SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the quarter ended September 30, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-640
NL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
New Jersey 13-5267260
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16825 Northchase Drive, Suite 1200, Houston, Texas 77060-2544
(Address of principal executive offices) (Zip Code)
(281)423-3300
(Registrant's telephone number, including area code)
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) had been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of common stock outstanding on November 12, 1996: 51,118,014
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1995
and September 30, 1996 3-4
Consolidated Statements of Operations - Three months
and nine months ended September 30, 1995 and 1996 5
Consolidated Statement of Shareholders' Deficit
- Nine months ended September 30, 1996 6
Consolidated Statements of Cash Flows - Nine
months ended September 30, 1995 and 1996 7-8
Notes to Consolidated Financial Statements 9-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 21
- 2 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, September 30,
1995 1996
------------ -------------
Current assets:
Cash and cash equivalents ...................... $ 141,333 $ 130,196
Accounts and notes receivable .................. 147,428 163,236
Refundable income taxes ........................ 4,941 2,643
Inventories .................................... 251,630 216,280
Prepaid expenses ............................... 3,217 6,736
Deferred income taxes .......................... 2,522 1,791
---------- ----------
Total current assets ....................... 551,071 520,882
---------- ----------
Other assets:
Marketable securities .......................... 20,944 22,354
Investment in joint ventures ................... 185,893 181,382
Prepaid pension cost ........................... 22,576 23,962
Deferred income taxes .......................... 788 --
Other .......................................... 31,165 24,712
---------- ----------
Total other assets ......................... 261,366 252,410
---------- ----------
Property and equipment:
Land ........................................... 22,902 22,001
Buildings ...................................... 166,349 163,249
Machinery and equipment ........................ 648,458 643,850
Mining properties .............................. 97,190 95,673
Construction in progress ....................... 11,187 30,520
---------- ----------
946,086 955,293
Less accumulated depreciation and depletion .... 486,870 489,355
---------- ----------
Net property and equipment ................. 459,216 465,938
---------- ----------
$1,271,653 $1,239,230
========== ==========
- 3 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND SHAREHOLDERS' DEFICIT December 31, September 30,
1995 1996
------------ -------------
Current liabilities:
Notes payable ................................ $ 39,247 $ 26,248
Current maturities of long-term debt ......... 43,369 98,573
Accounts payable and accrued liabilities ..... 165,985 159,512
Payable to affiliates ........................ 10,181 9,134
Income taxes ................................. 40,088 36,123
Deferred income taxes ........................ 3,555 2,837
----------- -----------
Total current liabilities ................ 302,425 332,427
----------- -----------
Noncurrent liabilities:
Long-term debt ............................... 740,334 711,846
Deferred income taxes ........................ 157,192 145,319
Accrued pension cost ......................... 69,311 57,541
Accrued postretirement benefits cost ......... 60,235 58,107
Other ........................................ 148,511 132,963
----------- -----------
Total noncurrent liabilities ............. 1,175,583 1,105,776
----------- -----------
Minority interest .............................. 3,066 257
----------- -----------
Shareholders' deficit:
Common stock ................................. 8,355 8,355
Additional paid-in capital ................... 759,281 759,281
Adjustments:
Currency translation ....................... (126,934) (123,702)
Pension liabilities ........................ (1,908) (1,908)
Marketable securities ...................... (525) 391
Accumulated deficit .......................... (481,432) (475,651)
Treasury stock ............................... (366,258) (365,996)
----------- -----------
Total shareholders' deficit .............. (209,421) (199,230)
----------- -----------
$ 1,271,653 $ 1,239,230
=========== ===========
Commitments and contingencies (Note 13)
See accompanying notes to consolidated financial statements.
