SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the fiscal year ended December 31, 2005
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Commission file number 1-640
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NL INDUSTRIES, INC.
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(Exact name of Registrant as specified in its charter)
New Jersey 13-5267260
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common stock New York Stock Exchange
($.125 par value)
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark:
If the Registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes No X
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If the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes No X
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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
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If disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. Yes No X
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Whether the Registrant is a large accelerated filer, an accelerated filer
or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large
accelerated filer Accelerated filer X Non-accelerated filer
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Whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes No X
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The aggregate market value of the 7.9 million shares of voting stock held by
nonaffiliates of NL Industries, Inc. as of June 30, 2005 (the last business day
of the Registrant's most recently-completed second fiscal quarter) approximated
$121 million.
As of February 28, 2006, 48,563,034 shares of the Registrant's common stock were
outstanding.
Documents incorporated by reference
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
PART I
ITEM 1. BUSINESS
NL Industries, Inc. (NYSE: NL), organized as a New Jersey corporation in
1891, has operations through majority-owned subsidiaries and less than
majority-owned affiliates in the component products and chemicals industries.
Information regarding the Company's business segments and the companies
conducting such businesses is set forth below. Business and geographic segment
financial information is included in Note 3 to the Consolidated Financial
Statements, which information is incorporated herein by reference. The Company
is based in Dallas, Texas.
Component Products CompX is a leading manufacturer of precision ball bearing
CompX International Inc.- 70% slides, security products and ergonomic computer support
owned at December 31, 2005 systems used in office furniture, computer-related
applications and a variety of other industries. CompX has
production facilities in North America and Asia.
Chemicals Kronos is a leading global producer and marketer of
Kronos Worldwide, Inc. - 36% value-added titanium dioxide pigments ("TiO2"), which are
owned at December 31, 2005 used for imparting whiteness, brightness and opacity to a
diverse range of customer applications and end-use markets,
including coatings, plastics, paper and other industrial
and consumer "quality-of-life" products. Kronos has
production facilities in Europe and North America. Sales
of TiO2 represent about 90% of Kronos' total sales in 2005,
with sales of other products that are complementary to
Kronos' TiO2 business comprising the remainder.
At December 31, 2005, (i) Valhi (NYSE: VHI) held approximately 83% of NL's
outstanding common stock, (ii) Contran Corporation and its subsidiaries held
approximately 92% of Valhi's outstanding common stock, (iii) Valhi held an
additional 57% of Kronos' outstanding common stock and (iv) Titanium Metals
Corporation ("TIMET") (NYSE:TIE), an affiliate of Valhi, held an additional 18%
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.
Consequently, Mr. Simmons may be deemed to control such companies. See Notes 1
and 17 to the Consolidated Financial Statements.
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 legal and
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. See Note 2 to the
Consolidated Financial Statements.
Prior to July 2004, the Company owned a majority of Kronos' outstanding
common stock, and the Company accounted for its ownership interest in Kronos as
a consolidated subsidiary. 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. See Note 2 to the Consolidated Financial
Statements.
CompX and Kronos each file periodic reports with the Securities and
Exchange Commission ("SEC"). The information set forth below with respect to
such companies has been derived from such reports.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Annual Report on Form 10-K relating to matters that are not historical facts,
including, but not limited to, statements found in this Item 1 - "Business,"
Item 1A - "Risk Factors," Item 3 - "Legal Proceedings," Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Item 7A - "Quantitative and Qualitative Disclosures About Market Risk," are
forward-looking statements that represent management's beliefs and assumptions
based on currently available information. Forward-looking statements can be
identified by the use of words such as "believes," "intends," "may," "should,"
"could," "anticipates," "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 from those described herein are the risks and uncertainties
discussed in this Annual Report and those described from time to time in the
Company's other filings with the SEC including, but not limited to, the
following:
o Future supply and demand for the Company's products,
o The extent of the dependence of certain of the Company's businesses on
certain market sectors,
o The cyclicality of the Company's businesses (such as Kronos' TiO2
operations),
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 and component products),
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 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, natural disasters, fires, explosions, unscheduled or unplanned
downtime and transportation interruptions),
o The timing and amounts of insurance recoveries,
o The ability of the Company to renew or refinance credit facilities,
o The ultimate outcome of income tax audits, tax settlement initiatives or
other tax matters,
o 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 benefits of
which have been recognized under the "more-likely-than-not" recognition
criteria,
o Environmental matters (such as those requiring compliance with emission and
discharge standards for existing and new facilities as well as adjustments
to environmental remediation at sites related to former operations of the
Company),
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 currently forecasted or
expected. The Company disclaims any intention or obligation to update or revise
any forward-looking statement whether as a result of changes in information,
future events or otherwise.
COMPONENT PRODUCTS - COMPX INTERNATIONAL INC.
General. CompX is a leading manufacturer of precision ball bearing slides,
security products (cabinet locks and other locking mechanisms) and ergonomic
computer support systems used in office furniture, computer-related applications
and a variety of other industries. CompX's products are principally designed for
use in medium- to high-end product applications, where design, quality and
durability are critical to CompX's customers. CompX believes that it is among
the world's largest producers of precision ball bearing slides, security
products and ergonomic computer support systems. In 2005, precision ball bearing
slides, security products and ergonomic computer support systems accounted for
approximately 42%, 43% and 15%, respectively, of net sales related to continuing
operations, respectively.
In January 2005, CompX completed the disposition of all of the net assets
of its Thomas Regout operations conducted in the Netherlands. Thomas Regout's
results of operations are classified as discontinued operations in the Company's
Consolidated Financial Statements. In August 2005, the Company completed the
acquisition of a component product business for aggregate cash consideration of
$7.3 million, net of cash acquired. See Notes 2 and 24 to the Consolidated
Financial Statements.
Products, product design and development. Precision ball bearing slides
manufactured to stringent industry standards are used in such applications as
office furniture, computer-related equipment, file cabinets, desk drawers,
automated teller machines, tool storage cabinets and imaging equipment. These
products include CompX's patented Integrated Slide Lock in which a file cabinet
manufacturer can reduce the possibility of multiple drawers being opened at the
same time, the adjustable patented Ball Lock which reduces the risk of
heavily-filled drawers, such as auto mechanic tool boxes, from opening while in
movement, and the Self-Closing Slide, which is designed to assist in closing a
drawer and is used in applications such as bottom mount freezers.
Security products are used in various applications including ignition
systems, office furniture, vending and gaming machines, parking meters,
electrical circuit panels, storage compartments, security devices for laptop and
desktop computers as well as mechanical and electronic locks for the toolbox,
medical and other industries. These products include CompX's KeSet high security
system, which has the ability to change the keying on a single lock 64 times
without removing the lock from its enclosure and its patented, high-security
TuBar locking system. CompX believes it is a North American market leader in the
manufacture and sale of cabinet locks and other locking mechanisms.
Ergonomic computer support systems include articulating computer keyboard
support arms (designed to attach to desks in the workplace and home office
environments to alleviate possible strains and stress and maximize usable
workspace), CPU storage devices which minimize adverse effects of dust and
moisture and a number of complementary accessories, including ergonomic wrist
rest aids, mouse pad supports and flat screen computer monitor support arms.
These products include CompX's Leverlock keyboard arm, which is designed to make
the adjustment of an ergonomic keyboard arm easier. In addition, CompX offers
its engineering and design capabilities for the design and manufacture of
products on a proprietary basis for key customers.
CompX's precision ball bearing slides and ergonomic computer support
systems are sold under the CompX Precision Slides, CompX Waterloo, Waterloo
Furniture Components, CompX DurISLide, and CompX Dynaslide brand names. Security
products are sold under the CompX Security Products, National Cabinet Lock, Fort
Lock, Timberline Lock, Chicago Lock, Stock Locks, KeSet, eLock, ACE II and TuBar
brand names. Ergonomic products are sold under the CompX ErgonomX brand name.
CompX believes that its brand names are well recognized in the industry.
Sales, marketing and distribution. CompX sells components to original
equipment manufacturers ("OEMs") and to distributors through a dedicated sales
force. The majority of CompX's sales are to OEMs, while the balance represents
standardized products sold through distribution channels. Sales to large OEM
customers are made through the efforts of factory-based sales and marketing
professionals and engineers working in concert with field salespeople and
independent manufacturers' representatives. Manufacturers' representatives are
selected based on special skills in certain markets or relationships with
current or potential customers.
A significant portion of CompX's sales are made through distributors. CompX
has a significant market share of cabinet lock sales to the locksmith
distribution channel. CompX supports its distributor sales with a line of
standardized products used by the largest segments of the marketplace. These
products are packaged and merchandised for easy availability and handling by
distributors and the end users. Based on CompX's successful STOCK LOCKS
inventory program, similar programs have been implemented for distributor sales
of ergonomic computer support systems and to some extent precision ball bearing
slides. CompX also operates a small tractor/trailer fleet associated with its
Canadian facilities to provide an industry-unique service response to major
customers for those Canadian manufactured products.
CompX does not believe it is dependent upon one or a few customers, the
loss of which would have a material adverse effect on its operations. In 2005,
the ten largest customers accounted for about 43% of component products sales
(2004 - 43%; 2003 - 44%). In 2004 and 2005, one customer accounted for 11% and
10%, respectively, of CompX's sales. No single customer accounted for more than
10% of CompX's sales in 2003.
Manufacturing and operations. At December 31, 2005, CompX operated six
manufacturing facilities in North America related to its continuing operations
(two in Illinois and one in each of Canada, South Carolina, Wisconsin and
Michigan) and two in Taiwan. Precision ball bearing slides are manufactured in
the facilities located in Canada, Michigan and Taiwan. Security products are
manufactured in the facilities located in South Carolina and Illinois. Ergonomic
products are manufactured in the facility located in Canada. Other component
products are manufactured at the Wisconsin facility acquired in 2005. The
Company owns all of these facilities except for one of the Taiwan facilities
which is leased. CompX also leases a distribution center in California. CompX
believes that all of its facilities are well maintained and satisfactory for
their intended purposes.
Raw materials. Coiled steel is the major raw material used in the
manufacture of precision ball bearing slides and ergonomic computer support
systems. Plastic resins for injection molded plastics are also an integral
material for ergonomic computer support systems. Purchased components and zinc
are the principal raw materials used in the manufacture of security products.
These raw materials are purchased from several suppliers and are readily
available from numerous sources.
CompX occasionally enters into raw material purchase arrangements to
mitigate the short-term impact of future increases in raw material costs. While
these arrangements do not commit CompX to a minimum volume of purchases, they
generally provide for stated unit prices based upon achievement of specified
volume purchase levels. This allows CompX to stabilize raw material purchase
prices, provided the specified minimum monthly purchase quantities are met.
Materials purchased outside of these arrangements are sometimes subject to
unanticipated and sudden price increases. Due to the competitive nature of the
markets served by CompX's products, it is often difficult to recover such
increases in raw material costs through increased product selling prices or raw
material surcharges. Consequently, overall operating margins can be affected by
such raw material cost pressures.
Competition. The markets in which CompX participates are highly
competitive. CompX competes primarily on the basis of product design, including
ergonomic and aesthetic factors, product quality and durability, price, on-time
delivery, service and technical support. CompX focuses its efforts on the middle
and high-end segments of the market, where product design, quality, durability
and service are placed at a premium.
CompX competes in the precision ball bearing slide market primarily on the
basis of product quality and price with two large manufacturers and a number of
smaller domestic and foreign manufacturers. CompX competes in the security
products market with a variety of relatively small domestic and foreign
competitors. CompX competes in the ergonomic computer support system market
primarily on the basis of product quality, features and price with one major
producer and a number of smaller domestic unique manufacturers, and primarily on
the basis of price with a number of smaller domestic and foreign manufacturers.
Although CompX believes that it has been able to compete successfully in its
markets to date, price competition from foreign-sourced products has intensified
in the current economic market. There can be no assurance that CompX will be
able to continue to successfully compete in all of its existing markets in the
future.
Patents and trademarks. CompX holds a number of patents relating to its
component products, certain of which are believed to be important to CompX and
its continuing business activity. CompX's patents generally have a term of 20
years, and have remaining terms ranging from less than 3 years to 18 years at
December 31, 2005. CompX's major trademarks and brand names including CompX,
CompX Security Products, CompX Waterloo, CompX ErgonomX, National Cabinet Lock,
KeSet, Fort Lock, Timberline Lock, Chicago Lock, ACE II, TuBar, STOCK LOCKS,
ShipFast, Waterloo Furniture Components Limited, CompX DurISLide and CompX
Dynaslide, which are protected by registration in the United States and
elsewhere with respect to the products CompX manufactures and sells. CompX
believes such trademarks are well recognized in the component products industry.
Regulatory and environmental matters. CompX's operations are subject to
federal, state, local and foreign laws and regulations relating to the use,
storage, handling, generation, transportation, treatment, emission, discharge,
disposal and remediation of, and exposure to, hazardous and non-hazardous
substances, materials and wastes. CompX's operations are also subject to
federal, state, local and foreign laws and regulations relating to worker health
and safety. CompX believes that it is in substantial compliance with all such
laws and regulations. The costs of maintaining compliance with such laws and
regulations have not significantly impacted CompX to date, and CompX has no
significant planned costs or expenses relating to such matters. There can be no
assurance, however, that compliance with future laws and regulations will not
require CompX to incur significant additional expenditures, or that such
additional costs would not have a material adverse effect on CompX's
consolidated financial condition, results of operations or liquidity.
Employees. As of December 31, 2005, CompX employed approximately 1,230
persons, including 750 in the United States, 330 in Canada, and 150 in Taiwan.
Approximately 70% of CompX's employees in Canada are represented by a labor
union covered by a collective bargaining agreement which provides for annual
wage increases from 1% to 2.5% over the life of the contract. A new collective
bargaining agreement was ratified in December 2005 and expires in January 2009.
Wage increases for these Canadian employees historically have also been in line
with overall inflation indices. CompX believes its labor relations are
satisfactory.
CHEMICALS - KRONOS WORLDWIDE, INC.
General. Kronos is a leading global producer and marketer of value-added
TiO2, an inorganic chemical used for imparting whiteness, brightness and opacity
to a diverse range of customer applications and end-use markets, including
paints, paper, plastics, paper, ink, textiles, ceramics, food and cosmetics.
TiO2 is considered to be a "quality-of-life" product with demand affected by the
gross domestic product in various regions of the world. TiO2, the largest
commercially used whitening pigment by volume, derives its value from its
whitening properties and opacifying ability (commonly referred to as hiding
power). As a result of TiO2's high refractive index rating, it can provide more
hiding power than any other commercially produced white pigment. In addition,
TiO2 demonstrates excellent resistance to chemical attack, good thermal
stability and resistance to ultraviolet degradation. TiO2 is supplied to
customers in either a powder or slurry form.
By volume, approximately one-half of Kronos' 2005 sales volumes were
attributable to markets in Europe with approximately 38% to North America and
the balance to export markets. Kronos believes it is the second-largest producer
of TiO2 in Europe, with an estimated 20% share of European TiO2 sales volumes in
2005 and has an estimated 15% share of North American TiO2 sales volumes.
Per capita consumption of TiO2 in the United States and Western Europe far
exceeds consumption in other areas of the world and these regions are expected
to continue to be the largest consumers of TiO2. Significant markets for TiO2
consumption could emerge in Eastern Europe, the Far East or China, as the
economies in these regions continue to develop to the point that quality-of-life
products, including TiO2, experience greater demand.
Products and operations. TiO2 is produced in two crystalline forms: rutile
and anatase. Both the chloride and sulfate production processes (discussed
below) produce rutile TiO2. Chloride process rutile is preferred for the
majority of customer applications. From a technical standpoint, chloride process
rutile has a bluer undertone and higher durability than sulfate process rutile
TiO2. Although many end-use applications can use either form of TiO2, chloride
process rutile TiO2 is the preferred form for use in coatings and plastics, the
two largest end-use markets. Anatase TiO2, which is produced only through the
sulfate production process, represents a much smaller percentage of annual
global TiO2 production and is preferred for use in selected paper, ceramics,
rubber tires, man-made fibers, food and cosmetics.
Kronos believes that there are no effective substitutes for TiO2.
Extenders, such as kaolin clays, calcium carbonate and polymeric opacifiers, are
used in a number of end-use markets; however the opacity in these products is
not able to duplicate the performance characteristics of TiO2, and Kronos
believes these products are unlikely to replace TiO2.
Kronos currently produces over 40 different TiO2 grades, sold under the
Kronos trademark, which provide a variety of performance properties to meet
customers' specific requirements. Kronos' major customers include domestic and
international paint, plastics and paper manufacturers.
Kronos and its distributors and agents sell and provide technical services
for its products to over 4,000 customers in over 100 countries with the majority
of sales in Europe and North America. TiO2 is distributed by rail and truck in
either dry or slurry form and by ocean carrier in dry form. Kronos and its
predecessors have produced and marketed TiO2 in North America and Europe for
over 80 years. Kronos believes that it has developed considerable expertise and
efficiency in the manufacture, sale, shipment and service of its products in
domestic and international markets.
Sales of TiO2 represented about 90% of Kronos' total sales in 2005. Sales
of other products, complementary to Kronos' TiO2 business, are comprised of the
following:
o Kronos owns an ilmenite mine in Norway operated pursuant to a governmental
concession with an unlimited term. Ilmenite is a raw material used directly
as a feedstock by some sulfate-process TiO2 plants, including all of
Kronos' European sulfate-process plants. The mine has estimated reserves
that are expected to last at least 50 years. Ilmenite sales to
third-parties represented approximately 5% of Kronos' consolidated net
sales in 2005.
o Kronos manufactures and sells iron-based chemicals, which are by-products
and processed by-products of the TiO2 pigment production process. These
co-product chemicals are marketed through Kronos' Ecochem division, and are
used primarily as treatment and conditioning agents for industrial
effluents and municipal wastewater as well as in the manufacture of iron
pigments, cement and agricultural products. Sales of iron based chemical
products were about 4% of chemical sales in 2005.
o Kronos manufactures and sells certain titanium chemical products (titanium
oxychloride and titanyl sulfate), which are side-stream products from the
production of TiO2. Titanium oxychloride is used in specialty applications
in the formulation of pearlescent pigments, production of electroceramic
capacitors for cell phones and other electronic devices. Titanyl sulfate
products are used primarily in pearlescent pigments. Sales of these
products were about 1% of chemical sales in 2005.
Manufacturing process, properties and raw materials. Kronos manufactures
TiO2 using both the chloride process and the sulfate process. Approximately 73%
of Kronos' current production capacity is based on the chloride process. The
chloride process is a continuous process in which chlorine is used to extract
rutile TiO2. The chloride process typically has lower manufacturing costs than
the sulfate process due to higher yield and production of less waste and lower
energy requirements and labor costs. Because much of the chlorine is recycled
and feedstock bearing a higher titanium content is used, the chloride process
produces less waste than the sulfate process. The sulfate process is a batch
chemical process that uses sulfuric acid to extract TiO2. Sulfate technology can
produce either anatase or rutile pigment. Once an intermediate TiO2 pigment has
been produced by either the chloride or sulfate process, it is "finished" into
products with specific performance characteristics for particular end-use
applications through proprietary processes involving various chemical surface
treatments and intensive micronizing (milling). Due to environmental factors and
customer considerations, the proportion of TiO2 industry sales represented by
chloride-process pigments has increased relative to sulfate-process pigments
and, in 2005, chloride-process production facilities represented approximately
64% of industry capacity.
During 2005, Kronos operated four TiO2 facilities in Europe (one in each of
Leverkusen, Germany, Nordenham, Germany, Langerbrugge, Belgium and Fredrikstad,
Norway). In North America, Kronos operates a TiO2 facility in Varennes, Quebec
and, through a manufacturing joint venture discussed below, has a one-half
interest in a TiO2 plant in Lake Charles, Louisiana. TiO2 is produced using the
chloride process at the Leverkusen, Langerbrugge, Varennes and Lake Charles
facilities, while TiO2 is produced using the sulfate process at the Nordenham,
Leverkusen, Fredrikstad and Varennes facilities. Kronos owns an ilmenite ore
mine in Norway operated pursuant to a governmental concession with an unlimited
term, and Kronos also owns a TiO2 slurry facility in Louisiana and leases
various corporate and administrative offices in the U.S. and various sales
offices in the U.S. and Europe. Kronos' co-products are produced at its
Norwegian, Belgian and German facilities, and its titanium chemicals are
produced at its Belgian and Canadian facilities. The Company believes the
transportation access to its facilities, which is generally maintained by the
applicable local government, is adequate for the Company's purposes.
All of Kronos' principal production facilities are owned, except for the
land under the Leverkusen and Fredrikstad facilities. The Fredrikstad plant is
located on public land and is leased until 2013, with an option to extend the
lease for an additional 50 years. Kronos leases the land under its Leverkusen
TiO2 production facility pursuant to a lease with Bayer AG that expires in 2050.
The Leverkusen facility, which is owned by Kronos and which represents
approximately one-third of Kronos' current TiO2 production capacity, is located
within Bayer's extensive manufacturing complex. Rent for such land lease
associated with the Leverkusen facility is periodically established by agreement
with Bayer for periods of at least two years at a time. Under a separate
supplies and services agreement expiring in 2011, Bayer provides some raw
materials, including chlorine, auxiliary and operating materials and utilities
and services necessary to operate the Leverkusen facility.
Kronos produced a company record 492,000 metric tons of TiO2 in 2005,
compared to the prior records of 484,000 metric tons in 2004 and 476,000 metric
tons in 2003. Such production amounts include the Company's one-half interest in
the joint venture owned Louisiana plant discussed below. Kronos' average
production capacity utilization rates were near full capacity in 2003, 2004 and
2005. Kronos' production capacity has increased by approximately 30% over the
past ten years due to debottlenecking programs, with only moderate capital
expenditures. Kronos believes its annual attainable production capacity for 2006
is approximately 510,000 metric tons, with some slight additional capacity
available in 2007 through Kronos' continued debottlenecking efforts.
The primary raw materials used in the TiO2 chloride production process are
titanium-containing feedstock, chlorine and coke. Chlorine and coke are
available from a number of suppliers. Titanium-containing feedstock suitable for
use in the chloride process is available from a limited but increasing number of
suppliers around the world, principally in Australia, South Africa, Canada,
India and the United States. Kronos purchased approximately 430,000 metric tons
of chloride feedstock in 2005, of which the vast majority was slag. Kronos
purchased chloride process grade slag in 2005 from a subsidiary of Rio Tinto plc
UK - Richards Bay Iron and Titanium Limited South Africa under a long-term
supply contract that expires at the end of 2007. Natural rutile ore is purchased
primarily from Iluka Resources, Limited (Australia) under a long-term supply
contract that expires at the end of 2009. Kronos does not expect to encounter
difficulties obtaining long-term extensions to existing supply contracts prior
to the expiration of the contracts. Raw materials purchased under these
contracts and extensions thereof are expected to meet Kronos' chloride process
feedstock requirements over the next several years.
The primary raw materials used in the TiO2 sulfate production process are
titanium-containing feedstock, derived primarily from rock and beach sand
ilmenite, and sulfuric acid. Sulfuric acid is available from a number of
suppliers. Titanium-containing feedstock suitable for use in the sulfate process
is available from a limited number of suppliers around the world. Currently, the
principal active sources are located in Norway, Canada, Australia, India and
South Africa. As one of the few vertically integrated producers of
sulfate-process pigments, Kronos owns and operates a rock ilmenite mine in
Norway, which provided all of Kronos' feedstock for its European sulfate-process
pigment plants in 2005. Kronos produced approximately 816,000 metric tons of
ilmenite in 2005, of which approximately 317,000 metric tons were used
internally with the remainder sold to third parties. For its Canadian
sulfate-process plant, Kronos also purchases sulfate grade slag (approximately
29,000 metric tons in 2005) primarily from Q.I.T. Fer et Titane Inc. Canada, a
subsidiary of Rio Tinto plc UK, under a long-term supply contract that expires
at the end of 2009. Raw materials purchased under these contracts and extensions
thereof are expected to meet the Company's sulfate process feedstock
requirements over the next several years. The contracts contain fixed quantities
that Kronos is required to purchase, although these contracts allow for an
upward or downward adjustment in the quantity purchased. The quantities under
these contracts do not require Kronos to purchase feedstock in excess of amounts
that Kronos would reasonably consume in any given year. The pricing under these
agreements is generally negotiated annually.
The number of sources of, and availability of, certain raw materials is
specific to the particular geographic region in which a facility is located. As
noted above, Kronos purchases titanium-bearing ore from three different
suppliers in different countries under multiple-year contracts. Political and
economic instability in certain countries from which Kronos purchases its raw
material supplies could adversely affect the availability of such feedstock.
Should Kronos' vendors not be able to meet their contractual obligations or
should Kronos be otherwise unable to obtain necessary raw materials, Kronos may
incur higher costs for raw materials or may be required to reduce production
levels, which may have a material adverse effect on Kronos' consolidated
financial position, results of operations or liquidity.
Quantities of Raw Materials Procured or
Mined
---------------------------------------------
---------------------------------------------
Production Process/Raw Material (In thousands of metric tons)
Chloride process plants -
purchased slag or natural rutile ore 433
Sulfate process plants:
Raw ilmenite ore mined internally 317
Purchased slag 29
TiO2 manufacturing joint venture. Subsidiaries of Kronos and Huntsman
Holdings LLC ("Huntsman") each own a 50%-interest in a manufacturing joint
venture, Louisiana Pigment Company ("LPC"). LPC owns and operates a
chloride-process TiO2 plant located in Lake Charles, Louisiana. Production from
the plant is shared equally by Kronos and Huntsman (the "Partners") pursuant to
separate offtake agreements.
A supervisory committee, composed of four members, two of which are
appointed by each Partner, directs the business and affairs of LPC including
production and output decisions. Two general managers, one appointed and
compensated by each Partner, manage the operations of the joint venture acting
under the direction of the supervisory committee.
Kronos is required to purchase one-half of the TiO2 produced by the joint
venture. The manufacturing joint venture operates on a break-even basis, and
accordingly Kronos does not report any equity in earnings of the joint venture.
With the exception of raw material and packaging costs for the pigment grades
produced, Kronos and Huntsman share all costs and capital expenditures of the
joint venture equally. Kronos' share of the net costs of the joint venture is
reported as a component of its cost of sales as the related TiO2 acquired from
the joint venture is sold.
Competition. The TiO2 industry is highly competitive. Kronos competes
primarily on the basis of price, product quality and technical service, and the
availability of high performance pigment grades. Although certain TiO2 grades
are considered specialty pigments, the majority of Kronos' grades and
substantially all of Kronos' production are considered commodity pigments with
price generally being the most significant competitive factor. Kronos believes
that it is the leading seller of TiO2 in several countries, including Germany,
with an estimated 12% share of worldwide Ti02 sales volume. Overall, Kronos is
the world's fifth largest producer of TiO2.
Kronos' principal competitors are E.I. du Pont de Nemours & Co. ("DuPont");
Millennium Chemicals, Inc.; Tronox Incorporated; Huntsman; and Ishihara Sangyo
Kaisha, Ltd. Kronos' five largest competitors have estimated individual shares
of TiO2 production capacity ranging from 24% to 4%, and an estimated aggregate
70% share of worldwide TiO2 production volume. DuPont has about one-half of
total North American TiO2 production capacity and is Kronos' principal North
American competitor.
Worldwide capacity additions in the TiO2 market resulting from construction
of greenfield plants require significant capital expenditures and substantial
lead time (typically three to five years in Kronos' experience). Kronos is not
aware of any greenfield plant under construction in the United States, Europe or
any other part of the world. However, a competitor has announced its intention
to build a greenfield facility in China, but it is not clear when construction
will begin and it is not likely that any product would be available until 2010,
at the earliest. During 2004, certain competitors either idled or shut down
facilities. However, Kronos does expect that industry capacity will increase as
Kronos and its competitors continue to debottleneck their existing facilities.
Based on the factors described above, Kronos expects that the average annual
increase in industry capacity from announced debottlenecking projects will be
less than the average annual demand growth for TiO2 during the next three to
five years. However, no assurance can be given that future increases in the TiO2
industry production capacity and future average annual demand growth rates for
TiO2 will conform to Kronos' expectations. If actual developments differ from
Kronos' expectations, Kronos and the TiO2 industry's performances could be
unfavorably affected.
Research and development. Kronos' expenditures for research and development
process technology and quality assurance activities were approximately $7
million in 2003, $8 million in 2004 and $9 million in 2005. Research and
development activities are conducted principally at the Leverkusen, Germany
facility. Such activities are directed primarily toward improving both the
chloride and sulfate production processes, improving product quality and
strengthening Kronos' competitive position by developing new pigment
applications.
Kronos continually seeks to improve the quality of its grades, and has been
successful at developing new grades for existing and new applications to meet
the needs of customers and increase product life cycle. Since 1999, thirteen new
grades have been added for plastics, coatings, fiber and paper laminate
applications.
Patents and trademarks. Patents held for products and production processes
are important to Kronos and its continuing business activities. Kronos seeks
patent protection for its technical developments, principally in the United
States, Canada and Europe, and from time to time enters into licensing
arrangements with third parties. Kronos' existing patents generally have a term
of 20 years from the date of filing, and have remaining terms ranging from one
to 20 years. Kronos seeks to protect its intellectual property rights, including
its patent rights, and from time to time Kronos is engaged in disputes relating
to the protection and use of intellectual property relating to its products.
Kronos' major trademarks, including Kronos, are protected by registration
in the United States and elsewhere with respect to those products it
manufactures and sells. Kronos also relies on unpatented proprietary know-how
and continuing technological innovation and other trade secrets to develop and
maintain its competitive position. Kronos' proprietary chloride production
process is an important part of Kronos' technology, and Kronos' business could
be harmed if Kronos should fail to maintain confidentiality of its trade secrets
used in this technology.
Customer base and annual seasonality. Kronos believes that neither its
aggregate sales nor those of any of its principal product groups are
concentrated in or materially dependent upon any single customer or small group
of customers. Kronos' largest ten customers accounted for approximately 26% of
sales in 2005. Neither Kronos' business as a whole or that of any of its
principal product groups is seasonal to any significant extent. Due in part to
the increase in paint production in the spring to meet the spring and summer
painting season demand, TiO2 sales are generally higher in the first half of the
year than in the second half of the year.
Employees. As of December 31, 2005, Kronos employed approximately 2,415
persons (excluding employees of the Louisiana joint venture), with 50 employees
in the United States, 420 employees in Canada and 1,945 employees in Europe.
Hourly employees in production facilities worldwide, including the TiO2
joint venture, are represented by a variety of labor unions, with labor
agreements having various expiration dates. In Europe, union employees are
covered by master collective bargaining agreements in the chemicals industry
that are renewed annually. In Canada, Kronos' union employees are covered by a
collective bargaining agreement that expires in June 2007. Kronos believes its
labor relations are good.
Regulatory and environmental matters. Kronos' operations are governed by
various environmental laws and regulations. Certain of Kronos' operations are,
or 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 and regulations. As with other companies engaged
in similar businesses, certain past and current operations and products of
Kronos have the potential to cause environmental or other damage. Kronos has
implemented and continues to implement various policies and programs in an
effort to minimize these risks. Kronos' policy is to maintain compliance with
applicable environmental laws and regulations at all its facilities and to
strive to improve its environmental performance. It is possible that future
developments, such as stricter requirements in environmental laws and
enforcement policies thereunder, could adversely affect Kronos' production,
handling, use, storage, transportation, sale or disposal of such substances as
well as Kronos' consolidated financial position, results of operations or
liquidity.
Kronos' U.S. manufacturing operations are governed by federal environmental
and worker health and safety laws and regulations, principally the Resource
Conservation and Recovery Act ("RCRA"), the Occupational Safety and Health Act,
the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the Toxic
Substances Control Act and the Comprehensive Environmental Response,
Compensation and Liability Act, as amended by the Superfund Amendments and
Reauthorization Act ("CERCLA"), as well as the state counterparts of these
statutes. Kronos believes the TiO2 plant owned by the LPC joint venture and the
TiO2 slurry facility owned by Kronos in Lake Charles, Louisiana are in
substantial compliance with applicable requirements of these laws or compliance
orders issued thereunder. Kronos has no other U.S. plants.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory framework is provided by the
European Union (the "EU"). Germany and Belgium are members of the EU and follow
its initiatives. Norway, although not a member of the EU, generally patterns its
environmental regulations after the EU. Kronos believes that it has obtained all
required permits and is in substantial compliance with applicable EU
requirements.
At its sulfate plant facilities in Leverkusen and Nordenham, Germany,
Kronos recycles weak sulfuric acid either through contracts with third parties
or using its own facilities. At Kronos' Fredrikstad, Norway plant, Kronos ships
its spent acid to a third party location where it is treated and disposed.
Kronos' Canadian sulfate plant neutralizes its spent acid and sells its gypsum
by-product to a local wallboard manufacturer. Kronos has a contract with a third
party to treat certain sulfate-process effluents at its German sulfate plants.
With regard to the German plants, either party may terminate the contract after
giving three or four years advance notice, depending on the contract.
From time to time, Kronos' facilities may be subject to environmental
regulatory enforcement under U.S. and foreign statutes. Resolution of such
matters typically involves the establishment of compliance programs.
Occasionally, resolution may result in the payment of penalties, but to date
such penalties have not involved amounts having a material adverse effect on
Kronos' consolidated financial position, results of operations or liquidity.
Kronos believes that all its plants are in substantial compliance with
applicable environmental laws.
Kronos' capital expenditures related to its ongoing environmental
protection and improvement programs in 2005 were approximately $4 million, and
are currently expected to be approximately $6 million in 2006.
OTHER
NL Industries, Inc. In addition to its 70% ownership of CompX and its 36%
ownership of Kronos at December 31, 2005, NL also holds certain marketable
securities and other investments. NL also owns 100% of EWI Re. Inc., an
insurance brokerage and risk management services company. See Notes 5 and 17 to
the Consolidated Financial Statements.
Foreign operations. Through its subsidiaries and affiliates, the Company
has substantial operations and assets located outside the United States,
principally chemicals operations in Germany, Belgium and Norway, chemicals and
component products operations in Canada and component products operations in
Taiwan. See Note 3 to the Consolidated Financial Statements. Approximately 71%
of Kronos' 2005 aggregate TiO2 sales were to non-U.S. customers, including 8% to
customers in areas other than Europe and Canada. Approximately 20% of CompX's
2005 sales were to non-U.S. customers located principally in Canada and Europe.
Foreign operations are subject to, among other things, currency exchange rate
fluctuations and the Company's results of operations have in the past been both
favorably and unfavorably affected by fluctuations in currency exchange rates.
See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 7A - "Quantitative and Qualitative Disclosures
About Market Risk."
CompX and Kronos have, from time to time, entered into currency forward
contracts to mitigate exchange rate fluctuation risk for a portion of its
receivables related to their Canadian operations denominated in currencies other
than the Canadian dollar (principally the U.S. dollar) or for similar risks
associated with future sales. CompX and Kronos may, from time to time, enter
into currency forward contracts to mitigate exchange rate fluctuation risk
associated with specific transactions, such as intercompany dividends or the
acquisition of a significant amount of assets. See Note 20 to the Consolidated
Financial Statements. Otherwise, the Company does not generally engage in
currency derivative transactions.
Political and economic uncertainties in certain of the countries in which
the Company operates may expose the Company to risk of loss. The Company does
not believe that there is currently any likelihood of material loss through
political or economic instability, seizure, nationalization or similar event.
The Company cannot predict, however, whether events of this type in the future
could have a material effect on its operations. The Company's manufacturing and
mining operations are also subject to extensive and diverse environmental
regulations in each of the foreign countries in which they operate, as discussed
in the respective business sections elsewhere herein.
Regulatory and environmental matters. Regulatory and environmental matters
are discussed in the respective business sections contained elsewhere herein and
in Item 3 - "Legal Proceedings." In addition, the information included in Note
19 to the Consolidated Financial Statements under the captions "Legal
proceedings -- lead pigment litigation" and - "Environmental matters and
litigation" is incorporated herein by reference.
Insurance. The Company maintains insurance for its businesses and
operations, with customary levels of coverage, deductibles and limits. See also
Item 3 - "Legal Proceedings - Insurance coverage claims" and Note 17 to the
Consolidated Financial Statements.
