SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2003
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.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common stock New York Stock Exchange
($.125 par value) Pacific Stock 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.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act). Yes X No
The aggregate market value of the 7.2 million shares of voting stock held by
nonaffiliates of NL Industries, Inc. as of June 30, 2003 (the last business day
of the Registrant's most recently-completed second fiscal quarter) approximated
$122.5 million.
As of February 27, 2004, 48,262,284 shares of the Registrant's common stock were
outstanding.
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 Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
PART I
ITEM 1. BUSINESS
NL Industries, Inc., (NYSE:NL) organized as a New Jersey corporation in
1891, conducts its primary operations through its majority-owned subsidiary,
Kronos Worldwide, Inc. (NYSE:KRO)(formerly known as Kronos, Inc.). NL and its
consolidated subsidiaries are sometimes referred to herein collectively as the
"Company." The Company held approximately 51% of Kronos' common stock at
December 31, 2003. Kronos is the world's fifth largest producer of titanium
dioxide pigments ("TiO2") with an estimated 12% share of worldwide TiO2 sales
volume in 2003. Approximately one-half of the Company's 2003 sales volume was in
Europe, where the Company is the second largest producer of TiO2 with an
estimated 18% share of European TiO2 sales volumes. The Company has an estimated
15% share of North American TiO2 sales volume. Kronos has production facilities
throughout Europe and North America.
At December 31, 2003, Valhi, Inc. and Tremont LLC, a wholly-owned
subsidiary of Valhi, held an aggregate of approximately 84% of NL's outstanding
common stock and approximately 32% of Kronos' outstanding common stock. At
December 31, 2003, Contran Corporation and its subsidiaries held approximately
90% of Valhi'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 each of Contran,
Valhi, NL, Kronos and Tremont, may be deemed to control each of such companies.
See Notes 1 and 16 to the Consolidated Financial Statements.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Annual Report on Form 10-K relating to matters that are not historical facts,
including, but not limited to, statements found in this Item 1 - "Business,"
Item 3 - "Legal Proceedings," Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 7A - "Quantitative and
Qualitative Disclosures About Market Risk," 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," "should," "could," "anticipates,"
"expected" or comparable terminology, or by discussions of strategies 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 substantial risks and uncertainties that could significantly impact
expected results, and actual future results could differ materially from those
described in such forward-looking statements. While it is not possible to
identify all factors, the Company continues to face many risks and
uncertainties. 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 SEC including, but not limited to, the following:
o Future supply and demand for the Company's products,
o The extent of the dependence of certain of the Company's businesses on
certain market sectors,
o The cyclicality of the Company's businesses,
o Customer inventory levels (such as the extent to which the Company's
customers may, from time to time, accelerate purchases of TiO2 in advance
of anticipated price increases or defer purchases of TiO2 in advance of
anticipated price decreases),
o Changes in raw material and other operating costs (such as energy costs),
o The possibility of labor disruptions,
o General global economic and political conditions (such as changes in the
level of gross domestic product in various regions of the world and the
impact of such changes on demand for TiO2),
o Competitive products and substitute products,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o The introduction of trade barriers,
o Fluctuations in currency exchange rates (such as changes in the exchange
rate between the U.S. dollar and each of the euro, the Norwegian kroner and
the Canadian dollar),
o Operating interruptions (including, but not limited to, labor disputes,
leaks, fires, explosions, unscheduled or unplanned downtime and
transportation interruptions),
o The ability of the Company to renew or refinance credit facilities,
o The ultimate outcome of income tax audits, tax settlement initiatives or
other tax matters,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government laws and regulations and possible changes therein (such as
changes in government regulations which might impose various obligations on
present and former manufacturers of lead pigment and lead-based paint,
including NL, with respect to asserted health concerns associated with the
use of such products),
o The ultimate resolution of pending litigation (such as NL's lead pigment
litigation and litigation surrounding environmental matters), and
o Possible future litigation.
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 or revise any
forward-looking statement whether as a result of changes in information, future
events or otherwise.
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, food, ceramics and cosmetics. 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 over the long term is cyclical, and
changes in industry economic conditions, especially in Western industrialized
nations, can significantly impact the Company's earnings and operating cash
flows. Kronos' average TiO2 selling prices were generally decreasing during all
of 2001 and the first quarter of 2002, were generally flat during the second
quarter of 2002, were generally increasing during the third and fourth quarters
of 2002 and the first quarter of 2003, were generally flat during the second
quarter of 2003 and were generally decreasing during the third and fourth
quarters of 2003. Industry-wide demand for TiO2 is estimated to have been flat
or declined slightly throughout 2003. This is believed to have been the result
of lower customer inventory levels resulting from overall declining selling
prices. Volume demand in 2004 is expected to increase moderately over 2003
levels.
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 as the
economies in these regions develop to the point that quality-of-life products,
including TiO2, are in greater demand. The Company 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 information is
contained in Note 3 to the Consolidated Financial Statements.
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, provides 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 the Company's 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.
The Company currently produces over 40 different TiO2 grades, sold under
the Kronos trademark, which provide a variety of performance properties to meet
customers' specific requirements. The Company's major customers include domestic
and international paint, plastics and paper manufacturers.
The Company is one of the world's leading producers and marketers of TiO2.
The Company 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. The Company's manufacturing facilities are located in
Germany, Canada, Belgium and Norway, and the Company owns a one-half interest in
a TiO2 manufacturing joint venture located in Louisiana, U.S.A. The Company
conducts sales and marketing activities in over 100 countries worldwide. The
Company and its predecessors have produced and marketed TiO2 in North America
and Europe for over 80 years. As a result, the Company 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 the Company's 2003 TiO2 sales were to Europe,
with approximately 40% to North America and the balance to export markets.
The Company is also engaged in the mining and sale of ilmenite ore (a raw
material used directly as a feedstock by some sulfate-process TiO2 plants)
pursuant to a governmental concession with an unlimited term that allows the
Company to operate an ilmenite mine in Norway. The ore body, owned by the
Norwegian government, has estimated ilmenite reserves that are expected to last
at least 20 years. Approximately 5% of the Company's consolidated net sales in
each of the last three years represented ilmenite sales to third-party
customers. The Company is also engaged in the manufacture and sale of iron-based
water treatment chemicals (derived co-products of the pigment production
processes). The Company's 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. Sales of
water treatment chemicals were approximately 3% of the Company's revenues in
each of 2001, 2002 and 2003.
Manufacturing process and raw materials. The Company manufactures TiO2
using both the chloride process and the sulfate process. Approximately 72% of
the Company's current production capacity is based on the chloride process. 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 feedstock bearing a higher titanium content is
used, the chloride process produces 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.
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 2003, chloride-process production
facilities represented approximately 62% of industry capacity.
The Company produced a new Company record 476,000 metric tons of TiO2 in
2003, compared to the prior record 442,000 metric tons produced in 2002 and
412,000 metric tons in 2001. The Company's average production capacity
utilization rate in 2003 was near full capacity, up from 96% in 2002. The rates
in 2002 and 2003 were higher than in 2001 due in part to continued
debottlenecking activities. The Company believes its current annual attainable
production capacity is approximately 480,000 metric tons, including its one-half
interest in the joint venture-owned Louisiana plant (see "TiO2 manufacturing
joint venture"). The Company expects this production capacity will be increased
by approximately 10,000 metric tons, primarily at its chloride facilities, with
moderate capital expenditures, bringing the Company's capacity to approximately
490,000 metric tons during 2005.
The primary raw materials used in the TiO2 chloride production process are
titanium-containing feedstock derived from 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 but increasing number of suppliers around the world,
principally in Australia, South Africa, Canada, India and the United States. The
Company purchased approximately 390,000 metric tons of chloride feedstock in
2003, of which the vast majority was slag.
The Company purchased slag in 2003 from two subsidiaries of Rio Tinto plc
UK - Richards Bay Iron and Titanium Limited South Africa and Q.I.T. Fer et
Titane Inc. Canada ("Q.I.T.") under long-term supply contracts that expire at
the end of 2007 and 2006 respectively. 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 the
Company's 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
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, the Company operates a rock ilmenite mine in Norway,
which provided all of the Company's feedstock for its European sulfate-process
pigment plants in 2003. The Company produced approximately 850,000 metric tons
of ilmenite in 2003, of which approximately 300,000 metric tons were used
internally with the remainder sold to third parties. For its Canadian
sulfate-process plant, the Company also purchases sulfate grade slag
(approximately 25,000 metric tons in 2003) primarily from Q.I.T., under a
long-term supply contract that expires at the end of 2006.
The Company believes the availability of titanium-containing feedstock for
both the chloride and sulfate processes is adequate for the next several years.
The Company 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 the Company's vendors not be able to meet their contractual obligations
or should the Company 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 the Company 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 the Company and Huntsman (the
"Partners") pursuant to separate offtake agreements.
A supervisory committee, composed of four members, two of which 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. The
Company's cost for its share of the TiO2 produced is equal to its share of the
joint venture's costs. The Company's share of net costs is reported as cost of
sales as the related TiO2 acquired from the joint venture is sold. See Note 7 to
the Consolidated Financial Statements.
Competition. The TiO2 industry is highly competitive. The Company 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 the Company's grades and
substantially all of the Company's production are considered commodity pigments
with price generally being the most significant competitive factor. During 2003
the Company had an estimated 12% share of worldwide TiO2 sales volume, and the
Company believes that it is the leading seller of TiO2 in several countries,
including Germany and Canada.
The Company's principal competitors are E.I. du Pont de Nemours & Co.
("DuPont"); Millennium Chemicals, Inc.; Huntsman; Kerr-McGee Corporation; and
Ishihara Sangyo Kaisha, Ltd. The Company's five largest competitors have
estimated individual shares of TiO2 production capacity ranging from 24% to 5%,
and an estimated aggregate 70% share of worldwide TiO2 production volume. DuPont
has about one-half of total U.S. TiO2 production capacity and is the Company's
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. As no new
plants are currently under construction, additional greenfield capacity is not
expected in the next three to five years, but industry capacity can be expected
to increase as the Company and its competitors debottleneck existing plants. In
addition to potential capacity additions, certain competitors 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 were approximately $6 million
in each of 2001 and 2002 and $7 million in 2003. 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 the Company's
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 the Company. 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(TM), 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 the Company's current production
capacity is located in Europe and Canada with non-U.S. net property and
equipment aggregating approximately $435 million at December 31, 2003. Net
property and equipment in the U.S., including 50% of the property and equipment
of LPC, was approximately $116 million at December 31, 2003. Kronos' European
operations include production facilities in Germany, Belgium and Norway.
Approximately $711 million of the Company's 2003 consolidated sales were to
non-U.S. customers, including $91 million to customers in areas other than
Europe and Canada. Sales to customers in the U.S. aggregated $297 million in
2003. Foreign operations are subject to, among other things, currency exchange
rate fluctuations, and the Company's results of operations have, in the 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 annual 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. The Company's largest ten customers accounted for approximately
25% of net sales in 2003. 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 first half
of the year than in the second half of the year.
Employees. As of December 31, 2003, the Company employed approximately
2,450 persons, excluding LPC employees, with approximately 50 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. The Company's operations are governed
by various environmental laws and regulations. Certain of the Company's
businesses operated through its subsidiaries 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 and its subsidiaries 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.
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 the TiO2 plant owned by the LPC joint venture and
a TiO2 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 production facilities operate in an environmental regulatory
framework in which governmental authorities typically are granted broad
discretionary powers that allow them to issue operating permits required for the
plants to operate. The Company believes that all current operating plants are in
substantial compliance with applicable environmental laws. With respect to the
Company's current operating plants, neither the Company nor any of its
subsidiaries have been notified of any environmental claim in the United States
or any foreign jurisdiction by the U.S. EPA or any applicable foreign authority
or any state, provincial or local authority.
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
has obtained all required permits and is in substantial compliance with
applicable EU requirements, including EU Directive 92/112/EEC regarding
establishment of procedures for reduction and eventual elimination of pollution
caused by waste from the TiO2 industry.
At the Company's sulfate plant facilities other than Fredrikstad, Norway
and Varennes, Quebec, Canada, the Company recycles spent acid either through
contracts with third parties or using the Company's own facilities. At its
Fredrikstad, Norway plant, the Company ships its spent acid to a third party
location where it is treated and disposed. The Company's Canadian sulfate plant
neutralizes its spent acid, and by product gypsum is sold to a local wallboard
manufacturer with solid wastes landfilled. The Company has a contract with a
third party to treat certain by-products 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, the
Company may terminate the contract after giving six months notice with respect
to treatment of by-products from the Leverkusen, Germany plant.
The Company's capital expenditures related to its ongoing environmental
protection and improvement programs in 2003 were approximately $5 million, and
are currently expected to be approximately $5 million in 2004.
The Company has been named as a defendant, potentially responsible party
("PRP"), or both, pursuant to CERCLA and similar state laws in approximately 70
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."
Website and other available information. The Company maintains a website on
the Internet with the address of www.nl-ind.com. Copies of this Annual Report on
Form 10-K for the year ended December 31, 2003 and copies of the Company's
Quarterly Reports on Form 10-Q for 2003 and 2004 and any Current Reports on Form
8-K for 2003 and 2004, and any amendments thereto, are or will be available free
of charge at such website as soon as reasonably practical after they are filed
with the SEC. Additional information regarding the Company, including the
Company's Audit Committee charter and the Company's Code of Business Conduct and
Ethics, can also be found at this website as required. Information contained on
the Company's website is not part of this report.
The general public may read and copy any materials the Company files with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company is
an electronic filer, and the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC, including the Company. The
Internet address of the SEC's website is www.sec.gov.
ITEM 2. PROPERTIES
The Company currently operates four TiO2 plants in Europe (one in
Leverkusen, Germany; one in Nordenham, Germany; one in Langerbrugge, Belgium;
and one in Fredrikstad, Norway). In North America, the Company has a TiO2 plant
in Varennes, Quebec, Canada and, through the manufacturing joint venture
described above, a one-half interest in a TiO2 plant in Lake Charles, Louisiana.
The Company operates an ilmenite ore mine in Hauge i Dalane, Norway pursuant to
a governmental concession and also owns a TiO2 slurry plant in Lake Charles,
Louisiana. See Note 7 to the Consolidated Financial Statements.
The Company's 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 the Company's current TiO2
production capacity, is located within an extensive manufacturing complex owned
by Bayer AG. Rent for the Leverkusen facility is periodically established by
agreement with Bayer AG for periods of at least two years at a time. Under a
separate supplies and services agreement expiring in 2011, Bayer provides some
raw materials, including chlorine and certain amounts of sulfuric acid,
auxiliary and operating materials and utilities services necessary to operate
the Leverkusen facility. The lease and the supplies and services agreement have
certain restrictions regarding the Company's ability to transfer ownership or
use of the Leverkusen facility.
The Company owns all of its principal production facilities described
above, except for the land under the Leverkusen and Fredrikstad facilities.
Kronos also operates an ilmenite ore mine in Norway pursuant to a governmental
concession with an unlimited term.
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings. In addition to
information that is included below, certain information called for by this Item
is included in Note 18 to the Consolidated Financial Statements, which
information is incorporated herein by reference.
Lead pigment litigation. The Company's former operations included the
manufacture of lead pigments for use in paint and lead-based paint. Since 1987,
NL, other former manufacturers of lead pigments for use in paint (together the
"former pigment manufacturers"), and lead-based paint, and the Lead Industries
Association (the "LIA") (which discontinued business operations in 2002) have
been named as defendants in various legal proceedings seeking damages for
personal injury, property damage and governmental expenditures 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 and
school districts, and certain others have been asserted as class actions. These
lawsuits seek recovery under a variety of theories, including public and private
nuisance, negligent product design, negligent failure to warn, strict liability,
breach of warranty, conspiracy/concert of action, aiding and abetting,
enterprise liability, market share liability, intentional tort, fraud and
misrepresentation violations of state consumer protection statutes, supplier
negligence and similar claims.
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. Several former cases have been
dismissed or withdrawn. Most of the remaining cases are in various pre-trial
stages. Some are on appeal following dismissal or summary judgment rulings in
favor of the defendants. In addition, various other cases are pending (in which
the Company is not a defendant) seeking recovery for injury allegedly caused by
lead pigment and lead-based paint. Although the Company is not a defendant in
these cases, the outcome of these cases may have an impact on additional cases
being filed against the Company.
NL believes these actions are without merit, intends to continue to deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. NL has neither lost nor settled any of these cases. NL has not
accrued any amounts for the pending lead pigment and lead-based paint
litigation. Liability that may result, if any, cannot reasonably be estimated.
There can be no assurance that NL will not incur future liability in respect of
the pending litigation in view of the inherent uncertainties involved in court
and jury rulings.
In 1989 and 1990 the Housing Authority of New Orleans ("HANO") filed
third-party complaints against the former pigment manufacturers and 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 New York City and the New York
City 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 had been proceeding in 2001, but
no activity has occurred since September 2001.
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 purport
to represent a class of similarly situated persons throughout the State of Ohio.
The trial court has denied plaintiffs' motion for class certification. Discovery
and pre-trial proceedings are continuing with respect to the individual
plaintiffs. Defendants have filed a motion for summary judgment on all claims.
The court has not yet ruled on the motion.
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. In February 2004, the trial court denied plaintiffs' motion for
class certification. The time for plaintiffs to appeal has not yet begun to run.
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. In January 2003 the trial court granted
defendants' motion for summary judgment, dismissing all counts of the complaint.
In June 2003, plaintiff appealed the trial court's grant of summary judgment for
defendants.
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 and
educational expenses, 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. Trial began in phase I of this case before a Rhode Island state court jury
on September 4, 2002 on the question of whether lead pigment in paint on Rhode
Island buildings is a public nuisance. On October 29, 2002 the trial judge
declared a mistrial in the case when the jury was unable to reach a verdict on
the question, with the jury reportedly deadlocked 4-2 in the defendants' favor.
Other claims made by the Attorney General, including violation of the Rhode
Island Unfair Trade Practices and Consumer Protection Act, strict liability,
negligence, negligent and fraudulent misrepresentation, civil conspiracy,
indemnity, and unjust enrichment remain pending and were not the subject of the
2002 trial. Both plaintiff and defendants filed post trial motions for judgment
notwithstanding the verdict, which the court denied in March 2003. In January
2004, plaintiff requested the court to dismiss its claims for State-owned
buildings, claiming all remaining claims did not require a jury and asking the
court to reconsider the trial schedule. In February 2004 the trial Court
dismissed the strict liability, negligence, negligent misrepresentation and
fraud claims with prejudice. The time for plaintiffs to appeal has not yet begun
to run. In March 2004, the trial court ruled that the defendants have a
constitutional right to a trial by jury under the Rhode Island Constitution. The
plaintiffs have announced their intention to appeal this decision. The trial
court also set April 2005 as the date for the retrial of all phases of this
case.
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 from four families, 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 National Paint and Coatings
Association 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. In November
2002 the trial court granted defendants' motion for summary judgment against the
first plaintiffs and plaintiffs have appealed. The appellate court held a
hearing on the appeal in November 2003; however no decision has yet been issued.
Pre-trial proceedings and discovery against the other plaintiffs are continuing.
The court has set trial dates in 2004 for these plaintiffs; however the trials
are stayed pending the appeal.
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 joint and several
liability against the former pigment manufacturers and the LIA. In November 2002
defendants' motion to dismiss was denied. In May 2003, plaintiffs filed an
amended complaint alleging only a nuisance claim. Defendants' renewed motion to
dismiss and motion for summary judgment are pending. Discovery is proceeding.
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. In February 2003, defendants filed a motion for summary
judgment. In July 2003, the trial court granted defendants' motion for summary
judgment on all remaining claims. Plaintiffs have appealed.
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. In June
2002, the trial court granted the Company's motion for summary judgment in the
Spring Branch Independent School District case. Plaintiffs have appealed. The
Houston Independent School District case has been abated pending appellate
review of the trial court's dismissal of the Spring Branch Independent School
District case or certain other events.
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. In March 2002 the trial court dismissed
all claims. Plaintiffs appealed, and in June 2003, the appellate court affirmed
the dismissal of five of the six counts of plaintiffs' complaint, but reversed
the dismissal of the conspiracy count.
In February 2001 the Company was served with a complaint in the case now
known as Barker, et al. v. The Sherwin-Williams Company, et al. (Circuit Court
of Jefferson County, Mississippi, Civil Action No. 2000-587). (The case was
formerly known as Borden, et al. v. The Sherwin-Williams Company, et al.) 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. One plaintiff has dropped his claims and the court has
ordered that the claims of nine of the plaintiffs be transferred to Holmes
County, Mississippi, state court. The defendants petitioned the Mississippi
Supreme Court to reverse the trial court's transfer of these plaintiffs to
Holmes County and have requested that the plaintiffs be transferred to their
appropriate venues. The Mississippi Supreme Court has stayed all activities in
Holmes County pending its decision. With respect to the eight plaintiffs
remaining in Jefferson County, pre-trial proceedings are continuing, and the
court has set a trial date of October 2004.
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). The City of Milwaukee 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. In July 2003, the trial court granted
defendants' motion for summary judgment. The plaintiff has appealed.
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. The case has been
stayed pending appellate review of the trial court's dismissal of the Spring
Branch Independent School District case or certain other events.
In January and February 2002 the Company was served with complaints by 25
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. In November 2002 the trial
court dismissed the cases with prejudice. Plaintiffs have appealed.
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 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 three adults for
injuries alleged to have been caused by the use of lead paint. After removal to
federal court, in February 2003 the case was remanded to state court. The
Company has denied all allegations of liability, and pre-trial proceedings are
continuing. In August 2003, the court set a trial date of June 2004. In February
2004 plaintiffs agreed to dismiss one plaintiff voluntarily upon defendants'
agreement to extend the statute of limitations period for that plaintiff for 12
months.
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 complaint
was amended to add Liberty County, the City of Liberty, and the Dayton
Independent School District as plaintiffs and drop the Lead Industries
Association as a defendant. The Company has denied all allegations of liability.
The case has been stayed pending appellate review of the trial court's dismissal
of the Spring Branch Independent School District case or certain other events.
In May 2002 the Company was served with a complaint in Brownsville
Independent School District v. Lead Industries Association, et al. (District
Court of Cameron County, Texas, No. 2002-052081 B), seeking compensatory and
punitive damages jointly and severally from the Company, the former lead pigment
manufacturers and the LIA for property damage. The Company has denied all
allegations of liability. The case has been stayed pending appellate review of
the trial court's dismissal of the Spring Branch Independent School District
case or certain other events.
In September 2002 the Company was served with a complaint in City of
Chicago v. American Cyanamid, et al. (Circuit Court of Cook County, Illinois,
No. 02CH16212), seeking damages to abate lead paint in a single-count complaint
alleging public nuisance against the Company and seven other former
manufacturers of lead pigment. In October 2003, the trial court granted
defendants' motion to dismiss. The plaintiff has appealed.
In October 2002 the Company was served with a complaint in Walters v. NL
Industries, et al. (Kings County Supreme Court, New York, No. 28087/2002), in
which an adult seeks compensatory and punitive damages from the Company and five
other former lead pigment manufacturers for childhood exposure to lead paint.
The complaint alleges negligence and strict product liability, and seeks joint
and several liability with claims of civil conspiracy, concert of action,
enterprise liability, and market share or alternative liability. In March 2003
the court granted defendants' motion to dismiss the product defect allegations
in the negligence and strict liability counts. Discovery is proceeding.
In April 2003 the Company was served with a complaint in Russell v. NL
Industries, Inc., et al. (Circuit Court of LeFlore County, Mississippi,
No.2002-0235-CICI), in which six painters have sued NL, four paint companies,
and a local retailer, alleging strict liability, negligence, fraudulent
concealment, misrepresentation, and conspiracy, and seeking compensatory and
punitive damages for alleged injuries caused by lead paint. Defendants removed
this case to federal court, and plaintiffs have dropped their motion to remand.
