SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2006 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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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934).
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes No X
--- ---
Number of shares of the Registrant's common stock outstanding on April 28, 2006:
48,563,034.
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 2005; March 31, 2006
(Unaudited) 1
Consolidated Statements of Income -
Three months ended March 31, 2005 and 2006
(Unaudited) 3
Consolidated Statements of Comprehensive Income (Loss) -
Three months ended March 31, 2005 and 2006
(Unaudited) 4
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 2006
(Unaudited) 5
Consolidated Statements of Cash Flows -
Three months ended March 31, 2005 and 2006
(Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 33
Item 4. Controls and Procedures 33
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 1A. Risk Factors 35
Item 6. Exhibits 35
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, March 31,
2005 2006
------------ -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 76,912 $ 68,088
Restricted cash and cash equivalents 4,327 3,835
Restricted marketable debt securities 9,265 9,405
Accounts and other receivables, net 23,392 25,507
Refundable income taxes 424 851
Receivable from affiliates 3,291 2,551
Inventories, net 22,538 22,005
Prepaid expenses 1,718 1,165
Deferred income taxes 7,295 7,202
---------- ----------
Total current assets 149,162 140,609
---------- ----------
Other assets:
Marketable equity securities 87,120 83,352
Investment in Kronos Worldwide, Inc. 146,774 149,125
Deferred income taxes 4 -
Goodwill 27,240 27,418
Other, net 5,499 5,859
---------- ----------
Total other assets 266,637 265,754
---------- ----------
Property and equipment:
Land 8,511 9,202
Buildings 28,001 28,483
Equipment 110,917 113,041
Construction in progress 2,015 3,525
---------- ----------
149,444 154,251
Less accumulated depreciation and amortization 80,540 85,242
---------- ----------
Net property and equipment 68,904 69,009
---------- ----------
$ 484,703 $ 475,372
========== ==========
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, March 31,
2005 2006
------------ -----------
(Unaudited)
Current liabilities:
Current maturities of long-term debt $ 171 $ 52
Accounts payable 11,079 9,817
Accrued liabilities 29,859 27,757
Accrued environmental costs 13,302 12,028
Payable to affiliates 982 1,138
Income taxes 599 360
---------- ----------
Total current liabilities 55,992 51,152
---------- ----------
Noncurrent liabilities:
Long-term debt 1,425 41
Accrued pension costs 942 468
Accrued postretirement benefits costs 10,141 9,644
Accrued environmental costs 41,645 40,867
Deferred income taxes 107,000 107,073
Other 2,246 2,186
---------- ----------
Total noncurrent liabilities 163,399 160,279
---------- ----------
Minority interest 45,630 45,578
---------- ----------
Stockholders' equity:
Common stock 6,070 6,070
Additional paid-in capital 363,233 363,242
Retained earnings - 423
Accumulated other comprehensive income (loss):
Marketable securities 34,084 31,586
Currency translation (141,018) (140,271)
Pension liabilities (42,687) (42,687)
---------- ----------
Total stockholders' equity 219,682 218,363
---------- ----------
$ 484,703 $ 475,372
========== ==========
Commitments and contingencies (Notes 10 and 12)
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2005 and 2006
(In thousands, except per share data)
(Unaudited)
2005 2006
---- ----
Net sales $ 46,843 $ 47,029
Cost of sales 36,560 35,401
---------- ----------
Gross margin 10,283 11,628
Selling, general and administrative expense 6,122 6,718
Other operating income (expense):
Currency transaction losses, net (54) (41)
Disposition of property and equipment (4) (73)
Insurance recoveries - 2,236
Other income 265 13
Corporate expense (5,837) (4,096)
---------- ----------
Income (loss) from operations (1,469) 2,949
Equity in earnings of Kronos Worldwide, Inc. 7,790 5,381
Other income (expense):
Trade interest income 21 75
Interest and dividend income from affiliates 619 471
Other interest income 866 868
Securities transactions, net 14,578 57
Interest expense (80) (61)
---------- ----------
Income from continuing operations before
income taxes and minority interest 22,325 9,740
Provision for income taxes 6,778 2,496
Minority interest in after-tax earnings 731 751
---------- ----------
Income from continuing operations 14,816 6,493
Discontinued operations (326) -
---------- ----------
Net income $ 14,490 $ 6,493
========== ==========
Basic and diluted net income per share $ .30 $ .13
========== ==========
Weighted-average shares used in the calculation
of net income per share:
Basic 48,490 48,563
Dilutive impact of stock options 71 24
---------- ----------
Diluted 48,561 48,587
========== ==========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three months ended March 31, 2005 and 2006
(In thousands)
(Unaudited)
2005 2006
---- ----
Net income $ 14,490 $ 6,493
---------- ----------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment 10,805 (2,498)
Currency translation adjustment 1,308 747
---------- ----------
Total other comprehensive income (loss) 12,113 (1,751)
---------- ----------
Comprehensive income $ 26,603 $ 4,742
========== ==========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2006
(In thousands)
(Unaudited)
Accumulated other
comprehensive income (loss)
Additional -------------------------------------------
Common paid-in Retained Marketable Currency Pension
stock capital earnings securities translation liabilities Total
----------------------------------------------------------------------------------------
Balance at December 31, 2005 $6,070 $363,233 $ - $ 34,084 $(141,018) $ (42,687) $219,682
Net income - - 6,493 - - - 6,493
Issuance of common stock - 9 - - - - 9
Dividends - - (6,070) - - - (6,070)
Other comprehensive income (loss) , net - - - (2,498) 747 - (1,751)
------ -------- -------- --------- --------- --------- --------
Balance at March 31, 2006 $6,070 $363,242 $ 423 $ 31,586 $(140,271) $ (42,687) $218,363
====== ======== ======== ========= ========= ========= ========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2005 and 2006
