SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-640
NL INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
New Jersey 13-5267260
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16825 Northchase Drive, Suite 1200, Houston, Texas 77060-2544
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 423-3300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common stock ($.125 par value) New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 14, 2002 approximated $137 million.
There were 48,820,984 shares of common stock outstanding at March 14, 2002.
Documents incorporated by reference:
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
Forward-Looking Information.
The statements contained in this Annual Report on Form 10-K ("Annual
Report") which are not historical facts, including, but not limited to,
statements found (i) under the captions "Industry," "Products and operations,"
"Manufacturing process and raw materials," "Competition," "Patents and
Trademarks," "Foreign Operations," and "Regulatory and Environmental Matters,"
all contained in Item 1. Business; (ii) under the captions "Lead pigment
litigation," "Environmental matters and litigation," and "Other Litigation," all
contained in Item 3. Legal Proceedings; (iii) under the captions "Results of
Operations" and "Liquidity and Capital Resources," both contained in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations; (iv) under the captions "Currency exchange rates," "Marketable
equity security prices," and "Other," all contained in Item 7A. Quantitative and
Qualitative Disclosures About Market Risk; and (v) in Note 20, "Commitments and
contingencies - Legal proceedings" to the Consolidated Financial Statements, 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," "anticipates," "expects," "could" 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 that could
significantly affect expected results, and actual future results could differ
materially from those described in such forward-looking statements.
Among the factors that could cause actual future results to differ
materially are the risks and uncertainties discussed in this Annual Report and
those described from time to time in the Company's other filings with the
Securities and Exchange Commission. While it is not possible to identify all
factors, the Company continues to face many 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 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.
PART I
ITEM 1. BUSINESS
General
NL Industries, Inc., organized as a New Jersey corporation in 1891,
conducts its operations through its principal wholly owned subsidiary, Kronos,
Inc. Kronos is the world's fifth largest producer of titanium dioxide pigments
("TiO2") with an estimated 11% share of worldwide TiO2 sales volume in 2001.
Approximately one-half of Kronos' 2001 sales volume was in Europe, where Kronos
is the second largest producer of TiO2. NL and its consolidated subsidiaries are
sometimes referred to herein collectively as the "Company."
The Company's primary objective is to maximize total shareholder return.
The Company continues to take steps towards achieving its objective, including
(i) controlling costs, (ii) investing in certain cost effective debottlenecking
projects to increase TiO2 production capacity and efficiency, (iii) maintaining
its regular quarterly dividend of $.20 per share, and (iv) improving its capital
structure. The Company periodically considers mergers or acquisitions, which may
be within or outside the chemical industry, and acquisitions of additional TiO2
production capacity to meet its objective.
Industry
Titanium dioxide pigments are chemical products used for imparting
whiteness, brightness and opacity to a wide range of products, including paints,
plastics, paper, fibers and ceramics. TiO2 is considered a "quality-of-life"
product with demand affected by gross domestic product in various regions of the
world.
Pricing within the global TiO2 industry is cyclical, and changes in
industry economic conditions can significantly impact the Company's earnings and
operating cash flows. The Company's average TiO2 selling price on a billing
currency basis decreased from the preceding quarter during each quarter of 2001,
reversing the upward trend in prices that began in the fourth quarter of 1999
and continued through the fourth quarter of 2000. Industry-wide demand for TiO2
weakened throughout 2001, with full year demand estimated as 7% lower than the
previous year. This is believed to have been the result of a slowdown in
economic growth and a reduction in customer inventory levels. Volume demand in
2002 is anticipated to increase, if an expected recovery in worldwide economic
growth materializes.
Kronos has an estimated 18% share of European TiO2 sales volume and an
estimated 13% share of North American TiO2 sales volume. Per capita consumption
of TiO2 in the United States and Western Europe far exceeds that in other areas
of the world and these regions are expected to continue to be the largest
consumers of TiO2. Significant regions for TiO2 consumption could emerge in
Eastern Europe, the Far East or China if the economies in these regions develop
to the point that quality-of-life products, including TiO2, are in greater
demand. Kronos believes that, due to its strong presence in Western Europe, it
is well positioned to participate in growth in consumption of TiO2 in Eastern
Europe. Geographic segment information is contained in Note 3 to the
Consolidated Financial Statements.
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Products and operations
TiO2 is produced in two crystalline forms: rutile and anatase. Rutile
TiO2 is a more tightly bound crystal that has a higher refractive index than
anatase TiO2 and, therefore, better opacification and tinting strength in many
applications. Although many end-use applications can use either form of TiO2,
rutile TiO2 is the preferred form for use in coatings, plastics and ink. Anatase
TiO2 has a bluer undertone and is less abrasive than rutile TiO2, and it is
often preferred for use in paper, ceramics, rubber and man-made fibers.
The Company believes that there are no effective substitutes for TiO2.
However, extenders such as kaolin clays, calcium carbonate and polymeric
opacifiers are used in a number of Kronos' markets. Generally, extenders are
used to reduce to some extent the utilization of higher-cost TiO2. The use of
extenders has not significantly changed TiO2 consumption over the past decade
because, to date, extenders generally have failed to match the performance
characteristics of TiO2. As a result, the Company believes that the use of
extenders will not materially alter the growth of the TiO2 business in the
foreseeable future.
Kronos currently produces over 40 different TiO2 grades, sold under the
Kronos trademark, which provide a variety of performance properties to meet
customers' specific requirements. Kronos' major customers include domestic and
international paint, plastics and paper manufacturers.
Kronos is one of the world's leading producers and marketers of TiO2.
Kronos and its distributors and agents sell and provide technical services for
its products to over 4,000 customers with the majority of sales in Europe and
North America. TiO2 is distributed by rail, truck and ocean carrier in either
dry or slurry form. Kronos' manufacturing facilities are located in Germany,
Canada, Belgium and Norway and Kronos owns a one-half interest in a TiO2
manufacturing joint venture located in Louisiana, U.S.A. Kronos has sales and
marketing activities in over 100 countries worldwide. Kronos and its
predecessors have produced and marketed TiO2 in North America and Europe for
over 80 years. As a result, Kronos believes that it has developed considerable
expertise and efficiency in the manufacture, sale, shipment and service of its
products in domestic and international markets. By volume, approximately
one-half of Kronos' 2001 TiO2 sales were to Europe, with 38% to North America
and the balance to export markets.
Kronos is also engaged in the mining and sale of ilmenite ore (a raw
material used as a feedstock by sulfate-process TiO2 plants) and has estimated
ilmenite reserves that are expected to last at least 20 years. Kronos is also
engaged in the manufacture and sale of iron-based water treatment chemicals
(derived from co-products of the pigment production processes). Kronos' water
treatment chemicals (marketed under the name Ecochem) are used as treatment and
conditioning agents for industrial effluents and municipal wastewater, and in
the manufacture of iron pigments.
A fire on March 20, 2001 damaged a section of the Company's Leverkusen,
Germany 35,000 metric ton sulfate-process TiO2 plant ("Sulfate Plant") and, as a
result, production of TiO2 at the Leverkusen facility was halted. The fire did
not enter the Company's adjacent 125,000 metric ton chloride-process TiO2 plant
("Chloride Plant"), but did damage certain support equipment necessary to
operate that plant. The damage to the support equipment resulted in a temporary
shutdown of the Chloride Plant. On April 8, 2001, repairs to the damaged support
equipment were substantially completed and full production resumed at the
Chloride Plant. The Sulfate Plant became approximately 50% operational in
September 2001 and became fully operational in late October 2001. See Note 17 to
the Consolidated Financial Statements.
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Manufacturing process and raw materials
TiO2 is manufactured by Kronos using both the chloride process and the
sulfate process. Approximately 70% of Kronos' current production capacity is
based on its chloride process which generates less waste than the sulfate
process. The sulfate process is a batch chemical process that uses sulfuric acid
to extract TiO2. Sulfate technology normally produces either anatase or rutile
pigment. The chloride process is a continuous process in which chlorine is used
to extract rutile TiO2. In general, the chloride process is also less intensive
than the sulfate process in terms of capital investment, labor and energy.
Because much of the chlorine is recycled and higher titanium-containing
feedstock is used, the chloride process produces less waste. Once an
intermediate TiO2 pigment has been produced by either the chloride or sulfate
process, it is 'finished' into products with specific performance
characteristics for particular end-use applications through proprietary
processes involving various chemical surface treatments and intensive milling
and micronizing.
Due to environmental factors and customer considerations, the proportion
of TiO2 industry sales represented by chloride-process pigments has increased
relative to sulfate-process pigments and, in 2001, chloride-process production
facilities represented approximately 60% of industry capacity.
Kronos produced 412,000 metric tons of TiO2 in 2001, compared to a
record 441,000 metric tons produced in 2000 and 411,000 metric tons in 1999.
Kronos' average production capacity utilization rate in 2001 was 91%, down from
near full capacity in 2000, primarily due to lost production volume resulting
from the Leverkusen fire and the Company's decision to curtail production in the
fourth quarter of 2001 as demand remained soft. Kronos believes its current
annual attainable production capacity is approximately 455,000 metric tons,
including its one-half interest in the joint venture-owned Louisiana plant (see
"TiO2 manufacturing joint venture"). The Company expects its production capacity
will be increased by approximately 25,000 metric tons primarily at its chloride
facilities, with moderate capital expenditures, bringing Kronos' capacity to
approximately 480,000 metric tons during 2005.
The primary raw materials used in the TiO2 chloride production process
are titanium-containing feedstock derived from beach sand ilmenite, natural
rutile ore, chlorine and coke. Chlorine and coke are available from a number of
suppliers. Titanium-containing feedstock suitable for use in the chloride
process is available from a limited number of suppliers around the world,
principally in Australia, South Africa, Canada, India and the United States.
Kronos purchases slag refined from ilmenite sand from Richards Bay Iron
and Titanium (Proprietary) Limited (South Africa), a 51%-owned subsidiary of Rio
Tinto plc (U.K.), under a long-term supply contract that expires at the end of
2006. Natural rutile ore is purchased primarily from Iluka Resources, Limited
(Australia), a company formed through the merger of Westralian Sands Limited
(Australia) and RGC Mineral Sands, Ltd., under a long-term supply contract that
expires at the end of 2005. The Company does not expect to encounter
difficulties obtaining long-term extensions to existing supply contracts prior
to the expiration of the contracts. Raw materials purchased under these
contracts and extensions thereof are expected to meet Kronos' chloride feedstock
requirements over the next several years.
The primary raw materials used in the TiO2 sulfate production process
are titanium-containing feedstock derived primarily from rock and beach sand
ilmenite and sulfuric acid. Sulfuric acid is available from a number of
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suppliers. Titanium-containing feedstock suitable for use in the sulfate process
is available from a limited number of suppliers around the world. Currently, the
principal active sources are located in Norway, Canada, Australia, India and
South Africa. As one of the few vertically integrated producers of
sulfate-process pigments, Kronos operates a rock ilmenite mine in Norway, which
provided all of Kronos' feedstock for its European sulfate-process pigment
plants in 2001. For its Canadian sulfate-process plant, Kronos also purchases
sulfate grade slag from Q.I.T. Fer et Titane Inc. (Canada), a wholly owned
subsidiary of Rio Tinto Iron & Titanium, Inc., under a long-term supply contract
which expires in 2006.
Kronos believes the availability of titanium-containing feedstock for
both the chloride and sulfate processes is adequate for the next several years.
Kronos does not expect to experience any interruptions of its raw material
supplies because of its long-term supply contracts. However, political and
economic instability in certain countries from which the Company purchases its
raw material supplies could adversely affect the availability of such feedstock.
Should Kronos' vendors not be able to meet their contractual obligations or
should Kronos be otherwise unable to obtain necessary raw materials, the Company
may incur higher costs for raw materials or may be required to reduce production
levels, which may have a material adverse effect on the Company's financial
position, results of operations or liquidity.
TiO2 manufacturing joint venture
Subsidiaries of Kronos and Huntsman International Holdings LLC
("Huntsman") each own a 50%-interest in a manufacturing joint venture, Louisiana
Pigment Company ("LPC"). LPC owns and operates a chloride-process TiO2 plant
located in Lake Charles, Louisiana. Production from the plant is shared equally
by Kronos and Huntsman (the "Partners") pursuant to separate offtake agreements.
A supervisory committee, composed of four members, two of whom are
appointed by each Partner, directs the business and affairs of LPC including
production and output decisions. Two general managers, one appointed and
compensated by each Partner, manage the operations of the joint venture acting
under the direction of the supervisory committee.
The manufacturing joint venture operates on a break-even basis and,
accordingly, the Company reports no equity in earnings of the joint venture.
Kronos' cost for its share of the TiO2 produced is equal to its share of the
joint venture's costs. Kronos' share of net costs is reported as cost of sales
as the related TiO2 acquired from the joint venture is sold.
Competition
The TiO2 industry is highly competitive. Kronos competes primarily on
the basis of price, product quality and technical service, and the availability
of high performance pigment grades. Although certain TiO2 grades are considered
specialty pigments, the majority of Kronos' grades and substantially all of
Kronos' production are considered commodity pigments with price generally being
the most significant competitive factor. During 2001 Kronos had an estimated 11%
share of worldwide TiO2 sales volume, and Kronos believes that it is the leading
seller of TiO2 in a number of countries, including Germany and Canada.
Kronos' principal competitors are E.I. du Pont de Nemours & Co.
("DuPont"); Millennium Chemicals, Inc.; Huntsman; Kerr-McGee Corporation; and
Ishihara Sangyo Kaisha, Ltd. Kronos' five largest competitors have estimated
individual shares of TiO2 production capacity ranging from 23% to 5%, and an
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estimated aggregate 70% share of worldwide TiO2 production volume. DuPont has
about one-half of total U.S. TiO2 production capacity and is Kronos' principal
North American competitor.
Capacity additions that are the result of construction of greenfield
plants in the worldwide TiO2 market require significant capital and substantial
lead time, typically three to five years in the Company's experience. No
greenfield plants have been announced, but industry capacity can be expected to
increase as Kronos and its competitors debottleneck existing plants. In addition
to potential capacity additions, certain competitors have announced that they
have either idled or shut down facilities. Based on the factors described under
the caption "Industry" above, the Company expects that the average annual
increase in industry capacity from announced debottlenecking projects will be
less than the average annual demand growth for TiO2 over the next three to five
years.
No assurance can be given that future increases in the TiO2 industry
production capacity and future average annual demand growth rates for TiO2 will
conform to the Company's expectations. If actual developments differ from the
Company's expectations, the Company and the TiO2 industry's performance could be
unfavorably affected.
Research and Development
The Company's expenditures for research and development and certain
technical support programs have averaged approximately $6 million annually
during the past three years. Research and development activities are conducted
principally at the Leverkusen, Germany facility. Such activities are directed
primarily toward improving both the chloride and sulfate production processes,
improving product quality and strengthening Kronos' competitive position by
developing new pigment applications.
Patents and Trademarks
Patents held for products and production processes are believed to be
important to the Company and to the continuing business activities of Kronos.
The Company continually seeks patent protection for its technical developments,
principally in the United States, Canada and Europe, and from time to time
enters into licensing arrangements with third parties.
The Company's major trademarks, including Kronos, are protected by
registration in the United States and elsewhere with respect to those products
it manufactures and sells.
Foreign Operations
The Company's chemical businesses have operated in non-U.S. markets
since the 1920s. Most of Kronos' current production capacity is located in
Europe and Canada with non-U.S. net property and equipment aggregating $323
million at December 31, 2001. Net property and equipment in the U.S., including
50% of the property and equipment of LPC, was $132 million at December 31, 2001.
Kronos' European operations include production facilities in Germany, Belgium
and Norway. Approximately $577 million of the Company's 2001 consolidated sales
were to non-U.S. customers, including $104 million to customers in areas other
than Europe and Canada. Sales to customers in the U.S. aggregated $258 million
in 2001. Foreign operations are subject to, among other things, currency
exchange rate fluctuations and the Company's results of operations have, in the
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past, been both favorably and unfavorably affected by fluctuations in currency
exchange rates. Effects of fluctuations in currency exchange rates on the
Company's results of operations are discussed in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Item 7A. "Quantitative and Qualitative Disclosures about Market Risk."
Political and economic uncertainties in certain of the countries in
which the Company operates may expose it to risk of loss. The Company does not
believe that there is currently any likelihood of material loss through
political or economic instability, seizure, nationalization or similar event.
The Company cannot predict, however, whether events of this type in the future
could have a material effect on its operations. The Company's manufacturing and
mining operations are also subject to extensive and diverse environmental
regulation in each of the foreign countries in which they operate. See
"Regulatory and Environmental Matters."
Customer Base and Seasonality
The Company believes that neither its aggregate sales nor those of any
of its principal product groups are concentrated in or materially dependent upon
any single customer or small group of customers. Kronos' largest ten customers
accounted for approximately 25% of net sales in 2001. Neither the Company's
business as a whole nor that of any of its principal product groups is seasonal
to any significant extent. Due in part to the increase in paint production in
the spring to meet the spring and summer painting season demand, TiO2 sales are
generally higher in the second and third calendar quarters than in the first and
fourth calendar quarters.
Employees
As of December 31, 2001, the Company employed approximately 2,500
persons, excluding the joint venture employees, with approximately 100 employees
in the United States and approximately 2,400 at sites outside the United States.
Hourly employees in production facilities worldwide, including LPC, are
represented by a variety of labor unions, with labor agreements having various
expiration dates. The Company believes its labor relations are good.
Regulatory and Environmental Matters
Certain of the Company's businesses are and have been engaged in the
handling, manufacture or use of substances or compounds that may be considered
toxic or hazardous within the meaning of applicable environmental laws. As with
other companies engaged in similar businesses, certain past and current
operations and products of the Company have the potential to cause environmental
or other damage. The Company has implemented and continues to implement various
policies and programs in an effort to minimize these risks. The policy of the
Company is to maintain compliance with applicable environmental laws and
regulations at all its facilities and to strive to improve its environmental
performance. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect the Company's production, handling, use, storage,
transportation, sale or disposal of such substances as well as the Company's
consolidated financial position, results of operations or liquidity.
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The Company's U.S. manufacturing operations are governed by federal
environmental and worker health and safety laws and regulations, principally the
Resource Conservation and Recovery Act ("RCRA"), the Occupational Safety and
Health Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act,
the Toxic Substances Control Act and the Comprehensive Environmental Response,
Compensation and Liability Act, as amended by the Superfund Amendments and
Reauthorization Act ("CERCLA"), as well as the state counterparts of these
statutes. The Company believes LPC and a slurry facility owned by the Company in
Lake Charles, Louisiana are in substantial compliance with applicable
requirements of these laws or compliance orders issued thereunder. The Company
has no other U.S. plants. From time to time, the Company's facilities may be
subject to environmental regulatory enforcement under such statutes. Resolution
of such matters typically involves the establishment of compliance programs.
Occasionally, resolution may result in the payment of penalties, but to date
such penalties have not involved amounts having a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
The Company's European and Canadian production facilities operate in an
environmental regulatory framework in which governmental authorities typically
are granted broad discretionary powers which allow them to issue operating
permits required for the plants to operate. The Company believes that all its
plants are in substantial compliance with applicable environmental laws.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union (the "EU"). Germany and Belgium are members of the EU and follow
its initiatives. Norway, although not a member, generally patterns its
environmental regulatory actions after the EU. The Company believes that Kronos
is in substantial compliance with agreements reached with European regulatory
authorities and with an EU directive to control the effluents produced by TiO2
production facilities.
The Company has a contract with a third party to treat certain effluents
of its German sulfate-process plants. Either party may terminate the contract
after giving four years advance notice with regard to its Nordenham, Germany
plant. Under certain circumstances, Kronos may terminate the contract after
giving six months notice with respect to treatment of effluents from the
Leverkusen, Germany plant.
The Company's capital expenditures related to its ongoing environmental
protection and improvement programs in 2001 were approximately $5 million, and
are currently expected to be approximately $5 million in 2002 and $4 million in
2003.
The Company has been named as a defendant, potentially responsible party
("PRP"), or both, pursuant to CERCLA and similar state laws in approximately 75
governmental and private actions associated with waste disposal sites, mining
locations and facilities currently or previously owned, operated or used by the
Company, or its subsidiaries, or their predecessors, certain of which are on the
U.S. Environmental Protection Agency's ("U.S. EPA") Superfund National
Priorities List or similar state lists. See Item 3. "Legal Proceedings."
Principal Shareholders
At December 31, 2001, Valhi, Inc. ("Valhi") and Tremont Corporation
("Tremont"), each affiliates of Contran Corporation ("Contran"), held
approximately 61% and 21%, respectively, of NL's outstanding common stock. At
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December 31, 2001, Contran and its subsidiaries held approximately 94% of
Valhi's outstanding common stock, and a company 80% owned by Valhi and 20% owned
by NL held approximately 80% of Tremont's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is the 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.
ITEM 2. PROPERTIES
Kronos currently operates four TiO2 facilities in Europe (Leverkusen and
Nordenham, Germany; Langerbrugge, Belgium; and Fredrikstad, Norway). In North
America, Kronos has a facility in Varennes, Quebec, Canada and, through the
manufacturing joint venture described above, a one-half interest in a plant in
Lake Charles, Louisiana. The Company also owns a slurry plant in Lake Charles,
Louisiana. See Notes 11 and 14 to the Consolidated Financial Statements.
Kronos' principal German operating subsidiary leases the land under its
Leverkusen TiO2 production facility pursuant to a lease expiring in 2050. The
Leverkusen facility, with about one-third of Kronos' current TiO2 production
capacity, is located within an extensive manufacturing complex owned by Bayer
AG. Kronos is the only unrelated party so situated. Under a separate supplies
and services agreement expiring in 2011, Bayer provides some raw materials,
auxiliary and operating materials and utilities services necessary to operate
the Leverkusen facility. Both the lease and the supplies and services agreement
have certain restrictions regarding Kronos' ability to transfer ownership or use
of the Leverkusen facility.
All of Kronos' principal production facilities described above are
owned, except for the land under the Leverkusen facility. Kronos has a
governmental concession with an unlimited term to operate its ilmenite mine in
Norway.
The Company has under lease various corporate and administrative offices
located in the U.S. and various sales offices located in the U.S., France, the
Netherlands, Denmark and the U.K. In January 2002 the Company announced its
intent to close its New York administrative office.
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ITEM 3. LEGAL PROCEEDINGS
Lead pigment litigation
The Company was formerly involved in the manufacture of lead pigments
for use in paint and lead-based paint. During the past 14 years, the Company has
been named as a defendant or third party defendant in various legal proceedings
alleging that the Company and approximately seven other companies that formerly
manufactured lead pigments for use in paint (together, the "former pigment
manufacturers") and lead-based paint are responsible for personal injury,
property damage and governmental expenditures allegedly associated with the use
of these products. These cases assert a combination of claims that generally
include negligent product design, negligent failure to warn, supplier
negligence, fraud and deceit, public and private nuisance, restitution,
indemnification, conspiracy, concert of action, aiding and abetting, strict
liability/failure to warn, and strict liability/defective design, violations of
state consumer protection statutes, enterprise liability, market share
liability, and similar claims. The Company has neither lost nor settled any of
these cases. Considering the Company's previous involvement in the lead pigment
and lead-based paint businesses, there can be no assurance that additional
litigation, similar to that described below, will not be filed.
The Company has not accrued any amounts for this litigation. 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 cases are without merit and will continue to defend the cases
vigorously. Liability that may result, if any, cannot reasonably be estimated.
In 1989 and 1990 the Housing Authority of New Orleans ("HANO") filed
third-party complaints against the former pigment manufacturers and the Lead
Industries Association (the "LIA") in 14 actions commenced by residents of HANO
units seeking compensatory and punitive damages for injuries allegedly caused by
lead pigment. All but two of these actions, Hall v. HANO, et al. (No. 89-3552)
and Allen v. HANO, et al. (No. 89-427) Civil District Court for the Parish of
Orleans, State of Louisiana, have been dismissed. These two cases have been
inactive since 1992.
In June 1989 a complaint was filed in the Supreme Court of the State of
New York, County of New York, against the former pigment manufacturers and the
LIA. Plaintiffs sought damages in excess of $50 million for monitoring and
abating alleged lead paint hazards in public and private residential buildings,
diagnosing and treating children allegedly exposed to lead paint in city
buildings, the costs of educating city residents to the hazards of lead paint,
and liability in personal injury actions against the City and the Housing
Authority based on alleged lead poisoning of city residents (The City of New
York, the New York City Housing Authority and the New York City Health and
Hospitals Corp. v. Lead Industries Association, Inc., et al., No. 89-4617). As a
result of pre-trial motions, the New York City Housing Authority is the only
remaining plaintiff in the case and is pursuing damage claims only with respect
to two housing projects. Discovery is proceeding.
In August 1992 the Company was served with an amended complaint in
Jackson, et al. v. The Glidden Co., et al., Court of Common Pleas, Cuyahoga
County, Cleveland, Ohio (Case No. 236835). Plaintiffs seek compensatory and
punitive damages for personal injury caused by the ingestion of lead, and an
order directing defendants to abate lead-based paint in buildings. Plaintiffs
-9-
purport to represent a class of similarly situated persons throughout the State
of Ohio. While the trial court has denied plaintiffs' motion for class
certification, discovery and pre-trial proceedings are continuing with the
individual plaintiffs.
In December 1998 the Company was served with a complaint on behalf of
four children and their guardians in Sabater, et al. v. Lead Industries
Association, et al. (Supreme Court of the State of New York, County of Bronx,
Index No. 25533/98). Plaintiffs purport to represent a class of all children and
mothers similarly situated in New York State. The complaint seeks damages from
the LIA and other former pigment manufacturers for establishment of property
abatement and medical monitoring funds and compensatory damages for alleged
injuries to plaintiffs. Discovery regarding class certification is proceeding.
In September 1999 an amended complaint was filed in Thomas v. Lead
Industries Association, et al. (Circuit Court, Milwaukee, Wisconsin, Case No.
99-CV-6411) adding as defendants the former pigment manufacturers to a suit
originally filed against plaintiff's landlords. Plaintiff, a minor, alleges
injuries purportedly caused by lead on the surfaces of premises in homes in
which he resided. Plaintiff seeks compensatory and punitive damages, and the
Company has denied liability. Pre-trial motions and discovery are proceeding.
Trial is scheduled for June 2003.
In October 1999 the Company was served with a complaint in State of
Rhode Island v. Lead Industries Association, et al. (Superior Court of Rhode
Island, No. 99-5226). The State seeks compensatory and punitive damages for
medical, school, and public and private building abatement expenses that the
State alleges were caused by lead paint, and for funding of a public education
campaign and health screening programs. Plaintiff seeks judgments of joint and
several liability against the former pigment manufacturers and the LIA. A trial
date has been set for September 2002 at which the issue of whether lead pigment
in paint on Rhode Island buildings is a public nuisance will be tried, and
discovery is proceeding.