Discovery is proceeding.
In April 2003 the Company was served with a complaint in Jones v. NL
Industries, Inc., et al. (Circuit Court of LeFlore County, Mississippi, Civil
Action No. 2002-0241-CICI), in which fourteen children from five families have
sued NL and one landlord alleging strict liability, negligence, fraudulent
concealment, and misrepresentation, and seeking compensatory and punitive
damages for alleged injuries caused by lead paint. Defendants have removed this
case to federal court, and plaintiffs have moved to remand the case back to
state court. Discovery is proceeding.
In November 2003 the Company was served with a complaint in Brown v. NL
Industries, Inc. et al (Circuit Court of Cook County, Illinois, County
Department, Law Division, Case No. 03L 012425). The complaint seeks damages
against the Company and two local property owners on behalf of a minor for
injuries alleged to be due to exposure to lead paint contained in the minor's
residence. 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 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.
Environmental matters and litigation. The Company has been named as a
defendant, PRP, or both, pursuant to CERCLA and similar state laws in
approximately 70 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. In addition,
the Company is a party to a number of lawsuits filed in various jurisdictions
alleging CERCLA or other environmental claims. See Note 18 to the Consolidated
Financial Statements.
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, 2003, the Company had accrued $77
million for those environmental matters that 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, 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
$110 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, the insolvency of other 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.
The exact time frame over which the Company makes payments with respect to
its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process which in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs which
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
are classified as a noncurrent liability.
At December 31, 2003 there are approximately 20 sites for which the Company
is unable to estimate a range of costs. For these sites, generally the
investigation is in the early stages, and it is either unknown as to whether or
not the Company actually had any association with the site, or if the Company
had association with the site, the nature of its responsibility, if any, for the
contamination at the site and the extent of contamination. The timing on when
information would become available to the Company to allow the Company to
estimate a range of loss is unknown and dependent on events outside the control
of the Company, such as when the party alleging liability provides information
to the Company.
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 Company and the U.S. EPA have entered into a consent decree
settling the Company's liability at the site for $31.5 million, which includes
penalties of $1 million. In May 2003, the court entered the consent decree.
Pursuant to the consent decree, in June 2003, the Company paid $30.8 million to
the United States and will pay up to an additional $.7 million upon completion
of an EPA audit of certain response costs.
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, all of which had been. 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 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 estimated the
total cleanup costs in the Baxter Springs subsite to be $5.4 million. The
cleanup has been completed within the previously disclosed estimates.
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.
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 cleanup costs, which the
U.S. EPA 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 cleanup has been completed
within previously disclosed estimates.
In January 2003, the Company received a General Notice of Liability from
the U.S. EPA regarding the site of a formerly owned primary lead smelting
facility located in Collinsville, Illinois. The U.S. EPA alleges the site
contains elevated levels of lead. The Company and the U.S. EPA are negotiating
the terms of a proposed administrative order to remediate the site.
In June 2003 the Company was served with a complaint in Cole, et al. v.
ASARCO Incorporated et al. (U.S. District Court for the Northern District of
Oklahoma, Case No. 03C V327 EA (J)), a purported class action on behalf of two
classes of persons living in the Picher/Cardin, Oklahoma area: (1) a medical
monitoring class of persons who have lived in the area since 1994; and (2) a
property owner class of residential, commercial and government property owners.
Plaintiffs are nine individuals and, in their official capacities, the Mayor of
Picher and the Chairman of the Picher/Cardin School Board. Plaintiffs allege
causes of action in trespass and nuisance and seek a medical monitoring program,
a relocation program, property damages and punitive damages. The Company has
answered the complaint and has denied all of the plaintiffs' allegations.
In July 2003 the Company was served with complaints in six cases asserting
personal injuries due to exposure to lead from mining waste on behalf of,
respectively, two, four, two, three, four and two children in Crawford, et al.
v. ASARCO Incorporated, et al. (Case No. CJ-03-304); Barr, et al. v. ASARCO
Incorporated, et al. (Case No. CJ-03-305); Brewer, et al. v. ASARCO
Incorporated, et al. (Case No. CJ-03-306); Kloer, et al. v. ASARCO Incorporated,
et al. (Case No. CJ-03-307); Rhoten, et al. v. ASARCO Incorporated, et al. (Case
No. CJ-03-308; and Nowlin, et al. v. ASARCO Incorporated, et al. (Case No.
CJ-2003-342)(all in the District Court in and for Ottawa County, State of
Oklahoma). Each complaint alleges causes of action in negligence, strict
liability, nuisance, and attractive nuisance; and each seeks $20 million in
compensatory and $20 million in punitive damages. The Company has answered each
complaint and has denied all of the plaintiffs' allegations.
In December 2003 the Company was served with a complaint in The Quapaw
Tribe of Oklahoma et al. v. ASARCO Incorporated et al. (United States District
Court, Northern District of Oklahoma, Case No. 03-CV-846H(J)). The complaint
alleges public nuisance, private nuisance, trespass, unjust enrichment, strict
liability and deceit by false representation against the Company and six other
mining companies with respect to former operations in the Tar Creek mining
district in Oklahoma. The complaint seeks class action status for former and
current owners, and possessors of real property located within the Quapaw
Reservation. Among other things, the complaint seeks actual and punitive damages
from the defendants. The Company has moved to dismiss the complaint and intends
to deny all allegations. The plaintiff has also notified the Company that it
intends to file a separate lawsuit seeking natural resource damages and
injunctive relief under the Resource Conservation Recovery Act and CERCLA.
In February 2004 the Company was served in Evans v. Asarco (United States
District Court, Northern District of Oklahoma, Case No. 04-CV-94EA(M)), a
purported class action on behalf of two classes of persons living in the town of
Quapaw, Oklahoma: (1) a medical monitoring class of persons who have lived in
the area since 1994, and (2) a property owner class of residential, commercial
and government property owners. Plaintiffs are four individuals, the mayor of
the town of Quapaw, Oklahoma, and the School Board of Quapaw, Oklahoma.
Plaintiffs allege causes of action in nuisance and seek a medical monitoring
program, a relocation program, property damages, and punitive damages. The
Company intends to deny all of the plaintiffs' allegations.
See Item 1. "Business - Regulatory and Environmental Matters and Note 18 to
the Consolidated Financial Statements."
Insurance coverage claims. NL has settled insurance coverage claims
concerning environmental claims with certain of the defendants in the
environmental coverage litigation, including NL's principal former carriers. See
Note 17 to the Consolidated Financial Statements. A portion of the proceeds from
these settlements were placed in special purpose trusts as discussed below. NL
also continues to negotiate with the remaining 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.
At December 31, 2003, the Company had $24 million in restricted cash,
restricted cash equivalents and restricted marketable debt securities held by
special purpose trusts, the assets of which can only be used to pay for certain
of the Company's future environmental remediation and other environmental
expenditures. Such restricted balances declined by approximately $35 million
during 2003 due primarily to a $30.8 million payment made by the Company related
to the final settlement of the Company's previously-reported Granite City,
Illinois lead smelter site.
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. NL has not considered any potential insurance recoveries for lead
pigment or environmental litigation in determining related accruals.
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, 2003.
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 and Pacific Stock
Exchanges (symbol: NL). As of February 27, 2004, there were approximately 5,600
holders of record of NL common stock. The following table sets forth the high
and low closing per share sales prices for NL common stock for the periods
indicated, according to Bloomberg, and dividends paid during such periods. On
February 27, 2004 the closing price of NL common stock according to the NYSE
Composite Tape was $15.03.
Cash
dividends
High Low paid
Year ended December 31, 2002
First Quarter $17.47 $13.01 $ .20
Second Quarter 18.80 14.84 .20
Third Quarter 16.10 13.07 .20
Fourth Quarter 18.83 13.80 2.70
Year ended December 31, 2003
First Quarter $18.23 14.51 $ .20
Second Quarter 17.85 15.80 .20
Third Quarter 18.25 16.14 .20
Fourth Quarter (prior to Kronos distribution) 18.22 16.35 -
Fourth Quarter (after Kronos distribution) 12.10 10.28 .20
On December 8, 2003, NL completed the distribution to its stockholders of
one share of common stock of Kronos, previously a wholly-owned subsidiary of NL,
for every two shares of NL common stock outstanding as of the close of business
on November 17, 2003. NL distributed approximately 23.9 million shares of
Kronos' common stock, representing approximately 48.8% of the outstanding stock
of Kronos.
The Company paid four quarterly $.20 per share cash dividends in 2003. On
February 19, 2004, the Company's Board of Directors declared a regular quarterly
dividend of $.20 per share to stockholders of record as of March 11, 2004 to be
paid in the form of shares of common stock of Kronos on March 29, 2004. 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 programs, 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 and 1,384,000 shares of its common stock in the open market at
an aggregate cost of $21.3 million in 2002. No common stock was purchased
pursuant to this share repurchase program in 2003. In October 2002, the
Company's Board of Directors authorized a 1,500,000 share extension of the
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. Approximately 1,323,000 additional shares are available for
purchase under the Company's share repurchase program.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Years ended December 31,
1999 2000 2001 2002 2003
------ ------ ------ ------ ------
(In millions, except per share data)
STATEMENTS OF OPERATIONS DATA:
Net sales $ 908.4 $ 922.3 $ 835.1 $ 875.2 $1,008.2
Net income (1) 159.8 154.6 121.4 36.8 63.7
EARNINGS PER SHARE DATA:
Basic $ 3.09 $ 3.07 $ 2.44 $ .76 $ 1.33
Diluted $ 3.08 $ 3.05 2.44 $ .76 $ 1.33
Cash dividends per share $ .14 $ .65 $ .80 $ 3.30 $ .80
BALANCE SHEET DATA (at year end):
Cash, cash equivalents, current and
noncurrent restricted cash equivalents and
current and noncurrent restricted
marketable debt securities $ 151.8 $ 207.6 $ 199.0 $ 130.4 $ 99.8
Current assets 506.4 554.9 561.8 486.3 567.3
Total assets 1,056.2 1,120.8 1,151.1 1,111.5 1,264.1
Current liabilities 264.8 298.0 299.1 238.0 239.9
Long-term debt including current maturities 244.5 196.1 196.5 325.9 356.7
Stockholders' equity 271.1 344.5 386.9 265.3 200.9
TiO2 OPERATING STATISTICS:
Average selling price
index (1983=100) 153 161 156 142 146
Sales volume* 427 436 402 455 462
Production volume* 411 441 412 442 476
Production capacity at beginning of year* 440 440 450 455 470
Production rate as a percentage of capacity 93% Full 91% 96% Full
* Metric tons in thousands
(1) Net income in 1999 includes a $57.7 million income tax benefit related to
(i) a favorable resolution of Kronos' previously-reported tax contingency
in Germany ($29.1 million) and (ii) a net reduction in Kronos' deferred
income tax asset valuation allowance due to a change in the estimate of
Kronos' ability to utilize certain income tax attributes under the
"more-likely-than-not" recognition criteria ($28.6 million). .
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 accounting
principles generally accepted in the United States of America ("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 ongoing basis, the Company evaluates its estimates, including
those related to bad debts, inventory reserves, impairments of investments in
marketable securities and investments accounted for by the equity method, the
recoverability of other long-lived assets (including goodwill and other
intangible assets), pension and other post-retirement benefit obligations and
the underlying actuarial assumptions related thereto, 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 it believes 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:
o The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments and
other factors. The Company takes into consideration the current financial
condition of its customers, the age of the outstanding balance and the
current economic environment when assessing the adequacy of the allowance.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. During 2001, 2002 and 2003, the net amount
written off against the allowance for doubtful accounts as a percentage of
the balance of the allowance for doubtful accounts as of the beginning of
the year ranged from 11% to 23%.
o The Company provides reserves for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated net realizable value using assumptions about future demand for
its products and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory reserves
may be required. The Company also provides reserves for tools and supplies
inventory based generally on both historical and expected future usage
requirements.
o The Company owns investments in certain companies that are accounted for
either as marketable securities carried at fair value or accounted for
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 below its cost basis (for marketable securities) or
below its carrying value (for equity method investees) 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.
At December 31, 2003, the carrying value of all of the Company's marketable
securities exceeded the cost basis of each of such investments. With
respect to the Company's investment in Valhi, which represented over 99% of
the carrying value of all of the Company's marketable equity securities at
December 31, 2003, the $70.5 million carrying value of such investment
exceeded its $34.6 million cost basis by about 104%.
o The Company recognizes an impairment charge associated with its long-lived
assets, including property and equipment, goodwill and other intangible
assets, whenever it determines that recovery of such long-lived asset is
not probable. Such determination is made in accordance with the applicable
GAAP requirements 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.
Under applicable GAAP (SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets), property and equipment is not assessed for
impairment unless certain impairment indicators, as defined, are present.
During 2003, no such impairment indicators, as defined, were present.
Under applicable GAAP (SFAS No. 142, Goodwill and other Intangible Assets),
goodwill is required to be reviewed for impairment at least on an annual
basis. Goodwill will also be reviewed for impairment at other times during
each year when impairment indicators, as defined, are present. The
Company's goodwill relates to an acquisition completed in January 2002. No
goodwill impairments were deemed to exist as a result of the Company's
annual impairment review completed during the third quarter of 2003.
o The Company maintains various defined benefit pension plans and
postretirement benefits other than pensions ("OPEB"). The amount recognized
as defined benefit pension and OPEB expense, and the reported amount of
prepaid and accrued pension costs and accrued OPEB costs, are actuarially
determined based on several assumptions, including discount rates, expected
rates of returns on plan assets and expected health care trend rates.
Variances from these actuarially assumed rates will result in increases or
decreases, as applicable, in the recognized pension and OPEB obligations,
pension and OPEB expense and funding requirements. These assumptions are
more fully described below under "--Assumptions on defined benefit pension
plans and OPEB plans."
o The Company records a valuation allowance to reduce its deferred income tax
assets to the amount that is believed to be realized 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 in the future, 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.
o The Company records accruals 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).
Executive summary
Relative changes in the Company's TiO2 sales and operating income during
the past three years are primarily due to (i) relative changes in TiO2 sales and
production volumes, (ii) relative changes in TiO2 average selling prices and
(iii) relative changes in foreign currency exchange rates. The relatively lower
levels of sales and production volumes in 2001 as compared to 2002 and 2003 are
due in part to the effects of a fire at one of the Company's production
facilities, as discussed below.
Selling prices for TiO2, the Company's principal product, were generally
decreasing during all of 2001 and the first quarter of 2002, were generally flat
during the second quarter of 2002, were generally increasing during the last
half of 2002 and the first quarter of 2003, were generally flat during the
second quarter of 2003 and were generally declining during the third and fourth
quarters of 2003.
As described in Item 3. "Legal Proceedings" and Note 18 to the Consolidated
Financial Statements, the Company is involved in various legal proceedings. Such
proceedings include lead pigment litigation resulting from the Company's former
operations, environmental matters and litigation associated with the Company's
current and former operating facilities along with various other environmental,
contractual, product liability and other claims and disputes incidental to its
present and former businesses.
Results of operations
NL conducts operations for TiO2, its principal product, through its
subsidiary, Kronos. Average TiO2 selling prices in billing currencies (which
exclude the effects of foreign currency translation) were generally decreasing
during all of 2001 and the first quarter of 2002, were generally flat during the
second quarter of 2002 and were generally increasing during the last half of
2002 and the first quarter of 2003. Average selling prices for TiO2 were
generally flat during the second quarter of 2003 and were generally decreasing
throughout the remainder of 2003.
Years ended December 31, % Change
----------------------------- -----------
2001 2002 2003 2001-02 2002-03
---- ---- ---- ------- -------
(In $ millions, except selling price data)
Net sales $835.1 $875.2 $ 1,008.2 + 5% +15%
Cost of sales 578.1 671.8 739.2 +16% +10%
--------- --------- ---------
Gross margin 257.0 203.4 269.0 -21% +32%
Selling, general and administrative
expense (98.7) (107.7) (124.4) + 9% +16%
Insurance recoveries, net 7.2 - -
Currency transaction gains (losses), net 1.2 (.5) (7.7)
Disposition of property and equipment (.7) (.6) 9.8
Litigation settlement gains, net 11.7 5.2 .8
Noncompete agreement income 4.0 4.0 .3
Corporate expense (25.8) (37.9) (57.4)
Other 1.4 .3 .5
--------- --------- ---------
Income from operations $ 157.3 $ 66.2 $ 90.9 -58% +37%
======== ======== =========
TiO2 operating statistics:
Percent change in average selling prices:
Using actual foreign currency
exchange rates - 7% +13%
Impact of changes in foreign
currency exchange rates - 2% -10%
---- ----
In billing currencies - 9% + 3%
==== ====
Sales volumes* 402 455 462 +13% + 2%
Production volumes* 412 442 476 + 7% + 8%
Production rate as
percent of capacity 91% 96% Full
* Thousands of metric tons
Year ended December 31, 2003 compared to year ended December 31, 2002
The Company's net sales increased $133.0 million (15%) in 2003 compared to
2002 due to higher average selling prices along with higher sales volumes in
2003 and the positive effects of currency exchange rates, specifically the
weaker U.S. dollar as compared to the euro and Canadian dollar. Excluding the
effect of fluctuations in the value of the U.S. dollar relative to other
currencies, the Company's average TiO2 selling price in 2003 was 3% higher than
2002, primarily due to the European and export markets. When translated from
billing currencies to U.S. dollars using actual foreign currency exchange rates
prevailing during the respective periods, the Company's average TiO2 selling
prices in 2003 increased 13% compared to 2002. The Company's TiO2 sales volumes
in 2003 set a new record, increasing 2% from the previous record achieved in
2002, with higher volumes in European and North American markets more than
offsetting a decline in volumes to export markets. By volume, approximately
one-half of NL's 2002 and 2003 TiO2 sales volumes were attributable to markets
in Europe, with 40% attributable to North America and the balance to export
markets.
The Company's sales are denominated in various currencies, including the
U.S. dollar, the euro, other major European currencies and the Canadian dollar.
The disclosure of the percentage change in the Company's average TiO2 selling
price in billing currencies (which excludes the effects of fluctuations in the
value of the U.S. dollar relative to other currencies) is considered a
"non-GAAP" financial measure under regulations of the SEC. The disclosure of the
percentage change in the Company's average TiO2 selling prices using actual
foreign currency exchange rates prevailing during the respective periods is
considered the most directly comparable financial measure presented in
accordance with accounting principles generally accepted in the United States
("GAAP measure"). The Company discloses percentage changes in its average TiO2
prices in billing currencies because the Company believes such disclosure
provides useful information to investors to allow them to analyze such changes
without the impact of changes in foreign currency exchange rates, thereby
facilitating period-to-period comparisons of the relative changes in average
selling prices in the actual various billing currencies. Generally, when the
U.S. dollar either strengthens or weakens against other currencies, the
percentage change in average selling prices in billing currencies will be higher
or lower, respectively, than such percentage changes would be using actual
exchange rates prevailing during the respective periods. The difference between
the 13% increase in the Company's average TiO2 selling prices during 2003 as
compared to 2002 using actual foreign currency exchange rates prevailing during
the respective periods (the GAAP measure) and the 3% percentage increase in the
Company's average TiO2 selling price in billing currencies (the non-GAAP
measure) during such periods is due to the effect of changes in foreign currency
exchange rates. The table above presents (i) the percentage change in the
Company's average TiO2 selling prices using actual foreign currency exchange
rates prevailing during the respective periods (the GAAP measure), (ii) the
percentage change in Kronos average TiO2 selling price in billing currencies
(the non-GAAP measure) and (iii) the percentage change due to changes in foreign
currency exchange rates (or the reconciling item between the non-GAAP measure
and the GAAP measure).
The Company's cost of sales increased $67.4 million (10%) in 2003 compared
to 2002 due to the higher sales volumes. The Company's cost of sales, as a
percentage of net sales, decreased from 77% in 2002 to 73% in 2003 due primarily
to the effects of continued cost reduction efforts combined with the impact of
higher production volumes and higher average selling prices. Operating rates
were near full capacity during most of 2003, setting a new Company production
record.
The Company's gross margins increased $65.6 million (32%) from 2002 to 2003
due to the net effects of the aforementioned changes in sales and cost of sales
during such periods.
As a percentage of net sales, selling general and administrative expenses
remained consistent at 12%, increasing proportionately with the increased sales
and production volume.
Certain of the sales generated by the Company's European and Canadian
operations are denominated in the U.S. dollar, and such operations routinely
hold U.S. dollar-denominated receivables. Primarily as a result of the weakening
of the U.S. dollar as compared to the Canadian dollar and the euro throughout
the year, the Company's results in 2003 included net currency transaction losses
of $7.7 million. Due to a more stable dollar in 2002, the Company recognized net
currency transaction losses of approximately $500,000. The gain on disposal of
property and equipment in 2003 related primarily to the disposal of certain real
property not associated with the Company's TiO2 operations, and aggregated $10.3
million. The Company has certain other real property, including some subject to
environmental remediation, which could be sold in the future for a profit. The
litigation settlement gains relate to legal settlements with certain of the
Company's former insurance carriers. The noncompete agreement income related to
a covenant not to compete involving a formerly owned business unit, which became
fully amortized in January 2003.
Corporate expenses for 2003 increased 51% to $57.4 million as compared to
2002 primarily due to higher environmental remediation expense accruals
(principally related to one formerly owned site for which the remediation
process is expected to occur over the next several years).
Kronos has substantial operations and assets located outside the United
States (primarily in Germany, Belgium, Norway and Canada). A significant amount
of Kronos' sales generated from its non-U.S. operations are denominated in
currencies other than the U.S. dollar, principally the euro, other major
European currencies and the Canadian dollar. A portion of Kronos' sales
generated from its non-U.S. operations are denominated in the U.S. dollar.
Certain raw materials, primarily titanium-containing feedstocks, are purchased
in U.S. dollars, while labor and other production costs are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
Kronos' foreign sales and operating results are subject to currency exchange
rate fluctuations which may favorably or adversely impact reported earnings and
may affect the comparability of period-to-period operating results. Overall,
fluctuations in the value of the U.S. dollar relative to other currencies,
primarily the euro, increased TiO2 sales in 2003 by a net $93 million compared
to 2002. Fluctuations in the value of the U.S. dollar relative to other
currencies similarly impacted Kronos' foreign currency-denominated operating
expenses. NL's operating costs that are not denominated in the U.S. dollar, when
translated into U.S. dollars, were higher in 2003 compared to the same periods
of 2002. Overall, currency exchange rate fluctuations resulted in a net decrease
in Kronos' operating income in 2003 of approximately $6 million as compared to
2002.
Year ended December 31, 2002 compared to year ended December 31, 2001
The Company's sales increased $40.1 million (5%) in 2002 compared to 2001
due primarily to higher TiO2 sales volumes, offset by lower average TiO2 selling
prices. The Company's record TiO2 sales volumes in 2002 were 13% higher compared
to 2001 primarily due to higher volumes in European and North American markets
of 14% and 17%, respectively. By volume, approximately one-half of the Company's
2002 TiO2 sales volumes were attributable to markets in Europe, with 39%
attributable to North America and the balance to export markets. The lower TiO2
sales volumes in 2001 were due in part to the effect of a fire at the Company's
Leverkusen, Germany facility in March 2001 that disrupted operations. See Note
17 to the Consolidated Financial Statements. Excluding the effect of
fluctuations in the value of the U.S. dollar relative to other currencies, the
Company's average TiO2 selling price in 2002 was 9% lower than 2001, with prices
lower in all major regions. When translated from billing currencies to U.S.
dollars using actual foreign currency exchange rates prevailing during the
respective periods, the Company's average TiO2 selling prices in 2002 decreased
7% compared to 2001.
