SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the fiscal year ended December 31, 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)
Registrant's telephone number, including area code: (281) 423-3300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common stock ($.125 par value) New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of March 20, 1997, 51,144,014 shares of common stock were outstanding. The
aggregate market value of the 13,662,324 shares of voting stock held by
nonaffiliates as of such date approximated $149 million.
Documents incorporated by reference:
The information required by Part III is incorporated by reference from the
registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
Forward-Looking Information.
The statements contained in this Annual Report on Form 10-K ("Annual
Report") which are not historical facts, including, but not limited to,
statements found (i) under the captions "Kronos-Industry," "Kronos-Products and
operations," "Kronos-Manufacturing process and raw materials,"
"Kronos-Competition," "Rheox-Products and operations," "Rheox-Manufacturing
process and raw materials," "Patents and Trademarks," "Foreign Operations," and
"Regulatory and Environmental Matters," all contained in Item 1. Business, (ii)
under the captions "Lead pigment litigation" and "Environmental matters and
litigation," both contained in Item 3. Legal Proceedings, and (iii) under the
captions "Results of Operations" and "Liquidity and Capital Resources," both
contained in Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations, 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 Annual 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 Annual Report, including, without limitation, the portions
referenced above, and the uncertainties set forth from time to time in the
Company's filings with the Securities and Exchange Committee, and other public
statements.
PART I
ITEM 1. BUSINESS
General
NL Industries, Inc., organized as a New Jersey corporation in 1891,
conducts its operations through its principal wholly-owned subsidiaries, Kronos,
Inc. and Rheox, Inc. Valhi, Inc. and Tremont Corporation, each affiliates of
Contran Corporation, hold 56% 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. Substantially all of
Contran's outstanding voting stock is held by trusts established for the benefit
of the children and grandchildren of Harold C. Simmons of which Mr. Simmons is
the sole trustee. Mr. Simmons, the Chairman of the Board of NL and the Chairman
of the Board, President and Chief Executive Officer of each of Contran and Valhi
and a director of Tremont, may be deemed to control each of such companies. NL
and its consolidated subsidiaries are sometimes referred to herein collectively
as the "Company."
Kronos is the world's fourth largest producer of titanium dioxide pigments
("TiO2") with an estimated 11% share of worldwide TiO2 sales volume in 1996.
Approximately one-half of Kronos' 1996 sales volume was in Europe, where Kronos
is the second largest producer of TiO2. In 1996, Kronos accounted for 86% of the
Company's sales and 63% of its operating income. Rheox is the world's largest
producer of rheological additives for solvent-based systems.
The Company's objective is to maximize total shareholder returns by (i)
focusing on continued cost control, (ii) investing in certain cost effective
debottlenecking projects to increase TiO2 production capacity and productivity,
and (iii) deleveraging as excess liquidity becomes available.
Kronos
Industry
Titanium dioxide pigments are chemical products used for imparting
whiteness, brightness and opacity to a wide range of products, including paints,
plastics, paper, fibers and ceramics. TiO2 is considered to be a
"quality-of-life" product with demand affected by the gross domestic product in
various regions of the world.
Demand, supply and pricing within the TiO2 industry is cyclical, and
changes in industry economic conditions can significantly impact the Company's
earnings and operating cash flow. The Company's average TiO2 selling prices have
been declining since the last half of 1995, which followed an upturn in TiO2
prices that began in the third quarter of 1993. The Company expects TiO2 prices
will begin to increase during the second quarter of 1997 as the impact of
recently-announced price increases begin to take effect. Despite the recent
decline in TiO2 average selling prices, industry-wide demand for TiO2 grew in
1996, and Kronos' record 1996 sales volume was about 6% higher than 1995. The
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Company's expectations as to the future prospects of the TiO2 industry are based
upon several factors beyond the Company's control, principally continued
worldwide growth of gross domestic product and the absence of technological
advancements in or modifications to TiO2 processes that would result in material
and unanticipated increases in production efficiencies. To the extent that
actual developments differ from the Company's expectations, the Company's and
the TiO2 industry's future performance could be unfavorably affected.
Kronos has an estimated 18% share of European TiO2 sales volume and an
estimated 12% share of North American TiO2 sales volume. Consumption per capita
in the United States and Western Europe far exceeds that in other areas of the
world and these regions are expected to continue to be the largest consumers of
TiO2. A significant market for TiO2 could emerge in Eastern Europe, the Far East
and China if the economies in these countries develop to the point where
quality-of-life products, including TiO2, are in greater demand. Kronos believes
that, due to its strong presence in Western Europe, it is well positioned to
participate in growth in the Eastern European market. Geographic segment
information is contained in Note 3 to the Consolidated Financial Statements.
Products and operations
The Company believes that there are no effective substitutes for TiO2.
However, extenders such as kaolin clays, calcium carbonate and polymeric
opacifiers are used in a number of Kronos' markets. Generally, extenders are
used to reduce to some extent the utilization of higher cost TiO2. The use of
extenders has not significantly affected TiO2 consumption over the past decade
because extenders generally have, to date, failed to match the performance
characteristics of TiO2. The Company believes that the use of extenders will not
materially alter the growth of the TiO2 business in the foreseeable future.
Kronos currently produces over 40 different TiO2 grades, sold under the
Kronos and Titanox trademarks, which provide a variety of performance properties
to meet customers' specific requirements. Kronos' major customers include
domestic and international paint, plastics and paper manufacturers.
Kronos is one of the world's leading producers and marketers of TiO2.
Kronos and its distributors and agents sell and provide technical services for
its products to over 4,000 customers with the majority of sales in Europe and
North America. Kronos' international operations are conducted through Kronos
International, Inc., a Germany-based holding company formed in 1989 to manage
and coordinate the Company's manufacturing operations in Germany, Canada,
Belgium and Norway, and its sales and marketing activities in over 100 countries
worldwide. Kronos and its predecessors have produced and marketed TiO2 in North
America and Europe for over 70 years. As a result, Kronos believes that it has
developed considerable expertise and efficiency in the manufacture, sale,
shipment and service of its products in domestic and international markets. By
volume, approximately one-half of Kronos' 1996 TiO2 sales were to Europe, with
37% to North America and the balance to export markets.
Kronos is also engaged in the mining and sale of ilmenite ore (a raw
material used in the sulfate pigment production process), and the manufacture
and sale of iron-based water treatment chemicals (derived from co-products of
the
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pigment production processes). Water treatment chemicals are used as treatment
and conditioning agents for industrial effluents and municipal wastewater and in
the manufacture of iron pigments.
Manufacturing process and raw materials
TiO2 is manufactured by Kronos using both the chloride process and the
sulfate process. Approximately two-thirds of Kronos' current production capacity
is based on its chloride process which generates less waste than the sulfate
process. Although most end-use applications can use pigments produced by either
process, chloride-process pigments are generally preferred in certain coatings
and plastics applications, and sulfate-process pigments are generally preferred
for certain paper, fibers and ceramics applications. Due to environmental
factors and customer considerations, the proportion of TiO2 industry sales
represented by chloride-process pigments has increased relative to
sulfate-process pigments in the past few years, and chloride-process production
facilities in 1996 represented approximately 56% of industry capacity.
Kronos produced 373,000 metric tons of TiO2 in 1996, compared to the
record 393,000 metric tons produced in 1995 and 357,000 metric tons in 1994.
Kronos reduced its production rates in early 1996 in response to softening
demand and its high inventory levels at the end of 1995. As demand increased
during 1996 and inventories declined, Kronos' production rates were increased to
near full capacity in late 1996. Kronos believes its annual attainable
production capacity is approximately 400,000 metric tons, including its one-half
interest in the joint venture-owned Louisiana plant (see "TiO2 manufacturing
joint venture"). Following the completion of the $35 million debottlenecking
expansion of its Leverkusen, Germany chloride-process plant in late 1997, the
Company expects its worldwide annual attainable production capacity to increase
to approximately 410,000 metric tons.