In October 1999 the Company was served with a complaint in Cofield, et
al. v. Lead Industries Association, et al. (Circuit Court for Baltimore City,
Maryland, Case No. 24-C-99-004491). Plaintiffs, six homeowners, seek to
represent a class of all owners of nonrental residential properties in Maryland.
Plaintiffs seek compensatory and punitive damages in excess of $20,000 per
household for the existence of lead-based paint in their homes, including funds
for monitoring, detecting and abating lead-based paint in those residences.
Plaintiffs allege that the former pigment manufacturers and other companies
alleged to have manufactured paint and/or gasoline additives, the LIA, and the
National Paint and Coatings Association (the "NPCA") are jointly and severally
liable. In August 2001 plaintiffs voluntarily dismissed substantially all of
their claims, and in December 2001 the trial court dismissed the remaining
claim. The time for appeal of that ruling has not expired.
In October 1999 the Company was served with a complaint in Smith, et al.
v. Lead Industries Association, et al. (Circuit Court for Baltimore City,
Maryland, Case No. 24-C-99-004490). Plaintiffs, seven minors, each seek
compensatory damages of $5 million and punitive damages of $10 million for
alleged injuries due to lead-based paint. Plaintiffs allege that the former
pigment manufacturers and other companies alleged to have manufactured paint
and/or gasoline additives, the LIA, and the NPCA are jointly and severally
liable. The Company has denied liability, and all defendants filed motions to
dismiss various of the claims. In February 2002 the trial court dismissed all
claims except those relating to product liability for lead paint and the
Maryland Consumer Protection Act. Pre-trial proceedings and discovery are
continuing.
-10-
In February 2000 the Company was served with a complaint in City of St.
Louis v. Lead Industries Association, et al. (Missouri Circuit Court 22nd
Judicial Circuit, St. Louis City, Cause No. 002-245, Division 1). Plaintiff
seeks compensatory and punitive damages for its expenses discovering and abating
lead-based paint, detecting lead poisoning and providing medical care and
educational programs for City residents, and the costs of educating children
suffering injuries due to lead exposure. Plaintiff seeks judgments of joint and
several liability against the former pigment manufacturers and the LIA. The
defendants' motion to dismiss the case is currently pending.
In April 2000 the Company was served with a complaint in County of Santa
Clara v. Atlantic Richfield Company, et al. (Superior Court of the State of
California, County of Santa Clara, Case No. CV788657) brought against the former
pigment manufacturers, the LIA and certain paint manufacturers. The County of
Santa Clara seeks to represent a class of California governmental entities
(other than the state and its agencies) to recover compensatory damages for
funds the plaintiffs have expended or will in the future expend for medical
treatment, educational expenses, abatement or other costs due to exposure to, or
potential exposure to, lead paint, disgorgement of profit, and punitive damages.
Santa Cruz, Solano, Alameda, San Francisco, and Kern counties, the cities of San
Francisco and Oakland, the Oakland and San Francisco unified school districts
and housing authorities and the Oakland Redevelopment Agency have joined the
case as plaintiffs. Pre-trial proceedings and discovery are continuing.
In June 2000 two complaints were filed in Texas state court, Spring
Branch Independent School District v. Lead Industries Association, et al.
(District Court of Harris County, Texas, No. 2000-31175), and Houston
Independent School District v. Lead Industries Association, et al. (District
Court of Harris County, Texas, No. 2000-33725). The School Districts seek past
and future damages and exemplary damages for costs they have allegedly incurred
or will incur due to the presence of lead-based paint in their buildings from
the former pigment manufacturers and the LIA . The Company has denied all
liability. Discovery and pre-trial motions are proceeding in both cases. Trial
is scheduled in the Spring Branch case for September 2002.
In June 2000 a complaint was filed in Illinois state court, Lewis, et
al. v. Lead Industries Association, et al. (Circuit Court of Cook County,
Illinois, County Department, Chancery Division, Case No. 00CH09800). Plaintiffs
seek to represent two classes, one of all minors between ages six months and six
years who resided in housing in Illinois built before 1978, and one of all
individuals between ages six and twenty years who lived between ages six months
and six years in Illinois housing built before 1978 and had blood lead levels of
10 micrograms/deciliter or more. The complaint seeks damages jointly and
severally from the former pigment manufacturers and the LIA to establish a
medical screening fund for the first class to determine blood lead levels, a
medical monitoring fund for the second class to detect the onset of latent
diseases, and a fund for a public education campaign. Pre-trial motions by the
defendants to dismiss all claims are pending.
In October 2000 the Company was served with a complaint filed in
California state court, Justice, et al. v. Sherwin-Williams Company, et al.
(Superior Court of California, County of San Francisco, No. 314686). Plaintiffs
are two minors who seek general, special and punitive damages from the former
pigment manufacturers and the LIA for injuries alleged to be due to ingestion of
paint containing lead in their residence. The Company has denied all liability.
Discovery is proceeding.
In January 2001 the Company was served with a complaint in Gaines, et
al., v. The Sherwin-Williams Company, et al. (Circuit Court of Jefferson County,
Mississippi, Civil Action No. 2000-0604). The complaint seeks joint and several
-11-
liability for compensatory and punitive damages from the Company,
Sherwin-Williams, and four local paint retailers on behalf of a minor and his
mother alleging injuries due to exposure to lead pigment and/or paint. The case
has been removed to federal court and that court has dismissed the local paint
retailers. Discovery and pre-trial motions are proceeding.
In February 2001 the Company was served with a complaint in Borden, et
al. v. The Sherwin-Williams Company, et al. (Circuit Court of Jefferson County,
Mississippi, Civil Action No. 2000-587). The complaint seeks joint and several
liability for compensatory and punitive damages from more than 40 manufacturers
and retailers of lead pigment and/or paint, including the Company, on behalf of
18 adult residents of Mississippi who were allegedly exposed to lead during
their employment in construction and repair activities. Pre-trial proceedings
are continuing.
In May 2001 the Company was served with a complaint in City of Milwaukee
v. NL Industries, Inc. and Mautz Paint (Circuit Court, Civil Division, Milwaukee
County, Wisconsin, Case No. 01CV003066). Plaintiff seeks compensatory and
equitable relief for lead hazards in Milwaukee homes, restitution for amounts it
has spent to abate lead, and punitive damages. The Company has denied all
liability. Pre-trial proceedings are continuing.
In May 2001 the Company was served with a complaint in Harris County,
Texas v. Lead Industries Association, et al. (District Court of Harris County,
Texas, No. 2001-21413). The complaint seeks actual and punitive damages and
asserts claims jointly and severally against the former pigment manufacturers
and the LIA for past and future damages due to the presence of lead paint in
County-owned buildings. The Company has denied all liability. Discovery and
pre-trial motions are continuing.
In June 2001 a complaint was filed in Jefferson County School District
v. Lead Industries Association, et al. (Circuit Court of Jefferson County,
Mississippi, Case No. 2001-69). The complaint seeks joint and several liability
for compensatory and punitive damages for the abatement of lead paint in
Jefferson County Schools from the former pigment manufacturers and local paint
retailers. The Company has denied all liability. The case was removed to federal
court and pre-trial proceedings are continuing.
In December 2001 the Company was served with a complaint in Quitman
County School District v. Lead Industries Association, et al. (Circuit Court of
Quitman County, Mississippi, Case No. 2001-0106). The complaint asserts joint
and several liability and seeks compensatory and punitive damages for the
abatement of lead paint in Quitman County schools from the former pigment
manufacturers, local paint retailers and others. The Company has denied all
liability. Pre-trial proceedings, including those related to the removal of the
case to federal court, are continuing.
In January and February 2002 the Company was served with complaints by
22 New Jersey municipalities and counties which have been consolidated as In re:
Lead Paint Litigation, Superior Court of New Jersey, Middlesex County, Case Code
702. Each complaint seeks abatement of lead paint from all housing and all
public buildings in each jurisdiction and punitive damages jointly and severally
from the former pigment manufacturers and the LIA. The Company intends to deny
all allegations of liability.
In January 2002 the Company was served with a complaint in Jackson, et
al., v. Phillips Building Supply of Laurel, et al., Circuit Court of Jones
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County, Mississippi, Dkt. Co. 2002-10-CV1. The complaint seeks joint and several
liability from three local retailers and six non-Mississippi companies that sold
paint for compensatory and punitive damages on behalf of four adults for
injuries alleged to have been caused by the use of lead paint. The case has been
removed to federal court. The Company has denied all allegations of liability
and pre-trial proceedings are continuing.
In February 2002 the Company was served with a complaint in Liberty
Independent School District v. Lead Industries Association, et al. , District
Court of Liberty County, Texas, No. 63,332. The school district seeks
compensatory and punitive damages jointly and severally from the former pigment
manufacturers and the LIA for property damage to its buildings. The Company has
denied all allegations of liability.
In addition to the foregoing litigation, 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. While no legislation or regulations have been enacted to date which
are expected to have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity, the imposition of market
share liability or other legislation could have such an effect.
The Company has filed actions seeking declaratory judgment and other
relief against various insurance carriers with respect to costs of defense and
indemnity coverage for certain of its environmental and lead pigment litigation.
NL Industries, Inc. v. Commercial Union Insurance Cos., et al., Nos. 90-2124,
- -2125 (HLS) (District Court of New Jersey). The action relating to lead pigment
litigation defense costs filed in May 1990 against Commercial Union Insurance
Company ("Commercial Union") sought to recover defense costs incurred in the
City of New York lead pigment case and two other lead pigment cases which have
since been resolved in the Company's favor. The action relating to lead paint
litigation defense costs has been settled. The Company has also settled
insurance coverage claims concerning environmental claims with certain of the
defendants in the New Jersey environmental coverage litigation, including the
Company's principal former carriers, as more fully described below. The settled
claims are to be dismissed from the New Jersey litigation in accordance with the
terms of the settlement agreements. The Company also continues to negotiate with
several other insurance carriers with respect to possible settlement of claims
that are being asserted in the New Jersey environmental litigation, although
there can be no assurance that settlement agreements can be reached with these
other carriers. No further material settlements relating to litigation
concerning environmental remediation coverage are expected. The issue of whether
insurance coverage for defense costs or indemnity or both will be found to exist
for lead pigment litigation depends upon a variety of factors, and there can be
no assurance that such insurance coverage will be available. The Company has not
considered any potential insurance recoveries for lead pigment or environmental
litigation in determining related accruals.
-13-
Environmental matters and litigation
The Company has been named as a defendant, PRP, or both, pursuant to
CERCLA and similar state laws in approximately 75 governmental and private
actions associated with waste disposal sites, mining locations and facilities
currently or previously owned, operated or used by the Company, or its
subsidiaries, or their predecessors, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. These proceedings
seek cleanup costs, damages for personal injury or property damage, and/or
damages for injury to natural resources. Certain of these proceedings involve
claims for substantial amounts. Although the Company may be jointly and
severally liable for such costs, in most cases it is only one of a number of
PRPs who may also be jointly and severally liable.
The extent of CERCLA liability cannot accurately be determined until the
Remedial Investigation and Feasibility Study ("RIFS") is complete, the U.S. EPA
issues a record of decision and costs are allocated among PRPs. The extent of
liability under analogous state cleanup statutes and for common law equivalents
are subject to similar uncertainties. The Company believes it has provided
adequate accruals for reasonably estimable costs for CERCLA matters and other
environmental liabilities. At December 31, 2001, the Company had accrued $107
million for those environmental matters which are reasonably estimable. The
Company determines the amount of accrual on a quarterly basis by analyzing and
estimating the range of reasonably possible costs to the Company. Such costs
include, among other things, expenditures for remedial investigations,
monitoring, managing, studies, certain legal fees, cleanup, removal and
remediation. 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 $160 million. The Company's estimate of such liability
has not been discounted to present value and the Company has not reduced its
accruals for any potential insurance recoveries. 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 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. More detailed descriptions of certain
legal proceedings relating to environmental matters are set forth below.
In June 2000 the Company recognized a $43 million net gain from a
settlement with one of the two principal former insurance carriers, and in
December 2000 the Company recognized a $26.5 million net gain from a settlement
with certain members of the other principal former insurance carrier. The
settlement gains are stated net of $3.1 million in commissions, and the gross
settlement proceeds of $72.6 million were transferred by the carriers to special
purpose trusts established to pay future remediation and other environmental
expenditures of the Company. A settlement with remaining members of the second
carrier group was reached in January 2001, and the Company recognized a $10.3
million gain in the first quarter of 2001. In 2001 the Company also recognized
$1.4 million of other litigation settlement gains. The settlements resolved
court proceedings that the Company initiated to seek reimbursement for legal
defense expenditures and indemnity coverage for certain of its environmental
remediation expenditures. No further material settlements relating to litigation
-14-
concerning environmental remediation coverage are expected. See Note 16 to the
Consolidated Financial Statements.
In July 1991 the United States filed an action in the U.S. District
Court for the Southern District of Illinois against the Company and others
(United States of America v. NL Industries, Inc., et al., Civ. No. 91-CV 00578)
with respect to the Granite City, Illinois lead smelter formerly owned by the
Company. The complaint seeks injunctive relief to compel the defendants to
comply with an administrative order issued pursuant to CERCLA, and fines and
treble damages for the alleged failure to comply with the order. The Company and
the other parties did not implement the order, believing that the remedy
selected by the U.S. EPA was invalid, arbitrary, capricious and was not selected
in accordance with law. The complaint also seeks recovery of past costs and a
declaration that the defendants are liable for future costs. Although the action
was filed against the Company and ten other defendants, there are 330 other PRPs
who have been notified by the U.S. EPA. Some of those notified were also
respondents to the administrative order. In September 1995 the U.S. EPA released
its amended decision selecting cleanup remedies for the Granite City site. In
September 1997 the U.S. EPA informed the Company that past and future cleanup
costs are estimated to total approximately $63.5 million. In 1999 the U.S. EPA
and certain other PRPs entered into a consent decree settling their liability at
the site for approximately 50% of the site costs. The Company and the U.S. EPA
reached an agreement in principle in 1999 to settle the Company's liability at
the site for $31.5 million. The Company and the U.S. EPA are negotiating a
consent decree embodying the terms of this agreement in principle.
The Company reached an agreement in 1999 with the other PRPs at a
formerly owned lead smelter site in Pedricktown, New Jersey to settle the
Company's liability for $6 million, of which $4.8 million has been paid as of
December 31, 2001. The settlement does not resolve issues regarding the
Company's potential liability in the event site costs exceed $21 million. The
Company does not presently expect site costs to exceed such amount and has not
provided accruals for such contingency.
In 1998 the Company reached an agreement to settle litigation with the
other PRPs at a lead smelter site in Portland, Oregon that was formerly owned by
the Company. Under the agreement, the Company agreed to pay a portion of future
cleanup costs. In 2000 the construction of the remediation was completed and is
now in the operation and maintenance phase.
In 2000 the Company reached an agreement with the other PRPs at the
Baxter Springs subsite in Cherokee County, Kansas, to resolve the Company's
liability. The Company and others formerly mined lead and zinc in the Baxter
Springs subsite. Under the agreement, the Company agreed to pay a portion of the
cleanup costs associated with the Baxter Springs subsite. The U.S. EPA has
estimated the total cleanup costs in the Baxter Springs subsite to be $5.4
million. The remedial action phase of the cleanup is underway.
In 1996 the U.S. EPA ordered the Company to perform a removal action at
a formerly owned facility in Chicago, Illinois. The Company has complied with
the order and has completed the on-site work at the facility. The Company is
conducting an investigation regarding potential offsite contamination.
Residents in the vicinity of the Company's former Philadelphia lead
chemicals plant commenced a class action allegedly comprised of over 7,500
individuals seeking medical monitoring and damages allegedly caused by emissions
-15-
from the plant. Wagner, et al. v. Anzon, Inc. and NL Industries, Inc., No.
87-4420, Court of Common Pleas, Philadelphia County. The complaint sought
compensatory and punitive damages from the Company and the current owner of the
plant, and alleged causes of action for, among other things, negligence, strict
liability, and nuisance. A class was certified to include persons who resided,
owned or rented property, or who work or have worked within up to approximately
three-quarters of a mile from the plant from 1960 through the present. In
December 1994 the jury returned a verdict in favor of the Company and the
verdict was affirmed on appeal. Residents also filed consolidated actions in the
United States District Court for the Eastern District of Pennsylvania, Shinozaki
v. Anzon, Inc. and Wagner and Antczak v. Anzon and NL Industries, Inc. Nos.
87-3441, 87-3502, 87-4137 and 87-5150. The consolidated action is a putative
class action seeking CERCLA response costs, including cleanup and medical
monitoring, declaratory and injunctive relief and civil penalties for alleged
violations of the RCRA, and also asserting pendent common law claims for strict
liability, trespass, nuisance and punitive damages. The court dismissed the
common law claims without prejudice, dismissed two of the three RCRA claims as
against the Company with prejudice, and stayed the case pending the outcome of
the state court litigation.
In 2000 the Company reached an agreement with the other PRPs at the
Batavia Landfill Superfund Site in Batavia, New York to resolve the Company's
liability. The Batavia Landfill is a former industrial waste disposal site.
Under the agreement, the Company agreed to pay 40% of the future remedial
construction costs, which the U.S. EPA has estimated to be approximately $11
million in total. Under the settlement, the Company is not responsible for costs
associated with the operation and maintenance of the remedy. In addition, the
Company received approximately $2 million from settling PRPs. The remedial
action phase of the remedy is underway.
In October 2000 the Company was served with a complaint in Pulliam, et
al. v. NL Industries, Inc., et al., No. 49F12-0104-CT-001301, filed in superior
court in Marion County, Indiana, on behalf of an alleged class of all persons
and entities who own or have owned property or have resided within a one-mile
radius of an industrial facility formerly owned by a subsidiary of the Company
in Indianapolis, Indiana. Plaintiffs allege that they and their property have
been injured by lead dust and particulates from the facility and seek
unspecified actual and punitive damages and a removal of all alleged lead
contamination under various theories, including negligence, strict liability,
battery, nuisance and trespass. In December 2000 the Company answered the
complaint denying all allegations of wrongdoing and liability. Discovery is
proceeding.
See Item 1. "Business - Regulatory and Environmental Matters."
Other litigation
The Company has been named as a defendant in various lawsuits in a
variety of jurisdictions alleging personal injuries as a result of occupational
exposure to asbestos, silica and/or mixed dust in connection with formerly owned
operations. Various of these actions remain pending, including the following
matters.
In March 1997 the Company was served with a complaint in Ernest Hughes,
et al. v. Owens-Corning Fiberglass, Corporation, et al., No. 97-C-051, 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 seeking compensatory and punitive damages. The Company has filed
an answer denying the material allegations. The case has been inactive since
1998.
-16-
In February 1999 and October 2000 the Company was served with complaints
in Cosey, et al. v. Bullard, et al., No. 95-0069, and Pierce, et al. v. GAF, et
al., No. 2006-150, filed in the Circuit Court of Jefferson County, Mississippi,
on behalf of approximately 4,600 plaintiffs and 275 plaintiffs, respectively,
alleging injury due to exposure to asbestos and/or silica and seeking
compensatory and punitive damages. The Cosey case was removed to federal court
and has been transferred to the eastern district of Pennsylvania for
consolidated proceedings. The Company has filed answers in both cases denying
the material allegations of the complaint.
In addition, the Company is a defendant in various asbestos, silica
and/or mixed dust cases pending in various jurisdictions on behalf of
approximately 6,900 personal injury claimants.
In August and September 2000 the Company and one of its subsidiaries,
NLO, Inc. ("NLO"), were named as defendants in four lawsuits filed in federal
court in the Western District of Kentucky against the Department of Energy
("DOE") and a number of other defendants alleging that nuclear materials
supplied by, among others, the Feed Materials Production Center ("FMPC") in
Fernald, Ohio, owned by the DOE and formerly managed under contract by NLO,
harmed employees and others at the DOE's Paducah, Kentucky Gaseous Diffusion
Plant ("PGDP"). With respect to each of the cases listed below, the Company
believes that the DOE is obligated to provide defense and indemnification
pursuant to its contract with NLO, and pursuant to its statutory obligation to
do so, as the DOE has in several previous cases relating to management of the
FMPC, and the Company has so advised the DOE. Answers in the four cases have not
been filed. The Company and NLO have moved to dismiss the complaints in all four
actions and, as described below, three of the cases have been settled subject to
court approval. If those motions are not granted, the Company and NLO intend to
deny all allegations of wrongdoing and liability and to defend the cases
vigorously.
* In Rainer, et al. v. E.I. du Pont de Nemours, et al., ("Rainer I") No.
5:00CV-223-M, plaintiffs purport to represent a class of former
employees at the PGDP and a class consisting of members of the former
employees' households and seek actual and punitive damages of $5 billion
each for alleged negligence, infliction of emotional distress,
ultra-hazardous activity/strict liability, strict products liability and
battery. No answer or response to that complaint is yet due.
* In Rainer, et al. v. Bill Richardson, et al. ("Rainer II"), No.
5:00CV-220-M, plaintiffs purport to represent the same classes regarding
the same matters alleged in Rainer I, and allege a violation of
constitutional rights and seek the same recovery sought in Rainer I, as
well as asserting claims for battery, fraud, deceit, and
misrepresentation, infliction of emotional distress, negligence, and
conspiracy, concert of action, joint venture and enterprise liability.
No answer or response to that complaint is yet due.
* In Dew, et al. v. Bill Richardson, et al. ("Dew"), No. 5:00CV-221-M,
plaintiffs purport to represent classes of all PGDP employees who
sustained pituitary tumors or cancer as a result of exposure to
radiation and seek actual and punitive damages of $2 billion each for
alleged violation of constitutional rights, assault and battery, fraud
and misrepresentation, infliction of emotional distress, negligence,
ultra-hazardous activity/strict liability, strict products liability,
conspiracy, concert of action, joint venture and enterprise liability,
and equitable estoppel. Pre-trial proceedings and discovery continue.
-17-
* In Shaffer, et al. v. Atomic Energy Commission, et al. ("Shaffer"), No.
5:00CV-307-M, plaintiffs purport to represent classes of PGDP employees
and household members, subcontractors at PGDP, and landowners near the
PGDP and seek actual and punitive damages of $1 billion each and medical
monitoring for the same counts alleged in Dew. In March 2001, the
magistrate judge ordered that the landowner plaintiffs be severed from
the action and pursue their claims in a separate action, Oreskovich v.
Atomic Energy Commission, No. 01CV-63-M. All of the Oreskovich
plaintiffs subsequently dismissed their claims against the Company and
NLO with prejudice.
Subject to court approval, the Company and NLO have reached an agreement
pursuant to which the Rainer I, Rainer II, and Shaffer cases against the Company
and NLO will be settled and dismissed with prejudice. The trial court approved
the settlement in March 2002; the time during which the approval may be appealed
has not yet expired. The DOE has agreed to reimburse the Company for the
settlement amount.
The Company is also involved in various other environmental,
contractual, product liability and other claims and disputes incidental to its
present and former businesses, and the disposition of past properties and former
businesses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 2001.
-18-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NL's common stock is listed and traded on the New York Stock Exchange
and the Pacific Exchange under the symbol "NL." As of March 14, 2002, there were
approximately 6,000 holders of record of NL common stock. The following table
sets forth the high and low sales prices for NL common stock on the New York
Stock Exchange ("NYSE") Composite Tape. On March 14, 2002, the closing price of
NL common stock according to the NYSE Composite Tape was $16.17.
Dividends
High Low Declared
--------- --------- ----------
Year ended December 31, 2001:
First quarter ................... $ 24.31 $ 16.25 $ .20
Second quarter .................. 18.00 11.60 .20
Third quarter ................... 16.75 13.80 .20
Fourth quarter .................. 15.70 12.04 .20
Year ended December 31, 2000:
First quarter ................... $ 16.38 $ 13.00 $ .15
Second quarter .................. 19.00 13.13 .15
Third quarter ................... 24.38 15.50 .15
Fourth quarter .................. 25.00 18.94 .20
The Company's indenture to its 11.75% Senior Secured Notes due 2003
limits the ability of the Company to pay dividends, acquire treasury shares and
make other restricted payments, as defined. The aggregate amount of dividends
and other restricted payments since October 1993 may not exceed 50% of the
aggregate consolidated net income, as defined in the indenture, since October
1993. At December 31, 2001, $20 million was available for restricted payments
including dividends, acquisition of treasury shares and affiliate stock
purchases.
The Company paid four quarterly $.20 per share cash dividends in 2001.
On February 6, 2002, the Company's Board of Directors declared a regular
quarterly dividend of $.20 per share to shareholders of record as of March 8,
2002 to be paid on March 22, 2002. The declaration and payment of future
dividends is discretionary, and the amount, if any, will be dependent upon the
Company's results of operations, financial condition, contractual restrictions
and other factors deemed relevant by the Company's Board of Directors.
Pursuant to its share repurchase program, the Company purchased
1,059,000 shares of its common stock in the open market at an aggregate cost of
$15.5 million in 2001, 1,682,000 shares of its common stock at an aggregate cost
of $30.9 million in 2000 and 552,000 shares of its common stock in the open
market at an aggregate cost of $7.2 million in 1999. Approximately 1,207,000
additional shares are available for purchase under the Company's share
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.
-19-
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read
in conjunction with the Consolidated Financial Statements and Notes thereto, and
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations." Certain amounts have been reclassified to conform with the
current year's consolidated financial statement presentation.
