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, 1997 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-640 NL INDUSTRIES, INC. (Exact name of registrant as specified in its charter) New Jersey 13-5267260 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 16825 Northchase Drive, Suite 1200, Houston, Texas 77060-2544 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (281) 423-3300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) had been subject to such filing requirements for the past 90 days. Yes X No Number of shares of common stock outstanding on May 14, 1997: 51,144,014
NL INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Balance Sheets - December 31, 1996 and March 31, 1997 3-4 Consolidated Statements of Operations - Three months ended March 31, 1996 and 1997 5 Consolidated Statement of Shareholders' Deficit - Three months ended March 31, 1997 6 Consolidated Statements of Cash Flows - Three months ended March 31, 1996 and 1997 7-8 Notes to Consolidated Financial Statements 9-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-17 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17-18 Item 6. Exhibits and Reports on Form 8-K 19 - 2 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) <TABLE> <CAPTION> December 31, March 31, ASSETS 1996 1997 ------------ ---------- <S> <C> <C> Current assets: Cash and cash equivalents, including restricted cash of $10,895 and $9,343 ......... $ 114,115 $ 77,662 Accounts and notes receivable .................. 138,538 162,547 Refundable income taxes ........................ 9,267 3,761 Inventories .................................... 232,510 194,033 Prepaid expenses ............................... 4,219 5,485 Deferred income taxes .......................... 1,597 1,234 ---------- ---------- Total current assets ....................... 500,246 444,722 ---------- ---------- Other assets: Marketable securities .......................... 23,718 25,297 Investment in joint ventures ................... 181,479 179,347 Prepaid pension cost ........................... 24,821 24,898 Deferred income taxes .......................... 223 223 Other .......................................... 24,825 25,634 ---------- ---------- Total other assets ......................... 255,066 255,399 ---------- ---------- Property and equipment: Land ........................................... 21,963 20,589 Buildings ...................................... 165,479 157,246 Machinery and equipment ........................ 660,333 628,269 Mining properties .............................. 95,891 94,062 Construction in progress ....................... 13,231 13,360 ---------- ---------- 956,897 913,526 Less accumulated depreciation and depletion .... 490,851 472,279 ---------- ---------- Net property and equipment ................. 466,046 441,247 ---------- ---------- $1,221,358 $1,141,368 ========== ========== </TABLE> - 3 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands) <TABLE> <CAPTION> December 31, March 31, LIABILITIES AND SHAREHOLDERS' DEFICIT 1996 1997 ------------- ------------ <S> <C> <C> Current liabilities: Notes payable ................................ $ 25,732 $ 23,776 Current maturities of long-term debt ......... 91,946 31,626 Accounts payable and accrued liabilities ..... 153,904 150,733 Payable to affiliates ........................ 10,204 9,619 Income taxes ................................. 5,664 5,860 Deferred income taxes ........................ 2,895 2,892 ----------- ----------- Total current liabilities ................ 290,345 224,506 ----------- ----------- Noncurrent liabilities: Long-term debt ............................... 737,100 746,605 Deferred income taxes ........................ 151,221 143,239 Accrued pension cost ......................... 57,941 54,093 Accrued postretirement benefits cost ......... 55,935 54,822 Other ........................................ 132,048 155,061 ----------- ----------- Total noncurrent liabilities ............. 1,134,245 1,153,820 ----------- ----------- Minority interest .............................. 249 237 Shareholders' deficit: Common stock ................................. 8,355 8,355 Additional paid-in capital ................... 759,281 759,281 Adjustments: Currency translation ....................... (118,629) (117,879) Pension liabilities ........................ (1,822) (1,822) Marketable securities ...................... 1,278 2,304 Accumulated deficit .......................... (485,948) (521,669) Treasury stock ............................... (365,996) (365,765) ----------- ----------- Total shareholders' deficit .............. (203,481) (237,195) ----------- ----------- $ 1,221,358 $ 1,141,368 =========== =========== </TABLE> Commitments and contingencies (Note 13) See accompanying notes to consolidated financial statements. - 4 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended March 31, 1996 and 1997 (In thousands, except per share data) <TABLE> <CAPTION> 1996 1997 --------- --------- <S> <C> <C> Revenues and other income: Net sales ...................................... $ 240,440 $ 239,476 Other, net ..................................... 