SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2004 Commission file number 1-640
--------------------- -------
NL INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New Jersey 13-5267260
- ------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
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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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No
--- ---
Number of shares of the Registrant's common stock outstanding on October 29,
2004: 48,435,484.
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 2003 and September 30, 2004 3
Consolidated Statements of Income -
Three months and nine months ended
September 30, 2003 and 2004 5
Consolidated Statements of Comprehensive Income -
Nine months ended September 30, 2003 and 2004 6
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 2004 7
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2003 and 2004 8
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 30
Item 4. Controls and Procedures 46
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 48
Item 6. Exhibits and Reports on Form 8-K 48
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, September 30,
2003 2004
------------ -------------
Current assets:
Cash and cash equivalents $ 89,525 $ 51,542
Restricted cash and cash equivalents 19,029 7,426
Restricted marketable debt securities 6,147 9,231
Accounts and other receivables 182,557 28,806
Refundable income taxes 37,712 -
Receivables from affiliates 361 203
Inventories 292,337 26,594
Prepaid expenses 7,097 1,724
Deferred income taxes 12,718 9,771
---------- ----------
Total current assets 647,483 135,297
---------- ----------
Other assets:
Marketable equity securities 70,487 70,877
Restricted marketable debt securities 6,870 5,615
Investment in Kronos Worldwide, Inc. - 202,321
Investment in TiO2 manufacturing joint venture 129,011 -
Receivable from affiliates 14,000 43,423
Deferred income taxes 7,033 540
Goodwill 52,715 52,371
Other 30,018 4,026
---------- ----------
Total other assets 310,134 379,173
---------- ----------
Property and equipment:
Land 37,727 5,206
Buildings 208,077 26,359
Equipment 886,846 121,965
Mining properties 83,183 19,482
Construction in progress 10,302 1,559
---------- ----------
1,226,135 174,571
Less accumulated depreciation and amortization 707,207 100,342
---------- ----------
Net property and equipment 518,928 74,229
---------- ----------
$1,476,545 $ 588,699
========== ==========
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30,
2003 2004
------------ -------------
Current liabilities:
Current maturities of long-term debt $ 288 $ 38
Accounts payable 111,777 13,232
Accrued liabilities 96,539 23,331
Accrued environmental costs 19,627 17,283
Payable to affiliates 19,537 10,135
Income taxes 12,726 2,518
Deferred income taxes 3,941 24,600
---------- ----------
Total current liabilities 264,435 91,137
---------- ----------
Noncurrent liabilities:
Long-term debt 382,451 91
Accrued pension costs 81,180 12,816
Accrued postretirement benefits costs 23,411 10,974
Accrued environmental costs 57,854 53,538
Deferred income taxes 229,336 44,501
Other 19,474 5,713
---------- ----------
Total noncurrent liabilities 793,706 127,633
---------- ----------
Minority interest 135,215 60,643
---------- ----------
Stockholders' equity:
Common stock 8,355 6,052
Additional paid-in capital 786,885 469,668
Retained earnings 87,900 -
Accumulated other comprehensive income (loss):
Marketable securities 23,323 23,518
Currency translation (152,623) (153,743)
Pension liabilities (36,209) (36,209)
Treasury stock (434,442) -
---------- ----------
Total stockholders' equity 283,189 309,286
---------- ----------
$1,476,545 $ 588,699
========== ==========
Commitments and contingencies (Notes 14 and 17)
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
2003 2004 2003 2004
---- ---- ---- ----
Net sales $ 295,465 $ 55,987 $ 915,795 $ 724,914
Cost of sales 220,303 43,490 690,366 559,758
--------- --------- --------- ---------
Gross margin 75,162 12,497 225,429 165,156
Selling, general and administrative expense 36,157 6,505 110,542 91,725
Other operating income (expense):
Currency transaction gains (losses), net (525) (117) (4,990) 754
Disposition of property and equipment 7,205 - 8,260 (2)
Restructuring expense (3,528) - (3,528) -
Noncompete agreement income - - 333 -
Legal settlement gains - 10 650 505
Other income 71 89 332 6,541
Corporate expense (9,721) (3,719) (48,238) (15,011)
--------- --------- --------- ---------
Income from operations 32,507 2,255 67,706 66,218
Equity in earnings of Kronos Worldwide, Inc. - 5,005 - 5,005
Other income (expense):
Trade interest income 240 15 687 495
Interest and dividend income from affiliates 456 4,662 1,408 5,518
Other interest income 330 213 1,164 961
Securities transactions, net (54) (33) 2,398 (58)
Interest expense (8,638) (86) (25,653) (18,253)
--------- --------- --------- ---------
Income before income taxes and minority interest 24,841 12,031 47,710 59,886
Income tax expense (benefit) 8,612 2,231 (7,765) (275,713)
Minority interest in after-tax earnings (105) 1,266 325 140,619
--------- --------- --------- ---------
Net income $ 16,334 $ 8,534 $ 55,150 $ 194,980
========= ========= ========= =========
Basic and diluted net income per share $ .34 $ .18 $ 1.15 $ 4.03
========= ========= ========= =========
Weighted-average shares used in the calculation of net
income per share:
Basic 47,717 48,395 47,702 48,299
Dilutive impact of stock options 61 64 57 88
--------- --------- --------- ---------
Diluted 47,778 48,459 47,759 48,387
--------- --------- --------- ---------
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Nine months ended September 30, 2003 and 2004
(In thousands)
2003 2004
---- ----
Net income $ 55,150 $ 194,980
--------- ---------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment:
Unrealized holding gains arising
during the period 8,217 195
Reclassification for realized net loss
included in net income (1,474) -
--------- ---------
6,743 195
Currency translation adjustment 22,013 (1,120)
--------- ---------
Total other comprehensive income (loss) 28,756 (925)
--------- ---------
Comprehensive income $ 83,906 $ 194,055
========= =========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 2004
(In thousands)
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, 2003,
as originally reported $8,355 $777,819 $ 16,023 $ 23,323 $(153,955) $ (36,209) $(434,442) $200,914
Adjustment to reflect
consolidation of CompX
International Inc. - 9,066 71,877 - 1,332 - - 82,275
------ -------- -------- --------- --------- --------- --------- --------
Balance at December 31, 2003,
as adjusted 8,355 786,885 87,900 23,323 (152,623) (36,209) (434,442) 283,189
Net income - - 194,980 - - - - 194,980
Distribution of shares of
Kronos Worldwide, Inc.
common stock - - (6,340) - - - - (6,340)
Income tax on distribution - - (1,901) - - - - (1,901)
Other comprehensive income
(loss), net - - - 195 (1,120) - - (925)
Issuance of common stock 4 503 - - - - - 507
Acquisition of 10,374,000
shares of CompX International
Inc. common stock - (102,963) (65,615) - - - - (168,578)
Treasury stock:
Reissued - - - - - - 8,354 8,354
Retired (2,307) (214,757) (209,024) - - - 426,088 -
------ -------- -------- --------- --------- --------- --------- --------
Balance at September 30, 2004 $6,052 $469,668 $ - $ 23,518 $(153,743) $ (36,209) $ - $309,286
====== ======== ======== ========= ========= ========= ========= ========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2003 and 2004
(In thousands)
2003 2004
---- ----
Cash flows from operating activities:
Net income $ 55,150 $194,980
Depreciation and amortization 40,248 32,724
Deferred income taxes (590) (287,609)
Minority interest 325 140,619
Net (gains) losses from securities transactions (2,398) 58
Disposition of property and equipment (8,260) 2
Other, net (4,735) 1,547
Equity in Kronos Worldwide, Inc. - (5,005)
Distributions from Kronos Worldwide, Inc. - 6,095
Distributions from TiO2 manufacturing joint venture, net 2,175 8,300
Change in assets and liabilities:
Accounts and other receivables (32,683) (50,507)
Insurance receivable 2,505 -
Inventories 25,045 51,113
Prepaid expenses (340) 1,309
Accrued environmental costs 28,193 (6,660)
Accounts payable and accrued liabilities (29,172) (34,338)
Income taxes 4,367 33,655
Other, net 2,003 (3,391)
--------- ---------
Net cash provided by operating activities 81,833 82,892
--------- ---------
Cash flows from investing activities:
Capital expenditures (31,733) (13,602)
Collection of loans to affiliates 2,000 2,000
Change in restricted cash equivalents and restricted
marketable debt securities, net 1,053 5,995
Proceeds from disposition of property and equipment 10,638 2,218
Other, net 695 -
--------- ---------
Net cash used in investing activities (17,347) (3,389)
--------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings 17,106 102,221
Principal payments (47,874) (128,081)
Deferred financing costs paid (416) (28)
Cash dividends paid (28,625) -
Distributions to minority interest (592) (12,036)
Proceeds from issuance of stock:
NL common stock 701 8,793
CompX common stock - 499
Capital transactions with affiliates (1,207) -
Other, net (14) -
--------- ---------
Net cash used in financing activities (60,921) (28,632)
--------- ---------
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 2003 and 2004
(In thousands)
2003 2004
---- ----
Cash and cash equivalents - net change from:
Operating, investing and financing activities $ 3,565 $ 50,871
Currency translation 3,351 (420)
Kronos cash balance at June 30, 2004 - (88,434)
Cash and cash equivalents at beginning of period 70,498 89,525
--------- ---------
Cash and cash equivalents at end of period $ 77,414 $ 51,542
========= =========
Supplemental disclosures:
Cash paid (received) for:
Interest, net of amounts capitalized $ 16,203 $ 17,062
Income taxes, net (10,224) (17,807)
Net assets of Kronos Worldwide, Inc.
deconsolidated as of July 1, 2004:
Cash and cash equivalents $ 88,434
Accounts and other receivables 200,845
Inventories 209,816
Other current assets 9,344
Investment in TiO2 manufacturing joint venture 120,711
Net property and equipment 413,171
Other assets 209,105
Current liabilities (156,701)
Long-term debt (346,682)
Note payable to affiliates (200,000)
Accrued pension costs (66,227)
Accrued postretirement benefits costs (10,677)
Deferred income taxes (50,730)
Other liabilities (13,408)
Minority interest (201,842)
---------
Net assets $ 205,159
=========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
At September 30, 2004, NL Industries, Inc. (NYSE: NL) conducts its
component products operations through its 68% owned subsidiary CompX
International, Inc. (NYSE: CIX). NL also held approximately 49% of the
outstanding common stock of Kronos Worldwide, Inc. (NYSE: KRO) at September 30,
2004. At September 30, 2004, (i) Valhi and a wholly-owned subsidiary of Valhi
held approximately 83% of NL's outstanding common stock, (ii) Contran
Corporation and its subsidiaries held approximately 90% of Valhi's outstanding
common stock, (iii) Valhi and a wholly-owned subsidiary of Valhi held an
additional 45% of Kronos' outstanding common stock and (iv) Titanium Metals
Corporation ("TIMET") (NYSE:TIE), an affiliate of Valhi, held an additional 15%
of CompX's outstanding common stock. Substantially all of Contran's outstanding
voting stock is held by trusts established for the benefit of certain children
and grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee, or
is held by Mr. Simmons or persons or other entities related to Mr. Simmons. Mr.
Simmons, the Chairman of the Board of Valhi, Contran and the Company, may be
deemed to control each of such companies.