- 4 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
---------------------- ---------------------
1995 1996 1995 1996
--------- --------- --------- ---------
Revenues and other income:
Net sales ................. $ 255,339 $ 248,462 $ 789,688 $ 752,064
Other, net ................ 7,060 5,013 16,075 25,890
--------- --------- --------- ---------
262,399 253,475 805,763 777,954
--------- --------- --------- ---------
Costs and expenses:
Cost of sales ............. 169,058 193,271 526,722 557,881
Selling, general and
administrative ........... 48,317 45,274 142,937 131,313
Interest .................. 20,325 18,472 62,053 56,127
--------- --------- --------- ---------
237,700 257,017 731,712 745,321
--------- --------- --------- ---------
Income (loss) before
income taxes and
minority interest .... 24,699 (3,542) 74,051 32,633
Income tax expense .......... 7,413 698 22,215 11,552
--------- --------- --------- ---------
Income (loss) before
minority interest .... 17,286 (4,240) 51,836 21,081
Minority interest ........... (140) 9 346 (33)
--------- --------- --------- ---------
Net income (loss) ..... $ 17,426 $ (4,249) $ 51,490 $ 21,114
========= ========= ========= =========
Net income (loss) per share
of common stock ............ $ .34 $ (.08) $ 1.00 $ .41
========= ========= ========= =========
Weighted average common and
common equivalent shares
outstanding ................ 51,628 51,118 51,522 51,376
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
- 5 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
Nine months ended September 30, 1996
(In thousands)
Adjustments
Additional -------------------------------------
Common paid-in Currency Pension Marketable Accumulated Treasury
stock capital translation liabilities securities deficit stock Total
--------- ---------- ----------- ------------ ---------- ----------- --------- ---------
Balance at December 31, 1995 $ 8,355 $ 759,281 $(126,934) $ (1,908) $ (525) $(481,432) $(366,258) $(209,421)
Net income .................. -- -- -- -- -- 21,114 -- 21,114
Dividends ................... -- -- -- -- -- (15,333) -- (15,333)
Adjustments ................. -- -- 3,232 -- 916 -- -- 4,148
Treasury stock reissued ..... -- -- -- -- -- -- 262 262
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1996 $ 8,355 $ 759,281 $(123,702) $ (1,908) $ 391 $(475,651) $(365,996) $(199,230)
========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
- 6 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1995 and 1996
(In thousands)
1995 1996
--------- ---------
Cash flows from operating activities:
Net income ....................................... $ 51,490 $ 21,114
Depreciation, depletion and amortization ......... 29,208 30,154
Noncash interest expense ......................... 14,368 15,500
Deferred income taxes ............................ 18,245 (4,864)
Other, net ....................................... (8,382) (12,401)
--------- ---------
104,929 49,503
Change in assets and liabilities:
Accounts and notes receivable .................. (23,161) (21,289)
Inventories .................................... (14,067) 26,424
Prepaid expenses ............................... (3,302) (3,863)
Accounts payable and accrued liabilities ....... (2,905) (1,363)
Income taxes ................................... (18,217) (166)
Other, net ..................................... (1,794) (10,994)
Marketable trading securities, net ............. 26,337 --
--------- ---------
Net cash provided by operating activities .... 67,820 38,252
--------- ---------
Cash flows from investing activities:
Capital expenditures ............................. (42,572) (52,328)
Purchase of minority interest .................... -- (5,168)
Investment in joint ventures, net ................ 1,664 4,123
Other, net ....................................... 68 478
--------- ---------
Net cash used by investing activities ........ (40,840) (52,895)
--------- ---------
- 7 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 1995 and 1996
(In thousands)
1995 1996
--------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ....................................... $ 38,840 $ 64,712
Principal payments ............................... (47,401) (43,359)
Dividends .......................................... -- (15,333)
Other, net ......................................... 159 (202)
--------- ---------
Net cash provided (used) by financing
activities .................................... (8,402) 5,818
--------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities .... 18,578 (8,825)
Currency translation ............................. 3,093 (2,312)
Balance at beginning of period ..................... 131,124 141,333
--------- ---------
Balance at end of period ........................... $ 152,795 $ 130,196
========= =========
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized ............... $ 37,079 $ 31,485
Income taxes ....................................... 22,388 16,652
See accompanying notes to consolidated financial statements.