10,548 2,242 --------- --------- 250,988 241,718 --------- --------- Costs and expenses: Cost of sales .................................. 169,816 185,035 Selling, general and administrative ............ 42,891 71,146 Interest ....................................... 19,139 18,958 --------- --------- 231,846 275,139 --------- --------- Income (loss) before income taxes and minority interest ......................... 19,142 (33,421) Income tax expense ............................... 5,740 2,292 --------- --------- Income (loss) before minority interest ..... 13,402 (35,713) Minority interest ................................ (42) 8 --------- --------- Net income (loss) .......................... $ 13,444 $ (35,721) ========= ========= Net income (loss) per share of common stock ...... $ .26 $ (.70) ========= ========= Weighted average common and common equivalent shares outstanding .............................. 51,510 51,144 ========= ========= </TABLE> See accompanying notes to consolidated financial statements. - 5 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT Three months ended March 31, 1997 (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, 1996 $ 8,355 $ 759,281 $(118,629) $ (1,822) $ 1,278 $(485,948) $(365,996) $(203,481) Net loss ................... - - - - - (35,721) - (35,721) Adjustments ................ - - 750 - 1,026 - - 1,776 Treasury stock reissued .... - - - - - - 231 231 --------- --------- --------- --------- --------- --------- --------- --------- Balance at March 31, 1997 .. $ 8,355 $ 759,281 $(117,879) $ (1,822) $ 2,304 $(521,669) $(365,765) $(237,195) ========= ========= ========= ========= ========= ========= ========= ========= </TABLE> See accompanying notes to consolidated financial statements. - 6 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended March 31, 1996 and 1997 (In thousands) <TABLE> <CAPTION> 1996 1997 -------- -------- <S> <C> <C> Cash flows from operating activities: Net income (loss) ................................ $ 13,444 $(35,721) Depreciation, depletion and amortization ......... 10,125 9,786 Noncash interest expense ......................... 5,026 5,483 Deferred income taxes ............................ (4,065) (198) Change in accounting for environmental remediation liabilities ......................... - 30,000 Other, net ....................................... (4,155) (1,990) -------- -------- 20,375 7,360 Change in assets and liabilities: Accounts and notes receivable .................. (24,052) (30,706) Inventories .................................... (10,213) 28,377 Prepaid expenses ............................... (3,433) (1,478) Accounts payable and accrued liabilities ....... (14,573) 57 Income taxes ................................... 3,153 6,335 Other, net ..................................... (2,514) (2,633) -------- -------- Net cash provided (used) by operating activities .................................. (31,257) 7,312 -------- -------- Cash flows from investing activities: Capital expenditures ............................. (12,250) (8,868) Purchase of minority interest .................... (5,168) - Investment in joint ventures, net ................ 1,379 2,379 Other, net ....................................... 82 64 -------- -------- Net cash used by investing activities ........ (15,957) (6,425) -------- -------- </TABLE> - 7 -
NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Three months ended March 31, 1996 and 1997 (In thousands) <TABLE> <CAPTION> 1996 1997 --------- --------- <S> <C> <C> Cash flows from financing activities: Indebtedness: Borrowings ....................................... $ 35,079 $ 140,000 Principal payments ............................... (10,002) (172,577) Deferred financing costs ......................... - (3,434) Dividends .......................................... (5,109) - Other, net ......................................... (406) 231 --------- --------- Net cash provided (used) by financing activities .................................... 19,562 (35,780) --------- --------- Cash and cash equivalents: Net change from: Operating, investing and financing activities .... (27,652) (34,893) Currency translation ............................. (623) (1,560) Balance at beginning of period ..................... 141,333 114,115 --------- --------- Balance at end of period ........................... $ 113,058 $ 77,662 ========= ========= Supplemental disclosures - cash paid (received) for: Interest, net of amounts capitalized ............... $ 6,557 $ 7,153 Income taxes, net .................................. 