On September 24, 2004, the Company completed the acquisition of 10,374,000
shares of CompX common stock, representing approximately 68% of the outstanding
shares of CompX common stock. The CompX common stock was purchased from Valhi
and Valcor, a wholly-owned subsidiary of Valhi, at a purchase price of $16.25
per share, or an aggregate of approximately $168.6 million. The purchase price
was paid by NL's transfer to Valhi and Valcor of $168.6 million of NL's $200
million long-term note receivable from Kronos. The acquisition was approved by a
special committee of NL's board of directors comprised of directors who were not
affiliated with Valhi, and such special committee retained their own financial
advisors who rendered an opinion to the special committee that the purchase
price was fair, from a financial point of view, to NL. NL's acquisition was
accounted for under accounting principles generally accepted in the United
States of America ("GAAP") as a transfer of net assets among entities under
common control, and accordingly resulted in a change in reporting entity. The
Company has retroactively restated its consolidated financial statements to
reflect the consolidation of CompX for all periods presented. Any excess of the
aggregate $168.6 million principal amount of NL's note receivable Kronos
transferred to Valhi and Valcor over the net carrying vlue of Valhi's and
Valcor's investment in CompX is accounted for as a reduction of NL's
consolidated stockholders' equity.
In March 2004, the Company paid its $.20 per share regular quarterly
dividend in the form of shares of Kronos common stock in which approximately
345,000 shares (approximately .7% of Kronos' outstanding common stock) were
distributed to NL stockholders in the form of a pro-rata dividend. The Company
paid its next regular quarterly dividend of $.20 per share in July 2004, in
which approximately 322,000 Kronos shares (approximately .7% of Kronos'
outstanding common stock) were distributed, and the Company paid its regular
third quarter dividend of $.20 per share in September 2004 in which
approximately 299,000 Kronos shares (approximately .6% of Kronos' outstanding
common stock) were distributed. The effect of the second and third 2004
quarterly distributions were recognized by the Company in the third quarter of
2004. The Company's distribution of such shares of Kronos common stock 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
distributed on the date of distribution and the Company's adjusted tax basis in
such shares at the date of distribution. Pursuant to the Company's tax sharing
agreement with Valhi, the Company is not required to pay taxes on the tax
liability generated for the shares of Kronos distributed to Valhi and its
wholly-owned subsidiary. The Company is required to recognize a tax liability
with respect to the Kronos shares distributed to NL stockholders other than
Valhi and its wholly-owned subsidiary, and such tax liability was approximately
$1.9 million in the aggregate for the three dividends paid in 2004. In
accordance with GAAP, the net carrying value of such shares of Kronos
distributed ($6.3 million in the aggregate at the respective distribution dates)
and the $1.9 million aggregate tax liability have been recognized as a reduction
of the Company's stockholders' equity and charged directly to retained earnings.
Following the Company's July 2004 dividend in the form of shares of Kronos
common stock distributed to NL shareholders, the Company's ownership of Kronos
was reduced to less than 50%. Consequently, effective July 1, 2004 the Company
ceased to consolidate Kronos' financial position, results of operations and cash
flows and the Company commenced accounting for its interest in Kronos by the
equity method. The Company continues to report Kronos as a consolidated
subsidiary through June 30, 2004, including the consolidation of Kronos' results
of operations and cash flows for the first two quarters of 2004.
The consolidated balance sheet of NL at December 31, 2003 has been
condensed from the Company's audited consolidated financial statements at that
date, as adjusted for the effect of the CompX acquisition discussed above. The
consolidated balance sheet at September 30, 2004, and the consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for the interim periods ended September 30, 2003 and 2004, have been prepared by
the Company, without audit, in accordance with GAAP. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the consolidated financial position, results of
operations and cash flows have been made.
The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted, and certain prior year
amounts have been reclassified to conform to the current year presentation. The
accompanying consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
2003 (the "2003 Annual Report") and the Annual Report on Form 10-K of CompX for
the year ended December 31, 2003 (the "CompX Annual Report").
The Company complied with the consolidation requirements of FASB
Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51," as amended, as of March 31, 2004. See Note 18.
As disclosed in the 2003 Annual Report, the Company accounts for
stock-based employee compensation in accordance with Accounting Principles Board
Opinion ("APBO") No. 25, "Accounting for Stock Issued to Employees," and its
various interpretations. Under APBO No. 25, no compensation cost is generally
recognized for fixed stock options in which the exercise price is greater than
or equal to the market price on the grant date. Prior to 2003, NL commenced
accounting for its stock options using the variable accounting method of APBO
No. 25, which requires the intrinsic value of all unexercised stock options
(including stock options with an exercise price at least equal to the market
price on the date of grant) to be accrued as an expense, with subsequent
increases (decreases) in NL's market price resulting in recognition of
additional compensation expense (income). Net compensation income recognized by
the Company and its consolidated subsidiaries in accordance with APBO No. 25 was
approximately $400,000 in each of the third quarter and first nine months of
2003 and net compensation cost recognized by the Company was $100,000 and $1.2
million in the third quarter and first nine months of 2004, respectively.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in the third quarter and first
nine months of 2003 and 2004 if the Company and its subsidiaries and affiliates
had each elected to account for their respective stock-based employee
compensation related to stock options in accordance with the fair value-based
recognition provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," for all awards granted
subsequent to January 1, 1995.
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
2003 2004 2003 2004
---- ---- ---- ----
(In millions, except per share amounts)
Net income as reported $16.3 $ 8.5 $55.2 $195.0
Adjustments, net of applicable income tax effects and
minority interest, of stock-based employee
compensation determined under:
APBO No. 25 (.3) .4 (.3) .8
SFAS No. 123 (.3) (.1) (1.0) (.4)
----- ----- ----- ------
Pro forma net income $15.7 $ 8.8 $53.9 $195.4
===== ===== ===== ======
Basic and diluted net income per share:
As reported $ .34 $ .18 $1.15 $ 4.03
Pro forma $ .33 $ .18 $1.13 $ 4.04
Note 2 - Business segment information
% owned at
Business segment Entity September 30, 2004
- -------------------- ------------------------ ------------------------
Chemicals Kronos Worldwide, Inc. 49%
Component products CompX International Inc. 68%
As discussed in Note 1, on September 24, 2004, the Company purchased
10,374,000 shares of CompX common stock, representing approximately 68% of the
outstanding shares of CompX common stock, from Valhi and a wholly-owned
subsidiary of Valhi. Because Valhi, NL and CompX are all entities under the
common control of Contran, the Company's acquisition of the shares of CompX
common stock results in a change in reporting entity and the Company has
retroactively restated its consolidated financial statements to reflect the
consolidation of CompX for all periods presented.
As a result of the restatement of the Company's consolidated financial
statements to reflect the consolidation of CompX's results of operations, the
Company has, for certain periods presented, more than one operating segment (as
that term is defined in SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information"). Accordingly, the following information is
presented to comply with the disclosure requirements of SFAS No. 131, including
disclosures with respect to each year in the three-year period ended December
31, 2003.
The Company is organized based on its operating subsidiaries. The Company's
operating segments are defined as components of our consolidated operations
about which separate financial information is available that is regularly
evaluated by the chief operating decision maker in determining how to allocate
resources and in assessing performance. The Company's chief operating decision
maker is Mr. Harold C. Simmons. Each operating segment is separately managed,
and each operating segment represents a strategic business unit offering
different products.
The Company's reportable operating segments are comprised of the component
products business conducted by CompX and, for all periods through June 30, 2004,
the chemicals business conducted by Kronos. As discussed in Note 1, effective
July 1, 2004, the Company ceased to consolidate Kronos and commenced accounting
for its interest in Kronos by the equity method.
CompX produces and sells component products (precision ball-bearing slides,
security products and ergonomic computer support systems) for office furniture,
computer related applications and a variety of other applications. CompX has
production facilities in North America, Europe and Asia.
Kronos manufactures and sells titanium dioxide pigments ("TiO2"). TiO2 is
used to impart whiteness, brightness and opacity to a wide variety of products,
including paints, plastics, paper, fibers and ceramics. Kronos has production
facilities located in North America and Europe. Kronos also owns a one-half
interest in a TiO2 production facility located in Louisiana.
The Company evaluates segment performance based on segment operating
income. Segment profit is defined as income before income taxes, minority
interest, extraordinary items, interest expense, certain nonrecurring items and
certain general corporate items. Corporate items excluded from segment profit
include corporate expense, interest and dividend income not attributable to the
component products business and the chemicals business, litigation settlement
gains, securities transaction gains and losses and losses from the disposal of
long-lived assets outside the ordinary course of business. The accounting
policies of the respective business segments are the same as those described in
the Company's Consolidated Financial Statements in the Company's 2003 Annual
Report.
Interest income included in the calculation of segment profit is not
material. Amortization of deferred financing costs is included in interest
expense. There are no intersegment sales or any significant intersegment
transactions.
Segment assets are comprised of all assets attributable to each reporting
operating segment. The Company's investment in the TiO2 manufacturing joint
venture is included in the chemicals business segment assets. Corporate assets
are not attributable to any operating segment and consist principally of cash
and cash equivalents, restricted cash equivalents, marketable debt and equity
securities and loans to affiliates. Substantially all corporate assets are
attributable to NL.
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.
At December 31, 2003, the net assets of non-U.S. subsidiaries included in
consolidated net assets approximated $240 million (2002 - $203 million).
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
2003 2004 2003 2004
---- ---- ---- ----
(In millions)
Net sales:
Chemicals $ 242.9 $ - $ 762.5 $ 559.1
Component products 52.6 56.0 153.3 165.8
------- ------- ------- -------
Total net sales $ 295.5 $ 56.0 $ 915.8 $ 724.9
Segment profit (loss):
Chemicals $ 35.4 $ - $ 105.2 $ 66.4
Component products (.4) 5.8 1.8 14.7
------- ------- ------- -------
Total segment profit 35.0 5.8 107.0 81.1
General corporate items:
Interest and dividend income .8 4.9 2.6 6.5
Securities transaction gains, net (.1) - 2.4 (.1)
Gain on disposal of fixed assets 7.2 - 8.3 -
Legal settlement gains, net - - .7 .5
Noncompete agreement income - - .3 -
Other income .2 .1 .3 .1
General corporate expenses, net (9.7) (3.7) (48.2) (15.0)
Interest expense (8.6) (.1) (25.7) (18.2)
------- ------- ------- -------
24.8 7.0 47.7 54.9
Equity in Kronos - 5.0 - 5.0
------- ------- ------- -------
Income before income taxes and minority interest $ 24.8 $ 12.0 $ 47.7 $ 59.9
======= ======= ======= =======
Years ended December 31,
------------------------------------------
2001 2002 2003
---- ---- ----
(In millions)
Net sales:
Chemicals $ 835.1 $ 875.2 $1,008.2
Component products 211.4 196.1 207.5
-------- -------- --------
Total net sales $1,046.5 $1,071.3 $1,215.7
======== ======== ========
Segment profit:
Chemicals $ 169.2 $ 96.5 $ 137.4
Component products 15.6 5.3 3.6
-------- -------- --------
Total segment profit 184.8 101.8 141.0
General corporate items:
Interest and dividend income 9.4 5.8 3.4
Legal settlement gains, net 11.7 5.2 .8
Noncompete agreement income 4.0 4.0 .3
Securities transactions, net (1.1) (.1) 2.4
Gain on disposal of fixed assets - - 10.3
Insurance recoveries, net 17.5 - -
Foreign currency transaction gain - 6.3 -
General corporate expenses, net (25.9) (37.9) (57.4)
Interest expense (30.4) (31.6) (34.3)
-------- -------- --------
Income before income taxes and
minority interest $ 170.0 $ 53.5 $ 66.5
======== ======== ========
Years ended December 31,
------------------------------------------
2001 2002 2003
---- ---- ----
(In millions)
Net sales - point of origin:
United States $ 367.2 $ 378.5 $ 404.9
Germany 398.5 404.3 510.1
Belgium 126.8 123.8 150.7
Norway 102.8 111.8 131.5
Netherlands 33.3 31.3 35.3
Other Europe 82.3 89.6 110.4
Canada 231.4 229.2 249.6
Taiwan 11.7 14.7 13.4
Eliminations (307.5) (311.9) (390.2)
-------- -------- --------
$1,046.5 $1,071.3 $1,215.7
======== ======== ========
Net sales - point of destination:
United States $ 388.8 $ 398.1 $ 423.6
Europe 462.4 489.9 605.0
Canada 82.5 83.0 85.5
Asia and other 112.8 100.3 101.6
-------- -------- --------
$1,046.5 $1,071.3 $1,215.7
======== ======== ========
Years ended December 31,
------------------------------------------
2001 2002 2003
---- ---- ----
(In millions)
Depreciation and amortization:
Chemicals $ 28.9 $ 32.2 $ 39.4
Component products 14.9 13.0 14.8
Corporate .7 1.0 .7
-------- -------- --------
$ 44.5 $ 46.2 $ 54.9
======== ======== ========
Capital expenditures:
Chemicals $ 53.7 $ 32.6 $ 35.3
Component products 13.3 12.7 8.9
Corporate - - .1
-------- -------- --------
$ 67.0 $ 45.3 $ 44.3
======== ======== ========
December 31,
------------------------------------------
2001 2002 2003
---- ---- ----
(In millions)
Total assets:
Operating segments:
Chemicals $ 910.1 $ 988.5 $1,121.9
Component products 225.9 203.1 212.4
Corporate and eliminations 241.0 123.0 142.2
-------- -------- --------
$1,377.0 $1,314.6 $1,476.5
======== ======== ========
Net property and equipment:
United States $ 55.9 $ 52.6 $ 48.2
Germany 182.4 213.2 252.4
Canada 78.1 77.8 87.0
Norway 38.5 49.7 50.8
Belgium 46.8 54.6 64.9
Netherlands 7.3 10.0 9.6
Taiwan 5.4 5.9 5.7
Other .4 .2 .3
-------- -------- --------
$ 414.8 $ 464.0 $ 518.9
======== ======== ========
Component products segment profit, as presented above, may differ from
amounts separately reported by CompX because the Company defines segment profit
differently than CompX.