The Company's cost of sales increased $93.8 million (16%) in 2002 compared
to 2001 due to higher sales volume, partially offset by lower unit costs, which
resulted primarily from the higher production levels. The effects of lower TiO2
sales and production volumes in 2001 were partially offset by receipt of the
business interruption proceeds discussed above. The Company's cost of sales, as
a percentage of net sales, increased from 69% in 2001 to 77% in 2002 primarily
due to the impact on net sales of the lower average selling prices partially
offset by lower unit costs.
The Company's gross margin declined $53.6 million (21%) in 2002 compared to
2001 as the effect of lower average TiO2 selling prices more than offset the
effect of higher TiO2 sales and production volumes. The effect of the higher
sales and production volumes was offset in part by the $27.3 million of business
interruption proceeds received in 2001, as discussed below.
The Company's record TiO2 production volume in 2002 was 7% higher than
2001. Kronos' operating rates in 2001 were lower as compared to 2002 primarily
due to lost production resulting from the Leverkusen fire.
The Company's income from operations in 2001 includes $27.3 million of
business interruption insurance proceeds as payment for losses (unallocated
period costs and lost margin) caused by the Leverkusen fire. The effects of the
lower TiO2 sales and production volumes were offset in part by the business
interruption insurance proceeds. Of such $27.3 million of business interruption
insurance proceeds, $20.1 million was recorded as a reduction of cost of sales
to offset unallocated period costs that resulted from lost production, and the
remaining $7.2 million, representing recovery of lost margin, is included in
income from operations (as shown on the table above). The business interruption
insurance proceeds distorted the income from operations margin percentage in
2001 as there are no sales associated with the $7.2 million of lost margin
recognized. See Note 17 to the Consolidated Financial Statements.
The Company also recognized insurance recoveries of $29.1 million in 2001
for property damage and related cleanup and other extra expenses related to the
Leverkusen fire, resulting in an insurance gain of $17.5 million, as the
insurance recoveries exceeded the carrying value of the property destroyed and
the cleanup and other extra expenses incurred. Such insurance gain is not
reported as a component of income from operations but is included in other
income and expense, as discussed below. The Company does not expect to recognize
any additional insurance recoveries related to the Leverkusen fire. See Note 17
to the Consolidated Financial Statements.
The Company's selling, general and administrative expenses ("SG&A
expenses") increased $9.0 million (9%) in 2002 as compared to 2001 primarily due
to higher distribution expenses ($600,000) associated with the higher sales
volume in 2002 and higher administrative expenses of $5.8 million, as well as
the impact of relative changes in foreign currency exchange rates, which
increased Kronos' expenses in 2002 compared to 2001. SG&A expenses were
approximately 12% of sales in both 2001 and 2002.
As discussed above, Kronos has substantial operations and assets located
outside the United States (primarily in Germany, Belgium, Norway and Canada) and
consequently, the translated U.S. dollar value of Kronos' foreign sales and
operating results are subject to currency exchange rate fluctuations that may
favorably or adversely impact reported earnings and may affect the comparability
of period-to-period operating results. Overall, fluctuations in the value of the
U.S. dollar relative to other currencies, primarily the euro, increased TiO2
sales in 2002 by a net $21 million compared to 2001. Fluctuations in the value
of the U.S. dollar relative to other currencies similarly impacted Kronos'
foreign currency-denominated operating expenses. NL's operating costs that are
not denominated in the U.S. dollar, when translated into U.S. dollars, were
higher in 2003 compared to the same periods of 2002. Overall, currency exchange
rate fluctuations on Kronos' operating income comparisons was not significant in
2002 as compared to 2001.
Outlook
Kronos expects its TiO2 production volumes in 2004 will approximate its
2003 production volumes, and sales volumes are expected to be slightly higher in
2004 as compared to 2003. Kronos' average Ti02 selling price, which declined
during the second half of 2003, is expected to continue to decline during the
first quarter of 2004. Kronos is hopeful that its average selling prices will
cease to decline sometime during the first half of 2004 and will rise
thereafter. Nevertheless, Kronos expects its average TiO2 selling prices, in
billing currencies, will be lower in 2004 as compared to 2003. Overall, Kronos
expects its operating income in 2004 will be lower than 2003. Kronos'
expectations as to the future prospects of Kronos and the TiO2 industry are
based upon a number of factors beyond its control, including worldwide growth of
gross domestic product, competition in the marketplace, unexpected or
earlier-than-expected capacity additions and technological advances. If actual
developments differ from Kronos' expectations, the Company's results of
operations could be unfavorably affected.
Other income (expense)
The following table sets forth certain information regarding other income
and expense items.
Years ended December 31, Change
--------------------------- ------------
2001 2002 2003 2001-02 2002-03
---- ---- ---- ------- -------
(In $ millions)
Currency transaction gains $ - $ 6.3 $ - $ 6.3 $ (6.3)
Insurance recoveries, net 17.5 - - (17.5) -
Trade interest income 2.3 1.7 .8 (.6) (.9)
Other interest and dividend income 8.9 5.7 3.2 (3.2) (2.5)
Securities gains (losses), net (1.1) (.1) 2.4 1.0 2.5
Interest expense (27.6) (29.8) (33.0) (2.2) (3.2)
------- ------- ------- ------- -------
$ - _ $ (16.2) $ (26.6) $ (16.2) $ (10.4)
======== ======= ======= ======= =======
Interest income, including noncash interest income on restricted cash
balances and restricted marketable debt securities, fluctuates in part based
upon the amount of funds invested and yields thereon. Aggregate interest and
dividend income declined $3.4 million in 2003 compared to 2002 and $3.8 million
in 2002 compared with 2001 primarily due to lower average yields on invested
funds. Average funds invested in 2001 were higher compared with the subsequent
years primarily due to the decrease in the balance of restricted cash and
marketable debt securities over the past three years as such funds were used to
pay for certain environmental remediation expenditures of the Company. See Note
18 to the Consolidated Financial Statements. The Company expects interest income
will be lower in 2004 than 2003 due to lower average yields and lower average
levels of funds available for investment.
Securities gains (losses), net in 2003 included a $2.3 million noncash
securities gain related to the exchange of the Company's holdings of Tremont
Corporation common stock for shares of Valhi, Inc. common stock as a result of a
series of merger transactions completed in February 2003. See Note 5 to the
Consolidated Financial Statements. Securities gains (losses), net in 2001
related to a $1.1 million noncash securities loss related to an
other-than-temporary decline in value of certain available-for-sale securities
held by the Company.
In June 2002 Kronos International, Inc. ("KII"), an indirect wholly-owned
subsidiary of the Company, sold (euro)285 million of its 8.875% Senior Secured
Notes (the "Notes") due 2009. KII used the net proceeds of the Notes offering to
repay certain intercompany indebtedness owed to the Company, a portion of which
the Company used to redeem at par all of its outstanding 11.75% Senior Secured
Notes due 2003, plus accrued interest. As a result of the refinancing, the
Company recognized a foreign currency transaction gain of $6.3 million in 2002
related to the extinguishment of certain intercompany indebtedness. See Note 11
to the Consolidated Financial Statements.
The insurance recoveries, net of $17.5 million in 2001 related to insurance
proceeds received from property damage resulting from the Leverkusen fire. The
insurance proceeds received exceeded the carrying value of the property
destroyed and cleanup costs incurred. See Note 17 to the Consolidated Financial
Statements.
Interest expense in 2003 increased $3.2 million compared to 2002 primarily
due to higher levels of outstanding debt and associated currency effects,
partially offset by lower interest rates. Interest expense in 2002 increased
$2.2 million compared with 2001 primarily due to $2.0 million of additional
second-quarter 2002 interest expense related to the early extinguishment of the
Company's 11.75% Senior Secured Notes. See Note 11 to the Consolidated Financial
Statements. Assuming no significant change in interest rates, interest expense
in 2004 is expected to be higher compared with 2003 due to higher average levels
of outstanding indebtedness, partially offset by lower average interest rates.
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rates are explained in Note 14 to the Consolidated Financial
Statements. Income tax rates vary by jurisdiction (country and/or state), and
relative changes in the geographic mix of the Company's pre-tax earnings can
result in fluctuations in the effective income tax rate.
During 2003, NL reduced its deferred income tax asset valuation allowance
by approximately $7.2 million, primarily as a result of utilization of certain
income tax attributes for which the benefit had not previously been recognized.
In addition, the Company recognized a $38.0 million income tax benefit related
to the net refund of certain prior year German income taxes.
During 2002, NL reduced its deferred income tax asset valuation allowance
by approximately $3.4 million, primarily as a result of utilization of certain
income tax attributes for which the benefit had not previously been recognized.
The provision for income taxes in 2002 also includes a $2.3 million deferred
income tax benefit related to certain changes in the Belgian tax law.
During 2001, NL reduced its deferred income tax asset valuation allowance
by $24.7 million. Of such reduction, $23.2 million related to a change in
estimate of NL's ability to utilize certain German income tax attributes
following the completion of a restructuring of its German operations, the
benefit of which had not previously been recognized under the
"more-likely-than-not" recognition criteria. In addition, NL also utilized
certain tax attributes during 2001 for which the benefit had also not previously
been recognized.
At December 31, 2003, the Company had the equivalent of approximately $438
million of German income tax loss carryforwards with no expiration date.
However, NL has provided a deferred tax valuation allowance against
substantially all of these income tax loss carryforwards because NL currently
believes they do not meet the "more-likely-than-not" recognition criteria. The
Company periodically evaluates the "more-likely-than-not" recognition criteria
with respect to such tax loss carryforwards, and it is possible that in the
future the Company may conclude such carryforwards do meet the recognition
criteria, at which time the Company would reverse all or a portion of such
deferred tax valuation allowance.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforward
effective January 1, 2004. The new law may significantly affect Kronos' future
income tax expense and cash tax payments.
Minority interest. The Company commenced recognizing minority interest in
Kronos following the Company's December 2003 distribution of a portion of the
shares of Kronos common stock to its stockholders. Because of such distribution,
the Company expects to report a higher amount of minority interest in earnings
in 2004 as compared to 2003. See Notes 12 and 13 to the Consolidated Financial
Statements.
Minority interest in NL's subsidiaries also relates to NL'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 NL's environmental liabilities. EMS' earnings are based, in part,
upon its ability to favorably resolve these liabilities on an aggregate basis.
The stockholders of EMS, other than NL, actively manage the environmental
liabilities and share in 39% of EMS' cumulative earnings. NL continues to
consolidate EMS and provides accruals for the reasonably estimable costs for the
settlement of EMS' environmental liabilities, as discussed below.
Related party transactions. The Company is a party to certain transactions
with related parties. See Note 16 to the Consolidated Financial Statements.
Accounting principles newly adopted in 2003. See Note 20 to the
Consolidated Financial Statements.
Accounting principles not yet adopted. See Note 22 to the Consolidated
Financial Statements
Assumptions on defined benefit pension plans and OPEB plans
Defined benefit pension plans. The Company maintains various defined
benefit pension plans in the U.S., Europe and Canada. See Note 15 to the
Consolidated Financial Statements.
The Company accounts for its defined benefit pension plans using SFAS No.
87, "Employer's Accounting for Pensions." Under SFAS No. 87, defined benefit
pension plan expense and prepaid and accrued pension costs are each recognized
based on certain actuarial assumptions, principally the assumed discount rate,
the assumed long-term rate of return on plan assets and the assumed increase in
future compensation levels. The Company recognized consolidated defined benefit
pension plan expense of $4.6 million in 2001, $7.0 million in 2002 and $8.9
million in 2003. The amount of funding requirements for these defined benefit
pension plans is generally based upon applicable regulations (such as ERISA in
the U.S.), and will generally differ from pension expense recognized under SFAS
No. 87 for financial reporting purposes. Contributions made by NL to all of its
plans aggregated $7.6 million in 2001, $9.3 million in 2002 and $14.1 million in
2003.
The discount rates the Company utilizes for determining defined benefit
pension expense and the related pension obligations are based on current
interest rates earned on long-term bonds that receive one of the two highest
ratings given by recognized rating agencies in the applicable country where the
defined benefit pension benefits are being paid. In addition, the Company
receives advice about appropriate discount rates from the Company's third-party
actuaries, who may in some cases utilize their own market indices. The discount
rates are adjusted as of each valuation date (September 30th) to reflect
then-current interest rates on such long-term bonds. Such discount rates are
used to determine the actuarial present value of the pension obligations as of
December 31st of that year, and such discount rates are also used to determine
the interest component of defined benefit pension expense for the following
year.
At December 31, 2003, approximately 15%, 54%, 11% and 15% of the projected
benefit obligation related to NL plans in the U.S., Germany, Canada and Norway,
respectively. The Company uses several different discount rate assumptions in
determining its consolidated defined benefit pension plan obligations and
expense because the Company maintains defined benefit pension plans in several
different countries in North America and Europe and the interest rate
environment differs from country to country.
The Company used the following discount rates for its defined benefit
pension plans:
Discount rates used for:
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Obligations at Obligations at Obligations at
December 31, 2001 and expense December 31, 2002 and expense December 31, 2003 and
in 2002 in 2003 expense in 2004
---------------------------------------------------------------------------------------------
U.S. 7.3% 6.5% 5.9%
Germany 5.8% 5.5% 5.3%
Canada 7.3% 7.0% 6.3%
Norway 6.0% 6.0% 5.5%
The assumed long-term rate of return on plan assets represents the
estimated average rate of earnings expected to be earned on the funds invested
or to be invested in the plans' assets provided to fund the benefit payments
inherent in the projected benefit obligations. Unlike the discount rate, which
is adjusted each year based on changes in current long-term interest rates, the
assumed long-term rate of return on plan assets will not necessarily change
based upon the actual, short-term performance of the plan assets in any given
year. Defined benefit pension expense each year is based upon the assumed
long-term rate of return on plan assets for each plan and the actual fair value
of the plan assets as of the beginning of the year. Differences between the
expected return on plan assets for a given year and the actual return are
deferred and amortized over future periods based either upon the expected
average remaining service life of the active plan participants (for plans for
which benefits are still being earned by active employees) or the average
remaining life expectancy of the inactive participants (for plans for which
benefits are not still being earned by active employees).
At December 31, 2003, approximately 18%, 48%, 10% and 18% of the plan
assets related to plan assets for NL's plans in the U.S., Germany, Canada and
Norway, respectively. The Company uses several different long-term rates of
return on plan asset assumptions in determining its consolidated defined benefit
pension plan expense because the Company maintains defined benefit pension plans
in several different countries in North America and Europe, the plan assets in
different countries are invested in a different mix of investments and the
long-term rates of return for different investments differ from country to
country.
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets for each of its plans and the expected long-term
rates of return for such asset components. In addition, the Company receives
advice about appropriate long-term rates of return from the Company's
third-party actuaries. Such assumed asset mixes are summarized below:
o During 2003, the Company's plan assets in the U.S. are invested in the
Combined Master Retirement Trust ("CMRT"), a collective investment trust
established by Valhi to permit the collective investment by certain master
trusts which fund certain employee benefits plans sponsored by Contran and
certain of its affiliates. Harold Simmons is the sole trustee of the CMRT.
The CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices
(including the S&P 500 and certain Russell indices) utilizing both
third-party investment managers as well as investments directed by Mr.
Simmons. During the 16-year history of the CMRT, through December 31, 2003,
the average annual rate of return has been 12.4%. Prior to 2003, the
Company's U.S. plan assets were invested with a combination and equity and
fixed income managers.
o In Germany, the composition of NL's plan assets is established to satisfy
the requirements of the German insurance commissioner. The current plan
asset allocation at December 31, 2003 was 25% to equity managers and 75% to
fixed income managers.
o In Canada, NL currently has a plan asset target allocation of 65% to equity
managers and 35% to fixed income managers, with an expected long-term rate
of return for such investments to average approximately 125 basis points
above the applicable equity or fixed income index. The current plan asset
allocation at December 31, 2003 was 57% to equity managers and 43% to fixed
income managers.
o In Norway, NL currently has a plan asset target allocation of 14% to equity
managers and 86% to fixed income managers, with an expected long-term rate
of return for such investments of approximately 8% and 6%, respectively.
The current plan asset allocation at December 31, 2003 was 15% to equity
managers and 85% to fixed income managers.
The Company regularly reviews its actual asset allocation for each of its
plans, and will periodically rebalance the investments in each plan to more
accurately reflect the targeted allocation when considered appropriate.
The Company's assumed long-term rates of return on plan assets for 2001,
2002 and 2003 were as follows:
2001 2002 2003
-------- -------- ------
U.S. 8.5% 8.5% 10.0%
Germany 7.3% 6.8% 6.5%
Canada 7.8% 7.0% 7.0%
Norway 7.0% 7.0% 6.0%
The Company currently expects to utilize the same long-term rate of return
on plan asset assumptions in 2004 as it used in 2003 for purposes of determining
the 2004 defined benefit pension plan expense.
To the extent that a plan's particular pension benefit formula calculates
the pension benefit in whole or in part based upon future compensation levels,
the projected benefit obligations and the pension expense will be based in part
upon expected increases in future compensation levels. For all of the Company's
plans for which the benefit formula is so calculated, the Company generally
bases the assumed expected increase in future compensation levels upon average
long-term inflation rates for the applicable country.
In addition to the actuarial assumptions discussed above, because NL
maintains defined benefit pension plans outside the U.S., the amount of
recognized defined benefit pension expense and the amount of prepaid and accrued
pension costs will vary based upon relative changes in foreign currency exchange
rates.
Based on the actuarial assumptions described above and NL's current
expectation for what actual average foreign currency exchange rates will be
during 2004, NL expects its defined benefit pension expense will approximate $13
million in 2004. In comparison, NL expects to be required to make approximately
$9 million of contributions to such plans during 2004.
As noted above, defined benefit pension expense and the amount recognized
as prepaid and accrued pension costs are based upon the actuarial assumptions
discussed above. The Company believes all of the actuarial assumptions used are
reasonable and appropriate. If NL had lowered the assumed discount rate by 25
basis points for all of its plans as of December 31, 2003, NL's aggregate
projected benefit obligations would have increased by approximately $12.8
million at that date, and NL's defined benefit pension expense would be expected
to increase by approximately $1.7 million during 2004. Similarly, if NL lowered
the assumed long-term rate of return on plan assets by 25 basis points for all
of its plans, NL's defined benefit pension expense would be expected to increase
by approximately $700,000 during 2004.
OPEB plans. Certain subsidiaries of the Company in the U.S. and Canada
currently provide certain health care and life insurance benefits for eligible
retired employees. See Note 15 to the Consolidated Financial Statements. The
Company accounts for such OPEB costs under SFAS No. 106, Employers Accounting
for Postretirement Benefits other than Pensions. Under SFAS No. 106, OPEB
expense and accrued OPEB costs are based on certain actuarial assumptions,
principally the assumed discount rate and the assumed rate of increases in
future health care costs. The Company recognized consolidated OPEB expense
(income) of ($191,000) in 2001, $80,000 in 2002 and $329,000 in 2003. Similar to
defined benefit pension benefits, the amount of funding will differ from the
expense recognized for financial reporting purposes, and contributions to the
plans to cover benefit payments aggregated $.5 million in 2001, $3.5 million in
2002 and $3.8 million in 2003.
The assumed discount rates the Company utilizes for determining OPEB
expense and the related accrued OPEB obligations are generally based on the same
discount rates the Company utilizes for its U.S. and Canadian defined benefit
pension plans.
In estimating the health care cost trend rate, the Company considers its
actual health care cost experience, future benefit structures, industry trends
and advice from its third-party actuaries. During each of the past three years,
the Company has assumed that the relative increase in health care costs will
generally trend downward over the next several years, reflecting, among other
things, assumed increases in efficiency in the health care system and
industry-wide cost containment initiatives. For example, at December 31, 2003,
the expected rate of increase in future health care costs ranges from 10% in
2004, declining to 5.5% in 2009 and thereafter.
Based on the actuarial assumptions described above and NL's current
expectation for what actual average foreign currency exchange rates will be
during 2004, the Company expects its consolidated OPEB expense will approximate
$1.4 million in 2004. In comparison, the Company expects the employer
contribution portion of costs to approximate $4.1 million during 2004.
As noted above, OPEB expense and the amount recognized as accrued OPEB
costs are based upon the actuarial assumptions discussed above. The Company
believes all of the actuarial assumptions used are reasonable and appropriate.
If the Company had lowered the assumed discount rate by 25 basis points for all
of its OPEB plans as of December 31, 2003, the Company's aggregate projected
benefit obligations would have increased by approximately $700,000 at that date,
and the Company's OPEB expense would be expected to increase by less than
$50,000 during 2004. Similarly, if the assumed future health care cost trend
rate had been increased by 100 basis points, the Company's accumulated OPEB
obligations would have increased by approximately $2.1 million at December 31,
2003, and OPEB expense would have increased by $200,000 in 2003.
Foreign operations
NL has substantial operations located outside the United States
(principally Europe and Canada) for which the functional currency is not the
U.S. dollar. As a result, the reported amount of NL'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. As of
January 1, 2001, the functional currency of NL's German, Belgian, Dutch and
French operations had been converted to the euro from their respective national
currencies. At December 31, 2003, NL had substantial net assets denominated in
the euro, Canadian dollar, Norwegian kroner and United Kingdom pound sterling.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash flows
The Company's consolidated cash flows for each of the past three years are
presented below:
Years ended December 31,
2001 2002 2003
---- ---- ----
(In millions)
Operating activities $ 129.7 $ 98.3 $ 90.5
Investing activities (57.2) (27.2) (19.2)
Financing activities (75.5) (132.5) (66.3)
------- ------- -----
Net cash provided (used) by operating, investing and financing
activities $ (3.0) $ (61.4) $ 5.0
======= ======= =======
Operating activities. Certain items included in the determination of net
income do not represent current inflows or outflows of cash. For example,
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. 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 15 to the Company's 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 is considered the primary source of liquidity
for the Company. Changes in TiO2 pricing, production volume and customer demand,
among other things, could significantly affect the liquidity of the Company.
Relative changes in assets and liabilities generally result from the timing
of production, sales, purchases and income tax payments. Such relative changes
can significantly impact the comparability of cash flow from operations from
period to period, as the income statement impact of such items may occur in a
different period from when the underlying cash transaction occurs. For example,
raw materials may be purchased in one period, but the payment for such raw
materials may occur in a subsequent period. Similarly, inventory may be sold in
one period, but the cash collection of the receivable may occur in a subsequent
period.
Cash flows from operating activities decreased from $98.3 million in 2002
to $90.5 million in 2003. This $7.8 million decrease was due primarily to the
effect of (i) higher net income of $26.9 million, (ii) higher depreciation
expense of $6.9 million, (iii) $10.5 million of higher gains on disposition of
property and equipment in 2003 as compared to 2002, (iv) lower net distributions
from the TiO2 manufacturing joint venture of $875,000 in 2003 compared to $8.0
million in 2002, (v) a lower amount of net cash generated from relative changes
in the Company's inventories, receivables, payables and accruals and accounts
with affiliates of $32.2 million in 2003 as compared to 2002 and (vi) lower cash
paid for income taxes of $14.2 million. Relative changes in accounts receivable
are affected by, among other things, the timing of sales and the collection of
the resulting receivable. Relative changes in inventories and accounts payable
and accrued liabilities are affected by, among other things, the timing of raw
material purchases and the payment for such purchases and the relative
difference between production volume and sales volume. Relative changes in
accrued environmental costs are affected by, among other things, the period in
which recognition of the environmental accrual is recognized and the period in
which the remediation expenditure is actually made.
Cash flows from operating activities decreased from $129.7 million in 2001
to $98.3 million in 2002. This $31.4 million decrease was due primarily to the
net effect of (i) lower net income of $84.6 million, (ii) higher depreciation
expense of $3.6 million, (iii) litigation settlement gains of $10.3 million in
2001 as compared to nil in 2002, (iv) insurance recoveries, net of $17.5 million
in 2001 as compared to nil in 2002, (v) lower distributions from the
manufacturing joint venture of $3.4 million in 2002 and (vi) a higher amount of
net cash generated from relative changes in the Company's inventories,
receivables, payables and accruals and accounts with affiliates of $26.7 million
in 2002 as compared to 2001. Relative changes in accounts receivable are
affected by, among other things, the timing of sales and the collection of the
resulting receivable.