6,637 (4,385) </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 approximately 56% and 18%, respectively, of NL's outstanding common stock, and together may be deemed to control NL. Contran and its subsidiaries and other entities related to Harold C. Simmons hold approximately 91% of Valhi's and 45% of Tremont's outstanding common stock. The consolidated balance sheet of NL Industries, Inc. and Subsidiaries (collectively, the "Company") at December 31, 1996 has been condensed from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at March 31, 1997 and the consolidated statements of operations, shareholders' deficit and cash flows for the interim periods ended March 31, 1996 and 1997 have been prepared by the Company, without audit. In the opinion of management, all adjustments necessary to present fairly the consolidated financial position, results of operations and cash flows have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 Annual Report"). The Company adopted a new method of accounting as required by the AICPA's Statement of Position ("SOP") No. 96-1, "Environmental Remediation Liabilities," in the first quarter of 1997. The SOP, among other things, expands the types of costs which must be considered in determining environmental remediation accruals. As a result of adopting the SOP, the Company recognized a noncash cumulative charge of $30 million in the first quarter of 1997. The charge is not expected to materially change the Company's 1997 income tax expense because the Company believes the resulting deferred income tax asset does not currently satisfy the more-likely-than-not realization criteria and, accordingly, the Company has established an offsetting valuation allowance. Such charge is comprised primarily of estimated future undiscounted expenditures associated with managing and monitoring existing environmental remediation sites. The expenditures consist principally of legal and professional fees, but do not include litigation defense costs with respect to situations in which the Company asserts that no liability exists. Previously, such expenditures were expensed as incurred. - 9 -
Note 2 - Net income (loss) per share of common stock: Net income (loss) per share of common stock is based on the weighted average number of common shares and equivalents outstanding. Common stock equivalents, consisting of nonqualified stock options, are excluded from the computation when their effect is antidilutive. The Company will retroactively adopt Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," effective December 31, 1997. Basic earnings per share pursuant to SFAS No. 128 will not be materially different from earnings per share presented herein and diluted earnings per share pursuant to SFAS No. 128 is not expected to be materially different from basic earnings per share. Note 3 - Business segment information: The Company's operations are conducted in two business segments - TiO2 conducted by Kronos and specialty chemicals conducted by Rheox. <TABLE> <CAPTION> Three months ended March 31, -------------------------- 1996 1997 --------- --------- (In thousands) <S> <C> <C> Net sales: Kronos ..................................... $ 206,368 $ 204,389 Rheox ...................................... 34,072 35,087 --------- --------- $ 240,440 $ 239,476 ========= ========= Operating income: Kronos ..................................... $ 29,472 $ 8,689 Rheox ...................................... 12,466 10,136 --------- --------- 41,938 18,825 General corporate income (expense): Securities earnings, net ................... 1,307 699 Expenses, net .............................. (4,964) (33,987) Interest expense ........................... (19,139) (18,958) --------- --------- $ 19,142 $ (33,421) ========= ========= </TABLE> Corporate expenses, net increased in the first quarter of 1997 due to the $30 million noncash charge related to the adoption of a new method of accounting for certain environmental remediation costs, as described in Note 1. Note 4 - Inventories: <TABLE> <CAPTION> December 31, March 31, 1996 1997 ------------ --------- (In thousands) <S> <C> <C> Raw materials ............................ $ 43,284 $ 28,529 Work in process .......................... 10,356 10,088 Finished products ........................ 142,091 121,149 Supplies ................................. 36,779 34,267 -------- -------- $232,510 $194,033 ======== ======== </TABLE> - 10 -
Note 5 - Marketable securities: <TABLE> <CAPTION> December 31, March 31, 1996 1997 ------------ --------- (In thousands) <S> <C> <C> Available-for-sale securities - noncurrent marketable equity securities: Unrealized gains $ 3,516 $ 4,933 Unrealized losses (1,550) (1,388) Cost 21,752 21,752 ------- ------- Aggregate market $23,718 $25,297 ======= ======= </TABLE> Note 6 - Investment in joint ventures: <TABLE> <CAPTION> December 31, March 31, 1996 1997 ------------ --------- (In thousands) <S> <C> <C> TiO2 manufacturing joint venture ............... $179,195 $176,816 Other .......................................... 2,284 2,531 -------- -------- $181,479 $179,347 ======== ======== </TABLE> Note 7 - Other noncurrent assets: <TABLE> <CAPTION> December 31, March 31, 1996 1997 ------------ --------- (In thousands) <S> <C> <C> Intangible assets, net ......................... $ 7,939 $ 6,683 Deferred financing costs, net .................. 