Note 3 - Accounts and other receivables:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Trade receivables $173,783 $ 29,149
Recoverable VAT and other receivables 12,768 625
Allowance for doubtful accounts (3,994) (968)
-------- --------
$182,557 $ 28,806
======== ========
Note 4 - Inventories:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Raw materials:
Chemicals $ 61,959 $ -
Component products 6,170 7,180
-------- --------
68,129 7,180
-------- --------
In process products:
Chemicals 19,855 -
Component products 10,852 10,757
-------- --------
30,707 10,757
-------- --------
Finished products:
Chemicals 147,270 -
Component products 9,166 8,578
-------- --------
156,436 8,578
-------- --------
Supplies 37,065 79
-------- --------
$292,337 $ 26,594
======== ========
Note 5 - Marketable equity securities:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Valhi common stock $ 70,450 $ 70,779
Other 37 98
-------- --------
$ 70,487 $ 70,877
======== ========
At September 30, 2004, the Company owned approximately 4.7 million shares
of Valhi common stock with a quoted market price of $15.03 per share (December
31, 2003 quoted market price - $14.96 per share). The aggregate cost basis of
such Valhi shares is approximately $34.6 million.
Note 6 - Investment in Kronos Worldwide, Inc.:
At September 30, 2004, the Company held 24.1 million shares of Kronos with
a quoted market price of $39.70 per share, or an aggregate market value of $956
million.
At September 30, 2004, Kronos reported total assets of $1.3 billion and
stockholders' equity of $412.5 million. Kronos' total assets at September 30,
2004 include current assets of $541 million, property and equipment of $419.6
million and an investment in a TiO2 manufacturing joint venture of $119.9
million. Kronos' total liabilities at September 30, 2004 include current
liabilities of $184.4 million, long-term debt of $350.4 million, accrued OPEB
and pension costs aggregating $76.4 million, deferred income taxes of $51.8
million and long-term notes payable to NL, Valhi and Valcor aggregating $200.0
million, including $31.4 million payable to NL. See Note 16.
During the third quarter of 2004, Kronos reported net sales of $286.1
million, income from operations of $28.9 million and net income of $10.0
million. Kronos' results of operations for the first six months of 2004, and for
the third quarter and first nine months of 2003, are included in the Company's
consolidated results of operations.
Note 7 - Other noncurrent assets:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Deferred financing costs, net $ 10,417 $ 47
Unrecognized net pension obligations 13,747 -
Intangible asset, net 3,804 3,341
Other 2,050 638
-------- --------
$ 30,018 $ 4,026
======== ========
Note 8 - Accrued liabilities:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Employee benefits $ 46,028 $13,768
Interest 206 49
Restructuring 3,223 -
Other 47,082 9,514
-------- --------
$ 96,539 $ 23,331
======== ========
In 2003, CompX recorded a $3.3 million charge related to the restructuring
its Thomas Regout operations. The charge represents severance to be paid to
approximately 100 terminated employees. At September 30, 2004 all severance
benefits had been paid by the Company.
Note 9 - Long-term debt:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Kronos International, Inc. and subsidiaries:
Senior Secured Notes $356,136 $ -
Other 603 -
-------- --------
356,739 -
-------- --------
CompX International Inc. and subsidiaries:
Revolving bank credit facility 26,000 -
Capital lease obligations - 129
-------- --------
26,000 129
-------- --------
382,739 129
Less current maturities 288 38
-------- --------
$382,451 $ 91
======== ========
During the first quarter of 2004, certain of Kronos International, Inc.'s
("KII") operating subsidiaries in Europe borrowed a net Euro 26 million ($32
million when borrowed) under the European revolving credit facility at an
interest rate of 3.8%. Such amounts were repaid in the second quarter of 2004.
Note 10 - Other noncurrent liabilities:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Employee benefits $ 4,849 $ -
Insurance 4,331 2,679
Other 10,294 3,034
-------- --------
$ 19,474 $ 5,713
======== ========
Note 11 - Minority interest:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Minority interest in net assets:
Kronos Worldwide, Inc. $ 77,763 $ -
CompX International Inc. 48,424 51,566
Other subsidiaries 9,028 9,077
-------- --------
$135,215 $ 60,643
======== ========
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
2003 2004 2003 2004
---- ---- ---- ----
(In thousands)
Minority interest in net earnings:
Kronos Worldwide, Inc. $ - $ - $ - $137,271
CompX International Inc. (123) 1,229 149 2,754
Other subsidiaries 18 37 176 594
------- ------- ------- --------
$ (105) $ 1,266 $ 325 $140,619
======= ======= ======= ========
As discussed in Note 1, effective July 1, 2004, the Company ceased to
consolidate Kronos and commenced accounting for its interest in Kronos by the
equity method. Accordingly, commencing July 1, 2004, the Company ceased to
report minority interest in Kronos' net assets and net earnings.
Note 12 - Treasury stock
During the third quarter of 2004, the Company cancelled approximately 18.5
million shares of its common stock that previously had been held in treasury.
The aggregate $426.1 million cost of such treasury shares was allocated to
common stock at par value, additional paid in capital and retained earnings in
accordance with GAAP. Such cancellation had no impact on the net NL shares
outstanding for financial reporting purposes.
Note 13 - Other income:
Nine months ended
September 30,
------------------------
2003 2004
---- ----
(In thousands)
Contract dispute settlement $ - $ 6,289
Other 332 757
------ -------
$ 332 $ 7,046
====== =======
The contract dispute settlement relates to Kronos' settlement with a
customer. As part of the settlement, the customer agreed to make payments to
Kronos through 2007 aggregating $7.3 million. The $6.3 million gain recognized
represents the present value of the future payments to be paid by the customer
to Kronos. Of such $7.3 million, $1.5 million was paid to Kronos in the second
quarter of 2004, $1.75 million is due in each of the second quarter of 2005 and
2006 and $2.25 million is due in the second quarter of 2007. At September 30,
2004, the present value of the remaining amounts due to be paid to Kronos
aggregated approximately $5.0 million, of which $1.7 million is included in
accounts receivable and $3.3 million is included in other noncurrent assets.
Note 14 - Income tax benefit:
Nine months ended
September 30,
------------------------
2003 2004
---- ----
(In millions)
Expected tax expense $ 16.7 $ 21.0
Change in deferred income tax valuation (285.4)
allowance, net (1.1)
Tax contingency reserve adjustments, net - (13.1)
Refund of prior year income taxes (24.6) (3.1)
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies .5 (.5)
Non-U.S. tax rates .1 (.1)
U.S. state income taxes, net .4 .3
Nondeductible expenses 2.3 1.9
Other, net (2.1) 3.3
------ -------
$ (7.8) $(275.7)
====== =======
Certain of the Company's and Kronos' 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 NL's majority-owned subsidiary's, NL Environmental Management
Services, Inc. ("EMS"), 1998 U.S. federal income tax returns are being
examined by the U.S. tax authorities, and NL and EMS have granted
extensions of the statute of limitations for assessments of tax with
respect to their 1998, 1999 and 2000 income tax returns until September 30,
2005. During the course of the examination, the IRS proposed 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 the initiative, a final settlement
with the IRS is to be reached through expedited negotiations and, if
necessary, through a specified arbitration procedure. NL has reached an
agreement with the IRS concerning the settlement of this matter pursuant to
which, among other things, the Company agreed to pay approximately $24
million, including interest, up front as a partial payment of the
settlement amount (which amount is expected to be paid in the next 12
months and is classified as a current liability at September 30, 2004), and
NL will be required to recognize the remaining settlement amount in its
taxable income over the 15 year time period beginning in 2004. NL has
signed the settlement agreement that was prepared by the IRS. The IRS will
sign the settlement agreement after certain procedural matters are
concluded, which procedural matters both NL and its outside legal counsel
believe are perfunctory. NL had previously provided accruals to cover its
estimated additional tax liability (and related interest) concerning this
matter. As a result of the settlement, NL has decreased its previous
estimate of the amount of additional income taxes and interest it will be
required to pay, and NL recognized a $12.6 million tax benefit in the
second quarter of 2004 related to the revised estimate. In addition, during
the second quarter of 2004, the Company recognized a $30.5 million tax
benefit related to the reversal of a deferred income tax asset valuation
allowance related to certain tax attributes of EMS which NL believes now
meet the "more-likely-than-not" recognition criteria. A majority of the
deferred income tax asset valuation allowance relates to net operating loss
carryforwards of EMS. As a result of the settlement agreement, NL (which
previously was not allowed to utilize such net operating loss carryforwards
of EMS) utilized such carryforwards in its 2003 taxable year, eliminating
the need for a valuation allowance related to such carryforwards. The
remainder of the deferred income tax asset valuation allowance relates to
deductible temporary differences associated with accrued environmental
obligations of EMS which NL now believes meet the "more-likely-than-not"
recognition criteria since, as a result of the settlement agreement, such
obligations and the related tax deductions will be included in NL's taxable
income.
o Kronos 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 ($7 million at September 30,
2004). 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 Kronos' 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). Kronos believes
the proposed assessment is substantially without merit, and Kronos has
filed a written response.
o The Norwegian tax authorities have notified Kronos of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million at
September 30, 2004) relating to the years 1998 to 2000. Kronos has objected
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, Kronos had a significant amount of net operating loss
carryforwards for German corporate and trade tax purposes, all of which have no
expiration date. These net operating loss carryforwards were generated by KII
principally during the 1990's when KII had a significantly higher level of
outstanding indebtedness than is currently outstanding. For financial reporting
purposes, however, the benefit of such net operating loss carryforwards had not
previously been recognized because Kronos did not believe they met the
"more-likely-than-not" recognition criteria, and accordingly Kronos had a
deferred income tax asset valuation allowance offsetting the benefit of such net
operating loss carryforwards and Kronos' other tax attributes in Germany. KII
had generated taxable income in Germany for both German corporate and trade tax
purposes since 2000, and starting with the quarter ended December 31, 2002 and
for each quarter thereafter, KII had cumulative taxable income in Germany for
the most recent twelve quarters. However, offsetting this positive evidence was
the fact that prior to the end of 2003, Kronos believed there was significant
uncertainty regarding its ability to utilize such net operating loss
carryforwards under German tax law and, principally because of the uncertainty
caused by this negative evidence, Kronos had concluded the benefit of the net
operating loss carryforwards did not meet the "more-likely-than-not" criteria.