(In thousands)
(Unaudited)
2005 2006
---- ----
Cash flows from operating activities:
Net income $ 14,490 $ 6,493
Depreciation and amortization 2,807 2,790
Deferred income taxes:
Continuing operations 3,012 1,011
Discontinued operations (187) -
Minority interest:
Continuing operations 731 751
Discontinued operations (151) -
Equity in earnings of Kronos Worldwide, Inc. (7,790) (5,381)
Dividends from Kronos Worldwide, Inc. 4,456 4,379
Securities transactions, net (14,578) (57)
Benefit plan expense less than cash funding:
Defined benefit pension plans (217) (662)
Other postretirement benefit plans (289) (498)
Other, net 875 340
Change in assets and liabilities:
Accounts and other receivables (4,246) (2,115)
Inventories (46) 343
Prepaid expenses 216 550
Accrued environmental costs (975) (2,052)
Accounts payable and accrued liabilities (2,930) (3,409)
Income taxes 3,509 (511)
Accounts with affiliates 589 806
Other, net (3,162) (766)
---------- ----------
Net cash provided by (used in)
operating activities (3,886) 2,012
---------- ----------
Cash flows from investing activities:
Capital expenditures (5,253) (2,593)
Change in restricted cash equivalents and
marketable debt securities, net 1,046 550
Proceeds from disposal of:
Business unit 18,094 -
Kronos common stock 19,047 -
Marketable securities 4,173 3,746
Purchase of:
CompX common stock - (404)
Marketable securities (3,161) (3,967)
Cash of disposed business unit (4,006) -
Other, net 6 7
---------- ----------
Net cash provided by (used in)
investing activities 29,946 (2,661)
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NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 2005 and 2006
(In thousands)
(Unaudited)
2005 2006
---- ----
Cash flows from financing activities:
Indebtedness:
Principal payments $ (10) $ (1,476)
Deferred financing costs paid (28) (105)
Cash dividends paid - (6,070)
Distributions to minority interest (602) (578)
Proceeds from issuance of common stock:
NL common stock 2,413 9
CompX common stock 191 -
---------- ----------
Net cash provided by (used in)
financing activities 1,964 (8,220)
---------- ----------
Cash and cash equivalents - net change from:
Operating, investing and financing activities 28,024 (8,869)
Currency translation 217 45
Cash and cash equivalents at beginning of period 99,185 76,912
---------- ----------
Cash and cash equivalents at end of period $ 127,426 $ 68,088
========== ==========
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized $ 55 $ 45
Income taxes, net 3,050 945
Noncash investing activity - note receivable
received upon disposal of business unit $ 4,179 $ -
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Organization and basis of presentation:
NL Industries, Inc. (NYSE: NL) is a subsidiary of Valhi, Inc. (NYSE: VHI).
At March 31, 2006, (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.
The Company's ownership of CompX (NYSE: CIX) is held principally by CompX
Group, Inc. The Company owns 82.4% of CompX Group, Inc. and Titanium Metals
Corporation ("TIMET") (NYSE: TIE), an affiliate of Valhi, 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. At March 31, 2006, NL owned 70% of CompX common stock, which
represents NL's ownership interest in CompX Group multiplied by CompX Group's
ownership interest in CompX and an additional 2% of CompX owned directly by NL.
At March 31, 2006, NL also directly owned 36% of Kronos Worldwide, Inc. (NYSE:
KRO) CompX, Kronos and TIMET each file periodic reports with the Securities and
Exchange Commission ("SEC") pursuant to the Securities Exchange Act of 1934, as
amended.
The consolidated balance sheet at March 31, 2006, and the consolidated
statements of income, comprehensive income (loss), stockholders' equity and cash
flows for the interim periods ended March 31, 2005 and 2006, have been prepared
by the Company, without audit, in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the consolidated financial position, results of
operations and cash flows have been made.
The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted. The consolidated balance
sheet data as of December 31, 2005 was derived from the Company's audited
consolidated financial statements at that date, but does not include all
disclosures required by GAAP, as permitted by regulations of the SEC. The
accompanying consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
2005 (the "2005 Annual Report").
Note 2 - Accounts and other receivables, net:
December 31, March 31,
2005 2006
------------ ----------
(In thousands)
Trade receivables $ 20,921 $ 23,134
Other receivables 2,783 2,713
Allowance for doubtful accounts (312) (340)
-------- --------
$ 23,392 $ 25,507
======== ========
Note 3 - Inventories, net:
December 31, March 31,
2005 2006
------------ ----------
(In thousands)
Raw materials $ 7,098 $ 6,423
In process products 9,899 9,876
Finished products 5,541 5,706
-------- --------
$ 22,538 $ 22,005
======== ========
Note 4 - Marketable equity securities:
At December 31, 2005 and March 31, 2006, the Company owned approximately
4.7 million shares of Valhi common stock with a quoted market price of $17.70
per share (December 31, 2005 quoted market price - $18.50 per share).
Note 5 - Investment in Kronos:
At March 31, 2006, the Company held 17.5 million shares of Kronos with a
quoted market price of $30.36 per share, or an aggregate market value of $532
million.
At March 31, 2006, Kronos reported total assets of $1.3 billion and
stockholders' equity of $416.5 million. Kronos' total assets at March 31, 2006
include current assets of $554.3 million, net property and equipment of $416.9
million, deferred income taxes of $213.1 million, and an investment in a TiO2
manufacturing joint venture of $118.1 million. Kronos' total liabilities at
March 31, 2006 include current liabilities of $198.3 million, long-term debt of
$493.3 million, accrued postretirement benefits and pension costs aggregating
$147.9 million and deferred income taxes of $54.0 million.
During the three months ended March 31, 2006, Kronos reported net sales of
$304.3 million, income from operations of $34.4 million and net income of $15
million (2005: $291.9 million, $46.4 million and $21.4 million, respectively).
