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, 1996 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) (281)423-3300 (Registrant's telephone number, including area code) 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 12, 1996: 51,118,014
NL INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Balance Sheets - December 31, 1995 and September 30, 1996 3-4 Consolidated Statements of Operations - Three months and nine months ended September 30, 1995 and 1996 5 Consolidated Statement of Shareholders' Deficit - Nine months ended September 30, 1996 6 Consolidated Statements of Cash Flows - Nine months ended September 30, 1995 and 1996 7-8 Notes to Consolidated Financial Statements 9-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-19 PART II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 6. Exhibits and Reports on Form 8-K 21 - 2 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) <TABLE> <CAPTION> ASSETS December 31, September 30, 1995 1996 ------------ ------------- <S> <C> <C> Current assets: Cash and cash equivalents ...................... $ 141,333 $ 130,196 Accounts and notes receivable .................. 147,428 163,236 Refundable income taxes ........................ 4,941 2,643 Inventories .................................... 251,630 216,280 Prepaid expenses ............................... 3,217 6,736 Deferred income taxes .......................... 2,522 1,791 ---------- ---------- Total current assets ....................... 551,071 520,882 ---------- ---------- Other assets: Marketable securities .......................... 20,944 22,354 Investment in joint ventures ................... 185,893 181,382 Prepaid pension cost ........................... 22,576 23,962 Deferred income taxes .......................... 788 -- Other .......................................... 31,165 24,712 ---------- ---------- Total other assets ......................... 261,366 252,410 ---------- ---------- Property and equipment: Land ........................................... 22,902 22,001 Buildings ...................................... 166,349 163,249 Machinery and equipment ........................ 648,458 643,850 Mining properties .............................. 97,190 95,673 Construction in progress ....................... 11,187 30,520 ---------- ---------- 946,086 955,293 Less accumulated depreciation and depletion .... 486,870 489,355 ---------- ---------- Net property and equipment ................. 459,216 465,938 ---------- ---------- $1,271,653 $1,239,230 ========== ========== </TABLE> - 3 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands) <TABLE> <CAPTION> LIABILITIES AND SHAREHOLDERS' DEFICIT December 31, September 30, 1995 1996 ------------ ------------- <S> <C> <C> Current liabilities: Notes payable ................................ $ 39,247 $ 26,248 Current maturities of long-term debt ......... 43,369 98,573 Accounts payable and accrued liabilities ..... 165,985 159,512 Payable to affiliates ........................ 10,181 9,134 Income taxes ................................. 40,088 36,123 Deferred income taxes ........................ 3,555 2,837 ----------- ----------- Total current liabilities ................ 302,425 332,427 ----------- ----------- Noncurrent liabilities: Long-term debt ............................... 740,334 711,846 Deferred income taxes ........................ 157,192 145,319 Accrued pension cost ......................... 69,311 57,541 Accrued postretirement benefits cost ......... 60,235 58,107 Other ........................................ 148,511 132,963 ----------- ----------- Total noncurrent liabilities ............. 1,175,583 1,105,776 ----------- ----------- Minority interest .............................. 3,066 257 ----------- ----------- Shareholders' deficit: Common stock ................................. 8,355 8,355 Additional paid-in capital ................... 759,281 759,281 Adjustments: Currency translation ....................... (126,934) (123,702) Pension liabilities ........................ (1,908) (1,908) Marketable securities ...................... (525) 391 Accumulated deficit .......................... (481,432) (475,651) Treasury stock ............................... (366,258) (365,996) ----------- ----------- Total shareholders' deficit .............. (209,421) (199,230) ----------- ----------- $ 1,271,653 $ 1,239,230 =========== =========== </TABLE> Commitments and contingencies (Note 13) See accompanying notes to consolidated financial statements. - 4 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, ---------------------- --------------------- 1995 1996 1995 1996 --------- --------- --------- --------- <S> <C> <C> <C> <C> Revenues and other income: Net sales ................. $ 255,339 $ 248,462 $ 789,688 $ 752,064 Other, net ................ 