Years ended December,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------ ------------ ------------- ---------------
(In millions, except per share amounts)
INCOME STATEMENT DATA:
Net sales ...................................... $ 835.1 $ 922.3 $ 908.4 $ 894.7 $ 837.2
Operating income ............................... 169.2 212.5 145.7 171.2 82.5
Income (loss) from continuing operations ....... 121.4 155.3 159.8 89.9 (29.9)
Net income (loss) .............................. 121.4 154.6 159.8 366.7 (9.5)
Earnings per share:
Basic:
Income (loss) from continuing operations $ 2.44 $ 3.08 $ 3.09 $ 1.75 $ (.58)
Net income (loss) ...................... 2.44 3.07 3.09 7.13 (.19)
Diluted:
Income (loss) from continuing operations $ 2.44 $ 3.06 $ 3.08 $ 1.73 $ (.58)
Net income (loss) ...................... 2.44 3.05 3.08 7.05 (.19)
Cash dividends per share ....................... $ .80 $ .65 $ .14 $ .09 $ --
BALANCE SHEET DATA at year end:
Cash, cash equivalents, current and
noncurrent restricted cash equivalents and
current and noncurrent marketable debt
securities ................................... $ 199.0 $ 207.6 $ 151.8 $ 163.1 $ 106.1
Current assets ................................. 559.1 553.8 506.4 546.8 454.9
Total assets ................................... 1,151.1 1,120.8 1,056.2 1,155.6 1,098.5
Current liabilities ............................ 299.1 298.0 264.8 310.7 276.7
Long-term debt including current maturities .... 196.5 196.1 244.5 357.6 744.2
Shareholders' equity (deficit) ................. 386.9 344.5 271.1 152.3 (222.3)
CASH FLOW DATA:
Operating activities ........................... $ 129.7 $ 139.7 $ 108.3 $ 45.1 $ 89.2
Investing activities ........................... (57.2) (56.2) (38.4) 417.3 (11.1)
Financing activities ........................... (75.5) (95.7) (88.0) (396.2) (82.6)
Operating, investing and financing activities .. (3.0) (12.2) (18.1) 66.2 (4.5)
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (1) ..................................... $ 206.7 $ 286.3 $ 162.5 $ 187.4 $ 67.6
-20-
Years ended December,
------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In millions, except per share amounts)
OTHER DATA:
Net debt at year end (2) .............. $ 43.7 $ 58.5 $149.8 $226.7 $652.0
Interest expense, net (3) ............. 18.7 22.9 30.3 43.1 63.0
Cash interest expense, net (4) ........ 21.8 23.8 28.6 24.8 39.9
Capital expenditures .................. 53.7 31.1 35.6 22.4 28.2
TiO2 OPERATING STATISTICS:
Average selling price in billing
currencies index (1983=100) ..... 156 161 153 154 133
Sales volumes (metric tons in
thousands) ...................... 402 436 427 408 427
Production volume (metric tons in
thousands) ...................... 412 441 411 434 408
Production capacity at beginning of
year (metric tons in thousands) . 450 440 440 420 400
Production rate as a percentage of
capacity ........................ 91% Full 93% Full Full
(1) EBITDA, as presented, represents operating income less corporate
expense, plus (i) litigation settlement gains, net, (ii) other corporate
income, (iii) depreciation, depletion and amortization and (iv)
insurance recoveries, net. EBITDA is presented as a supplement to the
Company's operating income and cash flow from operations because the
Company believes that EBITDA is a widely accepted financial indicator of
cash flows and the ability to service debt. EBITDA should not be
considered as an alternative to, or more meaningful than, operating
income or net income determined under U.S. generally accepted accounting
principles ("GAAP") as an indicator of the Company's operating
performance, or cash flows from operating, investing and financing
activities determined under GAAP as a measure of liquidity. EBITDA is
not intended to depict funds available for reinvestment or other
discretionary uses, as the Company has significant debt requirements and
other commitments. Investors should consider certain factors in
evaluating the Company's EBITDA, including interest expense, income
taxes, noncash income and expense items, changes in assets and
liabilities, capital expenditures, investments in joint ventures and
other items included in GAAP cash flows as well as future debt repayment
requirements and other commitments, including those described in
Notes11, 14 and 20 to the Consolidated Financial Statements. The Company
believes that the trend of its EBITDA is consistent with the trend of
its GAAP operating income, except in (i) 1997 when EBITDA decreased and
operating income increased from 1996 amounts due to a $30 million
noncash charge related to the Company's adoption of SOP 96-1,
"Environmental Remediation Liabilities" and (ii) 2000 when $70 million
of net litigation settlement gains are included in EBITDA and excluded
from operating income, which treatment results in a higher percentage
increase over 1999 for EBITDA as compared to the percentage increase
over 1999 for operating income. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a
discussion of operating income and cash flows during the last three
years and the Company's outlook. EBITDA as a measure of a company's
performance may not be comparable to other companies, unless
substantially all companies and analysts determine EBITDA as computed
and presented herein.
(2) Net debt represents notes payable and long-term debt less cash, cash
equivalents, current and noncurrent restricted cash equivalents and
current and noncurrent marketable debt securities.
-21-
(3) Interest expense, net represents interest expense less general corporate
interest and dividend income.
(4) Cash interest expense, net represents interest expense, net as defined
in (3) above less noncash interest expense plus noncash interest income.
Noncash interest expense includes deferred interest expense on the
Senior Secured Discount Notes in 1996 through 1998 and amortization of
deferred financing costs. Noncash interest income includes interest
income on restricted cash and restricted marketable debt securities in
2001 and 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon the Company's consolidated
financial statements, which have been prepared in accordance with generally
accepted accounting principles in the U.S. ("GAAP"). The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reported period. On an
on-going basis, the Company evaluates its estimates, including those related to
inventory reserves, impairments of investments in marketable equity securities
and investments accounted for by the equity method, the recoverability of other
long-lived assets, pension and other post-retirement benefit obligations and the
underlying actuarial assumptions related thereto, and the realization of
deferred income tax assets and accruals for environmental remediation,
litigation, income tax and other contingencies. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the reported amounts of assets, liabilities, revenues and
expenses. Actual results may differ from previously-estimated amounts under
different assumptions or conditions.
The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements:
* The Company provides reserves for estimated obsolescence or unmarketable
finished goods inventory equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about
future demand for its products and market conditions. If actual market
conditions are less favorable than those projected by management,
additional finished goods inventory reserves may be required. The
Company provides reserves for tools and supplies inventory generally
based on both historical and expected future usage requirements.
-22-
* The Company owns investments in certain companies that are accounted for
either as marketable equity securities or under the equity method. For
all of such investments, the Company records an impairment charge when
it believes an investment has experienced a decline in fair value that
is other than temporary. Future adverse changes in market conditions or
poor operating results of underlying investments could result in losses
or an inability to recover the carrying value of the investments that
may not be reflected in an investment's current carrying value, thereby
possibly requiring an impairment charge in the future.
* The Company recognizes an impairment charge associated with its
long-lived assets, including property and equipment, whenever it
determines that recovery of such long-lived asset is not probable. Such
determination is made in accordance with applicable GAAP requirement
associated with the long-lived asset, and is based upon, among other
things, estimates of the amount of future net cash flows to be generated
by the long-lived asset and estimates of the current fair value of the
asset. Adverse changes in such estimates of future net cash flows or
estimates of fair value could result in an inability to recover the
carrying value of the long-lived asset, thereby possibly requiring an
impairment charge to be recognized in the future.
* The Company records a valuation allowance to reduce its deferred income
tax assets to the amount that is believed to be realizable under the
"more-likely-than-not" recognition criteria. While the Company has
considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance, it
is possible that in the future the Company may change its estimate of
the amount of the deferred income tax assets that would
"more-likely-than-not" be realized, resulting in an adjustment to the
deferred income tax asset valuation allowance that would either increase
or decrease, as applicable, reported net income in the period such
change in estimate was made.
* The Company records an accrual for environmental, legal, income tax and
other contingencies when estimated future expenditures associated with
such contingencies become probable, and the amounts can be reasonably
estimated. However, new information may become available, or
circumstances (such as applicable laws and regulations) may change,
thereby resulting in an increase or decrease in the amount required to
be accrued for such matters (and therefore a decrease or increase in
reported net income in the period of such change).
RESULTS OF OPERATIONS
General
The Company's operations are conducted by Kronos in the TiO2 business
segment. As discussed below, average TiO2 selling prices in billing currencies
(which excludes the effects of foreign currency translation) decreased in 2001
compared with 2000 and increased in 2000 compared with 1999. Kronos' operating
income declined $43.3 million in 2001 compared with 2000 and increased $66.8
million in 2000 compared with 1999. Gross profit margins were 31% in 2001, 34%
in 2000 and 27% in 1999.
-23-
Many factors influence TiO2 pricing levels, including (i) industry
capacity, (ii) worldwide demand growth, (iii) customer inventory levels and
purchasing decisions and (iv) relative changes in foreign currency exchange
rates. Kronos believes that the TiO2 industry has long-term growth potential, as
discussed in "Item 1. Business - Industry" and "- Competition."
Years ended December 31, % Change
--------------------------------- ---------------------
2001 2000 1999 2001-00 2000-99
---------- ---------- ----------- ---------- ----------
(In millions)
Net sales and operating income
Net sales ........................ $835.1 $922.3 $908.4 -9% + 2%
Operating income ................. $169.2 $212.5 $145.7 -20% +46%
Operating income margin percentage 20% 23% 16%
TiO2 operating statistics
Percent change in average selling
prices (in billing currencies) . -3% +6%
Sales volume (metric tons in
thousands) ..................... 402 436 427 -8% +2%
Production volume (metric tons in
thousands) ..................... 412 441 411 -6% +7%
Production rate as a percent of
capacity ....................... 91% Full 93%
Kronos' operating income in 2001, including business interruption
proceeds of $27.3 million, was lower than 2000, primarily due to lower average
TiO2 selling prices in billing currencies and lower sales and production
volumes. Kronos' operating income for 2000 was higher than 1999 due to higher
average TiO2 selling prices in billing currencies and higher production and
sales volumes.
Average TiO2 selling prices in billing currencies during 2001 were 3%
lower than 2000, with lower prices in all major regions. Pigment prices
decreased from the preceding quarter during each quarter of 2001, reversing the
upward trend that began in the fourth quarter of 1999 and continued through the
fourth quarter of 2000. The rate of price declines increased in the fourth
quarter of 2001 to 5% over the third quarter of 2001, and December 2001 prices
were 2% lower than the average selling price for the quarter. The average
selling price in billing currencies in December 2001 was 13% below the December
2000 average selling price. The most significant price erosion during this time
period occurred in the European and export markets. TiO2 average selling prices
continued to trend downward in the first quarter of 2002. Average TiO2 selling
prices in billing currencies in 2000 were 6% higher than 1999, with higher
prices in all major regions.
Industry-wide demand was weak throughout 2001 as compared to 2000 and
1999 levels. Sales volume of 402,000 metric tons of TiO2 in 2001 was 8% lower
than 2000, primarily due to lower sales in Europe and North America. Kronos'
sales volume in the fourth quarter of 2001 decreased 1% from the fourth quarter
of 2000 and 11% from the third quarter of 2001. Approximately one-half of
Kronos' 2001 TiO2 sales volume was attributable to markets in Europe with
approximately 38% attributable to North America, and the balance to other
regions. Sales volume in 2000 was 2% higher than 1999, primarily due to higher
sales in Europe and North America. Industry-wide demand was weak in early 1999.
Demand in the second half of 1999 and the first three quarters of 2000 was
stronger than comparable year-earlier periods as a result of, among other
things, customers buying in advance of anticipated price increases. Demand
softened in the fourth quarter of 2000 and weakened throughout 2001.
-24-
The Company's production volume was 412,000 metric tons in 2001, a
decrease of 6% from a record 441,000 metric tons produced in 2000. Operating
rates were at 91% in 2001 down from near full capacity in 2000, primarily due to
lost production resulting from the Leverkusen fire and the Company's decision to
curtail production in the fourth quarter of 2001 as demand remained soft.
Kronos' production volume in 2000 increased 7% compared with the 411,000 metric
tons produced in 1999. Operating rates in 1999 were 93%. Production volume was
curtailed in the beginning of the first quarter of 1999 in order to manage
inventory levels. Finished goods inventory levels increased in the fourth
quarter of 2001 and at the end of 2001 represented approximately two and
one-half months of sales.
The Company settled the insurance coverage 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 reflects
recovery of lost margin ($7.2 million) and as a reduction of cost of sales to
offset unallocated period costs ($20.1 million). The business interruption
insurance proceeds distorted Kronos' operating income margin percentage in 2001
as there were no sales associated with the lost margin operating income
recognized. No additional insurance recoveries related to the Leverkusen fire
are expected to be received. See Notes 15 and 17 to the Consolidated Financial
Statements.
The Company's efforts to debottleneck Kronos' production facilities to
meet long-term demand continue to prove successful. The Company expects Kronos'
production capacity of 455,000 metric tons at the end of 2001 will be increased
to approximately 480,000 metric tons during 2005, primarily at its chloride
facilities, with moderate capital expenditures.
The Company expects TiO2 industry demand in 2002 will 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 late in the first quarter of
2002 and early in the second quarter of 2002. Kronos is hopeful that it will
realize such announced prices 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 generally declining during all of 2001, the Company believes that
its average 2002 prices in billing currencies will be significantly below its
average 2001 prices, even if the recently-announced 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 market place, 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.
-25-
Excluding the effects of foreign currency translation, which reduced the
Company's expenses in both 2001 and 2000 compared to the year-earlier periods,
Kronos' cost of sales in 2001 was lower than 2000 due to lower sales volume
partially offset by higher unit costs, which resulted primarily from lower
production levels. The effects of lower TiO2 sales volume and production volume
were partially offset by business interruption proceeds. Kronos' cost of sales
in 2000 was lower than 1999 primarily due to lower unit costs, which resulted
primarily from higher production levels. Cost of sales, as a percentage of net
sales, increased in 2001 primarily due to the impact on net sales of lower
average selling prices and higher unit costs partially offset by business
interruption insurance recoveries, and decreased in 2000 primarily due to the
impact on net sales of higher average selling prices and lower unit costs.
Excluding the effects of foreign currency translation, which reduced the
Company's expense in both 2001 and 2000 compared to the year-earlier periods,
selling, general and administrative expenses ("SG&A"), excluding corporate
expenses, decreased in 2001 from the year-earlier period due to lower variable
compensation expense and lower selling and distribution expenses associated with
lower 2001 sales volume. SG&A, excluding corporate expenses, increased in 2000
from the year-earlier period primarily due to higher variable compensation
expense and higher selling and distribution expenses associated with higher 2000
sales volumes. SG&A, excluding corporate expenses, as a percentage of net sales,
was 12% in each of 2001, 2000 and 1999. See discussion of corporate expenses
below.
The Company has substantial operations and assets located outside the
United States (principally Germany, Norway, Belgium and Canada). The Company's
non-U.S. sales and operating costs are subject to currency exchange rate
fluctuations which may impact reported earnings and may affect the comparability
of period-to-period revenues and expenses expressed in U.S. dollars. A
significant amount of the Company's sales (57% in 2001) are denominated in
currencies other than the U.S. dollar, principally the euro, other major
European currencies and the Canadian dollar. Certain purchases of raw materials,
primarily titanium-containing feedstocks, are denominated in U.S. dollars, while
labor and other production costs are primarily denominated in local currencies.
Fluctuations in the value of the U.S. dollar relative to other currencies,
primarily a stronger U.S. dollar compared to the euro, decreased sales by $19
million and $68 million during 2001 and 2000, respectively, compared with the
year-earlier period. When translated to U.S. dollars using currency exchange
rates prevailing during the respective periods, Kronos' average selling prices
for 2001 decreased 5% from 2000. Kronos' average selling prices in U.S. dollars
for 2000 decreased 1% from 1999. The effect of the stronger U.S. dollar on
Kronos' operating costs that are not denominated in U.S. dollars reduced
operating costs in 2001 and 2000 compared with the respective prior year. 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 2001 and 2000 was not significant when
compared to the year-earlier periods.
-26-
General corporate
The following table sets forth certain information regarding general
corporate income (expense).
Years ended December 31, Change
--------------------------- ------------------
2001 2000 1999 2001-00 2000-99
------- ------- ------- ------- -------
(In millions)
Securities earnings:
Interest and dividends ..... $ 8.9 $ 8.3 $ 6.6 $ .6 $ 1.7
Securities transactions, net (1.1) 2.5 -- (3.6) 2.5
Corporate income ............... 16.3 73.7 4.6 (57.4) 69.1
Corporate expense .............. (25.9) (29.6) (21.5) 3.7 (8.1)
Interest expense ............... (27.6) (31.2) (36.9) 3.6 5.7
------- ------- ------- ------- -------
$ (29.4) $ 23.7 $ (47.2) $ (53.1) $ 70.9
======= ======= ======= ======= =======
Corporate interest and dividend income, including noncash interest
income on restricted cash balances and restricted marketable debt securities,
fluctuate in part based upon the amount of funds invested and yields thereon.
Average funds invested in 2001 and 2000 were higher compared with the respective
prior year primarily due to the increase in restricted cash related to
litigation settlement proceeds in January 2001 and July 2000. See Note 16 to the
Consolidated Financial Statements. The Company expects security earnings to be
lower in 2002 than 2001 due to (i) lower average yields and (ii) lower average
levels of funds available for investment due to lower 2002 operating cash flow
and the Company's decision to prepay $25 million of its 11.75% Senior Secured
Notes. See Note 23 to the Consolidated Financial Statements.
Securities transactions, net in 2001 related to a second-quarter $1.1
million noncash securities loss related to an other-than-temporary decline in
value of certain available-for-sale securities held by the Company. Securities
transactions, net in 2000 included a second-quarter $5.6 million securities gain
related to common stock received from the demutualization of an insurance
company from which the Company had purchased certain insurance policies and a
fourth-quarter $3.1 million noncash securities loss related to an
other-than-temporary decline in value of certain available-for-sale securities
held by the Company. See Note 6 to the Consolidated Financial Statements.
Corporate income in 2001 and 2000 included gains of $11.7 million and
$69.5 million, respectively, related principally to settlements with former
insurance carrier groups. No further material settlements relating to litigation
concerning environmental remediation coverage are expected. See Note 16 to the
Consolidated Financial Statements. The Company recognized $4.0 million in each
of 2001, 2000 and 1999 of income related to the straight-line, five-year
amortization of $20 million of proceeds received in conjunction with the 1998
sale of its specialty chemicals business attributable to a five-year agreement
by the Company not to compete in the rheological products business.
Corporate expense in 2001 decreased from 2000, primarily as a result of
lower legal expenses and lower variable compensation expense. The Company
expects corporate expense in 2002 will be comparable to or somewhat higher than
2001 levels.
-27-
Interest expense in 2001 declined compared with the prior year primarily
due to reduced levels of its outstanding 11.75% Senior Secured Notes (resulting
from a $50 million prepayment in December 2000) and lower euro-denominated debt.
Interest expense in 2000 declined compared to 1999 due to reduced levels of
outstanding euro-denominated debt. Assuming no significant change in interest
rates, interest expense in 2002 is expected to be lower compared with 2001 due
to lower levels of outstanding indebtedness. See Note 23 to the Consolidated
Financial Statements.
Provision for income taxes
The principal reasons for the difference between the U.S. Federal
statutory income tax rates and the Company's effective income tax rates are
explained in Note 14 to the Consolidated Financial Statements. The Company's
operations are conducted on a worldwide basis and the geographic mix of income
can significantly impact the Company's effective income tax rate. In 2001 the
Company's effective income tax rate varied from the normally expected rate
primarily due to the recognition of certain German income tax attributes which
previously did not meet the "more-likely-than-not" recognition criteria and
incremental U.S. taxes on undistributed earnings of certain non-U.S.
subsidiaries. In 2000 the Company's effective income tax rate varied from the
normally expected rate primarily due to the geographic mix of income, changes in
the German income tax "base" rate and the recognition of certain deductible tax
assets which previously did not meet the "more-likely-than-not" recognition
criteria. In 1999 the Company's effective tax rate varied from the normally
expected rate due predominantly to the recognition of certain deductible tax
attributes which previously did not meet the "more-likely-than-not" recognition
criteria. Also in 2000 and 1999, the Company recognized certain one-time
benefits related to German tax settlements.
Effective January 1, 2001, the Company and its qualifying subsidiaries
were included in the consolidated U.S. federal tax return of Contran (the
"Contran Tax Group"). As a member of the Contran Tax Group, the Company is a
party to a tax sharing agreement (the "Contran Tax Agreement"). The Contran Tax
Agreement provides that the Company compute its provision for U.S. income taxes
on a separate-company basis using the tax elections made by Contran. Pursuant to
the Contran Tax Agreement and using the tax elections made by Contran, the
Company makes payments to or receives payments from Valhi in amounts it would
have paid to or received from the U.S. Internal Revenue Service had it not been
a member of the Contran Tax Group. Refunds are limited to amounts previously
paid under the Contran Tax Agreement unless the Company was entitled to a refund
from the U.S. Internal Revenue Service on a separate-company basis. Pursuant to
the Contran Tax Agreement, the Company has a $2.2 million receivable from Valhi
related to capital loss carrybacks which would have been recoverable from the
U.S. Internal Revenue Service. See Note 14 to the Consolidated Financial
Statements.
Other
Minority interest
Minority interest primarily relates to the Company's majority-owned
environmental management subsidiary, NL Environmental Management Services, Inc.
("EMS"). EMS was established in 1998, at which time EMS contractually assumed
certain of the Company's environmental liabilities. EMS' earnings are based, in
part, upon its ability to favorably resolve these liabilities on an aggregate
basis. The minority interest shareholders of EMS actively manage the
-28-
environmental liabilities and share in 39% of EMS' cumulative earnings, as
defined in the formation documents. The Company includes liabilities
contractually assumed by EMS in its consolidated balance sheet.
Related party transactions
The Company is a party to certain transactions with related parties. See
"Liquidity and Capital Resources - Investing Cash Flows" and Note 19 to the
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows for each of the past three years
are presented below.
Years ended December 31,
--------------------------------
2001 2000 1999
--------- -------- ---------
(In millions)
Operating activities:
Before changes in assets and liabilities .. $ 135.3 $ 153.1 $ 115.7
Changes in assets and liabilities ......... (5.6) (13.4) (7.4)
-------- -------- --------
129.7 139.7 108.3
Investing activities .......................... (57.2) (56.2) (38.4)
Financing activities .......................... (75.5) (95.7) (88.0)
-------- -------- --------
Net cash used by operating, investing and financing
activities ...................................... $ (3.0) $ (12.2) $ (18.1)
======== ======== ========
Operating cash flows
Certain items included in the determination of net income do not
represent current inflows or outflows of cash. For example, the net litigation
settlement proceeds of $10.3 million and $69.5 million received in 2001 and
2000, respectively, that were transferred by the insurance carriers to special
purpose trusts did not result in an increase in operating cash flow. Further,
insurance recoveries, net of $17.5 million in 2001 are excluded from the
determination of operating cash flow. These insurance proceeds are shown in the
statement of cash flows under investing activities to partially offset the cash
outflow impact of capital expenditures related to the Leverkusen sulfate plant
reconstruction. Noncash interest income consists of earnings on restricted cash
and restricted marketable debt securities which is not available for general
corporate purposes. Certain other items included in the determination of net
income have an impact on cash flows from operating activities, but the impact of
such items on cash will differ from their impact on net income. For example, the
amount of income or expense recorded for pension and OPEB assets and obligations
(which depend upon a number of factors, including actuarial assumptions used to
value obligations) will generally differ from the outflows of cash for such
benefits. See Note 12 to the Consolidated Financial Statements.
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 flow from operations, before changes in assets and liabilities
decreased $17.8 million in 2001 and increased $37.4 million in 2000 from the
preceding year.
Operating cash flows, before changes in assets and liabilities, in 2001
compared with 2000 were unfavorably affected by $43.3 million of lower operating
-29-
income, partially offset by $9.0 million of lower payments to fund the Company's
pension plans, $6.6 million of lower current tax expense, $3.8 million of higher
distributions from LPC, $3.8 million of lower corporate expenses and $2.0
million of lower cash interest expense, net.
Operating cash flows in 2000 compared with 1999 were favorably affected
by $66.8 million higher operating income and $4.8 million of lower cash interest
expense, net, partially offset by $5.3 million of higher payments to fund the
Company's pension plans, $8.2 million of higher corporate expenses, $16.1
million of higher current tax expense, and $6.1 million of lower distributions
from LPC.
Changes in the Company's assets and liabilities (excluding the effect of
currency translation) in 2001 compared with 2000 were favorably affected by
higher accounts payable of $21.8 million and a net decrease in accrued
environmental costs of $8.4 million primarily related to the use of assets from
the Company's special purpose trusts. The Company's assets and liabilities were
unfavorably affected by higher inventories of $9.3 million, lower accounts with
affiliates, net of $5.5 million, and payment of accrued supplemental retirement
benefits of $4.5 million. In 2001 and 2000, pursuant to terms of certain
titanium ore contracts, the Company purchased, in advance of receipt, $31.6
million and $15.3 million, respectively, of titanium ore, a raw material, which
is reflected in both inventory and accounts payable and had no net effect on
operating cash flow.
Changes in the Company's assets and liabilities (excluding the effect of
currency translation) in 2000 compared with 1999 were unfavorably affected by
higher inventories of $44.1 million partially offset by lower receivables of
$23.7 million and lower environmental accruals of $12.6 million.
Investing cash flows
The Company's capital expenditures were $53.7 million, $31.1 million and
$35.6 million in 2001, 2000 and 1999, respectively. Capital expenditures in 2001
include an aggregate of $22.3 million for the rebuilding of the Company's
Leverkusen, Germany sulfate plant. The Company received $23.4 million of
insurance proceeds for property damage resulting from the Leverkusen fire and
paid $3.2 million of expenses related to repairs and clean-up costs. Capital
expenditures in 1999 were higher due to $6.0 million of expenditures for a
landfill expansion for the Company's Belgian facility. Capital expenditures at
LPC were approximately $4.0 million in each of 2001, 2000 and 1999 and are not
included in the Company's capital expenditures.
The Company's capital expenditures during the past three years include
an aggregate of $23.0 million ($5.0 million in 2001) for the Company's ongoing
environmental protection and compliance programs. The Company's estimated 2002
and 2003 capital expenditures are $32.0 million for each year, and include $5.0
million and $4.0 million, respectively, in the area of environmental protection
and compliance. Included in the 2002 capital expenditure estimate is $4.0
million to complete reconstruction of the Leverkusen, Germany sulfate plant.
In February 2001, EMS loaned $13.4 million to Tremont Corporation
("Tremont") under a reducing revolving loan agreement. See Notes 1 and 7 to the
Consolidated Financial Statements. The loan was approved by special committees
of the Company's and EMS's Boards of Directors. The loan bears interest at prime
plus 2% (8% at December 31, 2001), is due March 31, 2003 and is collateralized
by 10.2 million shares of NL common stock owned by Tremont. The creditworthiness
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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 second, third and fourth quarters of 2001, Tremont repaid $250,000
of the loan. At December 31, 2001, the outstanding loan balance was $12.7
million and no amounts were available for additional borrowings by Tremont.
In May 2001, a wholly owned subsidiary of EMS loaned $20.0 million to
the Harold C. Simmons Family Trust No. 2 (the "Family Trust"), one of the trusts
described in Notes 1 and 7 to the Consolidated Financial Statements, under a
$25.0 million revolving credit agreement. The loan was approved by special
committees of the Company's and EMS's Boards of Directors. The loan bears
interest at prime (6% at December 31, 2001), is due on demand with 60 days
notice and is collateralized by 13,749 shares, or approximately 35%, of
Contran's outstanding Class A voting common stock and 5,000 shares, or 100%, of
Contran's Series E Cumulative preferred stock, both of which are owned by the
Family Trust. The value of the collateral is dependent, in part, on the value of
the Company as Contran's interest in the Company, through its beneficial
ownership of Valhi, is one of Contran's more substantial assets. At December 31,
2001, $5.0 million was available for additional borrowing by the Family Trust.
