progress ......................... 8,643 5,071 ---------- ---------- 767,895 765,967 Less accumulated depreciation and depletion ...... 442,357 436,217 ---------- ---------- Net property and equipment ................... 325,538 329,750 ---------- ---------- $1,077,588 $1,151,091 ========== ========== </TABLE> - 3 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands) <TABLE> <CAPTION> LIABILITIES AND SHAREHOLDERS' EQUITY March 31, December 31, 2002 2001 ----------- ------------ <S> <C> <C> Current liabilities: Notes payable .............................. $ 46,382 $ 46,201 Current maturities of long-term debt ....... 1,038 1,033 Accounts payable and accrued liabilities ... 142,542 176,223 Payable to affiliates ...................... 8,130 6,919 Accrued environmental costs ................ 52,472 59,891 Income taxes ............................... 6,515 7,277 Deferred income taxes ...................... 1,501 1,530 ----------- ----------- Total current liabilities .............. 258,580 299,074 ----------- ----------- Noncurrent liabilities: Long-term debt ............................. 170,246 195,465 Deferred income taxes ...................... 143,432 143,256 Accrued environmental costs ................ 51,412 47,589 Accrued pension cost ....................... 26,206 26,985 Accrued postretirement benefits cost ....... 29,536 29,842 Other ...................................... 14,488 14,729 ----------- ----------- Total noncurrent liabilities ........... 435,320 457,866 ----------- ----------- Minority interest .............................. 7,388 7,208 ----------- ----------- Shareholders' equity: Common stock ............................... 8,355 8,355 Additional paid-in capital ................. 777,597 777,597 Retained earnings .......................... 219,342 222,722 Accumulated other comprehensive loss ....... (210,483) (206,351) Treasury stock ............................. (418,511) (415,380) ----------- ----------- Total shareholders' equity ............. 376,300 386,943 ----------- ----------- $ 1,077,588 $ 1,151,091 =========== =========== </TABLE> Commitments and contingencies (Note 16) See accompanying notes to consolidated financial statements. - 4 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Three months ended March 31, 2002 and 2001 (In thousands, except per share data) <TABLE> <CAPTION> 2002 2001 --------- --------- <S> <C> <C> Revenues and other income: Net sales ................................................ $ 202,357 $ 226,060 Litigation settlement gains, net ......................... 1,920 10,582 Other income, net ........................................ 3,075 4,849 --------- --------- 207,352 241,491 --------- --------- Costs and expenses: Cost of sales ............................................ 156,253 149,902 Selling, general and administrative ...................... 34,845 32,322 Interest ................................................. 6,442 6,976 --------- --------- 197,540 189,200 --------- --------- Income before income taxes, minority interest and extraordinary item ................................. 9,812 52,291 Income tax expense ........................................... 3,184 17,146 --------- --------- Income before minority interest and extraordinary item 6,628 35,145 Minority interest ............................................ 184 586 --------- --------- Income before extraordinary item ..................... 6,444 34,559 Extraordinary item - early extinguishment of debt, net of tax benefit of $32 ............................................. (60) -- --------- --------- Net income ............................................... $ 6,384 $ 34,559 ========= ========= Basic earnings per share: Income before extraordinary item ......................... $ .13 $ .69 Extraordinary item ....................................... -- -- --------- --------- Net income ........................................... $ .13 $ .69 ========= ========= Diluted earnings per share: Income before extraordinary item ......................... $ .13 $ .69 Extraordinary item ....................................... -- -- --------- --------- Net income ........................................... $ .13 $ .69 ========= ========= Weighted average shares used in the calculation of earnings per share: Basic .................................................. 48,870 50,079 Dilutive impact of stock options ....................... 68 270 --------- --------- Diluted ................................................ 48,938 50,349 ========= ========= </TABLE> See accompanying notes to consolidated financial statements. - 5 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three months ended March 31, 2002 and 2001 (In thousands) <TABLE> <CAPTION> 2002 2001 -------- -------- <S> <C> <C> Net income .............................................. $ 6,384 $ 34,559 -------- -------- Other comprehensive loss, net of tax: Marketable securities adjustment .................... (1,523) (3,802) Currency translation adjustment ..................... (2,609) (15,898) -------- -------- Total other comprehensive loss .................. (4,132) (19,700) -------- -------- Comprehensive income ........................ $ 2,252 $ 14,859 ======== ======== </TABLE> See accompanying notes to consolidated financial statements. - 6 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Three months ended March 31, 2002 (In thousands) <TABLE> <CAPTION> Accumulated other comprehensive income (loss) Additional ------------------------------------- Common paid-in Retained Currency Pension Marketable Treasury stock capital earnings translation liabilities securities stock Total --------- ---------- --------- ----------- ----------- ---------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 2001 $ 8,355 $ 777,597 $ 222,722 $(208,349) $ (6,352) $ 8,350 $(415,380) $ 386,943 Net income .................. -- -- 6,384 -- -- -- -- 6,384 Other comprehensive loss, net of tax -- -- -- (2,609) -- (1,523) -- (4,132) Dividends ................... -- -- (9,764) -- -- -- -- (9,764) Treasury stock: Acquired (228 shares) ... -- -- -- -- -- -- (3,271) (3,271) Reissued (12 shares) .... -- -- -- -- -- -- 140 140 --------- --------- --------- --------- --------- --------- --------- --------- Balance at March 31, 2002 ... $ 8,355 $ 777,597 $ 219,342 $(210,958) $ (6,352) $ 6,827 $(418,511) $ 376,300 ========= ========= ========= ========= ========= ========= ========= ========= </TABLE> See accompanying notes to consolidated financial statements. - 7 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended March 31, 2002 and 2001 (In thousands) <TABLE> <CAPTION> 2002 2001 -------- -------- <S> <C> <C> Cash flows from operating activities: Net income ........................................... $ 6,384 $ 34,559 Depreciation, depletion and amortization ............. 7,782 7,511 Deferred income taxes ................................ 718 7,555 Distributions from TiO2 manufacturing joint venture .. 900 1,500 Litigation settlement gain, net included in .......... restricted cash .................................... -- (10,307) Extraordinary item ................................... 60 -- Other, net ........................................... (669) (1,606) -------- -------- 15,175 39,212 Change in assets and liabilities: Accounts and notes receivable .................... (25,282) (25,788) Insurance receivable ............................. 10,909 1,000 Inventories ...................................... 43,049 11,928 Prepaid expenses ................................. (845) (1,348) Accounts payable and accrued liabilities ......... (36,161) (14,578) Income taxes ..................................... (629) (2,404) Other, net ....................................... 6,580 1,248 -------- -------- Net cash provided by operating activities .... 12,796 9,270 -------- -------- Cash flows from investing activities: Capital expenditures ................................. (5,461) (5,913) Loans to affiliates: Loans ............................................ -- (13,400) Collections ...................................... 