Acquisition and restructuring activities. The Company routinely compares
its liquidity requirements and alternative uses of capital against the estimated
future cash flows to be received from its subsidiaries and unconsolidated
affiliates, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policy, consider
the sale of interests in subsidiaries, business units, marketable securities or
other assets, or take a combination of such steps or other steps, to increase
liquidity, reduce indebtedness and fund future activities. Such activities have
in the past and may in the future involve related companies. From time to time,
the Company and related entities also evaluate the restructuring of ownership
interests among its subsidiaries and related companies and expects to continue
this activity in the future.
The Company and other entities that may be deemed to be controlled by or
affiliated with Mr. Harold C. Simmons routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. In a number of instances, the Company has actively managed the
businesses acquired with a focus on maximizing return-on-investment through cost
reductions, capital expenditures, improved operating efficiencies, selective
marketing to address market niches, disposition of marginal operations, use of
leverage and redeployment of capital to more productive assets. In other
instances, the Company has disposed of the acquired interest in a company prior
to gaining control. The Company intends to consider such activities in the
future and may, in connection with such activities, consider issuing additional
equity securities and increasing the indebtedness of NL, its subsidiaries and
related companies.
Website and other available information. The Company files reports, proxy
and information statements and other information with the SEC. NL maintains a
website on the Internet with the address of www.nl-ind.com. Copies of this
Annual Report on Form 10-K for the year ended December 31, 2005, copies of NL's
Quarterly Reports on Form 10-Q for 2005 and 2006 and any Current Reports on Form
8-K for 2005 and 2006, and any amendments thereto, are or will be available free
of charge at such website as soon as reasonably practical after they are filed
with the SEC. Additional information regarding NL, including NL's Audit
Committee charter and NL's Code of Business Conduct and Ethics, can also be
found at this website as required. Information contained on NL's website is not
part of this report. The Company will also provide to anyone without charge
copies of such documents upon written request to the Company. Such requests
should be directed to the attention of the Corporate Secretary at the Company's
address on the cover page of this Form 10-K.
The general public may read and copy any materials NL files with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. NL is an electronic filer,
and the SEC maintains an Internet website that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC, including NL. The Internet address of the SEC's
website is www.sec.gov.
ITEM 1A. RISK FACTORS
Listed below are certain risk factors associated with the Company and its
businesses. In addition to the potential effect of these risk factors discussed
below, any risk factor which could result in reduced earnings or operating
losses, or reduced liquidity, could in turn adversely affect our ability to
service our liabilities or pay dividends on our common stock or adversely affect
the quoted market prices for our securities.
We could incur significant costs related to legal and environmental
matters. NL formerly manufactured lead pigments for use in paint. NL and others
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. 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 or risk contribution 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 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. As with all
legal proceedings, the outcome is uncertain. Any liability we might incur in the
future could be material. See also Item 3 - "Legal Proceedings - Lead pigment
litigation."
Certain properties and facilities used in our former businesses are the
subject of litigation, administrative proceedings or investigations arising
under various environmental laws. These proceedings seek cleanup costs, personal
injury or property damages and/or damages for injury to natural resources. Some
of these proceedings involve claims for substantial amounts. Environmental
obligations are difficult to assess and estimate for numerous reasons, and we
may incur costs for environmental remediation in the future in excess of amounts
currently estimated. Any liability we might incur in the future could be
material. See also Item 3 - "Legal Proceedings - Environmental matters and
litigation."
Our assets consist primarily of investments in our operating subsidiaries
and affiliates, and we are dependent upon distributions from our subsidiaries
and affiliates. A majority of our cash flows are generated by our operating
subsidiaries, and our ability to service our liabilities and to pay dividends on
our common stock depends to a large extent upon the cash dividends or other
distributions we receive from our subsidiaries. Our subsidiaries are separate
and distinct legal entities and they have no obligation, contingent or
otherwise, to pay such cash dividends or other distributions to us. In addition,
the payment of dividends or other distributions from our subsidiaries could be
subject to restrictions on or taxation of dividends or repatriation of earnings
under applicable law, monetary transfer restrictions, foreign currency exchange
regulations in jurisdictions in which our subsidiaries operate, any other
restrictions imposed by current or future agreements to which are subsidiaries
may be a party, including debt instruments. Events beyond our control, including
changes in general business and economic conditions, could adversely impact the
ability of our subsidiaries to pay dividends or make other distributions to us.
If our subsidiaries would become unable to make sufficient cash dividends or
other distributions to us, our ability to service our liabilities and to pay
dividends on our common stock could be adversely affected. In addition, a
significant portion of our assets consists of ownership interests in our
subsidiaries and affiliates. If we were required to liquidate any of such
securities in order generate funds to satisfy our liabilities, we may be
required to sell such securities at a time or times at which we would not be
able to realize what we believe to be the actual value of such assets.
Subject to specified limitations, the agreements covering the indebtedness
of our subsidiaries permit our subsidiaries to incur additional debt, including
secured debt. At December 31, 2005, the outstanding indebtedness of our
subsidiaries and affiliates aggregated $467.4 million, substantially all of
which relates to KII's Senior Secured Notes. In addition, as of such date our
subsidiaries and affiliates have unused borrowing availability of approximately
$186.0 million under our subsidiaries' credit facilities, subject to certain
tests. Any borrowing or other liabilities or our subsidiaries are structurally
senior to any liabilities of NL, and a substantial portion of our subsidiaries'
assets collateralize the indebtedness of our subsidiaries. If any new debt were
to be added to our subsidiaries' current debt levels, then the related risks
that we and they now face, as more fully described herein, could intensify.
Demand for, and prices of, certain of our products are cyclical and we may
experience prolonged depressed market conditions for our products, which may
result in reduced earnings or operating losses. A significant portion of our net
income is attributable to sales of TiO2 by Kronos. Pricing within the global
TiO2 industry over the long term is cyclical, and changes in industry economic
conditions, especially in western industrialized nations, can significantly
impact our earnings and operating cash flows. This may result in reduced
earnings or operating losses.
Historically, the markets for many of our products have experienced
alternating periods of tight supply, causing prices and profit margins to
increase, followed by periods of capacity additions, and demand reductions
resulting in oversupply and declining prices and profit margins. Selling prices
(in billing currencies) for TiO2 were generally: increasing during the first
quarter of 2003, flat during the second quarter of 2003, decreasing during the
last half of 2003 and the first quarter of 2004, flat during the second quarter
of 2004, increasing in the last half of 2004 and in the first six months of 2005
and decreasing during the second half of 2005.
Our overall average TiO2 selling prices in billing currencies:
o were 3% higher in 2003 as compared to 2002;
o were 2% lower in 2004 as compared to 2003; and
o were 8% higher in 2005 as compared to 2004.
Future growth in demand for TiO2 may not be sufficient to alleviate any
future conditions of excess industry capacity, and such conditions may not be
sustained or may be further aggravated by anticipated or unanticipated capacity
additions or other events. The demand for TiO2 during a given year is also
subject to annual seasonal fluctuations. TiO2 sales are generally higher in the
first half of the year than in the second half of the year due in part to the
increase in paint production in the spring to meet the spring and summer
painting season demand.
As a global business, we are exposed to local business risks in different
countries, which could result in losses. CompX and Kronos conduct some of their
businesses in several jurisdictions outside of the United States and are subject
to risks normally associated with international operations, which include trade
barriers, tariffs, exchange controls, national and regional labor strikes,
social and political risks, general economic risks, seizures, nationalizations,
compliance with a variety of foreign laws, including tax laws, and the
difficulty in enforcing agreements and collecting receivables through foreign
legal systems. For example, we have substantial net operating loss carryforwards
in Germany, and any change in German tax law that adversely impacts our ability
to fully utilize such carryforwards could adversely affect us.
We may incur losses from fluctuations in currency exchange rates. CompX and
Kronos operate their businesses in several different countries, and sell their
products worldwide. Therefore, we are exposed to risks related to the prices
that we receive for our products and the need to convert currencies that we may
receive for some of our products into the currencies required to pay some of our
debt, or into currencies in which we may purchase certain raw materials or pay
for certain services, all of which could result in future losses depending on
fluctuations in foreign currency exchange rates.
We sell several of our products in mature and highly competitive industries
and face price pressures in the markets in which we operate, which may result in
reduced earnings or operating losses. The global markets in which Kronos and
CompX operate their businesses are highly competitive. Competition is based on a
number of factors, such as price, product quality and service. Some of our
competitors may be able to drive down prices for our products because their
costs are lower than our costs, especially CompX's competitors in Asia. In
addition, some of our competitors' financial, technological and other resources
may be greater than our resources, and such competitors may be better able to
withstand changes in market conditions. Our competitors may be able to respond
more quickly than we can to new or emerging technologies and changes in customer
requirements. Further, consolidation of our competitors or customers in any of
the industries in which we compete may result in reduced demand for our
products. In addition, in some of our businesses new competitors could emerge by
modifying their existing production facilities so they could manufacture
products that compete with our products. The occurrence of any of these events
could result in reduced earnings or operating losses.
Higher costs or limited availability of our raw materials may decrease our
liquidity. The number of sources for, and availability of, certain raw materials
is specific to the particular geographical region in which a facility is
located. For example, titanium-containing feedstocks suitable for use in our
TiO2 facilities are available from a limited number of suppliers around the
world. Political and economic instability in the countries from which we
purchase our raw material supplies could adversely affect their availability.
Should our vendors not be able to meet their contractual obligations, should we
be otherwise unable to obtain necessary raw materials or should we experience
increased raw material and other operating costs, we may incur higher costs for
raw material or other operating costs or may be required to reduce production
levels, either of which may decrease our liquidity as we may be unable to offset
such higher costs with increased selling prices for our products.
We are subject to many environmental and safety regulations with respect to
our operating facilities that may result in unanticipated costs or liabilities.
Our facilities are subject to extensive laws, regulations, rules and ordinances
relating to the protection of the environment, including those governing the
discharge of pollutants in the air and water and the generation, management and
disposal of hazardous substances and wastes or other materials. We may incur
substantial costs, including fines, damages and criminal penalties or civil
sanctions, or experience interruptions in our operations for actual or alleged
violations or compliance requirements arising under environmental laws. Our
operations could result in violations under environmental laws, including spills
or other releases of hazardous substances to the environment. Some of our
operating facilities are in densely populated urban areas or in industrial areas
adjacent to other operating facilities. In the event of an accidental release or
catastrophic incident, we could incur material costs as a result of addressing
such an event and in implementing measures to prevent such incidents. Given the
nature of our business, violations of environmental laws may result in
restrictions imposed on our operating activities or substantial fines,
penalties, damages or other costs, including as a result of private litigation.
Our production facilities have been used for a number of years to
manufacture products or conduct mining operations. We may incur additional costs
related to compliance with environmental laws applicable to our historic
operations and these facilities. In addition, we may incur significant
expenditures to comply with existing or future environmental laws. Costs
relating to environmental matters will be subject to evolving regulatory
requirements and will depend on the timing of promulgation and enforcement of
specific standards that impose requirements on our operations. Costs beyond
those currently anticipated may be required under existing and future
environmental laws.
If our patents are declared invalid or our trade secrets become known to
competitors, our ability to compete may be adversely affected. Protection of our
proprietary processes and other technology is important to our competitive
position. Consequently, we rely on judicial enforcement for protection of our
patents, and our patents may be challenged, invalidated, circumvented or
rendered unenforceable. Furthermore, if any pending patent application filed by
us does not result in an issued patent, or if patents are issued to us but such
patents do not provide meaningful protection of our intellectual property, then
the use of any such intellectual property by our competitors could result in
decreasing our cash flows. Additionally, our competitors or other third parties
may obtain patents that restrict or preclude our ability to lawfully produce or
sell our products in a competitive manner, which could have the same effects.
We also rely on certain unpatented proprietary know-how and continuing
technological innovation and other trade secrets to develop and maintain our
competitive position. Although it is our practice to enter into confidentiality
agreements to protect our intellectual property, because these confidentiality
agreements may be breached, such agreements may not provide sufficient
protection for our trade secrets or proprietary know-how, or adequate remedies
may not be available in the event of an unauthorized use or disclosure of such
trade secrets and know-how. In addition, others could obtain knowledge of such
trade secrets through independent development or other access by legal means.
Loss of key personnel or our ability to attract and retain new qualified
personnel could hurt our businesses and inhibit our ability to operate and grow
successfully. Our success in the highly competitive markets in which we operate
will continue to depend to a significant extent on the leadership teams of our
businesses and other key management personnel. We generally do not have binding
employment agreements with any of these managers. This increases the risks that
we may not be able to retain our current management personnel and we may not be
able to recruit qualified individuals to join our management team, including
recruiting qualified individuals to replace any of our current personnel that
may leave in the future.
Our relationships with our union employees could deteriorate. At December
31, 2005, we employed approximately 3,650 persons worldwide in our various
businesses. A significant number of our employees are subject to collective
bargaining or similar arrangements. We may not be able to negotiate labor
agreements with respect to these employees on satisfactory terms or at all. If
our employees were to engage in a strike, work stoppage or other slowdown, we
could experience a significant disruption of our operations or higher ongoing
labor costs.
Our leverage may impair our financial condition or limit our ability to
operate our businesses. As of December 31, 2005, our total consolidated debt was
approximately $1.6 million, substantially all of which relates to CompX, and
Kronos had total debt of approximately $465.3 million. Our level of debt could
have important consequences to our stockholders and creditors, including:
o making it more difficult for us to satisfy our obligations with respect to
our liabilities;
o increasing our vulnerability to adverse general economic and industry
conditions;
o requiring that a portion of our cash flow from operations be used for the
payment of interest on our debt, therefore reducing our ability to use our
cash flow to fund working capital, capital expenditures, dividends on our
common stock, acquisitions and general corporate requirements;
o limiting our ability to obtain additional financing to fund future working
capital, capital expenditures, acquisitions and general corporate
requirements;
o limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate; and
o placing us at a competitive disadvantage relative to other less leveraged
competitors.
In addition to our indebtedness, we are party to various lease and other
agreements pursuant to which, along with our indebtedness, we are committed to
pay approximately $21.6 million in 2006. Kronos was similarly committed to pay
approximately $272.1 million. Our ability to make payments on and refinance our
debt, and to fund planned capital expenditures, depends on our future ability to
generate cash flow. To some extent, this is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. In addition, our ability to borrow funds under our
subsidiaries' credit facilities in the future will in some instances depend in
part on these subsidiaries' ability to maintain specified financial ratios and
satisfy certain financial covenants contained in the applicable credit
agreement. Our business may not generate cash flows from operating activities
sufficient to enable us to pay our debts when they become due and to fund our
other liquidity needs. As a result, we may need to refinance all or a portion of
our debt before maturity. We may not be able to refinance any of our debt on
favorable terms, if at all. Any inability to generate sufficient cash flows or
to refinance our debt on favorable terms could have a material adverse effect on
our financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
NL's principal executive offices are located in an office building located
at 5430 LBJ Freeway, Dallas, Texas, 75240-2697. The principal properties used in
the operations of the subsidiaries and affiliates of the Company, including
certain risks and uncertainties related thereto, are described in the applicable
business sections of Item 1 - "Business." The Company believes that its
facilities are generally adequate and suitable for their respective uses.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings. In addition to
information that is included below, certain information called for by this Item
is included in Note 19 to the Consolidated Financial Statements, which
information is incorporated herein by reference.
Lead pigment litigation.
NL's former operations included the manufacture of lead pigments for use in
paint and lead-based paint. NL, other former manufacturers of lead pigments for
use in paint and lead-based paint (together, the "former pigment
manufacturers"), and the Lead Industries Association ("LIA"), which discontinued
business operations in 2002, have been named as defendants in various legal
proceedings seeking damages for personal injury, property damage and
governmental expenditures allegedly caused by the use of lead-based paints.
Certain of these actions have been filed by or on behalf of states, large U.S.
cities or their public housing authorities and school districts, and certain
others have been asserted as class actions. These lawsuits seek recovery under a
variety of theories, including public and private nuisance, negligent product
design, negligent failure to warn, strict liability, breach of warranty,
conspiracy/concert of action, aiding and abetting, enterprise liability, market
share or risk contribution 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 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. A number of cases are inactive or 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 either the defendants or the plaintiffs. In addition, various other
cases are pending (in which NL is not a defendant) seeking recovery for injury
allegedly caused by lead pigment and lead-based paint. Although NL is not a
defendant in these cases, the outcome of these cases may have an impact on cases
that might be filed against NL in the future.
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 never settled any of these cases, nor have any final adverse
judgments against NL been entered. However, see the discussion below in The
State of Rhode Island case. See also Note 19 to the Consolidated Financial
Statements. NL has not accrued any amounts for pending lead pigment and
lead-based paint litigation. Liability that may result, if any, cannot currently
be reasonably estimated. There can be no assurance that NL will not incur
liability in the future in respect of this pending litigation in view of the
inherent uncertainties involved in court and jury rulings in pending and
possible future cases. If any such future liability were to be incurred, it
could have a material adverse effect on the Company's consolidated financial
position, results of operations and liquidity.
In August 1992, NL was served with an amended complaint in Jackson, et al.
v. The Glidden Co., et al., Court of Common Pleas, Cuyahoga County, Cleveland,
Ohio (Case No. 236835). Plaintiffs seek compensatory and punitive damages for
personal injury caused by the ingestion of lead, and an order directing
defendants to abate lead-based paint in buildings. Plaintiffs purport to
represent a class of similarly situated persons throughout the State of Ohio.
The trial court denied plaintiffs' motion for class certification. In 2003,
defendants filed a motion for summary judgment on all claims, which was granted
in January 2006. In February 2006, plaintiffs filed a notice of appeal.
In September 1999, an amended complaint was filed in Thomas v. Lead
Industries Association, et al. (Circuit Court, Milwaukee, Wisconsin, Case No.
99-CV-6411) adding as defendants the former pigment manufacturers to a suit
originally filed against plaintiff's landlords. Plaintiff, a minor, alleges
injuries purportedly caused by lead on the surfaces of premises in homes in
which he resided. Plaintiff seeks compensatory and punitive damages, and NL has
denied liability. In January 2003, the trial court granted defendants' motion
for summary judgment, dismissing all counts of the complaint. The plaintiff
appealed the dismissal, and in June 2004 the appellate court affirmed the
dismissal. In July 2005, the Wisconsin Supreme Court affirmed the appellate
court's dismissal of plaintiff's civil conspiracy and enterprise liability
claims and reversed and remanded the appellate court's dismissal of plaintiff's
risk contribution claim. The matter is now proceeding in the trial court.
In October 1999, NL was served with a complaint in State of Rhode Island v.
Lead Industries Association, et al. (Superior Court of Rhode Island, No.
99-5226). The State seeks compensatory and punitive damages for medical and
educational expenses, and public and private building abatement expenses that
the State alleges were caused by lead paint, and for funding of a public
education campaign and health screening programs. Plaintiff seeks judgments of
joint and several liability against the former pigment manufacturers and the
LIA. Trial began before a Rhode Island state court jury in September 2002 on the
question of whether lead pigment in paint on Rhode Island buildings is a public
nuisance. On October 29, 2002, the trial judge declared a mistrial in the case
when the jury was unable to reach a verdict on the question, with the jury
reportedly deadlocked 4-2 in the defendants' favor. Other claims made by the
Attorney General, including violation of the Rhode Island Unfair Trade Practices
and Consumer Protection Act, strict liability, negligence, negligent and
fraudulent misrepresentation, civil conspiracy, indemnity, and unjust enrichment
were not the subject of the 2002 trial and remain pending. In March 2003, the
court denied motions by plaintiffs and defendants for judgment notwithstanding
the verdict. In January 2004, plaintiff requested the court to dismiss its
claims for state-owned buildings, claiming all remaining claims did not require
a jury and asking the court to reconsider the trial schedule. In February 2004,
the court dismissed the strict liability, negligence, negligent
misrepresentation and fraud claims with prejudice, and the time for the state to
appeal this dismissal has not yet run. In March 2004, the court ruled that the
defendants have a constitutional right to a trial by jury under the Rhode Island
Constitution. Plaintiff appealed such ruling, and in July 2004 the Rhode Island
Supreme Court dismissed plaintiff's appeal of, and plaintiff's petition to
review, the trial court's ruling. In May 2005, the trial court dismissed the
conspiracy claim with prejudice, and the time for the state to appeal this
dismissal has not yet begun to run. In September 2005, the State dismissed its
Unfair Trade Practices Act claim against NL without prejudice. Trial commenced
on November 1, 2005 on the State's remaining claims of public nuisance,
indemnity and unjust enrichment against NL and three other defendants. Following
the State's presentation of its case, the trial court dismissed the State's
claims of indemnity and unjust enrichment. The public nuisance claim was sent to
the jury in February 2006, and the jury found that NL and two other defendants
substantially contributed to the creation of a public nuisance as a result of
the collective presence of lead pigments in paints and coatings on buildings in
Rhode Island. The jury also found that NL and the two other defendants should be
ordered to abate the public nuisance. Following the jury verdict, the trial
court dismissed the State's claim for punitive damages. The scope of the
abatement remedy will be determined by the judge. The extent, nature and cost of
such remedy is not currently known and will be determined only following
additional proceedings. NL intends to appeal any adverse judgment that the trial
court may enter against it.
In October 1999, NL was served with a complaint in Smith, et al. v. Lead
Industries Association, et al. (Circuit Court for Baltimore City, Maryland, Case
No. 24-C-99-004490). Plaintiffs, seven minors from four families, each seek
compensatory damages of $5 million and punitive damages of $10 million for
alleged injuries due to lead-based paint. Plaintiffs allege that the former
pigment manufacturers and other companies alleged to have manufactured paint
and/or gasoline additives, the LIA and the National Paint and Coatings
Association are jointly and severally liable. NL has denied liability. The trial
court, on defendants' motions, dismissed all plaintiffs' claims. Plaintiffs
appealed, and in May 2004 the court of appeals reinstated certain claims. In
September 2004, the court of appeals granted plaintiffs' petition for review of
such court's affirmation of the dismissal of certain of the plaintiffs'
remaining claims. In April 2005 the court of appeals vacated the decision of the
intermediate appellate court, stating that such court should not have accepted
the appeal, and remanded the case back to the trial court for further
proceedings. In February 2006, the trial court issued orders again dismissing
the Smith family's case and severing and staying the cases of the three other
families. Plaintiffs have appealed.
In February 2000, NL was served with a complaint in City of St. Louis v.
Lead Industries Association, et al. (Missouri Circuit Court 22nd Judicial
Circuit, St. Louis City, Cause No. 002-245, Division 1). Plaintiff seeks
compensatory and punitive damages for its expenses discovering and abating
lead-based paint, detecting lead poisoning and providing medical care and
educational programs for City residents, and the costs of educating children
suffering injuries due to lead exposure. Plaintiff seeks judgments of joint and
several liability against the former pigment manufacturers and the LIA. In
November 2002, defendants' motion to dismiss was denied. In May 2003, plaintiffs
filed an amended complaint alleging only a nuisance claim. Defendants' renewed
motion to dismiss and motion for summary judgment were denied by the trial court
in March 2004, but the trial court limited plaintiff's complaint to monetary
damages from 1990 to 2000, specifically excluding future damages. In March 2005,
the defendants filed a motion for summary judgment. In January 2006, the trial
court granted defendants' motion for summary judgment. Plaintiffs have appealed.
In April 2000, NL was served with a complaint in County of Santa Clara v.
Atlantic Richfield Company, et al. (Superior Court of the State of California,
County of Santa Clara, Case No. CV788657) brought against the former pigment
manufacturers, the LIA and certain paint manufacturers. The County of Santa
Clara seeks to represent a class of California governmental entities (other than
the state and its agencies) to recover compensatory damages for funds the
plaintiffs have expended or will in the future expend for medical treatment,
educational expenses, abatement or other costs due to exposure to, or potential
exposure to, lead paint, disgorgement of profit, and punitive damages. Santa
Cruz, Solano, Alameda, San Francisco, and Kern counties, the cities of San
Francisco and Oakland, the Oakland and San Francisco unified school districts
and housing authorities and the Oakland Redevelopment Agency have joined the
case as plaintiffs. In February 2003, defendants filed a motion for summary
judgment. In July 2003, the court granted defendants' motion for summary
judgment on all remaining claims. In March 2006, the appellate court affirmed
the dismissal of plaintiffs' trespass claim, Unfair Competition Law claim and
public nuisance claim for government-owned properties. The appellate court
reversed the dismissal of plaintiffs' public nuisance claim for residential
housing properties, plaintiffs' negligence and strict liability claims for
government-owned buildings and plaintiffs' fraud claim.
In June 2000, a complaint was filed in Illinois state court, Lewis, et al.
v. Lead Industries Association, et al. (Circuit Court of Cook County, Illinois,
County Department, Chancery Division, Case No. 00CH09800). Plaintiffs seek to
represent two classes, one of all minors between the ages of six months and six
years who resided in housing in Illinois built before 1978, and one of all
individuals between the ages of six and twenty years who lived between the ages
of six months and six years in Illinois housing built before 1978 and had blood
lead levels of 10 micrograms/deciliter or more. The complaint seeks damages
jointly and severally from the former pigment manufacturers and the LIA to
establish a medical screening fund for the first class to determine blood lead
levels, a medical monitoring fund for the second class to detect the onset of
latent diseases, and a fund for a public education campaign. In March 2002, the
court dismissed all claims. Plaintiffs appealed, and in June 2003 the appellate
court affirmed the dismissal of five of the six counts of plaintiffs, but
reversed the dismissal of the conspiracy count. In May 2004, defendants filed a
motion for summary judgment on plaintiffs' conspiracy count, which was granted
in February 2005. In February 2006, the court of appeals reversed the trial
court's dismissal of the case and remanded the case for further proceedings. In
March 2006, the defendants filed a petition with the Illinois Supreme Court
seeking review of the appellate court's ruling.
In February 2001, NL was served with a complaint in Barker, et al. v. The
Sherwin-Williams Company, et al. (Circuit Court of Jefferson County,
Mississippi, Civil Action No. 2000-587, and formerly known as Borden, et al. vs.
The Sherwin-Williams Company, et al.). The complaint seeks joint and several
liability for compensatory and punitive damages from more than 40 manufacturers
and retailers of lead pigment and/or paint, including NL, on behalf of 18 adult
residents of Mississippi who were allegedly exposed to lead during their
employment in construction and repair activities. In 2003, the court ordered
that the claims of ten of the plaintiffs be transferred to Holmes County,
Mississippi state court. In April 2004, the parties jointly petitioned the
Mississippi Supreme Court to transfer these ten plaintiffs to their appropriate
venue, and in May 2004 the Mississippi Supreme Court remanded the case to the
trial court in Holmes County and instructed the court to transfer these ten
plaintiffs to their appropriate venues. Five of these ten plaintiffs have been
dismissed without prejudice with respect to NL, and five remain against NL. With
respect to the eight plaintiffs in Jefferson County, seven of these plaintiffs
have been dismissed without prejudice with respect to NL, and one remains
against NL.
In May 2001, NL was served with a complaint in City of Milwaukee v. NL
Industries, Inc. and Mautz Paint (Circuit Court, Civil Division, Milwaukee
County, Wisconsin, Case No. 01CV003066). Plaintiff seeks compensatory and
equitable relief for lead hazards in Milwaukee homes, restitution for amounts it
has spent to abate lead and punitive damages. NL has denied all liability. In
July 2003, defendants' motion for summary judgment was granted by the trial
court. In November 2004, the appellate court reversed this ruling and remanded
the case. Defendants filed a petition for review of the appellate court's ruling
in December 2004 with the Wisconsin Supreme Court, but withdrew this petition in
July 2005. The case is now proceeding in the trial court. In January 2006,
defendants filed a motion to dismiss plaintiffs' claim.
In January and February 2002, NL was served with complaints by 25 different
New Jersey municipalities and counties which have been consolidated as In re:
Lead Paint Litigation (Superior Court of New Jersey, Middlesex County, Case Code
702). Each complaint seeks abatement of lead paint from all housing and all
public buildings in each jurisdiction and punitive damages jointly and severally
from the former pigment manufacturers and the LIA. In November 2002, the court
entered an order dismissing this case with prejudice. In August 2005, the
appellate court affirmed the trial court's dismissal of all counts except for
the state's public nuisance count, which has been reinstated. In November 2005,
the New Jersey Supreme Court granted defendants' petition seeking review of the
appellate court's ruling on the public nuisance count.
In January 2002, NL was served with a complaint in Jackson, et al., v.
Phillips Building Supply of Laurel, et al. (Circuit Court of Jones County,
Mississippi, Dkt. Co. 2002-10-CV1). The complaint seeks joint and several
liability from three local retailers and six non-Mississippi companies that sold
paint for compensatory and punitive damages on behalf of three adults for
injuries alleged to have been caused by the use of lead paint. After removal to
federal court, in February 2003 the case was remanded to state court. NL has
denied all liability and pre-trial proceedings are continuing. In August 2004,
plaintiffs voluntarily agreed to dismiss one plaintiff and to sever the
remaining two plaintiffs. In July 2005, plaintiffs voluntarily agreed to dismiss
another plaintiff without prejudice, leaving one plaintiff remaining. In January
2006, the court set a trial date of April 2007.
In April 2003, NL was served with a complaint in Jones v. NL Industries,
Inc., et al. (Circuit Court of LeFlore County, Mississippi, Civil Action No.
2002-0241-CICI). The plaintiffs, fourteen children from five families, sued NL
and one landlord alleging strict liability, negligence, fraudulent concealment
and misrepresentation, and seek compensatory and punitive damages for alleged
injuries caused by lead paint. Defendants removed this case to federal court.
Discovery is proceeding. In September 2005, the court set the trial date for
July 2006. In January 2006, defendants filed a motion for summary judgment.
In November 2003, NL was served with a complaint in Lauren Brown v. NL
Industries, Inc., et al. (Circuit Court of Cook County, Illinois, County
Department, Law Division, Case No. 03L 012425). The complaint seeks damages
against NL and two local property owners on behalf of a minor for injuries
alleged to be due to exposure to lead paint contained in the minor's residence.
NL has denied all allegations of liability. Discovery is proceeding.
In December 2004, NL was served with a complaint in Terry, et al. v. NL
Industries, Inc., et al. (United States District Court, Southern District of
Mississippi, Case No. 4:04 CV 269 PB). The plaintiffs, seven children from three
families, sued NL and one landlord alleging strict liability, negligence,
fraudulent concealment and misrepresentation, and seek compensatory and punitive
damages for alleged injuries caused by lead paint. The plaintiffs in the Terry
case are alleged to have resided in the same housing complex as the plaintiffs
in the Jones case. NL has denied all allegations of liability and has filed a
motion to dismiss plaintiffs' fraud claim. In August 2005, the court denied NL's
motion to strike plaintiffs' fraud claim for lack of particularity, allowing
plaintiffs to re-plead this claim.
In October 2005, NL was served with a complaint in Evans v. Atlantic
Richfield Company, et. al. (Circuit Court, Milwaukee, Wisconsin, Case No.
05-CV-9281). Plaintiff, a minor, alleges injuries purportedly caused by lead on
the surfaces of the homes in which she resided. Plaintiff seeks compensatory and
punitive damages. NL has denied all allegations of liability. In December 2005,
defendants filed a motion to dismiss the defective product damages claims.
In December 2005, NL was served with a complaint in Hurkmans v. Salczenko,
et al. (Circuit Court, Marinette County, Wisconsin, Case No. 05-CV-418).
Plaintiff, a minor, alleges injuries purportedly caused by lead on the surfaces
of the home in which he resided. Plaintiff seeks compensatory damages. NL has
denied all liability. In February 2006, defendants filed a motion to dismiss the
defective product damages claim.
In January 2006, NL was served with a complaint in Hess, et. al. v. NL
Industries, Inc., et al. (Missouri Circuit Court 22nd Judicial Circuit, St.
Louis City, Cause No. 052-11799). Plaintiffs are two minor children who allege
injuries purportedly caused by lead on the surfaces of the home in which they
resided. Plaintiffs seek compensatory and punitive damages. NL intends to deny
all allegations of liability.
In addition to the foregoing litigation, various legislation and
administrative regulations have, from time to time, been proposed that seek to
(a) impose various obligations on present and former manufacturers of lead
pigment and lead-based paint with respect to asserted health concerns associated
with the use of such products and (b) effectively overturn court decisions in
which NL and other pigment manufacturers have been successful. Examples of such
proposed legislation include bills which would permit civil liability for
damages on the basis of market share, rather than requiring plaintiffs to prove
that the defendant's product caused the alleged damage, and bills which would
revive actions barred by the statute of limitations. While no legislation or
regulations have been enacted to date that are expected to have a material
adverse effect on NL's consolidated financial position, results of operations or
liquidity, the imposition of market share liability or other legislation could
have such an effect.
Environmental matters and litigation.
General. The Company's operations are governed by various 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 and regulations. 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 maintain compliance with
applicable environmental laws and regulations at all of its plants and to strive
to improve environmental performance. From time to time, the Company may be
subject to environmental regulatory enforcement under U.S. and foreign 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 believes all of its plants are in
substantial compliance with applicable environmental laws.
Certain properties and facilities used in the Company's former businesses,
including divested primary and secondary lead smelters and former mining
locations of NL, 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 various 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. If any such future liability
were to be incurred, it could have a material adverse effect on the Company's
consolidated financial statements, results of operations and liquidity.
The Company records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are generally not
discounted to their present value. Recoveries of remediation costs from other
parties, if any, are recognized as assets when their receipt is deemed probable.
At December 31, 2005, no receivables for such recoveries have been recognized.
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.
NL. Certain properties and facilities used in the Company's former
operations, 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, PRP, or both, pursuant to 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.
In addition, the Company is a party to a number of lawsuits filed in various
jurisdictions alleging CERCLA or other environmental claims.
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 the Company's wholly-owned environmental management subsidiary,
NL Environmental Management Services, Inc. ("EMS") has contractually assumed
NL's obligation. See Note 19 to the Consolidated Financial Statements. At
December 31, 2005, the Company had accrued $55 million for those environmental
matters which the Company believes 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 it is possible to estimate costs is approximately
$80 million. The Company's estimates of such liabilities have not been
discounted to present value.
At December 31, 2005, there are approximately 20 sites for which the
Company is currently unable to estimate a range of costs. For these sites,
generally the investigation is in the early stages, and it is either unknown as
to whether or not the Company actually had any association with the site, or if
the Company had an 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. On certain of these sites that had previously been
inactive, NL has received general and special notices of liability from the EPA
alleging that NL, along with other PRPs, is liable for past and future costs of
remediating environmental contamination allegedly caused by former operations
conducted at such sites. These notifications may assert that NL, along with
other PRPs, is liable for past clean-up costs that could be material to NL if
liability for such amounts ultimately were determined against NL.
In January 2003, NL received a general notice of liability from the U.S.
EPA regarding the site of a formerly owned lead smelting facility located in
Collinsville, Illinois. The U.S. EPA alleged the site contained elevated levels
of lead. In July 2004, NL and the U.S. EPA entered into an administrative order
on consent to perform a removal action with respect to residential properties
located at the site. NL has complied with the order and has substantially
completed the clean-up work associated with the order. NL anticipates it will
undertake to perform an additional removal action with respect to ponds located
within the residential area.
In December 2003, NL was served with a complaint in The Quapaw Tribe of
Oklahoma et al. v. ASARCO Incorporated et al. (United States District Court,
Northern District of Oklahoma, Case No. 03-CII-846H(J)). The complaint alleges
public nuisance, private nuisance, trespass, unjust enrichment, strict liability
and deceit by false representation against NL and six other mining companies
with respect to former operations in the Tar Creek mining district in Oklahoma.
The complaint seeks class action status for former and current owners, and
possessors of real property located within the Quapaw Reservation. Among other
things, the complaint seeks actual and punitive damages from the defendants. NL
has moved to dismiss the complaint and has denied all of plaintiffs'
allegations. In April 2004, plaintiffs filed an amended complaint adding claims
under CERCLA and RCRA, and NL moved to dismiss those claims. In June 2004, the
court dismissed plaintiffs' claims for unjust enrichment and fraud as well as
one of the RCRA claims. In September 2004, the court stayed the case, pending an
appeal by the tribe related to sovereign immunity issues. In February 2006, the
court of appeals affirmed the trial court's ruling that plaintiffs waived their
sovereign immunity to defendants' counter claim for contribution and indemnity.