In November 2001, $7.9 million of restricted cash related to certain
letters of credit supporting certain insurance related contracts was released.
In January 2002, the Company purchased EWI RE, Inc. and EWI RE, Ltd.
(collectively "EWI") for approximately $9.0 million. See Notes 19 and 23 to the
Consolidated Financial Statements.
During 2000 the Company purchased 1,000,000 shares of Tremont's common
stock in market transactions for an aggregate of $26 million. See Notes 1 and 6
to the Consolidated Financial Statements. Tremont owns 10.2 million shares, or
21%, of NL's outstanding common stock.
Financing cash flows
In the second and third quarters of 2001, the Company repaid euro 7.6
million ($6.5 million when paid) and euro 16.4 million ($14.9 million when
paid), respectively, of its euro-denominated short-term debt with excess cash
flow from operations.
In the second and third quarters of 2000 the Company repaid euro 17.9
million ($16.7 million when paid) and euro 13.0 million ($12.2 million when
paid), respectively, of its euro-denominated short-term debt with cash flow from
operations. In December 2000 the Company borrowed $43 million of short-term
non-U.S. dollar-denominated bank debt and used the proceeds along with cash on
hand to redeem $50 million (par value) of the Company's 11.75% Senior Secured
Notes.
In the first quarter of 1999 the Company prepaid the remaining balance
of DM 107 million ($60 million when paid) of a term loan that was part of the
Company's previous DM bank credit facility, principally by drawing DM 100
million ($56 million when drawn) on the revolving portion of the DM credit
facility. In the second and third quarters of 1999, the Company repaid DM 60
million ($33 million when paid) of the DM revolving credit facility with cash
provided from operations. The revolver's outstanding balance of DM 120 million
was further reduced in October 1999 by DM 20 million ($11 million when paid). In
-31-
December 1999 the Company borrowed $26 million of short-term unsecured
euro-denominated bank debt and used the proceeds along with cash on hand to
prepay the remaining balance of DM 100 million ($52 million when paid) of the
revolving portion of the DM credit facility. The DM credit facility was then
terminated, which released collateral and eliminated certain restrictive loan
covenants.
On February 6, 2002, the Company gave notice to the trustee of its
intention to redeem $25 million principal amount of the 11.75% Senior Secured
Notes due 2003 on March 22, 2002, at the current call price of 100%. See Note 23
to the Consolidated Financial Statements. The Company may redeem additional
11.75% Senior Secured Notes in 2002.
The 11.75% Senior Secured Notes are issued pursuant to an indenture
which contains a number of covenants and restrictions which, among others,
restrict the ability of the Company and its subsidiaries to incur debt, incur
liens, pay dividends, merge or consolidate with, or sell or transfer all or
substantially all of their assets to another entity. In the event of a Change of
Control, as defined in the indenture, the Company would be required to make an
offer to purchase the 11.75% Senior Secured Notes at 101% of the principal
amount. The Company would also be required to make an offer to purchase a
specified amount of the 11.75% Senior Secured Notes at par value in the event
the Company generates a certain amount of net proceeds from the sale of assets
outside the ordinary course of business, and such net proceeds are not otherwise
used for specified purposes within a specified time period. See Note 11 to the
Consolidated Financial Statements. Other than operating lease commitments
disclosed in Note 20 to the Consolidated Financial Statements, the Company is
not party to any off-balance sheet financing arrangements.
Dividends paid during 2001, 2000 and 1999 totaled $39.8 million, $32.7
million and $7.2 million, respectively. At December 31, 2001, the Company had
$20 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 February 6, 2002, the Company's Board
of Directors declared a regular quarterly dividend of $.20 per share to
shareholders of record as of March 8, 2002 to be paid on March 22, 2002.
Pursuant to its share repurchase program, the Company purchased
1,059,000 shares of its common stock in the open market at an aggregate cost of
$15.5 million in 2001, 1,682,000 shares of its common stock at an aggregate cost
of $30.9 million in 2000 and 552,000 shares of its common stock in the open
market at an aggregate cost of $7.2 million in 1999. Approximately 1,207,000
additional shares are available for purchase under the Company's share
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 December 31, 2001, the Company had cash and cash equivalents
aggregating $116 million (29% held by non-U.S. subsidiaries) and $83 million of
restricted cash equivalents and restricted marketable debt securities held by
U.S. subsidiaries, of which $16 million was classified as a noncurrent asset. At
December 31, 2001, the Company's subsidiaries had $8 million available for
borrowing under non-U.S. credit facilities. At December 31, 2001, the Company
had complied with all financial covenants governing its debt agreements.
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Based upon the Company's expectations for the TiO2 industry and
anticipated demands on the Company's cash resources as discussed herein, the
Company expects to have sufficient liquidity to meet its near-term obligations
including operations, capital expenditures, debt service and current dividend
policy. To the extent that actual developments differ from Company's
expectations, the Company's liquidity could be adversely affected.
Income taxes
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. See Note 14 to the
Consolidated Financial Statements.
A reduction in the German "base" income tax rate from 30% to 25%,
enacted in October 2000, became effective January 1, 2001. The reduction in the
German income tax rate resulted in $5.7 million of additional deferred income
tax expense in the fourth quarter of 2000 due to a reduction of the Company's
deferred income tax asset related to certain German tax attributes. The Company
does not expect its future current income tax expense to be affected by the rate
change in Germany.
The Company received tax assessments from the Norwegian tax authorities
proposing tax deficiencies, including related interest, of NOK 39.3 million
pertaining to 1994 and 1996. The Company was unsuccessful in appealing the tax
assessments and in June 2001 paid NOK 39.3 million ($4.3 million when paid) to
the Norwegian tax authorities. The Company was adequately reserved for this
contingency. The lien on the Company's Fredrikstad, Norway TiO2 plant in favor
of the Norwegian tax authorities has been released.
The Company has received preliminary tax assessments for the years 1991
to 1997 from the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately euro 10.4 million ($9.2 million at December
31, 2001). 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 December 31, 2001, the Company had net deferred tax liabilities of
$133 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 $154 million at December 31, 2001, principally related to Germany,
partially offsetting deferred tax assets which the Company believes do not
currently meet the "more-likely-than-not" recognition criteria.
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Environmental matters and litigation
The Company has been named as a defendant, 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. EPA's
Superfund National Priorities List or similar state lists. On a quarterly basis,
the Company evaluates the potential range of its liability at sites where it has
been named as a PRP or defendant, including sites for which EMS has
contractually assumed the Company's obligation. The Company believes it has
adequate accruals 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 allocation of such costs
among PRPs.
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. The Company currently believes the disposition of all claims and
disputes, individually and in the aggregate, should not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity. There can be no assurance that additional matters of these types
will not arise in the future. See Item 3. "Legal Proceedings" and Note 20 to the
Consolidated Financial Statements.
Foreign operations
As discussed above, the Company has substantial operations located
outside the United States for which the functional currency is not the U.S.
dollar. As a result, the reported amount of the Company's assets and liabilities
related to its non-U.S. operations, and therefore the Company's consolidated net
assets, will fluctuate based upon changes in currency exchange rates. At
December 31, 2001, the Company had substantial net assets denominated in the
euro, Canadian dollar, Norwegian kroner and United Kingdom pound sterling.
Euro currency
Beginning January 1, 1999, certain members of the European Union ("EU"),
including Germany, Belgium, the Netherlands and France, adopted a new European
currency unit (the "euro") as their common legal currency. Following the
introduction of the euro, the participating countries' national currencies
remain legal tender as denominations of the euro from January 1, 1999 through
January 1, 2002, and the exchange rates between the euro and such national
currency units are fixed. Beginning January 1, 2002, national currency units
were exchanged for euros and the euro became the primary legal tender currency.
The Company conducts substantial operations in Europe. As of January 1,
2001, the functional currency of the Company's German, Belgian, Dutch and French
operations have been converted to the euro from their respective national
currencies. The Company has assessed and evaluated the impact of the euro
conversion on its business and made the necessary system conversions. The euro
-34-
conversion may impact the Company's operations including, among other things,
changes in product pricing decisions necessitated by cross-border price
transparencies. Such changes in product pricing decisions could impact both
selling prices and purchasing costs and, consequently, favorably or unfavorably
impact results of operations, financial condition or liquidity.
Other
The Company periodically evaluates its liquidity requirements,
alternative uses of capital, capital needs and availability of resources in view
of, among other things, its debt service and capital expenditure requirements
and estimated future operating cash flows. As a result of this process, the
Company in the past has sought, and in the future may seek, to reduce,
refinance, repurchase or restructure indebtedness; raise additional capital;
issue additional securities; repurchase shares of its common stock; modify its
dividend policy; restructure ownership interests; sell interests in subsidiaries
or other assets; or take a combination of such steps or other steps to manage
its liquidity and capital resources. In the normal course of its business, the
Company may review opportunities for the acquisition, divestiture, joint venture
or other business combinations in the chemicals or other industries, as well as
the acquisition of interests in 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. See
Note 11 to the Consolidated Financial Statements.
Summary of debt and other contractual commitments
As more fully described in the Notes to the Consolidated Financial
Statements, the Company is a party to various debt, lease and other agreements
which contractually and unconditionally commit the Company to pay certain
amounts in the future. See Notes 11 and 20 to the Consolidated Financial
Statements. The following table summarizes such contractual commitments that are
unconditional both in terms of timing and amount by the type and date of
payment.
Unconditional Payment Due Date
-----------------------------------------------
2003 - 2005 - 2007 and
Contractual Commitment 2002 2004 2006 after Total
---------------------- ------ ------- ------ -------- --------
(In millions)
Indebtedness .................. $ 47.2 $ 195.2 $ .2 $ -- $ 242.6
-------- -------- ------- -------- --------
Property and equipment ........ 11.0 -- -- -- 11.0
-------- -------- ------- -------- --------
Operating leases .............. 4.0 5.2 2.8 20.1 32.1
-------- -------- ------- -------- --------
$ 62.2 $ 200.4 $ 3.0 $ 20.1 $ 285.7
======== ======== ======= ======== ========
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In addition, the Company is a party to certain other agreements that
contractually and unconditionally commit the Company to pay certain amounts in
the future. However, while the Company believes it is probable that amounts will
be spent in the future under such contracts, the amount and/or the timing of
such future payments will vary depending on certain provisions of the applicable
contract. Agreements to which the Company is a party that fall into this
category, more fully described in Note 20 to the Consolidated Financial
Statements, includes the Company's long-term supply contracts for the purchase
of chloride-process TiO2 feedstock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
The Company is exposed to market risk from changes in currency exchange
rates, interest rates and equity security prices. In the past, the Company has
periodically entered into interest rate swaps or other types of contracts in
order to manage a portion of its interest rate market risk. Otherwise, the
Company has not generally entered into forward or option contracts to manage
such market risks, nor has the Company entered into any such contract or other
type of derivative instrument for trading purposes. The Company was not a party
to any forward or derivative option contracts related to currency exchange
rates, interest rates or equity security prices at December 31, 2001 or 2000.
See Notes 2 and 21 to the Consolidated Financial Statements.
Interest rates
The Company is exposed to market risk from changes in interest rates,
primarily related to indebtedness. At December 31, 2001, the Company's aggregate
indebtedness was split between 81% of fixed-rate instruments and 19% of
variable-rate borrowings (2000 - 73% fixed-rate and 27% variable-rate). The
large percentage of fixed-rate debt instruments minimizes earnings volatility
which would result from changes in interest rates. The following table presents
principal amounts and weighted-average interest rates, by contractual maturity
dates, for the Company's aggregate indebtedness at December 31, 2001 and 2000.
At December 31, 2001 and 2000, all outstanding fixed-rate indebtedness was
denominated in U.S. dollars, and all outstanding variable-rate indebtedness was
denominated in either euros or Norwegian kroner. Information shown below for
such euro- and kroner-denominated indebtedness is presented in its U.S. dollar
equivalent at December 31, 2001 using that date's exchange rate of 1.13 euro per
U.S. dollar (2000 - 1.08 euro per U.S. dollar) and 9.02 kroner per U.S. dollar
(2000 - 8.90 kroner per U.S. dollar). Certain kroner-denominated capital leases
totaling $2.5 million in 2001 and $2.1 million in 2000 have been excluded from
the table below.
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Fair value at
Contractual Maturity Date December 31,
---------------------------------- -------------
N/A 2002 2003 Total 2001
--- ---- ---- ----- -------------
(In millions)
December 31, 2001:
Fixed-rate debt (U.S. dollar-
denominated):
Principal amount .................. $ -- $ 194.0 $ 194.0 $ 194.9
Weighted-average interest rate .... -- 11.75% 11.75%
Variable-rate debt (Non-U.S. dollar
-denominated):
Principal amount - euro-denominated $ 24.0 $ -- $ 24.0 $ 24.0
Weighted-average interest rate .... 3.8% -- 3.8%
Principal amount - kroner
denominated ..................... $ 22.2 $ -- $ 22.2 $ 22.2
Weighted-average interest rate .... 7.3% -- 7.3%
2001 2002 2003 Total 2000
---- ---- ---- ----- ----
(In millions)
December 31, 2000:
Fixed-rate debt (U.S.dollar-
denominated):
Principal amount .................. $ -- $ -- $ 194.0 $ 194.0 $ 195.9
Weighted-average interest rate .... -- -- 11.75% 11.75%
Variable-rate debt (Non-U.S. dollar-
denominated):
Principal amount - euro-denominated $ 47.5 $ -- $ -- $ 47.5 $ 47.5
Weighted-average interest rate .... 5.3% -- -- 5.3%
Principal amount - kroner
denominated ..................... $ 22.5 $ -- $ -- $ 22.5 $ 22.5
Weighted-average interest rate .... 7.9% -- -- 7.9%
Currency exchange rates
The Company is exposed to market risk arising from changes in currency
exchange rates as a result of manufacturing and selling its products worldwide.
Earnings are primarily affected by fluctuations in the value of the U.S. dollar
relative to the euro, Canadian dollar, Norwegian kroner and the United Kingdom
pound sterling. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of risks and uncertainties
related to the conversion of certain of these currencies to the euro.
At December 31, 2001, the Company had $24.0 million of indebtedness
denominated in euros (2000 - $47.5 million) and $22.2 million of indebtedness
denominated in Norwegian kroner (2000 - $22.5 million). The potential increase
in the U.S. dollar equivalent of the principal amount outstanding resulting from
a hypothetical 10% adverse change in exchange rates would be approximately $4.6
million (2000 - $7.0 million).
-37-
Marketable equity and marketable debt security prices
The Company is exposed to market risk due to changes in prices of the
marketable equity securities which are held. The fair value of such equity
securities at December 31, 2001 and 2000 was $45.2 million and $47.2 million,
respectively. The potential change in the aggregate fair value of these
investments, assuming a 10% change in prices, would be $4.5 million and $4.7
million, respectively. The fair value of marketable debt securities at December
31, 2001 was $19.7 million. The potential change in the aggregate fair value of
these investments assuming a 10% change in prices would be $2.0 million. The
Company did not hold any investments in marketable debt securities at December
31, 2000.
Other
The Company believes there are certain shortcomings in the sensitivity
analyses presented above, which analyses are required under the Securities and
Exchange Commission's regulations. For example, the hypothetical affect of
changes in interest rates discussed above ignores the potential effect on other
variables which affect the Company's results of operations and cash flows, such
as demand for the Company's products, sales volumes and selling prices and
operating expenses. Contrary to the above assumptions, changes in interest rates
rarely result in simultaneous parallel shifts along the yield curve.
Accordingly, the amounts presented above are not necessarily an accurate
reflection of the potential losses the Company would incur assuming the
hypothetical changes in market prices were actually to occur.
The above discussion and estimated sensitivity analysis amounts include
forward-looking statements of market risk which assume hypothetical changes in
market prices. Actual future market conditions could differ materially from such
assumptions. Accordingly, such forward-looking statements should not be
considered to be projections by the Company of future events, gains or losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
the Company's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of
the fiscal year covered by this report (the "NL Proxy Statement").
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ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the NL Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the NL Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the NL Proxy Statement. See also Note 19 to the Consolidated Financial
Statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
----------------------------------
The consolidated financial statements and schedules listed by
the Registrant on the accompanying Index of Financial
Statements and Schedules (see page F-1) are filed as part of
this Annual Report.
(b) Reports on Form 8-K
-------------------
There were no Reports on Form 8-K filed during the quarter
ended December 31, 2001 and through the date of this report.
(c) Exhibits
--------
Included as exhibits are the items listed in the Exhibit
Index. NL will furnish a copy of any of the exhibits listed
below upon payment of $4.00 per exhibit to cover the costs to
NL of furnishing the exhibits. Instruments defining the rights
of holders of debt issues which do not exceed 10% of
consolidated total assets will be furnished to the Securities
and Exchange Commission upon request.
-39-
Item No. Exhibit Index
- -------- -------------
3.1 By-Laws, as amended on June 28, 1990 - incorporated by reference
to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1990.
3.2 Certificate of Amended and Restated Certificate of Incorporation
dated June 28, 1990 - incorporated by reference to Exhibit 1 to
the Registrant's Proxy Statement on Schedule 14A for the annual
meeting held on June 28, 1990.
4.1 Registration Rights Agreement dated October 30, 1991, by and
between the Registrant and Tremont Corporation - incorporated by
reference to Exhibit 4.3 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1991.
4.2 Indenture dated October 20, 1993 governing the Registrant's
11.75% Senior Secured Notes due 2003, including form of Senior
Note - incorporated by reference to Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
4.3 Senior Mirror Notes dated October 20, 1993 - incorporated by
reference to Exhibit 4.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
4.4 Senior Note Subsidiary Pledge Agreement dated October 20, 1993
between Registrant and Kronos, Inc. - incorporated by reference
to Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993.
4.5 Third Party Pledge and Intercreditor Agreement dated October 20,
1993 between Registrant, Chase Manhattan Bank (National
Association) and Chemical Bank - incorporated by reference to
Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993.
10.1 Lease Contract dated June 21, 1952, between Farbenfabrieken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung
(German language version and English translation thereof) -
incorporated by reference to Exhibit 10.14 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1985.
10.2 Contract on Supplies and Services among Bayer AG, Kronos
Titan-GmbH and Kronos International, Inc. dated June 30, 1995
(English translation from German language document) -
incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995.
10.3** Richards Bay Slag Sales Agreement dated May 1, 1995 between
Richards Bay Iron and Titanium (Proprietary) Limited and Kronos,
Inc. - incorporated by reference to Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.
-40-
10.4** Amendment to Richards Bay Slag Sales Agreement dated May 1, 1999
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999.
10.5** Amendment to Richards Bay Slag Sales Agreement dated June 1, 2001
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc.
10.6 Formation Agreement dated as of October 18, 1993 among Tioxide
Americas Inc., Kronos Louisiana, Inc. and Louisiana Pigment
Company, L.P. - incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.7 Joint Venture Agreement dated as of October 18, 1993 between
Tioxide Americas Inc. and Kronos Louisiana, Inc. - incorporated
by reference to Exhibit 10.3 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1993.
10.8 Kronos Offtake Agreement dated as of October 18, 1993 between
Kronos Louisiana, Inc. and Louisiana Pigment Company, L.P. -
incorporated by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.9 Amendment No. 1 to Kronos Offtake Agreement dated as of December
20, 1995 between Kronos Louisiana, Inc. and Louisiana Pigment
Company, L.P. - incorporated by reference to Exhibit 10.22 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.10 Tioxide Americas Offtake Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Louisiana Pigment Company, L.P.
- incorporated by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.11 Amendment No. 1 to Tioxide Americas Offtake Agreement dated as of
December 20, 1995 between Tioxide Americas Inc. and Louisiana
Pigment Company, L.P. - incorporated by reference to Exhibit
10.24 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995.
10.12 TCI/KCI Output Purchase Agreement dated as of October 18, 1993
between Tioxide Canada Inc. and Kronos Canada, Inc. -
incorporated by reference to Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.13 TAI/KLA Output Purchase Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Kronos Louisiana, Inc. -
incorporated by reference to Exhibit 10.7 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
-41-
10.14 Master Technology Exchange Agreement dated as of October 18, 1993
among Kronos, Inc., Kronos Louisiana, Inc., Kronos International,
Inc., Tioxide Group Limited and Tioxide Group Services Limited -
incorporated by reference to Exhibit 10.8 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.15 Parents' Undertaking dated as of October 18, 1993 between ICI
American Holdings Inc. and Kronos, Inc. - incorporated by
reference to Exhibit 10.9 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
10.16 Allocation Agreement dated as of October 18, 1993 between Tioxide
Americas Inc., ICI American Holdings, Inc., Kronos, Inc. and
Kronos Louisiana, Inc. - incorporated by reference to Exhibit
10.10 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993.
10.17 Form of Director's Indemnity Agreement between NL and the
independent members of the Board of Directors of NL -
incorporated by reference to Exhibit 10.20 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1987.
10.18* 1989 Long Term Performance Incentive Plan of NL Industries, Inc.
- incorporated by reference to Exhibit B to the Registrant's
Proxy Statement on Schedule 14A for the annual meeting of
shareholders held on May 8, 1996.
10.19* NL Industries, Inc. Variable Compensation Plan - incorporated by
reference to Exhibit A to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held on May
8, 1996.
10.20* NL Industries, Inc. Variable Compensation Plan - incorporated by
reference to Exhibit B to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held on May
9, 2001.
10.21* NL Industries, Inc. 1992 Non-Employee Director Stock Option Plan,
as adopted by the Board of Directors on February 13, 1992 -
incorporated by reference to Appendix A to the Registrant's Proxy
Statement on Schedule 14A for the annual meeting of shareholders
held April 30, 1992.
10.22* NL Industries, Inc. 1998 Long-Term Incentive Plan - incorporated
by reference to Appendix A to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held on May
6, 1998.
10.23 Intercorporate Services Agreement by and between Contran
Corporation and the Registrant effective as of January 1, 2001 -
incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2001.
-42-
10.24 Intercorporate Service Agreement by and between Titanium Metals
Corporation and the Registrant effective as of January 1, 2001 -
incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2001.
10.25 Intercorporate Services Agreement by and between Tremont
Corporation and the Registrant effective as of January 1, 2001 -
incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2001.
10.26 Insurance Sharing Agreement, effective January 1, 1990, by and
between the Registrant, NL Insurance, Ltd. (an indirect
subsidiary of Tremont Corporation) and Baroid Corporation -
incorporated by reference to Exhibit 10.20 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1991.
10.27* Executive severance agreement effective as of March 9, 1995 by
and between the Registrant and Lawrence A. Wigdor - incorporated
by reference to Exhibit 10.3 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
10.28* Executive severance agreement effective as of July 24, 1996 by
and between the Registrant and J. Landis Martin - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997.
10.29* Supplemental Executive Retirement Plan for Executives and
Officers of NL Industries, Inc. effective as of January 1, 1991 -
incorporated by reference to Exhibit 10.26 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992.
10.30* Amended and Restated Supplemental Executive Retirement Plan for
Executives and Officers of NL Industries, Inc. effective as of
May 1, 2001.
10.31* Agreement to Defer Bonus Payment dated February 20, 1998 between
the Registrant and Lawrence A. Wigdor and related trust agreement
- incorporated by reference to Exhibit 10.48 to the Registrant's
Annual Report of Form 10-K for the year ended December 31, 1997.
10.32* Agreement to Defer Bonus Payment dated January 10, 2002 between
the Registrant and Lawrence A. Wigdor and related trust
agreements.
10.33* Agreement to Defer Bonus Payment dated February 20, 1998 between
the Registrant and J. Landis Martin and related trust agreement -
incorporated by reference to Exhibit 10.49 to the Registrant's
Annual Report of Form 10-K for the year ended December 31, 1997.
10.34 Revolving Loan Note dated February 9, 2001 with Tremont
Corporation as Maker and NL Environmental Management Services,
Inc. as Payee - incorporated by reference to Exhibit 10.34 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000.
-43-
10.35 Security Agreement dated February 9, 2001 by and between Tremont
Corporation and NL Environmental Management Services, Inc. -
incorporated by reference to Exhibit 10.35 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000.
10.36 Tax Agreement between Valhi, Inc. and NL Industries, Inc.
effective as of January 1, 2001- incorporated by reference to
Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2000.
10.37 Subscription Agreement by and among Valhi, Inc., Tremont
Holdings, LLC and Tremont Group, Inc. effective as of December
31, 2000 - incorporated by reference to Exhibit 10.37 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000.
10.38 Revolving Loan Note dated May 4, 2001 with Harold C. Simmons
Family Trust No. 2 and EMS Financial, Inc. - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001.
10.39 Security Agreement dated May 4, 2001 by and between Harold C.
Simmons Family Trust No. 2 and EMS Financial, Inc. - incorporated
by reference to Exhibit 10.2 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001.
10.40 Purchase Agreement dated January 4, 2002 by and among Kronos,
Inc. as the Purchaser, and Big Bend Holdings LLC and Contran
Insurance Holdings, Inc., as Sellers regarding the sale and
purchase of EWI RE, Inc. and EWI RE, Ltd.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
99.1 Annual Report of NL Industries, Inc. Retirement Savings Plan
(Form 11-K) to be filed under Form 10-K/A to the Registrant's
Annual Report on Form 10-K within 180 days after December 31,
2001.
All documents in the Exhibit Index above that have been incorporated by
reference were previously filed by the Registrant under SEC File Number 1-640.
* Management contract, compensatory plan or arrangement.
** Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
-44-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By /s/ J. Landis Martin
-----------------------------------
J. Landis Martin, March 14, 2002
President and Chief Financial Officer
/s/ J. Landis Martin /s/ Harold C. Simmons
- ------------------------------------- -----------------------------------
J. Landis Martin, March 14, 2002 Harold C. Simmons, March 14, 2002
Director, President and Chief Chairman of the Board
Executive Officer
(Principal Executive Officer)
/s/ Glenn R. Simmons /s/ Steven L. Watson
- ------------------------------------- -----------------------------------
Glenn R. Simmons, March 14, 2002 Steven L. Watson, March 14, 2002
Director Director
/s/ Kenneth R. Peak /s/ Dr. Lawrence A. Wigdor
- ------------------------------------- -----------------------------------
Kenneth R. Peak, March 14, 2002 Dr. Lawrence A. Wigdor,
Director March 14,2002
Director, President and Chief
Executive Officer of Kronos
/s/ General Thomas P. Stafford /s/ Ann Manix
- ------------------------------------- -----------------------------------
General Thomas P. Stafford, Ann Manix, March 14, 2002
March 14, 2002 Director
Director
/s/ Robert D. Hardy
- -------------------------------------
Robert D. Hardy, March 14, 2002
Vice President, Chief Financial
Officer
(Principal Financial Officer and
Principal Accounting Officer)
-45-
NL INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
Items 8, 14(a) and 14(d)
Index of Financial Statements and Schedules
Financial Statements Pages
- -------------------- -----
Report of Independent Accountants F-2
Consolidated Balance Sheets - December 31, 2001 and 2000 F-3 / F-4
Consolidated Statements of Income - Years ended
December 31, 2001, 2000 and 1999 F-5 / F-6
Consolidated Statements of Comprehensive Income - Years
ended December 31, 2001, 2000 and 1999 F-7
Consolidated Statements of Shareholders' Equity - Years
ended December 31, 2001, 2000 and 1999 F-8
Consolidated Statements of Cash Flows - Years ended
December 31, 2001, 2000 and 1999 F-9 / F-11
Notes to Consolidated Financial Statements F-12 / F-56
Financial Statement Schedules
Report of Independent Accountants S-1
Schedule I - Condensed Financial Information of Registrant S-2 / S-7
Schedule II - Valuation and Qualifying Accounts S-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of NL Industries, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, shareholders'
equity and cash flows present fairly, in all material respects, the consolidated
financial position of NL Industries, Inc. at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Houston, Texas
March 1, 2002
F-2
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(In thousands, except per share data)
ASSETS 2001 2000
---------- ----------
Current assets:
Cash and cash equivalents ........................ $ 116,037 $ 120,378
Restricted cash equivalents ...................... 63,257 69,242
Restricted marketable debt securities ............ 3,583 --
Accounts and notes receivable .................... 125,721 131,540
Receivable from affiliates ....................... 3,698 214
Refundable income taxes .......................... 1,530 12,302
Inventories ...................................... 231,056 205,973
Prepaid expenses ................................. 3,193 2,458
Deferred income taxes ............................ 11,011 11,673
---------- ----------
Total current assets ......................... 559,086 553,780
---------- ----------
Other assets:
Marketable equity securities ..................... 45,227 47,186
Receivable from affiliates ....................... 31,650 --
Investment in TiO2 manufacturing joint venture ... 138,428 150,002
Prepaid pension cost ............................. 18,411 22,789
Restricted marketable debt securities ............ 16,121 --
Restricted cash equivalents ...................... -- 17,942
Unrecognized net pension obligations ............. 5,901 --
Other ............................................ 6,517 4,707
---------- ----------
Total other assets ........................... 262,255 242,626
---------- ----------
Property and equipment:
Land ............................................. 24,579 24,978
Buildings ........................................ 130,710 129,019
Machinery and equipment .......................... 537,958 530,920
Mining properties ................................ 67,649 67,134
Construction in progress ......................... 5,071 4,586
---------- ----------
765,967 756,637
Less accumulated depreciation and depletion ...... 436,217 432,255
---------- ----------
Net property and equipment ................... 329,750 324,382
---------- ----------
$1,151,091 $1,120,788
========== ==========
F-3
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2001 and 2000
(In thousands, except per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
----------- -----------
Current liabilities:
Notes payable ...................................... $ 46,201 $ 69,970
Current maturities of long-term debt ............... 1,033 730
Accounts payable and accrued liabilities ........... 176,223 147,877
Payable to affiliates .............................. 6,919 10,634
Accrued environmental costs ........................ 59,891 53,307
Income taxes ....................................... 7,277 13,616
Deferred income taxes .............................. 1,530 1,822
----------- -----------
Total current liabilities ...................... 299,074 297,956
----------- -----------
Noncurrent liabilities:
Long-term debt ..................................... 195,465 195,363
Deferred income taxes .............................. 143,256 145,673
Accrued environmental costs ........................ 47,589 57,133
Accrued pension cost ............................... 26,985 21,220
Accrued postretirement benefits cost ............... 29,842 29,404
Other .............................................. 14,729 23,272
----------- -----------
Total noncurrent liabilities ................... 457,866 472,065
----------- -----------
Minority interest ...................................... 7,208 6,279
----------- -----------
Shareholders' equity:
Preferred stock - 5,000 shares authorized, no shares
issued or outstanding ............................ -- --
Common stock - $.125 par value; 150,000 shares
authorized; 66,845 and 66,839 shares issued ...... 8,355 8,355
Additional paid-in capital ......................... 777,597 777,528
Retained earnings .................................. 222,722 141,073
Accumulated other comprehensive income (loss):
Currency translation ........................... (208,349) (190,757)
Marketable securities .......................... 8,350 8,885
Pension liabilities ............................ (6,352) --
Treasury stock, at cost (17,808 and 16,787 shares) . (415,380) (400,596)
----------- -----------
Total shareholders' equity ..................... 386,943 344,488
----------- -----------
$ 1,151,091 $ 1,120,788
=========== ===========
Commitments and contingencies (Notes 7, 14 and 20)
See accompanying notes to consolidated financial statements.
F-4
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2001, 2000 and 1999
(In thousands, except per share data)
2001 2000 1999
----------- ----------- -----------
Revenues and other income:
Net sales .............................. $ 835,099 $ 922,319 $ 908,387
Litigation settlement gains, net ....... 11,730 69,465 --
Insurance recoveries, net .............. 17,468 -- --
Other income, net ...................... 23,136 23,283 23,646
----------- ----------- -----------
887,433 1,015,067 932,033
----------- ----------- -----------
Costs and expenses:
Cost of sales .......................... 578,060 610,449 662,315
Selling, general and administrative .... 124,512 137,178 134,342
Interest ............................... 27,569 31,243 36,884
----------- ----------- -----------
730,141 778,870 833,541
----------- ----------- -----------
Income before income taxes, minority
interest and extraordinary item .. 157,292 236,197 98,492
Income tax expense (benefit) ............... 34,925 78,420 (64,601)
----------- ----------- -----------
Income before minority interest and
extraordinary item ............... 122,367 157,777 163,093
Minority interest .......................... 960 2,436 3,322
----------- ----------- -----------
Income before extraordinary item ... 121,407 155,341 159,771
Extraordinary item - early extinguishment of
debt, net of tax benefit of $394 ......... -- (732) --
----------- ----------- -----------
Net income ......................... $ 121,407 $ 154,609 $ 159,771
=========== =========== ===========
F-5
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
Years ended December 31, 2001, 2000 and 1999
(In thousands, except per share data)
2001 2000 1999
---------- ---------- ----------
Basic earnings per share:
Income before extraordinary item ... $ 2.44 $ 3.08 $ 3.09
Extraordinary item ................. -- (.01) --
---------- ---------- ----------
Net income ..................... $ 2.44$ 3.07 $ 3.09
========== ========== ==========
Diluted earnings per share:
Income before extraordinary item ... $ 2.44 $ 3.06 $ 3.08
Extraordinary item ................. -- (.01) --
---------- ---------- ----------
Net income ..................... $ 2.44 $ 3.05 $ 3.08
========== ========== ==========
Weighted average shares used in the
calculation of earnings per share:
Basic .............................. 49,732 50,415 51,774
Dilutive impact of stock options ... 124 334 93
---------- ---------- ----------
Diluted ............................ 49,856 50,749 51,867
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-6
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
--------- --------- ---------
Net income ................................... $ 121,407 $ 154,609 $ 159,771
--------- --------- ---------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment:
Unrealized holding gains (losses)
arising during the period .......... (1,275) 4,064 (1,641)
Add: reclassification adjustment
for loss included in net income .... 740 1,964 --
--------- --------- ---------
(535) 6,028 (1,641)
Minimum pension liabilities adjustment ... (6,352) 1,756 1,431
Currency translation adjustment .......... (17,592) (30,735) (26,582)
--------- --------- ---------
Total other comprehensive loss ....... (24,479) (22,951) (26,792)
--------- --------- ---------
Comprehensive income ..................... $ 96,928 $ 131,658 $ 132,979
========= ========= =========
See accompanying notes to consolidated financial statements.
F-7
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2001, 2000 and 1999
(In thousands, except per share data)
Accumulated other
comprehensive income (loss)
Additional Retained ---------------------------------------
Common paid-in earnings Currency Pension Marketable
stock capital (deficit) translation liabilities securities
--------- ---------- --------- ----------- ----------- ----------
Balance at December 31, 1998 .................... $ 8,355 $ 774,288 $(133,379) $(133,440) $ (3,187) $ 4,498
Net income ...................................... -- -- 159,771 -- -- --
Other comprehensive income (loss), net of tax ... -- -- -- (26,582) 1,431 (1,641)
Common dividends declared - $.14 per share ..... -- -- (7,242) -- -- --
Tax benefit of stock options exercised .......... -- 16 -- -- -- --
Treasury stock:
Acquired (552 shares) ....................... -- -- -- -- -- --
Reissued (25 shares) ........................ -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 .................... 8,355 774,304 19,150 (160,022) (1,756) 2,857
Net income ...................................... -- -- 154,609 -- -- --
Other comprehensive income (loss), net of tax ... -- -- -- (30,735) 1,756 6,028
Common dividends declared - $.65 per share ...... -- -- (32,686) -- -- --
Tax benefit of stock options exercised .......... -- 3,224 -- -- -- --
Treasury stock:
Acquired (1,682 shares) ..................... -- -- -- -- -- --
Reissued (450 shares) ....................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2000 .................... 8,355 777,528 141,073 (190,757) -- 8,885
Net income ...................................... -- -- 121,407 -- -- --
Other comprehensive loss, net of tax ............ -- -- -- (17,592) (6,352) (535)
Common dividends declared - $.80 per share ...... -- -- (39,758) -- -- --
Tax benefit of stock options exercised .......... -- 69 -- -- -- --
Treasury stock:
Acquired (1,059 shares) ..................... -- -- -- -- -- --
Reissued (38 shares) ........................ -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2001 .................... $ 8,355 $ 777,597 $ 222,722 $(208,349) $ (6,352) $ 8,350
========= ========= ========= ========= ========= =========
Treasury
stock Total
---------- --------
Balance at December 31, 1998 .................... $ (364,801) $152,334
Net income ...................................... -- 159,771
Other comprehensive income (loss), net of tax ... -- (26,792)
Common dividends declared - $.14 per share ..... -- (7,242)
Tax benefit of stock options exercised .......... -- 16
Treasury stock:
Acquired (552 shares) ....................... (7,210) (7,210)
Reissued (25 shares) ........................ 210 210
---------- --------
Balance at December 31, 1999 .................... (371,801) 271,087
Net income ...................................... -- 154,609
Other comprehensive income (loss), net of tax ... -- (22,951)
Common dividends declared - $.65 per share ...... -- (32,686)
Tax benefit of stock options exercised .......... -- 3,224
Treasury stock:
Acquired (1,682 shares) ..................... (30,886) (30,886)
Reissued (450 shares) ....................... 2,091 2,091
---------- --------
Balance at December 31, 2000 .................... (400,596) 344,488
Net income ...................................... -- 121,407
Other comprehensive loss, net of tax ............ -- (24,479)
Common dividends declared - $.80 per share ...... -- (39,758)
Tax benefit of stock options exercised .......... -- 69
Treasury stock:
Acquired (1,059 shares) ..................... (15,502) (15,502)
Reissued (38 shares) ........................ 718 718
---------- --------
Balance at December 31, 2001 .................... $ (415,380) $386,943
========== ========
See accompanying notes to consolidated financial statements.
F-8
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income ................................ $ 121,407 $ 154,609 $ 159,771
Depreciation, depletion and amortization .. 29,599 29,733 33,730
Noncash interest income on restricted cash
and restricted marketable debt securities (3,580) (1,531) --
Noncash interest expense .................. 467 599 1,682
Deferred income taxes ..................... 3,256 40,186 (86,772)
Minority interest ......................... 960 2,436 3,322
Net (gains) losses from:
Securities transactions ............... 1,133 (2,531) --
Disposition of property and equipment . 735 1,562 429
Pension cost, net ......................... (2,967) (11,816) (4,702)
Other postretirement benefits, net ........ 531 1,062 (5,459)
Distributions from TiO2 manufacturing joint
venture ................................. 11,313 7,550 13,650
Litigation settlement gains, net .......... (10,307) (69,465) --
Insurance recoveries, net ................. (17,468) -- --
Extraordinary item ........................ -- 732 --
Other, net ................................ 261 -- --
--------- --------- ---------
135,340 153,126 115,651
Change in assets and liabilities:
Accounts and notes receivable ........... 902 1,417 (22,289)
Inventories ............................. (32,698) (23,395) 20,663
Prepaid expenses ........................ (526) (244) (463)
Accounts payable and accrued liabilities 31,091 9,301 7,315
Income taxes ............................ 4,107 4,843 6,729
Accounts with affiliates ................ (5,670) (123) (3,572)
Accrued environmental costs ............. 7,068 (1,279) (13,856)
Other noncurrent assets ................. (1,937) (168) 1,090
Other noncurrent liabilities ............ (7,944) (3,723) (2,960)
--------- --------- ---------
Net cash provided by operating
activities ........................ 129,733 139,755 108,308
--------- --------- ---------
F-9
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures ......................... $ (53,669) $ (31,089) $ (35,559)
Property damaged by fire:
Insurance proceeds ....................... 23,361 -- --
Other, net ............................... (3,205) -- --
Loans to affiliates:
Loans .................................... (33,400) -- --
Collections .............................. 750 -- --
Purchase of Tremont Corporation common stock . -- (26,040) --
Change in restricted cash equivalents and
restricted marketable debt securities, net . 8,509 630 (5,176)
Proceeds from disposition of property and
equipment .................................. 419 139 2,344
Proceeds from disposition of marketable
securities ................................. 4 158 --
Other, net ................................... -- (33) --
--------- --------- ---------
Net cash used by investing activities .... (57,231) (56,235) (38,391)
--------- --------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ............................... 1,437 44,923 82,038
Principal payments ....................... (22,428) (79,162) (155,787)
Dividends paid ............................... (39,758) (32,686) (7,242)
Treasury stock:
Purchased ................................ (15,502) (30,886) (7,210)
Reissued ................................. 718 2,091 210
Distributions to minority interests .......... (5) (6) (6)
--------- --------- ---------
Net cash used by financing activities .... (75,538) (95,726) (87,997)
--------- --------- ---------
Net change during the year from operating,
investing and financing activities ..... $ (3,036) $ (12,206) $ (18,080)
========= ========= =========
F-10
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
--------- --------- ---------
Cash and cash equivalents:
Net change during the year from:
Operating, investing and financing activities $ (3,036) $ (12,206) $ (18,080)
Currency translation ......................... (1,305) (1,640) (2,649)
--------- --------- ---------
(4,341) (13,846) (20,729)
Balance at beginning of year ................. 120,378 134,224 154,953
--------- --------- ---------
Balance at end of year ....................... $ 116,037 $ 120,378 $ 134,224
========= ========= =========
Supplemental disclosures - cash paid for:
Interest ......................................... $ 27,143 $ 32,354 $ 35,540
Income taxes ..................................... 29,770 33,398 14,963
F-11
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
NL Industries, Inc. ("NL") conducts its titanium dioxide pigments
("TiO2") operations through its wholly owned subsidiary, Kronos, Inc.
("Kronos"). At December 31, 2001, Valhi, Inc. ("Valhi") and Tremont Corporation
("Tremont"), each affiliates of Contran Corporation ("Contran"), held
approximately 61% and 21%, respectively, of NL's outstanding common stock. At
December 31, 2001, Contran and its subsidiaries held approximately 94% of
Valhi's outstanding common stock, and a company 80% owned by Valhi and 20% owned
by NL held approximately 80% of Tremont's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons, the Chairman of the
Board of NL and the Chairman of the Board and Chief Executive Officer of Contran
and Valhi and a director of Tremont, may be deemed to control each of such
companies. See Notes 7 and 19.
Note 2 - Summary of significant accounting policies:
Principles of consolidation and management's estimates
The accompanying consolidated financial statements include the accounts
of NL and its majority-owned subsidiaries (collectively, the "Company"). All
material intercompany accounts and balances have been eliminated. Certain
prior-year amounts have been reclassified to conform to the current year
presentation. The preparation of financial statements in conformity with
generally accepted accounting principles in the U.S. ("GAAP") requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amount of revenues and
expenses during the reporting period. Actual results may differ from previously
estimated amounts under different assumptions or conditions.
Translation of foreign currencies
Assets and liabilities of subsidiaries whose functional currency is
other than the U.S. dollar are translated at year-end rates of exchange and
revenues and expenses are translated at weighted average exchange rates
prevailing during the year. Resulting translation adjustments are included in
other comprehensive income (loss), net of related income taxes. Currency
transaction gains and losses are recognized in income currently.
Cash equivalents
Cash equivalents include U.S. Treasury securities purchased under
short-term agreements to resell and bank deposits with original maturities of
three months or less.
F-12
Restricted cash equivalents and restricted marketable debt securities
Restricted cash equivalents and restricted marketable debt securities
are primarily invested in U.S. government securities and money market funds that
invest primarily in U.S. government securities. At December 31, 2001 and 2000,
restricted cash equivalents of approximately $8.6 million and $17.1 million,
respectively, collateralized undrawn letters of credit, and restricted cash
equivalents and restricted marketable debt securities of approximately $74.4
million and $70.1 million, respectively, were held by special purpose trusts
established to pay future environmental remediation obligations and other
environmental expenditures of the Company. Generally, restricted cash and
restricted marketable debt securities are classified as either a current or
noncurrent asset depending upon the classification of the liability to which the
restricted amount relates. Additionally, restricted marketable debt securities
are generally classified as either current or noncurrent assets depending upon
the maturity date of each marketable debt security and are carried at market
which approximates cost. Unrealized gains and losses on available-for-sale debt
securities are included in other comprehensive income (loss), net of related
deferred income taxes. See Note 6. Gains and losses on available-for-sale debt
securities are recognized in income upon realization and are computed based on
specific identification of the debt securities sold.
Marketable equity securities and securities transactions
Marketable equity securities are carried at market based on quoted
market prices. Unrealized gains and losses on available-for-sale equity
securities are included in other comprehensive income (loss), net of related
deferred income taxes. See Note 6. Gains and losses on available-for-sale equity
securities are recognized in income upon realization and are computed based on
specific identification of the equity securities sold. Declines in value that
are judged to be other-than-temporary are reported in other income, net.
Inventories
Inventories are stated at the lower of cost (principally average cost)
or market. Amounts are removed from inventories at average cost.
Investment in TiO2 manufacturing joint venture
Investment in a 50%-owned manufacturing joint venture is accounted for
by the equity method.
Property, equipment, depreciation and depletion
Property and equipment are stated at cost. Interest costs related to
major, long-term capital projects are capitalized as a component of construction
costs. Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized.
Depreciation is computed principally by the straight-line method over
the estimated useful lives of ten to forty years for buildings and three to
twenty years for machinery and equipment. Depletion of mining properties is
computed by the unit-of-production and straight-line methods.
F-13
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. Effective January 1, 2002, the Company will assess impairment of other
long-lived assets (such as property and equipment and mining properties) in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 144 as
discussed under "New accounting principles not yet adopted."
Long-term debt
Long-term debt is stated net of unamortized original issue discount
("OID"). OID is amortized over the period during which cash interest payments
are not required and deferred financing costs are amortized over the term of the
applicable issue, both by the interest method.
Employee benefit plans
Accounting and funding policies for retirement plans and postretirement
benefits other than pensions ("OPEB") are described in Note 12.
The Company accounts for stock-based employee compensation in accordance
with Accounting Principles Board Opinion ("APBO") No. 25, "Accounting for Stock
Issued to Employees," and its various interpretations. Under APBO No. 25, no
compensation cost is generally recognized for fixed stock options in which the
exercise price is not less than the market price on the grant date. Compensation
cost recognized by the Company in accordance with APBO No. 25 was nil in 2001,
$1.7 million in 2000 and nil in 1999.
Environmental remediation costs
Environmental remediation costs are accrued when estimated future
expenditures are probable and reasonably estimable. The estimated future
expenditures generally are not discounted to present value. Recoveries of
remediation costs from other parties, if any, are reported as receivables when
their receipt is deemed probable. At December 31, 2001 and 2000, no receivables
for recoveries have been recognized.
Net sales
The Company adopted the Securities and Exchange Commission's ("SEC")
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," as amended, in 2000. Revenue generally is realized or realizable
and earned when all of the requirements of SAB No. 101 are met, including when
title and the risks and rewards of ownership passes to the customer (generally
at the time the product is shipped to the customer). The impact of adopting SAB
No. 101 was not material. Amounts charged to customers for shipping and handling
are included in net sales.
F-14
Repair and maintenance costs
The Company performs planned major maintenance activities during the
year. Repair and maintenance costs estimated to be incurred in connection with
planned major maintenance activities are accrued in advance and are included in
cost of goods sold.
Shipping and handling costs
Shipping and handling costs are included in selling, general and
administrative expense and were $49 million in 2001, $50 million in 2000 and $54
million in 1999.
Income taxes
Deferred income tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the income tax
and financial reporting carrying amounts of assets and liabilities, including
investments in subsidiaries and unconsolidated affiliates not included in the
Company's U.S. tax group (the "NL Tax Group"). The Company periodically
evaluates its deferred tax assets in the various taxing jurisdictions in which
it operates and adjusts any related valuation allowance. The Company's valuation
allowance is equal to the amount of deferred tax assets which the Company
believes do not meet the "more-likely-than-not" recognition criteria.
Effective January 1, 2001, the Company and its qualifying subsidiaries
were included in the consolidated U.S. federal tax return of Contran (the
"Contran Tax Group"). As a member of the Contran Tax Group, the Company is a
party to a tax sharing agreement (the "Contran Tax Agreement"). The Contran Tax
Agreement provides that the Company compute its provision for U.S. income taxes
on a separate-company basis using the tax elections made by Contran. Pursuant to
the Contran Tax Agreement and using the tax elections made by Contran, the
Company makes payments to or receives payments from Valhi in amounts it would
have paid to or received from the U.S. Internal Revenue Service had it not been
a member of the Contran Tax Group. Refunds are limited to amounts previously
paid under the Contran Tax Agreement unless the Company was entitled to a refund
from the U.S. Internal Revenue Service on a separate company basis. Pursuant to
the Contran Tax Agreement, the Company has a $2.2 million receivable from Valhi
related to capital loss carrybacks which would have been recoverable from the
U.S. Internal Revenue Service.
Derivatives and hedging activities
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, effective January 1, 2001. SFAS No. 133
establishes accounting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Under SFAS No. 133, all derivatives are recognized as either assets or
liabilities and measured at fair value. The accounting for changes in fair value
of derivatives is dependent upon the intended use of the derivative. As
permitted by the transition requirements of SFAS No. 133, as amended, the
Company exempted from the scope of SFAS No. 133 all host contracts containing
embedded derivatives which were issued or acquired prior to January 1, 1999. The
Company is not a party to any significant derivative or hedging instrument
covered by SFAS No. 133 at December 31, 2001, and there was no impact on the
Company's financial statements from adopting SFAS No. 133.
F-15
The Company periodically uses interest rate swaps, currency swaps and
other types of contracts to manage interest rate and foreign exchange risk with
respect to financial assets or liabilities. The Company has not entered into
these contracts for trading or speculative purposes in the past, nor does it
currently anticipate doing so in the future. The Company was not a party to any
such contracts during 2001, 2000 and 1999.
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. The weighted average number of
outstanding stock options which were excluded from the calculation of diluted
earnings per share because their impact would have been antidilutive aggregated
876,000, 222,000 and 1,511,000 in 2001, 2000 and 1999, respectively. There were
no adjustments to income from continuing operations or net income in the
computation of the diluted earnings per share amounts.
Other
Effective July 1, 2001, the Company adopted SFAS No. 141, "Business
Combinations," for all business combinations initiated on or after July 1, 2001,
and all purchase business combinations (including step acquisitions). Under SFAS
No. 141, all business combinations will be accounted for by the purchase method,
and the pooling-of-interests method will be prohibited.
New accounting principles not yet adopted
The Company will adopt 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 any of the
Company's equity method investees. 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 no goodwill at December 31, 2001.
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 standard to determine, among other things,
F-16
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 SFAS
No. 143 has not yet been determined.
The Company will adopt 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 Company believes the adoption of SFAS No. 144 will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
Note 3 - Business and geographic segments:
The Company's operations are conducted by Kronos in one operating
business segment - the production and sale of TiO2. Titanium dioxide pigments
are used to impart whiteness, brightness and opacity to a wide variety of
products, including paints, plastics, paper, fibers and ceramics. At December
31, 2001 and 2000, the net assets of non-U.S. subsidiaries included in
consolidated net assets approximated $394 million and $352 million,
respectively.
The Company evaluates its TiO2 segment performance based on operating
income. Operating income is defined as income before income taxes, minority
interest, extraordinary items, interest expense, certain nonrecurring items and
certain general corporate items. Corporate items excluded from operating income
include corporate expense, interest and dividend income not attributable to TiO2
operations, litigation settlement gains, securities transaction gains and losses
and gains and losses from the disposal of long-lived assets outside the ordinary
course of business. The accounting policies of the TiO2 segment are the same as
those described in Note 2. Interest income included in the calculation of TiO2
operating income is disclosed in Note 15 as "Trade interest income."
Segment assets are comprised of all assets attributable to the
reportable operating segment. The Company's investment in the TiO2 manufacturing
joint venture (see Note 8) is included in TiO2 business segment assets.
Corporate assets are not attributable to the TiO2 operating segment and consist
principally of cash, cash equivalents, restricted cash equivalents, restricted
marketable debt securities, marketable equity securities and certain receivables
from affiliates. For geographic information, net sales are attributed to the
place of manufacture (point of origin) and the location of the customer (point
of destination); property and equipment are attributed to their physical
location.