Note 6 - Other noncurrent assets, net:
December 31, March 31,
2005 2006
------------ ----------
(In thousands)
Definite-lived customer list intangible asset, net $ 1,115 $ 1,022
Patents and other intangible assets, net 2,317 2,221
Other 2,067 2,616
-------- --------
$ 5,499 $ 5,859
======== ========
Note 7 - Accrued liabilities:
December 31, March 31,
2005 2006
------------ ----------
(In thousands)
Employee benefits $ 10,933 $ 9,196
Professional fees 5,269 5,113
Other 13,657 13,448
-------- --------
$ 29,859 $ 27,757
======== ========
Note 8 - Other noncurrent liabilities:
December 31, March 31,
2005 2006
------------ ----------
(In thousands)
Insurance $ 2,224 $ 1,998
Other 22 188
-------- --------
$ 2,246 $ 2,186
======== ========
Note 9 - Minority interest:
December 31, March 31,
2005 2006
------------ ----------
(In thousands)
Minority interest in net assets -
CompX International Inc. $ 45,630 $ 45,578
======== ========
Three months ended
March 31,
----------------------
2005 2006
---- ----
(In thousands)
Minority interest in net earnings:
CompX International Inc. $ 701 $ 751
NL Environmental Management Services, Inc. 30 -
-------- --------
$ 731 $ 751
======== ========
Note 10 - Provision for income taxes:
Three months ended
March 31,
----------------------
2005 2006
---- ----
(In millions)
Expected tax expense $ 7.8 $ 3.4
Non-U.S. tax rates (.1) (.1)
Incremental U.S. tax and rate differences on (1.1)
equity in earnings (3.8)
Nondeductible expenses .1 -
U.S. state income taxes, net .1 .1
Excess of book basis over tax basis of Kronos -
common stock sold or distributed 2.5
Other, net .2 .2
-------- --------
$ 6.8 $ 2.5
======== ========
Three months ended
March 31,
----------------------
2005 2006
---- ----
(In millions)
Comprehensive provision for
income taxes (benefit) allocable to:
Income from continuing operations $ 6.8 $ 2.5
Discontinued operations .3 -
Retained earnings 3.0 -
Other comprehensive income:
Marketable securities 5.8 (1.3)
Currency translation .3 .5
-------- --------
$ 16.2 $ 1.7
======== ========
Certain non-U.S. tax returns of 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 March 31, 2006).
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.
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.
No assurance can be given that these unresolved 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.
Note 11 - Employee benefit plans:
The components of net periodic defined benefit pension cost (income) are
presented in the table below.
Three months ended
March 31,
----------------------
2005 2006
---- ----
(In thousands)
Interest cost $ 760 $ 765
Expected return on plan assets (1,017) (1,345)
Amortization of net transition obligations (17) (16)
Recognized actuarial losses 100 99
-------- --------
$ (174) $ (497)
======== ========
The components of net periodic postretirement benefits other than pensions
("OPEB") cost are presented in the table below.
Three months ended
March 31,
----------------------
2005 2006
---- ----
(In thousands)
Interest cost $ 211 $ 184
Amortization of prior service credit (72) (28)
-------- --------
$ 139 $ 156
======== ========
Note 12 - 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 prior to 2005) 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 injuries
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 matters 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, legal proceedings
are subject to inherent uncertainties, and there is no assurance that any appeal
would be successful. Therefore it is reasonably possible 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. Various other cases in which NL is a defendant are also pending in
other jurisdictions, and new cases could be 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 March 31, 2006, no receivables for recoveries had 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 first quarter of 2006 is presented in the table below.
Amount
--------------
(In thousands)
Balance at the beginning of the period $ 54,947
Additions charged (credited) to expense, net (142)
Payments, net (1,910)
--------
Balance at the end of the period $ 52,895
========
Amounts recognized in the balance sheet
at the end of the period:
Current liability $ 12,028
Noncurrent liability 40,867
--------
$ 52,895
========
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. At March 31,
2006, the Company had accrued $52.9 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 $79 million.
The Company's estimates of such liabilities have not been discounted to present
value.
At March 31, 2006, there are approximately 20 sites for which the Company
is unable to estimate a range of costs. For these sites, generally the
investigation is in the early stages, and it is either unknown as to whether or
not the Company actually had any association with the site, or if the Company
had 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.
Other litigation. Reference is made to the 2005 Annual Report for a
discussion of certain other legal proceedings to which the Company is a party.
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
remain pending, involving a total of approximately 10,600 plaintiffs and their
spouses following the administrative dismissal of approximately 1,500 claims of
plaintiffs in March 2006. NL has not accrued any amounts for this litigation
because liability that NL might incur, 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 April 2006, NL was served with a complaint in Murphy, et al. v. NL
Industries, Inc., et al. (United States District Court, District of New Jersey,
Case No. 2:06-cv-01535-WHW-SDW). The plaintiffs, three former minority
shareholders of NL Environmental Management Services, Inc. ("EMS"), seek damages
related to their equity investment in EMS. The defendants named in the complaint
are Contran, Valhi, NL, EMS and certain current or former officers or directors
of NL or EMS. EMS was formed in 1998 as a majority-owned environmental
management subsidiary that contractually assumed certain of NL's environmental
liabilities. In June 2005, EMS received notices from the three minority
shareholders indicating that they were 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. In
June 2005 EMS set aside funds as payment for the shares of EMS. As of March
2006, however, the shareholders had not tendered their shares or received any of
such funds. The plaintiffs claim that, in preparing the valuation of the
plaintiffs' preferred shares for purchase by EMS, the defendants engaged in a
pattern of racketeering activity and a conspiracy in violation of United States
and New Jersey laws. In addition, the plaintiffs allege that the defendants have
committed minority shareholder oppression, fraud, breach of fiduciary duty,
civil conspiracy, aiding and abetting fraud, aiding and abetting breach of
fiduciary duty, breach of contract and tortious interference with economic
relations under New Jersey laws. The defendants believe that these claims are
without merit and intend to deny all allegations of wrongdoing and liability and
to defend against all such claims vigorously.
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.