In February 2004, NL was served in Evans v. ASARCO (United States District
Court, Northern District of Oklahoma, Case No. 04-CV-94EA(M)), a purported class
action on behalf of two classes of persons living in the town of Quapaw,
Oklahoma: (1) a medical monitoring class of persons who have lived in the area
since 1994, and (2) a property owner class of residential, commercial and
government property owners. Four individuals are named as plaintiffs, together
with the mayor of the town of Quapaw, Oklahoma, and the School Board of Quapaw,
Oklahoma. Plaintiffs allege causes of action in nuisance and seek a medical
monitoring program, a relocation program, property damages and punitive damages.
NL answered the complaint and denied all of plaintiffs' allegations. The trial
court subsequently stayed all proceedings in this case pending the outcome of a
class certification decision in another case that had been pending in the same
U.S. District Court, a case from which NL has been dismissed with prejudice.
In January 2006, NL was served in Brown et. al. v. NL Industries, Inc. et.
al. (Circuit Court Wayne County, Michigan, Case No. 06-602096 CZ), a purported
class action on behalf of a class of property owners living in the Krainz Woods
Neighborhood of Wayne County, Michigan. Plaintiffs allege causes of action in
negligence, nuisance, trespass and under the Michigan Natural Resources and
Environmental Protection Act with respect to a lead smelting facility formerly
operated by NL and another defendant. Plaintiffs seek property damages, personal
injury damages, loss of income and medical expense and medical monitoring costs.
In February 2006, NL filed a petition to remove the case to federal court. NL
intends to deny all allegations of liability.
See also Item 1. "Business - Regulatory and Environmental Matters and Note
19 to the Consolidated Financial Statements."
Insurance coverage claims.
In October 2005 NL was served with a complaint in OneBeacon American
Insurance Company v. NL Industries, Inc., et. al. (Supreme Court of the State of
New York, County of New York, Index No. 603429-05). The plaintiff, a former
insurance carrier, seeks a declaratory judgment of its obligations to NL under
insurance policies issued to NL by the plaintiff's predecessor with respect to
certain lead pigment lawsuits. NL filed a motion to dismiss the New York action.
NL has filed an action against OneBeacon and certain other former insurance
companies, captioned NL Industries, Inc. v. OneBeacon America Insurance Company,
et. al. (District Court for Dallas County, Texas, Case No. 05-11347) asserting
that OneBeacon has breached its obligations to NL under such insurance policies
and seeking a declaratory judgment of OneBeacon's obligations to NL under such
policies. Certain of the former insurance companies have filed a petition to
remove the Texas action to federal court.
In February 2006, NL was served with a complaint in Certain Underwriters at
Lloyds, London v. Millennium Holdings LLC et. Al. (Supreme Court of the State of
New York, County of New York, Index No. 06/60026). The plaintiff, a former
insurance carrier of NL, seeks a declaratory judgment of its obligations to
defendants under insurance policies issued to defendants by plaintiff with
respect to certain lead pigment lawsuits.
NL has reached an agreement with a former insurance carrier in which such
carrier would reimburse NL for a portion of its past and future lead pigment
litigation defense costs, although the amount that NL will ultimately recover
from such carrier with respect to such defense costs incurred by NL is not yet
determinable. In addition, during 2005, NL recognized $2.2 million of recoveries
from certain insolvent former insurance carriers relating to the settlement of
excess insurance claims that were paid to NL. While NL continues to seek
additional insurance recoveries, there can be no assurance that NL will be
successful in obtaining reimbursement for either defense costs or indemnity. Any
such additional insurance recoveries would be recognized when their receipt is
deemed probable and the amount is determinable.
The issue of whether insurance coverage for defense costs or indemnity or
both will be found to exist for NL's lead pigment litigation depends upon a
variety of factors, and there can be no assurance that such insurance coverage
will be available. NL has not considered any potential insurance recoveries for
lead pigment or environmental litigation matters in determining related
accruals.
NL has settled insurance coverage claims concerning environmental claims
with certain of its principal former carriers. A portion of the proceeds from
these settlements were placed into special purpose trusts, as discussed below.
No further material settlements relating to environmental remediation coverage
are expected.
At December 31, 2004, NL had $19 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 NL's
future environmental remediation and other environmental expenditures. Use of
such restricted balances does not affect the Company's consolidated net cash
flows. All of such $19 million was so used by NL during 2005.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NL's common stock is listed and traded on the New York Stock Exchange
(symbol: NL). As of February 28, 2006, there were approximately 4,100 holders of
record of NL common stock. The following table sets forth the high and low
closing per share sales prices for NL common stock for the periods indicated,
according to Bloomberg, and cash dividends paid during such periods. On February
28, 2006 the closing price of NL common stock according to the NYSE Composite
Tape was $13.19.
Regular
dividends
High Low paid *
---- --- ---------
Year ended December 31, 2004
First Quarter $15.25 $12.05 $ .20
Second Quarter 15.15 11.00 .20
Third Quarter 19.47 12.32 .20
Fourth Quarter 23.10 18.78 .20
Year ended December 31, 2005
First Quarter $23.27 $19.17 $ .25
Second Quarter 22.56 14.70 .25
Third Quarter 19.64 12.78 .25
Fourth Quarter 18.59 13.83 .25
__________________________
* In 2004, the Company paid four quarterly dividends of $.20 per share using
shares of Kronos common stock in the form of pro-rata dividends, valued as
of the respective dividend declaration dates. Dividends paid in 2005 were
cash dividends except for the first quarter of 2005 when the Company paid
dividends of $.25 per share using shares of Kronos common stock in the form
of pro rata dividends, valued as of the dividend declaration date. See Note
2 to the Consolidated Financial Statements.
On March 15, 2006, the Company's Board of Directors declared a regular
quarterly cash dividend of $.125 per share to stockholders of record as of March
27, 2006 to be paid on March 31, 2006. However, the declaration and payment of
future dividends, and the amount thereof, is discretionary and is dependent upon
the Company's results of operations, financial condition, cash requirements for
its businesses, contractual restrictions and other factors deemed relevant by
the Company's Board of Directors. The amount and timing of past dividends is not
necessarily indicative of the amount or timing of any future dividends which
might be paid. There are currently no contractual restrictions on the amount of
NL dividends which may be paid.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Years ended December 31,
------------------------------------------------------------
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
(In millions, except per share data)
STATEMENTS OF OPERATIONS DATA:
Net sales:
Chemicals (1) $ 835.1 $ 875.2 $1,008.2 $ 559.1 $ -
Component products 179.7 166.7 173.9 182.6 186.4
-------- -------- -------- -------- --------
$1,014.8 $1,041.9 $1,182.1 $ 741.7 $ 186.4
======== ======== ======== ======== ========
Segment profit:
Chemicals (1) $ 169.2 $ 96.5 $ 137.4 $ 66.4 $ -
Component products 15.7 4.4 9.0 16.3 19.3
-------- -------- -------- -------- --------
$ 184.9 $ 100.9 $ 146.4 $ 82.7 $ 19.3
======== ======== ======== ======== ========
Equity in earnings of Kronos (1) $ - $ - $ - $ 9.6 $ 25.5
======== ======== ======== ======== ========
Income (loss) from continuing
operations $ 138.0 $ 39.1 $ (18.3) $ 159.3 $ 33.2
Discontinued operations (1.1) (.2) (2.9) 3.5 (.3)
-------- -------- -------- -------- --------
Net income (loss) $ 136.9 $ 38.9 $ (21.2) $ 162.8 $ 32.9
======== ======== ======== ======== ========
DILUTED EARNINGS PER SHARE DATA:
Income (loss) from continuing
operations $ 2.77 $ .80 $ (.38) $ 3.29 $ .68
Discontinued operations (.02) - (.06) .07 -
-------- -------- -------- -------- --------
Net income (loss) $ 2.75 $ .80 $ (.44) $ 3.36 $ .68
======== ======== ======== ======== ========
Dividends per share (2) $ .80 $ 3.30 $ .80 $ .80 $ 1.00
======== ======== ======== ======== ========
Weighted average common shares
outstanding 49,856 48,612 47,795 48,419 48,587
BALANCE SHEET DATA (at year end):
Total assets $1,377.9 $1,315.6 $1,476.5 $ 551.6 $ 484.7
Long-term debt 244.5 355.6 382.5 .1 1.4
Stockholders' equity 485.0 362.9 127.5 233.6 219.7
STATEMENT OF CASH FLOW DATA:
Net cash provided (used) by:
Operating activities $ 157.1 $ 114.7 $ 114.9 $ 92.7 $ (5.3)
Investing activities (59.9) (39.9) (27.4) 34.5 18.5
Financing activities (77.3) (157.6) 13.8 98.6 (22.7)
(1) The Company ceased to consolidate the chemicals operations conducted by
Kronos effective July 1, 2004, at which time the Company commenced to
account for its interest in Kronos by the equity method. See Note 2 to the
Consolidated Financial Statements.
2) Excludes the distribution of shares of Kronos common stock at December 8,
2003. Amounts paid in 2000, 2001, 2002 and 2003 were cash dividends, while
amounts paid in 2004 and the first quarter of 2005 were in the form of
shares of Kronos common stock. See Note 2 to the Consolidated Financial
Statements and Item 5 - "Market For Registrant's Common Equity and Related
Stockholder Matters."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
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 from Valhi and a wholly-owned subsidiary of Valhi, representing
approximately 68% of the outstanding shares of CompX common stock. 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. The
deconsolidation of Kronos effective July 1, 2004 has a significant effect on the
comparability of the Company's consolidated financial statements.
The Company reported income from continuing operations of $33.2 million, or
$.68 per diluted share, in 2005 compared to income from continuing operations of
$159.3 million, or $3.29 per diluted share in 2004 and a loss of $18.3 million,
or ($.38) per diluted share, in 2003.
The decrease in the Company's diluted earnings per share from 2004 to 2005
is due primarily to the net effects of (i) higher component products segment
profit, (ii) higher earnings attributable to Kronos' income from operations in
2005, (iii) security transaction gains from the sale of shares of Kronos common
stock in 2005 and (iv) significant second quarter 2004 non-cash income tax
benefits related to Kronos and NL. The increase in the Company's diluted
earnings per share from 2003 to 2004 is due primarily to the net effects of (i)
lower chemicals segment profit, (ii) higher component products segment profit,
(iii) lower environmental remediation and legal expenses and (iv) the
significant second quarter 2004 income tax benefits.
Income from continuing operations in 2005 includes (i) income related to
NL's sales of Kronos common stock in market transactions of $.17 per diluted
share, (ii) income from Kronos' second quarter sale of its passive interest in a
Norwegian smelting operation of $.03 per diluted share, (iii) a net non-cash
income tax expense of $.03 per diluted share related to the aggregate effects of
recent developments with respect to certain non-U.S. income tax audits of Kronos
(principally in Germany, Belgium and Canada) and (iv) a net non-cash income tax
expense of $.02 per diluted share related to the aggregate effects of recent
developments with respect to certain U.S. income tax audits of NL and a change
in CompX's permanent reinvestment conclusion regarding certain of its non-U.S.
subsidiaries.
Income from continuing operations in 2004 includes (i) a second quarter
income tax benefit related to the reversal of Kronos' deferred income tax asset
valuation allowance in Germany of $2.80 per diluted share, (ii) a second quarter
income tax benefit related to the reversal of the deferred income tax asset
valuation allowance related to EMS and the adjustment of estimated income taxes
due upon the IRS settlement related to EMS of $1.00 per diluted share, (iii)
income related to Kronos' contract dispute settlement of $.04 per diluted share
and (iv) income related to NL's fourth quarter sales of Kronos common stock in
market transactions of $.03 per diluted share.
Income from continuing operations in 2003 includes (i) an income tax
benefit relating to Kronos' refund of prior year German income taxes of $.51 per
diluted share and (ii) gains from the disposal of property and equipment
(principally related to certain real property of NL) aggregating $.17 per
diluted share.
Each of these items is more fully discussed below and/or in the notes to
the Consolidated Financial Statements.
The Company currently believes its net income in 2006 will be lower
compared to 2005 due primarily to the effects of security transaction gains
recognized in 2005, as discussed above, and lower earnings attributable to
Kronos.
Critical accounting policies and estimates
The accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the reported
period. On an ongoing basis, the Company evaluates its estimates, including
those related to bad debts, inventory reserves, impairments of investments in
marketable securities and investments accounted for by the equity method, the
recoverability of other long-lived assets (including goodwill and other
intangible assets), pension and other post-retirement benefit obligations and
the underlying actuarial assumptions related thereto, the realization of
deferred income tax assets and accruals for environmental remediation,
litigation, income tax and other contingencies. The Company bases its estimates
on historical experience and on various other assumptions that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the reported amounts of assets, liabilities, revenues and
expenses. Actual results may differ from previously-estimated amounts under
different assumptions or conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
o The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments and
other factors. The Company takes into consideration the current financial
condition of its customers, the age of the outstanding balance and the
current economic environment when assessing the adequacy of the allowance.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. During 2003, 2004 and 2005, the net amount
written off against the allowance for doubtful accounts as a percentage of
the balance of the allowance for doubtful accounts as of the beginning of
the year ranged from 2% to 16%.
o The Company provides reserves for estimated obsolete or unmarketable
inventories equal to the difference between the cost of inventory and the
estimated net realizable value using assumptions about future demand for
its products and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory reserves
may be required.
o The Company owns investments in certain companies that are accounted for
either as marketable securities carried at fair value or accounted for
under the equity method. For all of such investments, the Company records
an impairment charge when it believes an investment has experienced a
decline in fair value below its cost basis (for marketable securities) or
below its carrying value (for equity method investees) that is other than
temporary. Future adverse changes in market conditions or poor operating
results of underlying investments could result in losses or an inability to
recover the carrying value of the investments that may not be reflected in
an investment's current carrying value, thereby possibly requiring an
impairment charge in the future.
At December 31, 2005, the carrying value of all of the Company's marketable
securities exceeded the cost basis of each of such investments. With
respect to the Company's investment in Valhi, which comprised all of the
Company's marketable equity securities at December 31, 2005, the $87.1
million carrying value of such investment exceeded its $34.6 million cost
basis by about 151%. At December 31, 2005, the $29.01 per share quoted
market price of the Company's investment in Kronos (the Company's only
equity method investee) exceeded its per share net carrying value by about
244%.
o The Company recognizes an impairment charge associated with its long-lived
assets, including property and equipment, goodwill and other intangible
assets, whenever it determines that recovery of such long-lived asset is
not probable. Such determination is made in accordance with the applicable
GAAP requirements associated with the long-lived asset, and is based upon,
among other things, estimates of the amount of future net cash flows to be
generated by the long-lived asset and estimates of the current fair value
of the asset. Adverse changes in such estimates of future net cash flows or
estimates of fair value could result in an inability to recover the
carrying value of the long-lived asset, thereby possibly requiring an
impairment charge to be recognized in the future.
Under applicable GAAP (SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets"), property and equipment is not assessed for
impairment unless certain impairment indicators, as defined, are present.
During 2005, no such impairment indicators, as defined, were present.
Under applicable GAAP (SFAS No. 142, "Goodwill and other Intangible
Assets"), goodwill is required to be reviewed for impairment at least on an
annual basis. Goodwill will also be reviewed for impairment at other times
during each year when impairment indicators, as defined, are present. At
December 31, 2005, goodwill attributable to the component products
operating segment was assigned to two reporting units within that operating
segment, one consisting of CompX's security products operations and one
consisting of CompX's Michigan, Canadian and Taiwanese operations. The
estimated fair values of the two CompX reporting units are determined based
on discounted cash flow projections. Significant judgment is required in
estimating the discounted cash flows for the CompX reporting units. Such
estimated cash flows are inherently uncertain, and there can be no
assurance that CompX will achieve the future cash flows reflected in its
projections. No goodwill impairments related to continuing operations were
deemed to exist as a result of the Company's annual impairment review
completed during the third quarter of 2005, as the estimated fair value of
each such reporting unit exceeded the net carrying value of the respective
reporting unit. The Company's goodwill also relates to an acquisition
completed prior to 2003. See Notes 8 and 24 to the Consolidated Financial
Statements.
As discussed in Note 8 to the Consolidated Financial Statements, the
Company recognized a $6.5 million goodwill impairment with respect to
CompX's European operations in the fourth quarter of 2004, following
CompX's decision to dispose of those assets. The disposal of such
operations was completed in January 2005, and therefore the Company no
longer reports any goodwill attributable to such operation at December 31,
2005.
o The Company maintains various defined benefit pension plans and
postretirement benefits other than pensions ("OPEB"). The amounts
recognized as defined benefit pension and OPEB expenses, and the reported
amounts of prepaid and accrued pension costs and accrued OPEB costs, are
actuarially determined based on several assumptions, including discount
rates, expected rates of returns on plan assets and expected health care
trend rates. Variances from these actuarially assumed rates will result in
increases or decreases, as applicable, in the recognized pension and OPEB
obligations, pension and OPEB expenses and funding requirements. These
assumptions are more fully described below under " Assumptions on defined
benefit pension plans and OPEB plans."
o The Company records a valuation allowance to reduce its deferred income tax
assets to the amount that is realizable under the "more-likely-than-not"
recognition criteria. While the Company has considered future taxable
income and ongoing prudent and feasible tax planning strategies in
assessing the need for a valuation allowance, it is possible that in the
future the Company may change its estimate of the amount of the deferred
income tax assets that would "more-likely-than-not" be realized in the
future, resulting in an adjustment to the deferred income tax asset
valuation allowance that would either increase or decrease, as applicable,
reported net income in the period such change in estimate was made.
In addition, the Company makes an evaluation at the end of each reporting
period as to whether or not some or all of the undistributed earnings of
its foreign subsidiaries are permanently reinvested (as that term is
defined in GAAP). While the Company may have concluded in the past that
some of such undistributed earnings are permanently reinvested, facts and
circumstances can change in the future, and it is possible that a change in
facts and circumstances, such as a change in the expectation regarding the
capital needs of its foreign subsidiaries, could result in a conclusion
that some or all of such undistributed earnings are no longer permanently
reinvested. In such an event, the Company would be required to recognize a
deferred income tax liability in an amount equal to the estimated
incremental U.S. income tax and withholding tax liability that would be
generated if all of such previously-considered permanently reinvested
undistributed earnings were distributed to the U.S. In this regard, during
2005 CompX determined that certain of the undistributed earnings of its
non-U.S. operations could no longer be considered permanently reinvested,
and in accordance with GAAP CompX recognized an aggregate $9.0 million
provision for deferred income taxes on such undistributed earnings of its
foreign subsidiaries. See Note 15 to the Consolidated Financial Statements.
o The Company records accruals for environmental, legal, income tax and other
contingencies and commitments when estimated future expenditures associated
with such contingencies become probable, and the amounts can be reasonably
estimated. However, new information may become available, or circumstances
(such as applicable laws and regulations) may change, thereby resulting in
an increase or decrease in the amount required to be accrued for such
matters (and therefore a decrease or increase in reported net income in the
period of such change).
Segment profit for each of the Company's two operating segments are
impacted by certain of these significant judgments and estimates, as summarized
below:
o Chemicals - allowance for doubtful accounts, reserves for obsolete or
unmarketable inventories, impairment of equity method investees, goodwill
and other long-lived assets, defined benefit pension and OPEB plans and
loss accruals.
o Component products - allowance for doubtful accounts, reserves for obsolete
or unmarketable inventories, impairment of long-lived assets and loss
accruals.
In addition, general corporate and other items are impacted by the
significant judgments and estimates for impairment of marketable securities and
equity method investees, defined benefit pension and OPEB plans, deferred income
tax asset valuation allowances and loss accruals.
Component products
Years ended December 31, % Change
------------------------------------- -----------------------
2003 2004 2005 2003-04 2004-05
---- ---- ---- ------- -------
(In $ millions)
Net sales $ 173.9 $ 182.6 $ 186.4 +5% +2%
Segment profit 9.0 16.3 19.3 +81% +18%
Segment profit margin 5% 9% 10%
Component product sales were higher in 2005 as compared to 2004 principally
due to increases in selling prices for certain products across all product lines
to recover volatile raw material prices, sales volume associated with a business
acquired in 2005 and the net effect of fluctuations in currency exchange rates,
which increased sales by $1.5 million, as discussed below, partially offset by
sales volume decreases for certain products resulting from Asian competition.
During 2005, sales of security products (including sales of the business
acquired in 2005) increased 6% as compared to 2004, while sales of precision
slide and ergonomic products decreased 1% and 2%, respectively. The percentage
changes in 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 sales were higher in 2004 as compared to 2003 due in
part to the favorable effect of fluctuations in foreign currency exchange rates,
which increased component products sales by $2.5 million in 2004 as compared to
2003, as discussed below. Component products sales comparisons were also
impacted by increases in product prices for precision slides and ergonomic
products which were primarily a pass through of raw material steel cost
increases to customers. During 2004, sales of slide products increased 13% as
compared to 2003, while sales of security products decreased less than 1% and
sales of ergonomic products increased 1% during the same period.
Component products segment profit increased in 2005 as compared to 2004 as
the favorable impact of continued reductions in manufacturing, fixed overhead
and other overhead costs more than offset the negative impact of changes in
foreign currency exchange rates, as discussed below, and higher raw material
costs.
Component products segment profit comparisons in 2004 were favorably
impacted by the effect of certain cost reduction initiatives undertaken in 2003.
Component products segment profit comparisons were also impacted by the net
effects of increases in the cost of steel (the primary raw material for CompX's
products) and continued reductions in manufacturing, fixed overhead and other
overhead costs.
CompX has substantial operations and assets located outside the United
States in Canada 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 and the New Taiwan dollar. In addition, a
portion of CompX's sales generated from its non-U.S. operations 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 2005, currency exchange rate
fluctuations positively impacted the Company's sales comparisons with 2004 as
discussed above, and negatively impacted component products segment profit
comparisons for the same periods by approximately $2.0 million. During 2004,
currency exchange rate fluctuations positively impacted component products sales
comparisons with 2003 as discussed above, while currency exchange rate
fluctuations did not significantly impact component products segment profit
comparisons for the same periods. The positive impact on sales relates to sales
denominated in non-U.S. dollar currencies translating into higher U.S. dollar
sales due to a strengthening of the local currency in relation to the U.S.
dollar. The negative impact on operating income results from the U.S. dollar
denominated sales of non-U.S. operations converting into lower local currency
amounts due to the weakening of the U.S. dollar. This negatively impacts margin
as it results in less local currency generated from sales to cover the costs of
non-U.S. operations which are denominated in local currency.
While demand has stabilized across most product segments, certain customers
continue to seek lower cost Asian sources as alternatives to CompX's products.
CompX believes the impact of this will be mitigated through ongoing initiatives
to expand both new products and new market opportunities. Asian sourced
competitive pricing pressures are expected to continue to be a challenge as
Asian manufacturers, particularly those located in China, gain market share.
CompX's strategy in responding to the competitive pricing pressure has included
reducing production cost through product reengineering, improvement in
manufacturing processes or moving production to lower-cost facilities, including
its own Asian based manufacturing facilities. CompX also has emphasized and
focused on opportunities where it can provide value-added customer support
services that Asian based 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.
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 an additional
focus on sales of CompX's higher-margin ergonomic computer support systems and
security products to improve operating results. In addition, CompX continues to
develop sources for lower cost components for certain product lines to
strengthen its ability to meet competitive pricing when practical. These
actions, along with other activities to eliminate excess capacity, are designed
to position CompX to expand more effectively on both 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 past three years are primarily due to (i) relative changes in TiO2 sales and
production volumes, (ii) relative changes in TiO2 average selling prices and
(iii) relative changes in foreign currency exchange rates. Selling prices (in
billing currencies) 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, increasing during the last half of 2004 and first half of 2005 and
decreasing during the last half of 2005.
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, 2004 and 2005, including the
periods (the second half of 2004 and 2005) for which the Company did not
consolidate Kronos' results of operations.
Years ended December 31, % Change Six months ended
------------------------------------- ----------------------- ------------------
2003 2004 2005 2003-04 2004-05 June 30,2004
---- ---- ---- ------- ------- ------------
(In $ millions)
Net sales $1,008.2 $1,128.6 $ 1,196.7 +12% +6% $559.1
Segment profit 137.4 119.6 181.5 -13% +52% 66.4
Segment profit margin 14% 11% 15% 12%
TiO2 operating
statistics:
Average selling price
index (1990=100) 84 82 89
Sales volume* 462 500 478
Production volume* 476 484 492
Production capacity
at beginning of
year* 470 480 495
Production rate as a
percentage of
capacity Full Full 99%
Percent change in TiO2 average selling prices:
Using actual foreign currency exchange rates + 4% + 9%
Impact of changes in foreign exchange rates - 6% - 1%
---- ----
- 2% + 8%
==== ====
________________________________
* Metric tons, in thousands
Kronos' sales increased $68.1 million (6%) in 2005 as compared to 2004 due
primarily to the net effects of higher average TiO2 selling prices, lower TiO2
sales volumes and the favorable effect of fluctuations in foreign currency
exchange rates, which increased sales by approximately $16 million as further
discussed below. Excluding the effect of fluctuations in the value of the U.S.
dollar relative to other currencies, Kronos' average TiO2 selling prices in
billing currencies were 8% higher in 2005 as compared to 2004. 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 2005 increased 9% as compared to 2004.
Kronos' sales increased $120.4 million (12%) in 2004 as compared to 2003 as
the favorable effect of fluctuations in foreign currency exchange rates, which
increased chemicals sales by approximately $60 million as further discussed
below, and higher 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, Kronos' average TiO2 selling prices in
billing currencies were 2% lower in 2004 as compared to 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 2004 increased 4% in 2004 as compared to 2003.
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 4% and 9%
increases in Kronos' average TiO2 selling prices during 2004 and 2005,
respectively, as compared to the respective prior year using actual foreign
currency exchange rates prevailing during the respective periods (the GAAP
measure), and the 2% decrease and 8% increase in Kronos' average TiO2 selling
prices in billing currencies (the non-GAAP measure) during such periods 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's segment profit increased $61.9 million (52%) in 2005 as compared
to 2004, as the effect of higher average TiO2 selling prices and higher
production volumes more than offset the impact of lower sales volumes, higher
raw material and maintenance costs in 2005 and the $6.3 million of income
related to a contract dispute settlement with a customer recognized in 2004, as
further discussed below.
On September 22, 2005, the chloride-process TiO2 facility operated by
Kronos' 50%-owned joint venture, Louisiana Pigment Company ("LPC"), temporarily
halted production due to Hurricane Rita. Although storm damage to core
processing facilities was not extensive, a variety of factors, including loss of
utilities, limited access and availability of employees and raw materials,
prevented the resumption of partial operations until October 9, 2005 and full
operations until late 2005. The joint venture expects the majority of its
property damage and unabsorbed fixed costs for periods in which normal
production levels were not achieved will be covered by insurance, and Kronos
believes insurance will cover its lost profits (subject to applicable
deductibles) resulting from its share of the lost production from LPC. Insurance
proceeds from the lost profit for product that Kronos was not able to sell as a
result of the loss of production from LPC, are expected to be recognized by
Kronos during 2006, although the amount and timing of such insurance recoveries
is not presently determinable. The effect on Kronos' financial results will
depend on the timing and amount of insurance recoveries.
Kronos' segment profit decreased $17.8 million (13%) in 2004 as compared to
2003, as the effect of lower average TiO2 selling prices and higher raw material
and maintenance costs more than offset the impact of higher sales and production
volumes and income from the contract dispute settlement. Kronos' segment profit
increased $40.9 million (42%) in 2003 compared to 2002 due primarily to higher
average TiO2 selling prices and higher TiO2 sales and production volumes.
Chemicals segment profit in 2004 includes $6.3 million of income related to
the settlement of a 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 gain recognized 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. See Note 18 to the Consolidated Financial Statements.
Kronos' TiO2 sales volumes in 2005 decreased 4% compared to 2004, with
volumes lower in all regions of the world. Approximately one-half of Kronos'
2005 TiO2 sales volumes were attributable to markets in Europe, with 38%
attributable to North America and the balance to export markets. Overall
worldwide demand for TiO2 in 2005 is estimated to have declined by approximately
5% from the exceptionally strong demand levels in 2004. Kronos attributes the
decline in overall sales and its own sales to slower overall economic growth in
2005 and inventory destocking by its customers. Kronos' segment profit
comparisons were favorably impacted by higher production levels, which increased
2%. Kronos' operating rates were near full capacity in both periods, and Kronos'
production volumes in 2005 set a new record for Kronos, which was the fourth
consecutive year record production volumes were achieved.
Kronos' TiO2 sales volumes in 2004 increased 8% compared to 2003, as higher
volumes in European and export markets more than offset lower volumes in Canada.
Approximately one-half of Kronos' 2004 TiO2 sales volumes were attributable to
markets in Europe, with 38% attributable to North America and the balance to
export markets. Demand for TiO2 remained strong throughout 2004, and while
Kronos believes that the strong demand is largely attributable to the end-use
demand of its customers, it is possible that some portion of the strong demand
resulted from customers increasing their inventory levels of TiO2 in advance of
implementation of announced or anticipated price increases. Kronos' segment
profit comparisons were also favorably impacted by higher production levels,
which increased 2%. Kronos' operating rates were near full capacity in both
periods, and Kronos' sales and production volumes in 2004 were both new records
for Kronos.
Kronos has substantial operations and assets located outside the United
States (primarily in Germany, Belgium, Norway and Canada). A significant amount
of Kronos' sales generated from its non-U.S. operations are denominated in
currencies other than the U.S. dollar, principally the euro, other major
European currencies and the Canadian dollar. A portion of Kronos' sales
generated from its non-U.S. operations are denominated in the U.S. dollar.
Certain raw materials, primarily titanium-containing feedstocks, are purchased
in U.S. dollars, while labor and other production costs are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
Kronos' foreign sales and operating results are subject to currency exchange
rate fluctuations which may favorably or adversely impact reported earnings and
may affect the comparability of period-to-period operating results. Overall,
fluctuations in the value of the U.S. dollar relative to other currencies,
primarily the euro, increased Kronos' TiO2 sales by a net $16 million in 2005 as
compared to 2004 and increased Kronos' TiO2 sales by a net $60 million in 2004
as compared to 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 2005 and 2004 compared
to the same periods of the respective prior years. Overall, currency exchange
rate fluctuations resulted in a net increase of $6 million in Kronos' income
from operations in each of 2004 and 2005 as compared to the respective prior
year.
Kronos expects its income from operations in 2006 will be somewhat lower
than 2005, as the favorable effect of anticipated modest improvements in sales
volumes and average TiO2 selling prices are expected to be more than offset by
the effect of higher production costs, particularly raw material and energy
costs. Kronos' expectations as to the future prospects of Kronos and the TiO2
industry are based upon a number of factors beyond Kronos' control, including
worldwide growth of gross domestic product, competition in the marketplace,
unexpected or earlier-than-expected capacity additions and technological
advances. If actual developments differ from Kronos' expectations, Kronos'
results of operations could be unfavorably affected.
Kronos' efforts to debottleneck its production facilities to meet long-term
demand continue to prove successful. Such debottlenecking efforts included,
among other things, the addition of finishing capacity in the German facility
and equipment upgrades and enhancements in several locations to allow for
reduced downtime for maintenance activities. Kronos' production capacity has
increased by approximately 30% over the past ten years due to debottlenecking
programs, with only moderate capital expenditures. Kronos believes its annual
attainable production capacity for 2006 is approximately 510,000 metric tons,
with some slight additional capacity expected to be available in 2007 through
its continued debottlenecking efforts.
Equity in earnings of Kronos - second half of 2004 and year ended December
31, 2005
Six months ended Year ended
December 31, December 31,
2004 2005
---- ----
(In millions) (In millions)
Kronos historical:
Net sales $ 569.5 $1,196.7
Segment profit $ 53.3 $ 181.5
Other general corporate, net (1.6) (4.1)
Securities transaction gain - 5.4
Interest expense (25.9) (44.7)
------- --------
25.8 138.1
Income tax expense 5.5 67.1
------- --------
Net income $ 20.3 $ 71.0
======= ========
Equity in earnings of Kronos Worldwide, Inc. $ 9.6 $ 25.5
======= ========
See above for a discussion relating to Kronos' operations during 2004.
Securities transaction gain in 2005 relates to the sale of Kronos' passive
interest in a Norwegian smelting operation, which had a nominal carrying value
for financial reporting purposes, for aggregate consideration of approximately
$5.4 million consisting of cash of $3.5 million and inventory with a value of
$1.9 million. Kronos' interest expense in the second half of 2004 and full year
2005 relates principally to Kronos International, Inc.'s ("KII" - a wholly-owned
subsidiary of Kronos) Senior Secured Notes. In addition, in 2004 Kronos'
interest expense also related to a $200 million long-term note payable to
affiliates which was fully prepaid in the fourth quarter of 2004.
Kronos' income tax expense in 2005 includes the net non-cash effects of (i)
the aggregate favorable effects of recent developments with respect to certain
non-U.S. income tax audits of Kronos, principally in Belgium and Canada, of
$11.5 million and (ii) the unfavorable effect with respect to the loss of
certain income tax attributes of Kronos in Germany of $17.5 million.
General corporate and other items
General corporate interest and dividend income. Interest and dividend
income fluctuates in part based upon the amount of funds invested and yields
thereon. Aggregate interest and dividend income decreased $4.0 million in 2005
compared to 2004 primarily due to the repayment of $31.4 million of the
Company's note receivable from Kronos in the fourth quarter of 2004. Aggregate
interest and dividend income increased $4.6 million in 2004 compared to 2003
primarily due to interest on NL's note receivable from Kronos which was not
eliminated upon consolidation in the last six months of 2004. The Company
expects interest income will be lower in 2006 than 2005 due to lower average
levels of funds available for investment.
Securities transactions. Net securities transactions gains in 2005 relate
principally to a $14.7 million pre-tax gain ($8.0 million, or $.17 per diluted
share, net of income taxes) related to NL's sale of approximately 470,000 shares
of Kronos common stock in market transactions during 2005. See Note 2 to the
Consolidated Financial Statements. Net securities transactions gains in 2004
includes a $2.2 million gain ($1.4 million, or $.03 per diluted share, net of
income taxes) related to NL's sale of shares of Kronos common stock in market
transactions. See Note 2 to the Consolidated Financial Statements. Net
securities transactions gains in 2003 included a $2.3 million noncash securities
gain related to the exchange of the Company's holdings of Tremont Corporation
common stock for shares of Valhi, Inc. common stock as a result of a series of
merger transactions completed in February 2003.
Other general corporate income items. The gain on disposal of fixed assets
in 2003 relates primarily to the sale of certain real property of NL not
associated with any operations. NL has certain other real property, including
some subject to environmental remediation, which could be sold in the future for
a profit. Noncompete income relates to NL's $20 million of proceeds from the
disposal of its specialty chemicals business unit in January 1998 related to its
agreement not to compete in the rheological products business, which was
recognized as a component of general corporate income ratably over the five-year
non-compete period ended in January 2003 ($333,000 recognized in 2003). See Note
18 to the Consolidated Financial Statements.
Insurance recoveries. NL has reached an agreement with a former insurance
carrier in which such carrier would reimburse NL for a portion of its past and
future lead pigment litigation defense costs, although the amount that NL will
ultimately recover from such carrier with respect to such defense costs incurred
by NL is not yet determinable. In addition, during 2005, NL recognized $2.2
million of recoveries from certain insolvent former insurance carriers relating
to settlement of excess insurance claims that were paid to NL.
Insurance recoveries of $823,000 in 2003, $552,000 in 2004 and $804,000 in
2005 relate to NL's settlements with certain of its former insurance carriers.
These settlements, as well as similar prior settlements NL reached prior to
2003, resolved court proceedings in which NL had sought reimbursement from the
carriers for legal defense costs and indemnity coverage for certain of its
environmental remediation expenditures. No further material settlements relating
to litigation concerning environmental remediation coverages are expected. See
Note 18 to the Consolidated Financial Statements.
While NL continues to seek additional insurance recoveries, there can be no
assurance that NL will be successful in obtaining reimbursement for either
defense costs or indemnity. NL has not considered any potential insurance
recoveries in determining related accruals for lead pigment litigation matters.
Any such additional insurance recoveries would be recognized when their receipt
is deemed probable and the amount is determinable.