The primary raw materials used in the TiO2 chloride production process are
chlorine, coke and titanium-containing feedstock derived from beach sand
ilmenite and natural rutile ore. Chlorine and coke are available from a number
of suppliers. Titanium-containing feedstock suitable for use in the chloride
process is available from a limited number of suppliers around the world,
principally in Australia, Africa, Canada, India and the United States. Kronos
purchases slag refined from beach sand ilmenite from Richards Bay Iron and
Titanium (Proprietary) Limited (South Africa), approximately 50% of which is
owned by RTZ Iron and Titanium Inc. ("RTZ"), an indirect subsidiary of RTZ
Corp., under a long-term supply contract that expires in 2000. Natural rutile
ore, another chloride feedstock, is purchased primarily from RGC Mineral Sands
Limited (Australia), under a long-term supply contract that expires in 2000. Raw
materials under these contracts are expected to meet Kronos' chloride feedstock
requirements over the next several years. The Company does not expect to
encounter difficulties obtaining new long-term supply contracts prior to the
expiration of its existing contracts.
The primary raw materials used in the TiO2 sulfate production process are
sulfuric acid and titanium-containing feedstock derived primarily from rock and
beach sand ilmenite. Sulfuric acid is available from a number of suppliers.
Titanium-containing feedstock suitable for use in the sulfate process is
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available from a limited number of suppliers around the world. Currently, the
principal active sources are located in Norway, Canada, Australia, India and
South Africa. As one of the few vertically-integrated producers of
sulfate-process pigments, Kronos operates a Norwegian rock ilmenite mine which
provided all of Kronos' feedstock for its European sulfate-process pigment
plants in 1996. Kronos also purchases sulfate grade slag under contracts
negotiated annually with RTZ and, through 1997, with Tinfos Titanium and Iron
K/S.
Kronos believes the availability of titanium-containing feedstock for both
the chloride and sulfate processes is adequate through the remainder of the
decade. Kronos does not anticipate experiencing any interruptions of its raw
material supplies because of its long-term supply contracts. However, political
and economic instability in the countries from which the Company purchases its
raw material supplies could adversely affect the availability of such feedstock.
TiO2 manufacturing joint venture
Subsidiaries of Kronos and Tioxide Group, Ltd., a wholly-owned subsidiary
of Imperial Chemicals Industries PLC ("Tioxide"), each own a 50%-interest in a
manufacturing joint venture. The joint venture owns and operates a
chloride-process TiO2 plant located in Lake Charles, Louisiana. Production from
the plant is shared equally by Kronos and Tioxide (the "Partners") pursuant to
separate offtake agreements.
A supervisory committee, composed of four members, two of whom are
appointed by each Partner, directs the business and affairs of the joint
venture, including production and output decisions. Two general managers, one
appointed and compensated by each Partner, manage the daily operations of the
joint venture acting under the direction of the supervisory committee.
The manufacturing joint venture is intended to be operated on a break-even
basis and, accordingly, Kronos' transfer price for its share of TiO2 produced is
equal to its share of the joint venture's production costs and interest expense.
Kronos' share of the production costs are reported as cost of sales as the
related TiO2 acquired from the joint venture is sold, and its share of the joint
venture's interest expense is reported as a component of interest expense.
Competition
The TiO2 industry is highly competitive. During the early 1990s, supply
exceeded demand, primarily due to new chloride-process capacity coming
on-stream. Relative supply/demand relationships, which had a favorable impact on
industry-wide prices during the late 1980s, had a negative impact during the
subsequent downturn. During 1994 and the first half of 1995, strong demand
growth improved industry capacity utilization and resulted in increases in
worldwide TiO2 prices. Kronos believes that the increased demand was partially
due to customers stocking inventories. In the second half of 1995 and first half
of 1996, customers reduced inventory levels, which reduced industry-wide demand.
Demand improved in the second half of 1996, indicating, Kronos believes, that
customer inventories had returned to more-normal levels. Price increases were
announced in late 1996 by most major TiO2 producers, including Kronos, and the
results of such announcements are expected to impact second-quarter 1997
operating results.
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No assurance can be given that price trends will conform to the Company's
expectations.
Capacity additions that are the result of construction of grassroot plants
in the worldwide TiO2 market require significant capital expenditures and
substantial lead time (typically three to five years in the Company's
experience) for, among other things, planning, obtaining environmental approvals
and construction. No grassroot plants have been announced, but industry capacity
can be expected to increase as Kronos and its competitors complete
debottlenecking projects at existing plants. Based on the factors described
under the caption "Kronos-Industry" above, the Company expects that the average
annual increase in industry capacity from announced debottlenecking projects
will be less than the average annual demand growth for TiO2 during the next few
years.
Kronos competes primarily on the basis of price, product quality and
technical service, and the availability of high performance pigment grades.
Although certain TiO2 grades are considered specialty pigments, the majority of
grades and substantially all of Kronos' production are considered commodity
pigments with price generally being the most significant competitive factor.
Kronos has an estimated 11% share of worldwide TiO2 sales volume, and believes
that it is the leading marketer of TiO2 in a number of countries, including
Germany and Canada.
Kronos' principal competitors are E.I. du Pont de Nemours & Co. ("Du
Pont"); Imperial Chemical Industries PLC (Tioxide) ("ICI"); Millennium
Chemicals, Inc. (Millennium Inorganic Chemicals, Inc.), formerly a unit of
Hanson PLC; Kemira Oy; Kerr-McGee Corporation; Ishihara Sangyo Kaisha, Ltd.;
Bayer AG; and Thann et Mulhouse. In January 1997, ICI announced its intention to
spin off to its shareholders its Tioxide unit in the next six to eighteen
months. These eight competitors have estimated individual worldwide shares of
TiO2 sales volume ranging from 3% to 21%, and an estimated aggregate 75% share
of TiO2 sales volume. Du Pont has about one-half of total U.S. TiO2 production
capacity and is Kronos' principal North American competitor.
Rheox
Products and operations
Rheological additives control the flow and leveling characteristics for a
variety of products, including paints, inks, lubricants, sealants, adhesives and
cosmetics. Organoclay rheological additives are clays which have been chemically
reacted with organic chemicals and compounds. Rheox produces rheological
additives for both solvent-based and water-based systems. Rheox is the world's
largest producer of rheological additives for solvent-based systems and is also
a supplier of rheological additives used in water-based systems. Rheological
additives for solvent-based systems accounted for about 80% of Rheox's sales in
1996, with the remainder being principally rheological additives for water-based
systems. Rheox introduced a number of new products during the past few years,
the majority of which are for water-based systems, which are sold into a larger
market than solvent-based systems. The Company believes water-based additives
will account for an increasing portion of its sales in the long term.
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Sales of rheological additives generally follow gross domestic product
growth in Rheox's principal markets and are influenced by the volume of
shipments of the worldwide coatings industry. Since a portion of Rheox's
rheological additives are used in industrial coatings, plant and equipment
spending has an influence on demand for this product line.
Manufacturing process and raw materials
The primary raw materials utilized in the production of rheological
additives are bentonite clays, hectorite clays, quaternary amines, polyethylene
waxes and castor oil derivatives. Bentonite clays are currently purchased under
a three-year contract, renewable through 2004, with a subsidiary of Dresser
Industries, Inc. ("Dresser"), which has significant bentonite reserves in
Wyoming. This contract assures Rheox the right to purchase its anticipated
requirements of bentonite clays for the foreseeable future, and Dresser's
reserves are believed to be sufficient for such purpose. Hectorite clays are
mined from Company-owned reserves in Newberry Springs, California, which the
Company believes are adequate to supply its needs for the foreseeable future.