250 -- Acquisition of business .............................. (9,149) -- Change in restricted cash equivalents and restricted marketable debt securities, net .................... 110 615 Other, net ........................................... 36 280 -------- -------- Net cash used by investing activities ............ (14,214) (18,418) -------- -------- </TABLE> - 8 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Three months ended March 31, 2002 and 2001 (In thousands) <TABLE> <CAPTION> 2002 2001 --------- --------- <S> <C> <C> Cash flows from financing activities: Dividends paid ................................... $ (9,764) $ (10,017) Treasury stock: Purchased .................................... (3,271) -- Reissued ..................................... 140 593 Principal payments of debt ....................... (25,263) (177) --------- --------- Net cash used by financing activities ............ (38,158) (9,601) --------- --------- Cash and cash equivalents: Net change from: Operating, investing and financing activities (39,576) (18,749) Currency translation ......................... (273) (1,920) Acquisition of business ...................... 196 -- --------- --------- (39,653) (20,669) Balance at beginning of period ................... 116,037 120,378 --------- --------- Balance at end of period ......................... $ 76,384 $ 99,709 ========= ========= Supplemental disclosures - cash paid for: Interest ......................................... $ 1,976 $ 1,160 Income taxes, net ................................ $ 3,095 $ 12,319 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 $ -- ========= ========= </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 March 31, 2002, Valhi, Inc. and Tremont Corporation, each affiliates of Contran Corporation, held approximately 62% and 21%, respectively, of NL's outstanding common stock. At March 31, 2002, 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 8. The consolidated balance sheet of NL Industries, Inc. and Subsidiaries (collectively, the "Company") at December 31, 2001 has been condensed from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at March 31, 2002 and the consolidated statements of income, comprehensive income, shareholders' equity and cash flows for the interim periods ended March 31, 2002 and 2001 have been prepared by the Company without audit. In the opinion of management all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the U.S. ("GAAP") have been condensed or omitted. Certain prior-year amounts have been reclassified to conform to the current year presentation. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 (the "2001 Annual Report"). The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. Under SFAS No. 142, goodwill, including goodwill arising from the difference between the cost of an investment accounted for by the equity method and the amount of the underlying equity in net assets of such equity method investee ("equity method goodwill"), will not be amortized on a periodic basis. Instead, goodwill (other than equity method goodwill) will be subject to an impairment test to be performed at least on an annual basis, and impairment reviews may result in future periodic write-downs charged to earnings. Equity method goodwill will not be tested for impairment in accordance with SFAS No. 142; rather, the overall carrying amount of an equity method investee will continue to be reviewed for impairment in accordance with existing GAAP. There is currently no equity method goodwill associated with the Company's equity method investee. All goodwill arising in a purchase business combination (including step acquisitions) completed on or after July 1, 2001 would not be periodically amortized from the date of such combination. The Company had goodwill of $6.4 million at March 31, 2002. See Note 3. - 10 -
The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective January 1, 2002. SFAS No. 144 retains the fundamental provisions of existing GAAP 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 to 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 adoption of SFAS No. 144 effective January 1, 2002 did not have a material effect on the Company's consolidated financial position, results of operations or liquidity. 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 combination 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 acquisition costs of $.2 million. An entity controlled by one of Harold C. Simmons' daughters owned a majority of EWI, and a wholly owned subsidiary of Contran owned the remainder of EWI. EWI provides reinsurance brokerage services for insurance policies of the Company, its joint venture and other affiliates of Contran as well as external third-party customers. In addition, EWI expects to obtain new third-party customers in the future. The purchase was approved by a special committee of the Company's Board of Directors consisting of two of its independent directors, and the purchase price was negotiated by the special committee based upon its consideration of relevant factors, including but not limited to due diligence performed by independent consultants and an appraisal of EWI conducted by an independent third party selected by the special committee. EWI's results of operations and cash flows are included in the Company's consolidated results of operations and cash flows beginning January 2002. The pro forma effect on the Company's results of operations in the first quarter of 2001, assuming the acquisition of EWI had occurred as of January 1, 2001, is not material. The aggregate cash purchase price of $9.2 million (including acquisition costs of $.2 million) has been allocated to the assets acquired and liabilities assumed, consisting of a definite-lived, customer list intangible asset of $2.6 million and goodwill of $6.4 million, based upon preliminary estimates of fair value. Such identifiable intangible asset and goodwill were included in other noncurrent assets at March 31, 2002. The actual allocation may be different from the preliminary allocation due to refinements in the estimates of fair values of the net assets acquired. The identifiable intangible asset will be amortized on a straight-line basis over a period of seven years with no assumed residual value. Goodwill will not be amortized on a periodic basis but instead will subject to periodic impairment tests in accordance with the requirements of SFAS No. 142. See Note 1. - 11 -
Note 4 - 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 March 31, ---------------------- 2002 2001 --------- --------- (In thousands) <S> <C> <C> Net sales ............................................... $ 202,357 $ 226,060 Other income, excluding corporate ....................... 783 1,242 --------- --------- 203,140 227,302 Cost of sales ........................................... 156,253 149,902 Selling, general and administrative, excluding corporate 24,728 25,484 --------- --------- Operating income ................................ 22,159 51,916 General corporate income (expense): Securities earnings, net ............................ 1,280 2,606 Litigation settlement gains, net and other income .. 2,932 11,583 Corporate expenses .................................. (10,117) (6,838) Interest expense .................................... (6,442) (6,976) --------- --------- Income before income taxes and minority interest $ 9,812 $ 52,291 ========= ========= </TABLE> Note 5 - Accounts and notes receivable: <TABLE> <CAPTION> March 31, December 31, 2002 2001 --------- ------------ (In thousands) <S> <C> <C> Trade receivables .............................. $ 129,098 $ 99,989 Insurance claims receivable .................... 596 11,505 Recoverable VAT and other receivables .......... 11,915 16,585 Allowance for doubtful accounts ................ (2,371) (2,358) --------- --------- $ 139,238 $ 125,721 ========= ========= </TABLE> - 12 -