General corporate expenses. Net general corporate expenses in 2005 were
$2.8 million (16%) higher than 2004 due primarily to higher legal expenses of
NL. Net general corporate expenses in 2004 were $40.3 million lower than 2003
due primarily to lower environmental remediation and legal expenses.
Net general corporate expenses in calendar 2006 are currently expected to
be higher as compared to 2005, primarily due to higher expected litigation and
related expenses. However, obligations for environmental remediation obligations
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 in the
future with respect to sites for which no estimate of liability can presently be
made. See Note 19 to the Consolidated Financial Statements.
Interest expense. Substantially all of the interest expense in 2004 relates
to Kronos and consequently, interest expense in 2004 decreased $16.0 million
compared to 2003 primarily due to the deconsolidation of Kronos effective July
1, 2004. Interest expense related to CompX in 2005 declined by approximately
$200,000 in 2005 compared to 2004 due primarily to lower average levels of
outstanding debt. The Company does not currently expect to report a material
amount of interest expense in 2006.
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rates are explained in Note 15 to the Consolidated Financial
Statements.
The Company's income tax expense in 2005 includes the net non-cash effects
of (i) the favorable effect of recent developments with respect to certain
income tax items of NL of $7.4 million (or $.15 per diluted share) and (ii) the
unfavorable effect with respect to a change in CompX's permanent reinvestment
conclusion regarding its non-U.S. subsidiaries of $9.0 million ($6.1 million, or
$.13 per diluted share, net of minority interest).
As more fully described in Note 15 to the Consolidated Financial
Statements, Kronos had previously provided a deferred income tax asset valuation
allowance against substantially all of its 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 the utilization of its
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 now met the "more-likely-than-not" recognition criteria.
Under applicable GAAP related to accounting for income taxes at interim periods,
a change in estimate at an interim period resulting in a decrease in the
valuation allowance is segregated into two components, the portion related to
the remaining interim periods of the current year and the portion related to all
future years. The portion of the valuation allowance reversal related to the
former is recognized over the remaining interim periods of the current year, and
the portion of the valuation allowance related to the latter is recognized at
the time the change in estimate is made. Accordingly, as of June 30, 2004,
Kronos reversed $268.6 million of the valuation allowance (the portion related
to future years), and Kronos reversed the remaining $3.4 million during the last
six months of 2004. Prior to the complete utilization of such carryforwards, it
is possible that the Company might conclude in the future that the benefit of
such carryforwards would no longer meet the "more-likely-than-not" recognition
criteria, at which point the Company would be required to recognize a valuation
allowance against the then-remaining tax benefit associated with the
carryforwards.
Also during 2004, NL recognized a second quarter $48.5 million income tax
benefit related to income tax attributes of EMS. This income tax benefit
resulted from a settlement agreement reached with the U.S. IRS concerning the
IRS' previously-reported examination of a certain restructuring transaction
involving EMS, and included (i) a $17.4 million tax benefit related to a
reduction in the amount of additional income taxes and interest which NL
estimates it will be required to pay related to this matter as a result of the
settlement agreement and (ii) a $31.1 million tax benefit related to the
reversal of a deferred income tax asset valuation allowance related to certain
tax attributes of EMS (including a U.S. net operating loss carryforward) which
NL now believes meet the "more-likely-than-not" recognition criteria.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss 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.
During 2003, NL and Kronos reduced their deferred income tax asset
valuation allowance by an aggregate of approximately $7.2 million, primarily as
a result of the utilization of certain income tax attributes for which the
benefit had not previously been recognized. In addition, Kronos recognized a
$38.0 million income tax benefit related to the net refund of certain prior year
German income taxes.
As discussed in Note 1 to the Consolidated Financial Statements, the
Company commenced to recognize deferred income taxes with respect to the excess
of the financial reporting carrying amount over the income tax basis of its
investment in Kronos beginning in December 2003 following the Company's pro-rata
distribution of shares of Kronos common stock to NL's shareholders. The
aggregate amount of such deferred income taxes (benefit) included in the
Company's provision for income taxes was $39.5 million in 2003, $23.2 million in
2004 and nil in 2005. In addition, the Company's provision for income taxes in
2003, 2004 and 2005 includes an aggregate $30.3 million, $21.2 million and
$913,000, respectively, for the current income tax effect related to NL's
distribution of such shares of Kronos common stock to its shareholders.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law provided for a special 85% deduction for certain dividends
received from a controlled foreign corporation in 2005. In the third quarter of
2005, the Company and Kronos each completed its evaluation of this new provision
and determined that it would not benefit from such 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 its stockholders, and ceased reporting minority
interest in Kronos effective July 1, 2004 upon the deconsolidation of Kronos.
See Note 13 to the Consolidated Financial Statements.
Minority interest in NL's subsidiary also related to EMS. EMS was
established in 1998, at which time EMS contractually assumed certain of NL's
environmental liabilities. EMS' earnings are based, in part, upon its ability to
favorably resolve these liabilities on an aggregate basis. See Note 13 to the
Consolidated Financial Statements.
Discontinued operations. See Note 24 to the Consolidated Financial
Statements.
Related party transactions. The Company is a party to certain transactions
with related parties. See Notes 2 and 17 to the Consolidated Financial
Statements. It is the policy of the Company to engage in transactions with
related parties on terms, in the opinion of the Company, no less favorable to
the Company than could be obtained from unrelated parties.
Accounting principles newly adopted in 2003 and 2004. See Note 22 to the
Consolidated Financial Statements.
Accounting principles not yet adopted. See Note 23 to the Consolidated
Financial Statements.
Assumptions on defined benefit pension plans and OPEB plans
Defined benefit pension plans. NL maintains various defined benefit pension
plans in the U.S., and Kronos maintains various defined benefit pension plans in
Europe, Canada and the U.S. See Note 16 to the Consolidated Financial
Statements.
The Company accounts for its defined benefit pension plans using SFAS No.
87, "Employer's Accounting for Pensions." Under SFAS No. 87, defined benefit
pension plan expense and prepaid and accrued pension costs are each recognized
based on certain actuarial assumptions, principally the assumed discount rate,
the assumed long-term rate of return on plan assets and the assumed increase in
future compensation levels. The Company recognized consolidated defined benefit
pension plan expense of $8.9 million in 2003, $6.8 million in 2004 and $700,000
in 2005. Such expense in 2004 includes one-half of the defined benefit pension
expense attributable to Kronos' plans for the period during which the Company
consolidated Kronos' results of operations. The amount of funding requirements
for these defined benefit pension plans is generally based upon applicable
regulations (such as ERISA in the U.S.), and will generally differ from pension
expense recognized under SFAS No. 87 for financial reporting purposes.
Contributions made by the Company to all of its plans aggregated $14.1 million
in 2003, $9.1 million in 2004 and $700,000 in 2005. Such contributions in 2004
includes one-half of the contributions attributable to Kronos' plans for the
period during which the Company consolidated Kronos' results of operations.
The discount rates the Company utilizes for determining defined benefit
pension expense and the related pension obligations are based on current
interest rates earned on long-term bonds that receive one of the two highest
ratings given by recognized rating agencies in the applicable country where the
defined benefit pension benefits are being paid. In addition, the Company
receives advice about appropriate discount rates from the Company's third-party
actuaries, who may in some cases utilize their own market indices. The discount
rates are adjusted as of each valuation date (September 30th) to reflect
then-current interest rates on such long-term bonds. Such discount rates are
used to determine the actuarial present value of the pension obligations as of
December 31st of that year, and such discount rates are also used to determine
the interest component of defined benefit pension expense for the following
year.
At December 31, 2005, approximately 85% of the projected benefit obligation
related to NL plans in the U.S, with the remainder related to an immaterial plan
in the United Kingdom associated with a former disposed business unit of the
Company. The Company uses several different discount rate assumptions in
determining its consolidated defined benefit pension plan obligations and
expense because the Company maintains defined benefit pension plans in the
United States and the United Kingdom and the interest rate environment differs
from country to country.
The Company used the following discount rates for its defined benefit
pension plans:
Discount rates used for:
-------------------------------------------------------------------------------------------
Obligations at Obligations at Obligations at
December 31, 2003 and December 31, 2004 and expense December 31, 2005 and
expense in 2004 in 2005 expense in 2006
-------------------------- ---------------------------------- ----------------------------
U.S. 5.9% 5.8% 5.5%
United Kingdom 5.3% 5.5% 5.0%
Germany 5.3% * *
Canada 6.3% * *
Norway 5.5% * *
__________________________
* Not applicable, as effective July 1, 2004, the Company no longer
consolidates Kronos.
The assumed long-term rate of return on plan assets represents the
estimated average rate of earnings expected to be earned on the funds invested
or to be invested in the plans' assets provided to fund the benefit payments
inherent in the projected benefit obligations. Unlike the discount rate, which
is adjusted each year based on changes in current long-term interest rates, the
assumed long-term rate of return on plan assets will not necessarily change
based upon the actual, short-term performance of the plan assets in any given
year. Defined benefit pension expense each year is based upon the assumed
long-term rate of return on plan assets for each plan and the actual fair value
of the plan assets as of the beginning of the year. Differences between the
expected return on plan assets for a given year and the actual return are
deferred and amortized over future periods based either upon the expected
average remaining service life of the active plan participants (for plans for
which benefits are still being earned by active employees) or the average
remaining life expectancy of the inactive participants (for plans for which
benefits are not still being earned by active employees).
At December 31, 2005, approximately 89% of the plan assets related to plan
assets for NL's plans in the U.S., with the remainder related to the United
Kingdom plan. The Company uses several different long-term rates of return on
plan asset assumptions in determining its consolidated defined benefit pension
plan expense because the Company maintains defined benefit pension plans the
United States and the United Kingdom, the plan assets in different countries are
invested in a different mix of investments and the long-term rates of return for
different investments differ from country to country.
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets for each of its plans and the expected long-term
rates of return for such asset components. In addition, the Company receives
advice about appropriate long-term rates of return from the Company's
third-party actuaries. Such assumed asset mixes are summarized below:
o During 2003, 2004 and 2005, the plan assets in the U.S. were invested in
the Combined Master Retirement Trust ("CMRT"), a collective investment
trust sponsored by Contran to permit the collective investment by certain
master trusts which fund certain employee benefits plans sponsored by
Contran and certain of its affiliates. Harold Simmons is the sole trustee
of the CMRT. The CMRT's long-term investment objective is to provide a rate
of return exceeding a composite of broad market equity and fixed income
indices (including the S&P 500 and certain Russell indices) utilizing both
third-party investment managers as well as investments directed by Mr.
Simmons. During the 18-year history of the CMRT through December 31, 2005,
the average annual rate of return has been approximately 14% (with a 36%
return for 2005).
The Company regularly reviews its actual asset allocation for each of its
plans, and will periodically rebalance the investments in each plan to more
accurately reflect the targeted allocation when considered appropriate.
The Company's assumed long-term rates of return on plan assets for 2003,
2004 and 2005 were as follows:
2003 2004 2005
---- ---- ----
U.S. 10.0% 10.0% 10.0%
United Kingdom 7.5% 7.0% 6.5%
Germany 6.5% * *
Canada 7.0% * *
Norway 6.0% * *
__________________________
* Not applicable, as effective July 1, 2004, the Company no longer
consolidates Kronos.
The Company currently expects to utilize the same long-term rate of return
on plan asset assumptions in 2006 as it used in 2005 for purposes of determining
the 2006 defined benefit pension plan expense.
To the extent that a plan's particular pension benefit formula calculates
the pension benefit in whole or in part based upon future compensation levels,
the projected benefit obligations and the pension expense will be based in part
upon expected increases in future compensation levels. For all of the Company's
plans for which the benefit formula is so calculated, the Company generally
bases the assumed expected increase in future compensation levels upon average
long-term inflation rates for the applicable country.
In addition to the actuarial assumptions discussed above, because NL
maintains defined benefit pension plans outside the U.S., the amount of
recognized defined benefit pension expense and the amount of prepaid and accrued
pension costs will vary based upon relative changes in foreign currency exchange
rates.
As discussed above, assumed discount rates and rate of return on plan
assets are re-evaluated annually. A reduction in the assumed discount rate
generally results in an actuarial loss, as the actuarially-determined present
value of estimated future benefit payments will increase. Conversely, an
increase in the assumed discount rate generally results in an actuarial gain. In
addition, an actual return on plan assets for a given year that is greater than
the assumed return on plan assets results in an actuarial gain, while an actual
return on plan assets that is less than the assumed return results in an
actuarial loss. Other actual outcomes that differ from previous assumptions,
such as individuals living longer or shorter than assumed in mortality tables
which are also used to determine the actuarially-determined present value of
estimated future benefit payments, changes in such mortality table themselves or
plan amendments, will also result in actuarial losses or gains. Under GAAP, all
of such actuarial gains and losses are not recognized in earnings currently, but
instead are deferred and amortized into income in the future as part of net
periodic defined benefit pension cost. However, any actuarial gains generated in
future periods would reduce the negative amortization effect of any cumulative
unrecognized actuarial losses, while any actuarial losses generated in future
periods would reduce the favorable amortization effect of any cumulative
unrecognized actuarial gains.
During 2005, all of the Company's defined benefit pension plans generated a
net actuarial loss of $4.1 million. This actuarial loss resulted primarily from
the general overall reduction in the assumed discount rates as well as the
unfavorable effect of using updated mortality tables (which generally reflect
individuals living longer than prior mortality tables used), partially offset by
an actual return on plan assets in excess of the assumed return.
Based on the actuarial assumptions described above and NL's current
expectation for what actual average foreign currency exchange rates will be
during 2006, NL expects its defined benefit pension income will approximate $2.2
million in 2006. In comparison, NL expects to be required to make approximately
$400,000 of contributions to such plans during 2006.
As noted above, defined benefit pension expense and the amounts recognized
as accrued pension costs are based upon the actuarial assumptions discussed
above. The Company believes all of the actuarial assumptions used are reasonable
and appropriate. If NL had lowered the assumed discount rate by 25 basis points
for all of its plans as of December 31, 2005, NL's aggregate projected benefit
obligations would have increased by approximately $1.3 million at that date.
Such a change would not materially impact NL's defined benefit pension expense
for 2006. Similarly, if NL lowered the assumed long-term rate of return on plan
assets by 25 basis points for all of its plans, NL's defined benefit pension
expense would be expected to increase by approximately $100,000 during 2006.
OPEB plans. Certain subsidiaries of the Company in the U.S. and Canada
currently provide certain health care and life insurance benefits for eligible
retired employees. See Note 16 to the Consolidated Financial Statements. The
Company accounts for such OPEB costs under SFAS No. 106, Employers Accounting
for Postretirement Benefits other than Pensions. Under SFAS No. 106, OPEB
expense and accrued OPEB costs are based on certain actuarial assumptions,
principally the assumed discount rate and the assumed rate of increases in
future health care costs. The Company recognized consolidated OPEB expense of
$329,000 in 2003, $1.1 million in 2004 and $558,000 in 2005. Such expense in
2004 includes one-half of the OPEB expense attributable to Kronos' plans for the
period during which the Company consolidated Kronos' results of operations.
Similar to defined benefit pension benefits, the amount of funding will differ
from the expense recognized for financial reporting purposes, and contributions
to the plans to cover benefit payments aggregated $3.8 million in 2003, $3.5
million in 2004 and $2.2 million in 2005. Such contributions in 2004 include
one-half of the contributions attributable to Kronos' plans for the period
during which the Company consolidated Kronos' results of operations.
Substantially all of the Company's accrued OPEB cost relates to benefits being
paid to current retirees and their dependents, and no material amount of OPEB
benefits are being earned by current employees. As a result, the amount
recognized for OPEB expense for financial reporting purposes has been, and is
expected to continue to be, significantly less than the amount of OPEB benefit
payments made each year. Accordingly, the amount of accrued OPEB expense has
been, and is expected to continue, to decline gradually.
The assumed discount rates the Company utilizes for determining OPEB
expense and the related accrued OPEB obligations are generally based on the same
discount rates the Company utilizes for its defined benefit pension plans.
In estimating the health care cost trend rate, the Company considers its
actual health care cost experience, future benefit structures, industry trends
and advice from its third-party actuaries. In certain cases, NL has the right to
pass on to retirees all or a portion of increases in health care costs. During
each of the past three years, the Company has assumed that the relative increase
in health care costs will generally trend downward over the next several years,
reflecting, among other things, assumed increases in efficiency in the health
care system and industry-wide cost containment initiatives. For example, at
December 31, 2005 the expected rate of increase in future health care costs
ranges from 9% in 2006, declining to 5.5% in 2009 and thereafter.
Based on the actuarial assumptions described above and NL's current
expectation for what actual average foreign currency exchange rates will be
during 2006, the Company expects its consolidated OPEB expense will approximate
$600,000 in 2006. In comparison, the Company expects the employer contribution
portion of costs to approximate $1.6 million during 2006.
As noted above, OPEB expense and the amount recognized as accrued OPEB
costs are based upon the actuarial assumptions discussed above. The Company
believes all of the actuarial assumptions used are reasonable and appropriate.
If the Company had lowered the assumed discount rate by 25 basis points for all
of its OPEB plans as of December 31, 2005, the Company's aggregate projected
benefit obligations would have increased by approximately $200,000 at that date,
and the Company's OPEB expense would be expected to increase by less than
$50,000 during 2006. Similarly, if the assumed future health care cost trend
rate had been increased by 100 basis points, the Company's accumulated OPEB
obligations would have increased by approximately $800,000 at December 31, 2005,
and OPEB expense would have increased by $50,000 in 2005.
Foreign operations
Kronos. Kronos has substantial operations located outside the United States
(principally Europe and Canada) for which the functional currency is not the
U.S. dollar. As a result, the reported amount of the Company's net investment in
Kronos will fluctuate based upon changes in currency exchange rates. At December
31, 2005, Kronos had substantial net assets denominated in the euro, Canadian
dollar, Norwegian kroner and British pound sterling.
CompX. CompX has substantial operations and assets located outside the
United States, principally slide and/or ergonomic product operations in Canada
and Taiwan.
LIQUIDITY AND CAPITAL RESOURCES
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. 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.
Based upon the Company's expectations for the industries in which its
subsidiaries and affiliates operate, and the anticipated demands on the
Company's cash resources as discussed herein, the Company expects to have
sufficient liquidity to meet its obligations including operations, capital
expenditures, debt service and current dividend policy. To the extent that
actual developments differ from the Company's expectations, the Company's
liquidity could be adversely affected.
The deconsolidation of Kronos effective July 1, 2004 has a significant
effect on the comparability of the Company's consolidated cash flows.
Consolidated cash flows
Operating activities. 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
CompX 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.
Cash flows from operating activities changed from $92.7 million of cash
provided by operating activities in 2004 to $5.3 million of cash used by
operating activities in 2005. This $98.0 million decrease in cash generated from
operating activities was due primarily to the deconsolidation of Kronos,
effective July 1, 2004. As such, cash flows from operating activities in 2004 is
not comparable to 2005. Cash flows from operating activities decreased from
$114.9 million provided by operating activities in 2003 to $92.7 million of cash
provided by operating activities in 2004. This $22.2 million decrease was due
primarily to the deconsolidation of Kronos, effective July 1, 2004. As such,
cash flows from operating activities in 2003 is not comparable to 2004. 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.
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.
Years ended December 31,
----------------------------
2003 2004 2005
---- ---- ----
(In millions)
Cash provided (used) by
operating activities:
Kronos $ 107.7 $ 67.5 $ -
CompX 24.4 30.2 20.0
NL Parent (19.9) 7.1 (10.1)
Other 9.7 1.6 (10.0)
Eliminations (7.0) (13.7) (5.2)
------- ------- -------
$ 114.9 $ 92.7 $ (5.3)
======= ======= =======
Investing activities. The Company's capital expenditures were $44.3
million, $16.2 million and $10.7 million in 2003, 2004 and 2005, respectively
and are disclosed by business segment in Note 3 to the Consolidated Financial
Statements. Such capital expenditures in 2004 include the first six months of
Kronos' capital expenditures for the period during which the Company
consolidated Kronos' cash flows.
At December 31, 2005, firm purchase commitments for capital projects in
process approximated $3 million, all of which relates to CompX's component
products facilities. Aggregate capital expenditures for 2006 are expected to
approximate $16 million for CompX, and are expected to be financed primarily
from operations or existing cash resources and credit facilities.
During 2005, (i) NL sold shares of Kronos common stock in market
transactions for $19.2 million, (ii) CompX received a net $18.1 million from the
sale of its Thomas Regout European operations (which had approximately $4.0
million of cash at the date of disposal), (iii) NL acquired CompX common stock
in market transactions for $3.6 million, (iv) EMS collected $10 million on its
loan to one of the Contran family trusts and (v) CompX acquired a company for an
aggregate of $7.3 million. See Notes 2, 3 and 15 to the Consolidated Financial
Statements.
During 2004, (i) NL sold shares of Kronos common stock in market
transactions for net proceeds of $2.7 million, (ii) Kronos repaid $31.4 million
of its note payable to NL in the fourth quarter of 2004 and (iii) EMS collected
$4 million of its loan to one of the Contran family trusts described in Note 1
to the Consolidated Financial Statements.
During 2003, (i) EMS collected $4 million on its loan to one of the Contran
family trusts and (ii) the Company generated approximately $12.8 million from
the sale of property and equipment, primarily certain real property of NL
discussed above.
Financing activities. During 2004, (i) CompX repaid a net $26.0 million
under its revolving bank credit facility and (ii) Kronos borrowed and repaid a
net of euro 26 million ($32 million when borrowed) under its European revolving
bank credit facility during the first six months of 2004.
Distributions to minority interest are primarily comprised of Kronos' cash
dividends in the first half of 2004 and CompX's fourth quarter 2004 and four
2005 quarterly cash dividends, in both cases paid to shareholders other than NL.
Other cash flows from financing activities relate primarily to proceeds from the
sale of NL common stock issued upon exercise of stock options.
During 2003, (i) CompX repaid a net $5 million under its revolving bank
credit facility and (ii) Kronos borrowed an aggregate of euro 15 million ($16
million when borrowed) under its European revolving bank credit facility and
repaid kroner 80 million ($11 million) and euro 30 million ($34 million) under
such facility. NL paid cash dividends aggregating $38.2 million for 2003.
Distributions to minority interest in 2002 are primarily comprised of CompX
dividends paid to its shareholders other than Valhi and Valcor, and capital
transactions with affiliates during 2003 relates principally to CompX dividends
paid to Valhi and Valcor.
CompX closed on an extension of its credit facility in December 2005. The
$50 million secured revolving bank credit facility is collateralized by a pledge
of 65% of the ownership interests in CompX's first-tier non-United States
subsidiaries. Provisions contained in CompX's revolving bank credit facility
could result in the acceleration of such indebtedness prior to its stated
maturity for reasons other than defaults from failing to comply with typical
financial covenants. For example, the credit agreement allows the lender to
accelerate the maturity of the indebtedness upon a change of control (as
defined) of the borrower. The terms of the credit agreement could result in the
acceleration of all or a portion of the indebtedness following a sale of assets
outside of the ordinary course of business.
On March 15, 2006, the Company's Board of Directors declared a regular
quarterly cash dividend of $.125 per share to be paid to stockholders of record
as of March 27, 2006 to be paid on March 31, 2006.
Off balance sheet financing arrangements. Other than operating lease
commitments disclosed in Note 19 to the Consolidated Financial Statements, the
Company is not party to any material off-balance sheet financing arrangements.
Component products - CompX International
CompX's capital expenditures during the past three years aggregated $24.7
million. Such capital expenditures included manufacturing equipment that
emphasizes improved production efficiency and increased production capacity.
CompX received approximately $18.1 million cash (net of costs to sell) in
January 2005 upon the sale of its Thomas Regout operations in the Netherlands.
See Note 24 to the Consolidated Financial Statements. CompX believes that its
cash on hand, together with cash generated from operations and borrowing
availability under its bank credit facility, will be sufficient to meet CompX's
liquidity needs for working capital, capital expenditures, debt service and
dividends. To the extent that CompX's actual operating results or developments
differ from CompX's expectations, CompX's liquidity could be adversely affected.
CompX, which had suspended its regular quarterly dividend of $.125 per share in
the second quarter of 2003, reinstated its regular quarterly dividend at the
$.125 per share rate in the fourth quarter of 2004.
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 cash,
issuing additional equity securities or increasing the indebtedness of CompX or
its subsidiaries.
Chemicals - Kronos
At December 31, 2005, Kronos had cash, cash equivalents and marketable debt
securities of $76.0 million, including restricted balances of $3.9 million, and
Kronos had approximately $136 million available for borrowing under its U.S.,
Canadian and European credit facilities. Based upon Kronos' expectations for the
TiO2 industry and anticipated demands on Kronos' cash resources as discussed
herein, Kronos expects to have sufficient liquidity to meet its future
obligations including operations, capital expenditures, debt service and current
dividend policy. To the extent that actual developments differ from Kronos'
expectations, Kronos' liquidity could be adversely affected.
At December 31, 2005, Kronos' outstanding debt was comprised of (i) $449.3
million related to KII's Senior Secured Notes, (ii) $11.5 million related to
Kronos' U.S. subsidiary's revolving bank credit facility and (iii) approximately
$4.5 million of other indebtedness. Prior to December 31, 2004, Kronos had $200
million of long-term notes payable to NL, $168.6 million of which was
subsequently assigned to affiliates upon the acquisition of 10,374,000 shares of
CompX. See Note 1 to the Consolidated Financial Statements. The entire $200
million of long-term notes, including the remaining balance owed to NL, was
prepaid by Kronos in the fourth quarter of 2004.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions significantly impact Kronos' earnings and operating cash
flows. Cash flow 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.
Kronos' capital expenditures during the past three years aggregated $117.9
million, including $15 million ($4 million in 2005) for Kronos' ongoing
environmental protection and compliance programs. Kronos' estimated 2006 capital
expenditures are $41 million, including $6 million in the area of environmental
protection and compliance.
See Note 15 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, and see Note 19 to the
Consolidated Financial Statements with respect to certain legal proceedings and
environmental matters with respect to Kronos.
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 the
acquisition, divestiture, joint venture 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 available cash, issuing equity securities or increasing
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.
NL Industries Parent
At December 31, 2005, NL (exclusive of CompX) had cash, cash equivalents
and marketable debt securities of $59.9 million, including restricted balances
of $4.3 million.
See Note 15 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 19 to the Consolidated Financial Statements with respect
to certain legal proceedings and environmental matters with respect to NL.
In addition to those legal proceedings described in Note 19 to the
Consolidated Financial Statements, various legislation and administrative
regulations have, from time to time, been proposed that seek to (i) impose
various obligations on present and former manufacturers of lead pigment and
lead-based paint with respect to asserted health concerns associated with the
use of such products and (ii) effectively overturn court decisions in which NL
and other pigment manufacturers have been successful. Examples of such proposed
legislation include bills which would permit civil liability for damages on the
basis of market share, rather than requiring plaintiffs to prove that the
defendant's product caused the alleged damage, and bills which would revive
actions barred by the statute of limitations. While no legislation or
regulations have been enacted to date that are expected to have a material
adverse effect on NL's consolidated financial position, results of operations or
liquidity, imposition of market share liability or other legislation could have
such an effect.
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 an aggregate of $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 2 to the Consolidated Financial
Statements).
During 2005, NL paid its first quarter $.25 per share regular quarterly
dividend in the form of shares of Kronos common stock in which an aggregate of
approximately 266,000 shares, or approximately .5% of Kronos' outstanding common
stock, were distributed to NL shareholders in the form of pro-rata dividends. NL
paid cash dividends of $.25 per share in each of the second, third and fourth
quarters of 2005.
During 2004, NL paid each of its $.20 per share regular quarterly dividends
in the form of shares of Kronos common stock in which an aggregate of
approximately 2.5% of Kronos' outstanding common stock was distributed to NL
shareholders in the form of pro-rata dividends. 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. During the fourth quarter of 2004, NL transferred approximately
5.5 million shares of Kronos common stock to Valhi in satisfaction of a tax
liability and the tax liability generated from the use of such Kronos shares to
settle such tax liability. See Note 2 to the Consolidated Financial Statements.
In the fourth quarter of 2004, NL also sold 64,500 shares of Kronos common stock
in market transactions for an aggregate of approximately $2.7 million.
On September 24, 2004, NL completed the acquisition of 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. After such acquisition, NL
retained a $31.4 million note receivable from Kronos, which note receivable
Kronos fully prepaid in November 2004 using funds from KII's November 2004
issuance of euro 90 million principal amount of KII Senior Secured Notes.
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and availability of resources in view of, among
other things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, 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 component
products 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.
Because NL's operations are conducted primarily through its subsidiaries
and affiliates, NL's long-term ability to meet its parent company level
corporate obligations is dependent in large measure on the receipt of dividends
or other distributions from its subsidiaries and affiliates. Kronos' current
regular quarterly cash dividends are $.25 per share. At that rate, and based on
the 17.5 million shares of Kronos held by NL at December 31, 2005, NL would
directly receive aggregate annual dividends from Kronos of $17.5 million.
CompX's current regular quarterly dividends are $.125 per share. At that rate,
and based on the 10.4 million shares of CompX held indirectly by NL (through its
ownership interest in CompX Group) or held directly by NL at December 31, 2005,
NL would receive aggregate annual dividends from CompX of $5.2 million. See Note
3 to the Consolidated Financial Statements. See also the discussion contained in
Item 1A - "Risk Factors - Our assets consist primarily of investments in our
operating subsidiaries and affiliates and we are dependent upon distributions
from our subsidiaries and affiliates."
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.
Summary of debt and other contractual commitments
As more fully described in the notes to the Consolidated Financial
Statements, the Company is a party to various debt, lease and other agreements
which contractually and unconditionally commit the Company to pay certain
amounts in the future. See Notes 12 and 19 to the Consolidated Financial
Statements. The following table summarizes such contractual commitments of the
Company and its consolidated subsidiaries as of December 31, 2005 by the type
and date of payment.
Payment due date
----------------------------------------------------------------------
2011 and
Contractual commitment 2006 2007/2008 2009/2010 after Total
---------------------- ---- --------- --------- --------- ------
(In millions)
Third-party indebtedness $ .2 $ .5 $ .9 $ - $ 1.6
Estimated tax obligations 1.4 - - - 1.4
Operating leases .5 .3 .1 - .9
Raw material and other purchase
obligations 16.9 - - - 16.9
Fixed asset acquisitions 2.6 - - - 2.6
------ ------ ------ ------ ------
$ 21.6 $ .8 $ 1.0 $ - $ 23.4
The timing and amount shown for the Company's commitments related to
third-party indebtedness, operating leases and fixed asset acquisitions are
based upon the contractual payment amount and the contractual payment date for
such commitments. The timing and amount shown for raw material and other
purchase obligations, which consist of all open purchase orders and contractual
obligations (primarily commitments to purchase raw materials) is also based on
the contractual payment amount and the contractual payment date for such
commitments. The amount shown for tax obligations is the consolidated amount of
income taxes payable at December 31, 2005, which is assumed to be paid during
2006. Fixed asset acquisitions include firm purchase commitments for capital
projects.
The above table does not reflect any amounts that the Company might pay to
fund its defined benefit pension plans and OPEB plans, as the timing and amount
of any such future fundings are unknown and dependent on, among other things,
the future performance of defined benefit pension plan assets, interest rate
assumptions and actual future retiree medical costs. Such defined benefit
pension plans and OPEB plans are discussed above in greater detail.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The Company is exposed to market risk from changes in foreign
currency exchange rates, interest rates and equity security prices. In the past,
the Company has periodically entered into interest rate swaps or other types of
contracts in order to manage a portion of its interest rate market risk. The
Company has also periodically entered into currency forward contracts to either
manage a nominal portion of foreign exchange rate market risk associated with
receivables denominated in a currency other than the holder's functional
currency or similar risk associated with future sales, or to hedge specific
foreign currency commitments. Otherwise, the Company does not generally enter
into forward or option contracts to manage such market risks, nor does the
Company enter into any such contract or other type of derivative instrument for
trading or speculative purposes. Other than as described below, the Company was
not a party to any material forward or derivative option contract related to
foreign exchange rates, interest rates or equity security prices at December 31,
2004 and 2005. See Notes 1 and 20 to the Consolidated Financial Statements. The
following discussion relates to NL and its consolidated subsidiaries at each
date indicated.
Interest rates. The Company is exposed to market risk from changes in
interest rates, primarily related to indebtedness. NL had no indebtedness at
December 31, 2004 or 2005. Outstanding indebtedness at December 31, 2004 and
2005 relates solely to CompX.
At December 31, 2005, no amounts were outstanding under CompX's
variable-rate revolving bank credit agreement. The remaining variable rate
indebtedness outstanding at December 31, 2004 and 2005 is not material.
Foreign currency exchange rates. The Company is exposed to market risk
arising from changes in foreign currency exchange rates as a result of
manufacturing and selling its products worldwide. Earnings are primarily
affected by fluctuations in the value of the U.S. dollar relative to the euro,
the Canadian dollar and the New Taiwan dollar.
Certain of the Company's sales generated by its non-U.S. operations are
denominated in U.S. dollars. The Company periodically uses currency forward
contracts to manage a very nominal portion of foreign exchange rate risk
associated with receivables denominated in a currency other than the holder's
functional currency or similar exchange rate risk associated with future sales.
The Company has not entered into these contracts for trading or speculative
purposes in the past, nor does the Company currently anticipate entering into
such contracts for trading or speculative purposes in the future. Derivatives
used to hedge forecasted transactions and specific cash flows associated with
foreign currency denominated financial assets and liabilities which meet the
criteria for hedge accounting are designated as cash flow hedges. Consequently,
the effective portion of gains and losses is deferred as a component of
accumulated other comprehensive income and is recognized in earnings at the time
the hedged item affects earnings. Contracts that do not meet the criteria for
hedge accounting are marked-to-market at each balance sheet date with any
resulting gain or loss recognized in income currently as part of net currency
transactions. To manage such exchange rate risk, at December 31, 2005, CompX
held a series of contracts to exchange an aggregate of U.S. $6.5 million for an
equivalent amount of Canadian dollars at an exchange rate of Cdn. $1.19 per U.S.
dollar. Such contracts mature through March 2006. The exchange rate was $1.17
per U.S. dollar at December 31, 2005. At December 31, 2004 CompX held contracts
maturing through March 2005 to exchange an aggregate of U.S. $7.2 million for an
equivalent amount of Canadian dollars at an exchange rates of Cdn. $1.19 to Cdn.
$1.23 per U.S. dollar. At December 31, 2004, the actual exchange rate was Cdn.
$1.21 per U.S. dollar. The estimated fair value of such contracts is not
material at December 31, 2004 and 2005.
Marketable equity and debt security prices. The Company is exposed to
market risk due to changes in prices of the marketable securities, which are
owned. The fair value of such debt and equity securities at December 31, 2004
and 2005 was $75.8 million and $87.1 million, respectively. The potential change
in the aggregate fair value of these investments, assuming a 10% change in
prices, would be $7.6 million at December 31, 2004 and $8.7 million at December
31, 2005. The fair value of restricted marketable debt securities at December
31, 2004 and 2005 was $13.3 million and $9.3 million, respectively. The
potential change in the aggregate fair value of these investments assuming a 10%
change in prices would be $1.3 million at December 31, 2004 and $930,000 at
December 31, 2005.
Other. The Company believes there may be a certain amount of incompleteness
in the sensitivity analyses presented above. For example, the hypothetical
effect of changes in interest rates discussed above ignores the potential effect
on other variables which affect the Company's results of operations and cash
flows, such as demand for the Company's products, sales volumes and selling
prices and operating expenses. Contrary to the above assumptions, changes in
interest rates rarely result in simultaneous parallel shifts along the yield
curve. Accordingly, the amounts presented above are not necessarily an accurate
reflection of the potential losses the Company would incur assuming the
hypothetical changes in market prices were actually to occur.