The Newberry Springs ore body contains the largest known commercial deposit of
hectorite clays in the world. Quaternary amines are purchased primarily from a
joint venture that is 50%-owned by Rheox and are also generally available on the
open market from a number of suppliers. Castor oil-based rheological additives
are purchased from sources outside the United States. Rheox has a supply
contract with a manufacturer of these products which may not be terminated
without 180 days notice by either party.
Competition
Competition in the specialty chemicals industry generally focuses on
product uniqueness, quality and availability, technical service, knowledge of
end-use applications and price. Rheox's principal competitors for rheological
additives for solvent-based systems are Laporte PLC and Sud-Chemie AG. Rheox's
principal competitors for water-based systems are Rohm and Haas Company,
Hercules Incorporated, and Union Carbide Corporation.
Research and Development
The Company's expenditures for research and development and certain
technical support programs have averaged approximately $11 million annually
during the past three years with Kronos accounting for approximately
three-quarters of the annual spending. Research and development activities
related to TiO2 are conducted principally at the Leverkusen, Germany facility.
Such activities are directed primarily toward improving both the chloride and
sulfate production processes, improving product quality and strengthening
Kronos' competitive position by developing new pigment applications. Activities
relating to rheological additives are conducted primarily in the United States
and are directed towards the development of new products for water-based
systems, environmental applications and new end-use applications for existing
product lines.
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Patents and Trademarks
Patents held for products and production processes are believed to be
important to the Company and contribute to the continuing business activities of
Kronos and Rheox. The Company continually seeks patent protection for its
technical developments, principally in the United States, Canada and Europe, and
from time to time enters into licensing arrangements with third parties. In
connection with the formation of the manufacturing joint venture with Tioxide,
Kronos and certain of its subsidiaries exchanged proprietary chloride process
and product technologies with Tioxide and certain of its affiliates. Use by each
recipient of the other's technology in Europe was restricted through October
1996. The Company does not expect that the technology sharing arrangement with
Tioxide will materially impact the Company's competitive position within the
TiO2 industry. See "Kronos - TiO2 manufacturing joint venture."
The Company's major trademarks, including Kronos, Titanox and Rheox, are
protected by registration in the United States and elsewhere with respect to
those products it manufactures and sells.
Foreign Operations
The Company's chemical businesses have operated in international markets
since the 1920s. Most of Kronos' current production capacity is located in
Europe and Canada, and approximately one-third of Rheox's sales in each of the
past three years have been from European production. Approximately
three-quarters of the Company's 1996 consolidated sales were to non-U.S.
customers, including 13% to customers in areas other than Europe and Canada.
Foreign operations are subject to, among other things, currency exchange rate
fluctuations and the Company's results of operations have in the past been both
favorably and unfavorably affected by fluctuations in currency exchange rates.
Effects of fluctuations in currency exchange rates on the Company's results of
operations are discussed in Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Political and economic uncertainties in certain of the countries in which
the Company operates may expose it to risk of loss. The Company does not believe
that there is currently any likelihood of material loss through political or
economic instability, seizure, nationalization or similar event. The Company
cannot predict, however, whether events of this type in the future could have a
material effect on its operations. The Company's manufacturing and mining
operations are also subject to extensive and diverse environmental regulation in
each of the foreign countries in which they operate. See "Regulatory and
Environmental Matters."
Customer Base and Seasonality
The Company believes that neither its aggregate sales nor those of any of
its principal product groups are concentrated in or materially dependent upon
any single customer or small group of customers. Neither the Company's business
as a whole nor that of any of its principal product groups is seasonal to any
significant extent. Due in part to the increase in paint production in the
spring to meet the spring and summer painting season demand, TiO2 sales are
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generally higher in the second and third calendar quarters than in the first and
fourth calendar quarters. Sales of rheological additives are influenced by the
worldwide industrial protective coatings industry, where second calendar quarter
sales are generally the strongest.
Employees
As of December 31, 1996, the Company employed approximately 3,100 persons,
excluding the joint venture employees, with approximately 400 employees in the
United States and approximately 2,700 at sites outside the United States. Hourly
employees in production facilities worldwide, including the TiO2 joint venture,
are represented by a variety of labor unions, with labor agreements having
various expiration dates. The Company believes its labor relations are good.
Regulatory and Environmental Matters
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 policy of the
Company is to achieve compliance with applicable environmental laws and
regulations at all its facilities and to strive to improve its environmental
performance. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect the Company's production, handling, use, storage,
transportation, sale or disposal of such substances as well as the Company's
consolidated financial position, results of operations or liquidity.
The Company's U.S. manufacturing operations are governed by federal
environmental and worker health and safety laws and regulations, principally the
Resource Conservation and Recovery Act, the Occupational Safety and Health Act,
the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the Toxic
Substances Control Act and the Comprehensive Environmental Response,
Compensation and Liability Act, as amended by the Superfund Amendments and
Reauthorization Act ("CERCLA"), as well as the state counterparts of these
statutes. The Company believes that all of its U.S. plants and the Louisiana
plant owned and operated by the joint venture are in substantial compliance with
applicable requirements of these laws or compliance orders issued thereunder.
From time to time, the Company's facilities may be subject to environmental
regulatory enforcement under such statutes. Resolution of such matters typically
involves the establishment of compliance programs. Occasionally, resolution may
result in the payment of penalties, but to date such penalties have not involved
amounts having a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
The Company's European and Canadian production facilities operate in an
environmental regulatory framework in which governmental authorities typically
are granted broad discretionary powers which allow them to issue operating
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permits required for the plants to operate. The Company believes that all its
plants are in substantial compliance with applicable environmental laws.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union (the "EU"). Germany, Belgium and the United Kingdom, each a
member of the EU, follow the initiatives of the EU. Norway, although not a
member, generally patterns its environmental regulatory actions after the EU.
The Company believes that Kronos is in substantial compliance with agreements
reached with European environmental authorities and with an EU directive to
control the effluents produced by TiO2 production facilities. The Company also
believes that Rheox is in substantial compliance with the environmental
regulations in Germany and the United Kingdom.
The Company has a contract with a third party to treat certain of its
Leverkusen and Nordenham, Germany sulfate-process effluents. Either party may
terminate the contract after giving four years notice with regard to the
Nordenham plant. After December 1998 and under certain circumstances, Kronos may
terminate the contract after giving six months notice with regard to the
Leverkusen plant.
In order to reduce sulfur dioxide emissions into the atmosphere consistent
with applicable environmental regulations, Kronos is completing the installation
of off-gas desulfurization systems at its Norwegian and German plants at an
estimated cost of $30 million. The manufacturing joint venture installed a $16
million off-gas desulfurization system at the Louisiana plant and Kronos
completed an $11 million water treatment chemical purification project at its
Leverkusen, Germany facility in 1996.
The Quebec provincial government has environmental regulatory authority
over Kronos' Canadian chloride and sulfate-process TiO2 production facility in
Varennes, Quebec. The provincial government regulates discharges into the St.
Lawrence River. In May 1992, the Quebec provincial government extended Kronos'
right to discharge effluents from its Canadian sulfate-process TiO2 plant into
the St. Lawrence River until June 1994. Kronos completed a waste acid
neutralization facility and discontinued discharging untreated waste acid
effluents into the St. Lawrence River in June 1994. Notwithstanding the
foregoing, in March 1993, Kronos' Canadian subsidiary and two of its directors
were charged by the Canadian federal government with five violations of the
Canadian Fisheries Act relating to discharges into the St. Lawrence River from
the Varennes sulfate-process TiO2 plant. The monetary penalty for these
violations, if proven, could be up to Canadian $15 million. Additional charges,
if brought, could involve additional penalties. The Company believes that this
charge is inconsistent with the extension granted by provincial authorities,
referred to above, and is vigorously contesting the charge. A trial date has
been set for May 1997.