By the end of 2003, and primarily as a result of a favorable German court ruling
in 2003 and the procedures Kronos had completed during 2003 with respect to the
filing of certain amended German tax returns (as discussed below), Kronos had
concluded that the significant uncertainty regarding its ability to utilize such
net operating loss carryforwards under German tax law had been eliminated.
However, at the end of 2003, Kronos believed at that time that it would generate
a taxable loss in Germany during 2004. Such expectation was based primarily upon
then current levels of prices for TiO2, and the fact that Kronos was
experiencing a downward trend in its TiO2 selling prices and Kronos did not have
any positive evidence to indicate that the downward trend would improve. If the
price trend continued downward throughout all of 2004 (which was a possibility
given Kronos' prior experience, Kronos would likely have a taxable loss in
Germany for 2004. If the downward trend in prices had abated, ceased or reversed
at some point during 2004, then Kronos would likely have taxable income in
Germany during 2004. Accordingly, Kronos continued to conclude at the end of
2003 that the benefit of the German net operating loss carryforwards did not
meet the "more-likely-than-not" criteria and that it would not be appropriate to
reverse the deferred income tax asset valuation allowance, given the likelihood
that Kronos would generate a taxable loss in Germany during 2004. The
expectation for a taxable loss in Germany continued through the end of the first
quarter of 2004. By the end of the second quarter of 2004, however, Kronos' TiO2
selling prices had started to increase, and Kronos believes its selling prices
will continue to increase during the second half of 2004 after Kronos and its
major competitors announced an additional round of price increases. The fact
that Kronos' selling prices started to increase during the second quarter of
2004, combined with the fact that Kronos and its competitors had announced
additional price increases (which based on past experience indicated to Kronos
that some portion of the additional price increases would be realized in the
marketplace), provided additional positive evidence that was not present at
December 31, 2003. Consequently, Kronos' revised projections now reflect taxable
income for Germany in 2004 as well as 2005. Given the magnitude of the German
net operating loss carryforwards, and the fact that current provisions of German
law limit the annual utilization of net operating loss carryforwards to 60% of
taxable income after the first euro 1 million of taxable income, Kronos believes
it will take several years to fully utilize the benefit of such operating loss
carryforwards. However, given the number of years for which Kronos has now
generated positive taxable income in Germany, combined with the fact that the
net operating loss carryforwards were generated during a time when KII had a
significantly higher level of outstanding, and the fact that the net operating
loss carryforwards have no expiration date, Kronos concluded it was appropriate
to reverse all of the valuation allowance related to the net operating loss
carryforwards. Accordingly, based on all available evidence, including the fact
that (i) Kronos had generated positive taxable income in Germany since 2000, and
starting with the quarter ended December 31, 2002 and for each quarter
thereafter, KII had cumulative taxable income in Germany for the most recent
twelve quarters, (ii) Kronos was now projecting positive taxable income in
Germany for 2004 and 2005 and (iii) the German net operating loss carryforwards
have no expiration date, Kronos concluded that the benefit of the net operating
loss carryforwards and other German tax attributes met the
"more-likely-than-not" recognition criteria, and Kronos reversed the deferred
income tax asset valuation allowance related to Germany. Given the magnitude of
the German net operating loss carryforwards and the fact that current provisions
of German law limit the annual utilization of net operations loss carryforwards
to 60% of taxable income after the first euro 1 million of taxable income,
Kronos believes it will take several years to fully utilize the benefit of such
operating loss carryforwards. However, given the number of years for which
Kronos has now generated positive taxable income in Germany, combined with the
fact that the net operating loss carryforwards were generated during a time when
KII had a significantly higher level of outstanding indebtedness than it
currently has outstanding, and the fact that the net operating loss
carryforwards have no expiration date, Kronos concluded it was appropriate to
reverse all of the valuation allowance related to the net operating loss
carryforwards. Accordingly, in the first six months of 2004, Kronos recognized a
$254.3 million income tax benefit related to the reversal of such deferred
income tax asset valuation allowance attributable to Kronos' income tax
attributes in Germany (principally the net operating loss carryforwards). Of
such $254.3 million, $8.7 million relates primarily to the utilization of the
German net operating loss carryforwards during the first six months of 2004, the
benefit of which had previously not met the "more-likely-than-not" recognition
criteria, and $245.6 million relates to the German deferred income tax asset
valuation allowance attributable to the remaining German net operating loss
carryforwards and other tax attributes as of June 30, 2004, the benefit of which
Kronos has concluded now meet the "more-likely-than-not" recognition criteria.
At September 30, 2004, the net operating loss carryforwards for German corporate
and trade tax purposes aggregated the equivalent of $602 million and $244
million, respectively, all of which have no expiration date.
In the first quarter of 2003, KII was notified by the German Federal Fiscal
Court that the Court had ruled in KII's favor concerning a claim for refund suit
in which KII sought refunds of prior taxes paid during the periods 1990 through
1997. KII and KII'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 net refund of taxes and related interest to KII and its
German operating subsidiary of Euro 26.9 million ($32.1 million), and the
Company recognized the benefit for these net refunds in its 2003 results of
operations. During the first six months of 2004, the Company recognized a
benefit of Euro 2.5 million ($3.1 million) related to additional net interest
which has accrued on the outstanding refund amounts. 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 returns with
respect to the 1990 through 1994 tax years. Through September 2004, KII's German
operating subsidiary had received net refunds of Euro 27.2 million ($33.6
million when received). KII believes it will receive the remainder of the net
refunds of taxes and related interest during the remainder of 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 KII received Euro 21.5
million ($24.6 million) in 2003, and the Company recognized the benefit of the
refund in the second quarter of 2003.
Effective October 1, 2004, NL and TIMET each contributed their shares of
CompX common stock to newly-formed CompX Group, Inc. in return for an 82.4% and
17.6% ownership interest in CompX Group, respectively, and CompX Group became
the owner of the 83% of CompX that NL and TIMET had previously owned in the
aggregate. CompX Group recorded the shares of CompX received from NL at NL's
predecessor carryover basis. Effective with the formation of CompX Group, CompX
became a member of Contran's consolidated United States federal income tax group
(the "Contran Tax Group"). NL and Valhi were already members of the Contran Tax
Group.
Note 15 - Employee benefit plans:
The components of net periodic defined benefit pension cost recognized by
the Company and its consolidated subsidiaries are presented in the table below.
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
2003 2004 2003 2004
---- ---- ---- ----
(In thousands)
Service cost benefits $1,337 $ - $ 3,970 $ 3,128
Interest cost on projected benefit obligations 4,560 760 13,511 10,780
Expected return on plan assets (4,322) (890) (13,695) (10,290)
Amortization of prior service cost 88 - 263 281
Amortization of net transition obligations 187 (17) 542 273
Recognized actuarial losses 444 220 1,339 2,148
------- ------- ------- --------
$ 2,294 $ 73 $ 5,930 $ 6,320
======= ======= ======= ========
The components of net periodic postretirement benefits other than pensions
("OPEB") cost recognized by the Company and its consolidated subsidiaries are
presented in the table below.
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
2003 2004 2003 2004
---- ---- ---- ----
(In thousands)
Service cost $ 39 $ - $ 112 $ 113
Interest cost 517 289 1,543 1,229
Amortization of prior service credit (518) (72) (1,556) (583)
Recognized actuarial losses 47 32 141 173
------- ------- ------- --------
$ 85 $ 249 $ 240 $ 932
======= ======= ======= ========
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(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 actuarially
equivalent to Medicare Part D. During the third quarter of 2004, the Company
determined that benefits provided by its plan are actuarially equivalent to the
Medicare Part D benefit and therefore the Company is eligible for the federal
subsidy provided for by the Medicare 2003 Act. The effect of such subsidy, which
is accounted for prospectively, as permitted by and in accordance with FASB
Staff Position No. 106-2, from the date actuarial equivalence was determined,
did not have a material impact on the accumulated postretirement benefit
obligation, and will not have a material impact on the net periodic OPEB cost
going forward.
Note 16 - Accounts with affiliates:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Current receivables from affiliates:
TIMET $ 50 $ -
Kronos - 138
Valhi - income taxes 306 65
Other 5 -
-------- --------
$ 361 $ 203
======== ========
Noncurrent receivables from affiliates:
Loan to Contran family trust $ 14,000 $ 12,000
Note receivable from Kronos - 31,423
-------- --------
$ 14,000 $ 43,423
======== ========
Current payables to affiliates:
Louisiana Pigment Company $ 8,560 $ -
Income taxes payable to Valhi 10,512 9,976
Kronos - 37
Other 465 122
-------- --------
$ 19,537 $ 10,135
======== ========
The note receivable from Kronos, included in noncurrent receivables from
affiliates, was eliminated in the Company's consolidated financial statements
prior to July 1, 2004. See Note 1.
Capital transactions with affiliates during the first nine months of 2003,
as reflected on the accompanying Consolidated Statements of Cash Flows, relates
principally to CompX dividends paid to Valhi and Valcor.
Note 17 - 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.
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
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.
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 60
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.
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 solvency of other 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 or 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 first nine months of 2004 is presented in the table below. The amount
shown in the table below for payments against the Company's accrued
environmental costs is net of a $1.5 million recovery of remediation costs
previously expended by NL that was paid to NL by other PRPs in the third quarter
of 2004 pursuant to an agreement entered into by NL and the other PRPs.
Amount
--------------
(In thousands)
Balance at the beginning of the period $ 77,481
Additions charged to expense 1,078
Payments, net (7,738)
--------
Balance at the end of the period $ 70,821
========
Amounts recognized in the balance sheet
at September 30, 2004:
Current liability $ 17,283
Noncurrent liability 53,538
--------
$ 70,821
========
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.
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 September 30,
2004, the Company had accrued $71 million for those environmental matters which
are reasonably estimable. The Company believes it is not possible to estimate
the range of costs for certain sites. The upper end of the range of reasonably
possible costs to the Company for sites for which the Company believes is
possible to estimate costs is approximately $101 million. The Company's
estimates of such liabilities have not been discounted to present value.
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 September 30, 2004, 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
did have 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.
At September 30, 2004, the Company had $17 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 (December 31, 2003 - $24 million). Use of such restricted balances
does not affect the Company's net cash flows.
Other litigation. The Company has been named as a defendant in various
lawsuits in a variety of jurisdictions, alleging personal injuries as a result
of occupational exposure primarily to products manufactured by formerly owned
operations containing asbestos, silica and/or mixed dust. Approximately 485 of
these types of cases involving a total of approximately 25,500 plaintiffs and
their spouses remain pending. Of these plaintiffs, approximately 9,200 are
represented by six cases pending in Mississippi state court, and approximately
5,500 are represented by four cases that have been removed to federal court in
Mississippi, where they have been, or are in the process of being, transferred
to the multi-district litigation (MDL) pending in the United States District
Court for the Eastern District of Pennsylvania.