The above discussion and estimated sensitivity analysis amounts include
forward-looking statements of market risk which assume hypothetical changes in
market prices. Actual future market conditions will likely differ materially
from such assumptions. Accordingly, such forward-looking statements should not
be considered to be projections by the Company of future events, gains or
losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" (page
F-1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Remediation of Prior Material Weakness. A material weakness is a control
deficiency, or a combination of control deficiencies, that results in more than
a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The Company has
previously concluded that as of December 31, 2004 and March 31, June 30 and
September 30, 2005, the Company did not maintain effective controls over the
accounting for income taxes, including the determination and reporting of income
taxes payable to affiliates, deferred income tax assets and liabilities,
deferred income tax asset valuation allowance, and the provision for income
taxes. Specifically, the Company did not have adequate personnel with sufficient
knowledge of income tax accounting and reporting. Additionally, the Company did
not maintain effective controls over the review and monitoring of the accuracy,
completeness and valuation of the components of the income tax provision and
related deferred income taxes, and income taxes payable resulting in errors in
(i) the accounting for the income tax effect of the difference between book and
income tax basis of the Company's investment in Kronos Worldwide, Inc., an
equity-method investment of the Company as of December 31, 2004, (ii) current
and deferred income taxes related to the Company's distributions of Kronos
common stock to the Company's stockholders and (iii) current and deferred income
taxes related to other items, that were not prevented or detected. This control
deficiency resulted in the previously-reported restatement of the Company's
2002, 2003 and 2004 consolidated financial statements and 2004 and 2005 interim
financial information. Additionally, this control deficiency could result in a
misstatement of income taxes payable to affiliates, deferred income tax assets
and liabilities, deferred income tax asset valuation allowance, and the
provision for income taxes that would result in a material misstatement to the
Company's annual or interim consolidated financial statements that would not be
prevented or detected. Accordingly, management of the Company determined that
this control deficiency constituted a material weakness.
To remediate this material weakness, in the fourth quarter of 2005,
additional resources have been added with a background in accounting for income
taxes in accordance with SFAS No. 109 and the related authoritative guidance.
Management has concluded that the addition of such staff has ensured that
accounting principles generally accepted in the United States of America
("GAAP") has been appropriately applied with respect to the calculation and
classification within the consolidated financial statements of income tax
provisions and related current and deferred income tax accounts. Accordingly,
the Company has concluded that this material weakness no longer exists at
December 31, 2005.
Evaluation of Disclosure Controls and Procedures. The Company maintains a
system of disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by Exchange Act Rule 13a-15(e), 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, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of Harold C. Simmons, the Company's
President and Chief Executive Officer, and Gregory M. Swalwell, the Company's
Vice President and Chief Financial Officer, has evaluated the design and
operating effectiveness of the Company's disclosure controls and procedures as
of December 31, 2005. Based upon their evaluation, these executive officers have
concluded that the Company's disclosure controls and procedures are effective as
of December 31, 2005.
Scope of Management's Report on Internal Control Over Financial Reporting.
The Company also maintains internal control over financial reporting. The term
"internal control over financial reporting," as defined by Exchange Act Rule
13a-15(f), 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 generally accepted accounting
principles, 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.
Section 404 of the Sarbanes-Oxley Act of 2002 requires the Company to
include a management report on internal control over financial reporting in this
Annual Report on Form 10-K for the year ended December 31, 2005. The Company's
independent registered public accounting firm is also required to audit the
Company's internal control over financial reporting as of December 31, 2005.
As permitted by the SEC, the Company's assessment of internal control over
financial reporting excludes (i) internal control over financial reporting at
its equity method investees and (ii) internal control over the preparation of
the Company's financial statement schedules required by Article 12 of Regulation
S-X. However, our assessment of internal control over financial reporting with
respect to the Company's equity method investees did include our controls over
the recording of amounts related to our investments that are recorded in our
consolidated financial statements, including controls over the selection of
accounting methods for our investments, the recognition of equity method
earnings and losses and the determination, valuation and recording of our
investment account balances.
Management's Report on Internal Control Over Financial Reporting. The
Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). The Company's evaluation of the effectiveness
of its internal control over financial reporting is based upon the criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on the
Company's evaluation under that framework, management of the Company has
concluded that the Company's internal control over financial reporting was
effective as of December 31, 2005.
PricewaterhouseCoopers LLP, the independent registered public accounting
firm that has audited the Company's consolidated financial statements included
in this Annual Report, has audited management's assessment of the effectiveness
of the Company's internal control over financial reporting as of December 31,
2005, as stated in their report which is included in this Annual Report on Form
10-K.
Changes in Internal Control Over Financial Reporting. Other than the
remediation of the material weakness discussed above, there have been no changes
to the Company's internal control over financial reporting during the quarter
ended December 31, 2005 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
Certifications. The Company's chief executive officer is required to
annually file a certification with the New York Stock Exchange ("NYSE"),
certifying the Company's compliance with the corporate governance listing
standards of the NYSE. During 2005, the Company's chief executive officer filed
such annual certification with the NYSE. The 2005 certification was qualified in
that, while the Company had publicly disclosed in its latest proxy statement
that the audit committee chairman presided at meetings of its independent
directors and how its stockholders might communicate directly with the audit
committee chairman, it had not publicly disclosed how other interested parties
could communicate with the presiding director of the non-management directors
and had not established procedures as to who presided at meetings of the
non-management directors. The Company remediated this qualification by amending
its corporate governance guidelines on October 27, 2005 and filing a Current
Report on Form 8-K with the SEC on November 30, 2005 disclosing that the audit
committee chairman presided at meetings of the non-management directors and how
stockholders and other interested parties might communicate with the presiding
director. The Company's chief executive officer and chief financial officer are
also required to, among other things, quarterly file certifications with the SEC
regarding the quality of the Company's public disclosures, as required by
Section 302 of the Sarbanes-Oxley Act of 2002. The certifications for the
quarter ended December 31, 2004 have been filed as exhibits 31.1 and 31.2 to
this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
Company's definitive Proxy Statement to be filed with the SEC pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
report (the "NL Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
NL Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
NL Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
NL Proxy Statement. See also Note 17 to the Consolidated Financial Statements.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Information required by the Item is incorporated by reference to the NL
Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) and (c) Financial Statements and Schedules
The Registrant
The consolidated financial statements and schedules of the
Registrant listed on the accompanying Index of Financial
Statements and Schedules (see page F-1) are filed as part of this
Annual Report.
50%-or-less persons
The consolidated financial statements of Kronos (36%-owned at
December 31, 2005) are incorporated by reference in Exhibit 99.1
of this Annual Report pursuant to Rule 3-09 of Regulation S-X.
Management's Report on Internal Control Over Financial Reporting
of Kronos is not included as part of Exhibit 99.1. The Registrant
is not required to provide any other consolidated financial
statements pursuant to Rule 3-09 of Regulation S-X
(b) Exhibits
Included as exhibits are the items listed in the Exhibit Index.
NL will furnish a copy of any of the exhibits listed below upon
payment of $4.00 per exhibit to cover the costs to NL of
furnishing the exhibits. Pursuant to Item 601(b)(4)(iii) of
Regulation S-K, any instrument defining the rights of holders of
long-term debt issues and other agreements related to
indebtedness which do not exceed 10% of consolidated total assets
as of December 31, 2005 will be furnished to the Commission upon
request.
The Company will also furnish, without charge, a copy of its Code
of Business Conduct and Ethics, as adopted by the board of
directors on February 19, 2004, upon request. Such requests
should be directed to the attention of the Company's Corporate
Secretary at the Company's corporate offices located at 5430 LBJ
Freeway, Suite 1700, Dallas, Texas 75240.
Item No. Exhibit Index
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2.1 Form of Distribution Agreement between NL Industries, Inc. and Kronos
Worldwide, Inc. - incorporated by reference to Exhibit 2.1 to the
Kronos Worldwide, Inc. Registration Statement on Form 10 (File No.
001-31763).
3.1 By-Laws, as amended on June 28, 1990 - incorporated by reference to
Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1990.
3.2 Amendment to the Amended and Restated By-Laws, as of June 28, 1990,
executed December 8, 2003 - incorporated by reference to Exhibit 3.2
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003.
3.3 Certificate of Amended and Restated Certificate of Incorporation dated
June 28, 1990 - incorporated by reference to Exhibit 1 to the
Registrant's Proxy Statement on Schedule 14A for the annual meeting
held on June 28, 1990.
4.1 Indenture governing the 8.875% Senior Secured Notes due 2009, dated
June 28, 2002, between Kronos International, Inc. and The Bank of New
York, as Trustee - incorporated by reference to Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2002.
4.2 Form of certificate of 8.875% Senior Secured Notes due 2009 of Kronos
International, Inc. (included as Exhibit A to Exhibit 4.1) -
incorporated by reference to Exhibit 4.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002.
4.3 Form of certificate of 8.875% Senior Secured Notes due 2009 of Kronos
International, Inc. (included as Exhibit B to Exhibit 4.1) -
incorporated by reference to Exhibit 4.3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002.
4.4 Purchase Agreement, dated June 19, 2002, among Kronos International,
Inc., Deutsche Bank AG London, Dresdner Bank AG London Branch and
Commerzbank Aktiengesellschaft, London Branch - incorporated by
reference to Exhibit 4.4 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002.
4.5 Purchase Agreement dated November 18, 2004 between Kronos
International, Inc. and Deutsche Bank AG London - incorporated by
reference to Exhibit 4.4 to the Current Report on Form 8-K of Kronos
International, Inc. (File No. 333-100047) dated November 24, 2004.
4.6 Form of Registration Rights Agreement, dated as of November 26, 2004
between Kronos International, Inc. and Deutsche Bank AG London -
incorporated by reference to Exhibit 4.5 to the Current Report on Form
8-K of Kronos International, Inc. (File No. 333-100047) dated November
24, 2004.
4.7 Collateral Agency Agreement, dated June 28, 2002, among The Bank of
New York, U.S. Bank, N.A. and Kronos International, Inc. -
incorporated by reference to Exhibit 4.6 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002.
4.8 Security Over Shares Agreement, dated June 28, 2002, between Kronos
International, Inc. and The Bank of New York - incorporated by
reference to Exhibit 4.7 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002.
4.9 Pledge of Shares (shares in Kronos Denmark ApS), dated June 28, 2002,
between Kronos International, Inc. and U.S. Bank, N.A. - incorporated
by reference to Exhibit 4.8 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002.
4.10 Pledge Agreement (shares in Societe Industrielle du Titane S.A.),
dated June 28, 2002, between Kronos International, Inc. and U.S. Bank,
N.A. - incorporated by reference to Exhibit 4.9 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
4.11 Partnership Interest Pledge Agreement (relating to fixed capital
contribution in Kronos Titan GmbH & Co.), dated June 28, 2002, between
Kronos International, Inc. and U.S. Bank, N.A. - incorporated by
reference to Exhibit 4.10 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002.
4.12 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 Registrant's Current
Report on Form 8-K as of September 24, 2004. (The disclosure schedule
attachment to this Exhibit 4.12 has not been filed; upon request, the
Registrant will furnish supplementally to the Securities and Exchange
Commission a copy of this attachment.)
10.1 Euro 80,000,000 Facility Agreement, dated June 25, 2002, among Kronos
Titan GmbH & Co. OHG, Kronos Europe S.A./N.V., Kronos Titan A/S and
Titania A/S, as borrowers, Kronos Titan GmbH & Co. OHG, Kronos Europe
S.A./N.V. and Kronos Norge AS, as guarantors, Kronos Denmark ApS, as
security provider, Deutsche Bank AG, as mandated lead arranger,
Deutsche Bank Luxembourg S.A., as agent and security agent, and KBC
Bank NV, as fronting bank, and the financial institutions listed in
Schedule 1 thereto, as lenders - incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002.
10.2 Lease Contract dated June 21, 1952, between Farbenfabriken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung
(German language version and English translation thereof) -
incorporated by reference to Exhibit 10.14 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1985.
10.3 Contract on Supplies and Services among Bayer AG, Kronos Titan-GmbH
and Kronos International, Inc. dated June 30, 1995 (English
translation from German language document) - incorporated by reference
to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995.
10.4** Richards Bay Slag Sales Agreement dated May 1, 1995 between Richards
Bay Iron and Titanium (Proprietary) Limited and Kronos, Inc. -
incorporated by reference to Exhibit 10.17 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
10.5** Amendment to Richards Bay Slag Sales Agreement dated May 1, 1999
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1999.
10.6** Amendment to Richards Bay Slag Sales Agreement dated June 1, 2001
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.5 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2001.
10.7** Amendment to Richards Bay Slag Sales Agreement dated December 20,
2002 between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.7 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2002.
10.8* Amendment to Richards Bay Slag Sales Agreement dated October 31, 2003
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.17 to Kronos
Worldwide, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2004.
10.9 Agreement between Sachtleben Chemie GmbH and Kronos Titan-GmbH
effective December 30, 1986 - incorporated by reference to Exhibit
10.1 of KII's Quarterly Report on Form 10-Q (File No. 333-100047) for
the quarter ended September 30, 2002.
10.10 Supplementary Agreement to the Agreement of December 30, 1986 between
Sachtleben Chemie GmbH and Kronos Titan-GmbH dated May 3, 1996 -
incorporated by reference to Exhibit 10.2 of KII's Quarterly Report on
Form 10-Q (File No. 333-100047) for the quarter ended September 30,
2002.
10.11 Second Supplementary Agreement to the Contract dated December 30,
1986 between Sachtleben Chemie GmbH and Kronos Titan-GmbH dated
January 8, 2002 - incorporated by reference to Exhibit 10.3 of KII's
Quarterly Report on Form 10-Q (File No. 333-100047) for the quarter
ended September 30, 2002.
10.12 Formation Agreement dated as of October 18, 1993 among Tioxide
Americas Inc., Kronos Louisiana, Inc. and Louisiana Pigment Company,
L.P. - incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.13 Joint Venture Agreement dated as of October 18, 1993 between Tioxide
Americas Inc. and Kronos Louisiana, Inc. - incorporated by reference
to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993.
10.14 Kronos Offtake Agreement dated as of October 18, 1993 between Kronos
Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993.
10.15 Amendment No. 1 to Kronos Offtake Agreement dated as of December 20,
1995 between Kronos Louisiana, Inc. and Louisiana Pigment Company,
L.P. - incorporated by reference to Exhibit 10.22 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995.
10.16 Tioxide Americas Offtake Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Louisiana Pigment Company, L.P. -
incorporated by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.17 Amendment No. 1 to Tioxide Americas Offtake Agreement dated as of
December 20, 1995 between Tioxide Americas Inc. and Louisiana Pigment
Company, L.P. - incorporated by reference to Exhibit 10.24 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1995.
10.18 TCI/KCI Output Purchase Agreement dated as of October 18, 1993
between Tioxide Canada Inc. and Kronos Canada, Inc. - incorporated by
reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993.
10.19 TAI/KLA Output Purchase Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Kronos Louisiana, Inc. -
incorporated by reference to Exhibit 10.7 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.20 Master Technology Exchange Agreement dated as of October 18, 1993
among Kronos, Inc., Kronos Louisiana, Inc., Kronos International,
Inc., Tioxide Group Limited and Tioxide Group Services Limited -
incorporated by reference to Exhibit 10.8 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.21 Parents' Undertaking dated as of October 18, 1993 between ICI
American Holdings Inc. and Kronos, Inc. - incorporated by reference to
Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993.
10.22 Allocation Agreement dated as of October 18, 1993 between Tioxide
Americas Inc., ICI American Holdings, Inc., Kronos, Inc. and Kronos
Louisiana, Inc. - incorporated by reference to Exhibit 10.10 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.23 Form of Director's Indemnity Agreement between NL and the independent
members of the Board of Directors of NL - incorporated by reference to
Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1987.
10.24* 1989 Long Term Performance Incentive Plan of NL Industries, Inc. -
incorporated by reference to Exhibit B to the Registrant's Proxy
Statement on Schedule 14A for the annual meeting of shareholders held
on May 8, 1996.
10.25* NL Industries, Inc. Variable Compensation Plan - incorporated by
reference to Exhibit B to the Registrant's Proxy Statement on Schedule
14A for the annual meeting of shareholders held on May 9, 2001.
10.26* NL Industries, Inc. 1992 Non-Employee Director Stock Option Plan, as
adopted by the Board of Directors on February 13, 1992 - incorporated
by reference to Appendix A to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held April 30,
1992.
10.27* NL Industries, Inc. 1998 Long-Term Incentive Plan - incorporated by
reference to Appendix A to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held on May 6,
1998.
10.28* Form of Kronos Worldwide, Inc. 2003 Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.4 to the Kronos Worldwide,
Inc. Registration Statement on Form 10 (File No. 001-31763).
10.29* Amended and Restated Supplemental Executive Retirement Plan for
Executives and Officers of NL Industries, Inc. effective as of May 1,
2001 - incorporated by reference to Exhibit 10.30 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2001.
10.30 Insurance Sharing Agreement, effective January 1, 1990, by and
between the Registrant, NL Insurance, Ltd. (an indirect subsidiary of
Tremont Corporation) and Baroid Corporation - incorporated by
reference to Exhibit 10.20 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1991.
10.31 Amended Tax Agreement among NL Industries, Inc., Valhi, Inc. and
Contran Corporation effective November 30, 2004 - incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report on Form
8-K as of November 30, 2004.
10.32 Intercorporate Services Agreement by and between Contran Corporation
and the Registrant effective as of January 1, 2004 - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2004.
10.33 Intercorporate Services Agreement by and between Contran Corporation
and Kronos Worldwide, Inc. - incorporated by reference to Exhibit 10.1
to the Kronos Worldwide, Inc. Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004.
10.34 Intercorporate Services Agreement between CompX International Inc.
and Contran Corporation effective as of January 1, 2004 - incorporated
by reference to Exhibit 10.2 to the CompX International Inc. Annual
Report on Form 10-K for the year ended December 31, 2004.
10.35 Revolving Loan Note dated May 4, 2001 with Harold C. Simmons Family
Trust No. 2 and EMS Financial, Inc. - incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001.
10.36 Security Agreement dated May 4, 2001 by and between Harold C. Simmons
Family Trust No. 2 and EMS Financial, Inc. - incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001.
10.37 Revolving Loan Note Agreement dated October 22, 2002 with Tremont
Corporation as Maker and NL Industries, Inc. as Payee - incorporated
by reference to Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002.
10.38 Security Agreement dated October 22, 2002 by and between Tremont
Corporation and NL Industries, Inc. - incorporated by reference to
Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002.
10.39 Purchase Agreement dated January 4, 2002 by and among Kronos, Inc. as
the Purchaser, and Big Bend Holdings LLC and Contran Insurance
Holdings, Inc., as Sellers regarding the sale and purchase of EWI RE,
Inc. and EWI RE, Ltd. - incorporated by reference to Exhibit 10.40 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001.
10.40 Form of Tax Agreement between Valhi, Inc. and Kronos Worldwide, Inc -
incorporated by reference to Exhibit 10.1 to the Kronos Worldwide,
Inc. Registration Statement on Form 10 (File No. 001-31763).
10.41 Amendment dated August 11, 2003 to the Contract on Supplies and
Services among Bayer AG, Kronos Titan-GmbH & Co. OHG and Kronos
International (English translation of German language document) -
incorporated by reference to Exhibit 10.32 to the Kronos Worldwide,
Inc. Registration Statement on Form 10 (File No. 001-31763).
10.42 Insurance sharing agreement dated October 30, 2003 by and among CompX
International Inc., Contran Corporation, Keystone Consolidated
Industries, Inc., Kronos Worldwide, Inc., Titanium Metals Corp.,
Valhi, Inc. and the Registrant - incorporated by reference to Exhibit
10.48 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2003.
10.43* Summary of Consulting Arrangement beginning August 1, 2003, as
amended between Lawrence A. Wigdor and Kronos Worldwide, Inc. -
incorporated by reference to Exhibit 10.2 to the Kronos Worldwide,
Inc. Quarterly Report on Form 10-Q for the period ended March 31,
2004.
10.44 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).
10.45 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.
10.46 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.
10.47 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.
10.48 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.
10.49 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.
10.50 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.
10.51 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 Registrant's Current Report on Form 8-K as of October 5,
2004. (Not all of the exhibits to this Exhibit 10.51 have been filed;
upon request, the Registrant will furnish supplementally to the
Securities and Exchange Commission a copy of the omitted exhibits.)
10.52 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 Registrant's Current Report on Form 8-K as of October 5,
2004.
10.53 Certificate of Incorporation of CompX Group, Inc. - incorporated by
reference to Exhibit 99.3 to the Registrant's Current Report on Form
8-K as of October 5, 2004.
10.54 Tax Agreement executed on October 5, 2004 but effective as of October
1, 2004 among NL Industries, Inc., Contran Corporation and CompX
International Inc. - incorporated by reference to Exhibit 99.4 to the
Registrant's Current Report on Form 8-K as of October 5, 2004.
10.55 Intercorporate Services Agreement between CompX International Inc.
and Contran Corporation effective as of January 1, 2003 - incorporated
by reference to Exhibit 10.1 to the CompX International Inc. Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003 (File No.
1-13905).
10.56* CompX International Inc. 1997 Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.2 to the CompX International
Inc. Registration Statement on Form S-1 (File No. 1-13905).
10.57 Tax Sharing Agreement among CompX International Inc., Valcor, Inc.
and Valhi, Inc. dated as of January 2, 1998 - incorporated by
reference to Exhibit 10.4 to the Registration Statement of CompX
International Inc. on Form S-1 (File No. 1-13905).
10.58 Second Amendment Agreement Relating to a Facility Agreement dated
June 25, 2002 executed as of June 14, 2005 by and among Deutsche Bank
AG, as mandated lead arranger, Deutsche Bank Luxembourg S.A. as agent,
the participating lenders, Kronos Titan GmbH, Kronos Europe S.A./N.V,
Kronos Titan AS, Kronos Norge AS, Titania AS and Kronos Denmark ApS -
incorporated by reference to Exhibit 10.1 of Kronos International,
Inc.s' Form 8-K dated June 14, 2005. Certain schedules, exhibits,
annexes and similar attachments to this Exhibit 10.58 have not been
filed; upon request, the Reporting Persons will furnish supplementally
to the Commission a copy of any omitted exhibit, annex or attachment.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP with respect to NL's
consolidated financial statements.
23.2 Consent of PricewaterhouseCoopers LLP with respect to Kronos'
consolidated financial statements.
31.1 Certification
31.2 Certification
32.1 Certification
99.1 Consolidated financial statements of Kronos Worldwide, Inc. -
incorporated by reference to Kronos' Annual Report on Form 10-K (File
No. 1-31763) for the year ended December 31, 2005.
All documents in the Exhibit Index above that have been incorporated by
reference were previously filed by the Registrant under SEC File Number 1-640.
* Management contract, compensatory plan or arrangement.
** Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NL Industries, Inc.
(Registrant)
By:/s/ Harold C. Simmons
----------------------------
Harold C. Simmons
March 16, 2006
(Chairman of the Board and
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Harold C. Simmons /s/ Steven L. Watson
- -------------------------------- ---------------------------------
Harold C. Simmons, March 16, 2006 Steven L. Watson, March 16, 2006
(Chairman of the Board and Chief (Director)
Executive Officer)
/s/ Thomas P. Stafford /s/ Glenn R. Simmons
- -------------------------------- ---------------------------------
Thomas P. Stafford, March 16, 2006 Glenn R. Simmons, March 16, 2006
(Director) (Director)
/s/ C. H. Moore, Jr. /s/ Gregory M. Swalwell
- -------------------------------- ---------------------------------
C. H. Moore, Jr., March 16, 2006 Gregory M. Swalwell, March 16, 2006
(Director) (Vice President, Finance and
Chief Financial Officer, Principal
Financial Officer)
/s/ Terry N. Worrell /s/ James W. Brown
- -------------------------------- ---------------------------------
Terry N. Worrell, March 16, 2006 James W. Brown, March 16, 2006
(Director) (Vice President and Controller,
Principal Accounting Officer)
NL Industries, Inc.
Annual Report on Form 10-K
Items 8, 15(a) and 15(d)
Index of Financial Statements and Schedules
Financial Statements Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets - December 31, 2004 and 2005 F-4
Consolidated Statements of Operations -
Years ended December 31, 2003, 2004 and 2005 F-6
Consolidated Statements of Comprehensive Income -
Years ended December 31, 2003, 2004 and 2005 F-8
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2003, 2004 and 2005 F-9
Consolidated Statements of Cash Flows -
Years ended December 31, 2003, 2004 and 2005 F-10
Notes to Consolidated Financial Statements F-13
Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant S-1
Schedule II - Valuation and Qualifying Accounts S-5
Schedules III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of NL Industries, Inc.:
We have completed integrated audits of NL Industries, Inc.'s 2004 and 2005
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2005, and an audit of its 2003 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements and financial statement schedules
- -------------------------------------------------------------------
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of NL Industries, Inc. and its subsidiaries at December 31, 2004 and
2005, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
Internal control over financial reporting
- -----------------------------------------
Also, in our opinion, management's assessment, included in Management's
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that the Company maintained effective internal control over financial reporting
as of December 31, 2005 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"), is fairly stated, in all material respects, based
on those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the COSO. The Company's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company,
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) 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 financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Dallas, Texas
March 16, 2006
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2005
(In thousands, except per share data)
ASSETS
2004 2005
---- ----
Current assets:
Cash and cash equivalents $ 99,185 $ 76,912
Restricted cash and cash equivalents 7,810 4,327
Restricted marketable debt securities 9,446 9,265
Accounts and other receivables 24,302 23,392
Refundable income taxes 32 424
Receivable from affiliates 1,681 3,291
Inventories 28,781 22,538
Prepaid expenses 1,332 1,718
Deferred income taxes 13,604 7,295
---------- ----------
Total current assets 186,173 149,162
---------- ----------
Other assets:
Marketable equity securities 75,793 87,120
Restricted marketable debt securities 3,848 -
Investment in Kronos Worldwide, Inc. 175,578 146,774
Receivable from affiliate 10,000 -
Deferred income taxes 545 4
Goodwill 20,772 27,240
Other assets 3,715 5,499
---------- ----------
Total other assets 290,251 266,637
---------- ----------
Property and equipment:
Land 5,356 8,511
Buildings 26,877 28,001
Equipment 127,044 110,917
Construction in progress 2,431 2,015
---------- ----------
161,708 149,444
Less accumulated depreciation 86,490 80,540
---------- ----------
Net property and equipment 75,218 68,904
---------- ----------
$ 551,642 $ 484,703
========== ==========
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2004 and 2005
(In thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2004 2005
---- ----
Current liabilities:
Current maturities of long-term debt $ 42 $ 171
Accounts payable 14,649 11,079
Accrued liabilities 23,134 29,859
Accrued environmental costs 16,570 13,302
Payable to affiliates 391 982
Income taxes 3,661 599
Deferred income taxes 23,842 -
---------- ----------
Total current liabilities 82,289 55,992
---------- ----------
Noncurrent liabilities:
Long-term debt 85 1,425
Accrued pension costs 7,968 942
Accrued postretirement benefits cost 10,572 10,141
Accrued environmental costs 51,247 41,645
Deferred income taxes 103,420 107,000
Other 4,028 2,246
---------- ----------
Total noncurrent liabilities 177,320 163,399
---------- ----------
Minority interest 58,404 45,630
---------- ----------
Stockholders' equity:
Preferred stock, no par value; 5,000 shares
authorized; none issued - -
Common stock, $.125 par value; 150,000 shares
authorized; 48,440 and 48,562 shares
issued and outstanding 6,054 6,070
Additional paid-in capital 369,728 363,233
Retained earnings - -
Accumulated other comprehensive income:
Marketable securities 26,783 34,084
Currency translation (135,729) (141,018)
Pension liabilities (33,207) (42,687)
---------- ----------
Total stockholders' equity 233,629 219,682
---------- ----------
$ 551,642 $ 484,703
========== ==========
Commitments and contingencies (Notes 12, 15 and 19)
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2003, 2004 and 2005
(In thousands, except per share data)
2003 2004 2005
---- ---- ----
Net sales $1,182,143 $ 741,687 $ 186,350
Cost of sales 882,114 572,541 142,594
---------- ---------- ----------
Gross margin 300,029 169,146 43,756
Selling, general and administrative expense 146,043 94,346 24,156
Other operating income (expense):
Currency transaction gains (losses), net (8,289) 741 (71)
Disposition of property and equipment 9,845 (2) (475)
Noncompete agreement income 333 - -
Legal settlement gains, net 823 552 2,969
Other income 436 6,953 462
Corporate expense (57,430) (17,094) (19,870)
---------- ---------- ----------
Income from operations 99,704 65,950 2,615
Equity in earnings of Kronos Worldwide, Inc. - 9,613 25,549
Other income (expense):
Trade interest income 932 493 110
Interest and dividend income from affiliates 3,319 7,986 2,347
Other interest income 1,351 1,303 3,293
Securities transactions, net 2,402 2,113 14,603
Interest expense (34,303) (18,305) (336)
---------- ---------- ----------
Income from continuing operations before
income taxes and minority interest 73,405 69,153 48,181
Provision for income taxes (benefit) 87,854 (239,704) 14,615
Minority interest 3,858 149,596 352
---------- ---------- ----------
Income (loss) from continuing operations (18,307) 159,261 33,214
Discontinued operations (2,874) 3,552 (326)
---------- ---------- ----------
Net income (loss) $ (21,181) $ 162,813 $ 32,888
========== ========== ==========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Years ended December 31, 2003, 2004 and 2005
(In thousands, except per share data)
2003 2004 2005
---- ---- ----
Basic earnings (loss) per share:
Income (loss) from continuing operations $ (.38) $ 3.30 $ .68
Discontinued operations (.06) .07 -
---------- ---------- ----------
Net income (loss) $ (.44) $ 3.37 $ .68
========== ========== ==========
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ (.38) $ 3.29 $ .68
Discontinued operations (.06) .07 -
---------- ---------- ----------
Net income (loss) $ (.44) $ 3.36 $ .68
========== ========== ==========
Weighted-average shares used in the calculation
of net income per share:
Basic 47,721 48,333 48,541
Dilutive impact of stock options 74 86 46
---------- ---------- ----------
Diluted 47,795 48,419 48,587
========== ========== ==========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
Net income (loss) $ (21,181) $ 162,813 $ 32,888
---------- ---------- ----------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment:
Unrealized holding gains arising
during the period 18,901 3,460 7,301
Reclassification for realized net loss
included in net income (1,474) - -
---------- ---------- ----------
17,427 3,460 7,301
Minimum pension liabilities adjustment (14,737) 3,639 (9,480)
Currency translation adjustment 22,491 16,894 (5,289)
---------- ---------- ----------
Total other comprehensive income (loss) 25,181 23,993 (7,468)
---------- ---------- ----------
Comprehensive income $ 4,000 $ 186,806 $ 25,420
========== ========== ==========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES , INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2003, 2004 and 2005
(In thousands, except per share data)
Accumulated other
comprehensive income (loss)
Additional -----------------------------------------------
Common paid-in Retained Marketable Currency Pension Treasury
stock capital earnings securities translation liabilities stock Total
--------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $8,355 $ 784,306 $ 197,767 $ 5,896 $ (175,114) $ (22,109) $ (436,180) $ 362,921
Net income - - (21,181) - - - - (21,181)
Other comprehensive income (loss),
net of tax - - - 17,427 22,491 (14,737) - 25,181
Distribution of 48.8% of Kronos
Worldwide, Inc. - - (88,532) - - - - (88,532)
Income tax on distribution - (64,538) (48,664) - - - - (113,202)
Cash dividends declared -
$.80 per share - - (38,183) - - - - (38,183)
Treasury stock - reissued - - - - - - 1,738 1,738
Other capital transactions
with affiliates - - (1,207) - - - - (1,207)
------ --------- --------- --------- ---------- ---------- ---------- ---------
Balance at December 31, 2003 8,355 719,768 - 23,323 (152,623) (36,846) (434,442) 127,535
Net income - - 162,813 - - - - 162,813
Other comprehensive income,
net of tax - - - 3,460 16,894 3,639 - 23,993
Distribution of shares of Kronos
Worldwide, Inc. - - (8,741) - - - - (8,741)
Income tax on distribution - (52,464) (34,765) - - - - (87,229)
Settlement of tax liability using
shares of Kronos Woldwide, Inc.
common stock with a net book
value in excess of the amount
of tax liability settled - 174,486 - - - - - 174,486
Issuance of common stock 6 909 - - - - - 915
Acquisition of 10,374 shares of
CompX International Inc. - (102,963) (65,615) - - - - (168,578)
Treasury stock:
Reissued - - - - - - 8,354 8,354
Retired (2,307) (370,089) (53,692) - - - 426,088 -
Other - 81 - - - - - 81
------ --------- --------- --------- ---------- ---------- ---------- ---------
Balance at December 31, 2004 6,054 369,728 - 26,783 (135,729) (33,207) - 233,629
Net income - - 32,888 - - - - 32,888
Other comprehensive income
(loss), net of tax - - - 7,301 (5,289) (9,480) - (7,468)
Distribution of shares of
Kronos Worldwide, Inc. - - (2,637) - - - - (2,637)
Income tax on distribution - - (3,024) - - - - (3,024)
Issuance of common stock 16 2,583 - - - - - 2,599
Cash dividends declared -
$.75 per share - (9,192) (27,227) - - - - (36,419)
Other - 114 - - - - - 114
------ --------- --------- --------- ---------- ---------- ---------- ---------
Balance at December 31, 2005 $6,070 $ 363,233 $ - $ 34,084 $ (141,018) $ (42,687) $ - $ 219,682
====== ========= ========= ========= ========== ========== ========== =========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (21,181) $ 162,813 $ 32,888
Depreciation and amortization 54,875 36,402 11,334
Goodwill impairment - 6,500 864
Noncash interest expense 2,197 1,222 183
Deferred income taxes:
Continuing operations 91,888 (265,062) (10,604)
Discontinued operations (2,590) (3,691) (187)
Minority interest:
Continuing operations 3,858 149,596 352
Discontinued operations (1,414) (3,944) (151)
Net losses (gains) from:
Securities transactions (2,402) (2,113) (14,603)
Disposition of property and equipment (9,845) 2 475
Benefit plan expense greater (less)
than cash funding:
Defined benefit pension plans (5,478) 244 (885)
Other postretirement benefit plans (3,468) (2,090) (431)
Equity in Kronos Worldwide, Inc. - (9,613) (25,549)
Distributions from Kronos Worldwide, Inc. - 10,731 17,593
Distributions from TiO2 manufacturing
joint venture, net 875 8,300 -
Other, net 1,053 2,254 623
Change in assets and liabilities:
Accounts and other receivable 2,541 (44,994) 246
Inventories (20,938) 50,062 (936)
Prepaid expenses 3,186 1,769 (41)
Accounts payable and accrued liabilities (9,732) (31,110) (4,038)
Income taxes (25,726) 34,076 6,324
Accounts with affiliates 34,138 7,958 (4,201)
Accrued environmental costs 24,137 (9,665) (12,870)
Other noncurrent assets and liabilities, net (1,091) (6,916) (1,684)
---------- ---------- ----------
Net cash provided (used) by
operating activities 114,883 92,731 (5,298)
---------- ---------- ----------
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
Cash flows from investing activities:
Capital expenditures $ (44,262) $ (16,209) $ (10,676)
CompX business acquisition, net of cash acquired - - (7,342)
Collection of loans to affiliates 4,000 35,423 10,000
Change in restricted cash equivalents and restricted
marketable debt securities, net (654) 10,367 (1,945)
Proceeds from disposal of:
Business unit - - 18,094
Kronos common stock - 2,745 19,176
Property and equipment 12,801 2,222 27
Cash of disposed business unit - - (4,006)
Purchase of CompX common stock - - (3,645)
Investment in marketable securities - - (7,503)
Proceeds from sale of marketable securities - - 6,301
Other, net 671 - -
---------- ---------- ----------
Net cash provided (used) by investing activities (27,444) 34,548 18,481
---------- ---------- ----------
Cash flows from financing activities:
Indebtedness:
Borrowings 17,106 102,225 18
Principal payments (52,012) (128,091) (93)
Deferred financing costs paid - (28) (114)
Cash dividends paid (38,183) - (36,419)
Treasury stock - reissued 1,738 - -
Proceeds from issuance of stock:
NL common stock - 9,201 2,507
CompX common stock - 617 639
Capital transactions with affiliates (1,207) - -
Distributions to minority interests (606) (12,635) (2,384)
Other, net (426) - -
---------- ---------- ----------
Net cash used by financing activities (73,590) (28,711) (35,846)
---------- ---------- ----------
Net increase (decrease) $ 13,849 $ 98,568 $ (22,663)
========== ========== ==========
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
Cash and cash equivalents-net change from:
Operating, investing and financing activities $ 13,849 $ 98,568 $ (22,663)
Currency translation 5,178 (474) 390
Kronos cash balance at June 30, 2004 - (88,434) -
---------- ---------- ----------
19,027 9,660 (22,273)
Balance at beginning of year 70,498 89,525 99,185
---------- ---------- ----------
Balance at end of year $ 89,525 $ 99,185 $ 76,912
========== ========== ==========
Supplemental disclosures:
Cash paid (received) for:
Interest $ 30,000 $ 17,119 $ 259
Income taxes (1,848) (17,000) 32,519
Non cash investing activities -
Note received upon disposal of CompX
business unit $ - $ - $ 4,179
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:
NL Industries, Inc. (NYSE: NL) is a subsidiary of Valhi, Inc. (NYSE: VHI).