Note 6 - Inventories: <TABLE> <CAPTION> March 31, December 31, 2002 2001 -------- ------------ (In thousands) <S> <C> <C> Raw materials ............................ $ 43,589 $ 79,162 Work in process .......................... 9,408 9,675 Finished products ........................ 108,711 117,201 Supplies ................................. 25,501 25,018 -------- -------- $187,209 $231,056 ======== ======== </TABLE> Note 7 - Marketable equity securities: <TABLE> <CAPTION> March 31, December 31, 2002 2001 --------- ------------ (In thousands) <S> <C> <C> Available-for-sale marketable equity securities: Unrealized gains ................................. $ 12,855 $ 14,917 Unrealized losses ................................ (2,530) (2,070) Cost ............................................. 32,380 32,380 -------- -------- Aggregate fair value ......................... $ 42,705 $ 45,227 ======== ======== </TABLE> Note 8 - 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% (6.75% at March 31, 2002), is due March 31, 2003 and is collateralized by 10.2 million shares of NL common stock owned by Tremont. The creditworthiness of Tremont is dependent in part on the value of the Company as Tremont's interest in the Company is one of Tremont's more substantial assets. The maximum amount available for borrowing by Tremont reduces by $250,000 per quarter. In each of the first quarter 2002 and the second, third and fourth quarters of 2001, Tremont repaid $250,000 of the loan. At March 31, 2002, the outstanding loan balance was $12.4 million and no amounts were available for additional borrowings by Tremont. The Company understands that Tremont may find it necessary to seek amendment of the terms of the revolving loan agreement and seek, among other things, extension of the maturity date and to increase the amount of borrowings available to Tremont in order for Tremont to meet its projected near term obligations and continue the payment of dividends at the present quarterly rate. The merits of Tremont's proposal will be considered once received. If the loan is extended, the Company does not expect a material impact on its liquidity. The current loan receivable balance of $1.0 million was included in receivable from affiliates at March 31, 2002. The remaining loan balance of $11.4 million was classified as noncurrent at March 31, 2002 as the Company does not expect repayment within one year. In May 2001, a wholly owned subsidiary of EMS loaned $20 million to the Harold C. Simmons Family Trust No. 2 ("Family 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 - 13 -
Directors. The loan bears interest at prime (4.75% at March 31, 2002), is due on demand with sixty 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 this collateral is dependent in part on the value of the Company as Contran's interest in the Company, through its beneficial ownership of Valhi, is one of Contran's more substantial assets. At March 31, 2002, $5 million was available for additional borrowing by the Family Trust. The loan was classified as noncurrent at March 31, 2002, as the Company does not expect to demand repayment within one year. Note 9 - Accounts payable and accrued liabilities: <TABLE> <CAPTION> March 31, December 31, 2002 2001 --------- ------------ (In thousands) <S> <C> <C> Accounts payable ......................... $ 66,461 $ 99,358 -------- -------- Accrued liabilities: Employee benefits .................... 26,013 29,722 Interest ............................. 9,331 4,980 Deferred income ...................... 3,333 4,000 Other ................................ 37,404 38,163 -------- -------- 76,081 76,865 -------- -------- $142,542 $176,223 ======== ======== </TABLE> Note 10 - Other noncurrent liabilities: <TABLE> <CAPTION> March 31, December 31, 2002 2001 --------- ------------ (In thousands) <S> <C> <C> Insurance claims and expenses .................. $ 8,998 $ 8,789 Employee benefits .............................. 3,397 3,476 Deferred income ................................ -- 333 Other .......................................... 2,093 2,131 ------- ------- $14,488 $14,729 ======= ======= </TABLE> - 14 -
Note 11 - Notes payable and long-term debt: <TABLE> <CAPTION> March 31, December 31, 2002 2001 --------- ------------ (In thousands) <S> <C> <C> Notes payable - Kronos ............................... $ 46,382 $ 46,201 ======== ======== Long-term debt: NL Industries, Inc. - 11.75% Senior Secured Notes (See Note 15) .................................. $169,000 $194,000 Kronos ........................................... 2,284 2,498 -------- -------- 171,284 196,498 Less current maturities .............................. 1,038 1,033 -------- -------- $170,246 $195,465 ======== ======== </TABLE> In March 2002 the Company redeemed $25 million principal amount of the 11.75% Senior Secured Notes due October 2003 at the current call price of 100%. The extraordinary item for early extinguishment of debt related to the write-off of the unamortized deferred financing costs associated with the redemption. Notes payable consists of (euro)27 million ($23.7 million and $24.0 million at March 31, 2002 and December 31, 2001, respectively) and NOK 200 million ($22.7 million and $22.2 million at March 31, 2002 and December 31, 2001, respectively,) at both March 31, 2002 and December 31, 2001. Note 12 - Income taxes: The difference between the provision for income tax expense attributable to income before income taxes and minority interest and the amount that would be expected using the U.S. federal statutory income tax rate of 35% is presented below. <TABLE> <CAPTION> Three months ended March 31, -------------------- 2002 2001 -------- -------- (In thousands) <S> <C> <C> Expected tax expense ...................................... $ 3,436 $ 18,302 Non-U.S. tax rates ........................................ (346) (1,443) Incremental tax on income of companies not included in NL's consolidated U.S. federal income tax return ............. 130 180 Valuation allowance ....................................... (67) (653) U.S. state income taxes ................................... (17) 195 Other, net ................................................ 48 565 -------- -------- Income tax expense ................................ $ 3,184 $ 17,146 ======== ======== </TABLE> - 15 -
Note 13 - Litigation settlement gains, net and other income, net: Litigation settlement gains, net In the first quarter of 2002 and 2001, the Company recognized litigation settlement gains with former insurance carrier groups of $1.9 million and $10.6 million, respectively, to settle certain insurance coverage claims related to environmental remediation. A majority of the proceeds from the 2001 settlement was transferred to special-purpose trusts established by the insurance carrier group 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 March 31, ----------------------- 2002 2001 ------- ------- (In thousands) <S> <C> <C> Corporate interest and dividend income ........... $ 1,280 $ 2,606 Currency transactions, net ....................... 598 1,067 Noncompete agreement income ...................... 1,000 1,000 Disposition of property and equipment ............ (46) (361) Trade interest income ............................ 222 593 Other, net ....................................... 21 (56) ------- ------- $ 3,075 $ 4,849 ======= ======= </TABLE> Note 14 - 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. The Chloride Plant became fully operational in April 2001 and the Sulfate Plant became approximately 50% operational in September 2001 and fully operational in late October 2001. The Company settled its insurance claim involving the Leverkusen fire for $56.4 million during the fourth quarter of 2001 ($46.9 million received as of December 31, 2001, with the remaining $9.5 million received in January 2002), of which $27.3 million related to business interruption and $29.1 million related to property damage, clean-up costs and other extra expenses. The Company recognized a $17.5 million pre-tax gain in fourth quarter 2001 related to the property damage recovery after deducting $11.6 million of clean-up costs and other extra expenses incurred and the carrying value of assets destroyed in the fire. The gain was excluded from the determination of operating income. The $27.3 million of business interruption proceeds recognized in 2001 were allocated between other income, excluding corporate, which reflects recovery of lost margin ($7.2 million) and as a reduction of cost of sales to offset unallocated period costs ($20.1 million). No additional insurance recoveries related to the Leverkusen fire are expected to be received and there was no impact on the results of operations of the Company in the first quarter 2002. - 16 -