The Company's capital expenditures related to its ongoing environmental
protection and improvement programs are currently expected to be approximately
$3 million in 1997 and $5 million in 1998.
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The Company has been named as a defendant, potentially responsible party
("PRP"), or both, pursuant to CERCLA and similar state laws in approximately 75
governmental and private actions associated with waste disposal sites, mining
locations and facilities currently or previously owned, operated or used by the
Company, or its subsidiaries, or their predecessors, certain of which are on the
U.S. Environmental Protection Agency's ("U.S. EPA") Superfund National
Priorities List or similar state lists. See Item 3. "Legal Proceedings."
ITEM 2. PROPERTIES
Kronos currently operates four TiO2 facilities in Europe (Leverkusen and
Nordenham, Germany; Langerbrugge, Belgium; and Fredrikstad, Norway). In North
America, Kronos has a facility in Varennes, Quebec, Canada and, through the
manufacturing joint venture described above, a one-half interest in a plant in
Lake Charles, Louisiana. Certain of the Company's properties collateralize
long-term debt agreements and the Company's Nordenham TiO2 plant has a lien that
secures the German tax authorities, pending resolution of certain tax
litigation. See Notes 10 and 13 to the Consolidated Financial Statements.
Kronos' principal German operating subsidiary leases the land under its
Leverkusen TiO2 production facility pursuant to a lease expiring in 2050. The
Leverkusen facility, with about one-third of Kronos' current TiO2 production
capacity, is located within an extensive manufacturing complex owned by Bayer
AG, and Kronos is the only unrelated party so situated. Under a separate
supplies and services agreement expiring in 2011, Bayer provides some raw
materials, auxiliary and operating materials and utilities services necessary to
operate the Leverkusen facility. Both the lease and the supplies and services
agreement restrict Kronos' ability to transfer ownership or use of the
Leverkusen facility.
All of Kronos' principal production facilities described above are owned,
except for the land under the Leverkusen facility. Kronos has a governmental
concession with an unlimited term to operate its ilmenite mine in Norway.
Specialty chemicals are produced by Rheox at facilities in Charleston,
West Virginia; Newberry Springs, California; St. Louis, Missouri; Livingston,
Scotland and Nordenham, Germany. A portion of the land under the Livingston,
Scotland facility is leased from an unrelated party; all of the remaining
production facilities are owned.
ITEM 3. LEGAL PROCEEDINGS
Lead pigment litigation
The Company was formerly involved in the manufacture of lead pigments for
use in paint and lead-based paint. The Company has been named as a defendant or
third party defendant in various legal proceedings alleging that the Company and
other manufacturers are responsible for personal injury and property damage
allegedly associated with the use of lead pigments. The Company is vigorously
defending such litigation. Considering the Company's previous involvement in the
lead pigment and lead-based paint businesses, there can be no assurance that
additional litigation, similar to that described below, will not be filed. In
addition, various legislation and administrative regulations have, from time to
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time, been enacted or proposed that seek to (a) impose various obligations on
present and former manufacturers of lead pigment and lead-based paint with
respect to asserted health concerns associated with the use of such products and
(b) effectively overturn court decisions in which the Company and other pigment
manufacturers have been successful. Examples of such proposed legislation
include bills which would permit civil liability for damages on the basis of
market share. No legislation or regulations have been enacted to date which are
expected to have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity. The Company has not
accrued any amounts for the pending lead pigment and lead-based paint
litigation. There is no assurance that the Company will not incur future
liability in respect of this pending litigation in view of the inherent
uncertainties involved in court and jury rulings in pending and possible future
cases. However, based on, among other things, the results of such litigation to
date, the Company believes that the pending lead pigment and lead-based paint
litigation is without merit. Liability that may result, if any, cannot
reasonably be estimated.
In 1989 and 1990, the Housing Authority of New Orleans ("HANO") filed
third-party complaints for indemnity and/or contribution against the Company,
other alleged manufacturers of lead pigment (together with the Company, the
"pigment manufacturers") and the Lead Industries Association (the "LIA") in 14
actions commenced by residents of HANO units seeking compensatory and punitive
damages for injuries allegedly caused by lead pigment. The actions, which were
pending in the Civil District Court for the Parish of Orleans, State of
Louisiana, were dismissed by the district court in 1990. Subsequently, HANO
agreed to consolidate all the cases and appealed. In March 1992, the Louisiana
Court of Appeals, Fourth Circuit, dismissed HANO's appeal as untimely with
respect to three of these cases. With respect to the other cases included in the
appeal, the court of appeals reversed the lower court decision dismissing the
cases. These cases were remanded to the District Court for further proceedings.
In November 1994, the District Court granted defendants' motion for summary
judgment in one of the remaining cases and in June 1995 the District Court
granted defendants' motion for summary judgment in several of the remaining
cases. After such grant, only two cases remain pending.
In June 1989, a complaint was filed in the Supreme Court of the State of
New York, County of New York, against the pigment manufacturers and the LIA.
Plaintiffs seek damages, contribution and/or indemnity in an amount in excess of
$50 million for monitoring and abating alleged lead paint hazards in public and
private residential buildings, diagnosing and treating children allegedly
exposed to lead paint in city buildings, the costs of educating city residents
to the hazards of lead paint, and liability in personal injury actions against
the City and the Housing Authority based on alleged lead poisoning of city
residents (The City of New York, the New York City Housing Authority and the New
York City Health and Hospitals Corp. v. Lead Industries Association, Inc., et
al., No. 89-4617). In December 1991, the court granted the defendants' motion to
dismiss claims alleging negligence and strict liability and denied the remainder
of the motion. In January 1992, defendants appealed the denial. The Company has
answered the remaining portions of the complaint denying all allegations of
wrongdoing, and the case is in discovery. In May 1993, the Appellate Division of
the Supreme Court affirmed the denial of the motion to dismiss plaintiffs'
fraud, restitution and indemnification claims. In May 1994, the trial court
granted the
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defendants' motion to dismiss the plaintiffs' restitution and indemnification
claims, and plaintiffs appealed. In June 1996, the Appellate Division reversed
the trial court's dismissal of plaintiffs' restitution and indemnification
claims, reinstating those claims. Defendants' motion for summary judgment on the
fraud claim was denied in August 1995; defendants have appealed. In December
1995, defendants moved for summary judgment on the basis that the fraud claim
was time-barred. In February 1996, the motion was denied and defendants have
appealed. Discovery is proceeding.
In March 1992, the Company was served with a complaint in Skipworth v.
Sherwin-Williams Co., et al. (No. 92-3069), Court of Common Pleas, Philadelphia
County. Plaintiffs are a minor and her legal guardians seeking damages from lead
paint and pigment producers, the LIA, the Philadelphia Housing Authority and the
owners of the plaintiffs' premises for bodily injuries allegedly suffered by the
minor from lead-based paint. Plaintiffs' counsel has asserted that approximately
200 similar complaints would be served shortly, but no such complaints have yet
been served. In April 1994, the court granted defendants' motion for summary
judgment and the dismissal was affirmed by the Superior Court in October 1995.
In February 1997, the Pennsylvania Supreme Court unanimously affirmed the
Superior Court's decision.