Investing activities. The Company's capital expenditures were $53.7
million, $32.6 million and $35.4 million in 2001, 2002 and 2003, respectively.
Capital expenditures in 2001 and 2002 included an aggregate of $22.3 million and
$3.1 million, respectively, for the rebuilding of the Company's Leverkusen,
Germany sulfate plant. In 2001 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. Substantially all of
the Company's capital expenditures relate to Kronos' operations.
The Company's capital expenditures during the past three years include an
aggregate of approximately $15.4 million ($5.4 million in 2003) for the
Company's ongoing environmental protection and compliance programs. The
Company's estimated 2004 capital expenditures are $38.0 million and include
approximately $5 million in the area of environmental protection and compliance.
At December 31, 2002 and 2003, the Company had entered into a revolving
credit facility with Tremont pursuant to which Tremont could borrow up to $15
million from the Company through December 31, 2004. Such loan facility replaced
a similar loan facility entered into between EMS and Tremont. During 2001, the
Company lent a net $12.65 million to Tremont, which amount Tremont fully repaid
in 2002. At December 31, 2003, Tremont had no borrowings from the Company under
the facility. See Note 16 to the Consolidated Financial Statements.
In 2001, EMS extended a $25 million revolving credit facility to the Harold
C. Simmons Family Trust No. 2 (the "Family Trust"), one of the trusts described
in Notes 1 and 16 to the Consolidated Financial Statements. The loan was
approved by special committees of the Company's and EMS' Boards of Directors.
During 2001, EMS lent $20 million to the Family Trust, and during 2002 and 2003
the Family Trust repaid $2 million and $4 million, respectively. At December 31,
2003, $14 million was outstanding and $11 million was available for additional
borrowing by the Family Trust. The loan was classified as noncurrent at December
31, 2003, as the Company does not expect to demand repayment within one year.
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 acquired all of the stock and limited liability
company units of EWI RE, Inc. and EWI RE, Ltd. (collectively "EWI"),
respectively, for an aggregate of $9.2 million in cash, including capitalized
acquisition costs of $.2 million. See Note 2 to the Consolidated Financial
Statements.
The Company disposed of certain real property and other assets for
approximately $12.8 million during the year ended December 31, 2003.
Financing activities. In March 2003, KII's operating subsidiaries in
Germany, Belgium and Norway borrowed (euro)15 million ($16.1 million when
borrowed), in April 2003, repaid NOK 80 million ($11.0 million when repaid) and
in the third quarter of 2003, repaid (euro)30.0 million ($33.9 million when
repaid) under its three-year (euro)80 million secured revolving credit facility
("European Credit Facility"). See Note 11 to the Consolidated Financial
Statements.
In March 2002 the Company redeemed $25 million principal amount of its
11.75% Senior Secured Notes using available cash on hand, and in June 2002 the
Company redeemed the remaining $169 million principal amount of such 11.75%
Senior Secured Notes using a portion of the proceeds from the June 2002 issuance
of the (euro)285 million principal amount of the KII 8.875% Senior Secured Notes
($280 million when issued). Also in June 2002, KII's operating subsidiaries in
Germany, Belgium and Norway borrowed (euro)13 million ($13 million) and NOK 200
million ($26 million) which, along with available cash, was used to repay and
terminate KII's short term notes payable ($53.2 million when repaid). In 2002,
the Company repaid a net euro-equivalent 12.7 million ($12.4 million when
repaid) and 1.7 million ($1.6 million when repaid), respectively, of the
European Credit Facility.
In September 2002 the Company's U.S. operating subsidiaries entered into a
three-year $50 million asset-based revolving credit facility ("U.S. Credit
Facility"). As of December 31, 2003, no borrowings were outstanding under the
U.S. Credit Facility and borrowing availability was approximately $39 million.
See Note 11 to the Consolidated Financial Statements.
Deferred financing costs of $10.7 million for the Notes, the European
Credit Facility and the U.S. Credit Facility are being amortized over the life
of the respective agreements and are included in other noncurrent assets as of
December 31, 2003.
In 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.
Other than operating lease commitments disclosed in Note 18 to the
Consolidated Financial Statements, the Company is not party to any material
off-balance sheet financing arrangements.
Cash dividends paid during 2001, 2002 and 2003 totaled $39.8 million,
$158.0 million (including an additional $2.50 per share cash dividend paid in
December 2002 aggregating $119.2 million) and $38.2 million, respectively. On
February 19, 2004, the Company's Board of Directors declared a regular quarterly
dividend of $.20 per share to be paid in the form of shares of common stock of
Kronos to stockholders of record as of March 11, 2004 to be paid on March 29,
2004.
Pursuant to its share repurchase program, the Company purchased 1,059,000
shares of its common stock at an aggregate cost of $15.5 million in 2001 and
1,384,000 shares of its common stock in the open market at an aggregate cost of
$21.3 million in 2002. The Company made no repurchases of common stock during
2003. In October 2002 the Company's Board of Directors authorized a 1,500,000
share extension of the 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. Approximately 1,323,000 additional
shares are available for purchase under the Company's share repurchase program
at December 31, 2003.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability. At December 31, 2003, Kronos and its
subsidiaries had (i) current cash and cash equivalents aggregating $55.9 million
($41 million held by non-U.S. subsidiaries) , (ii) current restricted cash
equivalents of $1.3 million and (iii) noncurrent restricted marketable debt
securities of $2.6 million. At December 31, 2003, certain of Kronos's
subsidiaries had approximately $139 million available for borrowing with
approximately $100 million available under non-U.S. credit facilities (including
approximately $97 million under the European Credit Facility) and approximately
$39 million available under the U.S. Credit Facility (based on Borrowing
Availability). At December 31, 2003, KII had approximately $70 million available
for payment of dividends and other restricted payments as defined in the Notes
indenture. At December 31, 2003, the Company had complied with all financial
covenants governing its debt agreements.
At December 31, 2003, NL, exclusive of Kronos and its subsidiaries had (i)
current cash and cash equivalents aggregating $11.9 million, (ii) current
restricted cash equivalents of $17.7 million, (iii) current restricted
marketable debt securities of $6.1 million and (iv) noncurrent restricted
marketable debt securities of $4.3 million.
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 the Company's expectations, the
Company's liquidity could be adversely affected.
Legal proceedings and environmental matters. See Note 18 to the
Consolidated Financial Statements for certain legal proceedings and
environmental matters with respect to the Company.
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. 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. At December 31, 2003, the Company had
substantial net assets denominated in the euro, Canadian dollar, Norwegian
kroner and United Kingdom pound sterling.
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 dividend policy, 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, 18 and 20 to the Consolidated Financial
Statements. The following table summarizes such contractual commitments of the
Company and its consolidated subsidiaries that are unconditional both in terms
of timing and amount by the type and date of payment.
Unconditional payment due date
2009 and
Contractual commitment 2004 2005/2006 2007/2008 after Total
---------------------- ---- --------- --------- ------- -----
(In millions)
Third-party indebtedness $ .3 $ .3 $ - $ 356.1 $ 356.7
Operating leases 3.3 3.7 2.5 19.9 29.4
Fixed asset acquisitions 9.6 - - - 9.6
Long-term supply contracts for the
purchase of TiO2 feedstock 146.1 265.8 135.0 - 546.9
-
Asset retirement obligations and other - - - 5.8 5.8
------- ------- ------- ------- -------
$ 159.3 $ 269.8 $ 137.5 $ 381.8 $ 948.4
======= ======= ======= ======= =======
The above table does not reflect any amounts that the Company might pay to
fund its defined benefit pension plans and OPEB plans, as the timing and amount
of any such future fundings are unknown and dependent on, among other things,
the future performance of defined benefit pension plan assets, interest rate
assumptions and actual future retiree medical costs. Such defined benefit
pension plans and OPEB plans are discussed above in greater detail.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The Company is exposed to market risk from changes in foreign
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 does not generally enter into forward or option contracts
to manage such market risks, nor does the Company enter into any such contract
or other type of derivative instrument for trading or speculative purposes.
Other than as described below, the Company was not a party to any material
forward or derivative option contract related to foreign exchange rates,
interest rates or equity security prices at December 31, 2002 and 2003. See
Notes 1 and 19 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, 2003, all of
the Company's aggregate indebtedness was comprised of fixed-rate instruments
(2002 - 92% of fixed-rate instruments and 8% of variable rate borrowings). 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 for the Company's
aggregate outstanding indebtedness at December 31, 2003. At December 31, 2002
and 2003, all outstanding fixed-rate indebtedness was denominated in U.S.
dollars or the euro, and the outstanding variable rate borrowings were
denominated in U.S. dollars, the euro or the Norwegian kroner. Information shown
below for such foreign currency denominated indebtedness is presented in its
U.S. dollar equivalent at December 31, 2003 using exchange rates of 1.25 U.S.
dollars per euro. Certain Norwegian kroner denominated capital leases totaling
$700,000 in 2003 have been excluded from the table below.
Amount
Carrying Fair Interest Maturity
Indebtedness value value rate date
(In millions)
Fixed-rate indebtedness:
Euro-denominated KII
Senior Secured Notes $ 356.1 $ 356.1 8.9% 2009
======= =======
At December 31, 2002, fixed rate indebtedness aggregated $296.9 million
(fair value - $299.9 million) with a weighted-average interest rate of 8.9%; and
variable rate indebtedness at such date aggregated $27.1 million, which
approximates fair value, with a weighted-average interest rate of 6.5%. All of
such fixed rate indebtedness was denominated in euros. Such variable rate
indebtedness was denominated in the euro (58% of the total) or the Norwegian
kroner (42%).
Foreign currency exchange rates. The Company is exposed to market risk
arising from changes in foreign 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,
the Canadian dollar, the Norwegian kroner and the United Kingdom pound sterling.
As described above, at December 31, 2003, NL had the equivalent of $356.1
million of outstanding euro-denominated indebtedness (2002 - the equivalent of
$312.5 million of euro-denominated indebtedness and $11.5 million of Norwegian
kroner-denominated indebtedness). The potential increase in the U.S. dollar
equivalent of the principal amount outstanding resulting from a hypothetical 10%
adverse change in exchange rates at such date would be approximately $35.6
million at December 31, 2003 (2002 - $32.4 million).
At December 31, 2003, the Company had entered into a short-term currency
forward contract maturing on January 2, 2004 to exchange an aggregate of
(euro)40 million into U.S. dollars at an exchange rate of U.S. $1.25 per euro.
Such contract was entered into in conjunction with the January 2004 payment of
an intercompany dividend from one of the Company's European subsidiaries. At
December 31, 2004, the actual exchange rate was U.S. $1.25 per euro. The
estimated fair value of such foreign currency forward contract was not material
at December 31, 2003.
Marketable equity and debt security prices. The Company is exposed to
market risk due to changes in prices of the marketable securities, which are
owned. The fair value of such debt and equity securities at December 31, 2002
and 2003 was $40.9 million and $70.5 million, respectively. The potential change
in the aggregate fair value of these investments, assuming a 10% change in
prices, would be $4.1 million at December 31, 2002 and $7.1 million at December
31, 2003. The fair value of restricted marketable debt securities at December
31, 2002 and 2003 was $18.9 million and $13.0 million, respectively. The
potential change in the aggregate fair value of these investments assuming a 10%
change in prices would be $1.9 million and $1.3 million, respectively.
Other. The Company believes there may be a certain amount of incompleteness
in the sensitivity analyses presented above. For example, the hypothetical
effect 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 will likely 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.
Non-GAAP Financial Measures. In an effort to provide investors with
additional information regarding the Company's results as determined by GAAP,
Kronos has disclosed certain non-GAAP information which the Company believes
provides useful information to investors. As discussed above, the Company
discloses percentage changes in its average TiO2 prices in billing currencies,
which excludes the effects of foreign currency translation. Such disclosure of
the percentage change in Kronos' average TiO2 selling price in billing
currencies is considered a "non-GAAP" financial measure under regulations of the
SEC. The disclosure of the percentage change in the Company's average TiO2
selling prices using actual foreign currency exchange rates prevailing during
the respective periods is considered the most directly comparable GAAP measure.
The Company discloses percentage changes in its average TiO2 prices in billing
currencies because the Company believes such disclosure provides useful
information to investors to allow them to analyze such changes without the
impact of changes in foreign currency exchange rates, thereby facilitating
period-to-period comparisons of the relative changes in average selling prices
in the actual various billing currencies. Generally, when the U.S. dollar either
strengthens or weakens against other currencies, the percentage change in
average selling prices in billing currencies will be higher or lower,
respectively, than such percentage changes that would be used actual exchange
rates prevailing during the respective periods.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" (page
F-1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that the Company files or submits to the
SEC under the Securities Exchange Act of 1934, as amended (the "Act"), is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
to the SEC under the Act is accumulated and communicated to the Company's
management, including its principal executive officer and its principal
financial officer, as appropriate to allow timely decisions to be made regarding
required disclosure. Each of Harold C. Simmons, the Company's President and
Chief Executive Officer, and Gregory M. Swalwell, the Company's Vice President,
Chief Financial Officer and Treasurer, have evaluated the Company's disclosure
controls and procedures as of December 31, 2003. Based upon their evaluation,
these executive officers have concluded that the Company's disclosure controls
and procedures are effective as of the date of such evaluation.
The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America ("GAAP)", and
includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
Company,
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company,
and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's consolidated financial
statements.
There has been no change to the Company's system of internal controls over
financial reporting during the quarter ended December 31, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
system of internal controls over financial reporting.
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 SEC pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
report (the "NL Proxy Statement").
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 16 to the Consolidated Financial Statements.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Information required by the Item is incorporated by reference to the NL
Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
The Registrant
The consolidated financial statements and schedules of the
Registrant listed 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
Reports on Form 8-K filed for the quarter ended December 31,
2003.
December 23, 2003 - Reported items 2 and 7.
(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. Pursuant to Item 601(b)(4)(iii) of
Regulation S-K, any instrument defining the rights of holders of
long-term debt issues and other agreements related to
indebtedness which do not exceed 10% of consolidated total assets
as of December 31, 2003 will be furnished to the Commission upon
request.
The Company will also furnish, without charge, a copy of its Code
of Business Conduct and Ethics, as adopted by the board of
directors on February 19, 2004, upon request. Such requests
should be directed to the attention of the Company's Corporate
Secretary at the Company's corporate offices located at 5430 LBJ
Freeway, Suite 1700, Dallas, Texas 75240.
Item No. Exhibit Index
2.1 Form of Distribution Agreement between NL Industries, Inc. and Kronos
Worldwide, Inc. - incorporated by reference to Exhibit 2.1 to the
Kronos Worldwide, Inc. Registration Statement on Form 10 (File No.
001-31763).
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 Amendment to the Amended and Restated By-Laws, as of June 28, 1990,
executed December 8, 2003.
3.3 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 Indenture governing the 8.875% Senior Secured Notes due 2009, dated
June 28, 2002, between Kronos International, Inc. and The Bank of New
York, as Trustee - incorporated by reference to Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2002.
4.2 Form of certificate of 8.875% Senior Secured Notes due 2009 of Kronos
International, Inc. (included as Exhibit A to Exhibit 4.1) -
incorporated by reference to Exhibit 4.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002.
4.3 Form of certificate of 8.875% Senior Secured Notes due 2009 of Kronos
International, Inc. (included as Exhibit B to Exhibit 4.1) -
incorporated by reference to Exhibit 4.3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002.
4.4 Purchase Agreement, dated June 19, 2002, among Kronos International,
Inc., Deutsche Bank AG London, Dresdner Bank AG London Branch and
Commerzbank Aktiengesellschaft, London Branch - incorporated by
reference to Exhibit 4.4 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002.
4.5 Collateral Agency Agreement, dated June 28, 2002, among The Bank of
New York, U.S. Bank, N.A. and Kronos International, Inc. -
incorporated by reference to Exhibit 4.6 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002.
4.6 Security Over Shares Agreement, dated June 28, 2002, between Kronos
International, Inc. and The Bank of New York - incorporated by
reference to Exhibit 4.7 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002.
4.7 Pledge of Shares (shares in Kronos Denmark ApS), dated June 28, 2002,
between Kronos International, Inc. and U.S. Bank, N.A. - incorporated
by reference to Exhibit 4.8 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002.
4.8 Pledge Agreement (shares in Societe Industrielle du Titane S.A.),
dated June 28, 2002, between Kronos International, Inc. and U.S. Bank,
N.A. - incorporated by reference to Exhibit 4.9 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
4.9 Partnership Interest Pledge Agreement (relating to fixed capital
contribution in Kronos Titan GmbH & Co.), dated June 28, 2002, between
Kronos International, Inc. and U.S. Bank, N.A. - incorporated by
reference to Exhibit 4.10 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002.
4.10 Deposit Agreement, dated June 28, 2002, among NL Industries, Inc. and
JP Morgan Chase Bank, as trustee - incorporated by reference to
Exhibit 4.11 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002.
4.11 Satisfaction and Discharge of Indenture, Release, Assignment and
Transfer, dated June 28, 2002, made by JP Morgan Chase Bank pursuant
to the Indenture for NL Industries, Inc.'s 11 3/4% Senior Secured
Notes due 2003 - incorporated by reference to Exhibit 4.12 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2002.
10.1 (euro)80,000,000 Facility Agreement, dated June 25, 2002, among Kronos
Titan GmbH & Co. OHG, Kronos Europe S.A./N.V., Kronos Titan A/S and
Titania A/S, as borrowers, Kronos Titan GmbH & Co. OHG, Kronos Europe
S.A./N.V. and Kronos Norge AS, as guarantors, Kronos Denmark ApS, as
security provider, Deutsche Bank AG, as mandated lead arranger,
Deutsche Bank Luxembourg S.A., as agent and security agent, and KBC
Bank NV, as fronting bank, and the financial institutions listed in
Schedule 1 thereto, as lenders - incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002.
10.2 Lease Contract dated June 21, 1952, between Farbenfabriken 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.
10.3 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.
10.4** 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.
10.5** 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.
10.6** Amendment to Richards Bay Slag Sales Agreement dated June 1, 2001
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.5 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2001.
10.7** Amendment to Richards Bay Slag Sales Agreement dated December 20,
2002 between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.7 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2002.
10.8* Amendment to Richards Bay Slag Sales Agreement dated October 31, 2003
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.17 to Kronos
Worldwide, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2003.
10.9 Agreement between Sachtleben Chemie GmbH and Kronos Titan-GmbH
effective December 30, 1986 - incorporated by reference to Exhibit
10.1 of KII's Quarterly Report on Form 10-Q (File No. 333-100047) for
the quarter ended September 30, 2002.
10.10 Supplementary Agreement to the Agreement of December 30, 1986 between
Sachtleben Chemie GmbH and Kronos Titan-GmbH dated May 3, 1996 -
incorporated by reference to Exhibit 10.2 of KII's Quarterly Report on
Form 10-Q (File No. 333-100047) for the quarter ended September 30,
2002.
10.11 Second Supplementary Agreement to the Contract dated December 30, 1986
between Sachtleben Chemie GmbH and Kronos Titan-GmbH dated January 8,
2002 - incorporated by reference to Exhibit 10.3 of KII's Quarterly
Report on Form 10-Q (File No. 333-100047) for the quarter ended
September 30, 2002.
10.12 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.
10.13 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.
10.14 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.
10.15 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.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 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.
10.24* 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.
10.25* 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.
10.26* 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.
10.27* 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.
10.28* Form of Kronos Worldwide, Inc. Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.4 to the Kronos Worldwide,
Inc. Registration Statement on Form 10 (File No. 001-31763).
10.29* Amended and Restated Supplemental Executive Retirement Plan for
Executives and Officers of NL Industries, Inc. effective as of May 1,
2001 - incorporated by reference to Exhibit 10.30 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2001.
10.30 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.
10.31* Agreement to Defer Bonus Payment dated January 10, 2002 between the
Registrant and Lawrence A. Wigdor and related trust agreements -
incorporated by reference to Exhibit 10.32 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001.
10.32* 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 on Form 10-K for the year ended December 31, 1997.
10.33 Amended Tax Agreement between Valhi, Inc. and NL Industries, Inc.
effective as of December 1, 2003 - incorporated by reference to
Exhibit 10.1 to the Registrant's Form 8-K as of December 8, 2003.
10.34 Intercorporate Services Agreement by and between Contran Corporation
and the Registrant effective as of January 1, 2003 - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002.
10.35 Intercorporate Services Agreement by and between Titanium Metals
Corporation and the Registrant effective as of January 1, 2003 -
incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.
10.36 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.
10.37 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.
10.38 Revolving Loan Note Agreement dated October 22, 2002 with Tremont
Corporation as Maker and NL Industries, Inc. as Payee - incorporated
by reference to Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002.
10.39 Security Agreement dated October 22, 2002 by and between Tremont
Corporation and NL Industries, Inc. - incorporated by reference to
Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002.
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. - incorporated by reference to Exhibit 10.40 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001.
10.41* Stock Option Purchase Agreement dated November 20, 2002 between the
Registrant (Purchaser) and J. Landis Martin (Seller) - incorporated by
reference to Exhibit 10.46 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2002.
10.42* Stock Option Purchase Agreement dated November 20, 2002 between the
Registrant (Purchaser) and Dr. Lawrence A. Wigdor (Seller) -
incorporated by reference to Exhibit 10.47 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2002.
10.43* Stock Option Purchase Agreement dated November 20, 2002 between the
Registrant (Purchaser) and David B. Garten (Seller) - incorporated by
reference to Exhibit 10.48 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2002.
10.44* Stock Option Purchase Agreement dated November 20, 2002 between the
Registrant (Purchaser) and Robert D. Hardy (Seller) - incorporated by
reference to Exhibit 10.49 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2002.
10.45 Form of Tax Agreement between Valhi, Inc. and Kronos Worldwide, Inc -
incorporated by reference to Exhibit 10.1 to the Kronos Worldwide,
Inc. Registration Statement on Form 10 (File No. 001-31763).
10.46 Form of Intercorporate Services Agreement between Contran Corporation
and Kronos Worldwide, Inc. - incorporated by reference to Exhibit 10.2
to the Kronos Worldwide, Inc. Registration Statements on Form 10 (File
No. 001-31763).
10.47 Amendment dated August 11, 2003 to the Contract on Supplies and
Services among Bayer AG, Kronos Titan-GmbH & Co. OHG and Kronos
International (English translation of German language document) -
incorporated by reference to Exhibit 10.32 to the Kronos Worldwide,
Inc. Registration Statement on Form 10 (File No. 001-31763).
10.48 Insurance sharing agreement dated October 30, 2003 by and among CompX
International Inc., Contran Corporation, Keystone Consolidated
Industries, Inc., Kronos Worldwide, Inc., Titanium Metals Corp.,
Valhi, Inc. and the Registrant.
10.49* Consulting Agreement dated July 23, 2003 between J. Landis Martin
and NL Industries, Inc.
10.50* Summary of Consulting Arrangement beginning August 1, 2003 between
Lawrence A. Wigdor and Kronos Worldwide, Inc.
10.51* Separation Agreement dated September 3, 2003, as amended, between
David B. Garten and NL Industries, Inc.
10.52* Separation Agreement dated July 16, 2003 between NL Industries, Inc.
and Robert D. Hardy
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
31.1 Certification
31.2 Certification
32.1 Certification
99.1 Annual Report of NL Industries, Inc. Retirement Savings Plan to be
filed under Form 10-K/A to the Registrant's Annual Report on Form 10-K
within 180 days after December 31, 2003.
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.