9,791 12,144 Other .......................................... 7,095 6,807 ------- ------- $24,825 $25,634 ======= ======= </TABLE> Note 8 - Accounts payable and accrued liabilities: <TABLE> <CAPTION> December 31, March 31, 1996 1997 ------------ --------- (In thousands) <S> <C> <C> Accounts payable ......................... $ 60,648 $ 52,390 -------- -------- Accrued liabilities: Employee benefits ...................... 34,618 31,437 Environmental costs .................... 6,000 9,000 Interest ............................... 9,429 14,890 Miscellaneous taxes .................... 4,073 3,736 Other .................................. 39,136 39,280 -------- -------- 93,256 98,343 -------- -------- $153,904 $150,733 ======== ======== </TABLE> - 11 -
Note 9 - Other noncurrent liabilities: <TABLE> <CAPTION> December 31, March 31, 1996 1997 ------------ --------- (In thousands) <S> <C> <C> Environmental costs .......................... $106,849 $130,918 Employee benefits ............................ 11,960 11,087 Insurance claims and expenses ................ 11,673 11,603 Other ........................................ 1,566 1,453 -------- -------- $132,048 $155,061 ======== ======== </TABLE> Note 10 - Notes payable and long-term debt: <TABLE> <CAPTION> December 31, March 31, 1996 1997 ------------ --------- (In thousands) <S> <C> <C> Notes payable - Kronos (DM 40,000) ................. $ 25,732 $ 23,776 ======== ======== Long-term debt: NL Industries: 11.75% Senior Secured Notes .................... $250,000 $250,000 13% Senior Secured Discount Notes .............. 149,756 154,493 -------- -------- 399,756 404,493 -------- -------- Kronos: DM bank credit facility (DM 539,971 and DM 288,322, respectively) ..................... 347,362 171,379 Joint venture term loan ........................ 57,858 54,000 Other .......................................... 9,125 8,111 -------- -------- 414,345 233,490 -------- -------- Rheox: Bank term loan ................................. 14,659 140,000 Other .......................................... 286 248 -------- -------- 14,945 140,248 -------- -------- 829,046 778,231 Less current maturities ............................ 91,946 31,626 -------- -------- $737,100 $746,605 ======== ======== </TABLE> - 12 -
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> Three months ended March 31, -------------------- 1996 1997 -------- -------- (In thousands) <S> <C> <C> Expected tax expense (benefit) ......................... $ 6,700 $(11,697) Non-U.S. tax rates ..................................... (1,462) (207) Incremental tax on income of companies not included in NL's consolidated U.S. federal income tax return ... 114 500 Valuation allowance .................................... (709) 12,942 U.S. state income taxes ................................ 364 450 Other, net ............................................. 733 304 -------- -------- Income tax expense ............................... $ 5,740 $ 2,292 ======== ======== </TABLE> Note 12 - Other income, net: <TABLE> <CAPTION> Three months ended March 31, ----------------------- 1996 1997 ------- ------- (In thousands) <S> <C> <C> Interest and dividends ......................... $ 1,307 $ 699 Pension curtailment gain ....................... 4,554 - Technology fee income .......................... 3,081 - Currency transaction gains, net ................ 1,046 517 Other, net ..................................... 560 1,026 ------- ------- $10,548 $ 2,242 ======= ======= </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) Management's Discussion and Analysis of Financial Condition and Results of Operations, (ii) Part II, Item 1 -"Legal Proceedings" and (iii) the 1996 Annual Report. - 13 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company's chemical operations are conducted in two business segments - TiO2 conducted by Kronos and specialty chemicals conducted by Rheox. <TABLE> <CAPTION> Three months ended % March 31, Change -------------------- ------ 1996 1997 ------ ------ (In millions) <S> <C> <C> <C> Net sales: Kronos ............................... $206.3 $204.4 -1% Rheox ................................ 34.1 35.1 +3% ------ ------ $240.4 $239.5 N/C ====== ====== Operating income: Kronos ............................... $ 29.5 $ 8.7 -70% Rheox ................................ 