7,060 5,013 16,075 25,890 --------- --------- --------- --------- 262,399 253,475 805,763 777,954 --------- --------- --------- --------- Costs and expenses: Cost of sales ............. 169,058 193,271 526,722 557,881 Selling, general and administrative ........... 48,317 45,274 142,937 131,313 Interest .................. 20,325 18,472 62,053 56,127 --------- --------- --------- --------- 237,700 257,017 731,712 745,321 --------- --------- --------- --------- Income (loss) before income taxes and minority interest .... 24,699 (3,542) 74,051 32,633 Income tax expense .......... 7,413 698 22,215 11,552 --------- --------- --------- --------- Income (loss) before minority interest .... 17,286 (4,240) 51,836 21,081 Minority interest ........... (140) 9 346 (33) --------- --------- --------- --------- Net income (loss) ..... $ 17,426 $ (4,249) $ 51,490 $ 21,114 ========= ========= ========= ========= Net income (loss) per share of common stock ............ $ .34 $ (.08) $ 1.00 $ .41 ========= ========= ========= ========= Weighted average common and common equivalent shares outstanding ................ 51,628 51,118 51,522 51,376 ========= ========= ========= ========= </TABLE> See accompanying notes to consolidated financial statements. - 5 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT Nine months ended September 30, 1996 (In thousands) <TABLE> <CAPTION> Adjustments Additional ------------------------------------- Common paid-in Currency Pension Marketable Accumulated Treasury stock capital translation liabilities securities deficit stock Total --------- ---------- ----------- ------------ ---------- ----------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 1995 $ 8,355 $ 759,281 $(126,934) $ (1,908) $ (525) $(481,432) $(366,258) $(209,421) Net income .................. -- -- -- -- -- 21,114 -- 21,114 Dividends ................... -- -- -- -- -- (15,333) -- (15,333) Adjustments ................. -- -- 3,232 -- 916 -- -- 4,148 Treasury stock reissued ..... -- -- -- -- -- -- 262 262 --------- --------- --------- --------- --------- --------- --------- --------- Balance at September 30, 1996 $ 8,355 $ 759,281 $(123,702) $ (1,908) $ 391 $(475,651) $(365,996) $(199,230) ========= ========= ========= ========= ========= ========= ========= ========= </TABLE> See accompanying notes to consolidated financial statements. - 6 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30, 1995 and 1996 (In thousands) <TABLE> <CAPTION> 1995 1996 --------- --------- <S> <C> <C> Cash flows from operating activities: Net income ....................................... $ 51,490 $ 21,114 Depreciation, depletion and amortization ......... 29,208 30,154 Noncash interest expense ......................... 14,368 15,500 Deferred income taxes ............................ 18,245 (4,864) Other, net ....................................... (8,382) (12,401) --------- --------- 104,929 49,503 Change in assets and liabilities: Accounts and notes receivable .................. (23,161) (21,289) Inventories .................................... (14,067) 26,424 Prepaid expenses ............................... (3,302) (3,863) Accounts payable and accrued liabilities ....... (2,905) (1,363) Income taxes ................................... (18,217) (166) Other, net ..................................... (1,794) (10,994) Marketable trading securities, net ............. 26,337 -- --------- --------- Net cash provided by operating activities .... 67,820 38,252 --------- --------- Cash flows from investing activities: Capital expenditures ............................. (42,572) (52,328) Purchase of minority interest .................... -- (5,168) Investment in joint ventures, net ................ 1,664 4,123 Other, net ....................................... 68 478 --------- --------- Net cash used by investing activities ........ (40,840) (52,895) --------- --------- </TABLE> - 7 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Nine months ended September 30, 1995 and 1996 (In thousands) <TABLE> <CAPTION> 1995 1996 --------- --------- <S> <C> <C> Cash flows from financing activities: Indebtedness: Borrowings ....................................... $ 38,840 $ 64,712 Principal payments ............................... (47,401) (43,359) Dividends .......................................... -- (15,333) Other, net ......................................... 