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/ Harold C. Simmons
------------------------------
Harold C. Simmons
March 8, 2004
(Chairman of the Board and
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Harold C. Simmons /s/ Steven L. Watson
- ------------------------------------- -----------------------------------
Harold C. Simmons, March 8, 2004 Steven L. Watson, March 8, 2004
(Chairman of the Board and Chief (Director)
Executive Officer)
/s/ Thomas P. Stafford /s/ Glenn R. Simmons
- ------------------------------------- -----------------------------------
Thomas P. Stafford, March 8, 2004 Glenn R. Simmons, March 8, 2004
(Director) (Director)
/s/ C. H. Moore, Jr. /s/ Gregory M. Swalwell
- ------------------------------------- -----------------------------------
C. H. Moore, Jr., March 8, 2004 Gregory M. Swalwell, March 8, 2004
(Director) (Vice President, Chief Financial Officer, Principal Financial
Officer)
/s/ Terry N. Worrell
- ------------------------------------
Terry N. Worrell, March 8, 2004
(Director)
NL Industries, Inc.
Annual Report on Form 10-K
Items 8, 14(a) and 14(d)
Index of Financial Statements and Schedules
Financial Statements Page
Report of Independent Auditors F-2
Consolidated Balance Sheets - December 31, 2002 and 2003 F-3
Consolidated Statements of Income -
Years ended December 31, 2001, 2002 and 2003 F-5
Consolidated Statements of Comprehensive Income -
Years ended December 31, 2001, 2002 and 2003 F-6
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2001, 2002 and 2003 F-7
Consolidated Statements of Cash Flows -
Years ended December 31, 2001, 2002 and 2003 F-8
Notes to Consolidated Financial Statements F-11
Financial Statement Schedules
Report of Independent Auditors S-1
Schedule I - Condensed Financial Information of Registrant S-2
Schedule II - Valuation and Qualifying Accounts S-7
Schedules III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders 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, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of NL Industries, Inc. and Subsidiaries as of December 31, 2002 and
2003, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, 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 financial 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
Dallas, Texas
March 5, 2004
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2003
(In thousands, except per share data)
ASSETS
2002 2003
---- ----
Current assets:
Cash and cash equivalents $ 58,091 $ 67,799
Restricted cash and cash equivalents 52,089 19,029
Restricted marketable debt securities 9,670 6,147
Accounts and other receivables 136,858 156,820
Refundable income taxes 1,782 35,336
Receivable from affiliates 207 55
Inventories 209,882 266,020
Prepaid expenses 7,207 5,257
Deferred income taxes 10,511 10,798
---------- ----------
Total current assets 486,297 567,261
---------- ----------
Other assets:
Marketable equity securities 40,901 70,487
Restricted marketable debt securities 9,232 6,870
Investment in TiO2 manufacturing joint venture 130,009 129,011
Receivable from affiliate 18,000 14,000
Prepaid pension costs 17,572 -
Deferred income taxes 1,934 6,682
Other assets 28,737 34,057
---------- ----------
Total other assets 246,385 261,107
---------- ----------
Property and equipment:
Land 29,072 32,981
Buildings 150,406 179,472
Equipment 640,297 765,704
Mining properties 84,778 83,183
Construction in progress 8,702 9,666
---------- ----------
913,255 1,071,006
Less accumulated depreciation 534,436 635,267
---------- ----------
Net property and equipment 378,819 435,739
---------- ----------
$1,111,501 $1,264,107
========== ==========
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2002 and 2003
(In thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2002 2003
---- ----
Current liabilities:
Current maturities of long-term debt $ 1,298 $ 288
Accounts payable 97,140 103,180
Accrued liabilities 70,434 81,117
Accrued environmental costs 51,307 19,627
Payable to affiliates 8,027 19,537
Income taxes 6,624 12,726
Deferred income taxes 3,219 3,436
---------- ----------
Total current liabilities 238,049 239,911
---------- ----------
Noncurrent liabilities:
Long-term debt 324,608 356,451
Accrued pension costs 43,757 81,180
Accrued postretirement benefits cost 26,477 23,411
Accrued environmental costs 40,199 57,854
Deferred income taxes 143,518 198,142
Other 21,050 19,453
---------- ----------
Total noncurrent liabilities 599,609 736,491
---------- ----------
Minority interest 8,516 86,791
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized; none issued - -
Common stock, $.125 par value; 150,000 shares
authorized; 66,845 shares issued 8,355 8,355
Additional paid-in capital 777,819 777,819
Retained earnings 101,554 16,023
Accumulated other comprehensive income:
Marketable securities 5,896 23,323
Currency translation (170,670) (153,955)
Pension liabilities (21,447) (36,209)
Treasury stock, at cost - 19,155 and 19,054 shares (436,180) (434,442)
---------- ----------
Total stockholders' equity 265,327 200,914
---------- ----------
$1,111,501 $1,264,107
========== ===========
Commitments and contingencies (Notes 11, 14 and 18)
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2001, 2002 and 2003
(In thousands, except per share data)
2001 2002 2003
---- ---- ----
Net sales $ 835,099 $ 875,188 $1,008,177
Cost of sales 578,060 671,830 739,237
-------- -------- ----------
Gross margin 257,039 203,358 268,940
Selling, general and administrative expense 98,667 107,675 124,446
Other operating income (expense):
Currency transaction gains (losses), net 1,188 (547) (7,743)
Disposition of property and equipment (735) (625) 9,845
Insurance recoveries, net 7,222 - -
Noncompete agreement income 4,000 4,000 333
Litigation settlement gains, net 11,730 5,225 823
Other income 1,454 544 629
Corporate expense (25,845) (37,860) (57,430)
Other expense (78) (172) (130)
--------- --------- ----------
Income from operations 157,308 66,248 90,821
Other income (expense):
Currency transaction gain - 6,271 -
Insurance recoveries, net 17,468 - -
Trade interest income 2,332 1,709 771
Other interest income 8,886 5,739 3,261
Securities transactions, net (1,133) (105) 2,402
Interest expense (27,569) (29,752) (33,004)
--------- --------- ----------
Income before income taxes and minority interest 157,292 50,110 64,251
Provision for income taxes (benefit) 34,925 12,036 (1,455)
--------- --------- ----------
Income before minority interest 122,367 38,074 65,706
Minority interest 960 1,264 2,044
--------- --------- ----------
Net income $ 121,407 $ 36,810 $ 63,662
========= ========= ==========
Net income per share:
Basic $ 2.44 $ .76 $ 1.33
Diluted $ 2.44 $ .76 $ 1.33
Weighted-average shares used in the calculation of net income per share:
Basic 49,732 48,530 47,721
Dilutive impact of stock options 124 82 74
--------- -------- ----------
Diluted 49,856 48,612 47,795
========= ======== ==========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
---- ---- ----
Net income $ 121,407 $ 36,810 $ 63,662
--------- --------- ---------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment:
Unrealized holding gains (losses) arising during the period (1,275) (2,454) 18,901
Reclassification for realized net gain (loss) included in net
income 740 - (1,474)
--------- --------- ---------
(535) (2,454) 17,427
Minimum pension liabilities adjustment (6,352) (15,095) (14,762)
Currency translation adjustment (17,592) 37,679 16,715
--------- --------- ---------
Total other comprehensive income (loss) (24,479) 20,130 19,380
--------- --------- ---------
Comprehensive income $ 96,928 $ 56,940 $ 83,042
========= ========= =========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES , INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2001, 2002 and 2003
(In thousands, except per share data)
Accumulated other
comprehensive income (loss)
Additional ---------------------------------
Common paid-in Retained Marketable Currency Pension Treasury
stock capital earnings securities translation liabilities stock Total
-------------------------------------------------------------------------------------
Balance at December 31, 2000 $8,355 $ 777,528 $ 141,073 $ 8,885 $ (190,757) $ - $(400,596) $ 344,488
Net income - - 121,407 - - - - 121,407
Other comprehensive loss, net of tax - - - (535) (17,592) (6,352) - (24,479)
Common dividends declared - $.80 per share - - (39,758) - - - - (39,758)
Tax benefit of stock options exercised - 69 - - - - - 69
Treasury stock:
Acquired - - - - - - (15,502) (15,502)
Reissued - - - - - - 718 718
------ --------- --------- --------- ---------- -------- -------- ---------
Balance at December 31, 2001 8,355 777,597 222,722 8,350 (208,349) (6,352) (415,380) 386,943
Net income - - 36,810 - - - - 36,810
Other comprehensive income (loss), net of tax - - - (2,454) 37,679 (15,095) - 20,130
Common dividends declared - $3.30 per share - - (157,978) - - - - (157,978)
Tax benefit of stock options exercised - 222 - - - - - 222
Treasury stock:
Acquired - - - - - - (21,254) (21,254)
Reissued - - - - - - 454 454
------ --------- --------- --------- ---------- -------- --------- ---------
Balance at December 31, 2002 8,355 777,819 101,554 5,896 (170,670) (21,447) (436,180) 265,327
Net income - - 63,662 - - - - 63,662
Other comprehensive income (loss), net of tax - - - 17,427 16,715 (14,762) - 19,380
Distribution of 48.8% of Kronos Worldwide, Inc. - - (88,532) - - - - (88,532)
Income tax on distribution - - (22,478) - - - - (22,478)
Common dividends declared - $.80 per share - - (38,183) - - - - (38,183)
Treasury stock - reissued - - - - - - 1,738 1,738
------ --------- --------- --------- ---------- --------- --------- ---------
Balance at December 31, 2003 $8,355 $ 777,819 $ 16,023 $ 23,323 $ (153,955) $(36,209) $(434,442) $ 200,914
====== ========= ========= ========= ========== ========= ========= =========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
---- ---- ----
Cash flows from operating activities:
Net income $ 121,407 $ 36,810 $ 63,662
Depreciation and amortization 29,599 33,221 40,095
Noncash interest income on restricted cash and
restricted marketable debt securities (3,580) (1,762) (869)
Noncash interest expense 467 1,768 2,197
Deferred income taxes 3,256 1,506 33,742
Minority interest 960 1,264 2,044
Net losses (gains) from:
Securities transactions 1,133 105 (2,402)
Disposition of property and equipment 735 625 (9,845)
Pension cost, net (2,967) (2,316) (5,478)
Other postretirement benefits, net 531 (3,385) (3,468)
Distributions from TiO2 manufacturing joint venture, net 11,313 7,950 875
Litigation settlement gains, net (10,307) - -
Insurance recoveries, net (17,468) - -
Other, net 261 - 854
Change in assets and liabilities:
Accounts and other receivable 902 4,788 3,262
Inventories (32,698) 42,249 (26,041)
Prepaid expenses (2,200) (545) 3,186
Accounts payable and accrued liabilities 31,091 (32,310) (10,606)
Income taxes 4,107 (2,036) (26,394)
Accounts with affiliates (5,670) 3,800 4,466
Accrued environmental costs 7,068 8,913 24,137
Other noncurrent assets (263) 150 (3,268)
Other noncurrent liabilities (7,944) (2,544) 379
--------- --------- --------
Net cash provided by operating activities 129,733 98,251 90,528
--------- --------- --------
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
---- ---- ----
Cash flows from investing activities:
Capital expenditures ................................. $(53,669) $ (32,600) $(35,354)
Loans to affiliates:
Loans .............................................. (33,400) -- --
Collections ........................................ 750 14,650 4,000
Acquisition of business .............................. -- (9,149) --
Property damaged by fire:
Insurance proceeds ................................. 23,361 -- --
Other, net ......................................... (3,205) -- --
Change in restricted cash equivalents and restricted
marketable debt securities, net ................. 8,509 (960) (654)
Proceeds from disposition of property and equipment 419 873 12,801
Other, net ......................................... 4 -- --
-------- --------- --------
Net cash used by investing activities ............ (57,231) (27,186) (19,207)
-------- --------- --------
Cash flows from financing activities:
Indebtedness:
Borrowings ......................................... 1,437 335,768 16,106
Principal payments ................................. (22,428) (278,814) (46,006)
Deferred financing fees ............................ -- (10,706) --
Dividends paid ....................................... (39,758) (157,978) (38,183)
Treasury stock:
Purchased .......................................... (15,502) (21,254) --
Reissued ........................................... 718 454 1,738
Distributions to minority interests .................. (5) (11) (14)
-------- --------- --------
Net cash used by financing activities ............ (75,538) (132,541) (66,359)
-------- --------- --------
Net increase (decrease) ................................ $ (3,036) $ (61,476) $ 4,962
======== ========= ========
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
---- ---- ----
Cash and cash equivalents-net change from:
Operating, investing and financing activities $ (3,036) $ (61,476) $ 4,962
Currency translation (1,305) 3,334 4,746
Acquisition of business - 196 -
---------- -------- ---------
(4,341) (57,946) 9,708
Balance at beginning of year 120,378 116,037 58,091
--------- --------- ---------
Balance at end of year $ 116,037 $ 58,091 $ 67,799
========= ========= =========
Supplemental disclosures - cash paid (received) for:
Interest $ 27,143 $ 32,896 $ 28,278
Income taxes 29,770 9,715 (4,523)
Acquisition of business - net assets consolidated
Cash and cash equivalents $ - $ 196 $ -
Restricted cash - 2,685 -
Goodwill - 6,406 -
Other intangible assets - 2,601 -
Other noncash assets - 1,259 -
Liabilities - (3,998) -
--------- --------- ----------
Cash paid $
========= ========= ==========
$ - $ 9,149 $ -
========= ========= ==========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies:
Organization and basis of presentation. NL Industries, Inc. (NYSE: NL)
conducts its titanium dioxide pigments ("TiO2") operations through its
approximately 51% -owned subsidiary, Kronos Worldwide, Inc. (NYSE: KRO),
formerly known as Kronos, Inc. ("Kronos"). At December 31, 2003, Valhi, Inc. and
a wholly-owned subsidiary of Valhi held approximately 84% of NL's outstanding
common stock, and Contran Corporation and its subsidiaries held approximately
90% of Valhi's outstanding common stock. At December 31, 2003, Valhi and a
wholly-owned subsidiary of Valhi also held an additional approximate 42% of
Kronos' 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 Valhi, Contran and the Company, may be
deemed to control each of such companies.
Management's estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America ("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.
Principles of consolidation. The consolidated financial statements include
the accounts of NL and its wholly-owned and majority-owned subsidiaries. All
material intercompany accounts and balances have been eliminated. Certain prior
year amounts have been reclassified to conform to the current year presentation.
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 average
exchange rates prevailing during the year. Resulting translation adjustments are
accumulated in stockholders' equity as part of accumulated other comprehensive
income, net of related deferred income taxes and minority interest. Currency
transaction gains and losses are recognized in income currently, and in 2002
included a $6.3 million gain related to the extinguishments of certain
intercompany indebtedness that is classified as a component of other income
(expense) in the accompanying consolidated statement of income.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed. Shipping terms of products shipped are generally FOB shipping point,
although in some instances shipping terms are FOB destination point (for which
sales are not recognized until the product is received by the customer). Amounts
charged to customers for shipping and handling are included in net sales. Sales
are stated net of price, early payment and distributor discounts and volume
rebates.
Inventories and cost of sales. Inventories are stated at the lower of cost
(principally average cost) or market, net of allowance for slow-moving
inventories. Amounts are removed from inventories at average cost. Cost of sales
includes costs for materials, packing and finishing, utilities, salary and
benefits, maintenance and depreciation.
Cash and cash equivalents. Cash equivalents include bank time deposits and
U.S. Treasury securities purchased under short-term agreements to resell with
original maturities of three months or less.
Restricted cash equivalents and restricted marketable debt securities.
Restricted cash equivalents and restricted marketable debt securities, primarily
invested in U.S. government securities and money market funds that invest
primarily in U.S. government securities, include amounts restricted pursuant to
outstanding letters of credit ($10 million and $5 million at December 31, 2002
and 2003 respectively), and at December 31, 2003 also includes $24 million held
by special purpose trusts (2002 - $59 million) formed by NL, the assets of which
can only be used to pay for certain of NL's future environmental remediation and
other environmental expenditures. Such restricted amounts are generally
classified as either a current or noncurrent asset depending on the
classification of the liability to which the restricted amount relates.
Additionally, the restricted marketable debt securities are generally classified
as either a current or noncurrent asset depending upon the maturity date of each
such debt security. Use of such restricted balances does not affect the
Company's Consolidated Statements of Cash Flows. See Note 8.
Marketable securities and securities transactions. Marketable debt and
equity securities are carried at fair value based upon quoted market prices.
Unrealized gains and losses on available-for-sale securities are accumulated in
stockholders' equity as part of accumulated other comprehensive income, net of
related deferred income taxes and minority interest. Realized gains and losses
are based upon the specific identification of the securities sold.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of these accounts.
Investment in TiO2 manufacturing joint venture. Investment in a 50%-owned
manufacturing joint venture is accounted for by the equity method.
Property and equipment and depreciation. Property and equipment are stated
at cost. The Company has a governmental concession with an unlimited term to
operate an ilmenite mine in Norway. Mining properties consist of buildings and
equipment used in the Company's Norwegian ilmenite mining operations. The
Company does not own the ilmenite reserves associated with the mine.
Depreciation of property and equipment for financial reporting purposes
(including mining properties) is computed principally by the straight-line
method over the estimated useful lives of ten to 40 years for buildings and
three to 20 years for equipment. Accelerated depreciation methods are used for
income tax purposes, as permitted. Upon sale or retirement of an asset, the
related cost and accumulated depreciation are removed from the accounts and any
gain or loss is recognized in income currently.
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
sales. Accrued repair and maintenance costs, included in other current
liabilities (see Note 9), was $4.0 million and $6.3 million at December 31, 2002
and 2003, respectively.
Interest costs related to major long-term capital projects and renewals are
capitalized as a component of construction costs. Interest costs capitalized
were not significant in 2001, 2002 or 2003.
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 commenced assessing impairment
of other long-lived assets (such as property and equipment and mining
properties) in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
Long-term debt. Amortization of deferred financing costs, included in
interest expense, is computed by the interest method over the term of the
applicable issue.
Derivatives and hedging activities. Derivatives are recognized as either
assets or liabilities and measured at fair value in accordance with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended.
The accounting for changes in fair value of derivatives depends upon the
intended use of the derivative, and such changes are recognized either in net
income or other comprehensive income. As permitted by the transition
requirements of SFAS No. 133, the Company has exempted from the scope of SFAS
No. 133 all host contracts containing embedded derivatives that were issued or
acquired prior to January 1, 1999. See Note 19.
Income taxes. The Company and its qualifying subsidiaries are 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 computes 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 generally
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. See Notes 13 and 14.
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 the Company's subsidiaries and affiliates who are not members of
the Contran Tax Group and undistributed earnings of foreign subsidiaries which
are not deemed to be permanently reinvested. The Company periodically evaluates
its deferred tax assets in the various taxing jurisdictions in which it operates
and adjusts any related valuation allowance based on the estimate of the amount
of such deferred tax assets that the Company believes does not meet the
"more-likely-than-not" recognition criteria. Earnings of foreign subsidiaries
deemed to be permanently reinvested aggregated $261 million at December 31, 2002
and $304 million at December 31, 2003.
Earnings per share. Basic earnings per share of common stock is based upon
the weighted average number of common shares actually outstanding during each
period. Diluted earnings per share of common stock includes the impact of
outstanding dilutive stock options. The weighted average number of outstanding
stock options excluded from the calculation of diluted earnings per share
because their impact would have been antidilutive aggregated approximately
876,000 in 2001, 788,000 in 2002 and nil in 2003. There were no adjustments to
net income in the computation of the diluted earnings per share amounts.
Stock options. The Company has elected the disclosure alternative
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure," and to account for its stock-based employee compensation
related to stock options 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. During the fourth quarter of 2002 and following the
Company's cash settlement of options to purchase NL common stock held by certain
individuals, the Company commenced accounting for its stock options using the
variable accounting method because the Company could not overcome the
presumption that it would not similarly cash settle its remaining stock options.
Under the variable accounting method, the intrinsic value of all unexercised
stock options (including those with an exercise price at least equal to the
market price on the date of grant) are accrued as an expense over their vesting
period, with subsequent increases (decreases) in NL's market price resulting in
additional compensation expense (income). Aggregate compensation cost related to
NL stock options recognized by the Company was nil in 2001, $3.2 million in 2002
and $1.9 million in 2003.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in 2001, 2002 and 2003 if the
Company and its subsidiaries had each elected to account for their respective
stock-based employee compensation related to all stock options in accordance
with the fair value-based recognition provisions of SFAS No. 123, for all awards
granted subsequent to January 1, 1995.
Years ended December 31,
2001 2002 2003
---- ---- ----
(In millions, except
per share amounts)
Net income as reported $ 121.4 $ 36.8 $ 63.7
Adjustments, net of applicable income tax effects and minority interest:
Stock-based employee compensation expense
determined under APBO No. 25 - 2.1 1.1
Stock-based employee compensation expense
determined under SFAS No. 123 (1.6) (1.0) (.4)
------- ------- -------
Pro forma net income $ 119.8 $ 37.9 $ 64.4
======= ======= =======
Basic earnings per share:
As reported $ 2.44 $ .76 $ 1.33
Pro forma $ 2.41 $ .78 $ 1.35
Diluted earnings per share:
As reported $ 2.44 $ .76 $ 1.33
Pro forma $ 2.40 $ .78 $ 1.35
Environmental remediation costs. The Company records liabilities related to
environmental remediation obligations when estimated future expenditures are
probable and reasonably estimable. Such accruals are adjusted as further
information becomes available or circumstances change. Estimated future
expenditures are generally not discounted to their present value. Recoveries of
remediation costs from other parties, if any, are recognized as assets when
their receipt is deemed probable. At December 31, 2002 and 2003, no receivables
for recoveries have been recognized.
Selling, general and administrative expenses; shipping and handling costs.
Selling, general and administrative expenses include costs related to marketing,
sales, distribution, shipping and handling, research and development, legal,
environmental remediation and administrative functions such as accounting,
treasury and finance, and includes costs for salaries and benefits, travel and
entertainment, promotional materials and professional fees. Shipping and
handling costs are included in selling, general and administrative expense and
were $49 million in 2001, $51 million in 2002 and $63 million in 2003.
Advertising costs are expensed as incurred and were $1 million in each of 2001,
2002, and 2003. Research, development and certain sales technical support costs
are expensed as incurred and approximated $6 million in each of 2001 and 2002
and approximated $7 million in 2003.
Other. Corporate expenses include environmental, legal and other costs
attributable to formerly owned business units.
Accounting and funding policies for retirement and postretirement benefits
other than pensions ("OPEB") plans are described in Note 15.
Note 2 - Business combinations:
In January 2002, the Company acquired all of the stock and limited
liability company units of EWI RE, Inc. and EWI RE, Ltd. (collectively "EWI"),
respectively, for an aggregate of $9.2 million in cash, including acquisition
costs of $.2 million. An entity controlled by one of Harold C. Simmons'
daughters owned a majority of EWI, and a wholly-owned subsidiary of Contran
owned the remainder of EWI. EWI provides reinsurance brokerage services for
insurance policies of the Company, its joint venture and other affiliates of
Contran as well as external third-party customers. The purchase was approved by
a special committee of the Company's Board of Directors consisting of two of its
directors unrelated to Contran, and the purchase price was negotiated by the
special committee based upon its consideration of relevant factors, including
but not limited to due diligence performed by independent consultants and an
appraisal of EWI conducted by an independent third party selected by the special
committee.
EWI's results of operations and cash flows are included in the Company's
consolidated results of operations and cash flows beginning January 2002. The
pro forma effect on the Company's results of operations at December 31, 2001,
assuming the acquisition of EWI had occurred as of January 1, 2001, is not
material. The aggregate cash purchase price has been allocated to the assets
acquired and liabilities assumed.
Note 3 - Geographic information:
The Company's primary operations are conducted by Kronos and are associated
with 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, 2002 and
2003, the net assets of non-U.S. subsidiaries included in consolidated net
assets approximated $159 million and $193 million, respectively.
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.