Note 15 - 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. 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. Management believes that separate financial statements would not provide additional material information that would be useful in assessing the financial position of Kronos (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. - 17 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Balance Sheet March 31, 2002 (In thousands) <TABLE> <CAPTION> Combined NL Industries Non-Guarantor ASSETS Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> Current assets: Cash and cash equivalents ............ $ 8,464 $ 52,262 $ 15,658 $ -- $ 76,384 Restricted cash equivalents .......... 50,683 -- 4,088 -- 54,771 Restricted marketable debt securities 8,663 -- -- -- 8,663 Accounts and notes receivable ........ 1,675 137,325 238 -- 139,238 Receivable from affiliates ........... 13,843 44 1,513 (12,099) 3,301 Refundable income taxes .............. -- 1,168 13 -- 1,181 Inventories .......................... -- 187,209 -- -- 187,209 Prepaid expenses ..................... 574 3,514 56 -- 4,144 Deferred income taxes ................ 6,161 4,440 -- -- 10,601 ----------- ----------- ----------- ----------- ----------- Total current assets ............. 90,063 385,962 21,566 (12,099) 485,492 ----------- ----------- ----------- ----------- ----------- Other assets: Investment in subsidiaries ........... 1,081,453 -- 288 (1,081,741) -- Marketable equity securities ......... 368 -- 42,337 -- 42,705 Receivable from affiliates ........... 169,000 629,798 66,400 (833,798) 31,400 Investment in TiO2 manufacturing joint venture ............................ -- 137,528 -- -- 137,528 Prepaid pension cost ................. 2,432 15,952 -- -- 18,384 Restricted cash equivalents .......... 5,640 -- -- -- 5,640 Restricted marketable debt securities 11,219 -- -- -- 11,219 Other ................................ 1,131 9,630 8,921 -- 19,682 ----------- ----------- ----------- ----------- ----------- Total other assets ............... 1,271,243 792,908 117,946 (1,915,539) 266,558 ----------- ----------- ----------- ----------- ----------- Property and equipment, net .............. 3,546 321,981 11 -- 325,538 ----------- ----------- ----------- ----------- ----------- $ 1,364,852 $ 1,500,851 $ 139,523 $(1,927,638) $ 1,077,588 =========== =========== =========== =========== =========== </TABLE> - 18 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Balance Sheet, (Continued) March 31, 2002 (In thousands) <TABLE> <CAPTION> Combined NL Industries Non-Guarantor LIABILITIES AND SHAREHOLDERS' EQUITY Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> Current liabilities: Notes payable .......................... $ -- $ 46,382 $ -- $ -- $ 46,382 Current maturities of long-term debt ... -- 1,038 -- -- 1,038 Accounts payable and accrued liabilities 25,383 112,464 4,695 -- 142,542 Payable to affiliates .................. 9,667 9,930 632 (12,099) 8,130 Accrued environmental costs ............ 7,975 -- 44,497 -- 52,472 Income taxes ........................... 183 6,203 129 -- 6,515 Deferred income taxes .................. -- 1,501 -- -- 1,501 ----------- ----------- ----------- ----------- ----------- Total current liabilities .......... 43,208 177,518 49,953 (12,099) 258,580 ----------- ----------- ----------- ----------- ----------- Noncurrent liabilities: Long-term debt ......................... 169,000 1,246 -- -- 170,246 Notes payable to affiliate ............. 664,798 169,000 -- (833,798) -- Deferred income taxes .................. 77,005 66,099 328 -- 143,432 Accrued environmental costs ............ 8,934 6,566 35,912 -- 51,412 Accrued pension cost ................... 1,431 24,775 -- -- 26,206 Accrued postretirement benefits cost ... 16,817 12,719 -- -- 29,536 Other .................................. 7,359 7,129 -- -- 14,488 ----------- ----------- ----------- ----------- ----------- Total noncurrent liabilities ....... 945,344 287,534 36,240 (833,798) 435,320 ----------- ----------- ----------- ----------- ----------- Minority interest .......................... -- 290 7,098 -- 7,388 ----------- ----------- ----------- ----------- ----------- Shareholders' equity ....................... 376,300 1,035,509 46,232 (1,081,741) 376,300 ----------- ----------- ----------- ----------- ----------- $ 1,364,852 $ 1,500,851 $ 139,523 $(1,927,638) $ 1,077,588 =========== =========== =========== =========== =========== </TABLE> - 19 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Balance Sheet December 31, 2001 (In thousands) <TABLE> <CAPTION> Combined NL Industries Non-Guarantor ASSETS Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> Current assets: Cash and cash equivalents ............ $ 10,413 $ 54,717 $ 50,907 $ -- $ 116,037 Restricted cash equivalents .......... 63,257 -- -- -- 63,257 Restricted marketable debt securities 3,583 -- -- -- 3,583 Accounts and notes receivable ........ 1,621 123,870 230 -- 125,721 Receivable from affiliates ........... 8,106 47 1,514 (5,969) 3,698 Refundable income taxes .............. -- 1,528 2 -- 1,530 Inventories .......................... -- 231,056 -- -- 231,056 Prepaid expenses ..................... 551 2,642 -- -- 3,193 Deferred income taxes ................ 6,371 4,640 -- -- 11,011 ----------- ----------- ----------- ----------- ----------- Total current assets ............. 93,902 418,500 52,653 (5,969) 559,086 ----------- ----------- ----------- ----------- ----------- Other assets: Investment in subsidiaries ........... 1,072,551 -- 288 (1,072,839) -- Marketable equity securities ......... 216 -- 45,011 -- 45,227 Receivable from affiliates ........... 194,000 655,918 31,650 (849,918) 31,650 Investment in TiO2 manufacturing joint venture ............................ -- 138,428 -- -- 138,428 Prepaid pension cost ................. 2,368 16,043 -- -- 18,411 Restricted marketable debt securities 16,121 -- -- -- 16,121 Other ................................ 1,318 11,100 -- -- 12,418 ----------- ----------- ----------- ----------- ----------- Total other assets ............... 1,286,574 821,489 76,949 (1,922,757) 262,255 ----------- ----------- ----------- ----------- ----------- Property and equipment, net .............. 3,725 326,025 -- -- 329,750 ----------- ----------- ----------- ----------- ----------- $ 1,384,201 $ 1,566,014 $ 129,602 $(1,928,726) $ 1,151,091 =========== =========== =========== =========== =========== </TABLE> - 20 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Balance Sheet, (Continued) December 31, 2001 (In thousands) <TABLE> <CAPTION> Combined NL Industries Non-Guarantor LIABILITIES AND SHAREHOLDERS' EQUITY Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> Current liabilities: Notes payable .......................... $ -- $ 46,201 $ -- $ -- $ 46,201 Current maturities of long-term debt ... -- 1,033 -- -- 1,033 Accounts payable and accrued liabilities 23,544 152,633 46 -- 176,223 Payable to affiliates .................. 1,083 11,365 440 (5,969) 6,919 Accrued environmental costs ............ 10,529 -- 49,362 -- 59,891 Income taxes ........................... 96 7,181 -- -- 7,277 Deferred income taxes .................. -- 1,530 -- -- 1,530 ----------- ----------- ----------- ----------- ----------- Total current liabilities .......... 35,252 219,943 49,848 (5,969) 299,074 ----------- ----------- ----------- ----------- ----------- Noncurrent liabilities: Long-term debt ......................... 194,000 1,465 -- -- 195,465 Notes payable to affiliate ............. 655,918 194,000 -- (849,918) -- Deferred income taxes .................. 78,708 64,163 385 -- 143,256 Accrued environmental costs ............ 