In August 1992, the Company was served with an amended complaint in
Jackson, et al. v. The Glidden Co., et al., Court of Common Pleas, Cuyahoga
County, Cleveland, Ohio (Case No. 236835). Plaintiffs seek compensatory and
punitive damages for personal injury caused by the ingestion of lead, and an
order directing defendants to abate lead-based paint in buildings. Plaintiffs
purport to represent a class of similarly situated persons throughout the State
of Ohio. The amended complaint identifies 18 other defendants who allegedly
manufactured lead products or lead-based paint, and asserts causes of action
under theories of strict liability, negligence per se, negligence, breach of
express and implied warranty, fraud, nuisance, restitution, and negligent
infliction of emotional distress. The complaint asserts several theories of
liability including joint and several, market share, enterprise and alternative
liability. In October 1992, the Company and the other defendants moved to
dismiss the complaint with prejudice. In July 1993, the court dismissed the
complaint. In December 1994, the Ohio Court of Appeals reversed the trial court
dismissal and remanded the case to the trial court. In July 1996, the trial
court granted defendants' motion to dismiss the property damage and enterprise
liability claims, but denied the remainder of the motion. Discovery is
proceeding with respect to class certification.
In November 1993, the Company was served with a complaint in Brenner, et
al. v. American Cyanamid, et al., (No. 12596-93) Supreme Court, State of New
York, Erie County alleging injuries to two children purportedly caused by lead
pigment. The complaint seeks $24 million in compensatory and $10 million in
punitive damages for alleged negligent failure to warn, strict liability, fraud
and misrepresentation, concert of action, civil conspiracy, enterprise
liability, market share liability, and alternative liability. In January 1994,
the Company answered the complaint, denying liability. Discovery is proceeding.
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In January 1995, the Company was served with complaints in Wright (Alvin)
and Wright (Allen) v. Lead Industries, et. al., (Nos. 94-363042 and 363043),
Circuit Court, Baltimore City, Maryland. Plaintiffs are two brothers (one
deceased) who allege injuries due to exposure to lead pigment. The complaints,
as amended in April 1995, seek more than $100 million in compensatory and
punitive damages for alleged strict liability, negligence, conspiracy, fraud and
unfair and deceptive trade practices claims. In July 1995, the trial court
granted, in part, the defendants' motion to dismiss, and dismissed the
plaintiffs' fraud and unfair and deceptive trade practices claims. In June 1996,
the trial court granted defendants' motions for summary judgement on plaintiffs'
conspiracy claim, and dismissed the Company and certain other defendants from
the cases. In September 1996, the trial court granted the remaining defendants'
motions for summary judgment. Plaintiffs have appealed as to all defendants.
In November 1995, the Company was served with the complaint in Jefferson
v. Lead Industry Association, et. al. (No. 95-2835), filed in the U.S. District
Court for the Eastern District of Louisiana. The complaint asserts claims
against the LIA and the lead pigment defendants on behalf of a putative class of
allegedly injured children in Louisiana. The complaint purports to allege claims
for strict liability, negligence, failure to warn, breach of alleged warranties,
fraud and misrepresentation, and conspiracy, and seeks actual and punitive
damages. The complaint asserts several theories of liability, including joint
and several and market share liability. In June 1996, the trial court granted
defendants' motions to dismiss the complaint and entered judgment in favor of
all defendants. Plaintiffs appealed to the Fifth Circuit Court of Appeals, which
affirmed the judgment in favor of all defendants in March 1997.
In January 1996, the Company was served with a complaint on behalf of
individual intervenors in German, et. al. v. Federal Home Loan Mortgage Corp.,
et. al., (U.S. District Court, Southern District of New York, Civil Action No.
93 Civ. 6941 (RWS)). This class action lawsuit had originally been brought
against the City of New York and other landlord defendants. The intervenors'
complaint alleges claims against the Company and other former manufacturers of
lead pigment for medical monitoring, property abatement, and other injunctive
relief, based on various causes of action, including negligent product design,
negligent failure to warn, strict liability, fraud and misrepresentation,
concert of action, civil conspiracy, enterprise liability, market share
liability, breach of express and implied warranties, and nuisance. The
intervenors purport to represent a class of children and pregnant women who
reside in New York City. In May 1996, the Company and the other former
manufacturers of lead pigments filed motions to dismiss the intervenors'
complaint. Class discovery is proceeding.
In April 1996, the Company was served with a complaint in Gates v.
American Cyanamid Co., et al., (No. I1996-2114) Supreme Court, State of New
York, Erie County, an action alleging personal injury arising out of exposure to
lead pigment. Plaintiff seeks compensatory and punitive damages from the
Company, other former lead pigment manufacturers and the LIA based on claims of
negligence, strict liability, fraud, concert of action, civil conspiracy,
enterprise liability, market share liability and alternative liability.
Plaintiff also asserts claims against the landlords of the apartments in which
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plaintiff has lived since 1977. In July 1996, the Company filed an answer
denying plaintiff's allegations of wrongdoing and liability. Discovery is
proceeding.
In September 1996, the Company was served with a complaint in Ritchie v.
NL Industries, et al. (U.S. District Court, Northern District of Western
Virginia, Civil Action No. 5:96-CV-166), an action originally filed in West
Virginia state court on behalf of a minor allegedly injured as a result of
exposure to lead pigment. Plaintiffs seeks compensatory and punitive damages
from the Company and five other former manufacturers of lead pigment based on
claims of negligence, strict liability, breach of warranty, fraud, conspiracy,
market share liability and alternative liability. In October 1996, the
defendants removed the case to federal court and filed motions to dismiss.
Plaintiffs has filed a motion to remand the case to state court. The motions are
pending.
The Company believes that the foregoing lead pigment actions are without
merit and intends to continue to deny all allegations of wrongdoing and
liability and to defend such actions vigorously.
The Company has filed actions seeking declaratory judgment and other
relief against various insurance carriers with respect to costs of defense and
indemnity coverage for certain of its environmental and lead pigment litigation.
NL Industries, Inc. v. Commercial Union Insurance Cos., et al., Nos. 90-2124,
- -2125 (HLS) (District Court of New Jersey). The action relating to lead pigment
litigation defense costs filed in May 1990 against Commercial Union Insurance
Company ("Commercial Union") seeks to recover defense costs incurred in the City
of New York lead pigment case and two other cases which have since been resolved
in the Company's favor. In July 1991, the court granted the Company's motion for
summary judgment and ordered Commercial Union to pay the Company's reasonable
defense costs for such cases. In June 1992, the Company filed an amended
complaint in the United States District Court for the District of New Jersey
against Commercial Union seeking to recover costs incurred in defending four
additional lead pigment cases which have since been resolved in the Company's
favor. In August 1993, the court granted the Company's motion for summary
judgment and ordered Commercial Union to pay the reasonable costs of defending
those cases. In July 1994, the court entered judgment on the order requiring
Commercial Union to pay previously-incurred Company costs in defending those
cases. In September 1995, the U.S. Court of Appeals for the Third Circuit
reversed and remanded for further consideration the decision by the trial court
that Commercial Union was obligated to pay the Company's reasonable defense
costs in certain of the lead pigment cases. The trial court had made its
decision applying New Jersey law; the appeals court concluded that New York and
not New Jersey law applied and remanded the case to the trial court for a
determination under New York law. On remand from the Court of Appeals, the trial
court in April 1996 granted the Company's motion for summary judgment, finding
that Commercial Union had a duty to defend the Company in the four lead paint
cases which were the subject of the Company's second amended complaint. The
court also issued a partial ruling on Commercial Union's motion for summary
judgment in which it sought allocation of defense costs and contribution from
the Company and two other insurance carriers in connection with the three lead
paint actions on which the court had granted the Company summary judgment in
1991. The court
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ruled that Commercial Union is entitled to receive such contribution from the
Company and the two carriers, but reserved ruling with respect to the relative
contributions to be made by each of the parties, including contributions by the
Company that may be required with respect to periods in which it was
self-insured and contributions from one carrier which were reinsured by a former
subsidiary of the Company, the reinsurance costs of which the Company may
ultimately be required to bear. Other than granting motions for summary judgment
brought by two excess liability insurance carriers, which contended that their
policies contained absolute pollution exclusion language, and certain summary
judgment motions regarding policy periods, the court has not made any final
rulings on defense costs or indemnity coverage with respect to the Company's
pending environmental litigation. The Court has not made any final ruling on
indemnity coverage in the lead pigment litigation. No trial dates have been set.