12.4 10.1 -19% ------ ------ $ 41.9 $ 18.8 -55% ====== ====== Percent changes in TiO2: Sales volume ......................... +22% Average selling prices (in billing currencies).............. -16% </TABLE> Kronos' TiO2 operating income in the first quarter of 1997 decreased from the first quarter of 1996 as lower average selling prices were only slightly offset by higher production and sales volumes. Kronos' record first quarter sales volumes improved 22% from the first quarter of 1996, reflecting improved demand for TiO2 in each of Kronos' major markets. Average TiO2 selling prices for the first quarter of 1997 were 16% lower than the first quarter of 1996, and average prices for the quarter were 2% lower than the fourth quarter of 1996. The Company expects TiO2 prices will begin to increase during the second quarter of 1997 as the impact of previously-announced price increases begin to take effect. Kronos anticipates its TiO2 sales volume will exceed year-earlier levels through the second quarter of 1997 and Kronos expects sales volumes for full-year 1997 to be slightly higher than full-year 1996. Kronos expects its full-year 1997 operating income will be below that of 1996, primarily because of lower anticipated average TiO2 prices for 1997 compared to 1996. Kronos' selling, general and administrative expenses decreased in the first quarter of 1997 due to favorable effects of foreign currency translation, partially offset by higher distribution expenses associated with higher first-quarter 1997 sales volume. Kronos' cost of sales as a percentage of net sales increased in the first quarter of 1997 due to lower average prices in the first quarter of 1997. Rheox's operating results for the first quarter of 1997 improved slightly compared to the first quarter of 1996 on slightly higher sales volumes, excluding - 14 -
a first-quarter 1996 $2.7 million gain related to the curtailment of certain U.S. employee pension benefits. Rheox's cost of sales increased in the first quarter of 1997 over the prior-year period primarily due to slightly higher sales volume, and cost of sales as a percentage of net sales was comparable to the 1996 period. Selling, general and administrative expenses increased in the first quarter of 1997 compared to the first quarter of 1996 primarily due to higher variable compensation expense. 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 first quarter of 1997 by $8 million compared to the first quarter of 1996. The following table sets forth certain information regarding general corporate income (expense). <TABLE> <CAPTION> Three months ended March 31, Difference --------------------- ---------- 1996 1997 ------ ------ (In millions) <S> <C> <C> <C> Securities earnings .................. $ 1.3 $ .7 $ (.6) Corporate expenses, net .............. (5.0) (34.0) (29.0) Interest expense ..................... (19.1) (19.0) .1 ------ ------ ------ $(22.8) $(52.3) $(29.5) ====== ====== ====== </TABLE> Securities earnings declined due to lower average balances available for investment. Corporate expense, net in the first quarter of 1997 was higher than the comparable period in 1996 due to the $30 million noncash charge related to the Company's adoption of SOP No. 96-1, "Environmental Remediation Liabilities." See Note 1 to the Consolidated Financial Statements. This charge is included in selling, general and administrative expense in the Company's consolidated statements of operations. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated cash flows from operating, investing and financing activities for the three months ended March 31, 1996 and 1997 are presented below. <TABLE> <CAPTION> Three months ended March 31, ------------------ 1996 1997 ------- ------- (In millions) <S> <C> <C> Net cash provided (used) by: Operating activities ................................. $ (31.3) $ 7.3 Investing activities ................................. (16.0) (6.4) Financing activities ................................. 19.6 (35.8) ------- ------- Net cash used by operating, investing and financing activities ............................ $ (27.7) $ (34.9) ======= ======= </TABLE> - 15 -
The TiO2 industry is cyclical and changes in economic conditions within the industry significantly impact the earnings and operating cash flows of the Company. Cash flows from operations before change in assets and liabilities in the 1997 period declined from the comparable period in 1996 due to lower operating income. Changes in the Company's inventories, receivables and payables (excluding the effect of currency translation) used cash in both the first quarter of 1996 and 1997; however, the cash used in the first quarter of 1997 was significantly less than the first quarter of 1996 due to cash provided from reductions in inventory levels in the 1997 period. Certain of the Company's income tax returns in various U.S. and non-U.S. jurisdictions are being examined and tax authorities have proposed or may propose tax deficiencies. The Company has previously reached an agreement with the German tax authorities, and paid certain tax deficiencies of approximately DM 44 million ($28 million when paid), including interest, which resolved significant tax contingencies for years through 1990. Certain other significant German tax contingencies remain outstanding and will continue to be litigated. The Company has received certain tax assessments aggregating DM 130 million ($77 million), including interest, for years through 1996 and expects to receive tax assessments for an additional DM 20 million ($12 million) related