- 8 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
NL Industries, Inc. conducts its operations primarily through its wholly-
owned subsidiaries, Kronos, Inc. (titanium dioxide pigments, or "TiO2") and
Rheox, Inc. (specialty chemicals). Valhi, Inc. and Tremont Corporation, each
affiliates of Contran Corporation, hold 55% and 18%, respectively, of NL's
outstanding common stock. Contran holds, directly or through subsidiaries,
approximately 91% of Valhi's and 44% of Tremont's outstanding common stock.
The consolidated balance sheet of NL Industries, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 1995 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at September 30, 1996 and the consolidated statements
of operations, shareholders' deficit and cash flows for the interim periods
ended September 30, 1995 and 1996 have been prepared by the Company, without
audit. In the opinion of management, all adjustments, consisting only of normal
recurring adjustments necessary to present fairly the consolidated financial
position, results of operations and cash flows have been made. The results of
operations for the interim periods are not necessarily indicative of the
operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. Certain prior-year amounts have been
reclassified to conform to the 1996 presentation. The accompanying consolidated
financial statements should be read in conjunction with the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 (the "1995 Annual Report").
Note 2 - Net income (loss) per share of common stock:
Net income (loss) per share of common stock is based on the weighted
average number of common shares and equivalents outstanding. Common stock
equivalents, consisting of nonqualified stock options, are excluded from the
computation when their effect is antidilutive.
- 9 -
Note 3 - Business segment information:
The Company's operations are conducted in two business segments - TiO2
conducted by Kronos and specialty chemicals conducted by Rheox.
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1995 1996 1995 1996
--------- --------- --------- ---------
(In thousands)
Net sales:
Kronos ................... $ 222,799 $ 215,038 $ 689,520 $ 649,635
Rheox .................... 32,540 33,424 100,168 102,429
--------- --------- --------- ---------
$ 255,339 $ 248,462 $ 789,688 $ 752,064
========= ========= ========= =========
Operating income:
Kronos ................... $ 40,828 $ 9,640 $ 120,381 $ 64,555
Rheox .................... 9,762 9,831 29,726 32,952
--------- --------- --------- ---------
50,590 19,471 150,107 97,507
General corporate income
(expense):
Securities earnings, net . 1,489 1,190 5,884 3,631
Expenses, net ............ (7,055) (5,731) (19,887) (12,378)
Interest expense ......... (20,325) (18,472) (62,053) (56,127)
--------- --------- --------- ---------
$ 24,699 $ (3,542) $ 74,051 $ 32,633
========= ========= ========= =========
Note 4 - Inventories:
December 31, September 30,
1995 1996
------------ -------------
(In thousands)
Raw materials ............................ $ 35,075 $ 34,548
Work in process .......................... 9,132 7,556
Finished products ........................ 172,330 138,169
Supplies ................................. 35,093 36,007
-------- --------
$251,630 $216,280
======== ========
- 10 -
Note 5 - Marketable securities and securities transactions:
December 31, September 30,
1995 1996
------------ -------------
(In thousands)
Available-for-sale securities - noncurrent
marketable equity securities:
Unrealized gains ................................. $ 1,962 $ 2,183
Unrealized losses ................................ (2,770) (1,581)
Cost ............................................. 21,752 21,752
-------- --------
Aggregate market ............................. $ 20,944 $ 22,354
======== ========
Net gains from trading securities transactions are composed of:
Three months ended Nine months ended
September 30, September 30,
------------------- -----------------
1995 1996 1995 1996
------ ------ ------ -----
(In thousands)
Unrealized gains .............. $ 7 $ -- $1,122 $--
Realized gains ................ -- -- 50 --
------ ------ ------ ---
$ 7 $ -- $1,172 $--
====== ====== ====== ===
Note 6 - Investment in joint ventures:
December 31, September 30,
1995 1996
------------ -------------
(In thousands)
TiO2 manufacturing joint venture ............... $183,129 $179,423
Other .......................................... 2,764 1,959
-------- --------
$185,893 $181,382
======== ========
- 11 -
Note 7 - Other noncurrent assets:
December 31, September 30,
1995 1996
------------ -------------
(In thousands)
Intangible assets, net ......................... $11,803 $ 8,849
Deferred financing costs, net .................. 13,199 10,534
Other .......................................... 6,163 5,329
------- -------
$31,165 $24,712
======= =======
Note 8 - Accounts payable and accrued liabilities:
December 31, September 30,
1995 1996
------------ -------------
(In thousands)
Accounts payable ......................... $ 68,734 $ 58,568
-------- --------
Accrued liabilities:
Employee benefits ...................... 49,884 37,627
Environmental costs .................... 6,000 6,000
Interest ............................... 6,633 15,718
Miscellaneous taxes .................... 2,557 2,274
Other .................................. 32,177 39,325
-------- --------
97,251 100,944
-------- --------
$165,985 $159,512
======== ========
Note 9 - Other noncurrent liabilities:
December 31, September 30,
1995 1996
------------ -------------
(In thousands)
Environmental costs .......................... $112,827 $107,322
Insurance claims and expenses ................ 12,088 11,405
Employee benefits ............................ 13,148 12,096
Deferred technology fee income ............... 8,456 463
Other ........................................ 1,992 1,677
-------- --------
$148,511 $132,963
======== ========
- 12 -
Note 10 - Notes payable and long-term debt:
December 31, September 30,
1995 1996
------------ -------------
(In thousands)
Notes payable - Kronos (DM 56,000 and DM 40,000,
respectively) ....................................... $ 39,247 $ 26,248
======== ========
Long-term debt:
NL Industries:
11.75% Senior Secured Notes ...................... $250,000 $250,000
13% Senior Secured Discount Notes ................ 132,034 145,064
-------- --------
382,034 395,064
Kronos:
DM bank credit facility (DM 397,609 and
DM 490,609, respectively) ....................... 276,895 321,938
Joint venture term loan .......................... 73,286 61,714
Other ............................................ 13,672 11,094
-------- --------
363,853 394,746
-------- --------
Rheox:
Bank term loan ................................... 37,263 20,284
Other ............................................ 553 325
-------- --------
37,816 20,609
-------- --------
783,703 810,419
Less current maturities ............................ 43,369 98,573
-------- --------
$740,334 $711,846
======== ========
Note 11 - Income taxes:
The difference between the provision for income tax expense attributable
to income before income taxes and minority interest and the amount that would be
expected using the U.S. federal statutory income tax rate of 35% is presented
below.
Nine months ended
September 30,
--------------------
1995 1996
-------- --------
(In thousands)
Expected tax expense ................................... $ 25,918 $ 11,422
Non-U.S. tax rates ..................................... (1,501) (273)
Incremental tax on income of companies not included
in NL's consolidated U.S. federal income tax return ... 1,007 870
Valuation allowance .................................... (3,183) (1,150)
U.S. state income taxes ................................ 898 1,350
Other, net ............................................. (924) (667)
-------- --------
Income tax expense ............................... $ 22,215 $ 11,552
======== ========
- 13 -
Note 12 - Other income, net:
Three months ended Nine months ended
September 30, September 30,
------------------- --------------------
1995 1996 1995 1996
-------- -------- -------- --------
(In thousands)
Securities earnings:
Interest and dividends .......... $ 1,482 $ 1,190 $ 4,712 $ 3,631
Securities transactions ......... 7 -- 1,172 --
-------- -------- -------- --------
1,489 1,190 5,884 3,631
Pension curtailment gain .......... -- -- -- 4,791
Technology fee income ............. 2,685 2,606 7,990 8,280
Litigation settlement gain ........ -- -- -- 2,756
Currency transaction gains,
(losses), net .................... 1,122 624 (795) 4,491
Other, net ........................ 1,764 593 2,996 1,941
-------- -------- -------- --------
$ 7,060 $ 5,013 $ 16,075 $ 25,890
======== ======== ======== ========
Note 13 - Commitments and contingencies:
For descriptions of certain legal proceedings, income tax and other
commitments and contingencies related to the Company, reference is made to (i)
Part II, Item 1 -"Legal Proceedings," (ii) the Company's Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996, and (iii) the