Other than rulings to date, the issue of whether insurance coverage for defense
costs or indemnity or both will be found to exist depends upon a variety of
factors, and there can be no assurance that such insurance coverage will exist
in other cases. The Company has not considered any potential insurance
recoveries for lead pigment or environmental litigation in determining related
accruals.
Environmental matters and litigation
The Company has been named as a defendant, PRP, or both, pursuant to
CERCLA and similar state laws in approximately 75 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, or both.
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.
The extent of CERCLA liability cannot accurately be determined until the
Remedial Investigation and Feasibility Study ("RIFS") is complete, the U.S. EPA
issues a record of decision and costs are allocated among PRPs. The extent of
liability under analogous state cleanup statutes and for common law equivalents
are subject to similar uncertainties. The Company believes it has provided
adequate accruals for reasonably estimable costs for CERCLA matters and other
environmental liabilities. At December 31, 1996, the Company had accrued $113
million for those environmental matters which are reasonably estimable. The
Company determines the amount of accrual on a quarterly basis by analyzing and
estimating the range of possible costs to the Company. Such costs include, among
other things, remedial investigations, monitoring, studies, clean-up, removal
and remediation. During the first quarter of 1997, the Company's accrual will be
increased to include legal fees and other costs of managing and monitoring
environmental remediation sites as required by the adoption of the AICPA's
Statement of Position 96-1, "Environmental Remediation Liabilities." See Note 2
to the Consolidated Financial Statements. 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 $160 million. The Company's
estimate of such liability has not been discounted to present value and the
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Company has not recognized any potential insurance recoveries. No assurance can
be given that actual costs will not exceed either accrued amounts or the upper
end of the range for sites for which estimates have been made, and no assurance
can be given that costs will not be incurred with respect to sites as to which
no estimate presently can be made. The imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs or allocation of such costs among PRPs, or
a determination that the Company is potentially responsible for the release of
hazardous substances at other sites could result in expenditures in excess of
amounts currently estimated by the Company to be required for such matters.
Further, there can be no assurance that additional environmental matters will
not arise in the future. More detailed descriptions of certain legal proceedings
relating to environmental matters are set forth below.
At Pedricktown, the U.S. EPA divided the site into two operable units.
Operable unit one addresses contaminated ground water, surface water, soils and
stream sediments. In July 1994, the U.S. EPA issued the Record of Decision for
operable unit one. The U.S. EPA estimates the cost to complete operable unit one
is $18.7 million. In May 1996, certain PRPs, but not the Company, entered into
an administrative consent order with the U.S. EPA to perform the remedial design
phase of operable unit one. In addition, the U.S. EPA incurred past costs in the
estimated amount of $5 million. The U.S. EPA issued an order with respect to
operable unit two in March 1992 to the Company and 30 other PRPs directing
immediate removal activities including the cleanup of waste, surface water and
building surfaces. The Company has complied with the order, and the work with
respect to operable unit two is completed. The Company has paid approximately
50% of operable unit two costs, or $2.5 million.
At Granite City, the RIFS is complete, and in 1990 the U.S. EPA selected a
remedy estimated at that time to cost approximately $28 million. In July 1991,
the United States filed an action in the U.S. District Court for the Southern
District of Illinois against the Company and others (United States of America v.
NL Industries, Inc., et al., Civ. No. 91-CV 00578) with respect to the Granite
City smelter. The complaint seeks injunctive relief to compel the defendants to
comply with an administrative order issued pursuant to CERCLA, and fines and
treble damages for the alleged failure to comply with the order. The Company and
the other parties did not implement the order believing that the remedy selected
by the U.S. EPA was invalid, arbitrary, capricious and was not selected in
accordance with law. The complaint also seeks recovery of past costs and a
declaration that the defendants are liable for future costs. Although the action
was filed against the Company and ten other defendants, there are 330 other PRPs
who have been notified by the U.S. EPA. Some of those notified were also
respondents to the administrative order. In February 1992, the court entered a
case management order directing that the remedy issues be tried before the
liability aspects are presented. In September 1995, the U.S. EPA released its
amended decision selecting cleanup remedies for the Granite City site. At that
time, the cost of the remedies selected by the U.S. EPA aggregated, in its
estimation, $40.8 million to $67.8 million, although its decision stated that
the higher amount was not considered to be representative of expected costs. The
Company presently is challenging portions of the U.S. EPA's selection of the
remedy. The U.S. EPA's current estimate for completion of the cleanup is $24.3
million, and in January 1997, the Company was informed that the U.S. EPA
incurred
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cleanup and other past costs approximating $30 million. There is currently no
allocation among the PRPs for these costs.
Having completed the RIFS at Portland, the Company conducted predesign
studies to explore the viability of the U.S. EPA's selected remedy pursuant to a
June 1989 consent decree captioned U.S. v. NL Industries, Inc., Civ. No. 89-
408, United States District Court for the District of Oregon. Subsequent to the
completion of the predesign studies, the U.S. EPA issued notices of potential
liability to approximately 20 PRPs, including the Company, directing them to
perform the remedy, which was initially estimated to cost approximately $17
million, exclusive of administrative and overhead costs and any additional
costs, for the disposition of recycled materials from the site. In January 1992,
the U.S. EPA issued unilateral administrative orders to the Company and six
other PRPs directing the performance of the remedy. The Company and the other
PRPs commenced performance of the remedy. In August 1994, the U.S. EPA
authorized the Company and the other PRPs to cease performing most aspects of
the selected remedy. The U.S. EPA has issued a proposed Record of Decision
Amendment changing portions of the cleanup remedy selected for the site. The
U.S. EPA currently estimates the cost of the proposed remedy to be from $10
million to $13 million. Pursuant to an interim allocation, the Company's share
of remedial costs is approximately 50%. In November 1991, Gould, Inc., the
current owner of the site, filed an action, Gould Inc. v. NL Industries, Inc.,
No. 91-1091, United States District Court for the District of Oregon, against
the Company for damages for alleged fraud in the sale of the smelter, rescission
of the sale, past CERCLA response costs and a declaratory judgment allocating
future response costs and punitive damages. The court granted Gould's motion to
amend the complaint to add additional defendants (adjoining current and former
landowners and generators). The amended complaint deletes the fraud and punitive
damages claims asserted against NL; thus, the pending action is essentially one
for reallocation of past and future cleanup costs. Discovery is proceeding. A
trial date has been set for September 1997. The Company and the other PRPs
performing the cleanup have reached settlement in principle with many of the
generators and adjoining landowner defendants.
The Company and other PRPs entered into an administrative consent order
with the U.S. EPA requiring the performance of a RIFS at two sites in Cherokee
County, Kansas, where the Company and others formerly mined lead and zinc. A
former subsidiary of the Company mined at the Baxter Springs subsite, where it
is the largest viable PRP. The final RIFS was submitted to the U.S. EPA in May
1993. In August 1994, the U.S. EPA issued its proposed plan for the cleanup of
the Baxter Springs and Treece sites in Cherokee County. The proposed remedy is
estimated by U.S. EPA to cost $6 million.
In January 1989, the State of Illinois brought an action against the
Company and several other subsequent owners and operators of the former plant in
Chicago, Illinois (People of the State of Illinois v. NL Industries, et al., No.
88-CH-11618, Circuit Court, Cook County). The complaint seeks recovery of $2.3
million of cleanup costs expended by the Illinois Environmental Protection
Agency, plus penalties and treble damages. In October 1992, the Supreme Court of
Illinois reversed the Appellate Division, which had affirmed the trial court's
earlier dismissal of the complaint, and remanded the case for further
proceedings. In December 1993, the trial court denied the State's petition to
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reinstate the complaint, and dismissed the case with prejudice. In November
1996, the appeals court reversed the dismissal. The U.S. EPA has issued an order
to the Company to perform a removal action at the Company's former facility
involved in the State of Illinois case. The Company is complying with the order.