7,489 6,732 33,368 -- 47,589 Accrued pension cost ................... 1,427 25,558 -- -- 26,985 Accrued postretirement benefits cost ... 16,806 13,036 -- -- 29,842 Other .................................. 7,658 7,071 -- -- 14,729 ----------- ----------- ----------- ----------- ----------- Total noncurrent liabilities ....... 962,006 312,025 33,753 (849,918) 457,866 ----------- ----------- ----------- ----------- ----------- Minority interest .......................... -- 284 6,924 -- 7,208 ----------- ----------- ----------- ----------- ----------- Shareholders' equity ....................... 386,943 1,033,762 39,077 (1,072,839) 386,943 ----------- ----------- ----------- ----------- ----------- $ 1,384,201 $ 1,566,014 $ 129,602 $(1,928,726) $ 1,151,091 =========== =========== =========== =========== =========== </TABLE> - 21 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Statement of Income Three months ended March 31, 2002 (In thousands) <TABLE> <CAPTION> Combined NL Industries Non-Guarantor Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> Revenues and other income: Net sales .................................... $ -- $ 202,357 $ -- $ -- $ 202,357 Interest and dividends ....................... 6,115 8,741 871 (14,225) 1,502 Equity in income of subsidiaries ............. 16,783 -- -- (16,783) -- Litigation settlement gains, net ............. 1,920 -- -- -- 1,920 Other income (expense), net .................. 1,012 561 -- -- 1,573 --------- --------- --------- --------- --------- 25,830 211,659 871 (31,008) 207,352 --------- --------- --------- --------- --------- Costs and expenses: Cost of sales ................................ -- 156,253 -- -- 156,253 Selling, general and administrative .......... 8,164 25,710 971 -- 34,845 Interest ..................................... 14,300 6,367 -- (14,225) 6,442 --------- --------- --------- --------- --------- 22,464 188,330 971 (14,225) 197,540 --------- --------- --------- --------- --------- Income before income taxes, minority interest and extraordinary item ........ 3,366 23,329 (100) (16,783) 9,812 Income tax expense (benefit) ..................... (3,078) 6,281 (19) -- 3,184 --------- --------- --------- --------- --------- Income before minority interest and extraordinary item ..................... 6,444 17,048 (81) (16,783) 6,628 Minority interest ................................ -- 10 174 -- 184 --------- --------- --------- --------- --------- Income before extraordinary item ........ 6,444 17,038 (255) (16,783) 6,444 Extraordinary item - early extinguishment of debt, net of tax benefit of $32 ...................... (60) -- -- -- (60) --------- --------- --------- --------- --------- Net income ............................... $ 6,384 $ 17,038 $ (255) $ (16,783) $ 6,384 ========= ========= ========= ========= ========= </TABLE> - 22 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Statement of Income Three months ended March 31, 2001 (In thousands) <TABLE> <CAPTION> Combined NL Industries Non-Guarantor Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> Revenues and other income: Net sales ......................... $ -- $ 226,060 $ -- $ -- $ 226,060 Interest and dividends ............ 7,140 6,595 1,559 (12,095) 3,199 Equity in income of subsidiaries .. 37,477 -- -- (37,477) -- Litigation settlement gains, net .. 10,582 -- -- -- 10,582 Other income, net ................. 1,001 649 -- -- 1,650 --------- --------- --------- --------- --------- 56,200 233,304 1,559 (49,572) 241,491 --------- --------- --------- --------- --------- Costs and expenses: Cost of sales ..................... -- 149,902 -- -- 149,902 Selling, general and administrative 6,641 26,215 (534) -- 32,322 Interest .......................... 12,162 6,909 -- (12,095) 6,976 --------- --------- --------- --------- --------- 18,803 183,026 (534) (12,095) 189,200 --------- --------- --------- --------- --------- Income before income taxes and minority interest ........... 37,397 50,278 2,093 (37,477) 52,291 Income tax expense .................... 2,838 14,308 -- -- 17,146 --------- --------- --------- --------- --------- Income before minority interest 34,559 35,970 2,093 (37,477) 35,145 Minority interest ..................... -- 5 581 -- 586 --------- --------- --------- --------- --------- Net income .................... $ 34,559 $ 35,965 $ 1,512 $ (37,477) $ 34,559 ========= ========= ========= ========= ========= </TABLE> - 23 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Statement of Cash Flows Three months ended March 31, 2002 (In thousands) <TABLE> <CAPTION> Combined NL Industries Non-Guarantor Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> Net cash provided (used) by operating activities $ (6,385) $ 12,665 $ (464) $ 6,980 $ 12,796 --------- --------- --------- --------- --------- Cash flows from investing activities: Capital expenditures ....................... -- (5,461) -- -- (5,461) Acquisition of business .................... -- (9,149) -- -- (9,149) Change in restricted cash equivalents and restricted marketable debt securities, net 7,322 -- (232) (6,980) 110 Loans to affiliates, net ................... -- -- (34,750) 35,000 250 Other, net ................................. 9 27 -- -- 36 --------- --------- --------- --------- --------- Net cash provided (used) by investing activities ........................... 7,331 (14,583) (34,982) 28,020 (14,214) --------- --------- --------- --------- --------- Cash flows from financing activities: Principal payments of debt ................. (25,000) (263) -- -- (25,263) Treasury stock purchased, net .............. (3,131) -- -- -- (3,131) Dividends, net ............................. (9,764) -- -- -- (9,764) Loans from affiliates ...................... 35,000 -- -- (35,000) -- --------- --------- --------- --------- --------- Net cash used by financing activities .. (2,895) (263) -- (35,000) (38,158) --------- --------- --------- --------- --------- Cash and cash equivalents: Net change from: Operating, investing and financing activities ........................... (1,949) (2,181) (35,446) -- (39,576) Currency translation ................... -- (274) 1 -- (273) Acquisition of business ................ -- -- 196 -- 196 --------- --------- --------- --------- --------- (1,949) (2,455) (35,249) -- (39,653) Balance at beginning of year ............... 10,413 54,717 50,907 -- 116,037 --------- --------- --------- --------- --------- Balance at end of year ..................... $ 8,464 $ 52,262 $ 15,658 $ -- $ 76,384 ========= ========= ========= ========= ========= </TABLE> - 24 -
NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Statement of Cash Flows Three months ended March 31, 2001 (In thousands) <TABLE> <CAPTION> Combined NL Industries Non-Guarantor Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated ------------- ------------ ------------- ------------ ------------ <S> <C> <C> <C> <C> <C> Net cash provided by operating activities ... $ 6,896 $ 10,608 $ 124 $ (8,358) $ 9,270 --------- --------- --------- --------- --------- Cash flows from investing activities: Capital expenditures .................... -- (5,913) -- -- (5,913) Loan to Tremont Corporation ............. -- -- (13,400) -- (13,400) Change in restricted cash equivalents ... 2,257 -- -- (1,642) 615 Other, net .............................. -- 280 -- -- 280 --------- --------- --------- --------- --------- Net cash provided (used) by investing activities ........................ 2,257 (5,633) (13,400) (1,642) (18,418) --------- --------- --------- --------- --------- Cash flows from financing activities: Principal payments of debt .............. -- (177) -- -- (177) Treasury stock reissued ................. 593 -- -- -- 593 Dividends, net .......................... (10,017) (10,000) -- 10,000 (10,017) --------- --------- --------- --------- --------- Net cash used by financing activities (9,424) (10,177) -- 10,000 (9,601) --------- --------- --------- --------- --------- Cash and cash equivalents: Net change from: Operating, investing and financing activities ........................ (271) (5,202) (13,276) -- (18,749) Currency translation ................ -- (1,917) (3) -- (1,920) --------- --------- --------- --------- --------- (271) (7,119) (13,279) -- (20,669) Balance at beginning of year ............ 3,632 52,979 63,767 -- 120,378 --------- --------- --------- --------- --------- Balance at end of year .................. $ 3,361 $ 45,860 $ 50,488 $ -- $ 99,709 ========= ========= ========= ========= ========= </TABLE> - 25 -