Years ended December 31,
2001 2002 2003
---- ---- ----
(In thousands)
Geographic areas
Net sales - point of origin:
Germany $ 398,470 $ 404,299 $ 510,105
United States 278,624 291,823 310,694
Canada 149,412 157,773 173,297
Belgium 126,782 123,760 150,728
Norway 102,843 111,811 131,457
Other 82,320 89,560 110,358
Eliminations (303,352) (303,838) (378,462)
--------- --------- ----------
$ 835,099 $ 875,188 $1,008,177
========= ========= ==========
Net sales - point of destination:
Europe $ 425,338 $ 456,834 $ 567,496
United States 258,347 271,865 296,643
Canada 47,061 53,371 53,170
Latin America 25,514 19,970 15,920
Asia 46,169 47,549 49,020
Other 32,670 25,599 25,928
--------- --------- ----------
$ 835,099 $ 875,188 $1,008,177
========= ========= ==========
December 31,
2001 2002 2003
---- ---- ----
(In thousands)
Net property and equipment:
Germany $182,387 $213,170 $252,411
Canada 54,676 54,719 63,623
Belgium 46,841 54,625 64,895
Norway 38,549 49,737 50,811
Other 7,297 6,568 3,999
-------- -------- --------
$329,750 $378,819 $435,739
======== ======== ========
Note 4 - Accounts and other receivables:
December 31,
2002 2003
---- ----
(In thousands)
Trade receivables $ 124,044 $ 146,971
Insurance claims 2,558 58
Recoverable VAT and other receivables 12,861 12,710
Allowance for doubtful accounts (2,605) (2,919)
--------- ----------
$ 136,858 $ 156,820
========= ==========
Note 5 - Marketable securities:
December 31,
2002 2003
---- ----
(In thousands)
Available-for-sale marketable equity securities:
Valhi $ 9,845 $ 70,450
Tremont Group 30,634 -
Tremont Corporation 243 -
Other 179 37
-------- --------
$ 40,901 $ 70,487
======== ========
At December 31, 2002, the Company owned 20% of Tremont Group, Inc. and
Valhi owned the remaining 80%. Tremont Group's only asset was an 80% ownership
interest in Tremont Corporation ("Tremont"). The Company's stock of Tremont
Group was redeemdable at the option of the Company for fair value based on the
value of the underlying Tremont shares, and the Company accounted for its
investment in Tremont Group as an available-for-sale marketable security carried
at fair value based on the fair value of the underlying Tremont shares. At
December 31, 2002, the Company also directly held a nominal number of shares of
Tremont and owned 1,186,200 shares of Valhi common stock. The Company accounts
for its investment in its parent companies as available-for-sale marketable
securities carried at fair value.
In February 2003 Valhi completed a series of merger transactions pursuant
to which, among other things, Tremont Group and Tremont both became wholly-owned
subsidiaries of Valhi. Under these merger transactions, (i) Valhi issued 3.5
million shares of its common stock to the Company in return for the Company's
20% ownership interest in Tremont Group and (ii) Valhi issued 3.4 shares of its
common stock (plus cash in lieu of fractional shares) to all Tremont
stockholders (other than Valhi and Tremont Group) in exchange for each share of
Tremont common stock held by such stockholders. The Company received
approximately 27,770 shares of Valhi common stock in the second transaction. The
number of shares of Valhi common stock issued to the Company in exchange for the
Company's 20% ownership interest in Tremont Group was equal to the Company's 20%
pro-rata interest in the shares of Tremont common stock held by Tremont Group,
adjusted for the same 3.4 exchange ratio. The Company reported a pre-tax
securities transaction gain of approximately $2.3 million in the first quarter
of 2003 which represented the difference between the market value of the shares
of Valhi received and the cost basis of the Tremont Group and Tremont shares
exchanged. Following these transactions, the Company owned approximately 4.7
million shares of Valhi's outstanding common stock (approximately 4% of Valhi's
outstanding shares). The Company will continue to account for its shares of
Valhi common stock as available-for-sale marketable equity securities carried at
fair value (based on quoted market prices).
The aggregate cost basis for the Company's investment in Valhi at December
31, 2003 was $34.6 million. The aggregate cost basis of the Company's investment
in Tremont Group and Valhi at December 31, 2002 was $26.2 million and $5.9
million, respectively.
The Valhi common stock owned by the Company is subject to the restrictions
on resale pursuant to certain provisions of the Securities and Exchange
Commission ("SEC") Rule 144. The shares of Valhi common stock cannot be voted by
the Company under Delaware Corporation Law, but the Company does receive
dividends from Valhi on these shares, when declared and paid. For financial
reporting purposes, Valhi reports its proportional interest in these shares as
treasury stock.
Note 6 - Inventories:
December 31,
2002 2003
---- ----
(In thousands)
Raw materials $ 54,077 $ 61,959
Work in process 15,936 19,855
Finished products 109,203 147,270
Supplies 30,666 36,936
-------- --------
$209,882 $266,020
======== ========
Note 7 - 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. Distributions from LPC,
which generally relate to excess cash generated by LPC from its non-cash
production costs, and contributions to LPC, which generally relate to cash
required by LPC when it builds working capital, are reported as part of cash
generated by operating activities in the Company's Consolidated Statements of
Cash Flows. Such distributions are reported net of any contributions made to LPC
during the periods. Net distributions of $11.3 million in 2001, $8.0 million in
2002 and $.9 million in 2003 are stated net of contributions of $6.2 million in
2001, $14.2 million in 2002 and $13.1 million in 2003.
LPC made net cash distributions of $22.6 million in 2001, $15.9 million in
2002 and $1.8 million in 2003, equally split between the partners.
Summary balance sheets of LPC are shown below:
December 31,
2002 2003
---- ----
(In thousands)
ASSETS
Current assets $ 56,745 $ 57,028
Property and equipment, net 235,739 226,971
--------- ---------
$ 292,484 $ 283,999
========= =========
LIABILITIES AND PARTNERS' EQUITY
Other liabilities, primarily current $ 29,716 $ 23,229
Partners' equity 262,768 260,770
--------- ---------
$ 292,484 $ 283,999
========= =========
Summary income statements of LPC are shown below:
Years ended December 31,
2001 2002 2003
---- ---- ----
(In thousands)
Revenues and other income:
Kronos $ 93,393 $ 92,428 $ 101,293
Tioxide 94,009 93,833 101,619
Interest 303 53 73
--------- --------- ----------
187,705 186,314 202,985
--------- --------- ----------
Cost and expenses:
Cost of sales 187,295 185,946 201,947
General and administrative 410 368 398
--------- --------- ----------
187,705 186,314 202,345
--------- --------- ----------
Net income from continuing operations - - 640
Cumulative effect of change in accounting principle - - (640)
--------- --------- ----------
Net income $ - $ - $ -
========= ========= ==========
Note 8 - Other noncurrent assets:
December 31,
2002 2003
---- ----
(In thousands)
Deferred financing costs, net $ 10,550 $ 10,417
Goodwill 6,406 6,406
Unrecognized net pension obligations 5,561 13,747
Intangible asset, net 2,230 1,859
Restricted cash equivalents 1,344 -
Other 2,646 1,628
-------- --------
$ 28,737 $ 34,057
======== ========
Goodwill and the definite-lived customer list intangible asset resulted
from the acquisition of EWI in January 2002. See Note 2. The intangible asset is
amortized on a straight-line basis over a period of seven years (approximately
five years remaining at December 31, 2003) with no assumed residual value and is
presented net of accumulated amortization of $372,000 and $743,000 as of
December 31, 2002 and 2003, respectively. Amortization expense of intangible
assets was approximately $372,000 in 2002 and $371,000 in 2003, and amortization
expense of intangible assets is expected to be approximately $370,000 in each of
2004 through 2008.
Note 9 - Accrued liabilities:
December 31,
2002 2003
------ ------
(In thousands)
Employee benefits $ 34,349 $ 38,368
Interest 240 206
Deferred income 333 -
Other 35,512 42,543
-------- --------
$ 70,434 $ 81,117
======== ========
Note 10 - Other noncurrent liabilities:
December 31,
2002 2003
---- ----
(In thousands)
Employee benefits $ 4,025 $ 4,849
Insurance 7,674 4,331
Other 9,351 10,273
-------- --------
$ 21,050 $ 19,453
======== ========
Note 11 - Long-term debt:
December 31,
2002 2003
---- ----
(In thousands)
Kronos International, Inc. and subsidiaries:
8.875% Senior Secured Notes $ 296,942 $ 356,136
Bank credit facility 27,077 -
Other 1,887 603
--------- ----------
325,906 356,739
Less current maturities 1,298 288
--------- ----------
$ 324,608 $ 356,451
========= ==========
In June 2002, Kronos International, Inc. ("KII"), which conducts the
Company's TiO2 operations in Europe, issued (euro)285 million principal amount
($280 million when issued) of its 8.875% Senior Secured Notes (the "Notes") due
2009. The Notes are collateralized by first priority liens on 65% of the common
stock or other ownership interests of certain of KII's first-tier operating
subsidiaries. In addition, the indenture contains customary cross-default
provisions with respect to other debt and obligations of KII or its
subsidiaries. The Notes are issued pursuant to an indenture which contains a
number of covenants and restrictions which, among other things, restricts the
ability of KII and its subsidiaries to incur debt, incur liens, pay dividends or
merge or consolidate with, or sell or transfer all or substantially all of their
assets to, another entity. The Notes are redeemable, at KII's option, on or
after December 30, 2005 at redemption prices ranging from 104.437% of the
principal amount, declining to 100% on or after December 30, 2008. In addition,
on or before June 30, 2005, KII may redeem up to 35% of the Notes with the net
proceeds of a qualified public equity offering at 108.875% of the principal
amount. In the event of a change of control of KII, as defined, KII would be
required to make an offer to purchase its Notes at 101% of the principal amount.
KII would also be required to make an offer to purchase a specified portion of
its Notes at par value in the event KII 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, 2003 the quoted market price of the Notes
was approximately (euro)1,000 per (euro)1,000 principal amount (2002 -
(euro)1,010 per (euro)1,000 principal amount).
Also in June 2002, KII's operating subsidiaries in Germany, Belgium and
Norway (collectively, the "Borrowers") entered into a (euro)80 million secured
revolving bank credit facility that matures in June 2005 ("European Credit
Facility"). Borrowings under this facility were used in part to repay and
terminate Kronos' short-term non-U.S. bank credit agreements. Borrowings may be
denominated in euros, Norwegian kroners or U.S. dollars, and bear interest at
the applicable interbank market rate plus 1.75%. The facility also provides for
the issuance of letters of credit up to euro 5 million. The European Credit
Facility is collateralized by the accounts receivable and inventories of the
borrowers, plus a limited pledge of all of the other assets of the Belgian
borrower. The European Credit Facility contains certain restrictive covenants
which, among other things, restricts the ability of the borrowers to incur debt,
incur liens, pay dividends or merge or consolidate with, or sell or transfer all
or substantially all of their assets to, another entity. In addition, the
European Credit Facility contains customary cross-default provisions with
respect to other debt and obligations of the Borrowers, KII and its other
subsidiaries. At December 31, 2003, no amounts were outstanding under the
European Credit Facility, and the equivalent of $97.5 million was available for
additional borrowing by the subsidiaries.
Under the cross-default provisions of the Notes, the Notes may be
accelerated prior to their stated maturity if KII or any of KII's subsidiaries
default under any other indebtedness in excess of $20 million due to a failure
to pay such other indebtedness at its due date (including any due date that
arises prior to the stated maturity as a result of a default under such other
indebtedness). Under the cross-default provisions of the European Credit
Facility, any outstanding borrowings under the European Credit Facility may be
accelerated prior to their stated maturity if the Borrowers or KII default under
any other indebtedness in excess of (euro)5 million due to a failure to pay such
other indebtedness at its due date (including any due date that arises prior to
the stated maturity as a result of a default under such other indebtedness). In
the event the cross-default provisions of either the Notes or the European
Credit Facility become applicable, and such indebtedness is accelerated, the
Company would be required to repay such indebtedness prior to their stated
maturity.
In March 2002, NL redeemed $25 million principal amount of its 11.75%
Senior Secured Notes ("NL Senior Secured Notes") at par value, using available
cash on hand. In addition, NL used a portion of the net proceeds from the
issuance of the Notes to redeem in full the remaining $169 million principal
amount of the NL Senior Secured Notes. In accordance with the terms of the
indenture governing the NL Senior Secured Notes, on June 28, 2002, NL
irrevocably placed on deposit with the NL Senior Secured Notes trustee funds in
an amount sufficient to pay in full the redemption price plus all accrued and
unpaid interest due on the July 28, 2002 redemption date. Immediately
thereafter, NL was released from its obligations under such indenture, the
indenture was discharged and all collateral was released to NL. Because NL had
been released as the primary obligor under the indenture as of June 30, 2002,
the NL Senior Secured Notes were eliminated from the balance sheet as of that
date along with the funds placed on deposit with the trustee to effect the July
28, 2002 redemption. NL recognized a loss on the early extinguishment of debt of
approximately $2 million in the second quarter of 2002, consisting primarily of
the interest on the NL Senior Secured Notes for the period from July 1 to July
28, 2002. Such loss is recognized as a component of interest expense.
In September 2002, certain of NL's U.S. subsidiaries entered into a $50
million revolving credit facility (nil outstanding at December 31, 2003) that
matures in September 2005 ("U.S. Credit Facility"). The facility is
collateralized by the accounts receivable, inventories and certain fixed assets
of the borrowers. Borrowings under this facility are limited to the lesser of
$45 million or a formula-determined amount based upon the accounts receivable
and inventories of the borrowers. Borrowings bear interest at either the prime
rate or rates based upon the eurodollar rate. The facility contains certain
restrictive covenants which, among other things, restricts the abilities of the
borrowers to incur debt, incur liens, pay dividends in certain circumstances,
sell assets or enter into mergers. At December 31, 2003, $39 million was
available for borrowing under the facility.
Deferred financing costs of $10.7 million for the KII Senior Notes, the
European Credit Facility and the U.S. Credit Facility are being amortized over
the life of the respective agreements and are included in other noncurrent
assets as of December 31, 2003.
In January 2004, Kronos' Canadian subsidiary entered into a new Cdn. $30
million revolving credit facility that matures in January 2009. The facility is
collateralized by the accounts receivable and inventories of the borrower.
Borrowings under this facility are limited to the lesser of Cdn. $26 million or
a formula-determined amount based upon the accounts receivable and inventories
of the borrower. Borrowings bear interest at rates based upon either the
Canadian prime rate, the U.S. prime rate or LIBOR. The facility contains certain
restrictive covenants that, among other things, restricts the ability of the
borrower to incur debt, incur liens, pay dividends in certain circumstances,
sell assets or enter into mergers.
Unused lines of credit available for borrowing under the Company's non-U.S.
credit facilities approximated $99.9 million at December 31, 2003 (including
approximately $97.5 million under the European Credit Facility).
In January and February 2004, certain of KII's operating subsidiaries
borrowed a net (euro)40 million ($50 million when borrowed) under the European
Credit Facility at an interest rate of 3.825%.
Aggregate maturities of long-term debt at December 31, 2003:
Years ending December 31, Amount
(In thousands)
2004 $ 288
2005 153
2006 145
2007 18
2008 -
2009 and thereafter 356,135
--------
$356,739
========
Note 12 - Minority interest:
December 31,
2002 2003
---- ----
(In thousands)
Minority interest in net assets:
Kronos Worldwide, Inc. $ - $ 77,763
Other 8,516 9,028
-------- --------
$ 8,516 $ 86,791
======== ========
Years ended December 31,
2001 2002 2003
---- ---- ----
(In thousands)
Minority interest in net earnings:
Kronos Worldwide, Inc. $ - $ - $ 1,602
Other 960 1,264 442
------- ------- -------
$ 960 $ 1,264 $ 2,044
======= ======= =======
Kronos Worldwide, Inc. The Company commenced recognizing minority interest
in Kronos' net assets and net earnings following the Company's December 2003
distribution of a portion of the shares of Kronos common stock to its
stockholders. See Note 13.
Other. Other minority interest relates principally to NL'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 NL's environmental liabilities. EMS's earnings are based, in part,
upon its ability to favorably resolve these liabilities on an aggregate basis.
The stockholders of EMS, other than NL, actively manage the environmental
liabilities and share in 39% of EMS's cumulative earnings. NL continues to
consolidate EMS and provides accruals for the reasonably estimable costs for the
settlement of EMS's environmental liabilities, as discussed in Note 18.
Note 13 - Stockholders' equity:
Shares of common stock
Issued Treasury Outstanding
(In thousands)
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
Treasury shares acquired - (1,384) (1,384)
Treasury shares reissued - 37 37
------- ------- -------
Balance at December 31, 2002 66,845 (19,155) 47,690
Treasury shares reissued - 101 101
------- ------- -------
Balance at December 31, 2003 66,845 (19,054) 47,791
======= ======= =======
Kronos Worldwide, Inc. Prior to December 2003, Kronos was a wholly-owned
subsidiary of the Company. In December 2003, the Company completed the
distribution of approximately 48.8% of Kronos' common stock to NL stockholders
(including Valhi and Tremont) in the form of a pro-rata dividend. Stockholders
of the Company received one share of Kronos common stock for every two shares of
NL held.
The Company is a party to a tax sharing agreement with Contran pursuant to
which the Company generally computes its provision for income taxes on a
separate-company basis, and the Company makes payments to or receives payments
from Valhi in amounts that it would have paid to or received from the U.S.
Internal Revenue Service had the Company not been a member of the Contran Tax
Group. Prior to the Company's completion of the distribution of 48.8% of the
outstanding shares of common stock of Kronos, Kronos and its qualifying
subsidiaries were members of the Company's tax group. Following completion of
the distribution, Kronos and its qualifying subsidiaries are no longer members
of the Company's tax group, but Kronos and its qualifying subsidiaries will
remain members of the Contran Tax Group. The Company's distribution of 48.8% of
the outstanding shares of common stock of Kronos is taxable to the Company, and
the Company is required to recognize a taxable gain equal to the difference
between the fair market value of the shares of Kronos common stock distributed
($17.25 per share, equal to the closing market price of Kronos' common stock on
December 8, 2003, the date the distribution was completed) and the Company's
adjusted tax basis in such stock at the date of distribution. With respect to
the shares of Kronos distributed to Valhi and Tremont (20.2 million shares in
the aggregate), effective December 1, 2003, Valhi and the Company amended the
terms of their tax sharing agreement to not require the Company to pay up to
Valhi the tax liability generated from the distribution of such Kronos shares to
Valhi and Tremont, since the tax on that portion of the gain is deferred at the
Valhi level due to Valhi, Tremont and the Company being members of the same tax
group. The Company was required to recognize a tax liability with respect to the
Kronos shares distributed to the Company's stockholders other than Valhi and
Tremont, and such tax liability was approximately $22.5 million.
In accordance with GAAP, the net carrying value of the shares of Kronos
distributed ($88.5 million) and the $22.5 million tax liability discussed above,
have been recognized as a reduction of the Company's stockholders' equity and
charged directly to retained earnings.
Common stock options. The NL Industries, Inc. 1998 Long-Term Incentive Plan
(the "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 nonemployee
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, 2003, no additional options may be granted under the Predecessor
Option Plan.
Up to five million shares of NL common stock may be issued pursuant to the
NL Option Plan and, at December 31, 2003, 3,864,500 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.
Following the December 2003 distribution of a portion of the shares of
Kronos common stock held by the Company, the exercise price for each outstanding
option to purchase NL common stock was reduced by $8.63 (or one-half of the
closing price of Kronos' common stock on December 8, 2003, the distribution
date).
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.
Amount Weighted- Weighted-
Exercise payable average average fair
price per upon exercise value at
Shares share exercise price grant
------ --------- -------- --------- ----------
(In thousands, except per share amounts)
Outstanding at December 31, 2000 1,602 $ 5.00-21.97 $ 24,363 $ 15.21
Granted 484 20.11-20.51 9,737 $ 20.12 $ 7.52
Exercised (38) 11.28-21.97 (627) $ 16.45
Canceled (34) 11.28-20.11 (513) $ 15.38
------ ------------ ---------
Outstanding at December 31, 2001 2,014 5.00-21.97 32,960 $ 16.36
Granted 12 13.81-13.81 166 $ 13.81 $ 5.71
Exercised (545) 5.00-15.75 (7,444) $ 13.65
Canceled (220) 11.88-21.97 (3,623) $ 16.43
------ ------------ ---------
Outstanding at December 31, 2002 1,261 8.69-21.97 22,059 $ 17.50
Exercised (95) 11.28-15.19 (1,271) $ 13.43
Canceled (26) 9.34-20.11 (391) $ 15.00
Adjusted for Kronos common stock
distribution - - (9,885) $ 8.63
------ ------------ ---------
Outstanding at December 31, 2003 1,140 $ 0.06-13.34 $ 10,512 $ 9.22
====== ============ =========
At December 31, 2001, 2002 and 2003 options to purchase 658,560, 428,400
and 695,700 shares, respectively, were exercisable, and options to purchase
214,200 shares become exercisable in 2004. Of the exercisable options, options
to purchase 592,700 shares at December 31, 2003 had exercise prices less than
the Company's December 31, 2003 quoted market price of $11.70 per share.
Outstanding options at December 31, 2003 expire at various dates through 2011.
The following table summarizes the Company's stock options outstanding and
exercisable as of December 31, 2003 by price range.
Options outstanding Options exercisable
Weighted-
average Weighted- Weighted-
Outstanding remaining average Exercisable average
Range of at contractual exercise at exercise
exercise prices 12/31/03 life price 12/31/03 price
--------------------- ---------- -------- --------- ---------- -----------
$ 0.06 - $ 4.84 78,300 4.4 $ 3.05 48,600 $ 2.92
$ 4.85 - $ 7.26 299,300 5.4 $ 5.75 124,700 $ 5.87
$ 7.27 - $ 9.68 162,000 3.7 $ 9.21 162,000 $ 9.21
$ 9.69 - $ 12.09 505,400 6.4 $ 11.46 265,400 $ 11.45
$ 12.10 - $ 14.51 95,000 4.1 $ 13.34 95,000 $ 13.34
--------- ---------
1,140,000 5.5 $ 9.22 695,700 $ 9.59
========= =========
The pro forma information required by SFAS No. 123 is based on an
estimation of the fair value of options issued subsequent to January 1, 1995.
See Note 1. No options were granted in 2003. The weighted-average fair values of
options granted during 2001 and 2002 were $7.52 and $5.71 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 and 2002: stock price volatility of 46%
and 47%, respectively; risk-free rate of return of 5% and 4%, respectively;
dividend yield of 4.0% and 5.8%, respectively; and an expected term of 9 and 7
years, respectively. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting period.
Note 14 - Income taxes:
Years ended December 31,
2001 2002 2003
---- ---- ----
(In millions)
Pre-tax income (loss):
U.S. $ 3.3 $(17.4) $(21.8)
Non-U.S. 154.0 67.5 86.1
------ ------ ------
$157.3 $ 50.1 $ 64.3
====== ====== ======
Expected tax expense (benefit), at U.S.
federal statutory income tax rate of 35% $ 55.0 $ 17.5 $ 22.5
Non-U.S. tax rates (4.0) (6.8) (1.1)
Incremental U.S. tax and rate differences
on equity in earnings of non-tax group
companies 6.0 .5 1.9
Change in deferred income tax valuation allowance, net (24.7) (3.4) (7.2)
Nondeductible expenses .6 3.4 3.4
Nontaxable income (3.2) - -
Change in Belgian income tax law - (2.3) -
U.S. state income taxes, net .5 (.1) .1
Refund of prior year German income taxes - - (38.0)
Tax contingency reserve adjustment, net 1.0 2.9 14.7
Other, net 3.7 .3 2.2
------ ------ ------
$ 34.9 $ 12.0 $ (1.5)
====== ====== ======
Years ended December 31,
2001 2002 2003
---- ---- ----
(In millions)
Components of income tax expense (benefit):
Currently payable (refundable):
U.S. federal and state $ 2.6 $ .1 $ .2
Non-U.S. 29.0 10.4 (35.4)
------ ------ ------
31.6 10.5 (35.2)
------ ------ ------
Deferred income taxes (benefit):
U.S. federal and state 11.5 (4.0) (3.8)
Non-U.S. (8.2) 5.5 37.5
------ ------ ------
3.3 1.5 33.7
------ ------ ------
$ 34.9 $ 12.0 $ (1.5)
====== ====== ======
Years ended December 31,
2001 2002 2003
---- ---- ----
(In millions)
Comprehensive provision for income taxes (benefit) allocable to:
Net income (loss) $ 34.9 $ 12.0 $ (1.5)
Retained earnings - - 22.5
Additional paid-in capital - (.2) -
Acquired definite-lived intangible asset - .9 -
Other comprehensive income:
Marketable securities (.3) (1.3) 9.4
Pension liabilities (2.2) (7.2) (12.2)
------ ------ ------
$ 32.4 $ 4.2 $ 18.2
====== ====== ======
The components of the net deferred tax liability at December 31, 2002 and
2003, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables.