Insurance coverage claims
Reference is made to the 2005 Annual Report for a discussion of certain
litigation involving NL and certain of its former insurance carriers. Additional
information regarding such litigation, or new litigation, is below.
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). In March 2006, NL's motion to dismiss was denied by the trial court.
In April 2006, NL filed a notice of appeal of the trial court's ruling.
NL Industries, Inc. v. OneBeacon America Insurance Company, et. al.
(District Court for Dallas County, Texas, Case No. 05-11347). In December 2005,
NL filed a motion to remand the case to state 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 NL
under insurance policies issued to NL by plaintiff with respect to certain lead
pigment lawsuits. In April 2006, NL filed a motion to dismiss.
In April 2006, NL filed an action against Certain Underwriters at Lloyds,
London and certain other former insurance companies, captioned NL Industries,
Inc. v. American Re Insurance Company, et. al. (Dallas County Court at Law,
Texas, Case No. CC-06-04523-E) asserting that the defendants have breached their
obligations to NL under such insurance policies with respect to lead pigment and
asbestos claims and seeking a declaratory judgment of each defendant's
obligations to NL under such policies.
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.
Note 13 - Discontinued operations:
Discontinued operations relates to CompX's former Thomas Regout operations
in the Netherlands. In January 2005, CompX completed the sale of such operations
for net proceeds that were approximately $860,000 less than previously estimated
(primarily due to higher expenses associated with the disposal of the Thomas
Regout operations), and discontinued operations in the first quarter of 2005
includes a charge related to such differential ($272,000, net of income tax
benefit and minority interest).
Note 14 - Accounting principles newly adopted in 2006:
Inventory costs. The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 151, "Inventory Costs, an amendment of ARB No. 43,
Chapter 4," as of January 1, 2006 for inventory costs incurred on or after such
date. 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 is 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's production cost accounting had already complied with the
requirements of SFAS No. 151, and therefore adoption of SFAS No. 151 did not
have a material effect on its consolidated financial statements.
Stock options. As permitted by regulations of the Securities and Exchange
Commission ("SEC") the Company adopted 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 Accounting Principles Board Opinion
("APBO") No. 25, "Accounting for Stock Issued to Employees". The Company is
generally 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, if 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, 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 (referred to
as the modified prospective method in SFAS No. 123R). Additionally, as of
January 1, 2006, the Company recognizes compensation cost 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 was not material, the effect of adopting SFAS
No. 123R, in so far as it relates to existing stock options, did not have a
material effect on the Company's consolidated financial statements. 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
effect on the Company's consolidated financial statements could be material.
Under SFAS No. 123R, the 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, is 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 reflects the
effect of cash paid for income taxes exclusive of such cash income tax benefit.
The aggregate amount of such income tax benefits recognized as a component of
cash flows from financing activities was nil in the first quarter of 2006.
SFAS No. 123R also requires certain expanded disclosures regarding the
Company's stock options, and such expanded disclosures were provided in the 2005
Annual Report.
Prior to January 1, 2006, the Company accounted for stock-based employee
compensation in accordance with APBO No. 25, and its various interpretations.
Under APBO No. 25, no compensation cost is generally recognized for fixed stock
options in which the exercise price is greater than or equal to the market price
on the grant date. Prior to 2005, and following the cash settlement of certain
stock options held by employees of NL, the Company commenced accounting for its
stock options using the variable accounting method of APBO No. 25, because NL
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 stock options with an exercise
price at least equal to the market price on the date of grant) is accrued as an
expense, with subsequent increases (decreases) in the Company's market price
resulting in the recognition of additional compensation expense (income).
Following adoption of SFAS No. 123R effective January 1, 2006, the Company will
continue to account for its remaining stock options in a manner similar to the
variable accounting method of APBO No. 25, as required by the guidance of SFAS
No. 123R.
Net compensation cost recognized by the Company in accordance with APBO No.
25 was not significant in the first quarter of 2005, and net compensation income
recognized by the Company was approximately $200,000 in the first quarter of
2006.
If the Company and its subsidiaries and affiliates had each elected to
account for their respective stock-based employee compensation related to stock
options in accordance with the fair value-based recognition provisions of SFAS
No. 123 for all awards granted subsequent to January 1, 1995, the effect on the
Company's results of operations in the first quarter of 2005 would not have been
material.
Note 15 - Accounts with affiliates:
December 31, March 31,
2005 2006
------------ ----------
(In thousands)
Current receivables from affiliates:
Income taxes receivable from Valhi $ 3,146 $ 2,087
Kronos - trade items 145 464
-------- --------
$ 3,291 $ 2,551
======== ========
Current payables to affiliates:
Income taxes payable to Valhi $ 771 $ 917
Tremont Corporation - trade items 211 221
-------- --------
$ 982 $ 1,138
======== ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
General
The Company reported net income of $6.5 million, or $.13 per diluted share,
in the first quarter of 2006 compared to income of $14.5 million, or $.30 per
diluted share, in the first quarter of 2005.
The decrease in the Company's diluted earnings per share from the first
quarter of 2005 compared to the first quarter of 2006 is due primarily to the
net effects of (i) higher component products income from operations, (ii) lower
earnings attributable to Kronos, (iii) security transactions gains from the sale
of shares of Kronos common stock in the first quarter of 2005 and (iv) lower
corporate expense. The Company currently believes its net income in 2006 will be
lower than 2005 due primarily to the effects of security transaction gains
recognized in 2005 and lower earnings attributable to Kronos.