159 (202) --------- --------- Net cash provided (used) by financing activities .................................... (8,402) 5,818 --------- --------- Cash and cash equivalents: Net change from: Operating, investing and financing activities .... 18,578 (8,825) Currency translation ............................. 3,093 (2,312) Balance at beginning of period ..................... 131,124 141,333 --------- --------- Balance at end of period ........................... $ 152,795 $ 130,196 ========= ========= Supplemental disclosures - cash paid for: Interest, net of amounts capitalized ............... $ 37,079 $ 31,485 Income taxes ....................................... 22,388 16,652 </TABLE> See accompanying notes to consolidated financial statements. - 8 -
NL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Organization and basis of presentation: NL Industries, Inc. conducts its operations primarily through its wholly- owned subsidiaries, Kronos, Inc. (titanium dioxide pigments, or "TiO2") and Rheox, Inc. (specialty chemicals). Valhi, Inc. and Tremont Corporation, each affiliates of Contran Corporation, hold 55% and 18%, respectively, of NL's outstanding common stock. Contran holds, directly or through subsidiaries, approximately 91% of Valhi's and 44% of Tremont's outstanding common stock. The consolidated balance sheet of NL Industries, Inc. and Subsidiaries (collectively, the "Company") at December 31, 1995 has been condensed from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at September 30, 1996 and the consolidated statements of operations, shareholders' deficit and cash flows for the interim periods ended September 30, 1995 and 1996 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 1996 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, 1995 (the "1995 Annual Report"). Note 2 - Net income (loss) per share of common stock: Net income (loss) per share of common stock is based on the weighted average number of common shares and equivalents outstanding. Common stock equivalents, consisting of nonqualified stock options, are excluded from the computation when their effect is antidilutive. - 9 -
Note 3 - Business segment information: The Company's operations are conducted in two business segments - TiO2 conducted by Kronos and specialty chemicals conducted by Rheox. <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, ---------------------- ---------------------- 1995 1996 1995 1996 --------- --------- --------- --------- (In thousands) <S> <C> <C> <C> <C> Net sales: Kronos ................... $ 222,799 $ 215,038 $ 689,520 $ 649,635 Rheox .................... 32,540 33,424 100,168 102,429 --------- --------- --------- --------- $ 255,339 $ 248,462 $ 789,688 $ 752,064 ========= ========= ========= ========= Operating income: Kronos ................... $ 40,828 $ 9,640 $ 120,381 $ 64,555 Rheox .................... 9,762 9,831 29,726 32,952 --------- --------- --------- --------- 50,590 19,471 150,107 97,507 General corporate income (expense): Securities earnings, net . 1,489 1,190 5,884 3,631 Expenses, net ............ (7,055) (5,731) (19,887) (12,378) Interest expense ......... (20,325) (18,472) (62,053) (56,127) --------- --------- --------- --------- $ 24,699 $ (3,542) $ 74,051 $ 32,633 ========= ========= ========= ========= </TABLE> Note 4 - Inventories: December 31, September 30, 1995 1996 ------------ ------------- (In thousands) <TABLE> <CAPTION> <S> <C> <C> Raw materials ............................ $ 35,075 $ 34,548 Work in process .......................... 9,132 7,556 Finished products ........................ 172,330 138,169 Supplies ................................. 35,093 36,007 -------- -------- $251,630 $216,280 ======== ======== </TABLE> - 10 -
Note 5 - Marketable securities and securities transactions: <TABLE> <CAPTION> December 31, September 30, 1995 1996 ------------ ------------- (In thousands) <S> <C> <C> Available-for-sale securities - noncurrent marketable equity securities: Unrealized gains ................................. $ 1,962 $ 2,183 Unrealized losses ................................ (2,770) (1,581) Cost ............................................. 21,752 21,752 -------- -------- Aggregate market ............................. $ 20,944 $ 22,354 ======== ======== </TABLE> Net gains from trading securities transactions are composed of: <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, ------------------- ----------------- 1995 1996 1995 1996 ------ ------ ------ ----- (In thousands) <S> <C> <C> <C> <C> Unrealized gains .............. $ 7 $ -- $1,122 $-- Realized gains ................ -- -- 50 -- ------ ------ ------ --- $ 7 $ -- $1,172 $-- ====== ====== ====== === </TABLE> Note 6 - Investment in joint ventures: <TABLE> <CAPTION> December 31, September 30, 1995 1996 ------------ ------------- (In thousands) <S> <C> <C> TiO2 manufacturing joint venture ............... $183,129 $179,423 Other .......................................... 2,764 1,959 -------- -------- $185,893 $181,382 ======== ======== </TABLE> - 11 -