1995 Annual Report.
- 14 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The Company's chemical operations are conducted in two business segments -
TiO2 conducted by Kronos and specialty chemicals conducted by Rheox.
Three months ended % Nine months ended %
September 30, Change September 30, Change
------------------ ------ ----------------- ------
1995 1996 1995 1996
------ ------ ------ ------
(In millions) (In millions)
Net sales:
Kronos ......... $222.8 $215.1 -3% $689.5 $649.7 -6%
Rheox .......... 32.5 33.4 +3% 100.2 102.4 +2%
------ ------ ------ ------
$255.3 $248.5 -3% $789.7 $752.1 -5%
====== ====== ====== ======
Operating income:
Kronos ......... $ 40.8 $ 9.7 -76% $120.4 $ 64.6 -46%
Rheox .......... 9.8 9.8 N/C 29.7 32.9 +11%
------ ------ ------ ------
$ 50.6 $ 19.5 -62% $150.1 $ 97.5 -35%
====== ====== ====== ======
Percent changes in TiO2:
Sales volume ............... +17% +3%
Average selling prices (in
billing currencies) ....... -15% -6%
Kronos' TiO2 operating income in the third quarter and first nine months
of 1996 decreased from the comparable periods in 1995 primarily due to the
decline in average TiO2 selling prices. Average TiO2 selling prices for the
third quarter of 1996 were 15% lower than the third quarter of 1995 and 6% lower
than the second quarter of 1996. Selling prices at the end of the third quarter
of 1996 were 15% lower than prices at the end of 1995. The Company expects
average TiO2 prices in the fourth quarter to be below the third quarter average.
While prices have declined, demand for TiO2 has grown. Kronos' third quarter
sales volumes increased 17% compared with the third quarter of 1995 with
improved sales volumes worldwide. Sales volumes for the first nine months in
1996 were 3% higher than the comparable period in 1995 primarily due to improved
sales volumes in the U.S.
Rheox's operating income of $9.8 million for the third quarter of 1996 was
even with the year-earlier period. Rheox's operating income in the first nine
months of 1996 includes a first-quarter $2.7 million gain related to the
curtailment of certain U.S. employee pension benefits.
Based on the continuing decline in TiO2 selling prices during the third
quarter and the current TiO2 industry pricing outlook, the Company expects its
fourth-quarter net loss will exceed that of the third quarter of 1996 and the
Board of Directors has suspended the regular quarterly dividend.
A significant amount of sales are denominated in currencies other than the
U.S. dollar, and fluctuations in the value of the U.S. dollar relative to other
currencies decreased the dollar value of sales for the third quarter and first
nine months of 1996 by $4 million and $7 million, respectively, compared to the
comparable 1995 periods.
- 15 -
The following table sets forth certain information regarding general
corporate income (expense).
Three months ended Nine months ended
September 30, Difference September 30, Difference
------------------ ---------- ----------------- ----------
1995 1996 1995 1996
----- ----- ---- ----
(In millions)
Securities earnings ...... $ 1.5 $ 1.2 $ (.3) $ 5.9 $ 3.6 $ (2.3)
Corporate expenses, net .. (7.1) (5.7) 1.4 (19.9) (12.4) 7.5
Interest expense ......... (20.3) (18.5) 1.8 (62.1) (56.1) 6.0
------- ------- ------- ------- ------- -------
$ (25.9) $ (23.0) $ 2.9 $ (76.1) $ (64.9) $ 11.2
======= ======= ======= ======= ======= =======
Securities earnings were lower due to lower average balances available for
investment. Net corporate expenses were lower in the third quarter and first
nine months of 1996 compared to the same periods in 1995 due to lower
environmental remediation costs. Interest expense was lower primarily due to
lower variable interest rates.