December 31,
2002 2003
------------------------- ---------------
Assets Liabilities Assets Liabilities
(In millions)
Tax effect of temporary differences related to:
Inventories $ 3.4 $ (3.3) $ 1.5 $ (4.1)
Property and equipment 44.3 (59.1) 46.0 (62.7)
Accrued OPEB costs 10.6 - 9.8 -
Accrued (prepaid) pension cost 8.5 (24.8) 25.1 (33.5)
Accrued environmental liabilities and -
other deductible differences 32.9 - 28.8
Noncompete agreement .1 - - -
Other accrued liabilities and deductible differences 16.4 - 5.9 -
Other taxable differences - (137.7) - (157.7)
Tax on unremitted earnings of non-U.S. subsidiaries - (4.1) - (4.3)
Tax loss and tax credit carryforwards 163.8 - 154.9 -
Valuation allowance (185.3) - (193.8) -
------- ------- ------ ------
Adjusted gross deferred tax assets 78.2
(liabilities) 94.7 (229.0) (262.3)
Netting of items by tax jurisdiction (82.3) 82.3 (60.7) 60.7
------- ------- ------ -------
12.4 (146.7) 17.5 (201.6)
Less net current deferred tax asset
(liability) 10.5 (3.2) 10.8 (3.4)
------- ------- ------ -------
Net noncurrent deferred tax asset
(liability) $ 1.9 $(143.5) $ 6.7 $(198.2)
====== ======= ====== =======
Years ended December 31,
2001 2002 2003
---- ---- ----
(In millions)
Increase (decrease) in valuation allowance:
Recognition of certain deductible tax
attributes for which the benefit had not
previously been recognized under the
"more-likely-than-not" recognition criteria $ (24.7) $ (3.4) $ (7.2)
Foreign currency translation (7.5) 21.6 28.2
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 (3.7) 12.6 (12.5)
-------- -------- -------
$ (35.9) $ 30.8 $ 8.5
======== ======== =======
A reduction in the Belgian income tax rate from 40% to 34% was enacted in
December 2002 and became effective in January 2003. This reduction in the
Belgian income tax rate resulted in a $2.3 million decrease in the Company's
income tax expense in 2002 because the Company had previously recognized a net
deferred income tax liability with respect to Belgian temporary differences.
In 2001, NL completed a restructuring of its German subsidiaries, and as a
result NL recognized a $17.6 million net income tax benefit. This benefit is
comprised of a $23.2 million decrease in NL's deferred income tax asset
valuation allowance due to a change in estimate of NL'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.
In the first quarter of 2003, the Company was notified by the German
Federal Fiscal Court (the "Court") that the Court had ruled in the Company's
favor concerning a claim for refund suit in which the Company sought refunds of
prior taxes paid during the periods 1990 through 1997. KII and the Company's
German operating subsidiary were required to file amended tax returns with the
German tax authorities to receive refunds for such years, and all of such
amended returns were filed during 2003. Such amended returns reflected an
aggregate refund of taxes and related interest to the Company's German operating
subsidiary of (euro)103.2 million ($123.0 million), and an aggregate additional
liability of taxes and related interest to KII of (euro)91.9 million ($109.6
million). Assessments and refunds will be processed by year as the respective
returns are reviewed by the tax authorities. Certain interest components may
also be refunded separately. The German tax authorities have reviewed and
accepted the amended return with respect to the 1990 tax year. In February 2004,
the Company's German operating subsidiary received interest of (euro)16.8
million ($19.2 million). The Company believes it will receive the net refunds of
taxes and related interest for the remaining years during 2004. In addition to
the refunds for the 1990 to 1997 periods, the court ruling also resulted in a
refund of 1999 income taxes and interest for which the Company received
(euro)21.5 million ($24.6 million) in 2003. The Company has recognized the
aggregate (euro)32.8 million ($38 million) benefit of such net refunds in its
2003 results of operations.
Certain of the Company's U.S. and non-U.S. tax returns are being examined
and tax authorities have or may propose tax deficiencies, including penalties
and interest. For example:
o NL's and EMS's 1998 U.S. federal income tax returns are currently being
examined by the U.S. tax authorities, and NL and EMS have granted
extensions of the statute of limitations for assessments until September
30, 2004. Based on the examination to date, NL anticipates that the U.S.
tax authorities will propose a substantial tax deficiency, including
interest, related to a restructuring transaction. In an effort to avoid
protracted litigation and minimize the hazards of such litigation, NL
applied to take part in an IRS settlement initiative applicable to
transactions similar to the restructuring transaction, and in April 2003 NL
received notification from the IRS that NL had been accepted into such
settlement initiative. Under this initiative, a final settlement with the
IRS is to be reached through expedited negotiations and, if necessary,
through a specified expidited arbitration procedure. NL anticipates that
settlement of this matter will likely occur in 2004, resulting in payments
of federal and state tax and interest ranging from $33 million to $45
million. Additional payments in later years may be required as part of the
settlement. NL has provided adequate accruals to cover the currently
expected range of settlement outcomes.
o The Company has received a preliminary tax assessment related to 1993 from
the Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately (euro)6 million ($8 million at December 31,
2003). Kronos has filed a protest to this assessment and believes that a
significant portion of the assessment is without merit. The Belgian tax
authorities have filed a lien on the fixed assets of the Company's Belgian
TiO2 operations in connection with this assessment. In April 2003, Kronos
received a notification from the Belgian tax authorities of their intent to
assess a tax deficiency related to 1999 that, including interest, is
expected to be approximately (euro)13 million ($16 million). The Company
believes the proposed assessment is substantially without merit, and the
Company has filed a written response. In December 2003, the Belgian tax
authorities agreed to a settlement of certain tax assessments for the years
1991 to 1997 of approximately (euro)5 million, including interest ($6.3
million) separate from the assessments noted previously.
o The Norwegian tax authorities have notified Kronos of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million at
December 31, 2003) relating to the years 1998 to 2000. Kronos has filed a
written protest to this proposed assessment.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in settlement
initiatives, 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 its consolidated financial position, results of operations or
liquidity.
At December 31, 2003, the Company had the equivalent of $438 million of
German income tax loss carryforwards with no expiration date. The Company has
provided a deferred tax valuation allowance of $185.3 million at December 31,
2002 and $193.8 million at December 31, 2003, principally related to Germany,
partially offsetting deferred tax assets that the Company believes do not meet
the "more-likely-than-not" recognition criteria.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforward
effective January 1, 2004. The new law may significantly affect the Company's
future income tax expense and cash tax payments.
Note 15 - Employee benefit plans:
Defined benefit plans. The Company maintains various defined benefit
pension plans. 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. Variances from actuarially assumed rates will result
in increases or decreases in accumulated pension obligations, pension expense
and funding requirements in future periods. At December 31, 2003, the Company
currently expects to contribute the equivalent of approximately $9 million to
all of its defined benefit pension plans during 2004.
The funded status of the Company's defined benefit pension plans, the
components of net periodic defined benefit pension cost related to the Company's
consolidated business segments and charged to continuing operations and the
rates used in determining the actuarial present value of benefit obligations are
presented in the tables below. The Company uses a September 30th measurement
date for their defined benefit pension plans.
Years ended December 31,
2002 2003
---- ----
(In thousands)
Change in projected benefit obligations ("PBO"):
Benefit obligations at beginning of the year $261,805 $ 302,377
Service cost 4,538 5,347
Interest cost 16,510 18,225
Participant contributions 1,057 1,357
Plan amendments - 3,200
Actuarial losses (gains) (1,704) 25,437
Change in foreign currency exchange rates 37,033 43,514
Benefits paid (16,862) (21,823)
------- --------
Benefit obligations at end of the year $302,377 $ 377,634
======== =========
Change in plan assets:
Fair value of plan assets at beginning of the year $208,267 $ 226,761
Actual return on plan assets (3,087) (6,391)
Employer contributions 9,310 14,082
Participant contributions 1,057 1,357
Change in foreign currency exchange rates 28,076 27,249
Benefits paid (16,862) (21,823)
-------- --------
Fair value of plan assets at end of year $226,761 $ 241,235
======== =========
Funded status at end of the year:
Plan assets less than PBO $(75,616) $ (136,399)
Unrecognized actuarial losses 68,390 131,172
Unrecognized prior service cost 4,881 8,566
Unrecognized net transition obligations 5,011 5,079
-------- ---------
$ 2,666 $ 8,418
======== =========
Amounts recognized in the balance sheet:
Prepaid pension costs $ 17,572 $ -
Unrecognized net pension obligations 5,561 13,747
Accrued pension costs:
Current (7,019) (8,366)
Noncurrent (43,757) (81,180)
Accumulated other comprehensive loss 30,309 84,217
-------- ---------
$ 2,666 $ 8,418
======== =========
Years ended December 31,
2001 2002 2003
---- ---- ----
(In thousands)
Net periodic pension cost:
Service cost benefits $ 3,976 $ 4,538 $ 5,347
Interest cost on PBO 15,605 16,510 18,225
Expected return on plan assets (16,143) (16,099) (17,580)
Amortization of prior service cost 201 307 354
Amortization of net transition obligations 510 515 733
Recognized actuarial losses 443 1,223 1,800
-------- -------- --------
$ 4,592 $ 6,994 $ 8,879
======== ======== =========
The weighted-average rate assumptions used in determining the actuarial
present value of benefit obligations as of December 31, 2002 and 2003 are
presented in the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
2002 2003
---- ----
Discount rate 5.9% 5.5%
Increase in future compensation levels 2.6% 2.8%
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2001, 2002 and 2003 are presented in the table below. The
weighted-average discount rate and the weighted-average increase in future
compensation levels were determined using the projected benefit obligations at
the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets at the beginning of
each year.
December 31,
2001 2002 2003
---- ---- ----
Discount rate 6.5% 6.2% 5.9%
Increase in future compensation levels 3.0% 2.8% 2.6%
Long-term return on plan assets 7.8% 7.5% 7.2%
As of December 31, 2003, the accumulated benefit obligations for all
defined benefit pension plans was approximately $332 million (2002 - $273
million). At December 31, 2003, the projected benefit obligations for all
defined benefit pension plans was comprised of $57 million related to U.S. plans
and $320 million related to non-U.S. plans (2002 - $51 million and $251 million,
respectively). The Company uses a September 30th measurement date for their
defined benefit pension plans.
At December 31, 2003, the fair value of plan assets for all defined benefit
pension plans was comprised of $44 million related to U.S. plans and $197
million related to non-U.S. plans (2002 - $43 million and $183 million,
respectively).
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, 2002 and 2003, 79% and 86%, respectively, of
the projected benefit obligations of such plans relate to non-U.S. plans.
___December 31,___
2002 2003
---- ----
(In thousands)
Projected benefit obligation $252,316 $377,634
Accumulated benefit obligation 229,373 332,399
Fair value of plan assets:
U.S. plans 43,487 44,356
Non - U.S. plans 135,950 196,879
At December 31, 2003, all of the assets attributable to U.S. plans were
invested in the Combined Master Retirement Trust ("CMRT"), a collective
investment trust established by Valhi to permit the collective investment by
certain master trusts which fund certain employee benefits plans sponsored by
Contran and certain of its affiliates.
At December 31, 2003, the asset mix of the CMRT was 50% in U.S. equity
securities, 24% in U.S. fixed income securities, 7% in international equity
securities and 19% in cash and other investments. At December 31, 2002, the
assets of the U.S. plans were allocated as 39% to equity managers and 61% to
fixed asset managers.
The CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indicies) utilizing both third-party investment
managers as well as investments directed by Mr. Harold Simmons. Mr. Simmons is
the trustee of the CMRT. The trustee of the CMRT, along with the CMRT's
investment committee, actively manage the investments of the CMRT. Such parties
have in the past, and may in the future, periodically change the asset mix of
the CMRT based upon, among other things, advice they receive from third-party
advisors and their expectations as to what asset mix will generate the greatest
overall return.
For the year ended December 31, 2003, the assumed long-term rate of return
for plan assets invested in the CMRT was 10%. In determining the appropriateness
of such long-term rate of return assumption, the Company considered, among other
things, the historical rates of return for the CMRT, the current and projected
asset mix of the CMRT and the investment objectives of the CMRT's managers.
During the 16-year history of the CMRT from its inception in 1987 through
December 31, 2003, the average annual rate of return has been 12.4%.
Defined contribution plans. The Company maintains various defined
contribution pension plans with Company contributions based on matching or other
formulas. Defined contribution plan expense approximated $600,000 in 2001,
$600,000 in 2002 and $700,000 in 2003.
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. Based on communications with
a certain insurance provider of certain retiree benefits of NL, and
consultations with NL's actuaries, NL has been released from certain life
insurance retiree benefit obligations as of December 31, 2002 through the use of
an equal amount of plan assets. In 1989 the Company began phasing out such
benefits for 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. The Company's policy is to fund medical claims as they are
incurred, net of any contributions by the retiree.
The components of the periodic OPEB cost and accumulated OPEB obligations
and the rates used in determining the actuarial present value of benefit
obligations are presented in the tables below. Variances from
actuarially-assumed rates will result in additional increases or decreases in
accumulated OPEB obligations, net periodic OPEB cost and funding requirements in
future periods. At December 31, 2003, the expected rate of increase in future
health care costs is 8% to 10% in 2004, declining to 5.5% in 2009 and
thereafter. (In 2002 the expected rate of increase in future healthcare costs
ranged from 9% in 2003, declining to 5.5% in 2007 and thereafter.) If the health
care cost trend rate was increased (decreased) by one percentage point for each
year, OPEB expense would have increased by $.2 million (decreased by $.2
million) in 2003, and the actuarial present value of accumulated OPEB
obligations at December 31, 2003 would have increased by $2.2 million (decreased
by $1.9 million).
Years ended December 31,
2002 2003
---- ----
(In thousands)
Change in accumulated OPEB obligations:
Obligations at beginning of the year $ 35,137 $ 32,899
Service cost 103 152
Interest cost 2,028 2,063
Actuarial losses 5,436 1,355
Release of benefit obligations (5,778) -
Change in foreign currency exchange rates 32 772
Benefits paid:
Company funds (3,464) (3,812)
Plan assets (595) -
-------- --------
Obligations at end of the year $ 32,899 $ 33,429
======== ========
Change in plan assets:
Fair value of plan assets at beginning of the year $ 6,400 $ -
Actual return on plan assets (27) -
Employer contributions 3,464 3,812
Release of benefit obligations (5,778) -
Benefits paid (4,059) (3,812)
-------- --------
Fair value of plan assets at end of the year $ - $ -
======== ========
Funded status at end of the year:
Plan assets less than benefit obligations $(32,899) $(33,429)
Unrecognized net actuarial losses 5,345 6,854
Unrecognized prior service credit (3,708) (1,633)
-------- --------
$(31,262) $(28,208)
======== ========
Accrued OPEB costs recognized in the balance sheet:
Current $ (4,785) $ (4,797)
Noncurrent (26,477) (23,411)
-------- -------
$(31,262) $(28,208)
======== ========
Years ended December 31,
2001 2002 2003
---- ---- ----
(In thousands)
Net periodic OPEB cost (credit):
Service cost $ 94 $ 103 $ 152
Interest cost 2,536 2,028 2,063
Expected return on plan assets (773) (3) -
Amortization of prior service credit (2,075) (2,075) (2,075)
Recognized actuarial losses 27 27 189
------- ------- -------
$ (191) $ 80 $ 329
======= ======= =======
The weighted average discount rate used in determining the actuarial
present value of benefit obligations as of December 31, 2003 was 5.9% (2002 -
6.5%). Such weighted average rate was determined using the projected benefit
obligation as of such dates. The impact of assumed increases in future
compensation levels does not have a material affect on the actuarial present
value of the benefit obligation as substantially all of such benefits relate
solely to eligible retirees, for which compensation is not applicable.
The weighted average discount rate used in determining the net periodic
OPEB cost for 2003 was 6.5% (2002 - 7.0%; 2001 - 7.3%). Such weighted average
rate was determined using the projected benefit obligation as of the beginning
of each year. The impact of assumed increases in future compensation levels does
not have a material affect on the net periodic OPEB cost as substantially all of
such benefits relate solely to eligible retirees, for which compensation is not
applicable. The impact of assumed rate of return on plan assets also does not
have a material affect on the net periodic OPEB cost as there were no plan
assets as of December 31, 2002 or 2003.
As of December 31, 2003, the accumulated benefit obligations for all OPEB
plans was approximately $33.4 million (2002 - $32.9 million). At December 31,
2003, the accumulated benefit obligations for all OPEB plans was comprised of
$27.9 million related to U.S. plans and $5.5 million related to non-U.S. plans
(2002 - $29.6 million and $3.3 million, respectively). The Company uses a
September 30th measurement date for their OPEB plans.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Medicare 2003 Act") was enacted. The Medicare
2003 Act introduced a prescription drug benefit under Medicare (Medicare Part D)
as well as a federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least equivalent to Medicare Part D. Detailed
regulations necessary to implement the Medicare 2003 Act have not been issued,
including those that would specify the manner in which plan sponsors could
demonstrate their eligibility to receive the subsidy. Certain accounting issues
raised by the Medicare 2003 Act, including how to account for the federal
subsidy, are not explicitly addressed by current existing authoritative
guidance. In accordance with FASB Staff Position No. 106-1, the Company has
elected to defer accounting for the effects of the Medicare 2003 Act until
authoritative guidance on how to account for the federal subsidy has been
issued. Consequently, the Company's accumulated postretirement benefit
obligation and net periodic postretirement benefit cost, as reflected in the
accompanying Consolidated Financial Statements, do not reflect any effect of the
Medicare 2003 Act. Specific authoritative guidance on the accounting for the
federal subsidy is pending, and that guidance, when issued, could require the
Company to change previously reported financial information, depending on the
transition provisions of such guidance.
Note 16 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. 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, 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. The Company
continuously considers, reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business, tax and other objectives then relevant, 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.
Receivables from and payables to affiliates are summarized in the table
below.
December 31,
2002 2003
---- ----
(In thousands)
Current receivables from affiliates:
CompX $ 20 $ -
TIMET 84 50
Other 103 5
------- -------
$ 207 $ 55
======= =======
Noncurrent receivable from affiliate -
loan to Contran family trust $18,000 $14,000
======= =======
Current payables to affiliates:
Louisiana Pigment Company $ 7,614 $ 8,560
Valhi - 10,512
Other 413 465
------- -------
$ 8,027 $19,537
======= =======
Amounts payable to LPC are generally for the purchase of TiO2. Purchases of
TiO2 from LPC were $93.4 million in 2001, $92.4 million in 2002 and $101.3
million in 2003. See Note 7.
From time to time, loans and advances are made between the Company and
various related parties, pursuant to term and demand notes. These loans and
advances are entered into principally for cash management purposes. When the
Company loans funds to related parties, the lender is generally able to earn a
higher rate of return on the loan than the lender would earn if the funds were
invested in other instruments. While certain of such loans may be 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 applicable
loans. When the Company borrows from related parties, the borrower is generally
able to pay a lower rate of interest than the borrower would pay if it borrowed
from other parties.
In 2001, EMS, NL's majority-owned environmental management subsidiary,
extended a $25 million revolving credit facility to one of the family trusts
discussed in Note 1 ($18 million and $14 million outstanding at December 31,
2002 and 2003, respectively). The loan bears interest at prime, is due on demand
with 60 days notice and is collateralized by certain shares of Contran's Class A
common stock and Class E cumulative preferred stock held by the trust. The value
of the collateral is dependent, in part, on the value of Valhi as Contran's
beneficial ownership interest in Valhi is one of Contran's more substantial
assets. The terms of this loan were approved by special committees of both NL's
and EMS' respective board of directors composed of independent directors. At
December 31, 2003, $11 million is available for borrowing by the family trust,
and the loan has been classified as a noncurrent asset because EMS does not
presently intend to demand repayment within the next 12 months.
At December 31, 2002 and 2003, the Company had entered into a revolving
credit facility with Tremont pursuant to which Tremont could borrow up to $15
million from the Company through December 31, 2004. Borrowings (none at December
31, 2002 and 2003) bear interest at prime plus 2%, with interest payable
quarterly, and are collateralized by the 10.2 million shares of NL common stock
and 5.1 million shares of Kronos 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 most substantial assets. At December 31,
2003, Tremont had $15 million of borrowing availability under the facility.
Interest income on all loans to affiliates was $2.0 million in 2001, $1.9
million in 2002 and $799,000 in 2003.
Under the terms of various intercorporate services agreements ("ISAs")
entered into between the Company and various related parties, including Contran,
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 large 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
agreements are reviewed and approved by the applicable independent directors of
the companies that are parties to the agreements.
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, $1.5 million in 2002 and $2.0 million in
2003.
The Company was party to an intercorporate services agreement with Tremont
("Tremont ISA"). Under the terms of the contract, the Company provided certain
management and financial services to Tremont on a fee basis during 2001 and
2002. Intercorporate services fee income related to the Tremont ISA was $.1
million in each of 2001 and 2002. The Company also has an ISA with Titanium
Metals Corporation ("TIMET") whereby the Company provides certain services to
TIMET for approximately $300,000 in each of 2001 and 2002 and approximately
$14,000 in 2003. Certain other subsidiaries of the Company are also parties to
similar ISAs among themselves, and expenses associated with these agreements are
eliminated in the Company's consolidated financial statements.
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, 2003, the Company has $1.6 million of
restricted cash that collateralizes certain of Tall Pines' outstanding letters
of credit.
Tall Pines, Valmont Insurance Company and EWI RE, Inc. provide for or
broker certain insurance policies for Contran and certain of its subsidiaries
and affiliates, including the Company. Tall Pines and Valmont are wholly-owned
subsidiaries of Valhi, and EWI is currently a wholly-owned subsidiary of NL.
Prior to January 2002, EWI was owned by Contran or parties related to Contran.
Consistent with insurance industry practices, Tall Pines, Valmont and EWI
receive commissions from the insurance and reinsurance underwriters for the
policies that they provide or broker. The aggregate premiums paid by the Company
to Tall Pines and Valmont were $8.3 million in 2001, $9.5 million in 2002 and
$7.2 million in 2003, and the aggregate premiums paid by affiliates (other than
the Company and its joint venture) for policies provided or brokered by EWI
prior to its acquisition by the Company were $6.2 million in 2001 and $6.5
million in 2002. These amounts principally included payments for insurance and
reinsurance premiums paid to 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 aggregate premiums paid by affiliates of the Company to EWI were
$7.0 million in 2003. The Company expects that these relationships with Tall
Pines, Valmont and EWI will continue in 2004.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and affiliates, including the Company, have entered
into a loss sharing agreement under which any uninsured loss is shared by those
entities who have submitted claims under the relevant policy. The Company
believes the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justifies the risk
associated with the potential for any uninsured loss.