Note 7 - Other noncurrent assets: <TABLE> <CAPTION> December 31, September 30, 1995 1996 ------------ ------------- (In thousands) <S> <C> <C> Intangible assets, net ......................... $11,803 $ 8,849 Deferred financing costs, net .................. 13,199 10,534 Other .......................................... 6,163 5,329 ------- ------- $31,165 $24,712 ======= ======= </TABLE> Note 8 - Accounts payable and accrued liabilities: <TABLE> <CAPTION> December 31, September 30, 1995 1996 ------------ ------------- (In thousands) <S> <C> <C> Accounts payable ......................... $ 68,734 $ 58,568 -------- -------- Accrued liabilities: Employee benefits ...................... 49,884 37,627 Environmental costs .................... 6,000 6,000 Interest ............................... 6,633 15,718 Miscellaneous taxes .................... 2,557 2,274 Other .................................. 32,177 39,325 -------- -------- 97,251 100,944 -------- -------- $165,985 $159,512 ======== ======== </TABLE> Note 9 - Other noncurrent liabilities: <TABLE> <CAPTION> December 31, September 30, 1995 1996 ------------ ------------- (In thousands) <S> <C> <C> Environmental costs .......................... $112,827 $107,322 Insurance claims and expenses ................ 12,088 11,405 Employee benefits ............................ 13,148 12,096 Deferred technology fee income ............... 8,456 463 Other ........................................ 1,992 1,677 -------- -------- $148,511 $132,963 ======== ======== </TABLE> - 12 -
Note 10 - Notes payable and long-term debt: <TABLE> <CAPTION> December 31, September 30, 1995 1996 ------------ ------------- (In thousands) <S> <C> <C> Notes payable - Kronos (DM 56,000 and DM 40,000, respectively) ....................................... $ 39,247 $ 26,248 ======== ======== Long-term debt: NL Industries: 11.75% Senior Secured Notes ...................... $250,000 $250,000 13% Senior Secured Discount Notes ................ 132,034 145,064 -------- -------- 382,034 395,064 Kronos: DM bank credit facility (DM 397,609 and DM 490,609, respectively) ....................... 276,895 321,938 Joint venture term loan .......................... 73,286 61,714 Other ............................................ 13,672 11,094 -------- -------- 363,853 394,746 -------- -------- Rheox: Bank term loan ................................... 37,263 20,284 Other ............................................ 553 325 -------- -------- 37,816 20,609 -------- -------- 783,703 810,419 Less current maturities ............................ 43,369 98,573 -------- -------- $740,334 $711,846 ======== ======== </TABLE> Note 11 - Income taxes: The difference between the provision for income tax expense attributable to income before income taxes and minority interest and the amount that would be expected using the U.S. federal statutory income tax rate of 35% is presented below. <TABLE> <CAPTION> Nine months ended September 30, -------------------- 1995 1996 -------- -------- (In thousands) <S> <C> <C> Expected tax expense ................................... $ 25,918 $ 11,422 Non-U.S. tax rates ..................................... (1,501) (273) Incremental tax on income of companies not included in NL's consolidated U.S. federal income tax return ... 1,007 870 Valuation allowance .................................... (3,183) (1,150) U.S. state income taxes ................................ 898 1,350 Other, net ............................................. (924) (667) -------- -------- Income tax expense ............................... $ 22,215 $ 11,552 ======== ======== </TABLE> - 13 -