F-17
Years ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
(In thousands)
Business segment - TiO2
Net sales ............................... $ 835,099 $ 922,319 $ 908,387
Other income, excluding corporate ....... 10,815 8,167 12,484
--------- --------- ---------
845,914 930,486 920,871
Cost of sales ........................... 578,060 610,449 662,315
Selling, general and administrative,
excluding corporate ................... 98,667 107,554 112,888
--------- --------- ---------
Operating income .................... 169,187 212,483 145,668
Insurance recoveries, net ............... 17,468 -- --
--------- --------- ---------
Income before corporate items, income
taxes, minority interest and
extraordinary item ................ 186,655 212,483 145,668
General corporate income (expense):
Securities earnings:
Interest and dividends .......... 8,886 8,346 6,597
Securities transactions, net .... (1,133) 2,531 --
Litigation settlement gains, net and
other income ...................... 16,298 73,704 4,565
Corporate expense ................... (25,845) (29,624) (21,454)
Interest expense .................... (27,569) (31,243) (36,884)
--------- --------- ---------
Income before income taxes, minority
interest and extraordinary item ... $ 157,292 $ 236,197 $ 98,492
========= ========= =========
Capital expenditures:
Kronos .............................. $ 53,656 $ 31,066 $ 32,703
General corporate ................... 13 23 2,856
--------- --------- ---------
$ 53,669 $ 31,089 $ 35,559
========= ========= =========
Depreciation, depletion and amortization:
Kronos .............................. $ 28,907 $ 28,989 $ 33,047
General corporate ................... 692 744 683
--------- --------- ---------
$ 29,599 $ 29,733 $ 33,730
========= ========= =========
F-18
Years ended December 31,
------------------------------------
2001 2000 1999
--------- --------- ---------
(In thousands)
Geographic areas
Net sales - point of origin:
Germany ......................... $ 398,470 $ 444,050 $ 459,467
United States ................... 278,624 313,426 299,520
Canada .......................... 149,412 154,579 162,746
Belgium ......................... 126,782 137,829 138,671
Norway .......................... 102,843 98,300 88,277
Other ........................... 82,320 92,691 90,442
Eliminations .................... (303,352) (318,556) (330,736)
--------- --------- ---------
$ 835,099 $ 922,319 $ 908,387
========= ========= =========
Net sales - point of destination:
Europe .......................... $ 425,338 $ 480,388 $ 478,652
United States ................... 258,347 283,327 268,037
Canada .......................... 47,061 53,060 60,834
Latin America ................... 25,514 27,104 35,308
Asia ............................ 46,169 45,922 41,612
Other ........................... 32,670 32,518 23,944
--------- --------- ---------
$ 835,099 $ 922,319 $ 908,387
========= ========= =========
December 31,
------------------------------------
2001 2000 1999
--------- --------- ---------
(In thousands)
Identifiable assets
Net property and equipment:
Germany ...................... $ 182,387 $ 173,385 $ 190,292
Canada ....................... 54,676 57,929 62,334
Belgium ...................... 46,841 46,778 49,146
Norway ....................... 38,549 38,361 39,845
Other ........................ 7,297 7,929 6,841
---------- ---------- ----------
$ 329,750 $ 324,382 $ 348,458
========== ========== ==========
Total assets:
Kronos ....................... $ 900,401 $ 893,340 $ 972,549
General corporate ............ 250,690 227,448 83,624
---------- ---------- ----------
$1,151,091 $1,120,788 $1,056,173
========== ========== ==========
F-19
Note 4 -Accounts and notes receivable:
December 31,
-------------------------
2001 2000
--------- ---------
(In thousands)
Trade receivables .............................. $ 99,989 $ 114,776
Insurance claims receivable .................... 11,505 2,236
Recoverable VAT and other receivables .......... 16,585 16,750
Allowance for doubtful accounts ................ (2,358) (2,222)
--------- ---------
$ 125,721 $ 131,540
========= =========
Note 5 - Inventories:
December 31,
---------------------------
2001 2000
-------- --------
(In thousands)
Raw materials ............................ $ 79,162 $ 66,061
Work in process .......................... 9,675 7,117
Finished products ........................ 117,201 107,120
Supplies ................................. 25,018 25,675
-------- --------
$231,056 $205,973
======== ========
Note 6- Marketable equity securities and securities transactions:
December 31,
--------------------
2001 2000
-------- --------
(in thousands)
Available-for-sale marketable equity securities:
Unrealized gains ................................... $ 14,917 $ 14,912
Unrealized losses .................................. (2,070) (1,244)
Cost ............................................... 32,380 33,518
-------- --------
Aggregate fair value ........................... $ 45,227 $ 47,186
======== ========
During 2000 the Company purchased 1,000,000 shares of Tremont's common
stock in market transactions for an aggregate of $26.0 million. Before the close
of business on December 31, 2000, the Company held 16% of Tremont's outstanding
common stock, including approximately 36,000 shares previously held by the
Company, and Valhi held an additional 64% of Tremont's outstanding common stock.
Effective with the close of business on December 31, 2000, the Company
contributed substantially all of its Tremont shares, and Valhi contributed all
of its Tremont shares, to a newly formed company, Tremont Group, Inc. ("Tremont
Group"), in return for a 20% and 80% respective ownership interest in Tremont
Group. After the contributions, Tremont Group held the 80% of Tremont previously
owned by the Company and Valhi. At December 31, 2001 and 2000, the aggregate
fair value of the Company's indirect investment in Tremont was $29.9 million and
$33.1 million, respectively.
The Company's stock of Tremont Group is redeemable at the option of the
Company for fair value based upon the value of the underlying Tremont shares,
F-20
and the Company accounts for its investment in Tremont Group as an
available-for-sale marketable equity security. The Company also held 1,186,200
shares of Valhi's outstanding common stock (approximately 1%) at December 31,
2001 and 2000. At December 31, 2001, the aggregate adjusted cost basis and fair
value of the Valhi common stock was $5.9 million ($5.9 million in 2000) and
$15.1 million ($13.6 million in 2000), respectively. The Company accounts for
investments in its parent companies as available-for-sale marketable equity
securities carried at fair value. See Note 1.
In 2000 the Company received approximately 390,000 shares of common
stock pursuant to the demutualization of an insurance company from which the
Company had purchased certain insurance policies. The Company recognized a $5.6
million securities gain based on the insurance company's initial public offering
price of $14.25 per share. The shares were placed in a Voluntary Employees'
Beneficiary Association ("VEBA") trust, the assets of which may only be used to
pay for certain retiree benefits. The Company accounted for the $5.6 million
contribution of the insurance company's common stock to the trust as a reduction
of its accrued postretirement benefits cost liability. The shares were sold by
the trust in 2000 for $7.8 million or $20 per share. See Notes 12 and 15.
In 2001 and 2000 the Company recognized noncash securities losses of
$1.1 million and $3.1 million, respectively, related to other-than-temporary
declines in value of certain available-for-sale marketable equity securities
held by the Company. See Note 15.
Note 7 - Receivable from affiliates:
A majority-owned subsidiary of the Company, NL Environmental Management
Services, Inc. ("EMS"), loaned $13.4 million to Tremont under a reducing
revolving loan agreement in the first quarter of 2001. See Note 1. The loan was
approved by special committees of the Company's and EMS's Boards of Directors.
The loan bears interest at prime plus 2% (8% at December 31, 2001), 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 second, third and fourth
quarters of 2001, Tremont repaid $250,000 of the loan. At December 31, 2001, the
outstanding loan balance was $12.7 million and no amounts were available for
additional borrowings by Tremont. See Note 19.
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
Directors. The loan bears interest at prime (6% at December 31, 2001), 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 December 31, 2001, $5 million was available for additional borrowing
by the Family Trust. The loan was classified as noncurrent at December 31, 2001
as the Company does not expect to demand repayment within one year. See Note 19.
F-21
Note 8 - Investment in TiO2 manufacturing joint venture:
Kronos Louisiana, Inc. ("KLA"), a wholly owned subsidiary of Kronos,
owns a 50% interest in Louisiana Pigment Company, L.P. ("LPC"). LPC is a
manufacturing joint venture that is also 50%-owned by Tioxide Americas Inc.
("Tioxide"), a wholly owned subsidiary of Huntsman International Holdings LLC, a
60%-owned subsidiary of Huntsman Corporation. LPC owns and operates a
chloride-process TiO2 plant in Lake Charles, Louisiana.
KLA is required to purchase one-half of the TiO2 produced by LPC. LPC
operates on a break-even basis and, accordingly, the Company reports no equity
in earnings of LPC. Kronos' cost for its share of the TiO2 produced is equal to
its share of LPC's costs. Kronos' share of net costs is reported as cost of
sales as the related TiO2 acquired from LPC is sold.
LPC made cash distributions of $22.6 million in 2001, $15.1 million in
2000 and $27.3 million in 1999, equally split between the partners.
Summary balance sheets of LPC are shown below.
December 31,
-----------------------
2001 2000
-------- --------
(In thousands)
ASSETS
Current assets ................................... $ 45,872 $ 56,063
Property and equipment, net ...................... 250,501 264,918
-------- --------
$296,373 $320,981
======== ========
LIABILITIES AND PARTNERS' EQUITY
Other liabilities, primarily current ............. $ 16,767 $ 18,749
Partners' equity ................................. 279,606 302,232
-------- --------
$296,373 $320,981
======== ========
F-22
Summary income statements of LPC are shown below.
Years ended December 31,
------------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Revenues and other income:
Kronos ........................... $ 93,393 $ 92,530 $ 85,304
Tioxide .......................... 94,009 93,366 86,309
Interest ......................... 303 578 569
-------- -------- --------
187,705 186,474 172,182
-------- -------- --------
Cost and expenses:
Cost of sales .................... 187,295 186,045 171,829
General and administrative ....... 410 429 353
-------- -------- --------
187,705 186,474 172,182
-------- -------- --------
Net income ................... $ -- $ -- $ --
======== ======== ========
Note 9 - Accounts payable and accrued liabilities:
December 31,
---------------------------
2001 2000
-------- --------
(In thousands)
Accounts payable ......................... $ 99,358 $ 64,553
-------- --------
Accrued liabilities:
Employee benefits .................... 29,722 34,160
Interest ............................. 4,980 5,019
Deferred income ...................... 4,000 4,000
Other ................................ 38,163 40,145
-------- --------
76,865 83,324
-------- --------
$176,223 $147,877
======== ========
Note 10 - Other noncurrent liabilities:
December 31,
-------------------------
2001 2000
------- -------
(In thousands)
Insurance claims expense ................... $ 8,789 $10,314
Employee benefits .......................... 3,476 7,721
Deferred income ............................ 333 4,333
Other ...................................... 2,131 904
------- -------
$14,729 $23,272
======= =======
F-23
Note 11 - Notes payable and long-term debt:
December 31,
-----------------------
2001 2000
-------- --------
(In thousands)
Notes payable .................................... $ 46,201 $ 69,970
======== ========
Long-term debt:
NL - 11.75% Senior Secured Notes ............. $194,000 $194,000
Kronos ....................................... 2,498 2,093
-------- --------
196,498 196,093
Less current maturities ...................... 1,033 730
-------- --------
$195,465 $195,363
======== ========
The Company's $194 million of 11.75% Senior Secured Notes due 2003 (the
"Notes") are collateralized by a series of intercompany notes from Kronos
International, Inc. ("KII"), a wholly owned subsidiary of Kronos, to NL, the
interest rate and payment terms of which mirror those of the respective Notes
(the "Mirror Notes"). 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 full and unconditional guarantee of the
Notes by Kronos. In lieu of providing separate audited financial statements of
Kronos, the Company has included condensed consolidating financial information
in accordance with Rule 3-10 (e) of the SEC's Regulation S-X. See Note 24.
The Company redeemed $50 million (par value) of the Notes on December
29, 2000 at 101.5%. The remaining Notes are redeemable, at the Company's option,
at a redemption price of 100% of the principal amount. The Notes are issued
pursuant to an indenture which contains a number of covenants and restrictions
which, among others, restrict the ability of the Company and its subsidiaries to
incur debt, incur liens, pay dividends, merge or consolidate with, or sell or
transfer all or substantially all of their assets to another entity. In the
event of a Change of Control, as defined in the indenture, the Company would be
required to make an offer to purchase the Notes at 101% of the principal amount
of the Notes. The Company would also be required to make an offer to purchase a
specified amount of the Notes at par value in the event the Company generates a
certain amount of net proceeds from the sale of assets outside the ordinary
course of business, and such net proceeds are not otherwise used for specified
purposes within a specified time period. At December 31, 2001, $20 million was
available for payment of dividends pursuant to the terms of the indenture. The
quoted market price of the Notes per $100 principal amount was $100.47 and $101
at December 31, 2001 and 2000, respectively.
On February 6, 2002, the Company gave notice to the trustee of its
intention to redeem $25 million principal amount of the Notes on March 22, 2002,
at the current call price of 100%.
Notes payable consist of short-term borrowings denominated in non-U.S.
currencies due within one year from non-U.S. banks. Borrowings total $46 million
F-24
(euro 27 million and NOK 200 million) at December 31, 2001 and $70 million (euro
51 million and NOK 200 million) at December 31, 2000. Interest rates on notes
payable ranged from 3.84% to 7.27% at December 31, 2001 and from 5.33% to 7.92%
at December 31, 2000.
Unused lines of credit available for borrowing under the Company's
non-U.S. credit facilities approximated $8 million at December 31, 2001.
The aggregate maturities of long-term debt at December 31, 2001 are
shown in the table below.
Years ending December 31, Amount
- ------------------------- ----------------
(In thousands)
2002 $ 1,033
2003 195,008
2004 216
2005 115
2006 112
2007 14
----------------
$ 196,498
================
Note 12 - Employee benefit plans:
Company-sponsored pension plans
The Company maintains various defined benefit and defined contribution
pension plans covering substantially all employees. Non-U.S. employees are
covered by plans in their respective countries and a majority of U.S. employees
are eligible to participate in a contributory savings plan.
The Company contributes to eligible U.S. employees' accounts an amount
equal to approximately 4% (4% in 2000 and 3% in 1999) of the employee's annual
eligible earnings and partially matches employee contributions to the U.S.
contributory savings plan. The Company also has a nonqualified defined
contribution plan covering certain executives, and participants receive benefits
based on a formula involving eligible earnings. The Company's expense related to
these plans was $.8 million in 2001, $1.6 million in 2000 and $1.1 million in
1999.
F-25
Certain actuarial assumptions used in measuring the defined benefit
pension assets, liabilities and expenses are presented below.
December 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(Percentages)
Discount rate ................................. 5.8 to 7.3 6.0 to 7.8 5.8 to 7.5
Rate of increase in future compensation levels. 2.8 to 4.5 3.0 to 4.5 2.5 to 4.5
Long-term rate of return on plan assets ....... 6.8 to 8.5 7.0 to 9.0 6.0 to 9.0
Plan assets are comprised primarily of investments in U.S. and non-U.S.
corporate equity and debt securities, short-term investments, mutual funds and
group annuity contracts.
SFAS No. 87, "Employers' Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit obligation exceeds the unfunded accrued pension liability. Variances
from actuarially assumed rates will change the actuarial valuation of accrued
pension liabilities, pension expense and funding requirements in future periods.
The components of the net periodic defined benefit pension cost are set
forth below.
Years ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Net periodic pension cost:
Service cost benefits ....................... $ 3,976 $ 4,063 $ 3,942
Interest cost on projected benefit obligation
("PBO") ................................... 15,605 15,088 16,170
Expected return on plan assets .............. (16,143) (15,403) (15,567)
Amortization of prior service cost .......... 201 238 267
Amortization of net transition obligation ... 510 530 578
Recognized actuarial losses ................. 443 226 1,144
-------- -------- --------
$ 4,592 $ 4,742 $ 6,534
======== ======== ========
F-26
The funded status of the Company's defined benefit pension plans is set
forth below.
December 31,
-------------------------
2001 2000
--------- ---------
(In thousands)
Change in PBO:
Beginning of year ............................ $ 248,355 $ 260,186
Service cost ................................. 3,976 4,063
Interest ..................................... 15,605 15,088
Participant contributions .................... 1,005 1,027
Amendments ................................... 1,819 --
Actuarial loss ............................... 10,149 1,022
Benefits paid ................................ (15,849) (16,993)
Change in currency exchange rates ............ (3,255) (16,038)
--------- ---------
End of year .............................. 261,805 248,355
--------- ---------
Change in fair value of plan assets:
Beginning of year ............................ 216,984 218,942
Actual return on plan assets ................. 4,711 11,762
Employer contributions ....................... 7,559 16,558
Participant contributions .................... 1,005 1,027
Benefits paid ................................ (15,849) (16,993)
Change in currency exchange rates ............ (6,143) (14,312)
--------- ---------
End of year .............................. 208,267 216,984
--------- ---------
Funded status at year end:
Plan assets less than PBO .................... (53,538) (31,371)
Unrecognized actuarial loss .................. 44,744 24,191
Unrecognized prior service cost .............. 4,371 1,693
Unrecognized net transition obligation ....... 4,269 786
--------- ---------
$ (154) $ (4,701)
========= =========
Amounts recognized in the balance sheet:
Prepaid pension cost ......................... $ 18,411 $ 22,789
Accrued pension cost:
Current .................................. (5,993) (6,270)
Noncurrent ............................... (26,985) (21,220)
Unrecognized net pension obligations ......... 5,901 --
Accumulated other comprehensive loss ......... 8,512 --
--------- ---------
$ (154) $ (4,701)
========= =========
Selected information related to the Company's defined benefit pension
plans that have accumulated benefit obligations in excess of fair value of plan
assets is presented below. At December 31, 2001 and 2000, 78% and 76%,
respectively, of the projected benefit obligations of such plans relate to
non-U.S. plans.
F-27
December 31,
-------------------------
2001 2000
-------- --------
(In thousands)
Projected benefit obligation ................. $228,647 $190,141
Accumulated benefit obligation ............... 206,669 169,077
Fair value of plan assets .................... 174,832 149,767
Incentive bonus programs
Certain employees are eligible to participate in the Company's various
incentive bonus programs. The programs provide for annual payments, which may be
in the form of cash or NL common stock. The amount of the annual payment paid to
an employee, if any, is based on formulas involving the profitability of Kronos
in relation to the annual operating plan and, for most of these employees,
individual performance.
Postretirement benefits other than pensions
In addition to providing pension benefits, the Company currently
provides certain health care and life insurance benefits for eligible retired
employees. Certain of the Company's Canadian employees may become eligible for
such postretirement health care and life insurance benefits if they reach
retirement age while working for the Company. In 1989 the Company began phasing
out such benefits for currently active U.S. employees over a ten-year period and
U.S. employees retiring after 1998 are not entitled to any such benefits. The
majority of all retirees are required to contribute a portion of the cost of
their benefits and certain current and future retirees are eligible for reduced
health care benefits at age 65. With the exception of the $5.6 million
contributed in 2000 to the VEBA trust discussed in Note 6, the Company's policy
is to fund medical claims as they are incurred, net of any contributions by the
retirees.
For measuring the OPEB liability at December 31, 2001, the expected rate
of increase in health care costs is 8% in 2002 decreasing to 5.5% in 2007 and
thereafter. Other weighted-average assumptions used to measure the liability and
expense are presented below.
December 31,
----------------------
2001 2000 1999
----- ----- ----
(Percentages)
Discount rate ....................................... 7.0 7.3 7.5
Long-term rate for compensation increases ........... 6.0 6.0 6.0
Long-term rate of return on plan assets ............. 7.7 7.7 9.0
Variances from actuarially assumed rates will change accrued OPEB
liabilities, net periodic OPEB expense and funding requirements in future
periods. If the health care cost trend rate was increased (decreased) by one
percentage point for each year, postretirement benefit expense would have
increased approximately $.2 million (decreased by $.1 million) in 2001, and the
projected benefit obligation at December 31, 2001 would have increased by
approximately $1.6 million (decreased by $1.4 million).
F-28
The components of the Company's net periodic postretirement benefit cost
are set forth below.
Years ended December 31,
--------------------------------
2001 2000 1999
------- ------- -------
(In thousands)
Net periodic OPEB cost (benefit):
Service cost benefits .................. $ 94 $ 84 $ 40
Interest cost on PBO ................... 2,536 2,646 2,069
Expected return on plan assets ......... (773) (521) (526)
Amortization of prior service cost ..... (2,075) (2,075) (2,075)
Recognized actuarial losses (gains) .... 27 24 (573)
------- ------- -------
$ (191) $ 158 $(1,065)
======= ======= =======
December 31,
------------------------
2001 2000
-------- --------
(In thousands)
Change in PBO:
Beginning of year ............................ $ 37,040 $ 37,354
Service cost ................................. 94 84
Interest cost ................................ 2,536 2,646
Actuarial losses ............................. 792 1,672
Plan asset reimbursements .................... 1,197 --
Benefits paid from:
Company funds ............................ -- (1,790)
Plan assets .............................. (6,377) (2,859)
Change in currency exchange rates ............ (145) (67)
-------- --------
End of year .............................. 35,137 37,040
-------- --------
Change in fair value of plan assets:
Beginning of year ............................ 11,842 5,968
Actual return on plan assets ................. 460 2,705
Employer contributions ....................... 475 6,028
Benefits paid ................................ (6,377) (2,859)
-------- --------
End of year .............................. 6,400 11,842
-------- --------
Funded status at year end:
Plan assets less than PBO .................... (28,737) (25,198)
Unrecognized actuarial gain .................. (105) (1,135)
Unrecognized prior service cost .............. (5,783) (7,858)
-------- --------
$(34,625) $(34,191)
======== ========
Amounts recognized in the balance sheet:
Current ...................................... $ (4,783) $ (4,787)
Noncurrent ................................... (29,842) (29,404)
-------- --------
$(34,625) $(34,191)
======== ========
F-29
Note 13 - Shareholders' equity:
Common stock
Shares of common stock
-------------------------------------
Treasury
Issued stock Outstanding
------- -------- -----------
(In thousands)
Balance at December 31, 1998 .......... 66,839 15,028 51,811
Treasury shares acquired .......... -- 552 (552)
Treasury shares reissued .......... -- (25) 25
------- ------- -------
Balance at December 31, 1999 .......... 66,839 15,555 51,284
Treasury shares acquired .......... -- 1,682 (1,682)
Treasury shares reissued .......... -- (450) 450
------- ------- -------
Balance at December 31, 2000 .......... 66,839 16,787 50,052
Treasury shares acquired .......... -- 1,059 (1,059)
Treasury shares reissued .......... -- (38) 38
Other ............................. 6 -- 6
------- ------- -------
Balance at December 31, 2001 .......... 66,845 17,808 49,037
======= ======= =======
Pursuant to its share repurchase program, the Company purchased
1,059,000 shares of its common stock in the open market at an aggregate cost of
$15.5 million in 2001, 1,682,000 shares of its common stock at an aggregate cost
of $30.9 million in 2000 and 552,000 shares of its common stock in the open
market at an aggregate cost of $7.2 million in 1999. Approximately 1,207,000
additional shares are available for purchase under the Company's share
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.
The Company increased the regular quarterly dividend from $.03 per share
to $.035 per share in February 1999 and subsequently paid four quarterly $.035
per share cash dividends in 1999. In February 2000 the Company increased the
regular quarterly dividend to $.15 per share and subsequently paid three
quarterly $.15 per share cash dividends in the first nine months of 2000. In
October 2000 the Company increased the regular quarterly dividend to $.20 per
share and subsequently paid a quarterly $.20 per share cash dividend in the
fourth quarter of 2000. The Company paid four quarterly $.20 per share cash
dividends in 2001. On February 6, 2002, the Company's Board of Directors
declared a regular quarterly dividend of $.20 per share to shareholders of
record as of March 8, 2002 to be paid on March 22, 2002.
Common stock options
The NL Industries, Inc. 1998 Long-Term Incentive Plan ("NL Option Plan")
provides for the discretionary grant of restricted common stock, stock options,
stock appreciation rights ("SARs") and other incentive compensation to officers
and other key employees of the Company and non-employee directors. Although
certain stock options granted pursuant to a similar plan which preceded the NL
Option Plan ("Predecessor Option Plan") remain outstanding at December 31, 2001,
no additional options may be granted under the Predecessor Option Plan.
F-30
Up to five million shares of NL common stock may be issued pursuant to
the NL Option Plan and, at December 31, 2001, 3,663,000 shares were available
for future grants. The NL Option Plan provides for the grant of options that
qualify as incentive options and for options which are not so qualified.
Generally, stock options and SARs (collectively, "options") are granted at a
price equal to or greater than 100% of the market price at the date of grant,
vest over a five year period and expire ten years from the date of grant.
Restricted stock, forfeitable unless certain periods of employment are
completed, is held in escrow in the name of the grantee until the restriction
period expires. No SARs have been granted under the NL Option Plan.
Changes in outstanding options granted pursuant to the NL Option Plan,
the Predecessor Option Plan and the nonemployee director plan are summarized in
the table below.
Exercise price Amount
per share payable
-------------------- upon
Shares Low High exercise
------ --------- --------- --------
(In thousands, except per share amounts)
Outstanding at December 31, 1998 2,119 $ 5.00 $ 24.19 $ 31,019
Granted .................... 410 11.28 15.19 5,377
Exercised .................. (25) 5.00 11.81 (209)
Forfeited .................. (67) 8.69 22.63 (1,244)
----- --------- --------- --------
Outstanding at December 31, 1999 2,437 5.00 24.19 34,943
Granted .................... 432 14.25 14.44 6,165
Exercised .................. (918) 5.00 17.97 (9,508)
Forfeited .................. (349) 8.69 24.19 (7,237)
----- --------- --------- --------
Outstanding at December 31, 2000 1,602 5.00 21.97 24,363
Granted .................... 484 20.11 20.51 9,737
Exercised .................. (38) 11.28 21.97 (627)
Forfeited .................. (34) 11.28 20.11 (513)
----- --------- --------- --------
Outstanding at December 31, 2001 2,014 $ 5.00 $ 21.97 $ 32,960
===== ========= ========= ========
At December 31, 2001, 2000 and 1999 options to purchase 658,560, 363,480
and 1,255,901 shares, respectively, were exercisable and options to purchase
391,000 shares become exercisable in 2002. Of the exercisable options, options
to purchase 386,760 shares at December 31, 2001 had exercise prices less than
the Company's December 31, 2001 quoted market price of $15.27 per share.
Outstanding options at December 31, 2001 expire at various dates through 2011,
with a weighted-average remaining life of seven years.
The pro forma information required by SFAS No. 123, "Accounting for
Stock-Based Compensation," is based on an estimation of the fair value of
options issued subsequent to January 1, 1995. The weighted-average fair values
of options granted during 2001, 2000 and 1999 were $7.52, $4.83 and $6.94 per
share, respectively. The fair values of employee stock options were calculated
using the Black-Scholes stock option valuation model with the following weighted
average assumptions for grants in 2001, 2000 and 1999: stock price volatility of
46%, 48% and 50% in 2001, 2000 and 1999, respectively; risk-free rate of return
F-31
of 5% in 2001 and 2000 and 6% in 1999; dividend yield of 4.0% in 2001, 4.9% in
2000 and 1.2% in 1999; and an expected term of 9 years in 2001, 2000 and 1999.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
The Company's pro forma net income and basic net income per common share
were as follows. The pro forma impact on earnings per common share for 2001,
2000 and 1999 is not necessarily indicative of future effects on earnings per
share.