Note 16 - Commitments and contingencies: For descriptions of certain legal proceedings, income tax and other commitments and contingencies related to the Company, reference is made to (i) Management's Discussion and Analysis of Financial Condition and Results of Operations, (ii) Part II, Item 1 - "Legal Proceedings," and (iii) the 2001 Annual Report. Note 17 - 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. - 26 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS <TABLE> <CAPTION> Three months ended % March 31, Change ----------------------- ------ 2002 2001 ----- ----- (In millions, except percentages and metric tons) <S> <C> <C> <C> Net sales and operating income Net sales ....................... $202.4 $226.1 -10% Operating income ................ $ 22.2 $ 51.9 -57% Operating income margin ......... 11% 23% percentage TiO2 operating statistics Percent change in average selling -15% price (in billing currencies) Sales volume (metric tons in .... 112 103 +9% thousands) Production volume (metric tons .. 106 108 -2% in thousands) </TABLE> Kronos' operating income in the first quarter of 2002 decreased $29.7 million or 57% from the first quarter of 2001 due to lower average selling prices partially offset by higher sales volume. Kronos' average selling price in billing currencies (which excludes the effects of foreign currency translation) during the first quarter of 2002 was 15% lower than the first quarter of 2001 and 5% lower than the fourth quarter of 2001. Compared with the fourth quarter of 2001, prices in billing currencies were lower in all major markets. The average selling price in billing currencies in March was slightly lower than the average selling price during the first quarter. Average selling prices in billing currencies continued to decline throughout the first quarter, however, the rate of decline slowed during the first quarter. The Company expects a lower average selling price for full-year 2002 compared to full-year 2001. First-quarter 2002 sales volume was a record first quarter for Kronos and first quarter 2002 sales volume increased 9% from the first quarter of 2001 and increased 23% from the fourth quarter of 2001. Sales volume in the first quarter of 2002 was 9% and 15% higher in Europe and North America, respectively, compared with the first quarter of 2001, while export volume decreased 6%. Compared with the fourth quarter of 2001, sales volume increased 29% and 25% in Europe and North America, respectively, while export sales volume decreased moderately. Kronos anticipates its sales volume for full-year 2002 will be higher than full-year 2001. Finished goods inventory decreased approximately 6,300 metric tons during the quarter and inventory levels at the end of March represented about two months of sales. First-quarter 2002 production volume was 2% lower than the comparable 2001 period with operating rates at 96% in the first quarter of 2002 compared with near full capacity in the first quarter of 2001. Kronos anticipates its production volume for full-year 2002 will be higher than that of full-year 2001, due in part to the Leverkusen fire. - 27 -
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. The Chloride Plant became fully operational in April 2001 and the Sulfate Plant became approximately 50% operational in September 2001 and fully operational in late October 2001. The Company settled its insurance claim involving the Leverkusen fire for $56.4 million during the fourth quarter of 2001 ($46.9 million received as of December 31, 2001, with the remaining $9.5 million received in January 2002), of which $27.3 million related to business interruption and $29.1 million related to property damage, clean-up costs and other extra expenses. The Company recognized a $17.5 million pre-tax gain in 2001 related to the property damage recovery after deducting $11.6 million of clean-up costs and other extra expenses incurred and the carrying value of assets destroyed in the fire. The gain was excluded from the determination of operating income. The $27.3 million of business interruption proceeds recognized in 2001 were allocated between other income, excluding corporate, which reflected recovery of lost margin ($7.2 million) and as a reduction of cost of sales to offset unallocated period costs ($20.1 million). No additional insurance recoveries related to the Leverkusen fire are expected to be received and there was no impact on the results of operations of the Company in the first quarter of 2002. The Company expects TiO2 industry demand in 2002 to continue to improve over 2001 levels, because it expects worldwide economic conditions to improve and customer inventory levels to increase. Kronos' TiO2 production volume in 2002 is expected to approximate Kronos' 2002 TiO2 sales volume. In January 2002, Kronos announced price increases in all major markets of approximately 5% to 8% above existing December 2001 prices, scheduled to be implemented during the second quarter of 2002. Kronos is hopeful that it will realize a portion of the announced price increases, but the extent to which Kronos can realize these and possibly other price increases during 2002 will depend on improving market conditions and global economic recovery. However, because TiO2 prices were declining in 2001 and the first quarter of 2002, the Company believes that its average 2002 prices in billing currencies will be significantly below its average 2001 prices, even if price increases are realized. Overall, the Company expects its TiO2 operating income in 2002 will be significantly lower than 2001, primarily due to lower average TiO2 selling prices. The Company's expectations as to the future prospects of the Company and the TiO2 industry are based upon a number of factors beyond the Company's control, including worldwide growth of gross domestic product, competition in the marketplace, unexpected or earlier-than-expected capacity additions and technological advances. If actual developments differ from the Company's expectations, the Company's results of operations could be unfavorably affected. Compared to the year-earlier period, cost of sales as a percentage of net sales increased in the first quarter of 2002 primarily due to lower average selling prices in billing currencies and lower production volume, partially offset by lower energy costs. Excluding the effects of foreign currency translation, which decreased the Company's expenses in the first quarter of 2002 compared to year-earlier period, the Company's selling, general and administrative expenses, excluding corporate expenses, in the first quarter of 2002 were comparable to the first quarter of 2001. 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 first quarter of 2002 versus the year-earlier period, decreased the dollar value of sales in the first quarter of 2002 by a - 28 -