Note 12 - Other income, net: <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, ------------------- -------------------- 1995 1996 1995 1996 -------- -------- -------- -------- (In thousands) <S> <C> <C> <C> <C> Securities earnings: Interest and dividends .......... $ 1,482 $ 1,190 $ 4,712 $ 3,631 Securities transactions ......... 7 -- 1,172 -- -------- -------- -------- -------- 1,489 1,190 5,884 3,631 Pension curtailment gain .......... -- -- -- 4,791 Technology fee income ............. 2,685 2,606 7,990 8,280 Litigation settlement gain ........ -- -- -- 2,756 Currency transaction gains, (losses), net .................... 1,122 624 (795) 4,491 Other, net ........................ 1,764 593 2,996 1,941 -------- -------- -------- -------- $ 7,060 $ 5,013 $ 16,075 $ 25,890 ======== ======== ======== ======== </TABLE> Note 13 - Commitments and contingencies: For descriptions of certain legal proceedings, income tax and other commitments and contingencies related to the Company, reference is made to (i) Part II, Item 1 -"Legal Proceedings," (ii) the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996, and (iii) the 1995 Annual Report. - 14 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company's chemical operations are conducted in two business segments - TiO2 conducted by Kronos and specialty chemicals conducted by Rheox. <TABLE> <CAPTION> Three months ended % Nine months ended % September 30, Change September 30, Change ------------------ ------ ----------------- ------ 1995 1996 1995 1996 ------ ------ ------ ------ (In millions) (In millions) <S> <C> <C> <C> <C> <C> <C> Net sales: Kronos ......... $222.8 $215.1 -3% $689.5 $649.7 -6% Rheox .......... 32.5 33.4 +3% 100.2 102.4 +2% ------ ------ ------ ------ $255.3 $248.5 -3% $789.7 $752.1 -5% ====== ====== ====== ====== Operating income: Kronos ......... $ 40.8 $ 9.7 -76% $120.4 $ 64.6 -46% Rheox .......... 9.8 9.8 N/C 29.7 32.9 +11% ------ ------ ------ ------ $ 50.6 $ 19.5 -62% $150.1 $ 97.5 -35% ====== ====== ====== ====== Percent changes in TiO2: Sales volume ............... +17% +3% Average selling prices (in billing currencies) ....... -15% -6% </TABLE> Kronos' TiO2 operating income in the third quarter and first nine months of 1996 decreased from the comparable periods in 1995 primarily due to the decline in average TiO2 selling prices. Average TiO2 selling prices for the third quarter of 1996 were 15% lower than the third quarter of 1995 and 6% lower than the second quarter of 1996. Selling prices at the end of the third quarter of 1996 were 15% lower than prices at the end of 1995. The Company expects average TiO2 prices in the fourth quarter to be below the third quarter average. While prices have declined, demand for TiO2 has grown. Kronos' third quarter sales volumes increased 17% compared with the third quarter of 1995 with improved sales volumes worldwide. Sales volumes for the first nine months in 1996 were 3% higher than the comparable period in 1995 primarily due to improved sales volumes in the U.S. Rheox's operating income of $9.8 million for the third quarter of 1996 was even with the year-earlier period. Rheox's operating income in the first nine months of 1996 includes a first-quarter $2.7 million gain related to the curtailment of certain U.S. employee pension benefits. Based on the continuing decline in TiO2 selling prices during the third quarter and the current TiO2 industry pricing outlook, the Company expects its fourth-quarter net loss will exceed that of the third quarter of 1996 and the Board of Directors has suspended the regular quarterly dividend. A significant amount of sales are denominated in currencies other than the U.S. dollar, and fluctuations in the value of the U.S. dollar relative to other currencies decreased the dollar value of sales for the third quarter and first nine months of 1996 by $4 million and $7 million, respectively, compared to the comparable 1995 periods. - 15 -
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 ------------------ ---------- ----------------- ---------- 1995 1996 1995 1996 ----- ----- ---- ---- (In millions) <S> <C> <C> <C> <C> <C> <C> Securities earnings ...... $ 1.5 $ 1.2 $ (.3) $ 5.9 $ 3.6 $ (2.3) Corporate expenses, net .. (7.1) (5.7) 1.4 (19.9) (12.4) 7.5 Interest expense ......... (20.3) (18.5) 1.8 (62.1) (56.1) 6.0 ------- ------- ------- ------- ------- ------- $ (25.9) $ (23.0) $ 2.9 $ (76.1) $ (64.9) $ 11.2 ======= ======= ======= ======= ======= ======= </TABLE> Securities earnings were lower due to lower average balances available for investment. Net corporate expenses were lower in the third quarter and first nine months of 1996 compared to the same periods in 1995 due to lower environmental remediation costs. Interest expense was lower primarily due to lower variable interest rates. Income tax expense for the third quarter of 1996 differs from a normally- expected effective tax rate because of losses in certain countries for which no tax benefit is currently available and for which recognition of a deferred tax asset is not appropriate. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated cash flows from operating, investing and financing activities for the nine months ended September 30, 1995 and 1996 are presented below. <TABLE> <CAPTION> Nine months ended September 30, ------------------ 1995 1996 ------- ------- (In millions) <S> <C> <C> Net cash provided (used) by: Operating activities ............................... $ 67.8 $ 38.3 Investing activities ............................... (40.8) (52.9) Financing activities ............................... (8.4) 5.8 ------- ------- Net cash provided (used) by operating, investing and financing activities ...................... $ 18.6 $ (8.8) ======= ======= </TABLE> The TiO2 industry is cyclical and changes in economic conditions within the industry significantly impact the earnings and operating cash flows of the Company. During the first nine months of 1996, declining TiO2 selling prices unfavorably impacted Kronos' operating income and cash flows from operations compared to the 1995 period. Average selling prices began a downward trend in the last half of 1995 and the Company expects the trend to continue at least for the remainder of the year. The Company expects prices will begin to increase during 1997; however, no assurance can be given that price trends will conform to the Company's expectations and future cash flows will be adversely affected should price trends be lower than the Company's expectations. The Company's cash flows from operations also declined in the first nine months of 1995 due to an increase in working capital of $43 million, while - 16 -
working capital remained about the same in the first nine months of 1996, excluding the effect of currency translation. Net changes in working capital used less cash in the 1996 period primarily due to TiO2 production curtailments and higher sales volumes reducing inventory levels during 1996. Certain of the Company's income tax returns in various U.S. and non-U.S. jurisdictions are being examined and tax authorities have proposed or may propose tax deficiencies. The Company has reached an agreement with the German tax authorities regarding examinations which resolves certain significant tax contingencies for years through 1990. The Company has received certain final assessments and expects to pay tax deficiencies of approximately DM 49 million ($32 million at September 30, 1996), including interest, in the fourth quarter of 1996 in final settlement of the agreed issues. Certain other German tax contingencies remain outstanding and will continue to be litigated. Although the Company believes that it will ultimately prevail, the Company has granted a DM 100 million ($66 million at September 30, 1996) lien on its Nordenham, Germany TiO2 plant in favor of the German tax authorities until the litigation is resolved. No assurance can be given that this litigation will be resolved in the Company's favor in view of the inherent uncertainties involved in court rulings. The Company believes that it has adequately provided accruals for additional income taxes and related interest expense which may ultimately result from all such examinations and believes that the ultimate disposition of such examinations should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. Rheox acquired the minority interests of its non-U.S. subsidiaries for $5.2 million in the first quarter of 1996. The Company borrowed DM 95 million ($64 million when borrowed) under its DM credit facility during the first nine months of 1996 and used the proceeds primarily to fund operations. During October 1996, the Company borrowed DM 49 million ($32 million when borrowed) under the DM credit facility to fund the German tax settlement payments described above. Repayments of indebtedness in the first nine months of 1996 included payments of $17.2 million on the Rheox bank term loan, $11.6 million on the joint venture term loan and DM 16 million ($10.4 million when repaid) on DM-denominated notes payable. In the third quarter of 1996, the Company paid a quarterly dividend of $.10 per share to shareholders aggregating $5.1 million. Dividends paid during the first nine months of 1996 totaled $15.3 million. In October 1996, the Company's Board of Directors suspended the Company's regular quarterly dividend. At September 30, 1996, the Company had cash and cash equivalents aggregating $130 million (36% held by non-U.S. subsidiaries) including restricted cash and cash equivalents of $11 million. The Company's subsidiaries had $5 million and $119 million available for borrowing at September 30, 1996 under existing U.S. and non-U.S. credit facilities, respectively, of which $82 million of the non-U.S. amount is available only for (i) permanently reducing the DM term loan or (ii) paying future German income tax assessments, as described above. In October 1996, the borrowing availability to pay German income tax assessments under the DM credit facility was reduced by $32 million related to the October 1996 borrowings described above. The Company is engaged in discussions with its - 17 -