Income from continuing operations in the first quarter of 2006 includes
income of $.03 per diluted share related to certain insurance recoveries
received by the Company. Income from continuing operations in the first quarter
of 2005 includes income of $.16 per diluted share related to the Company's sales
of shares of Kronos common stock. Such amounts are more fully described below or
in the 2005 Annual Report.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts,
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "could," "anticipates," "expected" or comparable terminology, or by
discussions of strategies or trends. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve substantial risks and uncertainties that
could significantly impact expected results, and actual future results could
differ materially from those described in such forward-looking statements. While
it is not possible to identify all factors, the Company continues to face many
risks and uncertainties. The factors that could cause actual future results to
differ materially from those described herein are the risks and uncertainties
discussed in this Quarterly Report and those described from time to time in the
Company's other filings with the SEC include, but are 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 benefit of which
has been recognized under the "more-likely-than-not" recognition criteria,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government laws and regulations and possible changes therein (such as
changes in government regulations which might impose various obligations on
present and former manufacturers of lead pigment and lead-based paint,
including NL, with respect to asserted health concerns associated with the
use of such products),
o The ultimate resolution of pending litigation (such as NL's lead pigment
litigation and litigation surrounding environmental matters), and
o Possible future litigation.
Should one or more of these risks materialize (or the consequences of such
a development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of changes in information, future
events or otherwise.
CompX International Inc.
Three months ended
March 31,
---------------------- %
2005 2006 Change
---- ---- ------
(In millions)
Net sales $ 46.8 $ 47.0 *
Income from operations attributable to CompX 4.1 4.8 +17%
_________________________
* less than 1% increase
Component product sales increased slightly in the first quarter of 2006 as
compared to the same quarter of 2005 as higher volumes of security product sales
were offset by decreases in sales for certain other products resulting from
increased competition. Component products income from operations increased due
to the favorable impact of CompX's continued focus on reducing costs across all
segments and a favorable change in product mix resulting from increases in sales
of certain higher margin security products.
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 (principally in
Canada) are denominated in the U.S. dollar. Most raw materials, labor and other
production costs for such non-U.S. operations are denominated primarily in local
currencies. Consequently, the translated U.S. dollar values of CompX's foreign
sales and operating results are subject to currency exchange rate fluctuations
which may favorably or unfavorably impact reported earnings and may affect
comparability of period-to-period operating results. Fluctuations in foreign
currency exchange rates did not have a significant effect on sales or operating
income in the first quarter of 2006 as compared to the first quarter of 2005.
The component product areas where CompX operates are highly competitive in
terms of product pricing and features. CompX's strategy is to focus on areas
where it can provide products that have value-added, user-oriented-features
which enable its customers to compete more effectively in their markets. One of
the focal points of this strategy is to replace low margin, commodity type
products with higher margin user-oriented feature products. Additionally, CompX
believes that its focus on collaborating with customers to identify solutions
and its ability to provide a high level of customer service enable it to compete
effectively. In response to competitive pricing pressure, CompX continuously
focuses on reducing production cost through product reengineering, improvement
in manufacturing processes or moving production to lower cost facilities.
Raw material prices, especially steel, zinc and copper continue to be
volatile putting pressure on CompX's margins. CompX actively seeks to mitigate
the margin impact by entering into raw material supply agreements in order to
stabilize the cost for a period of time, execute larger volume tactical spot
purchases at prices that are expected to be favorable compared to future prices
and, if necessary, pass on the cost increases to customers through surcharges
and price increases.
Equity in earnings of Kronos Worldwide, Inc.
Three months ended
March 31,
---------------------- %
2005 2006 Change
---- ---- ------
(In millions)
Kronos historical:
Net sales $291.9 $304.3 +4%
====== ======
Income from operations $ 46.5 $ 34.4 -26%
Other general corporate, net .4 .6
Interest expense (11.8) (10.7)
------ ------
35.1 24.3
Income tax expense 13.7 9.3
------ ------
Net income $ 21.4 $ 15.0
====== ======
Equity in earnings of Kronos Worldwide, Inc. $ 7.8 $ 5.4
====== ======
TiO2 operating statistics:
Sales volumes* 114 124 +9%
Production volumes* 122 127 +4%
Percentage change in Ti02 average selling
prices:
Using actual foreign currency exchange rates -3%
Impact of changes in foreign currency
exchange rates +5%
---
In billing currencies +2%
===
_______________________________
* Thousands of metric tons
Relative changes in Kronos' TiO2 sales and income from operations during
the 2005 and 2006 periods presented are primarily due to (i) relative changes in
TiO2 average selling prices, (ii) relative changes in selling volumes and (iii)
relative changes in foreign currency exchange rates. Selling prices (in billing
currencies) for TiO2, Kronos' principal product, were generally: increasing in
the first half of 2005, decreasing during the last half of 2005 and increasing
during the first quarter of 2006.
Kronos' sales increased $12.4 million (4%) in the first quarter of 2006
compared to the first quarter of 2005 due to the net effects of higher average
TiO2 selling prices (in billing currencies), higher TiO2 selling volumes and the
unfavorable effect of fluctuations in foreign currency exchange rates, which
decreased 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 in
the first quarter of 2006 were 2% higher as compared to the first quarter of
2005. When translated from billing currencies to U.S. dollars using actual
foreign currency exchange rates prevailing during the respective periods,
Kronos' average TiO2 selling prices in the first quarter of 2006 decreased 3%
compared to the first quarter of 2005.
Kronos' sales are denominated in various currencies, including the U.S.
dollar, the euro, other major European currencies and the Canadian dollar. The
disclosure of the percentage change in Kronos' average TiO2 selling prices in
billing currencies (which excludes the effects of fluctuations in the value of
the U.S. dollar relative to other currencies) is considered a "non-GAAP"
financial measure under regulations of the SEC. The disclosure of the percentage
change in Kronos' average TiO2 selling prices using actual foreign currency
exchange rates prevailing during the respective periods is considered the most
directly comparable financial measure presented in accordance with GAAP ("GAAP
measure"). Kronos discloses percentage changes in its average TiO2 prices in
billing currencies because Kronos believes such disclosure provides useful
information to investors to allow them to analyze such changes without the
impact of changes in foreign currency exchange rates, thereby facilitating
period-to-period comparisons of the relative changes in average selling prices
in the actual various billing currencies. Generally, when the U.S. dollar either
strengthens or weakens against other currencies, the percentage change in
average selling prices in billing currencies will be higher or lower,
respectively, than such percentage changes would be using actual exchange rates
prevailing during the respective periods. The difference between the 3% decrease
in Kronos' average TiO2 selling prices during the first quarter of 2006 as
compared to the first quarter of 2005 using actual foreign currency exchange
rates prevailing during the respective periods (the GAAP measure), and the 2%
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' TiO2 sales volumes in the first quarter of 2006 increased 9%
compared to the first quarter of 2005, due primarily to higher sales volumes in
the United States and slightly higher sales volumes in Europe and in export
markets offsetting the effects of lower sales volumes in Canada. Demand for TiO2
has remained strong in the first quarter of 2006, and while Kronos believes that
the strong demand for TiO2 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' income from operations
comparisons were favorably impacted by higher production levels, which increased
4% in the first quarter of 2006 as compared to the same period in 2005. Kronos'
operating rates were near full capacity in both periods, and Kronos' production
and sales volumes in the first quarter of 2006 were new records for Kronos for a
first quarter.