At December 31, 2005, (i) Valhi held approximately 83% of NL's outstanding
common stock and (ii) Contran Corporation and its subsidiaries held
approximately 92% of Valhi's outstanding common stock. Substantially all of
Contran's outstanding voting stock is held by trusts established for the benefit
of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons
is sole trustee, or is held by Mr. Simmons or persons or other entities related
to Mr. Simmons. Consequently, Mr. Simmons 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 International Inc. (NYSE: CIX) 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 legal and 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. The excess of the aggregate
$168.6 million principal amount of NL's note receivable Kronos transferred to
Valhi and Valcor over the net carrying value of Valhi's and Valcor's investment
in CompX was accounted for as a reduction of NL's consolidated stockholders'
equity. Subsequent to the September 24, 2004 acquisition of 68% of CompX common
stock, NL acquired an additional 2% of CompX common stock in open market
transactions through December 31, 2005.
Prior to July 2004, Kronos Worldwide, Inc. (NYSE: KRO) was a majority-owned
subsidiary of the Company. 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. Certain disclosures contained in these
consolidated financial statements for 2004 related to Kronos' results of
operations and cash flows include amounts related to the first six months of
2004.
Management's estimates. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reporting period. Actual
results may differ significantly from previously-estimated amounts under
different assumptions or conditions.
Principles of consolidation. The consolidated financial statements include
the accounts of NL and its wholly-owned and majority-owned subsidiaries. All
material intercompany accounts and balances have been eliminated. The effect of
decreases in the Company's ownership interest of its consolidated subsidiaries
through the Company's sale of its affiliate's common stock to third parties are
reflected in net income, with a gain or loss recognized equal to the difference
between the proceeds from such sale and the carrying value of the shares sold.
The effect of other decreases in the Company's ownership interest of its
consolidated subsidiaries, which usually result from the exercise of options
granted by such subsidiaries to purchase their shares of common stock to
employees, is generally not material.
Translation of foreign currencies. Assets and liabilities of subsidiaries
and affiliates whose functional currency is other than the U.S. dollar are
translated at year-end rates of exchange and revenues and expenses are
translated at average exchange rates prevailing during the year. Resulting
translation adjustments are accumulated in stockholders' equity as part of
accumulated other comprehensive income, net of related deferred income taxes and
minority interest. Currency transaction gains and losses are recognized in
income currently.
Derivatives and hedging activities. Derivatives are recognized as either
assets or liabilities and measured at fair value in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. The accounting for changes in
fair value of derivatives depends upon the intended use of the derivative, and
such changes are recognized either in net income or other comprehensive income.
As permitted by the transition requirements of SFAS No. 133, the Company has
exempted from the scope of SFAS No. 133 all host contracts containing embedded
derivatives that were issued or acquired prior to January 1, 1999.
Cash and cash equivalents. Cash equivalents include bank time deposits and
U.S. Treasury securities purchased under short-term agreements to resell with
original maturities of three months or less.
Restricted cash equivalents and restricted marketable debt securities.
Restricted cash equivalents and restricted marketable debt securities, primarily
invested in U.S. government securities and money market funds that invest
primarily in U.S. government securities, include amounts restricted pursuant to
outstanding letters of credit ($5 million at each of December 31, 2004 and
2005), and at December 31, 2004 also included $19 million held by special
purpose trusts (2005 - nil) formed by NL, the assets of which could only be used
to pay for certain of NL's future environmental remediation and other
environmental expenditures. Such restricted amounts are generally classified as
either a current or noncurrent asset depending on the classification of the
liability to which the restricted amount relates. Additionally, the restricted
marketable debt securities are generally classified as either a current or
noncurrent asset depending upon the maturity date of each such debt security.
Use of such restricted balances does not affect the Company's Consolidated
Statements of Cash Flows.
Marketable securities and securities transactions. Marketable debt and
equity securities are carried at fair value based upon quoted market prices.
Unrealized gains and losses on available-for-sale securities are accumulated in
stockholders' equity as part of accumulated other comprehensive income, net of
related deferred income taxes and minority interest. Realized gains and losses
are based upon the specific identification of the securities sold.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of these accounts.
Investment in Kronos Worldwide, Inc. 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.
Investment in TiO2 manufacturing joint venture. Through June 30, 2004,
Kronos' investment in its 50%-owned manufacturing joint venture was accounted
for by the equity method.
Goodwill and other intangible assets; amortization expense. Goodwill
represents the excess of cost over fair value of individual net assets acquired
in business combinations accounted for by the purchase method. Goodwill is not
subject to periodic amortization. Other intangible assets are amortized by the
straight-line method over their estimated lives. Other intangible assets are
stated net of accumulated amortization, and goodwill and other intangible assets
are assessed for impairment in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets." See Notes 8, 9 and 24.
Property and equipment; depreciation expense. Property and equipment are
stated at cost. Depreciation of property and equipment for financial reporting
purposes is computed principally by the straight-line method over the estimated
useful lives of ten to 40 years for buildings and three to 20 years for
equipment. Accelerated depreciation methods are used for income tax purposes, as
permitted. Upon sale or retirement of an asset, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss is recognized in
income currently. Expenditures for maintenance, repairs and minor renewals are
expensed; expenditures for major improvements are capitalized.
Interest costs related to major long-term capital projects and renewals are
capitalized as a component of construction costs. Interest costs capitalized
related to the Company's consolidated business segments were not significant in
2003, 2004 or 2005.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. The Company assesses impairment of property and equipment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."
Long-term debt. Amortization of deferred financing costs, included in
interest expense, is computed by the interest method over the term of the
applicable issue.
Employee benefit plans. Accounting and funding policies for retirement and
post retirement benefits other than pensions ("OPEB") plans are described in
Note 16.
Income taxes. The Company and its qualifying subsidiaries are included in
the consolidated U.S. federal tax return of Contran (the "Contran Tax Group").
As a member of the Contran Tax Group, the Company is a party to a tax sharing
agreement (the "Contran Tax Agreement"). The Contran Tax Agreement provides that
the Company compute its provision for U.S. income taxes on a separate-company
basis using the tax elections made by Contran. Kronos is also a member of the
Contran Tax Group. CompX, previously a separate U.S. federal income taxpayer,
became a member of the Contran Tax Group for federal income tax purposes in
October 2004 with the formation of CompX Group, Inc. See Note 2. As a member of
the Contran Tax Group, the Company is jointly and severally liable for the
federal income tax liability of Contran and the other companies included in the
Contran Tax Group for all periods in which the Company is included in the
Contran Tax Group. See Note 19. Pursuant to the Contran Tax Agreement and using
the tax elections made by Contran, the Company generally makes payments to or
receives payments from Valhi in amounts it would have paid to or received from
the U.S. Internal Revenue Service had it not been a member of the Contran Tax
Group. Refunds are limited to amounts previously paid under the Contran Tax
Agreement unless the Company was entitled to a refund from the U.S. Internal
Revenue Service on a separate company basis. Most members of the Contran Tax
Group also file consolidated unitary state income tax returns in qualifying U.S.
jurisdictions. See Note 15. The Company made net cash payments to Valhi for
income taxes of $3.9 million in 2003, $1.8 million in 2004 and $1.7 million in
2005. See also Note 2 regarding the Company's payment of certain income taxes to
Valhi using shares of Kronos common stock.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
investments in the Company's subsidiaries and affiliates who would not be
members of a NL consolidated U.S. federal income tax group on an NL separate
company basis and undistributed earnings of foreign subsidiaries which are not
permanently reinvested. In this regard, the Company commenced recognizing
deferred income taxes with respect to the excess of the financial reporting
carrying amount over the income tax basis of the Company's investment in Kronos
effective in December 2003 following the Company's distribution of approximately
48.8% of Kronos' common stock on a pro-rata basis to NL shareholders. Earnings
of CompX's foreign subsidiaries subject to permanent reinvestment plans
aggregated $31.3 million at December 31, 2004 and $5.5 million at December 31,
2005. Determination of the amount of the unrecognized deferred income tax
liability related to such earnings is not practicable due to the complexities
associated with the U.S. taxation on earnings of foreign subsidiaries
repatriated to the U.S. The Company periodically evaluates its deferred tax
assets in the various taxing jurisdictions in which it operates and adjusts any
related valuation allowance based on the estimate of the amount of such deferred
tax assets that the Company believes does not meet the "more-likely-than-not"
recognition criteria.
Environmental remediation costs. The Company records liabilities related to
environmental remediation obligations when estimated future expenditures are
probable and reasonably estimable. Such accruals are adjusted as further
information becomes available or circumstances change. Estimated future
expenditures are generally not discounted to their present value. Recoveries of
remediation costs from other parties, if any, are recognized as assets when
their receipt is deemed probable. At December 31, 2004 and 2005, no receivables
for recoveries have been recognized. See Note 19.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed. Shipping terms of products shipped are generally FOB shipping point,
although in some instances shipping terms are FOB destination point (for which
sales are not recognized until the product is received by the customer). Amounts
charged to customers for shipping and handling are included in net sales. Sales
are stated net of price, early payment and distributor discounts and volume
rebates.
Inventories and cost of sales. Inventories are stated at the lower of cost
or market, net of allowance for slow-moving inventories ($1.2 million at
December 31, 2004 and 2005). Inventory costs are based on average cost or the
first-in, first-out method. Cost of sales includes costs for materials, packing
and finishing, shipping and handling, utilities, salary and benefits,
maintenance and depreciation.
Selling, general and administrative expenses; shipping and handling costs.
Selling, general and administrative expenses include costs related to marketing,
sales, distribution, shipping and handling, research and development, legal,
environmental remediation and administrative functions such as accounting,
treasury and finance, and includes costs for salaries and benefits, travel and
entertainment, promotional materials and professional fees. Shipping and
handling costs of the Company's chemicals segment are included in selling,
general and administrative expense and were $63 million in 2003, $34 million in
2004 and nil in 2005. Shipping and handling costs of the Company's component
products segment included in selling, general and administration expense are not
material. Advertising costs related to continuing operations are expensed as
incurred and were $1 million in each of 2003, 2004 and 2005. Research,
development and certain sales technical support costs related to continuing
operations are expensed as incurred and approximated $7 million in 2003, $4
million in 2004 and $200,000 in 2005.
Corporate expenses. Corporate expenses include environmental, legal and
other costs attributable to formerly-owned business units.
Earnings per share. Basic earnings per share of common stock is based upon
the weighted average number of common shares actually outstanding during each
period. Diluted earnings per share of common stock includes the impact of
outstanding dilutive stock options. The weighted average number of outstanding
stock options excluded from the calculation of diluted earnings per share
because their impact would have been antidilutive aggregated nil in 2003, 2004
and 2005. There were no adjustments to net income in the computation of the
diluted earnings per share amounts.
Stock options. The Company has elected the disclosure alternative
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure," and to account for its stock-based employee compensation
related to stock options in accordance with Accounting Principles Board Opinion
("APBO") No. 25, "Accounting for Stock Issued to Employees," and its various
interpretations. Under APBO No. 25, no compensation cost is generally recognized
for fixed stock options in which the exercise price is not less than the market
price on the grant date. Prior to 2003, and following the Company's cash
settlement of options to purchase NL common stock held by certain individuals,
the Company commenced accounting for its stock options using the variable
accounting method because the Company could not overcome the presumption that it
would not similarly cash settle its remaining stock options. Under the variable
accounting method, the intrinsic value of all unexercised stock options
(including those with an exercise price at least equal to the market price on
the date of grant) are accrued as an expense over their vesting period, with
subsequent increases (decreases) in NL's market price resulting in additional
compensation expense (income). Aggregate compensation cost related to NL stock
options recognized by the Company was $1.9 million in 2003 and $1.7 million in
2004, and compensation income was $100,000 in 2005. The total income tax benefit
related to such compensation cost recognized by the Company was approximately
$700,000 in 2003 and $600,000 in 2004 and the total income tax provision related
to the compensation income was less than $100,000 in 2005. No compensation cost
was capitalized as part of assets (inventory or fixed assets) during 2003, 2004
and 2005.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in 2003, 2004 and 2005 if the
Company and its subsidiaries and affiliates had each elected to account for
their respective stock-based employee compensation related to all stock options
in accordance with the fair value-based recognition provisions of SFAS No. 123,
for all awards granted subsequent to January 1, 1995.
Years ended December 31,
-----------------------------------------
2003 2004 2005
---- ---- ----
(In millions, except per share amounts)
Net income (loss) as reported $ (21.2) $ 162.8 $ 32.9
Adjustments, net of applicable income
tax effects and minority interest:
Stock-based employee compensation
expense determined under APBO No. 25 1.1 1.1 -
Stock-based employee compensation
expense determined under SFAS No. 123 (1.3) (.2) (.2)
------- ------- -------
Pro forma net income (loss) $ (21.4) $ 163.7 $ 32.7
======= ======= =======
Basic earnings (loss) per share:
As reported $ (.44) $ 3.37 $ .68
Pro forma $ (.45) $ 3.39 $ .67
Diluted earnings (loss) per share:
As reported $ (.44) $ 3.36 $ .68
Pro forma $ (.45) $ 3.38 $ .67
The pro forma information required by SFAS No. 123 is based on an
estimation of the fair value of options issued subsequent to January 1, 1995. No
options were granted in 2003, 2004 or 2005. The fair value of employee stock
options were calculated using the Black-Scholes stock option valuation model.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
Note 2 - Business combinations and related transactions:
CompX International, Inc. 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.
Effective October 1, 2004, the Company contributed such 10,374,000 shares
of CompX common stock to newly-formed CompX Group in return for a 82.4%
ownership interest in CompX Group. Concurrently, Titanium Metals Corporation
("TIMET"), a less-than-majority owned affiliate of Valhi, contributed shares of
CompX common stock representing approximately 15% of CompX's outstanding common
shares in return for the remaining 17.6% ownership interest in CompX Group. At
that time, CompX Group became the owner of the 83% of CompX that NL and TIMET
had previously owned in the aggregate. These CompX shares are the sole asset of
CompX Group. CompX Group recorded the shares of CompX received from NL at NL's
carryover basis. During 2005, NL purchased approximately 234,000 shares of CompX
common stock in open market transactions representing approximately 1.5% of
CompX's outstanding common stock for an aggregate amount of $3.6 million during
2005.
In August 2005, CompX completed the acquisition of a components products
company for aggregate cash consideration of $7.3 million, net of cash acquired.
The purchase price has been allocated among the tangible and intangible net
assets (including goodwill) acquired based upon an estimate of the fair value of
such net assets. The pro forma effect on the Company's results of operations for
2005, assuming such acquisition had been completed as of January 1, 2005, is not
material.
Kronos Worldwide, Inc. Prior to December 2003, Kronos was a wholly-owned
subsidiary of the Company. In December 2003, NL completed the distribution of
approximately 48.8% of Kronos' common stock on a pro-rata basis to NL
shareholders (including Valhi and Tremont LLC) in the form of a pro-rata
dividend. Shareholders of NL received one share of Kronos common stock for every
two shares of NL held. During 2004 and the first quarter of 2005, NL paid an
aggregate of five quarterly dividends in the form of shares of Kronos common
stock in which an aggregate of approximately 1.5 million shares of Kronos (3.0%
of Kronos' outstanding shares) were distributed to NL shareholders in the form
of pro-rata dividends. In accordance with GAAP, the carrying amount of such
shares of Kronos common stock distributed were accounted for as a reduction of
the Company's retained earnings and aggregated $88.5 million in 2003, $8.7
million in 2004 and $2.6 million in 2005.
NL's December 2003, 2004 and 2005 distributions of shares of common stock
of Kronos are 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 on the various dates of distribution and NL's adjusted
tax basis in such stock at such dates of distribution. In accordance with GAAP,
the amount of such current income tax represented by the excess of the carrying
value of such stock for financial reporting purposes and the adjusted tax basis
of such stock is included in the determination of net income in the period the
shares were distributed, and the amount of such current income tax represented
by the excess of the fair market value of such stock and the carrying value of
such stock for financial reporting purposes is accounted for as a direct
reduction to the Company's stockholders' equity (retained earnings). The amount
of such current income tax included in the determination of net income
aggregated $30.3 million in 2003, $21.2 million in 2004 and $913,000 in 2005,
while the amount of such current income tax accounted for as a direct reduction
to equity aggregated $113.2 million in 2003, $87.2 million in 2004 and $3.0
million in 2005. In accordance with GAAP, the amount of the deferred income tax
recognized by the Company with respect to Kronos (see Note 1) are adjusted as of
the date of each distribution.
With respect to such shares of Kronos distributed to Valhi and Tremont,
effective December 1, 2003, Valhi and NL amended the terms of their tax sharing
agreement to not require NL to pay up to Valhi the tax liability generated from
the distribution of such Kronos shares to Valhi and Tremont, although for
financial reporting purposes the Company was required to recognize such tax
liability. On November 30, 2004, Valhi and NL agreed to further amend the terms
of their tax sharing agreement to provide that NL would now be required to pay
up to Valhi the tax liability generated from the distribution of shares of
Kronos common stock to Valhi and Tremont, including the tax related to such
shares distributed to Valhi and Tremont in December 2003 and the tax related to
the shares distributed to Valhi during all of 2004. In determining to so amend
the terms of the tax sharing agreement, NL and Valhi considered, among other
things, the changed expectation for the generation of taxable income at the NL
level resulting from the inclusion of CompX in NL's consolidated taxable income
effective in the fourth quarter of 2004, as discussed in Note 1. Valhi and NL
further agreed that in lieu of a cash income tax payment, such tax liability
could be paid by NL to Valhi in the form of shares of Kronos common stock held
by NL. Such tax liability related to the shares of Kronos distributed to Valhi
and Tremont in December 2003 and 2004, including the tax liability resulting
from the use of Kronos common stock to settle such liability, aggregated
approximately $227 million. Accordingly, in the fourth quarter of 2004 NL
transferred approximately 5.5 million shares of Kronos common stock to Valhi in
satisfaction of such tax liability and the tax liability generated from the use
of such Kronos shares to settle such tax liability. In agreeing to settle such
tax liability with such 5.5 million shares of Kronos common stock, the Kronos
shares were valued at an agreed-upon price of $41 per share. Kronos' average
closing market price during the months of November and December 2004 was $41.53
and $41.77, respectively. NL also considered the fact that the shares of Kronos
held by non-affiliates are very thinly traded, and consequently an average price
over a period of days mitigates the effect of the thinly-traded nature of
Kronos' common stock. In accordance with GAAP, the excess of the $227 million
tax liability settled by transfer of the 5.5 million shares of Kronos and the
aggregate $52.5 million carrying amount of such shares transferred (or $174.5
million) was recorded as a direct increase in the Company's stockholders' equity
(additional paid-in capital). Such tax liability related to the shares of Kronos
distributed to Valhi in the first quarter of 2005 aggregated $3.0 million, and
such tax liability was paid by NL to Valhi in cash. This aggregate $230 million
tax liability has not been paid by Valhi to Contran, nor has Contran paid such
tax liability to the applicable tax authority, because the related taxable gain
is currently deferred at the Valhi and Contran levels due to Valhi, Tremont and
NL all being members of the Valhi tax group on a separate company basis and of
the Contran Tax Group. Such income tax liability would become payable by Valhi
to Contran, and by Contran to the applicable tax authority, when the shares of
Kronos transferred or distributed by NL to Valhi and Tremont are sold or
otherwise transferred outside the Contran Tax Group or in the event of certain
restructuring transactions involving NL and Valhi.
During 2005, NL sold approximately 470,000 shares of Kronos common stock in
market transactions for an aggregate of $19.2 million. The Company recognized a
$14.7 million pre-tax securities transaction gain related to such sales. During
2004, NL sold shares of Kronos common stock in market transactions for an
aggregate of $2.7 million, and the Company recognized a $2.2 million pre-tax
gain related to the reduction of its ownership interest in Kronos related to
such sales. See Note 7.
As a result of all of the foregoing transactions, the Company's ownership
of Kronos was reduced to approximately 36% as of December 31, 2005. See Note 7.
At December 31, 2005, Valhi and a wholly-owned subsidiary of Valhi owned an
additional 57% of Kronos' outstanding common stock.
Note 3 - Business segment information
% owned at
Business segment Entity December 31, 2005
- -------------------- ------------------------ -------------------
Component products CompX International Inc. 70%
Chemicals Kronos Worldwide, Inc. 36%
The Company's ownership of CompX is held principally by CompX Group, Inc.
The Company owns 82.4% of CompX Group, and TIMET owns the remaining 17.6% of
CompX Group. CompX Group's sole asset consists of shares of CompX common stock
representing approximately 83% of the total number of CompX shares outstanding,
and the percentage ownership of CompX shown above includes NL's ownership
interest in CompX Group multiplied by CompX Group's ownership interest in CompX.
See Note 2. NL also owns an additional 2% of CompX directly.
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, 2005.
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 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. See Note 7.
CompX (NYSE:CIX) and Kronos (NYSE:KRO) each file periodic reports with the
SEC pursuant to the Securities Exchange Act of 1934, as amended.
The Company evaluates segment performance based on segment operating
income. Segment profit is defined as income from continuing operations 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 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
Note 1.
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, 2005, the net assets of non-U.S. subsidiaries included in
consolidated net assets approximated $45 million (2004 - $80 million).
Years ended December 31,
------------------------------------
2003 2004 2005
---- ---- ----
(In millions)
Net sales:
Chemicals $ 1,008.2 $ 559.1 $ -
Component products 173.9 182.6 186.4
--------- -------- --------
Total net sales $ 1,182.1 $ 741.7 $ 186.4
========= ======== ========
Segment profit:
Chemicals $ 137.4 $ 66.4 $ -
Component products 9.0 16.3 19.3
--------- -------- --------
Total segment profit 146.4 82.7 19.3
General corporate items:
Interest and dividend income
from affiliates 3.3 8.0 2.3
Other interest income 1.4 1.3 3.3
Securities transactions, net 2.4 2.1 14.6
Insurance recoveries .8 .6 3.0
Gain on disposal of fixed assets 10.4 - -
Noncompete agreement income .3 - -
Other income .1 .3 .4
General corporate expenses, net (57.4) (17.1) (19.9)
Interest expense (34.3) (18.3) (.3)
--------- -------- --------
73.4 59.6 22.7
Equity in earnings of Kronos
Worldwide, Inc. - 9.6 25.5
--------- -------- --------
Income from continuing operations
before income taxes and
minority interest $ 73.4 $ 69.2 $ 48.2
========= ======== ========
Years ended December 31,
------------------------------------
2003 2004 2005
---- ---- ----
(In millions)
Net sales - point of origin:
United States $ 404.9 $ 317.5 $ 113.5
Germany 510.1 294.7 -
Belgium 150.7 98.8 -
Norway 131.5 70.3 -
Canada 249.7 158.5 63.9
Taiwan 13.6 16.0 14.2
Eliminations (278.4) (214.1) (5.2)
--------- -------- --------
$ 1,182.1 $ 741.7 $ 186.4
========= ======== ========
Net sales - point of destination:
United States $ 423.7 $ 294.6 $ 149.5
Europe 574.5 335.3 2.7
Canada 85.5 56.8 25.0
Asia and other 98.4 55.0 9.2
--------- -------- --------
$ 1,182.1 $ 741.7 $ 186.4
========= ======== ========
Years ended December 31,
------------------------------------
2003 2004 2005
---- ---- ----
(In millions)
Depreciation and amortization:
Chemicals $ 39.4 $ 21.8 $ -
Component products 14.8 14.2 10.9
Corporate .7 .4 .4
--------- -------- --------
$ 54.9 $ 36.4 $ 11.3
========= ======== ========
Capital expenditures:
Chemicals $ 35.3 $ 10.8 $ -
Component products 8.9 5.3 10.5
Corporate .1 .1 .2
--------- -------- --------
$ 44.3 $ 16.2 $ 10.7
========= ======== ========
December 31,
------------------------------------
2003 2004 2005
---- ---- ----
(In millions)
Total assets:
Operating segments:
Chemicals $ 1,121.9 $ - $ -
Component products 212.4 169.6 173.7
Investment in Kronos Worldwide, Inc. - 175.6 146.8
Corporate and eliminations 142.2 206.4 164.2
--------- -------- --------
$ 1,476.5 $ 551.6 $ 484.7
========= ======== ========
Net property and equipment:
United States $ 48.2 $ 42.5 $ 43.7
Germany 252.4 - -
Canada 87.0 19.1 17.0
Norway 50.8 - -
Belgium 64.9 - -
Netherlands 9.6 7.9 -
Taiwan 5.7 5.7 8.2
Other .3 - -
--------- -------- --------
$ 518.9 $ 75.2 $ 68.9
========= ======== ========
Note 4 - Accounts and other receivables:
December 31,
--------------
2004 2005
---- ----
(In thousands)
Trade receivables $ 24,759 $ 20,921
Recoverable VAT and other receivables 551 2,783
Allowance for doubtful accounts (1,008) (312)
---------- ----------
$ 24,302 $ 23,392
========== ==========
Note 5 - Marketable securities:
December 31,
--------------
2004 2005
---- ----
(In thousands)
Valhi common stock $ 75,770 $ 87,120
Other 23 -
---------- ----------
$ 75,793 $ 87,120
========== ==========
At December 31, 2004 and 2005, the Company owned approximately 4.7 million
shares of Valhi common stock and accounts for such stock as available-for-sale
marketable equity securities carried at fair value (based on quoted market
prices). The aggregate cost basis for the Company's investment in Valhi at
December 31, 2004 and 2005 was $34.6 million. The Valhi common stock owned by
the Company is subject to the restrictions on resale pursuant to certain
provisions of the Securities and Exchange Commission ("SEC") Rule 144. The
shares of Valhi common stock cannot be voted by the Company under Delaware
Corporation Law, but the Company does receive dividends from Valhi on these
shares, when declared and paid. For financial reporting purposes, Valhi reports
its proportional interest in these shares as treasury stock.
Note 6 - Inventories:
December 31,
--------------
2004 2005
---- ----
(In thousands)
Raw materials $ 8,258 $ 7,098
In process products 10,827 9,899
Finished products 9,696 5,541
---------- ----------
$ 28,781 $ 22,538
========== ==========
All of the Company's inventories are related to the component products
operating segment.
Note 7 - Investment in affiliates:
Kronos Worldwide, Inc. At December 31, 2005, the Company held 17.5 million
shares of Kronos with a quoted market price of $29.01 per share, or an aggregate
market value of $508 million, (18.3 million shares at $40.75 per share at
December 31, 2004).
At December 31, 2005, Kronos reported total assets of $1.3 billion and
stockholders' equity of $410 million. Kronos' total assets at December 31, 2005
include current assets of $525 million, net property and equipment of $419
million and an investment in a TiO2 manufacturing joint venture of $115 million.
Kronos' total liabilities at December 31, 2005 include current liabilities of
$205 million, long-term debt of $464 million, accrued non current OPEB and
pension costs aggregating $150 million and non current deferred income taxes of
$53 million. At December 31, 2004, Kronos reported total assets of $1.4 billion
and stockholders' equity of $470.8 million. Kronos' total assets at December 31,
2004 include current assets of $495.5 million, net property and equipment of
$466.9 million and an investment in a TiO2 manufacturing joint venture of $120.3
million. Kronos' total liabilities at December 31, 2004 include current
liabilities of $212.9 million, long-term debt of $519.4 million, accrued OPEB
and pension costs aggregating $72.6 million and non current deferred income
taxes of $60.1 million.
During the year ended December 31, 2005, Kronos reported net sales of $1.2
billion, income from operations of $175 million and net income of $71 million.
During the last six months of 2004, Kronos reported net sales of $569.5 million,
income from operations of $50.3 million and net income of $20.3 million. Kronos'
results of operations for the first six months of 2004, and for the year ended
December 31, 2003, are included in the Company's consolidated results of
operations.
TiO2 manufacturing joint venture. Kronos Louisiana, Inc. ("KLA"), a
wholly-owned subsidiary of Kronos, owns a 50% interest in Louisiana Pigment
Company, L.P. ("LPC"). LPC is a manufacturing joint venture that is also
50%-owned by Tioxide Americas Inc. ("Tioxide"), a wholly-owned subsidiary of
Huntsman International Holdings LLC, which through its subsidiaries, is
wholly-owned by Huntsman Holdings LLC. LPC owns and operates a chloride-process
TiO2 plant in Lake Charles, Louisiana.
KLA is required to purchase one-half of the TiO2 produced by LPC. LPC
operates on a break-even basis and, accordingly, KLA reports no equity in
earnings of LPC. Kronos' cost for its share of the TiO2 produced is equal to its
share of LPC's costs. Kronos' share of net costs is reported as cost of sales as
the related TiO2 acquired from LPC is sold. Distributions from LPC, which
generally relate to excess cash generated by LPC from its non-cash production
costs, and contributions to LPC, which generally relate to cash required by LPC
when it builds working capital, are reported as part of cash generated by
operating activities in the Company's Consolidated Statements of Cash Flows.
Such distributions are reported net of any contributions made to LPC during the
periods. Net distributions of $.9 million in 2003, and $8.3 million in the first
six months of 2004 are stated net of contributions of $13.1 million in 2003 and
$8.1 million in the first half of 2004.
LPC made net cash distributions of $1.8 million in 2003 and $16.6 million
in the first six months of 2004, equally split between the partners. Effective
July 1, 2004, the Company no longer consolidates the financial position and
results of operations of Kronos and consequently accounts for Kronos' investment
in the TiO2 manufacturing joint venture as part of the Company's investment in
Kronos subsequent to that date.
During the first six months of 2004, LPC reported revenues of $102.0
million (for the year ended December 31, 2003 - $203.0 million,) with
approximately one-half attributable to each partner for each period. LPC
operates on a break-even basis, consequently net income is nil for all periods.
Note 8 - Goodwill:
Substantially all of the Company's goodwill is related to the component
products operating segment and was generated principally from CompX's
acquisitions of certain business units completed prior to 2002, and to a 2005
acquisition. The remaining goodwill resulted from the acquisition of EWI prior
to 2003 and totaled approximately $6.4 million in 2002, 2003 and 2004.
Changes in the carrying amount of goodwill related to the components
products operating segment during the past three years is presented in the table
below.
Component products
operating segment
--------------------
(In millions)
Balance at December 31, 2002 $43.7
Changes in foreign exchange rates 2.6
-----
Balance at December 31, 2003 46.3
Impairment related to discontinued operations (6.5)
Deferred tax adjustment (26.9)
Changes in foreign exchange rates 1.5
-----
Balance at December 31, 2004 14.4
Goodwill acquired during the year 8.0
Disposition of business (1.4)
Changes in foreign exchange rates (.2)
-----
Balance at December 31, 2005 $20.8
=====
The Company has assigned its goodwill related to its component products
segment to three reporting units (as that term is defined in SFAS No. 142)
within that operating segment: one consisting of CompX's security products
operations, one consisting of CompX's European operations and one consisting of
CompX's Michigan, Canadian and Taiwanese operations. Under SFAS No. 142, such
goodwill is deemed to not be impaired if the estimated fair value of the
applicable reporting unit exceeds the respective net carrying value of such
reporting unit, including the allocated goodwill. If the fair value of the
reporting unit is less than carrying value, then a goodwill impairment loss
would be recognized equal to the excess, if any, of the net carrying value of
the reporting unit goodwill over its implied fair value (up to a maximum
impairment equal to the carrying value of the goodwill). The implied fair value
of reporting unit goodwill would be the amount equal to the excess of the
estimated fair value of the reporting unit over the amount that would be
allocated to the tangible and intangible net assets of the reporting unit
(including unrecognized intangible assets) as if such reporting unit had been
acquired in a purchase business combination accounted for in accordance with
GAAP as of the date of the impairment testing.
In determining the estimated fair value of the reporting units, the Company
uses appropriate valuation techniques, such as discounted cash flows. In
accordance with GAAP, the Company reviews goodwill for impairment during the
third quarter of each year. Goodwill will also be reviewed for impairment at
other times during each year when events or changes in circumstances indicate
that an impairment might be present. No goodwill impairments relating to
continuing operations were deemed to exist as a result of the Company's annual
impairment review completed during 2003, 2004 or 2005. However, the Company did
recognize an impairment of goodwill related to its disposed European Thomas
Regout operations in December 2004. See Note 24.
As discussed in Note 1, prior to October 2004 CompX was not a member of the
Contran Tax Group, and the Company provided deferred income taxes with respect
to its investment in CompX. Effective October 2004, CompX became a member of the
Contran Tax Group, and the Company no longer provides such deferred income
taxes. In accordance with GAAP, and as a result of CompX becoming a member of
the Contran Tax Group, a net $26.9 million deferred tax liability, previously
provided with respect to the Company's investment in CompX, were eliminated
through a reduction in goodwill at December 31, 2004.
Note 9 - Intangible and other noncurrent assets:
December 31,
--------------
2004 2005
---- ----
(In thousands)
Definite-lived customer list intangible asset $ 1,487 $ 1,115
Patents and other intangible assets 1,703 2,317
Other 525 2,067
---------- ----------
$ 3,715 $ 5,499
========== ==========
Definite-lived customer list intangible asset resulted from the acquisition
of EWI RE, Inc. prior to 2003. See Note 8. This intangible asset is amortized on
a straight-line basis over a period of seven years (approximately three years
remaining at December 31, 2005) with no assumed residual value and is presented
net of accumulated amortization of $1.1 million and $1.5 million as of December
31, 2004 and 2005, respectively. The patents and other intangible assets, all of
which relate to CompX, are stated net of accumulated amortization of $1.7
million at December 31, 2004 and $2.3 million at December 31, 2005.
Aggregate amortization expense of intangible assets was $606,000 in 2003,
$603,000 in 2004 and $686,000 2005, and is expected to be approximately $675,000
in each of 2006 through 2008 and $300,000 in 2009 and 2010.
Note 10 - Accrued liabilities:
December 31,
--------------
2004 2005
---- ----
(In thousands)
Employee benefits $ 14,775 $ 10,933
Professional fees 2,654 5,269
Other 5,705 13,657
---------- ----------
$ 23,134 $ 29,859
========== ==========
Note 11 - Other noncurrent liabilities:
December 31,
--------------
2004 2005
---- ----
(In thousands)
Insurance $ 2,507 $ 2,224
Other 1,521 22
---------- ----------
$ 4,028 $ 2,246
========== ==========
Note 12 - Long-term debt:
December 31,
--------------
2004 2005
---- ----
(In thousands)
CompX International Inc. and subsidiaries:
Other indebtedness $ 127 $ 1,596
Less current maturities 42 171
---------- ----------
$ 85 $ 1,425
========== ==========
CompX. At December 31, 2005 CompX has a $50.0 million secured revolving
bank credit facility that matures in January 2009 and bears interest, at CompX's
option, at rates based on either the prime rate or LIBOR. The credit facility is
collateralized by a pledge of 65% of the ownership interests in CompX's
first-tier foreign subsidiaries. The facility contains certain covenants and
restrictions customary in lending transactions of this type which, among other
things, restricts the ability of CompX and its subsidiaries to incur debt, incur
liens, pay dividends or merge or consolidate with, or transfer all or
substantially all of their assets, to another entity. In the event of a change
of control of CompX, as defined, the lenders would have the right to accelerate
the maturity of the facility. At December 31, 2005 there were no outstanding
draws against the facility and the full amount of the facility was available for
borrowing.
Other indebtedness at December 31, 2005 includes certain industrial revenue
bonds assumed in connection with the August 2005 business acquisition discussed
in Note 2. Such indebtedness was fully prepaid in January 2006 for an amount
equal to its carrying value.