Income tax expense for the third quarter of 1996 differs from a normally-
expected effective tax rate because of losses in certain countries for which no
tax benefit is currently available and for which recognition of a deferred tax
asset is not appropriate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows from operating, investing and
financing activities for the nine months ended September 30, 1995 and 1996 are
presented below.
Nine months ended
September 30,
------------------
1995 1996
------- -------
(In millions)
Net cash provided (used) by:
Operating activities ............................... $ 67.8 $ 38.3
Investing activities ............................... (40.8) (52.9)
Financing activities ............................... (8.4) 5.8
------- -------
Net cash provided (used) by operating, investing
and financing activities ...................... $ 18.6 $ (8.8)
======= =======
The TiO2 industry is cyclical and changes in economic conditions within
the industry significantly impact the earnings and operating cash flows of the
Company. During the first nine months of 1996, declining TiO2 selling prices
unfavorably impacted Kronos' operating income and cash flows from operations
compared to the 1995 period. Average selling prices began a downward trend in
the last half of 1995 and the Company expects the trend to continue at least for
the remainder of the year. The Company expects prices will begin to increase
during 1997; however, no assurance can be given that price trends will conform
to the Company's expectations and future cash flows will be adversely affected
should price trends be lower than the Company's expectations.
The Company's cash flows from operations also declined in the first nine
months of 1995 due to an increase in working capital of $43 million, while
- 16 -
working capital remained about the same in the first nine months of 1996,
excluding the effect of currency translation. Net changes in working capital
used less cash in the 1996 period primarily due to TiO2 production curtailments
and higher sales volumes reducing inventory levels during 1996.
Certain of the Company's income tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies. The Company has reached an agreement with the German
tax authorities regarding examinations which resolves certain significant tax
contingencies for years through 1990. The Company has received certain final
assessments and expects to pay tax deficiencies of approximately DM 49 million
($32 million at September 30, 1996), including interest, in the fourth quarter
of 1996 in final settlement of the agreed issues. Certain other German tax
contingencies remain outstanding and will continue to be litigated. Although the
Company believes that it will ultimately prevail, the Company has granted a DM
100 million ($66 million at September 30, 1996) lien on its Nordenham, Germany
TiO2 plant in favor of the German tax authorities until the litigation is
resolved. No assurance can be given that this litigation will be resolved in the
Company's favor in view of the inherent uncertainties involved in court rulings.
The Company believes that it has adequately provided accruals for additional
income taxes and related interest expense which may ultimately result from all
such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
Rheox acquired the minority interests of its non-U.S. subsidiaries for
$5.2 million in the first quarter of 1996.
The Company borrowed DM 95 million ($64 million when borrowed) under its
DM credit facility during the first nine months of 1996 and used the proceeds
primarily to fund operations. During October 1996, the Company borrowed DM 49
million ($32 million when borrowed) under the DM credit facility to fund the
German tax settlement payments described above. Repayments of indebtedness in
the first nine months of 1996 included payments of $17.2 million on the Rheox
bank term loan, $11.6 million on the joint venture term loan and DM 16 million
($10.4 million when repaid) on DM-denominated notes payable.
In the third quarter of 1996, the Company paid a quarterly dividend of
$.10 per share to shareholders aggregating $5.1 million. Dividends paid during
the first nine months of 1996 totaled $15.3 million. In October 1996, the
Company's Board of Directors suspended the Company's regular quarterly dividend.