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.
In addition to the litigation described above, the Company and its
subsidiaries may be involved from time to time in various other environmental,
contractual, product liability, patent (or other intellectual property),
employment and other claims and disputes incidental to their present and former
businesses. In certain cases, the Company has insurance coverage for such claims
and disputes. The Company currently believes the disposition of all of these
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.
Note 18 - Accounting principle newly adopted in 2004:
The Company complied with the consolidation requirements of FIN No. 46R,
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,"
as amended, as of March 31, 2004. The Company does not have any involvement with
any variable interest entity (as that term is defined in FIN No. 46R) covered by
the scope of FIN No. 46R which had not already been consolidated under prior
applicable GAAP, and therefore the impact to the Company of adopting the
consolidation requirements of FIN No. 46R was not material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Executive summary
As discussed in Note 1 to the Consolidated Financial Statements, on
September 24, 2004, the Company purchased 10,374,000 shares of CompX common
stock, representing approximately 68% of the outstanding shares of CompX common
stock, from Valhi and a wholly-owned subsidiary of Valhi. Because Valhi, NL and
CompX are all entities under the common control of Contran, the Company's
acquisition of the shares of CompX common stock results in a change in reporting
entity and the Company has retroactively restated its consolidated financial
statements to reflect the consolidation of CompX for all periods presented.
Also as discussed in Note 1 to the Consolidated Financial Statements,
following the Company's July 2004 dividend in the form of shares of Kronos
common stock distributed to NL shareholders, the Company's ownership of Kronos
was reduced to less than 50%. Consequently, effective July 1, 2004 the Company
ceased to consolidate Kronos' financial position, results of operations and cash
flows and the Company commenced accounting for its interest in Kronos by the
equity method. The Company continues to report Kronos as a consolidated
subsidiary through June 30, 2004, including the consolidation of Kronos' results
of operations and cash flows for the first two quarters of 2004. As discussed in
Note 2 to the Consolidated Financial Statements, the Company has, for certain
periods presented, more than one operating segment and evaluates segment
performance based on segment operating income, as defined therein.
The Company reported net income of $8.5 million, or $.18 per diluted share,
in the third quarter of 2004 compared to net income of $16.3 million, or $.34
per diluted share, in the third quarter of 2003. For the first nine months of
2004, the Company reported net income of $195.0 million, or $4.03 per diluted
share, compared to net income of $55.2 million, or $1.15 per diluted share, in
the first nine months of 2003.
The increase in the Company's diluted earnings per share from the first
nine months of 2003 to the same period in 2004 is due primarily to the net
effects of (i) significantly higher tax benefit generated from the reversal of
Kronos' German deferred income tax asset valuation allowance and tax benefits
related to EMS during the first six months of 2004, (ii) changes in chemicals
operating income due in part to lower gross margins at Kronos, (iii) higher
component products operating income from CompX, (iv) income from a contract
dispute settlement with a Kronos customer and (v) lower environmental
remediation and legal expenses of NL. Overall, the Company believes its net
income in 2004 will be higher than 2003 as the impact of the reversal of Kronos'
and EMS' deferred income tax asset valuation allowances are expected to more
than offset the effect of Kronos' expected lower income from operations. Net
income in the first nine months of 2003 includes certain income tax benefits
relating to Germany aggregating $.52 per diluted share. Net income in the first
nine months of 2004 includes (a) certain income tax benefits related to Germany
aggregating $2.57 per diluted share, (b) reversal of the deferred income tax
asset valuation allowance related to NL Environmental Management Services, Inc.
("EMS") and adjustment of estimated tax due upon IRS settlement and (c) income
related to contract dispute settlement at Kronos of $.04 per diluted share, each
of which were recognized in the second quarter of 2004. These items are more
fully described below.
Forward-looking information
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
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," "expects" 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
Quarterly Report and those described from time to time in the Company's other
filings with the Securities and Exchange Commission ("SEC") including, but not
limited to, the following:
o Future supply and demand for the Company's products,
o The cyclicality of the Company's businesses,
o Customer inventory levels (such as the extent to which Kronos' 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 and steel
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 Demand for office furniture,
o Competitive products and substitute products, including increased
competition from low-cost manufacturing sources (such as China),
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o The introduction of trade barriers,
o Service industry employment levels,
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,
the New Taiwan dollar 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 ability to implement head count reductions in a cost effective manner
within the constraints on non-U.S. governmental regulations, and the timing
and amount of any cost savings
o The ultimate outcome of income tax audits, tax settlement initiatives or
other tax matters,
o The introduction of trade barriers,
o Potential difficulties in integrating completed or future acquisitions,
o Decisions to sell operating assets other than in the ordinary course of
business,
o Uncertainties associated with new product development,
o The ultimate ability to utilize income tax attributes, the benefit of which
has been recognized under the "more-likely-than-not" recognition criteria,
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 new information, future events
or otherwise.
Component products
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
2003 2004 % Change 2003 2004 % Change
---- ---- -------- ---- ---- --------
(In millions, except percentages and volumes)
Net sales $ 52.6 $ 56.0 +7% $153.3 $165.8 +8%
Segment profit (loss) (.4) 5.8 +1,550% 1.8 14.7 +717%
Component products sales were higher in the third quarter and first nine
months of 2004 as compared to the same periods in 2003 due in part to the
favorable effect of fluctuations in foreign currency exchange rates.
Fluctuations in the value of the U.S. dollar relative to other currencies
increased component products sales by $1.1 million in the third quarter of 2004
as compared to the third quarter of 2003, and increased sales by $4.5 million in
the first nine months of the year. Component products sales comparisons were
also impacted by higher sales volumes of security products and precision slide
products and the effect of price increases for certain products.
During the third quarter of 2004, sales of slide, security products and
ergonomic products increased 11%, 2% and 8% respectively, as compared to the
third quarter of 2003 (year-to-date increases for slide and security products of
15% and 3%, respectively, with no significant change in sales of ergonomic
products on a year-to-date basis). The percentage changes in both slide and
ergonomic products include the impact resulting from changes in foreign currency
exchange rates. Sales of security products are generally denominated in U.S.
dollars.
Component products segment profit comparisons were favorably impacted by
the effect of certain cost reduction initiatives undertaken in 2002 and 2003,
including retooling of CompX's facility in Michigan, consolidating CompX's two
Canadian facilities into one facility and restructuring CompX's operations in
the Netherlands. In addition, operating income comparisons were also favorably
impacted by relative changes in product mix of security products, the price
increases for certain products and expenses of approximately $900,000 incurred
during the first nine months of 2003 (mostly in the first half of the year)
associated with the consolidation of the two Canadian facilities into one
facility. In addition, the component products operating loss in the third
quarter of 2003 includes a $3.5 million restructuring charge associated with the
implementation of certain headcount reductions at CompX's Netherlands
operations.
CompX has substantial operations and assets located outside the United
States in Canada, the Netherlands and Taiwan. A portion of CompX's sales
generated from its non-U.S. operations are denominated in currencies other than
the U.S. dollar, principally the Canadian dollar, the euro and the New Taiwan
dollar. In addition, a portion of CompX's sales generated from its non-U.S.
operations (principally in Canada) are denominated in the U.S. dollar. Most raw
materials, labor and other production costs for such non-U.S. operations are
denominated primarily in local currencies. Consequently, the translated U.S.
dollar values of CompX's foreign sales and operating results are subject to
currency exchange rate fluctuations which may favorably or unfavorably impact
reported earnings and may affect comparability of period-to-period operating
results. During the third quarter and first nine months of 2004, currency
exchange rate fluctuations positively impacted component products sales
comparisons with the same period in 2003. Currency exchange rate fluctuations
negatively impacted component products segment profit comparisons for the same
periods.
While demand has improved across most of CompX's product segments, certain
customers are seeking lower cost Asian sources as alternatives to CompX's
products. Although CompX believes the impact of this will be mitigated through
its ongoing initiatives to expand both new products and new market
opportunities, the recent increase in its order rates may be moderated to a
certain extent in the near term. Asian-sourced competitive pricing pressures are
expected to continue to be a challenge as those manufacturers, particularly
those located in China, gain market share. CompX has responded to the
competitive pricing pressure in part by reducing production cost through product
reengineering or improvement in manufacturing processes, moving production to
lower-cost facilities and providing value-added customer support services that
foreign manufacturers are generally unable to provide. The combination of
CompX's cost control initiatives together with its value-added approach to
development and marketing of products are believed to help mitigate the impact
of competitive pricing pressures.
Additionally, CompX's cost for steel continues to rise dramatically due to
the continued high demand and shortages worldwide. While CompX has thus far been
able to pass a majority of its higher raw material costs on to its customers
through price increases and surcharges, there is no assurance that it would be
able to continue to pass along any additional higher costs to its customers. The
price increases and surcharges may accelerate the efforts of some of CompX's
customers to find less expensive products from foreign manufacturers. CompX will
continue to focus on cost improvement initiatives, utilizing lean manufacturing
techniques and prudent balance sheet management in order to minimize the impact
of lower sales, particularly to the office furniture industry, and to develop
value-added customer relationships with additional focus on sales of CompX's
higher-margin ergonomic computer support systems to improve operating results.
CompX expects the operating results of its operations in the Netherlands
will continue to improve, CompX is evaluating the overall strategic role of such
operations for CompX as a whole, and additional actions could be taken in the
future, including the possible sale of some or all of such operations, and
additional actions could be taken in the future that could result in significant
charges for asset impairment, including goodwill, and other costs in future
periods. These actions, along with other activities to eliminate excess
capacity, are designed to position CompX to more effectively expand on new
product and new market opportunities to improve CompX's profitability.
Chemicals - Kronos
Relative changes in Kronos' TiO2 sales and income from operations during
the third quarter and the first nine months of 2003 and 2004 are primarily due
to (i) relative changes in average TiO2 selling prices, (ii) relative changes in
TiO2 sales volumes and (iii) relative changes in foreign currency exchange
rates. Selling prices were generally: increasing during the first quarter of
2003, flat during the second quarter of 2003, decreasing during the third and
fourth quarters of 2003 and the first quarter of 2004, flat during the second
quarter of 2004 and increasing during the third quarter of 2004.
Effective July 1, 2004 the Company ceased to consolidate Kronos' financial
position, results of operations and cash flows and the Company commenced
accounting for its interest in Kronos by the equity method. The Company
continues to report Kronos as a consolidated subsidiary through June 30, 2004,
including the consolidation of Kronos' results of operations and cash flows for
the first two quarters of 2004. The following table shows information about
Kronos' sales and segment profit for the 2003 and 2004 periods, including the
third quarter of 2004 for which the Company did not consolidate Kronos' results
of operations.