Years ended December 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(In thousands except per share amounts)
Net income - as reported ...................... $ 121,407 $ 154,609 $ 159,771
Net income - pro forma ........................ $ 118,959 $ 152,201 $ 156,868
Net income per basic common share - as reported $ 2.44 $ 3.07 $ 3.09
Net income per basic common share - pro forma . $ 2.39 $ 3.02 $ 3.03
Preferred stock
The Company is authorized to issue a total of five million shares of
preferred stock. The rights of preferred stock as to dividends, redemption,
liquidation and conversion are determined upon issuance.
Note 14 - Income taxes:
The components of (i) income from continuing operations before income
taxes and minority interest ("pretax income"), (ii) the difference between the
provision for income taxes attributable to pretax income and the amounts that
would be expected using the U.S. federal statutory income tax rate of 35%, (iii)
the provision for income taxes and (iv) the comprehensive tax provision are
presented below.
F-32
Years ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
(In thousands)
Pretax income:
U.S ........................................ $ 3,267 $ 73,646 $ 23,642
Non-U.S .................................... 154,025 162,551 74,850
--------- --------- ---------
$ 157,292 $ 236,197 $ 98,492
========= ========= =========
Expected tax expense ........................... $ 55,052 $ 82,669 $ 34,472
Non-U.S. tax rates ............................. (3,887) (6,445) 6,119
Resolution of German income tax audits ......... -- (5,500) (36,490)
Change in valuation allowance:
Corporate restructuring in Germany and other (23,247) -- (77,580)
Change in German income tax law ............ -- -- 24,070
Recognition of certain deductible tax
attributes which previously
did not meet the "more-likely-than-not"
recognition criteria ..................... (1,460) (2,600) (15,807)
Incremental tax on income of companies not
included in the NL Tax Group ................. 6,009 1,943 2,747
German rate change adjustment of deferred taxes -- 5,695 --
U.S. state income taxes ........................ 459 1,348 (680)
Other, net ..................................... 1,999 1,310 (1,452)
--------- --------- ---------
Income tax expense (benefit) ............... $ 34,925 $ 78,420 $ (64,601)
========= ========= =========
Provision for income taxes:
Current income tax expense (benefit):
U.S. federal ........................... $ 1,352 $ (8,255) $ 193
U.S. state ............................. 1,309 622 (2,489)
Non-U.S ................................ 29,008 45,867 24,467
--------- --------- ---------
31,669 38,234 22,171
--------- --------- ---------
Deferred income tax expense (benefit):
U.S. federal ........................... 12,369 32,128 (47,426)
U.S. state ............................. (850) 726 1,809
Non-U.S ................................ (8,263) 7,332 (41,155)
--------- --------- ---------
3,256 40,186 (86,772)
--------- --------- ---------
$ 34,925 $ 78,420 $ (64,601)
========= ========= =========
Comprehensive provision (benefit) for income
taxes allocable to:
Pretax income .............................. $ 34,925 $ 78,420 $ (64,601)
Extraordinary item ......................... -- (394) --
Additional paid-in capital ................. (69) (3,224) (16)
Other comprehensive income (loss):
Marketable equity securities ........... (287) 3,244 (883)
Pension liabilities .................... (2,160) -- --
--------- --------- ---------
$ 32,409 $ 78,046 $ (65,500)
========= ========= =========
F-33
The components of the net deferred tax liability are summarized below:
December 31,
--------------------------------------------------
2001 2000
----------------------- -----------------------
Deferred tax Deferred tax
----------------------- -----------------------
Assets Liabilities Assets Liabilities
--------- ----------- -------- -----------
(In thousands)
Tax effect of temporary differences
relating to:
Inventories ........................ $ 3,202 $ (2,849) $ 4,027 $ (2,966)
Property and equipment ............. 42,721 (54,084) 61,738 (53,753)
Accrued postretirement benefits cost 11,398 -- 13,145 --
Accrued (prepaid) pension cost ..... 2,711 (21,224) 4,348 (22,928)
Accrued environmental costs ........ 35,508 -- 37,761 --
Noncompete agreement ............... 1,517 -- 2,917 --
Other accrued liabilities and
deductible differences ........... 18,647 -- 18,327 --
Other taxable differences .......... -- (131,094) -- (122,561)
Tax on unremitted earnings of non-U.S ..
subsidiaries ......................... -- (3,933) -- (4,396)
Tax loss and tax credit carryforwards .. 118,828 -- 119,064 --
Valuation allowance .................... (154,437) -- (190,312) --
--------- --------- --------- ---------
Gross deferred tax assets
(liabilities) .................... 80,095 (213,184) 71,015 (206,604)
Reclassification, principally netting by
tax jurisdiction ..................... (68,398) 68,398 (59,109) 59,109
--------- --------- --------- ---------
Net total deferred tax assets
(liabilities) .................... 11,697 (144,786) 11,906 (147,495)
Net current deferred tax assets
(liabilities) .................... 11,011 (1,530) 11,673 (1,822)
--------- --------- --------- ---------
Net noncurrent deferred tax assets
(liabilities) .................... $ 686 $(143,256) $ 233 $(145,673)
========= ========= ========= =========
F-34
Changes in the Company's deferred income tax valuation allowance are
summarized below.
Years ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
(In thousands)
Balance at the beginning of year .................... $ 190,312 $ 233,595 $ 134,477
Recognition of certain deductible tax
attributes which previously did not meet the
"more-likely-than-not" recognition criteria ... (24,707) (2,600) (70,946)
Increase in certain deductible temporary
differences which the Company believes do
not meet the "more-likely-than-not"
recognition criteria .......................... -- -- 1,629
Offset to the change in gross deferred income tax
assets due principally to redeterminations
of certain tax attributes and implementation
of certain tax planning strategies ............ (3,681) (24,955) 183,150
Foreign currency translation .................... (7,487) (15,728) (14,715)
--------- --------- ---------
Balance at the end of year .......................... $ 154,437 $ 190,312 $ 233,595
========= ========= =========
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.
A reduction in the German "base" income tax rate from 30% to 25%,
enacted in October 2000, became effective January 1, 2001. The reduction in the
German income tax rate resulted in $5.7 million of additional deferred income
tax expense in the fourth quarter of 2000 due to a reduction of the Company's
deferred income tax asset related to certain German tax attributes. The Company
does not expect its future current income tax expense to be affected by the rate
change in Germany.
The Company received tax assessments from the Norwegian tax authorities
proposing tax deficiencies, including related interest, of NOK 39.3 million
pertaining to 1994 and 1996. The Company was unsuccessful in appealing the tax
assessments and in June 2001 paid NOK 39.3 million ($4.3 million when paid) to
the Norwegian tax authorities. The Company was adequately reserved for this
contingency. The lien on the Company's Fredrikstad, Norway TiO2 plant in favor
of the Norwegian tax authorities has been released.
The Company has received preliminary tax assessments for the years 1991
to 1997 from the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately (euro)10.4 million ($9.2 million at December
31, 2001). 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.
F-35
During the fourth quarter of 2001, the Company completed a restructuring
of its German subsidiaries, and as a result recognized a $17.6 million net
income tax benefit. This benefit is comprised of a $23.2 million decrease in the
valuation allowance due to a change in estimate of the Company's ability to
utilize certain German income tax attributes that did not previously meet the
"more-likely-than-not" recognition criteria offset by $5.6 million of
incremental U.S. taxes on undistributed earnings of certain foreign
subsidiaries.
The Company recognized a $90 million noncash income tax benefit in 1999
related to (i) a favorable resolution of the Company's previously reported tax
contingency in Germany ($36 million) and (ii) a net reduction in the Company's
deferred income tax valuation allowance due to a change in estimate of the
Company's ability to utilize certain income tax attributes under the
"more-likely-than-not" recognition criteria ($54 million).
The $54 million net reduction in the Company's deferred income tax
valuation allowance in 1999 is comprised of (i) a $78 million decrease in the
valuation allowance to recognize the benefit of certain deductible income tax
attributes which the Company now believes meets the recognition criteria as a
result of, among other things, a corporate restructuring of the Company's German
subsidiaries offset by (ii) a $24 million increase in the valuation allowance to
reduce the previously recognized benefit of certain other deductible income tax
attributes which the Company now believes do not meet the recognition criteria
due to a change in German tax law.
At December 31, 2001, the Company had, for U.S. federal income tax
purposes, a net operating loss carryforward of approximately $25 million, of
which $3 million expires in 2019 and $22 million expires in 2021 and
approximately $5.7 million of alternative minimum tax credit carryforwards with
no expiration date. The Company also has approximately $317 million of income
tax loss carryforwards in Germany with no expiration date. Unutilized foreign
tax credit carryovers of $2 million expired in 1999.
Note 15 - Other income, net:
Years ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Securities earnings:
Interest and dividends ................. $ 8,886 $ 8,346 $ 6,597
Securities gains (losses), net ......... (1,133) 2,531 --
-------- -------- --------
7,753 10,877 6,597
Currency transaction gains, net ............ 1,188 6,499 10,161
Noncompete agreement income ................ 4,000 4,000 4,000
Trade interest income ...................... 2,332 2,333 2,365
Disposition of property and equipment ...... (735) (1,562) (429)
Insurance recoveries, net (See Note 17) .... 7,222 -- --
Other, net ................................. 1,376 1,136 952
-------- -------- --------
$ 23,136 $ 23,283 $ 23,646
======== ======== ========
The Company received a $20 million fee as part of the sale of Rheox in
January 1998 in payment for entering into a five-year covenant not to compete in
the rheological products business. The Company is amortizing the fee to income
F-36
using the straight-line method over the five-year noncompete period beginning
January 30, 1998.
Note 16 - Litigation settlement gains, net:
In June 2000 the Company recognized a $43 million net gain from a
settlement with one of its two principal former insurance carriers, and in
December 2000 the Company recognized a $26.5 million net gain from a settlement
with certain members of the other principal former insurance carrier. The
settlement gains are stated net of $3.1 million in commissions, and the gross
settlement proceeds of $72.6 million were transferred by the carriers to special
purpose trusts established to pay future remediation and other environmental
expenditures of the Company.
A settlement with remaining members of the second carrier group was
reached in January 2001, and the Company recognized a $10.3 million gain in the
first quarter of 2001. The gross settlement proceeds of $10.7 million were
transferred by the carriers to the above mentioned special purpose trusts. In
2001 the Company also recognized $1.4 million of other litigation settlement
gains.
The settlements resolved court proceedings that the Company initiated to
seek reimbursement for legal defense expenditures and indemnity coverage for
certain of its environmental remediation expenditures. No further material
settlements relating to litigation concerning environmental remediation coverage
are expected.
Note 17 - Leverkusen fire and insurance claim:
A fire on March 20, 2001 damaged a section of the Company's Leverkusen,
Germany 35,000 metric ton sulfate-process TiO2 plant ("Sulfate Plant") and, as a
result, production of TiO2 at the Leverkusen facility was halted. The fire did
not enter the Company's adjacent 125,000 metric ton chloride-process TiO2 plant
("Chloride Plant"), but did damage certain support equipment necessary to
operate that plant. The damage to the support equipment resulted in a temporary
shutdown of the Chloride Plant.
On April 8, 2001, repairs to the damaged support equipment were
substantially completed and full production resumed at the Chloride Plant. The
Sulfate Plant became approximately 50% operational in September 2001 and became
fully operational in late October 2001. The damages to property and the business
interruption losses caused by the fire were covered by insurance as noted below,
but the effect on the financial results of the Company on a quarter-to-quarter
basis was impacted by the timing and amount of insurance recoveries.
The Company reached an agreement and settled the coverage 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 reflects
recovery of lost margin ($7.2 million) and as a reduction of cost of sales to
F-37
offset unallocated period costs ($20.1 million). No additional insurance
recoveries related to the Leverkusen fire are expected to be received.
Note 18 - Other items:
Advertising costs are expensed as incurred and were $1 million in each
of 2001, 2000 and 1999.
Research, development and certain sales technical support costs are
expensed as incurred and approximated $6 million in each of 2001 and 2000 and $7
million in 1999.
Interest capitalized in connection with long-term capital projects was
nil in each of 2001, 2000 and 1999.
Note 19 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, tax
sharing agreements, joint ventures, partnerships, loans, options, advances of
funds on open account, and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties and (b) common
investment and acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly held minority equity interest in another related party.
While no transactions of the type described above are planned or proposed with
respect to the Company other than as set forth in this Annual Report on Form
10-K, the Company continuously considers, reviews and evaluates, and understands
that Contran, Valhi and related entities consider, review and evaluate, such
transactions. Depending upon the business, tax and other objectives then
relevant, and restrictions under the indentures and other agreements, it is
possible that the Company might be a party to one or more such transactions in
the future.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
The Company is a party to various intercorporate services agreements
("ISA") with various related parties discussed below. Under the ISA's, employees
of one company will provide certain management, tax planning, financial and
administrative services to the other company on a fee basis. Such charges are
based upon estimates of the time devoted by the employees of the provider of the
services to the affairs of the recipient, and the compensation of such persons.
Because of the number of companies affiliated with Contran, the Company believes
it benefits from cost savings and economies of scale gained by not having
certain management, financial and administrative staffs duplicated at each
entity, thus allowing certain individuals to provide services to multiple
companies but only be compensated by one entity. These ISA's are reviewed and
approved by the Company's Board of Directors including members who are not
officers or directors of any other entity that may be deemed to be related to
the Company.
F-38
The Company is a party to an intercorporate services agreement with
Contran ("Contran ISA") whereby Contran provides certain management services to
the Company on a fee basis. Intercorporate services fee expense related to the
Contran ISA was $1.2 million in 2001 and $1.0 million in each of 2000 and 1999.
The Company was a party in 2000 and 1999 to an intercorporate services
agreement with Valhi ("Valhi ISA") whereby Valhi and the Company provide certain
management, financial and administrative services to each other on a fee basis.
Net intercorporate services fee expense related to the Valhi ISA was $.2 million
in 2000 and $.1 million in 1999.
The Company is party to an intercorporate services agreement with
Tremont ("Tremont ISA"). Under the terms of the contract, the Company provides
certain management and financial services to Tremont on a fee basis.
Intercorporate services fee income related to the Tremont ISA was $.1 million in
each of 2001, 2000 and 1999.
The Company is party to an intercorporate services agreement ("TIMET
ISA") with Titanium Metals Corporation ("TIMET"), approximately 39% of the
outstanding common stock of which is currently held by Tremont at December 31,
2001. Under the terms of the contract, the Company provides certain management
and financial services to TIMET on a fee basis. Intercorporate services fee
income related to the TIMET ISA was $.2 million in 2001, $.4 million in 2000 and
$.3 million in 1999.
The Company was party in 2000 and 1999 to an intercorporate services
agreement ("CompX ISA") with CompX International, Inc. ("CompX"), a subsidiary
of Valhi, Under the terms of the contract, the Company provides certain
management and administrative services to CompX on a fee basis. Intercorporate
services fee income related to the CompX ISA was $.2 million in 2000 and $.1
million in 1999.
Purchases of TiO2 from LPC were $93.4 million in 2001, $92.5 million in
2000 and $85.3 million in 1999.
The Company and Tall Pines Insurance Company ("Tall Pines") (formerly NL
Insurance, Ltd. of Vermont), a wholly owned subsidiary of Tremont, are parties
to an Insurance Sharing Agreement with respect to certain loss payments and
reserves established by Tall Pines that (i) arise out of claims against other
entities for which the Company is contractually responsible and (ii) are subject
to payment by Tall Pines under certain reinsurance contracts. Also, Tall Pines
will credit the Company with respect to certain underwriting profits or credit
recoveries that Tall Pines receives from independent reinsurers that relate to
retained liabilities. At December 31, 2001, the Company has $1.7 million of
restricted cash that collateralizes certain of Tall Pines' outstanding letters
of credit.
Tall Pines, Valmont Insurance Company ("Valmont")and EWI RE, Inc. and
EWI RE, Ltd. (collectively "EWI") provide for or broker certain of the
Company's, its joint venture's and its affiliates' insurance policies. Valmont
is a wholly owned insurance company of Valhi. An entity controlled by one of
Harold C. Simmons' daughters and Contran owned all of the outstanding common
stock of EWI at December 31, 2001. On January 7, 2002, the Company purchased EWI
for $9 million. See Note 23. Through December 31, 2000, Harold C. Simmons'
son-in-law managed the operations of EWI. Subsequent to December 31, 2000, this
son-in-law provides advisory services to EWI as requested by EWI. Consistent
with insurance industry practices, Tall Pines, Valmont and EWI receive
F-39
commissions from the insurance and reinsurance underwriters for the policies
that they provide or broker. The Company and its joint venture paid
approximately $10.1 million, $5.7 million and $3.7 million in 2001, 2000 and
1999, respectively, for policies provided or brokered by Tall Pines, Valmont and
EWI. These amounts principally included payments for reinsurance and insurance
premiums paid to unrelated third parties, but also included commissions paid to
Tall Pines, Valmont and EWI. In the Company's opinion, the amounts that the
Company paid for these insurance policies and the allocation among the Company
and its affiliates of relative insurance premiums are reasonable and similar to
those they could have obtained through unrelated insurance companies and/or
brokers. The Company expects that these relationships with Tall Pines, Valmont
and EWI will continue in 2002.
During 2000 the Company purchased 414,000 shares of its common stock
from officers and directors of the Company for an aggregate of $9.4 million.
Such purchases were at market prices on the respective dates of purchase.
From time to time, the Company loans funds to related parties. See Note
7. These loans permit the Company to earn a higher rate of return on cash not
needed at the time for use in its operations than it could otherwise earn. While
such loans are of a lesser credit quality than cash equivalent instruments
otherwise available to the Company, the Company believes that it has evaluated
the credit risks involved, and that those risks are reasonable and reflected in
the terms of the loans.
Amounts receivable from and payable to affiliates are summarized in the
following table.
December 31,
---------------------
2001 2000
------- -------
(In thousands)
Current receivable from affiliates:
Tremont ........................................ $ 1,000 $ --
Valhi - income taxes ........................... 2,194 --
TIMET .......................................... 459 1
CompX .......................................... 45 82
Other .......................................... -- 131
------- -------
$ 3,698 $ 214
======= =======
Current payable to affiliates:
Tremont ........................................ $ 544 $ 1,923
LPC ............................................ 6,362 8,711
Other .......................................... 13 --
------- -------
$ 6,919 $10,634
======= =======
Noncurrent receivable from affiliates:
Family Trust ................................... $20,000 $ --
Tremont ........................................ 11,650 --
------- -------
$31,650 $ --
======= =======
Amounts payable to LPC are generally for the purchase of TiO2 (see Note
8), and amounts payable to Tremont principally relate to the Company's Insurance
Sharing Agreement described above.
F-40
Note 20 - Commitments and contingencies:
Leases
The Company leases, pursuant to operating leases, various manufacturing
and office space and transportation equipment. Most of the leases contain
purchase and/or various term renewal options at fair market and fair rental
values, respectively. In most cases management expects that, in the normal
course of business, leases will be renewed or replaced by other leases.
Kronos' principal German operating subsidiary leases the land under its
Leverkusen TiO2 production facility pursuant to a lease expiring in 2050. The
Leverkusen facility, with approximately one-third of Kronos' current TiO2
production capacity, is located within the lessor's extensive manufacturing
complex, and Kronos is the only unrelated party so situated. Under a separate
supplies and services agreement expiring in 2011, the lessor provides some raw
materials, auxiliary and operating materials and utilities services necessary to
operate the Leverkusen facility. Both the lease and the supplies and services
agreements restrict the Company's ability to transfer ownership or use of the
Leverkusen facility.
Net rent expense aggregated $9 million in each of 2001, 2000 and 1999.
At December 31, 2001, minimum rental commitments under the terms of
noncancellable operating leases were as follows:
Real Estate Equipment
----------- ---------
(In thousands)
Years ending December 31,
2002 ............................................ $ 1,855 $ 2,190
2003 ............................................ 1,636 1,235
2004 ............................................ 1,440 903
2005 ............................................ 1,062 439
2006 ............................................ 1,026 245
2007 and thereafter ............................. 19,437 700
------- -------
$26,456 $ 5,712
======= =======
Capital expenditures
At December 31, 2001, the estimated cost to complete capital projects in
process approximated $11 million, including $4 million to complete the
reconstruction of the Leverkusen Sulfate Plant.
Purchase commitments
The Company has long-term supply contracts that provide for the
Company's chloride feedstock requirements through 2006. The agreements require
the Company purchase certain minimum quantities of feedstock with average
minimum annual purchase commitments aggregating approximately $159 million.
Legal proceedings
Lead pigment litigation. Since 1987 the Company, other former
manufacturers of lead pigments for use in paint and lead-based paint, and the
Lead Industries Association have been named as defendants in various legal
F-41
proceedings seeking damages for personal injury and property damage allegedly
caused by the use of lead-based paints. Certain of these actions have been filed
by or on behalf of states, large U.S. cities or their public housing
authorities, school districts and certain others have been asserted as class
actions. These legal proceedings seek recovery under a variety of theories,
including public and private nuisance, negligent product design, failure to
warn, strict liability, breach of warranty, conspiracy/concert of action,
enterprise liability, market share liability, intentional tort, and fraud and
misrepresentation.
The plaintiffs in these actions generally seek to impose on the
defendants responsibility for lead paint abatement and asserted health concerns
associated with the use of lead-based paints, including damages for personal
injury, contribution and/or indemnification for medical expenses, medical
monitoring expenses and costs for educational programs. Most of these legal
proceedings are in various pre-trial stages; some are on appeal.
The Company believes that these actions are without merit, intends to
continue to deny all allegations of wrongdoing and liability and to defend all
actions vigorously. The Company has not accrued any amounts for the pending lead
pigment litigation. Considering the Company's previous involvement in the lead
and lead pigment businesses, there can be no assurance that additional
litigation similar to that currently pending will not be filed.
Environmental matters and litigation. Some of the Company's current and
former facilities, including several divested secondary lead smelters and former
mining locations, are the subject of civil litigation, administrative
proceedings or investigations arising under federal and state environmental
laws. Additionally, in connection with past disposal practices, the Company has
been named as a defendant, potential responsible party ("PRP") or both, pursuant
to the Comprehensive Environmental Response, Compensation and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act ("CERCLA") and
similar state laws in approximately 75 governmental and private actions
associated with waste disposal sites, mining locations, and facilities currently
or previously owned, operated or used by the Company or its subsidiaries, or
their predecessors, certain of which are on the U.S. Environmental Protection
Agency's Superfund National Priorities List or similar state lists. These
proceedings seek cleanup costs, damages for personal injury or property damage
and/or damages for injury to natural resources. Certain of these proceedings
involve claims for substantial amounts. Although the Company may be jointly and
severally liable for such costs, in most cases it is only one of a number of
PRPs who may also be jointly and severally liable.
At December 31, 2001, the Company had accrued $107 million for those
environmental matters which are reasonably estimable. It is not possible to
estimate the range of costs for certain sites. The upper end of the range of
reasonably possible costs to the Company for sites which it is possible to
estimate costs is approximately $160 million. The Company's estimates of such
liabilities have not been discounted to present value, and the Company has not
recognized any potential insurance recoveries other than the settlements in 2001
and 2000 discussed in Note 16.
The imposition of more stringent standards or requirements under
environmental laws or regulations, new developments or changes respecting site
cleanup costs or allocation of such costs among PRPs, 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. 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
F-42
presently can be made. Further, there can be no assurance that additional
environmental matters will not arise in the future.
Certain of the Company's businesses are and have been engaged in the
handling, manufacture or use of substances or compounds that may be considered
toxic or hazardous within the meaning of applicable environmental laws. As with
other companies engaged in similar businesses, certain past and current
operations and products of the Company have the potential to cause environmental
or other damage. The Company has implemented and continues to implement various
policies and programs in an effort to minimize these risks. The policy of the
Company is to maintain compliance with applicable environmental laws and
regulations at all of its facilities and to strive to improve its environmental
performance. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect the Company's production, handling, use, storage,
transportation, sale or disposal of such substances as well as the Company's
consolidated financial position, results of operations or liquidity.
Other litigation. The Company is also involved in various other
environmental, contractual, product liability and other claims and disputes
incidental to its present and former businesses.
The Company currently believes the disposition of all claims and
disputes individually or in the aggregate, should not have a material adverse
effect on the Company's consolidated financial condition, results of operations
or liquidity. See Item 3. "Legal Proceedings."
Concentrations of credit risk
Sales of TiO2 accounted for more than 90% of net sales from continuing
operations during each of the past three years. The remaining sales result from
the mining and sale of ilmenite ore (a raw material used in the sulfate pigment
production process), and the manufacture and sale of iron-based water treatment
chemicals (derived from co-products of the TiO2 production processes). TiO2 is
generally sold to the paint, plastics and paper industries. Such markets are
generally considered "quality-of-life" markets whose demand for TiO2 is
influenced by the relative economic well-being of the various geographic
regions. TiO2 is sold to over 4,000 customers, with the top ten customers
approximating 25% of net sales in each of the last three years. Approximately
one-half of the Company's TiO2 sales by volume were to Europe in each of the
past three years and approximately 38% in 2001 and 37% in both 2000 and 1999 of
sales were attributable to North America.
Consolidated cash, cash equivalents, current and noncurrent restricted
cash equivalents includes $121 million and $159 million invested in U.S.
Treasury securities purchased under short-term agreements to resell at December
31, 2001 and 2000, respectively, of which $62 million and $67 million,
respectively, of such securities are held in trust for the Company by a single
U.S. bank.
F-43
Note 21 - Financial instruments:
Summarized below is the estimated fair value and related net carrying
value of the Company's financial instruments.
December 31, December 31,
2001 2000
------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- ----------
(In millions)
Cash, cash equivalents, current and noncurrent
restricted cash equivalents and current and
noncurrent marketable debt securities ......... $ 199.0 $ 199.0 $ 207.6 $ 207.6
Marketable equity securities - classified as
available-for-sale ............................ 45.2 45.2 47.2 47.2
Notes payable and long-term debt:
Fixed rate with market quotes - 11.75% Senior
Secured Notes ............................. $ 194.0 $ 194.9 $ 194.0 $ 195.9
Variable rate debt .......................... 48.7 48.7 72.1 72.1
Common shareholders' equity ..................... $ 386.9 $ 748.8 $ 344.5 $ 1,213.8
Fair value of the Company's marketable equity securities, marketable
debt securities and Notes are based upon quoted market prices and the fair value
of the Company's common shareholder's equity is based upon quoted market prices
for NL's common stock at the end of the year. The Company held no derivative
financial instruments at December 31, 2001 or 2000.