net $6.0 million when compared to the year-earlier period. When translated from billing currencies to U.S. dollars using currency exchange rates prevailing during the respective periods, Kronos' first-quarter 2002 average selling price in U.S. dollars was 18% lower than in the first quarter of 2001 and 6% lower than the fourth quarter of 2001. The effect of the stronger U.S. dollar on Kronos' operating costs that are not denominated in U.S. dollars reduced operating costs in the first quarter of 2002 compared to the year-earlier period. 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 first quarter of 2002 was not significant when compared to the first quarter of 2001. General corporate The following table sets forth certain information regarding general corporate income (expense). <TABLE> <CAPTION> Three months ended March 31, Difference --------------------------- ---------- 2002 2001 ---- ---- (In millions) <S> <C> <C> <C> Securities earnings ............ $ 1.3 $ 2.6 $ (1.3) Corporate income ............... 2.9 11.6 (8.7) Corporate expense .............. (10.1) (6.8) (3.3) Interest expense ............... (6.4) (7.0) .6 ------- ------- ------- $ (12.3) $ .4 $ (12.7) ======= ======= ======= </TABLE> Securities earnings in the first three months of 2002 declined from the comparable period in 2001 primarily due to lower levels of funds invested and lower average yields. The Company expects securities earnings to be lower in 2002 compared with 2001 due to lower average yields and lower average levels of funds available for investment. Corporate income in the first quarter of 2002 and 2001 included litigation settlement gains with former insurance carrier groups of $1.9 million and $10.6 million, respectively. See Note 13 to the Consolidated Financial Statements. No further material settlements relating to litigation concerning environmental remediation coverage are expected. Corporate expense in the first three months of 2002 was higher than the year-earlier period, primarily due to higher environmental remediation expenses and higher legal fees. The Company expects corporate expense in 2002 to be higher than full year 2001. Interest expense in the first quarter of 2002 decreased 9% primarily due to reduced levels of outstanding non-U.S. dollar denominated variable rate debt. Assuming no significant change in interest rates, interest expense in 2002 is expected to be lower than full year 2001 due to lower levels of outstanding indebtedness, including the effect of the $25 million in principal amount redemption of the 11.75% Senior Secured Notes in March 2002. - 29 -
Provision for income taxes The Company reduced its deferred income tax valuation allowance by $.1 million in the first quarter of 2002 and $.7 million in the first quarter of 2001 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 17 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 three months ended March 31, 2002 and 2001 are presented below. <TABLE> <CAPTION> Three months ended March 31, -------------------- 2002 2001 -------- -------- (In millions) <S> <C> <C> Net cash provided (used) by: Operating activities: Before changes in assets and liabilities ..... $ 15.2 $ 39.2 Changes in assets and liabilities ............ (2.4) (29.9) ------- ------- 12.8 9.3 Investing activities ............................. (14.2) (18.4) Financing activities ............................. (38.2) (9.6) ------- ------- Net cash used by operating, investing, and financing activities ..................... $ (39.6) $ (18.7) ======= ======= </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 three months of 2002 decreased from the comparable period in 2001 primarily due to $29.7 million of 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 three months of 2002 was significantly less than the first three months of 2001 with $20 million lower inventory balances (net of raw material accruals) and the collection of $9.5 million of insurance proceeds, offset by decreases in accounts payable and accrued liabilities in the first three months of 2002. Inventories and accounts payable were affected by certain non-cash accruals for certain titanium ore contracts of $31.6 million and $15.3 million at December 31, 2001 and 2000, - 30 -
respectively. These non-cash accruals were reversed as raw materials were received under the contracts in the amounts of $25.8 million and $15.3 million in first quarters 2002 and 2001, respectively. Investing activities Capital expenditures of $5.5 million in first quarter 2002 included approximately $1.2 million related to ongoing reconstruction of the Leverkusen, Germany sulfate plant. 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. See Note 3 to the Consolidated Financial Statements. 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 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% (6.75% at March 31, 2002), is due March 31, 2003 and is collateralized by 10.2 million shares of NL common stock owned by Tremont. The creditworthiness of Tremont is dependent in part on the value of the Company as Tremont's interest in the Company is one of Tremont's more substantial assets. The maximum amount available for borrowing by Tremont reduces by $250,000 per quarter. In the first quarter 2002 Tremont repaid $250,000 of the loan. At March 31, 2002, the outstanding loan balance was $12.4 million and no amounts were available for additional borrowings by Tremont. The Company understands that Tremont may find it necessary to seek amendment of the terms of the revolving loan agreement and seek, among other things, extension of the maturity date and to increase the amount of borrowings available to Tremont in order for Tremont to meet its projected near term obligations and continue the payment of dividends at the present quarterly rate. The merits of Tremont's proposal will be considered once received. If the loan is extended, the Company does not expect a material impact on its liquidity. The current loan receivable balance of $1.0 million was included in receivable from affiliates at March 31, 2002. The remaining loan balance of $11.4 million was classified as noncurrent at March 31, 2002, as the Company does not expect repayment within one year. See Note 8 to the Consolidated Financial Statements. Financing activities In March 2002 the Company redeemed $25.0 million principal amount of the 11.75% Senior Secured Notes due October 2003 at the current call price of 100%. The Company may redeem additional 11.75% Senior Secured Notes in 2002, however, there is no assurance that further redemptions will occur. In the first quarter of 2002, the Company paid a regular quarterly dividend to shareholders of $.20 per share, aggregating $9.8 million. At March 31, 2002, the Company had $33 million available for payment of dividends, acquisition of treasury shares, acquisition of affiliate stock and other restricted payments as defined in the 11.75% Senior Secured Notes indenture. On May 8, 2002, the Company's Board of Directors declared a regular quarterly dividend of $.20 per share to shareholders of record as of June 14, 2002 to be paid on June 24, 2002. Pursuant to its share repurchase program, the Company purchased 228,000 shares of its common stock in the open market at an aggregate cost of $3.3 million in the first quarter of 2002. Approximately 979,000 additional shares - 31 -
are available for purchase under the Company's repurchase program. The available shares may be purchased over an unspecified period of time and are to be held as treasury shares available for general corporate purposes. Cash, cash equivalents, restricted cash and restricted marketable debt securities and borrowing availability At March 31, 2002, the Company had cash and cash equivalents aggregating $76 million ($43 million held by non-U.S. subsidiaries) and an additional $80 million of restricted cash equivalents and restricted marketable debt securities held by the Company, of which $17 million was classified as a noncurrent asset. The Company's subsidiaries had $8 million available for borrowing at March 31, 2002 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 penalties and interest. The Company's 1998 U.S. federal income tax return is currently being examined by the U.S. Internal Revenue Service. The Company has granted an extension of the statute of limitations for assessment until September 30, 2003. The Company has received preliminary tax assessments for the years 1991 to 1997 from the Belgian tax authorities proposing tax deficiencies, including related interest, of approximately (euro)10.4 million ($9.1 million at March 31, 2002). The Company has filed protests to the assessments for the years 1991 to 1997. The Company is in discussions with the Belgian tax authorities and believes that a significant portion of the assessments is without merit. No assurance can be given that the Company's tax matters will be favorably resolved due to the inherent uncertainties involved in court and tax proceedings. The Company believes that it has provided adequate accruals for additional taxes and related interest expense which may ultimately result from all such examinations and believes that the ultimate disposition of such examinations should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. At March 31, 2002, the Company had net deferred tax liabilities of $134 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 $150 million at March 31, 2002, principally related to Germany, partially offsetting deferred tax assets which the Company believes do not currently meet the "more-likely-than-not" recognition criteria. Environmental matters and litigation The Company has been named as a defendant, potentially responsible party ("PRP"), or both, in a number of legal proceedings associated with environmental matters, including waste disposal sites, mining locations and facilities currently or previously owned, operated or used by the Company, certain of which are on the U.S. Environmental Protection Agency's (the "U.S. EPA") Superfund National Priorities List or similar state lists. On a quarterly basis, the - 32 -