During 2002 the Company and certain officers of the Company entered into
agreements whereby stock options held by such officers to purchase an aggregate
of 513,800 shares of the Company's common stock were exercised or canceled for
value. The officers tendered 52,179 shares of their own Company common stock,
held by such officers for at least six months, to pay for a portion of the stock
option exercise price, and such shares were valued at the market price of the
Company's common stock on the date of exercise. The remaining aggregate exercise
price was paid by such officers by tendering of a portion of the shares acquired
upon exercise of the options, also based on the market price of the Company's
common stock on the date of exercise. On a net basis, the Company made aggregate
cash payments to the officers of approximately $2.2 million, of which
approximately $1.7 million was recorded as compensation expense and
approximately $.5 million (equal to the intrinsic value of the options exercised
through the tender of the 52,179 shares) was recorded as a direct reduction to
equity through treasury stock. The aggregate number of treasury shares held by
the Company did not change as a result of these transactions. Payment of
required tax withholding related to these transactions were funded by the
officers using a portion of the cash payments made to them.
Note 17 - Leverkusen fire and insurance claim; litigation settlement gains:
In March 2001, NL suffered a fire at its Leverkusen, Germany TiO2 facility.
Production at the facility's chloride-process plant returned to full capacity on
April 8, 2001. The facility's sulfate-process 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, 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's operating income in 2001 includes $27.3
million of business interruption insurance recoveries losses caused by the
Leverkusen fire. Of such business interruption proceeds amount, $20.1 million
was recorded as a reduction of cost of sales to offset unallocated period costs
that resulted from lost production and the remaining $7.2 million, representing
recovery of lost margin, was recorded as other income. The Company also
recognized insurance recoveries of $29.1 million in 2001 for property damage and
related cleanup and other extra costs, resulting in an insurance gain of $17.5
million as such recoveries exceeded the carrying value of the property destroyed
and the cleanup and other extra expenses incurred.
In 2001, 2002 and 2003, the Company recognized $11.7 million, $5.2 million
and $823,000, respectively, of net gains from legal settlements, of which $11.4
million in 2001, and all in 2002 and 2003, relates to settlements with certain
of its former insurance carriers. These settlements resolved court proceedings
in which the Company sought reimbursement from the carriers for legal defense
expenditures and indemnity coverage for certain of its environmental remediation
expenditures. Proceeds from substantially all of the 2001 settlements, plus the
proceeds from similar settlements in 2000, were transferred by the carriers to
special purpose trusts formed by the Company to pay for certain of its future
remediation and other environmental expenditures. At December 31, 2002 and 2003,
restricted cash equivalents and debt securities include an aggregate of $59
million and $24 million, respectively, held by such special purpose trusts.
Note 18 - Commitments and contingencies:
Lead pigment litigation. The Company's former operations included the
manufacture of lead pigments for use in paint and lead-based paint. Since 1987,
NL, other former manufacturers of lead pigments for use in paint, and lead-based
paint, and the Lead Industries Association (which discontinued business
operations in 2002) have been named as defendants in various legal proceedings
seeking damages for personal injury, property damage and governmental
expenditures 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 and school districts, and certain others have been
asserted as class actions. These lawsuits seek recovery under a variety of
theories, including public and private nuisance, negligent product design,
negligent failure to warn, strict liability, breach of warranty,
conspiracy/concert of action, aiding and abetting, enterprise liability, market
share liability, intentional tort, fraud and misrepresentation violations of
state consumer protection statutes, supplier negligence and similar claims.
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. Several former cases have been
dismissed or withdrawn. Most of the remaining cases are in various pre-trial
stages. Some are on appeal following dismissal or summary judgment rulings in
favor of the defendants. In addition, various other cases are pending (in which
the Company is not a defendant) seeking recovery for injury allegedly caused by
lead pigment and lead-based paint. Although the Company is not a defendant in
these cases, the outcome of these cases may have an impact on additional cases
being filed against the Company.
The Company believes these actions are without merit, intends to continue
to deny all allegations of wrongdoing and liability and to defend against all
actions vigorously. The Company has neither lost nor settled any of these cases.
The Company has not accrued any amounts for the pending lead pigment and
lead-based paint litigation. Liability that may result, if any, cannot
reasonably be estimated. 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, and there can be
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.
Environmental matters and litigation. The Company's operations are governed
by various federal, state, local and foreign environmental laws and regulations.
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 Company's policy is to
comply with environmental laws and regulations at all of its plants and to
continually strive to improve environmental performance in association with
applicable industry initiatives. The Company believes that its operations are in
substantial compliance with applicable requirements of environmental laws. From
time to time, the Company may be subject to environmental regulatory enforcement
under various statutes, resolution of which typically involves the establishment
of compliance programs. 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.
The Company's production facilities operate within an environmental
regulatory framework in which governmental authorities typically are granted
broad discretionary powers that allow them to issue operating permits under
which the plants must operate. The Company believes all of its plants are in
substantial compliance with applicable environmental laws. With respect to the
Company's plants, neither the Company nor any of its subsidiaries have been
notified of any environmental claim in the United States or any foreign
jurisdiction by the U.S. EPA or any applicable foreign authority or any state,
provincial or local authority.
Some of the Company's current and former facilities, including divested
primary and 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, potentially
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 70
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.
Environmental obligations are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of governmental
regulations, the number of PRPs and the PRPs' ability or willingness to fund
such allocation of costs, their financial capabilities and the allocation of
costs among PRPs, the multiplicity of possible solutions, and the years of
investigatory, remedial and monitoring activity required. In addition, 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, solvency of other PRPs, the results of
future testing and analysis undertaken with respect to certain sites 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. In
addition, with respect to other PRPs and the fact that the Company may be
jointly and severally liable for the total remediation cost at certain sites,
the Company could ultimately be liable for amounts in excess of its accruals due
to, among other things, reallocation of costs among PRPs or the insolvency of
one of more PRPs. No assurance can be given that actual costs will not exceed
accrued amounts or the upper end of the range for sites for which estimates have
been made and no assurance can be given that costs will not be incurred with
respect to sites as to which no estimate presently can be made. Further, there
can be no assurance that additional environmental matters will not arise in the
future.
A summary of the activity in the Company's accrued environmental costs
during the past two years is presented in the table below.
Years ended December 31,
2002 2003
---- ----
(In thousands)
Balance at the beginning of the year $100,748 $ 91,506
Additions charged to expense 9,388 26,211
Payments (18,630) (40,236)
-------- --------
Balance at the end of the year $ 91,506 $ 77,481
======== ========
Amounts recognized in the balance sheet:
Current liability $ 51,307 $ 19,627
Noncurrent liability 40,199 57,854
-------- --------
$ 91,506 $ 77,481
======== ========
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 NL's obligation. At December 31,
2003, the Company had accrued $77 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 $110
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 discussed in Note 17.
The exact time frame over which the Company makes payments with respect to
its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process which in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs which
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
is classified as a noncurrent liability.
At December 31, 2003, there are approximately 20 sites for which the
Company is unable to estimate a range of costs. For these sites, generally the
investigation is in the early stages, and it is either unknown as to whether or
not the Company actually had any association with the site, or if the Company
had association with the site, the nature of its responsibility, if any, for the
contamination at the site and the extent of contamination. The timing on when
information would become available to the Company to allow the Company to
estimate a range of loss is unknown and dependent on events outside the control
of the Company, such as when the party alleging liability provides information
to the Company.
Other litigation. The Company's Belgian subsidiary and various Belgian
employees are the subject of civil and criminal proceedings related to an
accident that resulted in two fatalities in such facility in 2000. At a hearing
held in January 2004, the government requested the court to impose fines on the
Company's subsidiary and certain of its employees in an amount equal to
approximately (euro)367,500 ($460,000). The Company's subsidiary has undertaken
the defense of and liability for any fines and costs incurred by its employees
arising out of these proceedings. The court's decision is anticipated in April
2004.
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. Approximately 425 of these cases involving a total of approximately
32,000 plaintiffs and their spouses remain pending. Of these plaintiffs,
approximately 22,000 are represented by 8 cases pending in Texas and Mississippi
state courts. The Company has not accrued any amounts for this litigation
because liability that might result to the Company, if any, cannot be reasonably
estimated. In addition, from time to time, the Company has received notices
regarding asbestos or silica claims purporting to be brought against former
subsidiaries of the Company, including notices provided to insurers with which
the Company has entered into settlements extinguishing certain insurance
policies. These insurers may seek indemnification from the Company.
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.
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. By
volume, approximately one-half of the Company's TiO2 sales were to Europe in
each of the past three years and approximately 38% in 2001, 39% in 2002 and 40%
in 2003 of sales were attributable to North America.
At December 31, 2003, consolidated cash, cash equivalents and restricted
cash includes $38 million invested in U.S. Treasury securities purchased under
short-term agreements to resell (2002 - $80 million), of which $17 million are
held in trust for the Company by a single U.S. bank (2002 - $24 million).
Capital expenditures. At December 31, 2003 the estimated cost to complete
capital projects in process approximated $9.6 million.
Long-term contracts. NL has long-term supply contracts that provide for
NL's chloride-process TiO2 feedstock requirements through 2007. The agreements
require NL to purchase certain minimum quantities of feedstock with average
minimum annual purchase commitments aggregating approximately $165 million.
Operating 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. Rent for the Leverkusen facility is periodically
established by agreement with the lessor for periods of at least two years at a
time. 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 NL's ability to transfer
ownership or use of the Leverkusen facility.
The Company also leases various other manufacturing facilities and
equipment. Some of the leases contain purchase and/or various term renewal
options at fair market and fair rental values, respectively. In most cases the
Company expects that, in the normal course of business, such leases will be
renewed or replaced by other leases. Net rent expense approximated $9 million in
2001, $10 million in 2002 and $12 million in 2003. At December 31, 2003, future
minimum payments under noncancellable operating leases having an initial or
remaining term of more than one year were as follows:
Years ending December 31, Amount
(In thousands)
2004 $ 3,255
2005 2,271
2006 1,468
2007 1,316
2008 1,194
2009 and thereafter 19,881
-------
$29,385
=======
Approximately $19.4 million of the $29.4 million aggregate future minimum
rental commitments at December 31, 2003 relates to NL's Leverkusen facility
lease discussed above. The minimum commitment amounts for such lease included in
the table above for each year through the 2050 expiration of the lease are based
upon the current annual rental rate as of December 31, 2003.
Note 19 - Financial instruments:
Summarized below is the estimated fair value and related net carrying value
of the Company's financial instruments.
December 31, December 31,
2002 2003
--------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- -------------------------
(In millions)
Cash, cash equivalents, current and noncurrent restricted
cash equivalents and current and noncurrent restricted
marketable debt securities $ 130.4 $ 130.4 $ 99.8 $ 99.8
Marketable equity securities - classified as
available-for-sale $ 40.9 $ 40.9 $ 70.5 $ 70.5
Notes payable and long-term debt:
Fixed rate with market quotes-
8.875% Senior Secured Notes $ 296.9 $ 299.9 $ 356.1 $ 356.1
Variable rate debt 29.0 29.0 .6 .6
Minority interest in Kronos common stock $ - $ - $ 77.8 $ 530.2
Common stockholders' equity $ 265.3 $ 810.7 $ 200.9 $ 559.2
Fair value of the Company's marketable equity securities, restricted
marketable debt securities and Notes, and the fair value of the Company's common
stockholder's equity and minority interest in Kronos, are based upon quoted
market prices at each balance sheet date.
At December 31, 2003, the Company had entered into a short-term currency
forward contract maturing January 2, 2004 to exchange an aggregate of (euro)40
million for an equivalent amount of U.S. dollars at an exchange rate of U.S.
$1.25 per euro. Such contract was entered into in conjunction with the January
2004 payment of an intercompany dividend from one of Kronos' European
subsidiaries. At December 31, 2003, the actual exchange rate was U.S. $1.25 per
euro. The estimated fair value of such foreign currency contract was not
material at December 31, 2003. The Company held no other significant derivative
financial instruments at December 31, 2002 or 2003.
Note 20 - Accounting principles newly adopted in 2003:
Asset retirement obligations. The Company adopted SFAS No. 143, Accounting
for Asset Retirement Obligations, on 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 is 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 future
value, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
Under the transition provisions of SFAS No. 143, at the date of adoption on
January 1, 2003 the Company recognized (i) an asset retirement cost capitalized
as an increase to the carrying value of its property, plant and equipment, (ii)
accumulated depreciation on such capitalized cost and (iii) a liability for the
asset retirement obligation. Amounts resulting from the initial application of
SFAS No. 143 are measured using information, assumptions and interest rates all
as of January 1, 2003. The amount recognized as the asset retirement cost is
measured as of the date the asset retirement obligation was incurred. Cumulative
accretion on the asset retirement obligation, and accumulated depreciation on
the asset retirement cost, is recognized for the time period from the date the
asset retirement cost and liability would have been recognized had the
provisions of SFAS No. 143 been in effect at the date the liability was
incurred, through January 1, 2003. The difference, if any, between the amounts
to be recognized as described above and any associated amounts recognized in the
Company's balance sheet as of December 31, 2002 is recognized as a cumulative
effect of a change in accounting principle as of the date of adoption. The
effect of adopting SFAS No. 143 as of January 1, 2003 was not material, as
summarized in the table below, and is not separately recognized in the
accompanying Statement of Income.
Amount
(in millions)
Increase in carrying value of net property, plant and equipment:
Cost $ .4
Accumulated depreciation (.1)
Decrease in carrying value of previously-accrued closure and
post-closure activities .3
Asset retirement obligation recognized (.6)
-----
Net impact $ -
=====
The increase in the asset retirement obligations from January 1, 2003
($600,000) to December 31, 2003 ($800,000) is due to accretion expense and the
effects of currency translation. Accretion expense, which is reported as a
component of cost of sales in the accompanying statement of income, approximated
$100,000 for the year ended December 31, 2003. If the Company had adopted SFAS
No. 143 as of January 1, 2001, the asset retirement obligations would have been
approximately $500,000 at December 31, 2001.
Estimates of the ultimate cost to be incurred to settle the Company's asset
retirement obligations require a number of assumptions, are inherently difficult
to develop and the ultimate outcome may differ from current estimates. As
additional information becomes available, cost estimates will be adjusted as
necessary. It is possible that technological, regulatory or enforcement
developments, the results of studies or other factors could necessitate the
recording of additional liabilities.
Costs associated with exit or disposal activities. The Company adopted SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," on
January 1, 2003 for exit or disposal activities initiated on or after that date.
Under SFAS No. 146, costs associated with exit activities, as defined, that are
covered by the scope of SFAS No. 146 will be recognized and measured initially
at fair value, generally in the period in which the liability is incurred. Costs
covered by the scope of SFAS No. 146 include termination benefits provided to
employees, costs to consolidate facilities or relocate employees, and costs to
terminate contracts (other than a capital lease). Under prior GAAP, a liability
for such an exit cost is recognized at the date an exit plan is adopted, which
may or may not be the date at which the liability has been incurred. The effect
of adopting SFAS No. 146 as of January 1, 2003 was not material as the Company
was not involved in any exit or disposal activities covered by the scope of the
new standard as of such date.
Note 21 - Quarterly results of operations (unaudited):
Quarter ended
March 31 June 30 Sept. 30 Dec. 31
(In millions, except per share data)
Year ended December 31, 2002
Net sales $202.4 $ 226.9 $234.1 $211.8
Cost of sales 156.3 176.2 177.5 161.8
Net income $ 6.4 $ 14.0 $ 8.8 $ 7.6
Basic and diluted earnings per common share $ .13 $ .29 $ .18 $ .16
Year ended December 31, 2003
Net sales $253.0 $ 266.6 $242.9 $245.7
Cost of sales 188.4 197.6 177.4 175.8
Net income $ 9.4 $ 28.8 $ 16.6 $ 8.9
Basic and diluted earnings per common share
$ .20 $ .60 $ .35 $ .18
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.
Net income in the second quarter of 2002 included a one-time foreign
currency transaction gain of $6.3 million related to the extinguishments of
certain intercompany indebtedness. Net income in the second quarter 2002 also
included $2.0 million pretax of additional interest expense related to the early
extinguishments of the Company's 11.75% Senior Secured Notes.
Note 22 - Accounting principles not yet adopted:
The Company is required to comply with the consolidation requirements of
FASB Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51," as amended at March 31, 2004. While
the Company currently does not believe it has any involvement with any variable
interest entity (as that term is defined in FIN No. 46R) covered by the scope of
FIN No. 46R, the interpretation is complex and therefore the impact of adopting
the consolidation requirements of FIN No. 46R has not yet been definitively
determined.
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULES
To the Stockholders and Board of Directors of NL Industries, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated March 5, 2004, appearing on page F-2 of the 2003 Annual Report on
Form 10-K of NL Industries, Inc., also included an audit of the financial
statement schedules listed in the index on page F-1 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
Dallas, Texas
March 5, 2004
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31, 2002 and 2003
(In thousands)
2002 2003
---- ----
Current assets:
Cash and cash equivalents $ 1,034 $ 2,428
Restricted cash equivalents 50,798 14,725
Restricted marketable debt securities 9,670 6,147
Accounts and notes receivable 2,476 536
Receivable from subsidiaries 1,467 932
Prepaid expenses 1,055 709
Deferred income taxes 6,107 7,745
-------- -------
Total current assets 72,607 33,222
-------- -------
Other assets:
Marketable securities 31,056 52,741
Restricted marketable debt securities 6,740 4,284
Investment in subsidiaries 329,460 104,827
Note receivable from Kronos Worldwide, Inc. - 200,000
Other 2,327 331
Property and equipment, net 3,033 647
-------- ---------
Total other assets 372,616 362,830
-------- ---------
$445,223 $ 396,052
======== =========
Current liabilities:
Payable to affiliates $ 1,656 $ 12,429
Accounts payable and accrued liabilities 17,344 14,375
Income taxes 325 372
Accrued environmental costs 11,904 13,745
-------- ---------
Total current liabilities 31,229 40,921
-------- ---------
Noncurrent liabilities:
Notes payable to affiliates 44,600 22,320
Deferred income tax 64,509 75,406
Accrued environmental costs 7,989 26,510
Accrued pension cost 10,659 13,019
Accrued postretirement benefits cost 14,671 12,235
Other 6,239 4,727
-------- ---------
Total noncurrent liabilities 148,667 154,217
-------- ---------
Stockholders' equity 265,327 200,914
-------- ---------
$ 445,223 $ 396,052
========= =========
Contingencies (Note 3)
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Income
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
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Revenues and other income (expense):
Equity in income from continuing operations of subsidiaries $ 154,410 $ 68,911 $ 88,445
Interest and dividends 4,354 2,494 1,858
Interest income from subsidiaries 22,969 12,165 1,184
Securities transactions, net (1,133) (105) 2,737
Litigation settlements gains, net 11,730 5,225 823
Disposition of property & equipment 83 1 10,325
Other income, net 4,514 4,080 414
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196,927 92,771 105,786
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Costs and expenses:
General and administrative 13,831 35,431 54,154
Interest 58,263 34,217 909
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72,094 69,648 55,063
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Income before income taxes 124,833 23,123 50,723
Provision for income taxes (benefit) 3,426 (13,687) (12,939)
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Net income $121,407 $ 36,810 $ 63,662
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NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Cash Flows
Years ended December 31, 2001, 2002 and 2003
(In thousands)
2001 2002 2003
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Cash flows from operating activities:
Net income $ 121,407 $ 36,810 $ 63,662
Distributions from Kronos 30,500 111,000 -
Litigation settlement gains, net (10,307) - -
Noncash interest expense (income), net (3,113) 15,704 (869)
Deferred income taxes 7,498 (9,119) (2,807)
Equity in earnings of subsidiaries (154,410) (68,911) (88,445)
Securities transactions 1,133 105 (2,737)
Other, net 1,824 (1,899) (11,304)
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(5,468) 83,690 (42,500)
Net change in assets and liabilities 1,563 4,480 15,555
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Net cash provided (used) by operating activities
(3,905) 88,170 (26,945)
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Cash flows from investing activities:
Capital expenditures (13) (2) -
Repayment of loans to affiliates - 194,000 -
Change in restricted cash equivalents and restricted
marketable debt securities, net 18,539 16,622 42,744
Proceeds from disposition of property and equipment 20 9 12,420
Proceeds from disposition of marketable equity securities 4 - -
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Net cash provided by investing activities 18,550 210,629 55,164
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Cash flows from financing activities:
Indebtedness - principal payments - (194,000) -
Loans from affiliates, net 46,678 64,600 2,620
Dividends paid (39,758) (157,978) (31,183)
Treasury stock:
Purchased (15,502) (21,254) -
Reissued 718 454 1,738
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Net cash used by financing activities (7,864) (308,178) (26,825)
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Net change during the year from operating investing and
financing activities 6,781 (9,379) 1,394
Balance at beginning of year 3,632 10,413 1,034
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Balance at end of year $ 10,413 $ 1,034 $ 2,428
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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. and the
related Notes to Consolidated Financial Statements are incorporated herein by
reference. The accompanying financial statements reflect NL Industries, Inc.'s
investment in Kronos Worldwide, Inc. and NL's other subsidiaries on the equity
method of accounting.
Note 2 - Investment in and advances to subsidiaries:
December 31,
2002 2003
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(In thousands)
Current:
Receivable from:
Kronos - income taxes $ 417 $ 384
EWI - income taxes 350 89
153506 Canada 392 405
TIMET 84 50
CompX 20 -
Other 204 4
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$ 1,467 $ 932
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Payable to:
Kronos - income taxes 978 11,722
Tremont 281 445
EMS 79 217
Other 318 45
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$ 1,656 $ 12,429
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Noncurrent:
Notes receivable from Kronos $ - $200,000
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Notes payable to Kronos $ 44,600 $ -
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Notes payable to EMS Financial $ - $ 22,320
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During 2002 the Company completed certain capital restructuring
transactions whereby Kronos distributed to the Company certain affiliate notes
receivable, net and the Company recorded a corresponding decrease in its
investment in Kronos.
In December 2003, NL completed the distribution of approximately 48.8% of
the outstanding shares of Kronos' common stock to NL stockholders in the form of
a pro-rata dividend. As part of the plan immediately prior to the distribution
of shares of Kronos common stock, Kronos paid a $200 million dividend to NL in
the form of a long-term note payable. The $200 million long-term note payable to
NL is unsecured and bears interest at 9% per annum, with interest payable
quarterly and all principal due in 2010.
December 31,
2002 2003
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(In thousands)
Investment in:
Kronos $ 313,479 $ 81,588
Other subsidiaries 15,981 23,239
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$ 329,460 $ 104,827
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Years ended December 31,
2001 2002 2003
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(In thousands)
Equity in income from continuing operations of subsidiaries:
Kronos $ 150,742 $ 66,264 $ 86,642
Other subsidiaries 3,668 2,647 1,803
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$ 154,410 $ 68,911 $ 88,445
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Note 3 - Long-term debt:
The Company's $194 million of 11.75% Senior Secured Notes at December 31,
2001 were redeemed at par value in 2002.
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at charged to Balance
beginning costs and Net Currency at end
Description of year expenses deductions translation Other of year
- --------------------------------- --------- --------- ---------- ----------- ----- -------
Year ended December 31, 2001:
Allowance for doubtful accounts $ 2,222 $ 485 $ (245) $ (104) $ - $ 2,358
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Amortization of intangibles $ - $ - $ - $ - $ - $ -
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Year ended December 31, 2002:
Allowance for doubtful accounts $ 2,358 $ 481 $ (533) $ 299 $ - $ 2,605
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Amortization of intangibles $ - $ 372 $ - $ - $ - $ 372
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Year ended December 31, 2003:
Allowance for doubtful accounts $ 2,605 $ 367 $ (439) $ 387 $ - $ 2,920
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Amortization of intangibles $ 372 $ 371 $ - $ - $ - $ 743
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Note - Certain information has been omitted from this Schedule because it is
disclosed in the notes to the Consolidated Financial Statements.