Kronos and its subsidiaries. In July 2004, the Company ceased to
consolidate the financial position of Kronos. See Note 1.
Note 13 - Minority interest:
December 31,
--------------
2004 2005
---- ----
(In thousands)
Minority interest in net assets:
CompX International, Inc. $ 49,154 $ 45,630
NL Environmental Management Services, Inc. 9,250 -
---------- ----------
$ 58,404 $ 45,630
========== ==========
Years ended December 31,
------------------------------------
2003 2004 2005
---- ---- ----
(In millions)
Minority interest in net earnings:
Kronos Worldwide, Inc. $ 1,602 $145,837 $ -
CompX International, Inc. 1,814 2,993 290
NL Environmental Management Services, Inc. 370 747 62
Subsidiary of Kronos Worldwide, Inc. 72 19 -
--------- -------- --------
$ 3,858 $149,596 $ 352
========= ======== ========
Kronos Worldwide, Inc. The Company commenced recognizing minority interest
in Kronos' net assets and net earnings following the Company's December 2003
distribution of a portion of the shares of Kronos common stock to its
stockholders and ceased to report minority interest in Kronos' net assets and
net earnings commencing July 1, 2004. See Notes 1 and 2.
Other. Other minority interest related principally to NL's majority-owned
environmental management subsidiary, NL Environmental Management Services, Inc.
("EMS"). EMS was established in 1998, at which time EMS contractually assumed
certain of NL's environmental liabilities. EMS' earnings were based, in part,
upon its ability to favorably resolve these liabilities on an aggregate basis.
NL continues to consolidate EMS and provides accruals for the reasonably
estimable costs for the settlement of EMS' environmental liabilities, as
discussed in Note 19.
In June 2005, EMS received notices from the three minority shareholders of
EMS indicating they were each exercising their right, which became exercisable
on June 1, 2005, to require EMS to purchase their preferred shares in EMS as of
June 30, 2005 for a formula-determined amount as provided in EMS' certificate of
incorporation. In accordance with the certificate of incorporation, EMS made a
determination in good faith of the amount payable to the three former minority
shareholders to purchase their shares of EMS stock, which amount may be subject
to review by a third party. In June 2005, EMS set aside funds as payment for the
shares of EMS, but as of December 31, 2005 the former minority shareholders have
not tendered their shares, and accordingly the liability owed to these former
minority shareholders, which has not been extinguished for financial reporting
purposes as of December 31, 2005, is classified as a current liability at such
date. Similarly, the funds which have been set aside are classified as a current
asset at such date.
Discontinued operations. Minority interest in losses of discontinued
operations was $1.4 million in 2003, $3.9 million in 2004 and $200,000 in 2005.
See Note 24.
Note 14 - Stockholders' equity:
Shares of common stock
-----------------------------------------
Issued Treasury Outstanding
-------- ---------- -----------
(In thousands)
Balance at December 31, 2002 66,845 (19,155) 47,690
Treasury shares reissued - 101 101
-------- -------- --------
Balance at December 31, 2003 66,845 (19,054) 47,791
Treasury shares reissued 598 598
Treasury shares retired (18,456) 18,456 -
Common stock issued 51 - 51
-------- -------- --------
Balance at December 31, 2004 48,440 - 48,440
Common stock issued 122 - 122
-------- -------- --------
Balance at December 31, 2005 48,562 - 48,562
======== ======== ========
NL common stock options. The NL Industries, Inc. 1998 Long-Term Incentive
Plan (the "NL Option Plan") provides for the discretionary grant of restricted
common stock, stock options, stock appreciation rights ("SARs") and other
incentive compensation to officers and other key employees of the Company and
nonemployee directors. Although certain stock options granted pursuant to a
similar plan which preceded the NL Option Plan ("Predecessor Option Plan")
remain outstanding at December 31, 2005, no additional options may be granted
under the Predecessor Option Plan.
Up to five million shares of NL common stock may be issued pursuant to the
NL Option Plan and, at December 31, 2005, 4,084,800 shares were available for
future grants. The NL Option Plan provides for the grant of options that qualify
as incentive options and for options which are not so qualified. Generally,
stock options and SARs (collectively, "options") are granted at a price equal to
or greater than 100% of the market price at the date of grant, vest over a
five-year period and expire ten years from the date of grant. Restricted stock,
forfeitable unless certain periods of employment are completed, is held in
escrow in the name of the grantee until the restriction period expires. No SARs
have been granted under the NL Option Plan.
Following the December 2003 distribution of a portion of the shares of
Kronos common stock held by the Company, the exercise price for each outstanding
option to purchase NL common stock was reduced by $8.63 (or one-half of the
closing price of Kronos' common stock on December 8, 2003, the distribution
date).
Changes in outstanding options granted pursuant to the NL Option Plan, the
Predecessor Option Plan and the nonemployee director plan are summarized in the
table below.
Amount Weighted-
Exercise payable average
price per upon exercise
Shares share exercise price
------ ----------- ---------- -----------
(In thousands, except per share amounts)
Outstanding at December 31, 2002 1,261 $ 8.69-21.97 $ 22,059 $ 17.50
Exercised (95) 11.28-15.19 (1,271) 13.43
Canceled (26) 9.34-20.11 (391) 15.00
Adjusted for Kronos common stock
distribution - - (9,885) 8.63
----- ------------ --------
Outstanding at December 31, 2003 1,140 0.06-13.34 10,512 9.22
Exercised (643) 0.06-13.34 (6,073) 9.44
Canceled (252) 3.56-13.34 (2,038) 8.10
----- ------------ --------
Outstanding at December 31, 2004 245 2.66-13.34 2,401 9.80
Exercised (116) 5.63-11.89 (1,222) 10.53
Cancelled (1) 11.49 (14) 11.49
----- ------------ --------
Outstanding at December 31, 2005 128 $ 2.66-11.89 $ 1,165 $ 9.11
===== ============ ========
At December 31, 2005 all of the outstanding options were exercisable, with
an aggregate intrinsic value (defined as the excess of the market price of NL's
common stock over the exercise price) of $600,000. All of such outstanding
options had exercise prices less than the Company's December 31, 2005 quoted
market price of $14.09 per share. Outstanding options at December 31, 2005
expire at various dates through 2011. Shares issued under the incentive stock
plan are generally newly-issued shares, however prior to September 30, 2004
shares issued under the incentive stock plan were issued from NL's treasury
shares.
The following table summarizes the Company's stock options outstanding and
exercisable as of December 31, 2005 by price range.
Options outstanding Options exercisable
- ----------------------------------------------------------------------- ----------------------------
Weighted-
average Weighted- Weighted-
Outstanding remaining average Exercisable average
Range of at contractual exercise at exercise
exercise prices 12/31/05 life price 12/31/05 price
------------------- ----------- ----------- ---------- ------------ -----------
$ 2.66 - $ 3.25 8,550 2.8 $ 2.74 8,550 $ 2.74
$ 5.19 - $ 5.81 38,350 3.8 $ 5.58 38,350 $ 5.58
$ 9.34 - $ 11.49 80,950 4.8 $ 11.46 80,950 $ 11.46
-------- --------
127,850 4.6 $ 9.11 127,850 $ 9.11
======== ========
The intrinsic value of these NL options exercised aggregated $100,000 in
2003, $3.1 million in 2004 and $1.3 million in 2005, and the related income tax
benefit from such exercises was less than $50,000 in 2003, $1.1 million in 2004
and $500,000 in 2005.
Stock option plan of subsidiaries and affiliates. Through December 31,
2005, Kronos has not granted any options to purchase its common stock. CompX
maintains a stock option plan that provides for the grant of options to purchase
its common stock. At December 31, 2005, options to purchase 470,000 CompX shares
were outstanding with exercise prices ranging from $10.00 to $20.00 per share,
or an aggregate amount payable upon exercise of $8.6 million.
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.
Dividends. On March 15, 2006, the Company's Board of Directors declared a
regular quarterly cash dividend of $.125 per share to be paid to stockholders of
record as of March 27, 2006 to be paid on March 31, 2006
Other. The pro forma information included in Note 1, required by SFAS No.
123, "Accounting for Stock-Based Compensation," as amended, is based on an
estimation of the fair value of options issued subsequent to January 1, 1995
using the Black-Scholes stock option valuation model. The Black-Scholes model
was not developed for use in valuing employee stock options, but was developed
for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, it requires the use of
subjective assumptions including expectations of future dividends and stock
price volatility. Such assumptions are only used for making the required fair
value estimate and should not be considered as indicators of future dividend
policy or stock price appreciation. Because changes in the subjective
assumptions can materially affect the fair value estimate, and because employee
stock options have characteristics significantly different from those of traded
options, the use of the Black-Scholes option-pricing model may not provide a
reliable estimate of the fair value of employee stock options. The pro forma
impact on net income and basic earnings per share disclosed in Note 1 is not
necessarily indicative of future effects on net income or earnings per share.
See also Note 23.
Note 15 - Income taxes:
Years ended December 31,
------------------------------------
2003 2004 2005
---- ---- ----
(In millions)
Pre-tax income (loss):
U.S. $ (15.5) $ 23.8 $ 39.3
Non-U.S. 88.9 45.4 8.9
--------- -------- --------
$ 73.4 $ 69.2 $ 48.2
========= ======== ========
Expected tax expense (benefit), at U.S.
federal statutory income tax rate of 35% $ 25.7 $ 24.2 $ 16.9
Non-U.S. tax rates (1.2) (.5) (.3)
Incremental U.S. tax and rate differences
on equity in earnings 42.3 29.1 3.1
Change in deferred income tax valuation
allowance, net (7.2) (308.4) -
Nondeductible expenses 3.4 2.3 .3
U.S. state income taxes, net .1 .1 .5
Refund of prior year German income taxes (38.0) (3.0) -
Excess of book basis over tax basis of
Kronos common stock:
Sold - - .9
Distributed 30.3 21.2 1.9
Tax contingency reserve adjustment, net 30.5 (13.4) (7.2)
Other, net 2.0 8.7 (1.5)
--------- -------- --------
$ 87.9 $ (239.7) $ 14.6
========= ======== ========
Years ended December 31,
------------------------------------
2003 2004 2005
---- ---- ----
(In millions)
Components of income tax expense (benefit):
Currently payable (refundable):
U.S. federal and state $ 30.0 $ 13.6 $ 21.7
Non-U.S. (34.0) 11.8 3.5
--------- -------- --------
(4.0) 25.4 25.2
--------- -------- --------
Deferred income taxes (benefit):
U.S. federal and state 54.3 8.2 (10.5)
Non-U.S. 37.6 (273.3) (.1)
--------- -------- --------
91.9 (265.1) (10.6)
--------- -------- --------
$ 87.9 $ (239.7) $ 14.6
========= ======== ========
Years ended December 31,
------------------------------------
2003 2004 2005
---- ---- ----
(In millions)
Comprehensive provision for
income taxes (benefit) allocable to:
Income from continuing operations $ 87.9 $ (239.7) $ 14.6
Discontinued operations (2.6) (4.6) (.4)
Retained earnings 48.7 34.8 3.0
Additional paid-in capital 64.5 52.4 .1
Other comprehensive income:
Marketable securities 9.4 1.9 3.9
Pension liabilities (12.2) 1.0 (5.4)
Currency translation 0.1 (7.2) (3.5)
--------- -------- --------
$ 195.8 $ (161.4) $ 12.3
========= ======== ========
The components of the net deferred tax liability at December 31, 2004 and
2005, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables.
December 31,
---------------------------------------------------
2004 2005
----------------------- -----------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(In millions)
Tax effect of temporary differences
related to:
Inventories $ - $ - $ .8 $ -
Marketable securities - (12.4) - (16.4)
Property and equipment - (9.5) - (6.0)
Accrued OPEB costs 4.8 - 4.2 -
Accrued pension cost 3.2 - .4 -
Accrued environmental liabilities and
other deductible differences 24.8 - 19.7 -
Other accrued liabilities and deductible
differences 4.3 - 2.7 -
Other taxable differences - (71.4) - (35.7)
Investments in subsidiaries and
affiliates 4.5 (70.0) - (69.9)
Tax loss and tax credit carryforwards 8.6 - .5 -
------ ------- ------ -------
Adjusted gross deferred tax assets
(liabilities) 50.2 (163.3) 28.3 (128.0)
Netting of items by tax jurisdiction (36.1) 36.1 (21.0) 21.0
------ ------- ------ -------
14.1 (127.2) 7.3 (107.0)
Less net current deferred tax asset
(liability) 13.6 (23.8) 7.3 -
------ ------- ------ -------
Net noncurrent deferred tax asset
(liability) $ .5 $(103.4) $ - $ (107.0)
====== ======= ====== ========
Years ended December 31,
------------------------------------
2003 2004 2005
---- ---- ----
(In millions)
Decrease (increase) in valuation allowance:
Recognition of certain deductible tax
attributes for which the benefit had not
previously been recognized under the
"more-likely-than-not" recognition criteria $ (7.2) $ 308.4 $ -
Foreign currency translation 28.2 3.2 -
Deconsolidation of Kronos - 3.2 -
Offset to the change in gross deferred
income tax assets due principally to
redeterminations of certain tax attributes
and implementation of certain tax
planning strategies (12.5) (121.0) -
------- ------- -------
$ 8.5 $ 193.8 $ -
======= ======= =======
Certain U.S. and non-U.S. tax returns of the Company and Kronos are being
examined and tax authorities have or may propose tax deficiencies, including
penalties and interest. For example:
o Kronos 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 December 31,
2005). Kronos 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, would
have aggregated approximately euro 9 million ($11 million). Kronos filed a
written response to the assessment, and in September 2005 the Belgian tax
authorities withdrew the assessment.
o The Norwegian tax authorities have notified Kronos of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million)
relating to the years 1998 through 2000. Kronos has objected to this
proposed assessment.
o Kronos has received a tax assessment from the Canadian tax authorities
related to the years 1998 and 1999 proposing tax deficiencies, including
interest, of approximately Cdn. $5 million ($4 million). Kronos filed a
protest and in October 2005, the Canadian tax authorities agreed to reduce
the assessment and settle all issues, including interest, for approximately
Cdn. $2 million ($1.7 million).
o During the third quarter of 2005, Kronos reached an agreement in principle
with the German tax authorities regarding such tax authorities' objection
to the value assigned to certain intellectual property rights held by
Kronos' operating subsidiary in Germany. Under the agreement in principle,
the value assigned to such intellectual property for German income tax
purposes will be reduced retroactively, resulting in a reduction in the
amount of Kronos' net operating loss carryforward in Germany as well as a
future reduction in the amount of amortization expense attributable to such
intellectual property.
o The $7.2 million non-cash tax contingency reserve adjustment recognized in
the year ended December 31, 2005 relates primarily to favorable
developments with respect to certain income tax items of NL in the U.S.
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.
Under GAAP, a company is required to recognize a deferred income tax
liability with respect to the incremental U.S. taxes (federal and state) and
foreign withholding taxes that would be incurred when undistributed earnings of
a foreign subsidiary are subsequently repatriated, unless management has
determined that those undistributed earnings are permanently reinvested for the
foreseeable future. Prior to the third quarter of 2005, CompX had not recognized
a deferred tax liability related to such incremental income taxes on the
undistributed earnings of its foreign operations, as those earnings were subject
to specific permanent reinvestment plans. GAAP requires a company to reassess
the permanent reinvestment conclusion on an ongoing basis to determine if
management's intentions have changed. As of September 30, 2005, and based
primarily upon changes in CompX management's strategic plans for certain of its
non-U.S. operations, CompX's management has determined that the undistributed
earnings of such subsidiaries can no longer be considered to be permanently
reinvested, except for the pre-2005 earnings of its Taiwanese subsidiary.
Accordingly, and in accordance with GAAP, CompX recognized an aggregate $9.0
million provision for deferred income taxes on the aggregate undistributed
earnings of these foreign subsidiaries.
At December 31, 2005, CompX had $1.6 million of U.S. net operating loss
carryforwards expiring in 2007 through 2017. Utilization of such net operating
loss carryforwards is limited to approximately $400,000 per tax year. The
Company utilized approximately $400,000 of such carryforwards in 2005,
approximately $800,000 in 2004, which included two tax years (See Note 1), and
$400,000 in 2003. The Company believes it is more-likely-than-not that such
carryforwards will be utilized to reduce future income tax liabilities, and
accordingly the Company has not provided a deferred income tax asset valuation
allowance to offset the benefit of such carryforwards.
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. At the
end of the second quarter of 2004, and based on all available evidence, Kronos
concluded that the benefit of the net operating loss carryforwards and other
German tax attributes now met the "more-likely-than-not" recognition criteria,
and that reversal of the deferred income tax asset valuation allowance related
to Germany was appropriate. 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, KII believes it will take
several years to fully utilize the benefit of such loss carryforwards. However,
given that Kronos had generated positive taxable income in Germany in recent
years, combined with the fact that the net operating loss carryforwards have no
expiration date, Kronos concluded, among other reasons, that it was now
appropriate to reverse all of the valuation allowance related to the net
operating loss carryforwards because the benefit of such operating loss
carryforwards now meet the "more-likely-than-not" recognition criteria. Of the
$280.7 million valuation allowance related to Germany which was reversed during
2004, and in accordance with the applicable GAAP related to accounting for
income taxes at interim periods, (i) $8.7 million was reversed during the first
six months of 2004 that related primarily to the utilization of the German net
operating loss carryforwards during such period, (ii) $268.6 million was
reversed as of June 30, 2004 and (iii) Kronos reversed $3.4 million during the
last six months of 2004.
NL's and NL's subsidiary, EMS's, 1998 U.S. federal income tax returns were
examined by the U.S. tax authorities, and NL and EMS 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
reached an agreement with the IRS concerning the settlement of this matter
pursuant to which, among other things, the Company agreed to pay approximately
$21 million, including interest, up front as a partial payment of the settlement
amount (which amount was paid during 2005 and was classified as a current
liability at December 31, 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 had previously provided accruals to cover its estimated
additional tax liability (and related interest) concerning this matter. As a
result of the settlement, NL decreased its previous estimate of the amount of
additional income taxes and interest it will be required to pay, and NL
recognized an $17.4 million tax benefit in 2004 related to the revised estimate.
In addition, during 2004, the Company recognized a $31.1 million tax benefit
related to the reversal of a deferred income tax asset valuation allowance
related to certain tax attributes of EMS which NL believed now met the
"more-likely-than-not" recognition criteria. A majority of the deferred income
tax asset valuation allowance at December 31, 2003, related 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 reversed related to deductible
temporary differences associated with accrued environmental obligations of EMS
which NL now believed met the "more-likely-than-not" recognition criteria since,
as a result of the settlement agreement, such obligations and the related tax
deductions have been or will be included in NL's taxable income.
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 of these net refunds in its 2003 results of
operations. For the year ended December 31, 2004, the Company recognized a net
refund of euro 2.5 million ($3.1 million) related to additional net interest
which has accrued on the outstanding refund amount. Through December 2004, KII
and its German operating subsidiary had received net refunds of euro 35.6
million ($44.7 million when received). All refunds relating to the periods 1990
to 1997 were received by December 31, 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, and the Company recognized euro 21.5 million ($24.6 million)
in 2003.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law provided for a special 85% deduction for certain dividends
received from a controlled foreign corporation in 2005. In the third quarter of
2005, the Company and Kronos each completed its evaluation of this new provision
and determined that it would not benefit from such special dividends received
deduction.
In January 2005, CompX completed its disposition of the Thomas Regout
operations in Europe (see Note 24 to the financial statements). The Company
generated a $4.2 million income tax benefit associated with the U.S. capital
loss expected to be realized in the first quarter of 2005 upon completion of the
sale of the Thomas Regout operations. Under applicable GAAP, CompX recognized
the benefit of such capital loss in the fourth quarter of 2004 at the time such
operations were classified as held for sale. See Notes 1 and 24.
Note 16 - Employee benefit plans:
Defined benefit plans. The Company maintains various defined benefit
pension plans. Non-U.S. employees (associated with a former disposed business
unit in the United Kingdom) are covered by plans in their respective countries
and a majority of U.S. employees are eligible to participate in a contributory
savings plan. Variances from actuarially assumed rates will result in increases
or decreases in accumulated pension obligations, pension expense and funding
requirements in future periods. At December 31, 2005, the Company currently
expects to contribute the equivalent of approximately $450,000 to all of its
defined benefit pension plans during 2006.
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
consolidate the employee benefit obligations and expenses of Kronos.
The funded status of the Company's defined benefit pension plans, the
components of net periodic defined benefit pension cost (income) related to the
Company's consolidated business segments and charged to continuing operations
and the rates used in determining the actuarial present value of benefit
obligations are presented in the tables below. The Company uses a September 30th
measurement date for their defined benefit pension plans.
Years ended December 31,
-------------------------
2004 2005
---- ----
(In thousands)
Change in projected benefit obligations ("PBO"):
Benefit obligations at beginning of the year $ 377,634 $ 52,424
Service cost 3,379 -
Interest cost 11,655 3,020
Participant contributions 716 12
Actuarial losses 2,832 4,137
Change in foreign currency exchange rates 15,739 (930)
Benefits paid (12,118) (3,224)
Adjustment to cease consolidation of Kronos (347,413) -
---------- ----------
Benefit obligations at end of the year $ 52,424 $ 55,439
========== ==========
Change in plan assets:
Fair value of plan assets at beginning of the year $ 241,235 $ 43,901
Actual return on plan assets 17,644 17,352
Employer contributions 9,106 682
Participant contributions 716 12
Change in foreign currency exchange rates 10,198 (640)
Benefits paid (12,118) (3,224)
Adjustment to cease consolidation of Kronos (222,880) -
---------- ----------
Fair value of plan assets at end of year $ 43,901 $ 58,083
========== ==========
Funded status at end of the year:
Plan assets more (less) than PBO $ (8,523) $ 2,644
Unrecognized actuarial losses 10,668 589
Unrecognized net transition obligations (141) (63)
---------- ----------
$ 2,004 $ 3,170
========== ==========
Amounts recognized in the balance sheet:
Accrued pension costs:
Current $ (384) $ (428)
Noncurrent (7,968) (942)
Accumulated other comprehensive income 10,356 4,540
---------- ----------
$ 2,004 $ 3,170
========== ==========
Years ended December 31,
------------------------------------
2003 2004 2005
---- ---- ----
(In millions)
Net periodic pension cost (income):
Service cost benefits $ 5,347 $ 3,379 $ -
Interest cost on PBO 18,225 11,655 3,020
Expected return on plan assets (17,580) (11,181) (4,051)
Amortization of prior service cost 354 285 -
Amortization of net transition obligations 733 262 (67)
Recognized actuarial losses 1,800 2,389 384
-------- -------- --------
$ 8,879 $ 6,789 $ (714)
======== ======== ========
The weighted-average discount rate assumptions used in determining the
actuarial present value of benefit obligations as of December 31, 2004 and 2005
are 5.7% and 5.4% at December 31, 2004 and 2005, respectively. Such
weighted-average rates were determined using the projected benefit obligations
at each date. At December 31, 2004 and 2005, the Company had no active employees
participating in its defined benefit pension plans. Such plans are closed to
additional participants and consequently discount rate assumptions regarding
future compensation levels are not applicable.
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2003, 2004 and 2005 are presented in the table below. The
weighted-average discount rate and the weighted-average increase in future
compensation levels were determined using the projected benefit obligations at
the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets at the beginning of
each year.
Rate December 31,
---- --------------------------------------------
2003 2004 2005
---- ---- ----
Discount rate 5.9% 5.8% 5.7%
not not
Increase in future compensation levels 2.6% applicable applicable
Long-term return on plan assets 7.2% 9.7% 9.6%
As of December 31, 2005, the accumulated benefit obligations for all
defined benefit pension plans was approximately $55 million (2004 - $52
million). At December 31, 2005, the projected benefit obligations for all
defined benefit pension plans was comprised of $47 million related to U.S. plans
and $8 million related to non-U.S. plans (2004 - $43 million and $9 million,
respectively).
At December 31, 2005, the fair value of plan assets for all defined benefit
pension plans was comprised of $52 million related to U.S. plans and $6 million
related to non-U.S. plans (2004 - $38 million and $6 million, respectively).
Selected information related to the Company's defined benefit pension plans
that have accumulated benefit obligations in excess of fair value of plan assets
is presented below. At December 31, 2004, 17% of the projected benefit
obligations of such plans relate to non-U.S. plans.
December 31,
-------------------------
2004 2005
---- ----
(In thousands)
Projected benefit obligation $ 52,424 $ -
Accumulated benefit obligation 50,694 -
Fair value of plan assets:
U.S. plans 38,201 -
Non - U.S. plans 5,700 -
At December 31, 2004 and 2005, all of the assets attributable to U.S. plans
were invested in The Combined Master Retirement Trust ("CMRT"), a collective
investment trust sponsored by Contran to permit the collective investment by
certain master trusts which fund certain employee benefits plans sponsored by
Contran and certain of its affiliates.
At December 31, 2005, the asset mix of the CMRT was 86% in U.S. equity
securities, 3% in U.S. fixed income securities, 7% in international equity
securities and 4% in cash and other investments. At December 31, 2004, the asset
mix of the CMRT was 77% in U.S. equity securities, 14% in U.S. fixed income
securities, 7% in international equity securities and 2% in cash and other
investments.
The CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indicies) utilizing both third-party investment
managers as well as investments directed by Mr. Harold Simmons. Mr. Harold
Simmons is the sole trustee of the CMRT. The trustee of the CMRT, along with the
CMRT's investment committee, of which Mr. Simmons is a member, actively manage
the investments of the CMRT. Such parties have in the past, and may in the
future, periodically change the asset mix of the CMRT based upon, among other
things, advice they receive from third-party advisors and their expectations as
to what asset mix will generate the greatest overall return. For the years ended
December 31, 2003, 2004 and 2005, the assumed long-term rate of return for plan
assets invested in the CMRT was 10%. In determining the appropriateness of such
long-term rate of return assumption, the Company considered, among other things,
the historical rates of return for the CMRT, the current and projected asset mix
of the CMRT and the investment objectives of the CMRT's managers. During the
18-year history of the CMRT from its inception in 1987 through December 31,
2005, the average annual rate of return has been approximately 14% (with a 36%
return for 2005).
The Company expects future benefits paid from all defined benefit pension
plans are as follows:
Amount
--------------
Years ending December 31, (In thousands)
- ---------------------------
2006 $ 3,107
2007 3,089
2008 3,112
2009 3,124
2010 3,153
2011 to 2015 16,988
Defined contribution plans. The Company maintains various defined
contribution pension plans with Company contributions based on matching or other
formulas. Defined contribution plan expense related to continuing operations
approximated $2.5 million in 2003, $2.0 million in 2004 and $2.3 million in
2005, primarily related to CompX.
Postretirement benefits other than pensions. In addition to providing
pension benefits, the Company currently provides certain health care and life
insurance benefits for eligible retired employees. The majority of all retirees
are required to contribute a portion of the cost of their benefits and certain
current and future retirees are eligible for reduced health care benefits at age
65. The Company's policy is to fund medical claims as they are incurred, net of
any contributions by the retiree.
The components of the periodic OPEB cost and accumulated OPEB obligations
and the rates used in determining the actuarial present value of benefit
obligations are presented in the tables below. Variances from
actuarially-assumed rates will result in additional increases or decreases in
accumulated OPEB obligations, net periodic OPEB cost and funding requirements in
future periods. At December 31, 2005, the expected rate of increase in future
health care costs is 9% in 2006, declining to 5.5% in 2009 and thereafter. (In
2004 the expected rate of increase in future healthcare costs 9% in 2005,
declining to 5.5% in 2009 and thereafter.) If the health care cost trend rate
was increased (decreased) by one percentage point for each year, OPEB expense
would have increased by approximately $50,000 (decreased by $50,000) in 2005,
and the actuarial present value of accumulated OPEB obligations at December 31,
2005 would have increased by $800,000 (decreased by $700,000). At December 31,
2005, the Company currently expects to contribute the equivalent of
approximately $1.6 million to all of its OPEB plans during 2006, and aggregate
benefit payments to OPEB plan participants are expected to be the equivalent of
approximately $1.6 million in 2006, $1.5 million in each of 2007 and 2008, $1.4
million in each of 2009 and 2010 and $5.9 million during 2011 through 2015. Such
amounts are stated net of estimated Medicare Part D subsidy, discussed below, of
approximately $225,000 per year
Years ended December 31,
-------------------------
2004 2005
---- ----
(In thousands)
Change in projected OPEB obligations:
Obligations at beginning of the year $ 33,429 $ 15,903
Service cost 116 -
Interest cost 1,386 844
Plan amendments (1,385) -
Actuarial gains (2,759) (592)
Change in foreign currency exchange rates 206 -
Benefits paid (3,500) (2,154)
Adjustment to deconsolidate Kronos (11,590) -
---------- ----------
Obligations at end of the year $ 15,903 $ 14,001
========== ==========
Change in plan assets:
Employer contributions $ 3,500 $ 2,154
Benefits paid (3,500) (2,154)
---------- ----------
Fair value of plan assets at end of the year $ - $ -
========== ==========
Funded status at end of the year:
Plan assets less than benefit obligations $ (15,903) $ (14,001)
Unrecognized net actuarial losses 3,284 2,692
Unrecognized prior service credit (968) (682)
---------- ----------
$ (13,587) $ (11,991)
========== ==========
Accrued OPEB costs recognized in the balance sheet:
Current $ 3,015 $ 1,850
Noncurrent 10,572 10,141
---------- ----------
$ 13,587 $ 11,991
========== ==========
Years ended December 31,
------------------------------------
2003 2004 2005
---- ---- ----
(In thousands)
Net periodic OPEB cost:
Service cost $ 152 $ 116 $ -
Interest cost 2,063 1,386 844
Amortization of prior service credit (2,075) (540) (286)
Recognized actuarial losses 189 132 -
-------- -------- --------
$ 329 $ 1,094 $ 558
======== ======== ========
The weighted average discount rate used in determining the actuarial
present value of benefit obligations as of December 31, 2005 was 5.6% (2004 -
5.7%). Such weighted average rate was determined using the projected benefit
obligation as of such dates. The impact of assumed increases in future
compensation levels does not have a material effect on the actuarial present
value of the benefit obligation as substantially all of such benefits relate
solely to eligible retirees, for which compensation is not applicable.
The weighted average discount rate used in determining the net periodic
OPEB cost for 2005 was 5.7% (2004 - 5.9%; 2003 - 6.5%). Such weighted average
rate was determined using the projected benefit obligation as of the beginning
of each year. The impact of assumed increases in future compensation levels does
not have a material effect on the net periodic OPEB cost as substantially all of
such benefits relate solely to eligible retirees, for which compensation is not
applicable. The impact of assumed rate of return on plan assets also does not
have a material effect on the net periodic OPEB cost as there were no plan
assets as of December 31, 2004 or 2005.
As of December 31, 2005, the accumulated benefit obligations for all OPEB
plans was approximately $14.0 million (2004 - $15.9 million). At December 31,
2005, all of the Company's consolidated accrued OPEB costs related to the
Company's U.S. plan.
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 from the date actuarial equivalence was
determined, as permitted by and in accordance with FASB Staff Position No.
106-2, 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 17 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. The Company
continuously considers, reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business, tax and other objectives then relevant, it is possible that the
Company might be a party to one or more such transactions in the future.
Receivables from and payables to affiliates are summarized in the table
below.
December 31,
-------------------------
2004 2005
---- ----
(In thousands)
Current receivables from affiliates:
Income taxes refundable from Valhi $ 1,681 $ 3,146
Kronos - 145
------- -------
$ 1,681 $ 3,291
======= =======
Noncurrent receivable from affiliate -
loan to Contran family trust $10,000 $ -
======= =======
Current payables to affiliates:
Income taxes payable to Valhi $ 86 $ 771
Kronos 16 -
Tremont 289 211
------- -------
$ 391 $ 982
======= =======
Purchases of TiO2 from LPC were $101.3 million in 2003 and $51.0 million in
the first half of 2004. See Note 7.
From time to time, loans and advances are made between the Company and
various related parties, pursuant to term and demand notes. These loans and
advances are entered into principally for cash management purposes. When the
Company loans funds to related parties, the lender is generally able to earn a
higher rate of return on the loan than the lender would earn if the funds were
invested in other instruments. While certain of such loans may be of a lesser
credit quality than cash equivalent instruments otherwise available to the
Company, the Company believes that it has evaluated the credit risks involved,
and that those risks are reasonable and reflected in the terms of the applicable
loans. When the Company borrows from related parties, the borrower is generally
able to pay a lower rate of interest than the borrower would pay if it borrowed
from other parties.
In 2001, EMS, NL's majority-owned environmental management subsidiary,
extended a $25 million revolving credit facility to one of the family trusts
discussed in Note 1 ($10 million and nil outstanding at December 31, 2004 and
2005, respectively). The loan bore interest at prime, was due on demand with 60
days notice and was collateralized by certain shares of Contran's Class A common
stock and Class E cumulative preferred stock held by the trust. The terms of
this loan were approved by special committees of both NL's and EMS' respective
board of directors composed of independent directors. During 2005, all amounts
due and outstanding on this credit facility were repaid and the revolving credit
facility was cancelled.
Interest income on all loans to affiliates was $2.2 million in 2003, $6.9
million in 2004 and nil in 2005, including $1.4 million in 2003 and $1.5 million
in 2004 in interest income from CompX's discontinued operation. Also included in
2004 is $4.7 million in interest income related to a $200 million note
receivable from Kronos that was distributed to NL in December 2003. A portion of
such note was used to acquire CompX in September 2004. See Note 1. The remainder
of the note was repaid in 2004. Interest income earned prior to July 1, 2004 was
eliminated upon consolidation.
Under the terms of various intercorporate services agreements ("ISAs")
entered into between the Company and various related parties, including Contran,
employees of one company will provide certain management, tax planning,
financial and administrative services to the other company on a fee basis. Such
charges are based upon estimates of the time devoted by the employees of the
provider of the services to the affairs of the recipient, and the compensation
of such persons. Because of the large number of companies affiliated with
Contran, the Company believes it benefits from cost savings and economies of
scale gained by not having certain management, financial and administrative
staffs duplicated at each entity, thus allowing certain individuals to provide
services to multiple companies but only be compensated by one entity. The net
ISA fees charged to the Company (including amounts attributable to Kronos for
all periods) included in selling general and administrative expense and
corporate expense aggregated approximately $4.1 million in 2003, $10.4 million
in 2004 and $12.6 million in 2005. The increase in the aggregate ISA fee charged
to the Company in 2004 is due primarily to approximately 30 staff positions,
previously compensated by NL and Kronos, who in 2004 commenced being compensated
by Contran. NL also had an ISA with TIMET whereby NL provided certain services
to TIMET for approximately $14,000 in 2003.
Tall Pines Insurance Company and EWI RE, Inc. provide for or broker certain
insurance policies for Contran and certain of its subsidiaries and affiliates,
including the Company. Tall Pines is wholly-owned by a subsidiary of Valhi, and
EWI is a wholly-owned subsidiary of NL. Consistent with insurance industry
practices, Tall Pines and EWI receive commissions from insurance and reinsurance
underwriters and/or assess fees for the policies that they provide or broker.
The aggregate premiums paid by the Company to Tall Pines (including amounts paid
to Valmont Insurance Company, another subsidiary of Valhi that was merged into
Tall Pines in 2004) were $8.2 million in 2003, $4.3 million in 2004 and nil in
2005. These amounts principally included payments for insurance and reinsurance
premiums paid to third parties, but also included commissions paid to Tall Pines
and EWI. Tall Pines purchases reinsurance for substantially all of the risks it
underwrites. The aggregate premiums paid by affiliates of the Company for
insurance brokered by EWI were approximately $15 million in 2004 and $10 million
in 2005. The Company expects that these relationships with Tall Pines and EWI
will continue in 2006.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and affiliates, including the Company, have entered
into a loss sharing agreement under which any uninsured loss is shared by those
entities who have submitted claims under the relevant policy. The Company
believes the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justifies the risk
associated with the potential for any uninsured loss.
Capital transactions with affiliates during 2003, as reflected on the
accompanying Consolidated Statements of Cash Flows, relates principally to CompX
dividends paid to Valhi and Valcor.