to these remaining tax contingencies. No payments of tax or interest deficiencies related to these assessments will be required until the litigation is resolved, which the Company anticipates may take approximately two to five years. Although the Company believes that it will ultimately prevail, the Company has granted a DM 100 million ($59 million at March 31, 1997) 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 proceedings. The Company believes that it has adequately provided accruals for additional income taxes and related interest expense which may ultimately result from all such examinations and believes that the ultimate disposition of such examinations should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. In order to improve its near-term liquidity, the Company refinanced its Rheox subsidiary during January 1997, obtaining a net $125 million of new long-term financing. The net proceeds, along with other available funds, were used to prepay DM 207 million ($127 million when paid) of the Company's DM term loan and to repay DM 43 million ($26 million when paid) of the Company's DM revolving credit facility. As a result of the refinancing and prepayment, the Company's aggregate scheduled debt payments for 1997 and 1998 decreased by $103 million ($64 million in 1997 and $39 million in 1998). In connection with the prepayment, the Company and its lenders modified certain financial covenants of the DM credit agreement and NL guaranteed the facility. At March 31, 1997, the Company was in compliance with all financial covenants governing its debt agreements. In addition to the above refinancing and prepayment, the Company repaid $3.9 million of the joint venture term loan in the first quarter of 1997. At March 31, 1997, the Company had cash and cash equivalents aggregating $78 million (51% held by non-U.S. subsidiaries), including restricted cash and - 16 -
cash equivalents of $9 million. The Company's subsidiaries had $9 million and $94 million available for borrowing at March 31, 1997 under existing U.S. and non-U.S. credit facilities, respectively. The Company has been named as a defendant, potentially responsible party ("PRP"), or both, in a number of legal proceedings associated with environmental matters, including waste disposal sites, mining locations and facilities currently or previously owned, operated or used by the Company, certain of which are on the U.S. Environmental Protection Agency's (the "U.S. EPA") Superfund National Priorities List or similar state lists. On a quarterly basis, the Company evaluates the potential range of its liability at sites where it has been named as a PRP or defendant. The Company believes it has adequate accruals ($140 million at March 31, 1997) for reasonably estimable costs of such matters, but the Company's ultimate liability may be affected by a number of factors, including changes in remedial alternatives and costs and the allocations of such costs among PRPs. It is not possible to estimate the range of costs for certain sites. The upper end of the range of reasonably possible costs to the Company for sites for which it is possible to estimate costs is approximately $185 million. The Company's estimates of such liabilities have not been discounted to present value, and the Company has not recognized any potential insurance recoveries. No assurance can be given that actual costs will not exceed accrued amounts or the upper end of the range for sites for which estimates have been made, and no assurance can be given that costs will not be incurred with respect to sites as to which no estimate presently can be made. Further, there can be no assurance that additional environmental matters will not arise in the future. The Company is also a defendant in a number of legal proceedings seeking damages for personal injury and property damage arising from the sale of lead pigments and lead-based paints. There is no assurance that the Company will not incur future liability in respect of this pending litigation in view of the inherent uncertainties involved in court and jury rulings in pending and possible future cases. However, based on, among other things, the results of such litigation to date, the Company believes that the pending lead pigment and paint litigation is without merit. The Company has not accrued any amounts for such pending litigation. Liability that may result, if any, cannot be reasonably estimated. In addition, various legislation and administrative regulations have, from time to time, been enacted or proposed that seek to impose various obligations on present and former manufacturers of lead pigment and lead-based paint with respect to asserted health concerns associated with the use of such products and to effectively overturn court decisions in which the Company and other pigment manufacturers have been successful. The Company currently believes the disposition of all claims and disputes, individually and in the aggregate, should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. There can be no assurance that additional matters of these types will not arise in the future. The Company periodically evaluates its liquidity requirements, alternative uses of capital, capital needs and availability of resources in view of, among other things, its debt service and capital expenditure requirements and estimated future operating cash flows. As a result of this process, the Company in the past has sought, and in the future may seek, to reduce, refinance, repurchase or restructure indebtedness, raise additional capital, issue additional securities, - 17 -