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, decreased TiO2 sales by a net $16 million in the first
quarter of 2006 as compared to the first quarter of 2005. Fluctuations in the
value of the U.S. dollar relative to other currencies similarly impacted Kronos'
foreign currency-denominated operating expenses. Kronos' operating costs that
are not denominated in the U.S. dollar, when translated into U.S. dollars, were
higher in the first quarter of 2006 as compared to the same period in 2005.
Overall, currency exchange rate fluctuations resulted in approximately a net $5
million decrease in Kronos' income from operations in the first quarter of 2006
as compared to the first quarter of 2005.
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 the remainder of 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' 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 chloride
process 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 additional capacity expected to be available in
2007 through its continued debottlenecking efforts.
Kronos expects its income from operations in 2006 will continue to be
somewhat lower than 2005. 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' interest expense relates principally to Kronos International,
Inc.'s ("KII") Senior Secured Notes. In April 2006, KII called all of its 8.875%
Senior Secured Notes for redemption on May 11, 2006 at 104.437% of their
aggregate principal amount of euro 375 million (an aggregate of $470.2 million
at March 31, 2006 exchange rates). Funds for such redemption were provided by
KII's issuance of an aggregate of euro 400 million principal amount of new 6.5%
Senior Secured Notes due April 2013, issued on April 11, 2006 at 99.306% of
their principal amount. Kronos expects to recognize a $21 million pre-tax charge
in the second quarter related to the early extinguishment of the 8.875% Senior
Secured Notes, consisting of the call premium on such Notes and the net
write-off of deferred financing costs and existing unamortized premium related
to such Notes.
General corporate items
Interest expense. Substantially all of the interest expense relates to
CompX. Interest expense related to CompX declined in the first quarter of 2006
compared to 2005 due primarily to lower average levels of outstanding debt.
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. During the first quarter of 2006,
NL received approximately $750,000 under such agreement. The aggregate amount
that NL will ultimately recover from such carrier with respect to such defense
costs incurred by NL is not yet determinable.
Insurance recoveries in the first quarter of 2006 also include
approximately $1.5 million in settlements NL received from certain of its former
insurance carriers. These settlements, as well as similar prior settlements NL
reached in the past few years, resolved court proceedings in which NL had sought
reimbursement from carriers for legal defense costs and indemnity coverage for
certain of NL's environmental remediation expenditures. No further material
settlements relating to litigation concerning environmental remediation
coverages are expected.
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 expense. Net general corporate expenses in the first
quarter of 2006 were lower than the same period of 2005 due primarily to lower
environmental remediation and legal expenses of NL. Net general corporate
expenses in calendar 2006 are currently expected to be higher than 2005,
primarily due to higher expected legal expenses of NL resulting from an increase
in litigation and related expenses. However, obligations for environmental
remediation are difficult to assess and estimate and no assurance can be given
that actual costs will not exceed accrued amounts or that costs will not be
incurred with respect to sites for which no estimate of liability can presently
be made. See Note 12 to the Consolidated Financial Statements.
Provision for income taxes
The principal reasons for the difference between the Company's effective
income tax rate and the U.S. federal statutory income tax rates are explained in
Note 10 to the Consolidated Financial Statements.
Minority interest
See Note 9 to the Consolidated Financial Statements.
Discontinued operations.
See Note 13 to the Consolidated Financial Statements.
Accounting principles newly adopted in 2006.
See Note 14 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Consolidated cash flows
Summary
The Company's primary source of liquidity on an ongoing short-term and
long-term 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.
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 and deferred income taxes.
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 currently pay
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. Relative
changes in accounts receivable are affected by, among other things, the timing
of sales and the collection of the resulting receivable. Relative changes in
inventories, 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 the environmental accrual is recognized and
the period in which the remediation expenditure is actually made.
Cash flows from operating activities increased from $3.9 million used by
operating activities in the first three months of 2005 to $2.0 million of cash
provided by operating activities in the first three months of 2006. This $5.9
million increase was due primarily to the net effects of (i) lower net income of
$8.0 million, (ii) lower deferred income taxes of $1.8 million, (iii) a lower
amount of net cash used from relative changes in the Company's inventories,
receivables, payables and accruals of $1.2 million in the first three months of
2006 as compared to the first three months of 2005 (iv) lower equity in earnings
from Kronos of $2.4 million and (v) lower cash paid for income taxes of $2.1
million. Relative changes in accounts receivable are affected by, among other
things, the timing of sales and the collection of the resulting receivables.
Relative changes in inventories and accounts payable and accrued liabilities are
affected by, among other things, the timing of raw material purchases and the
payment for such purchases and the relative difference between production
volumes and sales volumes. Relative changes in accrued environmental costs are
affected by, among other things, the period in which recognition of the
environmental accrual is recognized and the period in which the remediation
expenditure is actually made.