lenders to modify the repayment terms and covenants of certain of its indebtedness and to refinance certain other indebtedness. 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 or facilities currently or formerly owned, operated or used by the Company, many of which disposal sites or facilities are on the U.S. Environmental Protection Agency's (the "U.S. EPA") Superfund National Priorities List or similar state lists. On a quarterly basis, the Company evaluates the potential range of its liability at sites where it has been named as a PRP or defendant. The Company believes it has adequate accruals ($114 million at September 30, 1996) for reasonably estimable costs of such matters. It is not possible to estimate the range of costs for certain sites. The Company has estimated that 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 $175 million. The Company's estimates of such liabilities have not been discounted to present value, and the Company has not recognized any potential insurance recoveries. No assurance can be given that actual costs will not exceed accrued amounts or the upper end of the range for sites for which estimates have been made, and no assurance can be given that costs will not be incurred with respect to sites as to which no estimate presently can be made. Further, there can be no assurance that additional environmental matters will not arise in the future. The Company is also a defendant in a number of legal proceedings seeking damages for personal injury and property damage arising from the sale of lead pigments and lead-based paints. Although no assurance can be given that the Company will not incur future liability in respect of this litigation, based on, among other things, the results of such litigation to date, the Company believes that the pending lead pigment and paint litigation is without merit. The Company has not accrued any amounts for such pending litigation. Liability that may result, if any, cannot be reasonably estimated. In addition, various legislation and administrative regulations are, from time to time, enacted or proposed at the state, local and federal levels seeking to impose various obligations on present and former manufacturers of lead pigment and lead-based paint with respect to asserted health concerns associated with the use of such products and to effectively overturn court decisions in which the Company and other pigment manufacturers have been successful. The Company currently believes the disposition of all claims and disputes, individually and in the aggregate, should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. There can be no assurance that additional matters of these types will not arise in the future. The Company periodically evaluates its liquidity requirements, alternative uses of capital, capital needs and availability of resources in view of, among other things, its debt service and capital expenditure requirements and estimated future operating cash flows. As a result of this process, the Company has in the past and may in the future seek to reduce, refinance, repurchase or restructure indebtedness, raise additional capital, 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 also review - 18 -
opportunities for acquisitions or other business combinations in the chemicals industry. In the event of any such 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. The statements contained in this Report on Form 10-Q ("Quarterly Report") which are not historical facts, including, but not limited to, statements found under the captions "Results of Operations" and "Liquidity and Capital Resources" above, are forward-looking statements that involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in this Quarterly Report could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in this Quarterly Report and in the 1995 Annual Report, including, without limitation, the portions of such reports under the captions referenced above, and the uncertainties set forth from time to time in the Company's filings with the Securities and Exchange Commission, and other public statements. - 19 -