At September 30, 1996, the Company had cash and cash equivalents
aggregating $130 million (36% held by non-U.S. subsidiaries) including
restricted cash and cash equivalents of $11 million. The Company's subsidiaries
had $5 million and $119 million available for borrowing at September 30, 1996
under existing U.S. and non-U.S. credit facilities, respectively, of which $82
million of the non-U.S. amount is available only for (i) permanently reducing
the DM term loan or (ii) paying future German income tax assessments, as
described above. In October 1996, the borrowing availability to pay German
income tax assessments under the DM credit facility was reduced by $32 million
related to the October 1996 borrowings described above. The Company is engaged
in discussions with its
- 17 -
lenders to modify the repayment terms and covenants of certain of its
indebtedness and to refinance certain other indebtedness.
The Company has been named as a defendant, potentially responsible party
("PRP"), or both, in a number of legal proceedings associated with environmental
matters, including waste disposal sites or facilities currently or formerly
owned, operated or used by the Company, many of which disposal sites or
facilities are on the U.S. Environmental Protection Agency's (the "U.S. EPA")
Superfund National Priorities List or similar state lists. On a quarterly basis,
the Company evaluates the potential range of its liability at sites where it has
been named as a PRP or defendant. The Company believes it has adequate accruals
($114 million at September 30, 1996) for reasonably estimable costs of such
matters. It is not possible to estimate the range of costs for certain sites.
The Company has estimated that the upper end of the range of reasonably possible
costs to the Company for sites for which it is possible to estimate costs is
approximately $175 million. The Company's estimates of such liabilities have not
been discounted to present value, and the Company has not recognized any
potential insurance recoveries. 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.
The Company is also a defendant in a number of legal proceedings seeking
damages for personal injury and property damage arising from the sale of lead
pigments and lead-based paints. Although no assurance can be given that the
Company will not incur future liability in respect of this litigation, based on,
among other things, the results of such litigation to date, the Company believes
that the pending lead pigment and paint litigation is without merit. The Company
has not accrued any amounts for such pending litigation. Liability that may
result, if any, cannot be reasonably estimated. In addition, various legislation
and administrative regulations are, from time to time, enacted or proposed at
the state, local and federal levels seeking to 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
to effectively overturn court decisions in which the Company and other pigment
manufacturers have been successful. The Company currently believes the
disposition of all claims and disputes, individually and in the aggregate,
should not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity. There can be no
assurance that additional matters of these types will not arise in the future.
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and availability of resources in view of, among
other things, its debt service and capital expenditure requirements and
estimated future operating cash flows. As a result of this process, the Company
has in the past and may in the future seek to reduce, refinance, repurchase or
restructure indebtedness, raise additional capital, modify its dividend policy,
restructure ownership interests, sell interests in subsidiaries or other assets,
or take a combination of such steps or other steps to manage its liquidity and
capital resources. In the normal course of its business, the Company may also
review
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opportunities for acquisitions or other business combinations in the chemicals
industry. In the event of any such transaction, the Company may consider using
available cash, issuing equity securities or increasing its indebtedness to the
extent permitted by the agreements governing the Company's existing debt.
The statements contained in this Report on Form 10-Q ("Quarterly Report")
which are not historical facts, including, but not limited to, statements found
under the captions "Results of Operations" and "Liquidity and Capital Resources"
above, are forward-looking statements that involve a number of risks and
uncertainties. The actual results of the future events described in such
forward-looking statements in this Quarterly Report could differ materially from
those stated in such forward-looking statements. Among the factors that could
cause actual results to differ materially are the risks and uncertainties
discussed in this Quarterly Report and in the 1995 Annual Report, including,
without limitation, the portions of such reports under the captions referenced
above, and the uncertainties set forth from time to time in the Company's
filings with the Securities and Exchange Commission, and other public
statements.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the 1995 Annual Report and the Company's Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996 for
descriptions of certain previously-reported legal proceedings.