Three months ended Nine months ended Six months
September 30, September 30, ended
----------------------------- ----------------------------- June 30,
2003 2004 % Change 2003 2004 % Change 2004
---- ---- -------- ---- ---- -------- ----
(In millions, except percentages)
Net sales $242.9 $ 286.1 +18% $762.5 $845.1 +11% $ 559.1
Segment profit 35.4 29.8 -16% 105.2 96.2 -9% 66.4
TiO2 data:
Percent change in average TiO2
selling prices:
Using actual foreign
currency exchange rates +3% +2%
Impact of changes in
foreign currency
exchange rates -4% -5%
---- ----
In billing currencies -1% -3%
==== ====
Kronos' sales increased $43.2 million (18%) in the third quarter of 2004
compared to the third quarter of 2003 and increased $82.6 million (11%) in the
first nine months of 2004 compared to the same period in 2003, as the favorable
effect of fluctuations in foreign currency exchange rates, which increased sales
by approximately $11 million and $46 million, respectively, (as more fully
discussed below) and increased sales volumes more than offset the impact of
lower average TiO2 selling prices. Excluding the effect of fluctuations in the
value of the U.S. dollar relative to other currencies, the Company's average
TiO2 selling prices in billing currencies were 1% lower in the third quarter of
2004 as compared to the third quarter of 2003 and 3% lower in the first nine
months of 2004 as compared to the first nine months of 2003. When translated
from billing currencies into U.S. dollars using actual foreign currency exchange
rates prevailing during the respective periods, Kronos' average TiO2 selling
prices in the third quarter of 2004 were 3% higher than the third quarter of
2003 and 2% higher for the first nine months of 2004 compared to the first nine
months of 2003. Kronos' TiO2 sales volumes in the third quarter and first nine
months of 2004 increased 16% and 9%, respectively, compared to the same periods
of 2003, as higher volumes in Europe, the United States and export markets more
than offset lower volumes in Canada. Kronos' TiO2 sales volumes in the first
nine months of 2004 were a new record for Kronos.
Kronos' 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 Kronos' average TiO2 selling prices 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 Kronos' 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 GAAP ("GAAP
measure"). Kronos discloses percentage changes in its average TiO2 prices in
billing currencies because Kronos 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 3% and 2%
increase in Kronos' average TiO2 selling prices during the third quarter and
first nine months of 2004, respectively, as compared to the same periods in 2003
using actual foreign currency exchange rates prevailing during the respective
periods (the GAAP measure) and the 1% and 3% decreases in Kronos' average TiO2
selling price in billing currencies (the non-GAAP measure) during the third
quarter and first nine months is due to the effect of changes in foreign
currency exchange rates. The above table presents in a tabular format (i) the
percentage change in Kronos' 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 prices 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).
Kronos' cost of sales increased $42.0 million (24%) in the third quarter of
2004 compared to the third quarter of 2003, and increased $85.6 million (15%) in
the year-to-date period largely due to the increased sales and production
volumes and the effects of translating foreign currencies (primarily the euro)
into U.S. dollars. As a result of the lower average TiO2 selling prices in
billing currencies, Kronos' cost of sales, as a percentage of net sales
increased from 73% and 74% in each of the third quarter and first nine months of
2003, respectively, to 77% in each of the third quarter and first nine months of
2004. Kronos' TiO2 production volumes in the third quarter of 2004 increased 5%
compared to the third quarter of 2003, and increased 3% in the first nine months
of 2004 as compared to the same period in 2003, with operating rates near full
capacity in those periods. Kronos' TiO2 production volumes in the first nine
months of 2004 were also a new record for Kronos.
Kronos's gross margins for the third quarter of 2004 increased $1.2 million
(2%) from the third quarter of 2003, as the higher sales volumes and the
favorable effect of relative changes in foreign currency exchange rates more
than offset the effect of lower average selling prices. However, gross margins
decreased $3.0 million (2%) from the first nine months of 2003 as compared to
the first nine months of 2004, as the unfavorable effect of lower average TiO2
selling prices more than offset the favorable effect of higher sales volumes and
relative changes in foreign currency exchange rates.
Kronos' selling, general and administrative expenses increased $6.1 million
(20%) and $15.9 million (18%), respectively, in the third quarter and first nine
months of 2004 as compared to the corresponding periods in 2003. These increases
are largely attributable to the higher sales volumes as well as the impact of
translating foreign currencies (primarily the euro) into U.S. dollars.
Kronos' segment profit in the first nine months of 2004 also includes $6.3
million of income related to the settlement of a certain contract dispute with a
customer. As part of the settlement, the customer agreed to make payments to
Kronos through 2007 aggregating $7.3 million. The $6.3 million recognized gain
represents the present value of the future payments to be paid by the customer
to Kronos. The dispute with the customer concerned the customer's alleged past
failure to purchase the required amount of TiO2 from Kronos under the terms of
Kronos' contract with the customer. Under the settlement, the customer agreed to
pay an aggregate of $7.3 million to Kronos through 2007 to resolve such dispute.
Kronos has substantial operations and assets located outside the United
States (particularly 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, primarily the euro, other major
European currencies and the Canadian dollar. In addition, 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 the third quarter of 2004 by a net
amount of approximately $11 million compared to the same period in 2003 and
increased TiO2 sales in the first nine months of 2004 by approximately $46
million compared to the same period in 2003. Fluctuations in the value of the
U.S. dollar relative to other currencies similarly impacted Kronos' foreign
currency-denominated operating expenses. Kronos' operating costs that are not
denominated in the U.S. dollar, when translated into U.S. dollars, were higher
in the third quarter and first nine months of 2004 compared to the third quarter
and first nine months of 2003. Overall, currency exchange rate fluctuations
resulted in a net increases in Kronos' segment profit of approximately $7
million in the first nine months of 2004 as compared to the same period in 2003.
Currency exchange rate fluctuations did not have a material effect on Kronos'
segment profit in the third quarter of 2004 as compared to the third quarter of
2003.
Reflecting the impact of partial implementation of prior price increase
announcements, Kronos' average TiO2 selling prices in billing currencies in the
third quarter of 2004 were 3% higher than the second quarter of 2004, the first
quarter with an upward trend in selling prices since the third quarter of 2003.
In June 2004, Kronos announced additional price increases of 4 cents per pound
in the U.S., Canadian 6 cents per pound in Canada and Euro 120 per metric ton in
Europe, all of which are targeted to be implemented in the fourth quarter of
2004. In September 2004, Kronos announced additional price increases of 3 cents
to 6 cents per pound in the U.S., Canadian 4 cents to Canadian 8 cents per pound
in Canada and Euro 110 per metric ton in Europe, all of which are in addition to
the July/August announced increases and are targeted to be implemented in
January 2005. The Company is also targeting to achieve price increases in export
markets in the fourth quarter of the year. The extent to which all of such price
increases will be realized will depend on, among other things, economic factors.
Kronos expects its TiO2 sales and production volumes in 2004 will be higher
than in 2003. Kronos' average TiO2 selling price, which declined during the
second half of 2003 and first quarter of 2004, commenced to begin to rise during
the second quarter of 2004, and was higher by 3% in the third quarter of 2004 as
compared to the second quarter of 2004, and should continue to rise during the
remainder of the year. Nevertheless, Kronos expects its average TiO2 selling
prices, in billing currencies, will be lower in calendar 2004 as compared to
2003 and expects its gross margin in 2004 to 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 the Kronos' expectations, Kronos' results of operations
could be unfavorably affected.
Equity in earnings of Kronos - third quarter 2004
Three months ended
September 30,
2004
----
(In millions)
Kronos historical:
Net sales $ 286.1
=======
Segment profit 29.8
Other general corporate, net (.3)
Interest expense (13.3)
-------
16.2
Income tax expense 6.2
-------
Net income 10.0
=======
Equity in Kronos Worldwide, Inc. $ 5.0
=======
See the preceding discussion relating to Kronos' segment profit for the
third quarter of 2004. Kronos' interest expense in the third quarter of 2004
relates principally to Kronos International, Inc.'s Senior Secured Notes and
Kronos' $200 million of long-term notes payable to affiliates.
General corporate items
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
2003 2004 Difference 2003 2004 Difference
---- ---- ---------- ---- ---- ----------
(In millions)
Interest income on note receivable
from Kronos $ - $ 4.2 $ 4.2 $ - $ 4.2 $ 4.2
Dividend income from Valhi .3 .3 - .8 .8 -
Other interest and dividend income .5 .4 (.1) 1.8 1.5 (.3)
Other income .2 .1 (.1) .6 .1 (.5)
Securities transactions, net (.1) - .1 2.4 (.1) (2.5)
Gain on disposal of fixed assets 7.2 - (7.2) 8.3 - (8.3)
Legal settlement gains - - - .7 .5 (.2)
General corporate expenses, net (9.7) (3.7) 6.0 (48.2) (15.0) 33.2
Interest expense:
Kronos (8.3) - 8.3 (24.7) (17.8) 6.9
CompX (.3) (.1) .2 (1.0) (.4) .6
------- ------- ------- ------- ------- -------
$ (10.2) $ 1.2 $ 11.4 $ (59.3) $ (26.2) $ 33.1
======= ======= ======= ======= ======= =======
Interest and dividend income in the third quarter and first nine months of
2004 relates primarily to interest received on the Company's long-term note
receivable with Kronos ($4.2 million in the quarter and year-to-date period).
Prior to the third quarter of 2004, the Company's interest income on such
long-term note receivable from Kronos was eliminated in the Company's
consolidated financial statements. Dividend income from the Company's ownership
of Valhi common stock totaled approximately $800,000 for each of the nine month
periods ended September 30, 2003 and 2004. The gain on disposal of fixed assets
relates primarily to the sale of certain real property of NL.
Net general corporate expenses in the third quarter and first nine months
of 2004 were lower than the same periods of 2003 due primarily to lower
environmental remediation and legal expenses of NL. Net general corporate
expenses in 2004 are currently expected to continue to be lower than 2003 due to
lower expected environmental remediation expenses of NL. However, obligations
for environmental remediation are difficult to assess and estimate, and no
assurance can be given that actual costs will not exceed accrued amounts or that
costs will not be incurred with respect to sites for which no estimate of
liability can presently be made. See Note 17 to the Consolidated Financial
Statements.
Kronos has a significant amount of outstanding indebtedness denominated in
the euro, including KII's Euro 285 million Senior Secured Notes. Accordingly,
the reported amount of interest expense during 2003 and for the first half of
2004, when Kronos' results of operations were consolidated with those of the
Company, varied depending on relative changes in foreign currency exchange
rates. Kronos' interest expense in the first six months of 2004 was $17.8
million and was $8.3 million and $24.7 million in the third quarter and first
nine months of 2003, respectively. The decrease in the amount of interest
expense reported in the Company's consolidated financial statements was due
primarily to the change in accounting for Kronos to the equity method.
Consequently Kronos' interest expense was not included in the Company's results
of operations beginning in the third quarter of 2004.
Interest expense related to the Component Products segment declined in the
interim periods of 2004 compared to 2003 due primarily to lower average levels
of outstanding debt. CompX expects interest expense will continue to be lower
during the remainder of 2004 as compared to the last quarter of 2003 due to
lower average levels of outstanding debt.
Provision for income taxes
The principal reasons for the difference between the Company's effective
income tax rate and the U.S. federal statutory income tax rates are explained in
Note 14 to the Consolidated Financial Statements.
At September 30, 2004, Kronos had the equivalent of $602 million and $244
million, respectively, of net operating loss carryforwards for German corporate
and trade tax purposes, all of which have no expiration date. As more fully
described in Note 14 to the Consolidated Financial Statements, Kronos had
previously provided a deferred income tax asset valuation allowance against
substantially all of these tax loss carryforwards and other deductible temporary
differences in Germany because Kronos did not believe they met the
"more-likely-than-not" recognition criteria. During the first six months of
2004, Kronos reduced its deferred income tax asset valuation allowance by
approximately $8.7 million, primarily as a result of utilization of these German
net operating loss carryforwards, the benefit of which had not previously been
recognized. At June 30, 2004, after considering all available evidence, Kronos
concluded that these German tax loss carryforwards and other deductible
temporary differences met the "more-likely-than-not" recognition criteria.
Accordingly, as of June 30, 2004, Kronos reversed the remaining $245.6 million
valuation allowance related to such items. Because the benefit of such net
operating loss carryforwards and other deductible temporary differences in
Germany has now been recognized, the Company's future effective income tax rate
will be higher than what it would have otherwise been, although its future cash
income tax rate would not be affected.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforwards
effective January 1, 2004 to 60% of taxable income after the first Euro 1
million of taxable income. The new law will have a significant effect on Kronos'
cash tax payments in Germany going forward, the extent of which will be
dependent upon the level of taxable income earned in Germany.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law contains several provisions that could impact the Company.