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to the 1995 Annual Report and the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996 for descriptions of certain previously-reported legal proceedings. Frank D. Seinfeld v. Harold C. Simmons, et al. (Superior Court of New York, Bergen County, Chancery Division, No. C-336-96). Plaintiff brought this action in September 1996 on behalf of himself and derivatively, on behalf of NL, against the Company, Valhi and certain current and former members of the Company's Board of Directors. The complaint alleges, among other things, that the Company's August 1991 "Dutch auction" tender offer was an unfair and wasteful expenditure of the Company's funds. Plaintiff seeks, among other things, to rescind the Company's purchase of approximately 10.9 million shares of its common stock from Valhi pursuant to the Dutch auction. The Company believes, and understands that each of the other defendants believes, the complaint is without merit. The Company intends, and believes that each of the other defendants intends, to defend the action vigorously. Ritchie v. NL Industries, et al. (Circuit Court of Marshall County, West Virginia, No. 96-C-179M). In September 1996, the Company was served with a complaint filed in West Virginia state court that seeks compensatory and punitive damages for alleged personal injury caused by lead paint and asserts causes of action against the Company and five other former manufacturers of lead pigment for negligence, strict liability, breach of warranty, fraud, conspiracy, market share liability and alternative liability. In October 1996, defendants removed the case to federal court and filed motions to dismiss. The City of New York, et al. v. Lead Industries Association, Inc., et al. (No. 89-4617). In September 1996, defendants' request for permission to appeal was denied. Skipworth v. Sherwin-Williams Co., et al. (No. 92-3069). Oral argument was held in this matter in the Pennsylvania Supreme Court in October 1996. Wright, et al. v. Lead Industries Association, Inc., et al. (Nos. 94- 363042 and 94-363043). In September 1996, the remaining defendants' motion for summary judgment was granted. Plaintiffs have appealed as to all defendants. Gates v. American Cyanamid Co., et al. (I1996 - 2114). In July 1996, the Company filed an answer denying plaintiff's allegations. Hines v. Gates, et al. (96-616161). In July 1996, plaintiffs voluntarily dismissed the complaint without prejudice. NL Industries, Inc. v. Commercial Union Insurance Cos., et al. The Company is seeking interlocutory appellate review of the previously-reported ruling regarding contribution. - 20 -
Granite City, Illinois smelter site. In August 1996, the district court denied Granite City's and the PRP's motion for a temporary restraining order and preliminary injunction seeking to enjoin the U.S. EPA from proceeding with the residential component of the cleanup. Wagner, et al. v. Anzon, Inc. and NL Industries, Inc. (No. 87-4420). In September 1996, the Superior Court of Pennsylvania affirmed the judgment of the jury verdict for the Company. Plaintiffs have filed an application for reargument in the Superior Court, which the Company has opposed. The application is pending before the Superior Court. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 - Eighth amendment to the Credit Agreement, dated September 17, 1996, between Rheox, Inc. and Subsidiaries, Guarantors and the Chase Manhattan Bank (National Association) and the Nippon Credit Bank, Ltd. as Co-Agents. 10.2 - Executive Severance Agreement effective as of February 16, 1994 by and between the Registrant and Joseph S. Compofelice. 10.3 - Executive Severance Agreement effective as of March 9, 1995 by and between the Registrant and Lawrence A. Wigdor. 27.1 - Financial Data Schedule for the nine months ended September 30, 1996. (b) Reports on Form 8-K Reports on Form 8-K for the quarter ended September 30, 1996 and through the date of this report: July 25, 1996 - reported Items 5 and 7. October 23, 1996 - reported Items 5 and 7. - 21 -
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 12, 1996 By /s/ Joseph S. Compofelice - ------------------------ ------------------------- Joseph S. Compofelice Vice President and Chief Financial Officer Date: November 12, 1996 By /s/ Dennis G. Newkirk - ------------------------ --------------------- Dennis G. Newkirk Vice President and Controller (Principal Accounting Officer) - 22 -