Frank D. Seinfeld v. Harold C. Simmons, et al. (Superior Court of New
York, Bergen County, Chancery Division, No. C-336-96). Plaintiff brought this
action in September 1996 on behalf of himself and derivatively, on behalf of NL,
against the Company, Valhi and certain current and former members of the
Company's Board of Directors. The complaint alleges, among other things, that
the Company's August 1991 "Dutch auction" tender offer was an unfair and
wasteful expenditure of the Company's funds. Plaintiff seeks, among other
things, to rescind the Company's purchase of approximately 10.9 million shares
of its common stock from Valhi pursuant to the Dutch auction. The Company
believes, and understands that each of the other defendants believes, the
complaint is without merit. The Company intends, and believes that each of the
other defendants intends, to defend the action vigorously.
Ritchie v. NL Industries, et al. (Circuit Court of Marshall County,
West Virginia, No. 96-C-179M). In September 1996, the Company was served with a
complaint filed in West Virginia state court that seeks compensatory and
punitive damages for alleged personal injury caused by lead paint and asserts
causes of action against the Company and five other former manufacturers of lead
pigment for negligence, strict liability, breach of warranty, fraud, conspiracy,
market share liability and alternative liability. In October 1996, defendants
removed the case to federal court and filed motions to dismiss.
The City of New York, et al. v. Lead Industries Association, Inc., et
al. (No. 89-4617). In September 1996, defendants' request for permission to
appeal was denied.
Skipworth v. Sherwin-Williams Co., et al. (No. 92-3069). Oral argument
was held in this matter in the Pennsylvania Supreme Court in October 1996.
Wright, et al. v. Lead Industries Association, Inc., et al. (Nos. 94-
363042 and 94-363043). In September 1996, the remaining defendants' motion for
summary judgment was granted. Plaintiffs have appealed as to all defendants.
Gates v. American Cyanamid Co., et al. (I1996 - 2114). In July 1996,
the Company filed an answer denying plaintiff's allegations.
Hines v. Gates, et al. (96-616161). In July 1996, plaintiffs
voluntarily dismissed the complaint without prejudice.
NL Industries, Inc. v. Commercial Union Insurance Cos., et al. The
Company is seeking interlocutory appellate review of the previously-reported
ruling regarding contribution.
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Granite City, Illinois smelter site. In August 1996, the district court
denied Granite City's and the PRP's motion for a temporary restraining order and
preliminary injunction seeking to enjoin the U.S. EPA from proceeding with the
residential component of the cleanup.
Wagner, et al. v. Anzon, Inc. and NL Industries, Inc. (No. 87-4420). In
September 1996, the Superior Court of Pennsylvania affirmed the judgment of the
jury verdict for the Company. Plaintiffs have filed an application for
reargument in the Superior Court, which the Company has opposed. The application
is pending before the Superior Court.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 - Eighth amendment to the Credit Agreement, dated September
17, 1996, between Rheox, Inc. and Subsidiaries, Guarantors and the
Chase Manhattan Bank (National Association) and the Nippon Credit
Bank, Ltd. as Co-Agents.
10.2 - Executive Severance Agreement effective as of February 16,
1994 by and between the Registrant and Joseph S. Compofelice.
10.3 - Executive Severance Agreement effective as of March 9, 1995
by and between the Registrant and Lawrence A. Wigdor.
27.1 - Financial Data Schedule for the nine months ended September
30, 1996.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended September 30, 1996 and
through the date of this report:
July 25, 1996 - reported Items 5 and 7.
October 23, 1996 - reported Items 5 and 7.
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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: November 12, 1996 By /s/ Joseph S. Compofelice
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Joseph S. Compofelice
Vice President and
Chief Financial Officer
Date: November 12, 1996 By /s/ Dennis G. Newkirk
- ------------------------ ---------------------
Dennis G. Newkirk
Vice President and Controller
(Principal Accounting Officer)
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