Company evaluates the potential range of its liability at sites where it has been named as a PRP or defendant, including sites for which EMS has contractually assumed the Company's obligation. The Company believes it has adequate accruals ($104 million at March 31, 2002) 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 $155 million. The Company's estimates of such liabilities have not been discounted to present value. No assurance can be given that actual costs will not exceed either accrued amounts or the upper end of the range for sites for which estimates have been made, and no assurance can be given that costs will not be incurred with respect to sites as to which no estimate presently can be made. The imposition of more stringent standards or requirements under environmental laws or regulations, new developments or changes with respect to site cleanup costs, or the allocation of such costs among PRPs, or a determination that the Company is potentially responsible for the release of hazardous substances at other sites, could result 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. The Company expects that additional lead pigment and lead-based litigation may be filed against the Company in the future asserting similar or different legal theories and seeking similar or different types of damages and relief. See Item 1 - "Legal Proceedings." Other The Company periodically evaluates its liquidity requirements, alternative uses of capital, capital needs and availability of resources in view of, among other things, its 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; - 33 -
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 of words such as "believes," "intends," "may," "will," "should," "could," "anticipates," "expects," or comparable terminology or by discussions of strategy or trends. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it cannot give any assurances that these expectations will prove to be correct. Such statements by their nature involve risks and uncertainties, including, but not limited to, the cyclicality of the titanium dioxide industry, global economic and political conditions, global productive capacity, customer inventory levels, changes in product pricing, changes in product costing, changes in foreign currency exchange rates, competitive technology positions, operating interruptions (including, but not limited to, labor disputes, leaks, fires, explosions, unscheduled downtime, transportation interruptions, war and terrorist activities), 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 2001 Annual Report, and the uncertainties set forth from time to time in the Company's filings with the Securities and Exchange Commission. Should one or more of these risks materialize (or the consequences of such a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those forecasted or expected. The Company disclaims any intention or obligation to update publicly or revise such statements whether as a result of new information, future events or otherwise. - 34 -
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to the 2001 Annual Report for descriptions of certain previously reported legal proceedings. Cofield, et. al. v. Lead Industries Association, et al. (Circuit Court for Baltimore City, Maryland, Case No. 24-C-99-004491). The time for plaintiffs to timely file an appeal of the previously reported dismissal of this case has expired and with no notice of appeal having been received by the Company. Lewis, et al. v. Lead Industries Association, et al. (Circuit Court of Cook County, Illinois, County Department, Chancery Division, Case No. 00CH09800). In March 2002 the trial court dismissed all claims in this previously reported case. Plaintiffs have appealed. Gaines, et al. v. The Sherwin-Williams Company, et al. (Circuit Court of Jefferson County, Mississippi, Civil Action No. 2000-0604). Upon motion to reconsider the case has been remanded to state court and local paint retailers reinstated as defendants in this previously reported case. In re: Lead Paint Litigation, Superior Court of New Jersey, Middlesex County, Case Code 702. One additional municipality has filed suit in this previously reported case. Rainer, et al. v. E.I. du Pont de Nemours, et al. ("Rainer I"), No. 5:00CV-223-M; Rainer, et al. v. Bill Richardson, et al. ("Rainer II"), No. 5:00CV-220-M; Shaffer, et al. v. Atomic Energy Commission, et al. ("Shaffer"), No. 5:00CV-307-M. In March 2002 the court approved the previously reported settlement in these cases and dismissed the claims against the Company and NLO, Inc. ("NLO") and the Department of Energy ("DOE") has agreed to pay the settlement amount. In the previously reported case of Dew, et al. v. Bill Richardson, et al. ("Dew"), No. 5:00CV-221-M, the Company's and NLO's motions to dismiss plaintiffs' claims were granted in part and denied in part. Pretrial proceedings and discovery continue in the Dew case. Liberty Independent School District, et al. v. Lead Industries Association, et al. (District Court of Liberty County, Texas, No. 63,332). In May 2002 the Company was served with an amended complaint in this previously reported case. The amended complaint adds Liberty County, the City of Liberty, and the Dayton Independent School District as plaintiffs and drops the Lead Industries Association as a defendant. 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 2001 Annual Report. Since the filing of the 2001 Annual Report, the Company has been named as a defendant in asbestos cases in various jurisdictions on behalf of approximately 150 additional personal injury claimants. - 35 -
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Shareholders on May 8, 2002. All the nominees for director were elected with the voting results for each as follows: <TABLE> <CAPTION> Director Shares For Shares Withheld - ---------------------------- ------------------- -------------------- <S> <C> <C> Ms. Ann Manix 47,166,757 448,386 Mr. J. Landis Martin 47,337,241 277,902 Mr. George E. Poston 47,394,487 220,656 Mr. Glenn R. Simmons 47,122,427 492,716 Mr. Harold C. Simmons 47,124,025 491,118 General Thomas P. Stafford 47,183,951 431,192 Mr. Steven L. Watson 47,116,287 498,856 </TABLE> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 - Intercorporate Services Agreement by and between Contran Corporation and the Registrant effective as of January 1, 2002. 10.2 - Intercorporate Services Agreement by and between Tremont Corporation and the Registrant effective as of January 1, 2002. 10.3 - Intercorporate Services Agreement by and between Titanium Metals Corporation and the Registrant effective as of January 1, 2002. (b) Reports on Form 8-K There were no Reports on Form 8-K filed during the quarter ended March 31, 2002 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: May 13, 2002 By /s/ Robert D. Hardy - ------------------- ----------------------- Robert D. Hardy Principal Financial and Accounting Officer - 37 -