modify its dividend policy, restructure ownership interests, sell interests in subsidiaries or other assets, or take a combination of such steps or other steps to manage its liquidity and capital resources. In the normal course of its business, the Company may review opportunities for the acquisition, divestiture, joint venture or other business combinations in the chemicals industry. In the event of any such transactions, the Company may consider using available cash, issuing equity securities or increasing its indebtedness to the extent permitted by the agreements governing the Company's existing debt. The statements contained in this Report on Form 10-Q ("Quarterly Report") which are not historical facts, including, but not limited to, statements found under the captions "Results of Operations" and "Liquidity and Capital Resources" above, are forward-looking statements that involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in this Quarterly Report could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in this Quarterly Report and in the 1996 Annual Report, including, without limitation, the portions of such reports under the captions referenced above, and the uncertainties set forth from time to time in the Company's other public reports and filings and public statements. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to the 1996 Annual Report for descriptions of certain previously-reported legal proceedings. In April 1997 the Quebec Court of Appeals dismissed the Canadian Fisheries Act case (previously reported at page 9 of the 1996 Annual Report) against one of the individual defendants. In May 1997 the Crown's counsel filed an order of nolle prosequi effectively terminating the matter as against Kronos Canada, Inc. and the remaining individual defendant. In May 1998 the matter will be expunged from the records as if it had never been brought. Kronos Canada and the individual defendant have agreed not to seek damages for malicious or improper prosecution. Ritchie v. NL Industries, et al. (No. 5:96-CV-166). The case was remanded to state court in April 1997. In April 1997 the Company was served with a complaint in Parker v. NL Industries, et al. (Circuit Court, Baltimore City, Maryland, No. 97085060 CC915). Plaintiff, now an adult, and his wife, seek compensatory and punitive damages from the Company, another former manufacturer of lead paint and a local paint retailer, based on claims of negligence, strict liability and fraud, for plaintiff's alleged ingestion of lead paint as a child. In May 1997 the Company removed the case to federal court. In March 1997 the Company was served with a complaint filed in the Fifth Judicial District Court of Cass County, Texas, on behalf of approximately 4,000 plaintiffs and their spouses alleging injury due to exposure to asbestos and - 18 -
seeking compensatory and punitive damages. The Company has filed an answer denying the material allegations. (Ernest Hughes, et al. v. Owens-Corning Fiberglass, Corporation, et al., No. 97-C-051). ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 - Executive severance agreement effective as of July 24, 1996 by and between the Registrant and J. Landis Martin. 10.2 - Intercorporate Services Agreement by and between Contran Corporation and the Registrant effective as of January 1, 1997. 10.3 - Intercorporate Services Agreement by and between Valhi, Inc. and the Registrant effective as of January 1, 1997. 10.4 - Intercorporate Services Agreement by and between Tremont Corporation and the Registrant effective as of January 1, 1997. 10.5 - Intercorporate Services Agreement by and between Titanium Metals Corporation and the Registrant effective as of January 1, 1997. 27.1 - Financial Data Schedule for the three-month period ended March 31, 1997. (b) Reports on Form 8-K Reports on Form 8-K for the quarter ended March 31, 1997 and through the date of this report: January 30, 1997 - reported Items 5 and 7. April 22, 1997 - reported Items 5 and 7. - 19 -
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 14, 1997 By /s/ Joseph S. Compofelice - ------------------- ------------------------------ Joseph S. Compofelice Vice President and Chief Financial Officer Date: May 14, 1997 By /s/ Dennis G. Newkirk - ------------------- ------------------------------ Dennis G. Newkirk Vice President and Controller (Principal Accounting Officer) - 20 -