Note 18 - Other income; noncompete agreement income and litigation settlement
gains:
Other income for the years ended December 31, 2003, 2004 and 2005 is
summarized below:
Years ended December 31,
------------------------------------
2003 2004 2005
---- ---- ----
(In thousands)
Contract dispute settlement $ - $ 6,289 $ -
Other 436 664 462
-------- -------- --------
$ 436 $ 6,953 $ 462
======== ======== ========
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
in 2004 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
2004, $1.75 million was paid in 2005, $1.75 million is due in 2006 and $2.25
million is due in 2007.
NL's $20 million of proceeds from the disposal of its specialty chemicals
business unit in January 1998 related to its agreement not to compete in the
rheological products business was recognized as a component of general corporate
income (expense) ratably over the five-year non-compete period ended in January
2003 ($333,000 recognized in 2003).
Insurance recoveries of $823,000 in 2003, $552,000 in 2004 and $804,000 in
2005 relate to NL's settlements with certain of its former insurance carriers.
These settlements, as well as similar prior settlements NL reached prior to
2003, resolved court proceedings in which NL had sought reimbursement from the
carriers for legal defense costs and indemnity coverage for certain of its
environmental remediation expenditures. No further material settlements relating
to litigation concerning environmental remediation coverages are expected.
Insurance recoveries in 2005 also include $2.2 million related to settlement of
excess insurance claims that were paid to NL. See Note 19.
Note 19 - Commitments and contingencies:
Lead pigment litigation. NL's former operations included the manufacture of
lead pigments for use in paint and lead-based paint. NL, other former
manufacturers of lead pigments for use in paint and lead-based paint (together,
the "former pigment manufacturers"), and the Lead Industries Association
("LIA"), which discontinued business operations in 2002, have been named as
defendants in various legal proceedings seeking damages for personal injury,
property damage and governmental expenditures allegedly caused by the use of
lead-based paints. Certain of these actions have been filed by or on behalf of
states, large U.S. cities or their public housing authorities and school
districts, and certain others have been asserted as class actions. These
lawsuits seek recovery under a variety of theories, including public and private
nuisance, negligent product design, negligent failure to warn, strict liability,
breach of warranty, conspiracy/concert of action, aiding and abetting,
enterprise liability, market share or risk contribution 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 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. A number of cases are inactive or 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 either the defendants or plaintiffs. In addition, various other cases
are pending (in which NL is not a defendant) seeking recovery for injury
allegedly caused by lead pigment and lead-based paint. Although NL is not a
defendant in these cases, the outcome of these cases may have an impact on cases
that might be filed against NL in the future.
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 never settled any of these cases, nor have any final adverse
judgments been entered against NL. NL has not accrued any amounts for pending
lead pigment and lead-based paint litigation. Liability that may result, if any,
cannot currently be reasonably estimated. There can be no assurance that NL will
not incur liability in the future in respect of this pending litigation in view
of the inherent uncertainties involved in court and jury rulings in pending and
possible future cases. If any such future liability were to be incurred, it
could have a material adverse effect on the Company's consolidated financial
position, results of operations and liquidity.
In one of these lead pigment cases (State of Rhode Island v. Lead
Industries Association), a trial before a Rhode Island state court jury began in
September 2002 on the question of whether lead pigment in paint on Rhode Island
buildings is a public nuisance. In October 2002, the trial judge declared a
mistrial in the case when the jury was unable to reach a verdict on the
question, with the jury reportedly deadlocked 4-2 in the defendants' favor. In
November 2005, the State of Rhode Island began a retrial of the case on the
State's claims of public nuisance, indemnity and unjust enrichment against NL
and three other defendants. Following the state's presentation of its case, the
trial court dismissed the state's claims of indemnity and unjust enrichment. The
public nuisance claim was sent to the jury in February 2006, and the jury found
that NL and two other defendants substantially contributed to the creation of a
public nuisance as a result of the collective presence of lead pigments in
paints and coatings on buildings in Rhode Island. The jury also found that NL
and the two other defendants should be ordered to abate the public nuisance.
Following the jury verdict, the trial court dismissed the state's claim for
punitive damages. The scope of the abatement remedy will be determined by the
judge. The extent, nature and cost of such remedy is not currently known and
will be determined only following additional proceedings. Various motions remain
pending before the trial court, including NL's motion to dismiss. NL intends to
appeal any adverse judgment which the trial court may enter against NL.
The Rhode Island case is unique in that this is the first time that an
adverse verdict in the lead pigment litigation has been entered against NL. NL
does not believe it is currently possible to determine the nature or extent of
any potential liability resulting from the verdict. In addition, liability that
might result to NL, if any, with respect to this and the other lead pigment
litigation can not currently be reasonably estimated. However, as with any legal
proceeding, there is no assurance that any of these appeals would be successful,
and it is reasonably possible, based on the outcome of the appeals process, that
NL would in the near term conclude that it was probable NL had incurred some
liability in this Rhode Island matter that would result in the recognition of a
loss contingency accrual. Such potential liability could have a material adverse
impact on net income for the interim or annual period during which such
liability is recognized, and a material adverse impact on NL's financial
condition and liquidity. NL believes it is reasonably possible that additional
legal proceedings in this matter could be scheduled for trial in 2006 and beyond
in other jurisdictions, including cases in which NL is currently a defendant or
in cases not yet filed against NL, the resolution of which could also result in
recognition of a loss contingency accrual that could have a material adverse
impact on net income for the interim or annual period during which such
liability is recognized, and a material adverse impact on NL's financial
condition and liquidity. An estimate of the potential impact on NL's results of
operations, financial condition or liquidity related to these matters can not
currently be reasonably estimated.
Environmental matters and litigation. The Company's operations are governed
by various 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 maintain compliance
with applicable environmental laws and regulations at all of its plants and to
strive to improve environmental performance. From time to time, the Company may
be subject to environmental regulatory enforcement under U.S. and foreign
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 believes all of its plants are in
substantial compliance with applicable environmental laws.
Certain properties and facilities used in the Company's former businesses,
including divested primary and secondary lead smelters and former mining
locations of NL, 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 various 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. If any such future liability
were to be incurred, it could have a material adverse effect on the Company's
consolidated financial statements, results of operations and liquidity.
The Company records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are generally not
discounted to their present value. Recoveries of remediation costs from other
parties, if any, are recognized as assets when their receipt is deemed probable.
At December 31, 2005, no receivables for such recoveries have been recognized.
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.
A summary of the activity in the Company's accrued environmental costs
during the past three years is presented in the table below. The amount charged
to expense, as shown in the table below, is included in corporate expense on the
Company's consolidated statement of operations. 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.
Years ended December 31,
------------------------------------
2003 2004 2005
---- ---- ----
(In thousands)
Balance at the beginning of the year $ 91,506 $ 77,481 $ 67,817
Additions charged to expense, net 26,211 1,602 2,293
Payments (40,236) (11,266) (15,163)
-------- -------- --------
Balance at the end of the year $ 77,481 $ 67,817 $ 54,947
======== ======== ========
Amounts recognized in the balance sheet:
Current liability $ 16,570 $ 13,302
Noncurrent liability 51,247 41,645
-------- --------
$ 67,817 $ 54,947
======== ========
On a quarterly basis, the Company evaluates the potential range of its
liability at sites where it has been named as a PRP or defendant, including
sites for which EMS has contractually assumed NL's obligation. At December 31,
2004 and 2005, the Company had accrued $68 million and $55 million, respectively
for those environmental matters which are reasonably estimable. It is not
possible to estimate the range of costs for certain sites. The upper end of the
range of reasonably possible costs to the Company for sites which it is possible
to estimate costs is approximately $80 million. The Company's estimates of such
liabilities have not been discounted to present value.
At December 31, 2005, there are approximately 20 sites for which the
Company is currently unable to estimate a range of costs. For these sites,
generally the investigation is in the early stages, and it is either unknown as
to whether or not the Company actually had any association with the site, or if
the Company had an 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. On certain of these sites that had previously been
inactive, NL has received general and special notices of liability from the EPA
alleging that NL, along with other PRPs, is liable for past and future costs of
remediating environmental contamination allegedly caused by former operations
conducted at such sites. These notifications may assert that NL, along with
other PRPs, is liable for past clean-up costs that could be material to NL if
liability for such amounts ultimately were determined against NL.
At December 31, 2004, the Company had $19 million in restricted cash
equivalents and debt securities held by special purpose trusts, the assets of
which could only be used to pay for certain of the Company's future
environmental remediation and other environmental expenditures. During 2005, all
of such restricted balances had been so utilized. Use of such restricted
balances does not affect the Company's consolidated net cash flows.
Insurance coverage claims. In October 2005, NL was served with a complaint
in OneBeacon American Insurance Company v. NL Industries, Inc., et. Al. (Supreme
Court of the State of New York, County of New York, Index No. 603429-05). The
plaintiff, a former insurance carrier, seeks a declaratory judgment of its
obligations to NL under insurance policies issued to NL by the plaintiff's
predecessor with respect to certain lead pigment lawsuits. NL filed a motion to
dismiss the New York action. NL filed an action against OneBeacon and certain
other former insurance companies, captioned NL Industries, Inc. v. OneBeacon
America Insurance Company, et. al. (District Court for Dallas County, Texas,
Case No. 05-11347) asserting that OneBeacon has breached its obligations to NL
under such insurance policies and seeking a declaratory judgment of OneBeacon's
obligations to NL under such policies. Certain of the former insurance companies
have filed a petition to remove the Texas action to federal court.
NL has reached an agreement with a former insurance carrier in which such
carrier would reimburse NL for a portion of its past and future lead pigment
litigation defense costs, although the amount that NL will ultimately recover
from such carrier with respect to such defense costs incurred by NL is not yet
determinable. In addition, during 2005, NL recognized $2.2 million of recoveries
from certain insolvent former insurance carriers relating to settlement of
excess insurance claims that were paid to NL. See Note 18. While NL continues to
seek additional insurance recoveries, there can be no assurance that NL will be
successful in obtaining reimbursement for either defense costs or indemnity. Any
such additional insurance recoveries would be recognized when their receipt is
deemed probable and the amount is determinable.
The issue of whether insurance coverage for defense costs of indemnity or
both will be found to exist for NL's lead pigment litigation depends upon a
variety of factors, and there can be no assurance that such insurance coverage
will be available. NL has not considered any potential insurance recoveries for
lead pigment or environmental litigation matters in determining related
accruals.
NL has settled insurance coverage claims concerning environmental claims
with certain of its principal former carriers. A portion of the proceeds from
these settlements were placed into special purpose trusts, as discussed above.
No further material settlements relating to environmental remediation coverage
are expected.
Other litigation. NL 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 of NL
containing asbestos, silica and/or mixed dust. Approximately 500 of these types
of cases, involving a total of approximately 12,000 plaintiffs and their
spouses, remain pending. NL has not accrued any amounts for this litigation
because liability that might result to NL, if any, cannot currently be
reasonably estimated. To date, NL has not been adjudicated liable in any of
these matters. Based on information available to NL, including facts concerning
its historical operations, the rate of new claims, the number of claims from
which NL has been dismissed and NL's prior experience in the defense of these
matters, NL believes that the range of reasonably possible outcomes of these
matters will be consistent with NL's historical costs with respect to these
matters (which are not material), and no reasonably possible outcome is expected
to involve amounts that are material to NL. NL has and will continue to
vigorously seek dismissal from each claim and/or a finding of no liability by NL
in each case. In addition, from time to time, NL has received notices regarding
asbestos or silica claims purporting to be brought against former subsidiaries
of NL, including notices provided to insurers with which NL has entered into
settlements extinguishing certain insurance policies. These insurers may seek
indemnification from NL.
In addition to the litigation described above, the Company and its
affiliates are also involved in various other environmental, contractual,
product liability, patent (or intellectual property), employment and other
claims and disputes incidental to its present and former businesses. In certain
cases, the Company has insurance coverage for such items; however the Company
does not currently expect additional material insurance coverage for
environmental claims.
The Company currently believes that the disposition of all claims and
disputes, individually or in the aggregate, should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity beyond the accruals already provided for.
Concentrations of credit risk. Sales of TiO2 accounted for substantially
all of Kronos' net sales from continuing operations during each of 2003, 2004
and 2005. TiO2 is generally sold to the paint, plastics and paper industries.
Such markets are generally considered "quality-of-life" markets whose demand for
TiO2 is influenced by the relative economic well-being of the various geographic
regions. TiO2 is sold to over 4,000 customers, with the top ten customers
accounting for approximately one-fourth of Kronos' net sales in each of the last
three years. By volume, approximately one-half of Kronos' TiO2 sales were to
Europe in each of the past three years with about 38% attributable to North
America.
Component products are sold primarily in North America to original
equipment manufacturers in North America and Europe. In 2005, the ten largest
customers accounted for approximately 43% of component products sales (2004 -
43%; 2003 - 44%).
CompX does not believe it is dependent upon one or a few customers, the
loss of which would have a material adverse effect on its operations. In 2005,
the ten largest customers accounted for about 43% of component products sales
(2004 - 43%; 2003 - 44%). In 2004 and 2005, one customer accounted for 11% and
10%, respectively, of CompX's sales. No single customer accounted for more than
10% of CompX's sales in 2003.
At December 31, 2005, consolidated cash, cash equivalents and restricted
cash includes $50.0 million invested in U.S. Treasury securities purchased under
short-term agreements to resell (2004 - $82.8 million), all of which is held in
trust for the Company by a single U.S. bank.
Other. Royalty expense was $450,000 in 2003, $222,000 in 2004 and $66,000
in 2005. Royalties relate principally to certain products manufactured by CompX
in Canada and sold in the United States under the terms of third-party patent
license agreements, one of which expired in 2003 and the remaining agreement
expires in 2021.
Rent expense, principally for CompX equipment in 2005 and principally for
Kronos' operating facilities and equipment during 2003 and the first six months
of 2004, was approximately $13 million in 2003, $6 million in 2004 and $800,000
in 2005. At December 31, 2005, future minimum rentals under noncancellable
operating leases are approximately $540,000 in 2006, $260,000 in 2007, $70,000
in 2008, $30,000 in 2009 and $10,000 in 2010.
Income taxes. The Company and Valhi have agreed to a policy providing for
the allocation of tax liabilities and tax payments as described in Note 1. Under
applicable law, the Company, as well as every other member of the Contran Tax
Group, are each jointly and severally liable for the aggregate federal income
tax liability of Contran and the other companies included in the Contran Tax
Group for all periods in which the Company is included in the Contran Tax Group.
Valhi has agreed, however, to indemnify the Company for any liability for income
taxes of the Contran Tax Group in excess of the Company's tax liability
previously computed and paid by NL in accordance with the tax allocation policy.
In this regard, in the event all or a portion of the $230 million income tax
liability related to the shares of Kronos transferred or distributed by NL to
Valhi and Tremont becomes payable by Contran to the applicable tax authority
(See Note 2), NL and every other member of the Contran Tax Group would be
jointly and severally liable for such income tax in the event Contran did not
pay such tax to the applicable tax authority. However, in this event, the
Company would also have the benefit of Valhi's indemnification, as described
above.
Note 20 - Financial instruments:
Summarized below is the estimated fair value and related net carrying value
of the Company's financial instruments.
December 31, December 31,
2004 2005
--------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ----------- ------------- ----------
Cash, cash equivalents, current and noncurrent
restricted cash equivalents and current and
noncurrent restricted marketable debt securities $ 120.3 $ 120.3 $ 90.5 $ 90.5
Marketable equity securities - classified as
available-for-sale $ 75.8 $ 75.8 $ 87.1 $ 87.1
Minority interest in CompX common stock $ 49.2 $ 79.4 $ 45.6 $ 74.1
Common stockholders' equity $ 233.6 $1,070.5 $ 219.7 $ 684.2
Fair value of the Company's marketable equity securities, restricted
marketable debt securities and Notes, and the fair value of the Company's common
stockholder's equity and minority interest in Kronos and CompX, are based upon
quoted market prices at each balance sheet date.
Certain of the Company's sales generated by its non-U.S. operations are
denominated in U.S. dollars. The Company periodically uses currency forward
contracts to manage a very nominal portion of foreign exchange rate risk
associated with receivables denominated in a currency other than the holder's
functional currency or similar exchange rate risk associated with future sales.
The Company has not entered into these contracts for trading or speculative
purposes in the past, nor does the Company currently anticipate entering into
such contracts for trading or speculative purposes in the future. Derivatives
used to hedge forecasted transactions and specific cash flows associated with
foreign currency denominated financial assets and liabilities which meet the
criteria for hedge accounting are designated as cash flow hedges. Consequently,
the effective portion of gains and losses is deferred as a component of
accumulated other comprehensive income and is recognized in earnings at the time
the hedged item affects earnings. Contracts that do not meet the criteria for
hedge accounting are marked-to-market at each balance sheet date with any
resulting gain or loss recognized in income currently as part of net currency
transactions. To manage such exchange rate risk, at December 31, 2005, CompX
held a series of contracts to exchange an aggregate of U.S. $6.5 million for an
equivalent amount of Canadian dollars at an exchange rate of Cdn. $1.19 per U.S.
dollar. Such contracts mature through March 2006. The exchange rate was $1.17
per U.S. dollar at December 31, 2005. At December 31, 2004 CompX held contracts
maturing through March 2005 to exchange an aggregate of U.S. $7.2 million for an
equivalent amount of Canadian dollars at an exchange rates of Cdn. $1.19 to Cdn.
$1.23 per U.S. dollar. At December 31, 2004, the actual exchange rate was Cdn.
$1.21 per U.S. dollar. The estimated fair value of such contracts is not
material at December 31, 2004 and 2005.
The Company periodically uses interest rate swaps and other types of
contracts to manage interest rate risk with respect to financial assets or
liabilities. The Company has not entered into these contracts for trading or
speculative purposes in the past, nor does the Company currently anticipate
entering into such contracts for trading or speculative purposes in the future.
The Company was not a party to any such contract during 2003, 2004 or 2005.
Note 21 - Quarterly results of operations (unaudited):
Quarter ended
----------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- ---------
(In millions, except per share data)
Year ended December 31, 2004
Net sales $ 306.8 $ 342.0 $ 46.3 $ 46.6
Gross margin $ 69.4 $ 79.2 $ 10.3 $ 10.2
Income from continuing operations $ 5.5 $ 146.4 $ 6.8 $ .6
Discontinued operations - .2 .2 3.1
------- ------- ------ ------
Net income $ 5.5 $ 146.6 $ 7.0 $ 3.7
======= ======= ====== ======
Diluted earnings per common share
$ .11 $ 3.03 $ .14 $ .07
Year ended December 31, 2005
Net sales $ 46.8 $ 45.7 $ 47.1 $ 46.8
Gross margin $ 10.3 $ 10.5 $ 11.0 $ 12.0
Income from continuing operations $ 14.8 $ 9.9 $ 2.8 $ 5.7
Discontinued operations (.3) - - -
------- ------- ------ ------
Net income $ 14.5 $ 9.9 $ 2.8 $ 5.7
======= ======= ====== ======
Diluted earnings per common share
$ .30 $ .20 $ .06 $ .12
The sum of the quarterly per share amounts may not equal the annual per
share amounts due to relative changes in the weighted average number of shares
used in the per share computations.
Note 22 - Accounting principles newly adopted in 2003 and 2004:
Asset retirement obligations. The Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations," on January 1, 2003. Under SFAS No. 143, the
fair value of a liability for an asset retirement obligation covered under the
scope of SFAS No. 143 is recognized in the period in which the liability is
incurred, with an offsetting increase in the carrying amount of the related
long-lived asset. Over time, the liability would be accreted to its future
value, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
Under the transition provisions of SFAS No. 143, at the date of adoption on
January 1, 2003 the Company recognized (i) an asset retirement cost capitalized
as an increase to the carrying value of its property, plant and equipment, (ii)
accumulated depreciation on such capitalized cost and (iii) a liability for the
asset retirement obligation. Amounts resulting from the initial application of
SFAS No. 143 are measured using information, assumptions and interest rates all
as of January 1, 2003. The amount recognized as the asset retirement cost is
measured as of the date the asset retirement obligation was incurred. Cumulative
accretion on the asset retirement obligation, and accumulated depreciation on
the asset retirement cost, is recognized for the time period from the date the
asset retirement cost and liability would have been recognized had the
provisions of SFAS No. 143 been in effect at the date the liability was
incurred, through January 1, 2003. The difference, if any, between the amounts
to be recognized as described above and any associated amounts recognized in the
Company's balance sheet as of December 31, 2002 is recognized as a cumulative
effect of a change in accounting principle as of the date of adoption. The
effect of adopting SFAS No. 143 as of January 1, 2003 was not material, as
summarized in the table below, and is not separately recognized in the
accompanying Statement of Operations.
Amount
---------
(in millions)
Increase in carrying value of net property, plant and equipment:
Cost $ .4
Accumulated depreciation (.1)
Decrease in carrying value of previously-accrued closure and
post-closure activities .3
Asset retirement obligation recognized (.6)
----
Net impact $ -
====
The increase in the asset retirement obligations in 2004, approximately
$200,000 during 2004, is due to accretion expense and the effects of currency
translation. Accretion expense, which is reported as a component of cost of
sales in the accompanying statement of income, was less than $100,000 for each
of the years ended December 31, 2003 and 2004. At December 31, 2004, the Company
no longer consolidates the financial position of Kronos and therefore no longer
reports any asset retirement obligations.
Costs associated with exit or disposal activities. The Company adopted SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," on
January 1, 2003 for exit or disposal activities initiated on or after that date.
Under SFAS No. 146, costs associated with exit activities, as defined, that are
covered by the scope of SFAS No. 146 will be recognized and measured initially
at fair value, generally in the period in which the liability is incurred. Costs
covered by the scope of SFAS No. 146 include termination benefits provided to
employees, costs to consolidate facilities or relocate employees, and costs to
terminate contracts (other than a capital lease). Under prior GAAP, a liability
for such an exit cost is recognized at the date an exit plan is adopted, which
may or may not be the date at which the liability has been incurred. The effect
of adopting SFAS No. 146 as of January 1, 2003 was not material as the Company
was not involved in any exit or disposal activities covered by the scope of the
new standard as of such date.
Variable interest entities. 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. 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 that would require the Company to consolidate such entity under 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.
Note 23 - Accounting principles not yet adopted:
Inventory costs. The Company will adopt SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs are charged to expense as incurred. Alternatively, in periods of
production above the high end of normal capacity, the amount of fixed overhead
costs allocated to each unit of production is decreased so that inventories are
not measured above cost. SFAS No. 151 also clarifies existing GAAP to require
that abnormal freight and wasted materials (spoilage) are to be expensed as
incurred. The Company believes its production cost accounting already complies
with the requirements of SFAS No. 151, and the Company does not expect adoption
of SFAS No. 151 will have a material effect on its consolidated financial
statements.
Stock options. As permitted by regulations of the SEC the Company will
adopt SFAS No. 123R, "Share-Based Payment," as of January 1, 2006. SFAS No.
123R, among other things, eliminates the alternative in existing GAAP to use the
intrinsic value method of accounting for stock-based employee compensation under
APBO No. 25. Upon adoption of SFAS No. 123R, the Company will generally be
required to recognize the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award,
with the cost recognized over the period during which an employee is required to
provide services in exchange for the award (generally, the vesting period of the
award). No compensation cost will be recognized in the aggregate for equity
instruments for which the employee does not render the requisite service
(generally, if the instrument is forfeited before it has vested). The grant-date
fair value will be estimated using option-pricing models (e.g. Black-Scholes or
a lattice model). Under the transition alternatives permitted under SFAS No.
123R, the Company will apply the new standard to all new awards granted on or
after January 1, 2006, and to all awards existing as of December 31, 2005 which
are subsequently modified, repurchased or cancelled. Additionally, as of January
1, 2006, the Company will be required to recognize compensation cost previously
measured under SFAS No. 123 for the portion of any non-vested award existing as
of December 31, 2005 over the remaining vesting period. Because the number of
non-vested awards as of December 31, 2005 with respect to options granted by NL
is not expected to be material, and because the Company has not granted any
options and does not expect to grant any options prior to January 1, 2006, the
effect of adopting SFAS No. 123R is not expected to be significant in so far as
it relates to the recognition of compensation cost in the Company's consolidated
statements of income for existing stock options. Should NL or its subsidiaries
and affiliates, however, either grant a significant number of options or modify,
repurchase or cancel existing options in the future, the Company could recognize
material amounts of compensation cost related to such options in its
consolidated financial statements.
Also upon adoption of SFAS No. 123R, any cash income tax benefit resulting
from the exercise of stock options in excess of the cumulative income tax
benefit related to such options previously recognized for GAAP financial
reporting purposes in the Company's consolidated statements of income, if any,
will be reflected as a cash inflow from financing activities in the Company's
consolidated statements of cash flows, and the Company's cash flows from
operating activities will reflect the effect of cash paid for income taxes
exclusive of such cash income tax benefit.
SFAS No. 123R also requires certain expanded disclosures regarding the
Company's stock options, and such expanded disclosures have been provided in
Note 14.
Note 24 - Discontinued operations:
In December 2004, CompX's board of directors committed to a formal plan to
dispose of its Thomas Regout operations in the Netherlands. Such operations,
which previously were included in the Company's component products operating
segment (see Note 3), met all of the criteria under GAAP to be classified as an
asset held for sale at December 31, 2004, and accordingly the results of
operations of Thomas Regout have been classified as discontinued operations for
all periods presented. The Company has not reclassified its consolidated balance
sheets or statements of cash flows. In classifying the net assets of the Thomas
Regout operations as an asset held for sale, the Company concluded that the
estimated fair value less costs to sell of such operations exceeded the carrying
amount of the related net assets, and accordingly in the fourth quarter of 2004
the Company recognized a $6.5 million impairment charge to write down its
investment in the Thomas Regout operations to estimated realizable value. Such
impairment charge represented an impairment of goodwill. See Note 8.
In January 2005, CompX completed the sale of such operations for proceeds
(net of expenses) of approximately $18.1 million in cash at the date of sale and
a $4.2 million principal amount note receivable from the purchaser bearing
interest at a fixed rate of 7% and payable over four years. The note receivable
is collateralized by a secondary lien on the assets sold and is subordinated to
certain third-party indebtedness of the purchaser. Accordingly, the Company no
longer includes the results of operations of Thomas Regout subsequent to
December 31, 2004 in its consolidated financial statements. The net proceeds
from the January 2005 sale of Thomas Regout were $860,000 (before income tax
benefit) less than the net realizable value previously estimated at the time the
goodwill impairment charge (primarily due to higher expenses associated with the
disposal of such operations), and discontinued operations in the first quarter
of 2005 includes a charge related to such differential ($326,000 loss, net of
income tax benefit and minority interest). Such change represents an additional
impairment of goodwill.
Condensed income statement data for Thomas Regout is presented below. The
$6.5 million impairment charge is included in Thomas Regout's operating loss for
2004. Interest expense included in discontinued operations represents interest
on certain intercompany indebtedness with CompX, which indebtedness arose at the
time of CompX's acquisition of such operations prior to 2002 and corresponded to
certain third-party indebtedness CompX incurred at the time such operations were
acquired. Discontinued operations in 2004 includes a $4.2 million income tax
benefit associated with the U.S. capital loss expected to be realized in the
first quarter of 2005 upon completion of the sale of the Thomas Regout
operations. Under applicable GAAP, CompX recognized the benefit of such capital
loss in the fourth quarter of 2004 at the time such operations were classified
as held for sale because the Company concluded that such benefit meets the
more-likely-than-not recognition criteria as of December 31, 2004.
Years ended December 31,
------------------------------------
2003 2004 2005
---- ---- ----
Net sales $ 35.3 $ 41.7 $ -
======== ======== =======
Operating loss $ (5.5) $ (3.5) $ (.9)
Interest expense (1.4) (1.5) -
Income tax benefit 2.6 4.6 .4
Minority interest in losses 1.4 3.9 .2
-------- -------- -------
$ (2.9) $ 3.5 $ (.3)
======== ======== =======
Condensed balance sheet data for Thomas Regout, included in the Company's
consolidated balance sheets, is presented below.
December 31,
2004
----
Current assets $ 18.0
Noncurrent assets 11.0
-------
$ 29.0
=======
Current liabilities $ 5.0
Net assets 24.0
-------
$ 29.0
=======
Included in the net assets of Thomas Regout are certain intercompany loans
payable by Thomas Regout to CompX which are eliminated in the Company's
consolidated balance sheet.
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31, 2004 and 2005
(In thousands)
2004 2005
---- ----
Current assets:
Cash and cash equivalents $ 45,029 $ 20,149
Restricted cash equivalents 3,131 -
Restricted marketable debt securities 6,713 5,428
Accounts and notes receivable 478 100
Receivable from subsidiaries and affiliates 2,001 3,259
Prepaid expenses 151 50
Deferred income taxes 12,435 5,026
---------- ----------
Total current assets 69,938 34,012
---------- ----------
Other assets:
Marketable securities 56,707 65,175
Restricted marketable debt securities 3,848 -
Investment in subsidiaries 119,278 107,664
Investment in Kronos Worldwide, Inc. 175,578 146,774
Other 301 269
Property and equipment, net 646 642
---------- ----------
Total other assets 356,358 320,524
---------- ----------
$ 426,296 $ 354,536
========== ==========
Current liabilities:
Payable to subsidiaries and affiliates $ 1,644 $ 518
Accounts payable and accrued liabilities 11,140 8,803
Income taxes 1,050 273
Accrued environmental costs 11,216 11,113
Deferred taxes 23,842 -
---------- ----------
Total current liabilities 48,892 20,707
---------- ----------
Noncurrent liabilities:
Deferred income tax 98,157 88,398
Accrued environmental costs 23,050 12,420
Accrued pension cost 7,968 942
Accrued postretirement benefits cost 10,572 10,141
Other 4,028 2,246
---------- ----------
Total noncurrent liabilities 143,775 114,147
---------- ----------
Stockholders' equity 233,629 219,682
---------- ----------
$ 426,296 $ 354,536
========== ==========
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Operations
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
Revenues and other income (expense):
Equity in income from continuing operations of
subsidiaries and affiliates $ 92,192 $ 169,966 $ 27,477
Interest and dividends 1,858 1,420 3,105
Interest income from subsidiaries 1,184 13,649 -
Securities transactions, net 2,737 2,113 14,603
Litigation settlements gains, net 823 552 2,970
Disposition of property & equipment 10,325 99 -
Other income, net 414 223 335
---------- ---------- ----------
109,533 188,022 48,490
---------- ---------- ----------
Costs and expenses:
General and administrative 54,154 17,984 19,779
Interest 909 409 -
---------- ---------- ----------
55,063 18,393 19,779
---------- ---------- ----------
Income before income taxes 54,470 169,629 28,711
Provision for income taxes (benefit) 72,777 10,368 (4,503)
---------- ---------- ----------
Income (loss) from continuing operations (18,307) 159,261 33,214
Discontinued operations (2,874) 3,552 (326)
---------- ---------- ----------
Net income (loss) $ (21,181) $ 162,813 $ 32,888
========== ========== ==========
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Cash Flows
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (21,181) $ 162,813 $ 32,888
Distributions from Kronos 7,000 23,168 17,593
Distributions from CompX - 1,297 5,224
Noncash interest expense (income), net (869) - -
Deferred income taxes 53,220 (3,621) (20,612)
Equity in earnings of subsidiaries
and investments:
Continuing operations (92,192) (169,966) (27,477)
Discontinued operations 2,874 684 326
Securities transactions (2,737) (2,113) (14,603)
Other, net (11,304) (1,203) (1,225)
Net change in assets and liabilities 45,244 (3,967) (2,204)
---------- ---------- ----------
Net cash provided (used) by
operating activities (19,945) 7,092 (10,090)
---------- ---------- ----------
Cash flows from investing activities:
Repayment of loans by affiliates - 31,423 -
Change in restricted cash equivalents
and restricted marketable debt
securities, net 42,744 14,460 3,591
Proceeds from disposition of property
and equipment 12,420 - -
Proceeds from sales of securities - 2,745 19,176
Purchase of CompX common stock - - (3,645)
---------- ---------- ----------
Net cash provided by investing
activities 55,164 48,628 19,122
---------- ---------- ----------
Cash flows from financing activities:
Loans from affiliates, net 2,620 (22,320) -
Dividends paid (38,183) - (36,419)
Common stock issued - 915 2,507
Treasury stock reissued 1,738 8,286 -
---------- ---------- ----------
Net cash used by financing activities (33,825) (13,119) (33,912)
---------- ---------- ----------
Net change during the year from operating
investing and financing activities 1,394 42,601 (24,880)
Balance at beginning of year 1,034 2,428 45,029
---------- ---------- ----------
Balance at end of year $ 2,428 $ 45,029 $ 20,149
========== ========== ==========
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Notes to Condensed Financial Information
Note 1 - Basis of presentation:
The Consolidated Financial Statements of NL Industries, Inc. and the
related Notes to Consolidated Financial Statements are incorporated herein by
reference. The accompanying financial statements reflect NL Industries, Inc.'s
investment in Kronos Worldwide, Inc., CompX International, Inc. and NL's other
subsidiaries on the equity method of accounting.
Note 2 - Investment in and advances to subsidiaries:
December 31,
-------------------------
2004 2005
---- ----
(In thousands)
Current:
Receivable from:
Kronos $ - $ 145
EWI - income taxes 130 166
Valhi - income taxes 1,381 2,073
153506 Canada 410 413
CompX - income taxes 52 462
Other 28 -
--------- ---------
$ 2,001 $ 3,259
========= =========
Payable to:
CompX - income taxes $ 1,253 $ -
Valhi - income taxes 86 -
Tremont 288 221
EMS - 297
Other 17 -
--------- ---------
$ 1,644 $ 518
========= =========
December 31,
-------------------------
2004 2005
---- ----
(In thousands)
Investment in:
CompX $ 90,045 $ 89,625
Other subsidiaries 29,233 18,039
--------- ---------
$ 119,278 $ 107,664
========= =========
Years ended December 31,
----------------------------------------
2003 2004 2005
---- ---- ----
(In thousands)
Equity in income from continuing operations
of subsidiaries and affiliates:
Kronos $ 86,642 $158,373 $ 25,549
CompX 3,747 6,039 592
Other subsidiaries 1,803 5,554 1,336
-------- -------- --------
$ 92,192 $169,966 $ 27,477
======== ======== ========
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at (recoveries) Balance
beginning charged to Net Currency at end
of year costs and deductions translation Other of year
Description expenses (1)/(2)
- --------------------------------- ----------- ------------ ---------- ----------- ------- ---------
Year ended December 31, 2003:
Allowance for doubtful accounts $ 3,417 $ 624 $ (537) $ 491 $ - $ 3,995
======= ======= ======= ======= ====== =======
Allowance for slow moving and
obsolete inventories $ 9,314 $ 2,076 $(1,699) $ 182 $ - $ 9,873
======= ======= ======= ======= ====== =======
Accrual for planned major
maintenance activities $ 3,986 $ 5,337 $(3,896) $ 900 $ - $ 6,327
======= ======= ======= ======= ====== =======
Year ended December 31, 2004:
Allowance for doubtful accounts $ 3,995 $ 188 $ (324) $ (2) $ (2,849) $ 1,008
======= ======= ======= ======= ====== =======
Allowance for slow moving and
obsolete inventories $ 9,873 $ 1,242 $(1,969) $ 29 $ (7,959) $ 1,216
======= ======= ======= ======= ====== =======
Accrual for planned major
maintenance activities $ 6,327 $ 5,311 $(4,993) $ (156) $ (6,489) $ -
======= ======= ======= ======= ====== =======
Year ended December 31, 2005:
Allowance for doubtful accounts $ 1,008 $ (127) $ (18) $ 3 $ (554) $ 312
======= ======= ======= ======= ====== =======
Allowance for slow moving and
obsolete inventories $ 1,216 $ 373 $ (652) $ 2 $ 254 $ 1,193
======= ======= ======= ======= ====== =======
Note - Certain information has been omitted from this Schedule because it
is disclosed in the notes to the Consolidated Financial Statements.
Information is presented for continuing operations only.
(1) Effective July 1, 2004 NL commenced accounting for its investment in
Kronos Worldwide, Inc. using the equity method and ceased
consolidation of Kronos' operations at that time.
(2) For the year ended December 31, 2005, acquisition and/or disposition
of business unit.