In 1980, the State of New York commenced litigation against the Company in
connection with the operation of a plant in Colonie, New York formerly owned by
the Company. Flacke v. NL Industries, Inc., No. 1842-80 ("Flacke I") and Flacke
v. Federal Insurance Company and NL Industries, Inc., No. 3131-92 ("Flacke II"),
New York Supreme Court, Albany County. The plant manufactured military and
civilian products from depleted uranium and was acquired from the Company by the
U.S. Department of Energy ("DOE") in 1984. Flacke I seeks penalties for alleged
violations of New York's Environmental Conservation Law, and of a consent order
entered into to resolve these alleged violations. Flacke II seeks forfeiture of
a $200,000 surety bond posted in connection with the consent order, plus
interest from February 1980. The Company denied liability in both actions. The
litigation had been inactive from 1984 until July 1993 when the State moved for
partial summary judgment for approximately $1.5 million on certain of its claims
in Flacke I and for summary judgment in Flacke II. In January 1994, the Company
cross-moved for summary judgment in Flacke I and Flacke II. All summary judgment
motions have been denied. The Company has reached a settlement in principle with
the State.
Residents in the vicinity of the Company's former Philadelphia lead
chemicals plant commenced a class action allegedly comprised of over 7,500
individuals seeking medical monitoring and damages allegedly caused by emissions
from the plant. Wagner, et al. v. Anzon, Inc. and NL Industries, Inc., No. 87-
4420, Court of Common Pleas, Philadelphia County. The complaint sought
compensatory and punitive damages from the Company and the current owner of the
plant, and alleged causes of action for, among other things, negligence, strict
liability, and nuisance. A class was certified to include persons who resided,
owned or rented property, or who work or have worked within up to approximately
three-quarters of a mile from the plant from 1960 through the present. The
Company answered the complaint, denying liability. In December 1994, the jury
returned a verdict in favor of the Company. Plaintiffs appealed to the
Pennsylvania Superior Court, requesting a new trial and in September 1996, the
Superior Court affirmed the judgment in favor of the Company. In December 1996,
plaintiffs filed a petition for allowance of appeal to the Pennsylvania Supreme
Court. Plaintiffs' petition is pending. Residents also filed consolidated
actions in the United States District Court for the Eastern District of
Pennsylvania, Shinozaki v. Anzon, Inc. and Wagner and Antczak v. Anzon and NL
Industries, Inc. Nos. 87-3441, 87-3502, 87-4137 and 87-5150. The consolidated
action is a putative class action seeking CERCLA response costs, including
cleanup and medical monitoring, declaratory and injunctive relief and civil
penalties for alleged violations of the Resource Conservation and Recovery Act
("RCRA"), and also asserting pendent common law claims for strict liability,
trespass, nuisance and punitive damages. The court dismissed the common law
claims without prejudice, dismissed two of the three RCRA claims as against the
Company with prejudice, and stayed the case pending the outcome of the state
court litigation.
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In July 1991, a complaint was filed in the United States District Court
for the Central District of California, United States of America v. Peter Gull
and NL Industries, Inc., Civ. No. 91-4098, seeking recovery of $2 million in
costs incurred by the United States in response to the alleged release of
hazardous substances into the environment from a facility located in Norco,
California, treble damages and $1.75 million in penalties for the Company's
alleged failure to comply with the U.S. EPA's administrative order No. 88-13.
The order, which alleged that the Company arranged for the treatment or disposal
of materials at the Norco site, directed the immediate removal of hazardous
substances from the site. The Company carried out a portion of the remedy at the
Norco site, but did not complete the ordered activities because it believed they
were in conflict with California law. The court ruled that the Company was
liable for approximately $2.7 million in response costs plus approximately $3.6
million in penalties for failure to comply with the administrative order. In
April 1994, the court entered final judgment in this matter directing the
Company to pay $6.3 million plus interest. Both the Company and the government
have appealed. In August 1994, this matter was referred to mediation, which is
pending.
At a municipal and industrial waste disposal site in Batavia, New York,
the Company and six others have been identified as PRPs. The U.S. EPA has
divided the site into two operable units. Pursuant to an administrative consent
order entered into with the U.S. EPA, the Company conducted a RIFS for operable
unit one, the closure of the industrial waste disposal section of the landfill.
The Company's RIFS costs were approximately $2 million. In June 1995, the U.S.
EPA issued the record of decision for operable unit one, which is estimated by
the U.S. EPA to cost approximately $12.3 million. In September 1995, the U.S.
EPA and certain PRPs entered into an administrative order on consent for the
remedial design phase of the remedy for operable unit one and the design phase
is proceeding. The Company and other PRPs entered into an interim cost sharing
arrangement for this phase of work. With respect to the second operable unit,
the extension of the municipal water supply, the U.S. EPA estimated the costs at
$1.2 million plus annual operation and maintenance costs. The Company and the
other PRPs are performing the work comprising operable unit two. The U.S. EPA
has also demanded approximately $.9 million in past costs from the PRPs.
See Item 1. "Business - Regulatory and Environmental Matters."
Other litigation
Rhodes, et al. v. ACF Industries, Inc., et al. (Circuit Court of Putnam
County, West Virginia, No. 95-C-261). Twelve plaintiffs brought this action
against the Company and various other defendants in July 1995. Plaintiffs allege
that they were employed by demolition and disposal contractors, and claim that
as a result of the defendants' negligence they were exposed to asbestos during
demolition and disposal of materials from defendants' premises in West Virginia.
Plaintiffs allege personal injuries and seek compensatory damages totaling $18.5
million and punitive damages totaling $55.5 million. The Company has filed an
answer denying plaintiffs' allegations. Discovery is proceeding.
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The Company has been named as a defendant in various lawsuits alleging
personal injuries as a result of exposure to asbestos in connection with
formerly-owned operations. Various of these actions remain pending. One such
case, In re: Monongalia Mass II, (Circuit Court of Monongalia County, West
Virginia, Nos. 93-C-362, et al.), involves the consolidated claims of
approximately 3,100 plaintiffs. The Company intends to defend these matters
vigorously.
Plaintiff brought the complaint in Frank D. Seinfeld v. Harold C. Simmons,
et al. (Superior Court of New York, Bergen County, Chancery Division, No.
C-336-96) 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 purchase of shares in an August 1991 "Dutch auction" tender offer
was an unfair and wasteful expenditure of the Company's funds that constituted a
breach of the defendants' fiduciary duties to the Company's shareholders.
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, and plaintiff has stated that damages sought are $149 million.
The Company and the other defendants have answered the complaint and have denied
all allegations of wrongdoing. The Company believes, and understands that each
of the other defendants believes, that the complaint is without merit. The
Company intends, and believes that each of the other defendants intends, to
defend the action vigorously. Trial is scheduled to begin in November 1997.
The Company is also involved in various other environmental, contractual,
product liability and other claims and disputes incidental to its present and
former businesses, and the disposition of past properties and former businesses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
NL's common stock is listed and traded on the New York and Pacific Stock
Exchanges under the symbol "NL." As of March 20, 1997, there were approximately
9,000 holders of record of NL common stock. The following table sets forth the
high and low sales prices for NL common stock on the New York Stock Exchange
("NYSE") Composite Tape. On March 20, 1997, the closing price of NL common stock
according to the NYSE Composite Tape was $10-7/8.