F-44
Note 22 - Quarterly financial data (unaudited):
Quarter ended
-----------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
(In thousands, except per share amounts)
Year ended December 31, 2001:
Net sales ............................... $226,060 $220,105 $206,952 $181,982
Cost of sales ........................... 149,902 151,320 145,945 130,893
Operating income ........................ 51,916 45,170 36,222 35,879(a)
Net income .............................. 34,559 25,424 20,538 40,886(a)
Earnings per share - net income:
Basic ............................... $ .69 $ .51 $ .41 $ .83(a)
======== ======== ======== ========
Diluted ............................. $ .69 $ .51 $ .41 $ .83(a)
======== ======== ======== ========
Weighted average common shares and
potential common shares outstanding:
Basic ............................... 50,079 49,932 49,621 49,304
Diluted ............................. 50,349 50,027 49,705 49,339
Year ended December 31, 2000:
Net sales ............................... $231,009 $251,126 $242,309 $197,875
Cost of sales ........................... 159,265 164,033 159,021 128,130
Operating income ........................ 46,235 62,743 57,511 45,994
Income from continuing operations ....... 23,708 63,438 30,169 38,026(b)
Net income .............................. 23,708 63,438 30,169 37,294(b)
Earnings per share:
Basic:
Income from continuing operations $ .47 $ 1.26 $ .60 $ .76(b)
======== ======== ======== ========
Net income ...................... $ .47 $ 1.26 $ .60 $ .75(b)
======== ======== ======== ========
Diluted:
Income from continuing operations $ .46 $ 1.25 $ .60 $ .75(b)
======== ======== ======== ========
Net income ...................... $ .46 $ 1.25 $ .60 $ .74(b)
======== ======== ======== ========
Weighted average common shares and
potential common shares outstanding:
Basic ............................... 50,920 50,499 50,203 50,045
Diluted ............................. 51,154 50,850 50,606 50,385
The sum of the quarterly per share amounts may not equal the annual per
share amounts due to relative changes in the weighted average number of shares
used in the per share computations.
(a) Operating income in the fourth quarter of 2001 included $16.6 million of
pretax insurance recoveries for business interruption related to prior
quarters due to the Leverkusen fire. Net income in the fourth quarter of
2001 also included $11.6 million net of pretax insurance recoveries for
property damage related to the Leverkusen fire and a $17.6 million net
income tax benefit related to a restructuring of the Company's German
subsidiaries.
F-45
(b) Income from continuing operations in the fourth quarter of 2000 included
a $26.5 million pretax net litigation settlement gain (see Note 16) and
a $3.1 million noncash securities loss (see Note 6). Net income in the
fourth quarter of 2000 also included a $.7 million extraordinary item
for early extinguishment of debt, net of tax.
Note 23 - Subsequent events:
Through January 7, 2002, an entity controlled by one of Harold C.
Simmons' daughters (the wife of the son-in-law who provides services to EWI)
owned a majority of EWI, and Contran owned the remainder of EWI. On January 7,
2002, the Company purchased EWI from its previous owners for an aggregate cash
purchase price of approximately $9 million, and EWI became a wholly owned
subsidiary of the Company. 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.
On February 6, 2002, the Company gave notice to the trustee of its
intention to redeem $25 million principal amount of its 11.75% Senior Secured
Notes due 2003 on March 22, 2002, at the current call price of 100%.
Note 24 - Condensed consolidating financial information:
The Company's 11.75% Senior Secured Notes are collateralized by a series
of intercompany notes to NL (the "Parent Issuer"). The Notes are also
collateralized by a first priority lien on the stock of Kronos. A second
priority lien on the stock of NL Capital Corporation ("NLCC") collateralized the
notes until February 2000, at which time it was merged into KII and became
included in the first priority lien on the stock of Kronos.
In the event of foreclosure, the holders of the Notes would have access
to the consolidated assets, earnings and equity of the Company. The Company
believes the collateralization of the Notes, as described above, is the
functional economic equivalent of a joint and several, full and unconditional
guarantee of the Notes by Kronos and, prior to its merger into KII, NLCC.
Management believes that separate audited financial statements would not
provide additional material information that would be useful in assessing the
financial position of Kronos and NLCC (the "Guarantor Subsidiaries"). In lieu of
providing separate audited 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. The elimination entries eliminate (i) the parent's investment in
subsidiaries and the equity in earnings of subsidiaries, (ii) intercompany
payables and receivables and (iii) other transactions between subsidiaries.
F-46
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
December 31, 2001
(In thousands)
Combined
NL Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
ASSETS
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
=========== =========== =========== =========== ===========
F-47
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet, (Continued)
December 31, 2001
(In thousands)
Combined
NL Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
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
========== ========== =========== =========== ==========
F-48
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
December 31, 2000
(In thousands)
Combined
NL Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............ $ 3,632 $ 52,979 $ 63,767 $ -- $ 120,378
Restricted cash equivalents .......... 69,242 -- -- -- 69,242
Accounts and notes receivable ........ 172 131,295 73 -- 131,540
Receivable from affiliates ........... 6,189 -- 216 (6,191) 214
Refundable income taxes .............. 10,512 1,790 -- -- 12,302
Inventories .......................... -- 205,973 -- -- 205,973
Prepaid expenses ..................... 347 2,111 -- -- 2,458
Deferred income taxes ................ 6,394 5,279 -- -- 11,673
---------- ---------- ----------- ----------- ----------
Total current assets ............. 96,488 399,427 64,056 (6,191) 553,780
---------- ---------- ----------- ----------- ----------
Other assets:
Investment in subsidiaries ........... 687,300 -- 285 (687,585) --
Marketable equity securities ......... 452 -- 46,734 -- 47,186
Receivable from affiliates ........... 194,000 301,695 23,000 (518,695) --
Investment in TiO2 manufacturing joint
venture ............................ -- 150,002 -- -- 150,002
Prepaid pension cost ................. 1,772 21,017 -- -- 22,789
Restricted cash equivalents .......... 17,942 -- -- -- 17,942
Other ................................ 1,739 2,968 -- -- 4,707
---------- ---------- ----------- ----------- ----------
Total other assets ............... 903,205 475,682 70,019 (1,206,280) 242,626
---------- ---------- ----------- ----------- ----------
Property and equipment, net .............. 4,425 319,957 -- -- 324,382
---------- ---------- ----------- ----------- ----------
$1,004,118 $1,195,066 $ 134,075 $(1,212,471) $1,120,788
========== ========== =========== =========== ==========
F-49
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet, (Continued)
December 31, 2000
(In thousands)
Combined
NL Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable .......................... $ -- $ 69,970 $ -- $ -- $ 69,970
Current maturities of long-term debt ... -- 730 -- -- 730
Accounts payable and accrued liabilities 24,098 123,555 224 -- 147,877
Payable to affiliates .................. 2,140 14,073 612 (6,191) 10,634
Accrued environmental costs ............ 5,046 -- 48,261 -- 53,307
Income taxes ........................... -- 13,604 12 -- 13,616
Deferred income taxes .................. -- 1,822 -- -- 1,822
---------- ---------- ----------- ----------- ----------
Total current liabilities .......... 31,284 223,754 49,109 (6,191) 297,956
---------- ---------- ----------- ----------- ----------
Noncurrent liabilities:
Long-term debt ......................... 194,000 1,363 -- -- 195,363
Notes payable to affiliate ............. 324,695 194,000 -- (518,695) --
Deferred income taxes .................. 70,985 73,699 989 -- 145,673
Accrued environmental costs ............ 6,729 8,699 41,705 -- 57,133
Accrued pension cost ................... 1,438 19,782 -- -- 21,220
Accrued postretirement benefits cost ... 15,039 14,365 -- -- 29,404
Other .................................. 15,460 7,812 -- -- 23,272
---------- ---------- ----------- ----------- ----------
Total noncurrent liabilities ....... 628,346 319,720 42,694 (518,695) 472,065
---------- ---------- ----------- ----------- ----------
Minority interest .......................... -- 299 5,980 -- 6,279
---------- ---------- ----------- ----------- ----------
Shareholders' equity ....................... 344,488 651,293 36,292 (687,585) 344,488
---------- ---------- ----------- ----------- ----------
$1,004,118 $1,195,066 $ 134,075 $(1,212,471) $1,120,788
========== ========== =========== =========== ==========
F-50
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Income
Year ended December 31, 2001
(In thousands)
Combined
NL Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
Revenues and other income:
Net sales ................................. $ -- $835,099 $ -- $ -- $835,099
Interest and dividends .................... 27,323 36,060 5,803 (57,968) 11,218
Equity in income of subsidiaries .......... 154,410 -- -- (154,410) --
Litigation settlement gains, net .......... 11,730 -- -- -- 11,730
Insurance recoveries, net ................. -- 17,468 -- -- 17,468
Other income (expense), net ............... 3,464 8,483 (11) (18) 11,918
-------- -------- --------- --------- --------
196,927 897,110 5,792 (212,396) 887,433
-------- -------- --------- --------- --------
Costs and expenses:
Cost of sales ............................. -- 578,060 -- -- 578,060
Selling, general and administrative ....... 13,831 109,535 1,146 -- 124,512
Interest .................................. 58,263 27,274 -- (57,968) 27,569
-------- -------- --------- --------- --------
72,094 714,869 1,146 (57,968) 730,141
-------- -------- --------- --------- --------
Income before income taxes and minority
interest ............................ 124,833 182,241 4,646 (154,428) 157,292
Income tax expense ............................ 3,426 31,483 16 -- 34,925
-------- -------- --------- --------- --------
Income before minority interest ....... 121,407 150,758 4,630 (154,428) 122,367
Minority interest ............................. -- 16 944 -- 960
-------- -------- --------- --------- --------
Net income ............................ $121,407 $150,742 $ 3,686 $(154,428) $121,407
======== ======== ========= ========= ========
F-51
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Income
Year ended December 31, 2000
(In thousands)
Combined Combined
NL Industries Guarantor Non-guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
Revenues and other income:
Net sales .................................... $ -- $ 922,319 $ -- $ -- $ 922,319
Interest and dividends ....................... 31,598 25,587 5,937 (52,443) 10,679
Equity in income of subsidiaries ............. 173,620 -- -- (173,620) --
Litigation settlement gains, net ............. 69,465 -- -- -- 69,465
Other income, net ............................ 12,595 5,834 -- (5,825) 12,604
--------- --------- --------- ----------- -----------
287,278 953,740 5,937 (231,888) 1,015,067
--------- --------- --------- ----------- -----------
Costs and expenses:
Cost of sales ................................ -- 610,449 -- -- 610,449
Selling, general and administrative .......... 25,381 112,429 (632) -- 137,178
Interest ..................................... 52,701 30,985 -- (52,443) 31,243
--------- --------- --------- ----------- -----------
78,082 753,863 (632) (52,443) 778,870
--------- --------- --------- ----------- -----------
Income before income taxes, minority
interest and extraordinary item ........ 209,196 199,877 6,569 (179,445) 236,197
Income tax expense ............................... 53,855 22,850 12 1,703 78,420
--------- --------- --------- ----------- -----------
Income before minority interest and
extraordinary item ..................... 155,341 177,027 6,557 (181,148) 157,777
Minority interest ................................ -- 47 2,389 -- 2,436
--------- --------- --------- ----------- -----------
Income before extraordinary item ......... 155,341 176,980 4,168 (181,148) 155,341
Extraordinary item - early extinguishment of debt,
net of tax benefit of $394 ..................... (732) -- -- -- (732)
--------- --------- --------- ----------- -----------
Net income ............................... $ 154,609 $ 176,980 $ 4,168 $ (181,148) $ 154,609
========= ========= ========= =========== ===========
F-52
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Income
Year ended December 31, 1999
(In thousands)
Combined Combined
NL Industries Guarantor Non-guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
Revenues and other income:
Net sales ......................... $ -- $908,387 $ -- $ -- $908,387
Interest and dividends ............ 30,843 24,425 6,823 (53,129) 8,962
Equity in income of subsidiaries .. 154,625 -- -- (154,625) --
Other income, net ................. 4,565 10,119 -- -- 14,684
-------- -------- --------- --------- --------
190,033 942,931 6,823 (207,754) 932,033
-------- -------- --------- --------- --------
Costs and expenses:
Cost of sales ..................... -- 662,315 -- -- 662,315
Selling, general and administrative 16,037 116,138 2,167 -- 134,342
Interest .......................... 49,872 40,141 -- (53,129) 36,884
-------- -------- --------- --------- --------
65,909 818,594 2,167 (53,129) 833,541
-------- -------- --------- --------- --------
Income before income taxes
and minority interest ....... 124,124 124,337 4,656 (154,625) 98,492
Income tax benefit .................... 35,647 26,955 1,999 -- 64,601
-------- -------- --------- --------- --------
Income before minority interest 159,771 151,292 6,655 (154,625) 163,093
Minority interest ..................... -- 48 3,274 -- 3,322
-------- -------- --------- --------- --------
Net income .................... $159,771 $151,244 $ 3,381 $(154,625) $159,771
======== ======== ========= ========= ========
F-53
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
Year ended December 31, 2001
(In thousands)
Combined
NL Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
Net cash provided (used) by operating activities $ (3,905) $ 157,306 $ (3,169) $(20,499) $ 129,733
-------- --------- -------- -------- ---------
Cash flows from investing activities:
Capital expenditures ....................... (13) (53,656) -- -- (53,669)
Property damaged by fire:
Insurance proceeds ..................... -- 23,361 -- -- 23,361
Other, net ............................. -- (3,205) -- -- (3,205)
Change in restricted cash equivalents and
restricted marketable debt securities, net 18,539 -- -- (10,030) 8,509
Loans to affiliates, net ................... -- (69,678) (9,650) 46,678 (32,650)
Other, net ................................. 24 399 (8) 8 423
-------- --------- -------- -------- ---------
Net cash provided (used) by investing
activities ........................... 18,550 (102,779) (9,658) 36,656 (57,231)
-------- --------- -------- -------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ............................. -- 1,437 -- -- 1,437
Principal payments ..................... -- (22,428) -- -- (22,428)
Treasury stock purchased, net .............. (14,784) -- -- -- (14,784)
Dividends, net ............................. (39,758) (30,500) (29) 30,529 (39,758)
Loans from affiliates ...................... 46,678 -- -- (46,678) --
Other, net ................................. -- 3 -- (8) (5)
-------- --------- -------- -------- ---------
Net cash used by financing activities .. (7,864) (51,488) (29) (16,157) (75,538)
-------- --------- -------- -------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing
activities ........................... 6,781 3,039 (12,856) -- (3,036)
Currency translation ................... -- (1,301) (4) -- (1,305)
-------- --------- -------- -------- ---------
6,781 1,738 (12,860) -- (4,341)
Balance at beginning of year ............... 3,632 52,979 63,767 -- 120,378
-------- --------- -------- -------- ---------
Balance at end of year ..................... $ 10,413 $ 54,717 $ 50,907 $ -- $ 116,037
======== ========= ======== ======== =========
F-54
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
Year ended December 31, 2000
(In thousands)
Combined Combined
NL Industries Guarantor Non-guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
Net cash provided by operating activities ...... $ 12,318 $ 177,642 $ 4,795 $(55,000) $ 139,755
-------- --------- -------- -------- ---------
Cash flows from investing activities:
Capital expenditures ....................... (23) (31,066) -- -- (31,089)
Purchase of Tremont Corporation common stock (26,040) -- -- -- (26,040)
Change in restricted cash equivalents ...... 4,480 -- (3,850) -- 630
Loans to affiliates ........................ 50,000 (115,856) 55,000 10,856 --
Other, net ................................. 107 77 -- 80 264
-------- --------- -------- -------- ---------
Net cash provided (used) by investing
activities .......................... 28,524 (146,845) 51,150 10,936 (56,235)
-------- --------- -------- -------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ............................. -- 44,923 -- -- 44,923
Principal payments ..................... (50,000) (29,162) -- -- (79,162)
Treasury stock:
Purchased .............................. (30,886) -- -- -- (30,886)
Reissued ............................... 2,091 -- -- -- 2,091
Dividends, net ............................. (32,686) (55,000) -- 55,000 (32,686)
Loans from affiliates ...................... 60,856 (50,000) -- (10,856) --
Other, net ................................. -- (6) 80 (80) (6)
-------- --------- -------- -------- ---------
Net cash provided (used) by financing
activities ........................... (50,625) (89,245) 80 44,064 (95,726)
-------- --------- -------- -------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing
activities ........................... (9,783) (58,448) 56,025 -- (12,206)
Currency translation ................... -- (1,635) (5) -- (1,640)
-------- --------- -------- -------- ---------
(9,783) (60,083) 56,020 -- (13,846)
Balance at beginning of year ............... 13,415 113,062 7,747 -- 134,224
-------- --------- -------- -------- ---------
Balance at end of year ..................... $ 3,632 $ 52,979 $ 63,767 $ -- $ 120,378
======== ========= ======== ======== =========
F-55
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
Year ended December 31, 1999
(In thousands)
Combined Combined
NL Industries Guarantor Non-guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
Net cash provided (used) by operating activities $ 28,742 $ 134,937 $(5,371) $(50,000) $ 108,308
-------- --------- ------- -------- ---------
Cash flows from investing activities:
Capital expenditures ....................... (2,856) (32,703) -- -- (35,559)
Change in restricted cash equivalents ...... (12,065) -- 6,889 -- (5,176)
Other, net ................................. (17) 2,334 -- 27 2,344
-------- --------- ------- -------- ---------
Net cash provided (used) by investing
activities ........................... (14,938) (30,369) 6,889 27 (38,391)
-------- --------- ------- -------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ............................. -- 82,038 -- -- 82,038
Principal payments ..................... -- (155,787) -- -- (155,787)
Treasury stock purchased ................... (7,000) -- -- -- (7,000)
Dividends, net ............................. (7,242) (50,030) 30 50,000 (7,242)
Other, net ................................. -- (6) 27 (27) (6)
-------- --------- ------- -------- ---------
Net cash provided (used) by financing
activities ........................... (14,242) (123,785) 57 49,973 (87,997)
-------- --------- ------- -------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing
activities ........................... (438) (19,217) 1,575 -- (18,080)
Currency translation ................... -- (2,649) -- -- (2,649)
-------- --------- ------- -------- ---------
(438) (21,866) 1,575 -- (20,729)
Balance at beginning of year ............... 13,853 134,928 6,172 -- 154,953
-------- --------- ------- -------- ---------
Balance at end of year ..................... $ 13,415 $ 113,062 $ 7,747 $ -- $ 134,224
======== ========= ======= ======== =========
F-56
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of NL Industries, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated March 1, 2002 appearing on page F-2 in the 2001 Annual Report to
Shareholders on Form 10-K of NL Industries, Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the financial statement schedules listed in Item
14(a) and (d) of this Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers LLP
Houston, Texas
March 1, 2002
S-1
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
--------------------------------------------------------
Condensed Balance Sheets
December 31, 2001 and 2000
(In thousands)
2001 2000
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 10,413 $ 3,632
Restricted cash equivalents ...................... 63,257 69,242
Restricted marketable debt securities ............ 3,583 --
Accounts and notes receivable .................... 1,621 172
Receivable from subsidiaries ..................... 8,106 6,189
Refundable income taxes .......................... -- 10,512
Prepaid expenses ................................. 551 347
Deferred income taxes ............................ 6,371 6,394
---------- ----------
Total current assets ......................... 93,902 96,488
---------- ----------
Other assets:
Marketable equity securities ..................... 216 452
Notes receivable from subsidiary ................. 194,000 194,000
Investment in subsidiaries ....................... 1,072,551 687,300
Restricted marketable debt securities ............ 16,121 17,942
Prepaid pension cost ............................. 2,368 1,772
Other ............................................ 1,318 1,739
---------- ----------
Total other assets ........................... 1,286,574 903,205
---------- ----------
Property and equipment, net .......................... 3,725 4,425
---------- ----------
$1,384,201 $1,004,118
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ......... $ 23,544 $ 24,098
Payable to affiliates ............................ 1,083 2,140
Accrued environmental costs ...................... 10,529 5,046
Income taxes ..................................... 96 --
---------- ----------
Total current liabilities .................... 35,252 31,284
---------- ----------
Noncurrent liabilities:
Long-term debt ................................... 194,000 194,000
Notes payable to affiliates ...................... 655,918 324,695
Deferred income taxes ............................ 78,708 70,985
Accrued environmental costs ...................... 7,489 6,729
Accrued pension cost ............................. 1,427 1,438
Accrued postretirement benefits cost ............. 16,806 15,039
Other ............................................ 7,658 15,460
---------- ----------
Total noncurrent liabilities ................. 962,006 628,346
---------- ----------
Shareholders' equity ................................. 386,943 344,488
---------- ----------
$1,384,201 $1,004,118
========== ==========
Contingencies (Note 4)
S-2
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
--------------------------------------------------------------------
Condensed Statements of Income
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
--------- --------- ---------
Revenues and other income:
Equity in income from continuing operations of
subsidiaries ................................. $ 154,410 $ 173,620 $ 154,625
Interest and dividends ......................... 4,354 2,961 1,184
Interest income from subsidiaries .............. 22,969 28,637 29,659
Securities transactions, net ................... (1,133) 8,356 --
Litigation settlement gains, net ............... 11,730 69,465 --
Other income, net .............................. 4,597 4,239 4,565
--------- --------- ---------
196,927 287,278 190,033
--------- --------- ---------
Costs and expenses:
General and administrative ..................... 13,831 25,381 16,037
Interest ....................................... 58,263 52,701 49,872
--------- --------- ---------
72,094 78,082 65,909
--------- --------- ---------
Income before income taxes and extraordinary
item ..................................... 124,833 209,196 124,124
Income tax expense (benefit) ....................... 3,426 53,855 (35,647)
--------- --------- ---------
Income before extraordinary item ........... 121,407 155,341 159,771
Extraordinary item ................................. -- (732) --
--------- --------- ---------
Net income ................................. $ 121,407 $ 154,609 $ 159,771
========= ========= =========
S-3
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
--------------------------------------------------------------------
Condensed Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income ................................... $ 121,407 $ 154,609 $ 159,771
Equity in income of subsidiaries ............. (154,410) (173,620) (154,625)
Distributions from subsidiaries .............. 30,500 55,000 50,000
Noncash interest income, net ................. (3,113) (932) (390)
Deferred income taxes ........................ 7,498 71,837 (18,071)
Securities gains, net ........................ 1,133 (8,356) --
Litigation settlement gains, net ............. (10,307) (69,465) --
Other, net ................................... 1,824 (4,399) (3,164)
--------- --------- ---------
(5,468) 24,674 33,521
Change in assets and liabilities, net ........ 1,563 (12,356) (4,779)
--------- --------- ---------
Net cash provided (used) by operating
activities ............................. (3,905) 12,318 28,742
--------- --------- ---------
Cash flows from investing activities:
Change in restricted cash equivalents and
restricted marketable debt securities, net . 18,539 4,480 (12,065)
Capital expenditures ......................... (13) (23) (2,856)
Purchase of Tremont Corporation common stock . -- (26,040) --
Loans to affiliates .......................... -- 50,000 --
Investments in subsidiaries .................. -- (80) (27)
Proceeds from disposition of marketable equity
securities ................................. 4 158 --
Other, net ................................... 20 29 10
--------- --------- ---------
Net cash provided (used) by investing
activities ............................. 18,550 28,524 (14,938)
--------- --------- ---------
S-4
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
--------------------------------------------------------------------
Condensed Statements of Cash Flows (Continued)
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
-------- -------- --------
Cash flows from financing activities:
Dividends ........................................ $(39,758) $(32,686) $ (7,242)
Treasury stock:
Purchased .................................... (15,502) (30,886) (7,210)
Reissued ..................................... 718 2,091 210
Indebtedness - principal payments ................ -- (50,000) --
Loans from affiliates ............................ 46,678 60,856 --
-------- -------- --------
Net cash used by financing activities ........ (7,864) (50,625) (14,242)
-------- -------- --------
Net change from operating, investing and financing
activities ..................................... 6,781 (9,783) (438)
Balance at beginning of year ..................... 3,632 13,415 13,853
-------- -------- --------
Balance at end of year ........................... $ 10,413 $ 3,632 $ 13,415
======== ======== ========
S-5
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
----------------------------------------------------------------------
Notes to Condensed Financial Information
Note 1 - Basis of presentation:
The Consolidated Financial Statements of NL Industries, Inc. (the
"Company") and the related Notes to Consolidated Financial Statements are
incorporated herein by reference.
Note 2 - Net receivable from (payable to) subsidiaries and affiliates:
December 31,
---------------------------
2001 2000
--------- ---------
(In thousands)
Current:
Receivable from:
Kronos:
Income taxes ..................... $ 64 $ 1,260
Other, net ....................... 4,943 4,103
Valhi - income taxes ................. 2,194 --
TIMET ................................ 459 1
CompX ................................ 45 82
Other ................................ 401 743
--------- ---------
$ 8,106 $ 6,189
========= =========
Payable to:
Tremont .............................. $ (553) $ (1,925)
EMS .................................. (74) (146)
Other ................................ (456) (69)
--------- ---------
$ (1,083) $ (2,140)
========= =========
Noncurrent:
Notes receivable from Kronos ............. $ 194,000 $ 194,000
========= =========
Notes payable to:
Kronos ............................... $(655,918) $(301,695)
EMS .................................. -- (23,000)
--------- ---------
$(655,918) $(324,695)
========= =========
S-6
Note 3 - Long-term debt:
See Note 11 of the Consolidated Financial Statements for a description
of the Notes. The Company's $194 million of 11.75% Senior Secured Notes at
December 31, 2001 are due October 2003. The Company has guaranteed Kronos'
non-U.S. dollar-denominated notes payable of $46 million.
Note 4 - Contingencies:
See Legal proceedings in Note 20 to the Consolidated Financial Statements.
S-7
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Charges
Balance at (credits) Currency
beginning to costs and translation Balance at
Description of year expenses Deductions adjustments end of year
----------- ---------- ------------ ---------- ----------- -----------
Year ended December 31, 2001:
Allowance for doubtful accounts and notes
receivable ............................ $ 2,222 $ 485 $ (245)(a) $ (104) $ 2,358
======= ====== ======== ======= =======
Amortization of intangibles ............. $ -- $ -- $ -- $ -- $ --
======= ====== ======== ======= =======
Year ended December 31, 2000:
Allowance for doubtful accounts and notes
receivable ............................ $ 2,075 $ 342 $ (67)(a) $ (128) $ 2,222
======= ====== ======== ======= =======
Amortization of intangibles ............. $22,095 $ 113 $(20,429) $(1,779) $ --
======= ====== ======== ======= =======
Year ended December 31, 1999:
Allowance for doubtful accounts and notes
receivable ............................ $ 2,377 $ 140 $ (180)(a) $ (262) $ 2,075
======= ====== ======== ======= =======
Amortization of intangibles ............. $23,704 $1,851 $ -- $(3,460) $22,095
======= ====== ======== ======= =======
(a) Amounts written off, less recoveries.
Certain prior-year amounts have been reclassified to conform to the current year
presentation.
S-8