Relative changes in working capital assets and liabilities can have a
significant effect on cash flows from operating activities. CompX's average days
sales outstanding related to its continuing operations increased from 40 days at
December 31, 2005 to 44 days at March 31, 2006, due to the timing of collection
on the slightly higher accounts receivable balance at the end of March. CompX's
average number of days in inventory related to its continuing operations was 59
days at December 31, 2005 and 57 days at March 31, 2006. The decrease in days in
inventory is primarily due to lower raw materials inventory.
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,
which are paid by CompX to NL.
Three months ended
March 31,
----------------------
2005 2006
---- ----
(In millions)
Cash provided (used) by operating activities:
CompX $ 1.9 $ 4.0
NL Parent (3.4) .2
Other (1.1) (.9)
Eliminations (1.3) (1.3)
----- -----
$(3.9) $ 2.0
===== =====
Investing and financing activities
Substantially all of the Company's consolidated capital expenditures relate
to CompX. During the first quarter of 2006, (i) NL purchased approximately
26,500 shares of CompX common stock in market transactions for an aggregate of
$404,000, (ii) CompX prepaid certain industrial revenue bonds, reducing debt by
$1.5 million and (iii) NL paid cash dividends of $6.1 million ($.125 per share).
Distributions to minority interest consist of CompX dividends paid to
shareholders other than NL. Other cash flows from financing activities relate
primarily to proceeds from the issuance of NL and CompX common stock upon
exercise of stock options.
At March 31, 2006, there were no amounts outstanding under CompX's credit
facility that matures in January 2009. The Company does not expect it will be
required to use any of its cash flow from operating activities generated during
2006 to repay indebtedness.
Provisions contained in certain of the Company's and its subsidiaries' and
affiliates' credit agreements could result in the acceleration of the applicable
indebtedness prior to its stated maturity for reasons other than defaults from
failing to comply with typical financial covenants. For example, certain credit
agreements allow the lender to accelerate the maturity of the indebtedness upon
a change of control (as defined) of the borrower. In addition, certain credit
agreements could result in the acceleration of all or a portion of the
indebtedness following a sale of assets outside the ordinary course of business,
which provision was waived in connection with CompX's sale of its Thomas Regout
operations.
Off-balance sheet financing arrangements
Other than the operating leases discussed in the 2005 Annual Report, NL nor
any of its subsidiaries or affiliates are parties to any off-balance sheet
financing arrangements.
CompX
Certain of the CompX's sales generated by its non-U.S. operations are
denominated in U.S. dollars. CompX periodically uses currency forward contracts
to manage a 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. CompX has
not entered into these contracts for trading or speculative purposes in the
past, nor does CompX currently anticipate entering into such contracts for
trading or speculative purposes in the future. 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 March 31, 2006, CompX held a series of contracts,
which mature through June 2006, to exchange an aggregate of U.S. $5.2 million
for an equivalent amount of Canadian dollars at an exchange rate of Cdn. $1.16
per U.S. dollar. At March 31, 2006, the actual exchange rate was Cdn. $1.17 per
U.S. dollar. The estimated fair value of such foreign currency forward contracts
at March 31, 2006 is not material.
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.
Kronos
At March 31, 2006, Kronos had cash, cash equivalents and marketable debt
securities of $65.3 million, including restricted balances of $3.6 million, and
Kronos had approximately $124 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 March 31, 2006, Kronos' outstanding debt was comprised of (i) $455.6
million related to KII's Senior Secured Notes and (ii) approximately $38.7
million of other indebtedness, principally $29.8 million related to Kronos' U.S.
bank credit facility which matures in September 2008 and $4.3 million related to
its Canadian bank credit facility which matures in January 2009. In April 2006,
KII called its 8.875% Senior Secured Notes due 2009 for redemption, which
redemption will be funded by KII's new issuance of 6.5% Senior Secured Notes due
2013 issued in April 2006.
Based upon Kronos' expectations for the TiO2 industry and anticipated
demand for Kronos' cash resources as discussed herein, Kronos expects to have
sufficient short-term (defined as the twelve-month period ending March 31, 2007)
and long-term (defined as the five year period ending December 31, 2010, the
time period for which the Company generally does long-term budgeting) liquidity
to meet its obligations including operations, capital expenditures, debt service
and dividends. To the extent that actual developments differ from Kronos'
expectations, Kronos' liquidity could be adversely affected.
See Note 10 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 12 to the
Consolidated Financial Statements with respect to certain legal proceedings with
respect to Kronos.
Certain of the Kronos' sales generated by its non-U.S. operations are
denominated in U.S. dollars. Kronos 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. Kronos has
not entered into these contracts for trading or speculative purposes in the
past, nor does Kronos 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 March 31, 2006, Kronos held a series of contracts,
with expiration dates ranging from April to September 2006, to exchange an
aggregate of U.S. $25.5 million for an equivalent amount of Canadian dollars at
exchange rates ranging from Cdn. $1.16 to Cdn. $1.17 per U.S. dollar. At March
31, 2006, the actual exchange rate was Cdn. $1.17 per U.S. dollar. The estimated
fair value of such foreign currency forward contracts at March 31, 2006 is
insignificant.
KII's assets consist primarily of investments in its operating
subsidiaries, and its ability to service its parent level obligations, including
the Senior Secured Notes, depends in large part upon the distribution of
earnings of its subsidiaries, whether in the form of dividends, advances or
payments on account of intercompany obligation, or otherwise. None of its
subsidiaries have guaranteed the Senior Secured Notes, although Kronos
International has pledged 65% of the common stock or other ownership interest of
certain of its first-tier operating subsidiaries as collateral of such Senior
Secured Notes.
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' net assets, will fluctuate based upon changes in currency
exchange rates.
NL Industries
At March 31, 2006, NL (exclusive of CompX) had cash, cash equivalents and
marketable debt securities of $52.8 million, including restricted balances of
$13.2 million.
See Note 10 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 12 to the Consolidated Financial Statements and Part II,
Item 1, "Legal Proceedings" with respect to certain legal proceedings and
environmental matters with respect to NL.