These provisions provide for, among other things, a special deduction from U.S.
taxable income equal to a stipulated percentage of qualified income from
domestic activities (as defined) beginning in 2005, and a special 85% dividends
received deduction for certain dividends received from controlled foreign
corporations, which deduction is subject to a number of limitations. Both of
these provisions are complex and subject to numerous restrictions. The Company
is still studying the new law, including the technical provisions related to the
two complex provisions noted above. The effect on the Company of the new law, if
any, has not yet been determined, in part because the Company has not yet
determined whether its operations qualify for the special deduction or whether
it would benefit from the special dividends received deduction.
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 the Company's shareholders, and the Company ceased to recognize
minority interest in Kronos, effective July 1, 2004. See Note 11 to the
Consolidated Financial Statements.
Minority interest in NL's subsidiaries relates to the Company's
majority-owned environmental management subsidiary, EMS. EMS was established in
1998, at which time EMS contractually assumed certain of the Company's
environmental liabilities. EMS' earnings are based, in part, upon its ability to
favorably resolve these liabilities on an aggregate basis. The shareholders of
EMS, other than the Company, actively manage the environmental liabilities and
share in 39% of EMS' cumulative earnings. The Company continues to consolidate
EMS and provides accruals for the reasonably estimable costs for the settlement
of EMS' environmental liabilities, as discussed below.
Recently adopted accounting principle
See Note 18 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Consolidated cash flows
The Company's consolidated cash flows from operating, investing and
financing activities for the nine months ended September 30, 2003 and 2004 are
presented below:
Nine months ended
September 30,
------------------------
2003 2004
---- ----
(In millions)
Net cash provided (used) by:
Operating activities $ 81.8 $ 82.9
Investing activities (17.3) (3.4)
Financing activities (60.9) (28.6)
------ ------
Net cash provided by operating,
investing and financing activities $ 3.6 $ 50.9
====== ======
Summary
The Company's primary source of liquidity on an ongoing basis is its cash
flows from operating activities, which is generally used to (i) fund capital
expenditures, (ii) repay any short-term indebtedness incurred primarily for
working capital purposes and (iii) provide for the payment of dividends
(including dividends paid to Valhi by its subsidiaries). In addition, from
time-to-time the Company will incur indebtedness, generally to (i) fund
short-term working capital needs, (ii) refinance existing indebtedness or (iii)
fund major capital expenditures or the acquisition of other assets outside the
ordinary course of business. Also, the Company will from time-to-time sell
assets outside the ordinary course of business, the proceeds of which are
generally used to (i) repay existing indebtedness (including indebtedness which
may have been collateralized by the assets sold), (ii) make investments in
marketable and other securities, (iii) fund major capital expenditures or the
acquisition of other assets outside the ordinary course of business or (iv) pay
dividends.
Operating Activities
Cash flows from operating activities increased from $81.8 million provided
by operating activities in the first nine months of 2003 to $82.9 million of
cash provided by operating activities in the first nine months of 2004. This
$1.1 million increase was due primarily to the net effects of (i) higher net
income of $139.8 million, (ii) lower depreciation and amortization expense of
$7.5 million, (iii) lower deferred income taxes of $287.0 million, (iv) higher
minority interest in earnings of $140.5 million, (v) higher net distributions
from the TiO2 manufacturing joint venture of $8.3 million in the first nine
months of 2004 compared to a $2.2 million distribution in the first nine months
of 2003, (vi) distributions from Kronos in the nine month period of 2004 of $6.1
million and equity in earnings of Kronos of $5.0 million during the same period
as compared to nil in the 2003 period, (vii) a higher amount of net cash used
from relative changes in the Company's inventories, receivables, payables and
accruals of $34.3 million in the first nine months of 2004 as compared to the
first nine months of 2003 and (vii) lower cash paid for income taxes of $7.6
million. Relative changes in accounts receivable are affected by, among other
things, the timing of sales and the collection of the resulting receivables.
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
volumes and sales volumes. 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.
Trends in cash flows from operating activities (excluding the impact of
significant asset dispositions and relative changes in assets and liabilities)
are generally similar to trends in the Company's earnings. However, certain
items included in the determination of net income are non-cash, and therefore
such items have no impact on cash flows from operating activities. Non-cash
items included in the determination of net income include depreciation and
amortization expense, deferred income taxes and non-cash interest expense.
Non-cash interest expense relates principally to Kronos and consists of
amortization of deferred financing costs.
Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, equity in earnings of affiliates will generally differ from
the amount of distributions received from such affiliates, and equity in losses
of affiliates does not necessarily result in current cash outlays paid to such
affiliates. The amount of periodic defined benefit pension plan expense and
periodic OPEB expense depends upon a number of factors, including certain
actuarial assumptions, and changes in such actuarial assumptions will result in
a change in the reported expense. In addition, the amount of such periodic
expense generally differs from the outflows of cash required to be currently
paid for such benefits.
Certain other items included in the determination of net income have no
impact on cash flows from operating activities, but such items do impact cash
flows from investing activities (although their impact on such cash flows
differs from their impact on net income). For example, realized gains and losses
from the disposal of long-lived assets are included in the determination of net
income, although the proceeds from any such disposal are shown as part of cash
flows from investing activities.
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.
NL does not have complete access to the cash flows of its subsidiaries and
affiliates, in part due to limitations contained in certain credit agreements as
well as the fact that certain of such subsidiaries and affiliates are not 100%
owned by NL. A detail of NL's consolidated cash flows from operating activities
is presented in the table below. Eliminations consist of intercompany dividends
(most of which are paid by Kronos to NL).
Nine months ended
September 30,
------------------------
2003 2004
---- ----
(In millions)
Cash provided (used) by operating activities:
Kronos $ 83.4 $ 67.5
CompX 14.1 20.8
NL Parent (13.3) 7.6
Other 4.6 (.6)
Eliminations (7.0) (12.4)
------ ------
$ 81.8 $ 82.9
====== ======
Investing and financing activities
The Company's capital expenditures were $31.7 million and $13.6 million in
the first nine months of 2003 and 2004, respectively, the majority of which
relate to Kronos during the first six months of 2004. Approximately 80% of the
Company's consolidated capital expenditures in the first nine months of 2004
relate to Kronos and 20% relate to CompX.
In the first quarter of 2004 KII's operating subsidiaries in Germany,
Belgium and Norway borrowed a net Euro 26 million ($32 million when borrowed)
under the European revolving credit facility at an interest rate of 3.8%. Such
amounts were repaid in the second quarter of 2004.
In each of the first two quarters of 2004, Kronos paid a regular quarterly
cash dividend to its stockholders of $.25 per share, of which $12.0 million was
paid to Kronos shareholders other than NL and is reflected as a distribution to
minority interest on NL's Consolidated Statements of Cash Flows. Kronos' third
quarter 2004 dividend paid to NL was approximately $6.1 million and is reflected
as a distribution from Kronos on the Company's Consolidated Statement of Cash
Flows.
Component Products - CompX
CompX believes that its cash on hand, together with cash generated from
operations and borrowing availability under its new bank credit facility, will
be sufficient to meet CompX's liquidity needs for working capital, capital
expenditures and debt service requirements for the foreseeable future. To the
extent that CompX's actual operating results or developments differ from CompX's
expectations, CompX's liquidity could be adversely affected. CompX suspended its
regular quarterly dividend of $.125 per share in the second quarter of 2003. In
the fourth quarter of 2004, CompX resumed its regular quarterly dividend at the
$.125 per share rate.
Certain of the CompX's sales generated by its non-U.S. operations are
denominated in U.S. dollars. CompX periodically uses currency forward contracts
to manage a portion of foreign exchange rate risk associated with receivables or
similar exchange rate risk associated with future sales denominated in a
currency other than the holder's functional currency. CompX has not entered into
these contracts for trading or speculative purposes in the past, nor does CompX
currently anticipate entering into such contracts for trading or speculative
purposes in the future. At each balance sheet date, any such outstanding
currency forward contract is marked-to-market with any resulting gain or loss
recognized in income currently as part of net currency transactions. To manage
such exchange rate risk, at September 30, 2004, CompX held a series of contracts
maturing through November 2004 to exchange an aggregate of U.S. $3.1 million for
an equivalent amount of Canadian dollars at exchange rates ranging from Cdn.
$1.29 to Cdn. $1.31 per U.S. dollar. At September 30, 2004 the actual exchange
rate was Cdn. $1.28 per U.S. dollar.
CompX periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, dividend policy and estimated
future operating cash flows. As a result of this process, CompX has in the past
and may in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities, modify its dividend policy,
repurchase shares of its common stock or take a combination of such steps or
other steps to manage its liquidity and capital resources. In the normal course
of business, CompX may review opportunities for acquisitions, divestitures,
joint ventures or other business combinations in the component products
industry. In the event of any such transaction, CompX may consider using its
then-available cash, issuing additional equity securities or increasing the
indebtedness of CompX or its subsidiaries.
Chemicals - Kronos
At September 30, 2004, Kronos had cash, cash equivalents and marketable
debt securities of $122.0 million, including restricted balances of $3.5
million, and Kronos had $144 million available for borrowing under its U.S. and
non-U.S. credit facilities.
At September 30, 2004, Kronos' outstanding debt was comprised of (i) $350.2
million related to KII's Senior Secured Notes and (ii) $348,000 of other
indebtedness. In addition, Kronos had a $200 million long-term note payable to
affiliates due in 2010, including $31.4 million payable to NL. In October 2004,
Kronos prepaid $100 million (including interest) of such note receivable held by
Valhi.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions significantly impact Kronos' earnings and operating cash
flows. Cash flows from operations is considered the primary source of liquidity
for Kronos. Changes in TiO2 pricing, production volume and customer demand,
among other things, could significantly affect the liquidity of Kronos.
See Note 14 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of Kronos' income tax
returns in various U.S. and non-U.S. jurisdictions.
Kronos 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, Kronos has in the past and may in the future seek to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, 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, Kronos may review opportunities for
acquisitions, divestitures, joint ventures or other business combinations in the
chemicals or other industries, as well as the acquisition of interests in, and
loans to, related entities. In the event of any such transaction, Kronos may
consider using its available cash, issuing its equity securities or increasing
its indebtedness to the extent permitted by the agreements governing Kronos'
existing debt.
Kronos has substantial operations located outside the United States for
which the functional currency is not the U.S. dollar. As a result, the reported
amounts of Kronos' assets and liabilities related to its non-U.S. operations,
and therefore Kronos' and the Company's consolidated net assets, will fluctuate
based upon changes in currency exchange rates.
Provisions contained in certain of Kronos' credit agreements could result
in the acceleration of the applicable indebtedness prior to its stated maturity
for reasons other than defaults from failing to comply with typical financial
covenants. For example, certain credit agreements allow the lender to accelerate
the maturity of the indebtedness upon a change of control (as defined) of the
borrower. In addition, certain credit agreements could result in the
acceleration of all or a portion of the indebtedness following a sale of assets
outside the ordinary course of business. Other than operating leases discussed
in the 2003 Annual Report, neither NL nor any of its subsidiaries or affiliates
are parties to any off-balance sheet financing arrangements.