In addition to those legal proceedings described in Note 12 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, enactment of such legislation could have such an effect.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its dividend policy 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 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.
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. In the fourth
quarter of 2004, CompX reinstated its regular quarterly dividend at the $.125
per share rate. At that rate, and based on the 10.6 million shares of CompX held
directly or indirectly by NL at March 31, 2006, NL would receive aggregate
annual dividends from CompX of $5.3 million. In February 2004, Kronos announced
it would pay its first regular quarterly cash dividend of $.25 per share. At
that rate, and based on the 17.5 million shares of Kronos held by NL at March
31, 2006, NL would receive aggregate annual dividends from Kronos of $17.5
million. If NL's subsidiaries would become unable to make sufficient cash
dividends or other distributions to it, NL's ability to service its liabilities
and to pay dividends on its common stock could be adversely affected. In
addition, a significant portion of NL's assets consists of ownership interests
in its subsidiaries and affiliates. If NL were required to liquidate any of such
securities in order to generate funds to satisfy its liabilities, NL may be
required to sell such securities at a time or times at which it would not be
able to realize what it believes to be the actual value of such assets.
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 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 policies, consider
the sale of interests in subsidiaries, affiliates, 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.
The Company and related entities 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. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies.
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 TiO2
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 TiO2 selling prices in billing currencies will
be higher or lower, respectively, than such percentage changes would be
using actual exchange rates prevailing during the respective periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Reference is made to the 2005 Annual Report for a discussion of the market
risks associated with changes in foreign currency exchange rates, interest rates
and security prices that affect the Company. There have been no material changes
in such market risks since the Company filed the 2005 Annual Report.
ITEM 4.
CONTROLS AND PROCEDURES
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 regulations of the SEC, means controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, 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
Chief Executive Officer, and Gregory M. Swalwell, the Company's Vice President,
Finance and Chief Financial Officer, have evaluated the Company's disclosure
controls and procedures as of March 31, 2006. Based upon their evaluation, these
executive officers have concluded that the Company's disclosure controls and
procedures are effective as of March 31, 2006.
Internal Control Over Financial Reporting. The Company also maintains
internal control over financial reporting. The term "internal control over
financial reporting," as defined by regulations of the SEC, means a process
designed by, or under the supervision of, the Company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the Company's board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with GAAP, and includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
Company,
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company,
and
o Provide reasonable assurance regarding prevention or timely detection of an
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's Consolidated Financial
Statements.
As permitted by the SEC, the Company's assessment of internal control over
financial reporting excludes (i) internal control over financial reporting of
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, the Company's assessment of internal control over financial
reporting with respect to the Company's equity method investees did include the
Company's controls over the recording of amounts related to the Company's
investments that are recorded in the Company's consolidated financial
statements, including controls over the selection of accounting methods for the
Company's investments, the recognition of equity method earnings and losses and
the determination, valuation and recording of the Company's investment account
balances.
Changes in Internal Control Over Financial Reporting. There has been no
change to the Company's internal control over financial reporting during the
quarter ended March 31, 2006 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 12 to the Consolidated Financial Statements and
to the 2005 Annual Report for descriptions of certain previously reported legal
proceedings.
State of Rhode Island v. Lead Industries Association, et al. (Superior
Court of Rhode Island, No. 99-5226). In April 2006, NL filed a post-trial motion
to dismiss, motion for new trial and motion for judgment notwithstanding the
verdict.
Smith, et al. v. Lead Industries Association, et al. (Circuit Court for
Baltimore City, Maryland, Case No. 24-C-99-004490). In March 2006, defendants
filed a conditional cross-appeal, asserting that there is no final judgment to
be reviewed because the trial court's severance was improper.
County of Santa Clara v. Atlantic Richfield Company, et al. (Superior Court
of the State of California, County of Santa Clara, Case No. CV788657). In March
2006, defendants filed a petition for rehearing with the appellate court. In
April 2006, the defendants filed a petition for review with the California
Supreme Court; however this petition was denied.
City of Milwaukee v. NL Industries, Inc. and Mautz Paint (Circuit Court,
Civil Division, Milwaukee County, Wisconsin, Case No. 01CV003066). In March
2006, the court denied the defendants' motion to dismiss and set a trial date of
January 2007.
Hess, et. al. v. NL Industries, Inc., et al. (Missouri Circuit Court 22nd
Judicial Circuit, St. Louis City, Cause No. 052-11799). NL has denied all
allegations of liability. In April 2006, NL removed the case to Federal Court.
In April 2006, NL and the U.S. EPA entered into an administrative order on
consent to perform an additional removal action with respect to ponds located
within a residential area at the site of a formerly owned lead smelting facility
located in Collinsville, Illinois.
Brown et. al. v. NL Industries, Inc. et. al. (Circuit Court Wayne County,
Michigan, Case No. 06-602096 CZ). In February 2006, NL removed the case to
federal court.
Item 1A. Risk Factors. Reference is made to the 2005 Annual Report for a
discussion of risk factors related to the Company's businesses. There have been
no material changes in such risk factors since the Company filed the 2005 Annual
Report.
Item 6. Exhibits
31.1 - Certification
31.2 - Certification
32.1 - Certification
The Company has retained a signed original of any of the above exhibits
that contains signatures, and the Company will provide such exhibit to the
Commission or its staff upon request. NL will also furnish, without charge, a
copy of its Code of Business Conduct and Ethics, its Audit Committee Charter and
its Corporate Governance Guidelines, each as adopted by the Company's board of
directors, upon request. Such requests should be directed to the attention of
NL's Corporate Secretary at NL's corporate offices located at 5430 LBJ Freeway,
Suite 1700, Dallas, Texas 75240.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NL INDUSTRIES, INC.
------------------------
(Registrant)
Date May 5, 2006 By /s/ Gregory M. Swalwell
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Gregory M. Swalwell
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
Date May 5 , 2006 By /s/ James W. Brown
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James W. Brown
Vice President and Controller
(Principal Accounting Officer)