In October 2004, Kronos filed a registration statement with the SEC for a
proposed offering of up to 8.25 million shares of its common stock. The
registration statement has not yet been declared effective by the SEC. There can
be no assurance that the registration statement will be declared effective, or
if declared effective, that the offering would be completed. The securities may
not be offered for sale or sold nor may offers to buy be accepted prior to the
time the registration statement becomes effective. If the offering is completed,
Kronos would use a portion of the net proceeds from such offering to repay the
remaining balance of its long-term note payable to affiliates (including the
$31.4 million owed to NL), with the balance of the net proceeds available for
Kronos' general corporate purposes, including possible acquisitions.
NL Industries
At September 30, 2004, NL (exclusive of CompX and Kronos) had (i) current
cash and cash equivalents aggregating $35.5 million, (ii) current restricted
cash equivalents of $7.4 million, (iii) current restricted marketable debt
securities of $9.2 million and (iv) noncurrent restricted marketable debt
securities of $5.6 million. Of such restricted balances, $17 million was held by
special purpose trusts, the assets of which can only be used to pay for certain
of NL's future environmental remediation and other environmental expenditures.
NL also has a $31.4 million long-term note receivable from Kronos due in 2010.
As discussed above, Kronos has filed a registration statement with the SEC for a
proposed offering of up to 8.25 million shares of its common stock. Assuming the
offering is completed, Kronos has stated that it intends to use a portion of the
net proceeds from such offering to prepay its remaining notes payable to
affiliates, including the $31.4 million held by NL.
See Note 14 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of NL's income tax
returns, and see Note 17 to the Consolidated Financial Statements and Part II,
Item 1, "Legal Proceedings" with respect to certain legal proceedings and
environmental matters with respect to NL.
In December 2003, NL completed the distribution of approximately 48.8% of
Kronos' outstanding common stock to its shareholders under which NL shareholders
received one share of Kronos' common stock for every two shares of NL common
stock held. Approximately 23.9 million shares of Kronos common stock were
distributed. Immediately prior to the distribution of shares of Kronos common
stock, Kronos distributed a $200 million promissory note payable by Kronos to NL
(of which NL transferred $168.6 million to Valhi and Valcor in connection with
NL's acquisition of the shares of CompX common stock previously held by Valhi
and Valcor, as discussed in Note 1 to the Consolidated Financial Statements).
During the first nine months of 2004, NL paid its three $.20 per share regular
quarterly dividend in the form of shares of Kronos common stock in which an
aggregate of approximately 966,000 shares, or approximately 2% of Kronos'
outstanding common stock, were distributed to NL shareholders (including Valhi
and an affiliate of Valhi) in the form of pro-rata dividends. Valhi and NL are
members of the Contran Tax Group. NL's distribution of such shares of Kronos
common stock is taxable to NL, and NL is required to recognize a taxable gain
equal to the difference between the fair market value of the shares of Kronos
common stock distributed and NL's adjusted tax basis in such stock at the
applicable date of distribution. With respect to the shares of Kronos
distributed to Valhi and an affiliate of Valhi (806,000 shares in the
aggregate), the terms of NL's tax sharing agreement with Valhi, as amended in
December 2003, do not require NL to pay up to Valhi the tax liability generated
from the distribution of such Kronos shares to Valhi and an affiliate of Valhi,
since the tax on that portion of the gain is deferred at the Valhi level due to
Valhi and NL being members of the same tax group. NL was required to recognize a
tax liability with respect to the Kronos shares distributed to NL shareholders
other than Valhi and an affiliate of Valhi, and such tax liability aggregated
approximately $1.9 million.
Following the second of such quarterly dividends in 2004, NL no longer
owned a majority of Kronos' outstanding common stock, and accordingly NL ceased
to consolidate Kronos as of July 1, 2004.
On September 24, 2004, NL completed the acquisition the CompX shares
previously held by Valhi and Valcor at a purchase price of $16.25 per share, or
an aggregate of approximately $168.6 million. The purchase price was paid by
NL's transfer to Valhi and Valcor of $168.6 million of NL's $200 million
long-term note receivable from Kronos (which long-term note was eliminated in
the preparation of the Company's consolidated financial statements). See Note 1
to the Consolidated Financial Statements. NL's acquisition was accounted for
under GAAP as a transfer of net assets among entities under common control, and
accordingly resulted in a change in reporting entity and the Company has
retroactively restated its consolidated financial statements to reflect the
consolidation of CompX for all periods presented.
NL 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, NL has in the past and may in the future seek to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, 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, NL may review opportunities for acquisitions,
divestitures, joint ventures or other business combinations in the chemicals or
other industries, as well as the acquisition of interests in, and loans to,
related entities. In the event of any such transaction, NL may consider using
its available cash, issuing its equity securities or increasing its indebtedness
to the extent permitted by the agreements governing NL's existing debt.
Non-GAAP financial measures
In an effort to provide investors with additional information regarding the
Company's results of operations as determined by GAAP, the Company has disclosed
certain non-GAAP information which the Company believes provides useful
information to investors.
o The Company discloses percentage changes in Kronos' average TiO2 selling
prices in billing currencies, which excludes the effects of foreign
currency translation. The Company believes disclosure of such percentage
changes allows investors 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.
ITEM 4. 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 Chief Executive
Officer, and Gregory M. Swalwell, the Company's Vice President, Finance and
Chief Financial Officer, have evaluated the Company's disclosure controls and
procedures as of September 30, 2004. 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 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 September 30, 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
system of internal controls over financial reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 will require the Company to
annually include a management report on internal control over financial
reporting starting in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004. The Company's independent auditors will also be
required to annually attest to the Company's internal control over financial
reporting. In order to achieve compliance with Section 404, the Company has been
documenting, testing and evaluating its internal control over financial
reporting since 2003, using a combination of internal and external resources.
The process of documenting, testing and evaluating the Company's internal
control over financial reporting under the applicable guidelines is complex and
time consuming, and available internal and external resources necessary to
assist the Company in the documentation and testing required to comply with
Section 404 are limited. While the Company currently believes it has dedicated
the appropriate resources and that it will be able to fully comply with Section
404 in its Annual Report on Form 10-K for the year ended December 31, 2004 and
be in a position to conclude that the Company's internal control over financial
reporting is effective as of December 31, 2004, because the applicable
requirements are complex and time consuming, and because currently unforeseen
events or circumstances byond the Company's control could arise, there can be no
assurance that the Company will ultimately be able to fully comply with Section
404 in its Annual Report on Form 10-K for the year ended December 31, 2004 or
whether it will be able to conclude the Company's internal control over
financial reporting is effective as of December 31, 2004.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 17 to the Consolidated Financial Statements, the
2003 Annual Report and the Company's Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2004 and June 30, 2004 for descriptions of certain
previously reported legal proceedings.
Thomas v. Lead Industries Association, et al. (Circuit Court, Milwaukee,
Wisconsin, Case No. 99-CV-6411). In September 2004, the Wisconsin Supreme Court
granted plantiff's petition for review of the appellate court's June 2004
decision affirming the trial court's dismissal of all of the plaintiff's claims.
Smith, et al. v. Lead Industries Association, et al. (Circuit Court for
Baltimore City, Maryland, Case No. 24-C-99-004490). In September 2004, the
Maryland Court of Appeals granted plaintiffs' petition for review of the
appellate court's dismissal of certain of the plaintiffs' claims.
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). In
September 2004, the court amended the scheduling order and reset the trial date
for January 2006.
Spring Branch Independent School District v. Lead Industries Association,
et al. (District Court of Harris County, Texas, No. 2000-31175). The time for
plaintiff's appeal of the appellate court's June 2004 decision granting
defendant's motion for summary judgment expired in August 2004.
Jackson, et al., v. Phillips Building Supply of Laurel, et al. (Circuit
Court of Jones County, Mississippi, Dkt. Co. 2002-10-CV1). In August 2004,
plaintiffs voluntarily agreed to sever one of the plaintiffs, and defendants
withdrew their motion to sever such plaintiff.
The Quapaw Tribe of Oklahoma et al. v. ASARCO Incorporated et al. (United
States District Court, Northern District of Oklahoma, Case No. 03C-V846 H). In
September 2004, the court stayed the case pending an appeal by the tribe related
to sovereign immunity issues.
In July 2004, the U.S EPA and the Company entered into an administrative
order on consent to perform a removal action with respect to the site of a
formerly owned lead smelting facility in Collinsville, Illinois.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Company has retained a signed original of any exhibit listed below
that contains signatures, and the Company will provide any such
exhibit to the SEC or its staff upon request. The Company will also
furnish, without charge, a copy of its Code of Business Conduct and
Ethics, its Audit Committee Charter and its Corporate Governance
Guidelines, each as approved by the Company's board of directors and
each of which are also available at the Company's website at
www.nl-ind.com, 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.
10.1 - First Amendment Agreement, dated September 3, 2004, Relating to
a Facility Agreement dated June 25, 2002 among Kronos Titan GmbH,
Kronos Europe S.A./N.V., Kronos Titan AS and Titania A/S, as
borrowers, Kronos Titan GmbH, Kronos Europe S.A./N.V. and Kronos
Norge AS, as guarantors, Kronos Denmark ApS, as security
provider, with Deutsche Bank Luxembourg S.A., acting as agent -
incorporated by reference to Exhibit 10.8 to the Registration
Statement on Form S-1 of Kronos Worldwide, Inc. (File No.
333-119639).
10.2 - Stock Purchase Agreement dated September 24, 2004 between
Valhi, Inc. and Valcor, Inc., as sellers, and NL Industries, Inc.
as purchaser - incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K of the Registrant dated September 24,
2004.
10.3 - Promissory Note dated September 24, 2004 in the original
principal amount of $31,422,500.00 payable to the order of NL
Industries, Inc. and executed by Kronos Worldwide, Inc. -
incorporated by reference to Exhibit 10.2 to the Current Report
on Form 8-K of the Registrant dated September 24, 2004.
10.4 - Promissory Note dated September 24, 2004 in the original
principal amount of $162,500,000.00 payable to the order of
Valcor, Inc. and executed by Kronos Worldwide, Inc. -
incorporated by reference to Exhibit 99.1 to the Current Report
on Form 8-K of the Registrant dated September 24, 2004.
10.5 - Promissory Note dated September 24, 2004 in the original
principal amount of $6,077,500.00 payable to the order of Valhi,
Inc. and executed by Kronos Worldwide, Inc. - incorporated by
reference to Exhibit 99.2 to the Current Report on Form 8-K of
the Registrant dated September 24, 2004.
10.6 - Subscription agreement executed on October 5, 2004 but
effective as of October 1, 2004 among NL Industries, Inc., TIMET
Finance Management Company and CompX Group, Inc. - incorporated
by reference to Exhibit 99.1 to the Current Report on Form 8-K of
the Registrant dated October 5, 2004.
10.7 - Voting agreement executed on October 5, 2004 but effective as
of October 1, 2004 among NL Industries, Inc., TIMET Finance
Management Company and CompX Group, Inc. - incorporated by
reference to Exhibit 99.2 to the Current Report on Form 8-K of
the Registrant dated October 5, 2004.
31.1 - Certification
31.2 - Certification
32.1 - Certification
(b) Reports on Form 8-K Reports on Form 8-K for the quarter ended
September 30, 2004.
August 6, 2004 - Reported Item 9 and Item 12
September 1, 2004 - Reported Item 7.01 and Item 9.01
September 7, 2004 - Reported Item 1.01 and Item 2.03
September 29, 2004 - Reported Item 1.01, Item 2.01, Item 7.01 and Item
9.01
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NL INDUSTRIES, INC.
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(Registrant)
Date November 8, 2004 By /s/ Gregory M. Swalwell
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Gregory M. Swalwell
Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
Date November 8, 2004 By /s/ James W. Brown
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James W. Brown
Vice President and Controller
(Principal Accounting Officer)