High Low
------- -------
Year ended December 31, 1995:
First quarter ................................ $13-1/2 $11-3/4
Second quarter ............................... 16-5/8 11-7/8
Third quarter ................................ 17-1/2 13-1/2
Fourth quarter ............................... 16-5/8 10-7/8
Year ended December 31, 1996:
First quarter ................................ 14-3/4 12-1/4
Second quarter ............................... 15-3/8 11-1/2
Third quarter ................................ 12-1/4 9-1/8
Fourth quarter ............................... 11-1/4 7-5/8
The Company's Senior Notes generally limit the ability of the Company to
pay dividends to 50% of consolidated net income, as defined in the indenture
governing the Notes, subsequent to October 1993. At December 31, 1996, no
amounts were available for dividends. The Company paid three quarterly cash
dividends during 1996 of $.10 per share, beginning with a dividend paid on March
1, 1996. The Company suspended its quarterly dividend in October 1996. The
Company did not pay dividends in 1994 or 1995. The declaration and payment of
future dividends and the amount thereof will be dependent upon the Company's
results of operations, financial condition, contractual restrictions and other
factors deemed relevant by the Company's Board of Directors.
-21-
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with the Consolidated Financial Statements and Notes thereto, and
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Years ended December 31,
-------------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(In millions, except per share amounts)
INCOME STATEMENT DATA:
Net sales ..................... $ 893.5 $ 805.3 $ 888.0 $ 1,023.9 $ 986.1
Operating income .............. 110.7 62.4 111.4 199.7 113.4
Income (loss) from
continuing operations ........ (44.6) (83.2) (24.0) 85.6 10.8
Net income (loss) ............. (76.4) (109.8) (24.0) 85.6 10.8
Per common share:
Income (loss) from
continuing operations ...... $ (.88) $ (1.63) $ (.47) $ 1.66 $ .21
Net income (loss) ........... (1.50) (2.16) (.47) 1.66 .21
Cash dividends .............. $ .35 $ -- $ -- $ -- $ .30
BALANCE SHEET DATA at year-end:
Cash, cash equivalents
and current marketable
securities, including
restricted cash .............. $ 187.9 $ 147.6 $ 156.3 $ 141.3 $ 114.1
Current assets ................ 635.8 467.5 486.4 551.1 500.2
Total assets .................. 1,472.1 1,206.5 1,162.4 1,271.7 1,221.4
Current liabilities ........... 248.8 232.5 244.9 302.4 290.3
Long-term debt including
current maturities ........... 1,035.3 870.9 789.6 783.7 829.0
Shareholders' deficit ......... (146.3) (264.8) (293.1) (209.4) (203.5)
CASH FLOW DATA:
Operating activities .......... $ (44.7) $ (7.3) $ 181.8 $ 71.6 $ 16.5
Investing activities .......... 234.9 182.0 (32.8) (62.2) (67.6)
Financing activities .......... (223.1) (155.3) (132.1) (3.3) 26.6
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (1) .................... $ 115.1 $ 67.2 $ 101.3 $ 212.1 $ 135.6
OTHER DATA:
Net debt (2) .................. $ 847.7 $ 723.2 $ 633.4 $ 681.6 $ 740.7
Interest expense, net (3) ..... 104.3 95.1 78.9 75.4 70.3
Cash interest expense,
net (4) ...................... 98.0 86.8 60.8 59.7 49.4
Capital expenditures .......... 85.2 48.0 36.9 64.2 66.9
TiO2 sales volumes
(metric tons in
thousands) ................... 336 346 376 366 388
Average TiO2 selling
price index (1983=100) ....... 140 128 132 152 139
-22-
(1) EBITDA, as presented, represents operating income less corporate expense,
net, plus depreciation, depletion and amortization. EBITDA is presented as
a supplement to the Company's operating income and cash flow from
operations because the Company believes that EBITDA is a widely accepted
financial indicator of cash flows and the ability to service debt. EBITDA
should not be considered as an alternative to, or more meaningful than,
generally accepted accounting principles ("GAAP") operating income or net
income as an indicator of the Company's operating performance, or GAAP
cash flows from operating, investing and financing activities as a measure
of liquidity. EBITDA is not intended to depict funds available for
reinvestment or other discretionary uses, as the Company has significant
debt requirements and other commitments. Investors should consider certain
factors in evaluating the Company's EBITDA, including interest expense,
income taxes, noncash income and expense items, changes in assets and
liabilities, capital expenditures, investments in joint ventures and other
items included in GAAP cash flows as well as future debt repayment
requirements and other commitments, including those described in Notes 10,
13 and 17 to the Consolidated Financial Statements. The Company believes
that the trend of its EBITDA is consistent with the trend of its GAAP
operating income. See "Management's Discussion and Analysis" for a
discussion of operating income and cash flows during the last three years
and the Company's outlook. EBITDA as a measure of a company's performance
may not be comparable to other companies, unless substantially all
companies and analysts determine EBITDA as computed and presented herein.
(2) Net debt represents notes payable and long-term debt less cash, cash
equivalents (including restricted cash) and current marketable securities.
(3) Interest expense, net represents interest expense less general corporate
interest and dividend income.
(4) Cash interest expense, net represents interest expense, net less noncash
interest expense (deferred interest expense on the Senior Secured Discount
Notes and amortization of deferred financing costs).
-23-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
The Company's operations are conducted in two business segments - TiO2
conducted by Kronos and specialty chemicals conducted by Rheox. As discussed
below, TiO2 selling prices increased during 1994 and the first half of 1995, but
declined in the last half of 1995 and during 1996. Kronos' operating income and
margins improved during 1995, but declined in 1996.
Many factors influence TiO2 pricing levels, including industry capacity,
worldwide demand growth and customer inventory levels and purchasing decisions.
Kronos believes the decline in prices in 1996 was due, in part, to the impact of
recent debottlenecking projects increasing capacity, TiO2 customers reducing
inventory levels in a period of declining prices, and greater competition for
sales volume with more industry capacity available. Kronos believes that the
TiO2 industry has long-term growth potential, as discussed in "Item 1. Business
- - Kronos - Industry" and "Competition."
Net sales and operating income
Years ended December 31, % Change
------------------------------ ----------------
1994 1995 1996 1995-94 1996-95
-------- -------- -------- ------- -------
(In millions)
Net sales:
Kronos .................... $ 770.1 $ 894.1 $ 851.2 +16% -5%
-------- -------- --------
Rheox ..................... 117.9 129.8 134.9 +10% +4%
$ 888.0 $1,023.9 $ 986.1 +15% -4%
======== ======== ========
Operating income:
Kronos .................... $ 80.6 $ 161.2 $ 71.6 +100% -56%
Rheox ..................... 30.8 38.5 41.8 +25% +8%
-------- -------- --------
$ 111.4 $ 199.7 $ 113.4 +79% -43%
======== ======== ========
Percent change in TiO2:
Sales volume .............. -3% +6%
Average selling prices
(in billing currencies) .. +15% -9%
Kronos' operating income in 1996 was lower than 1995 primarily due to
lower average TiO2 selling prices, partially offset by higher sales volumes. In
billing currency terms, Kronos' 1996 average TiO2 selling prices were
approximately 9% lower than in 1995. Average selling prices in the fourth
quarter of 1996 were 17% lower than the fourth quarter of 1995 and were 3% lower
than the third quarter of 1996. Selling prices at the end of 1996 were 17% below
year-end 1995 levels, 8% below the average for 1996 and were 1% below the
average selling prices during the fourth quarter of 1996. The improvement in
Kronos' 1995 results over 1994 was primarily due to 15% higher average TiO2
selling
-24-
prices and higher TiO2 production volumes, partially offset by lower TiO2 sales
volumes.
Kronos' cost of sales in 1996 was higher than 1995 due to higher sales
volumes and higher unit costs, primarily due to lower production levels. Kronos'
costs of sales in 1995 was higher than 1994 due to slightly higher manufacturing
costs, partially offset by lower sales volumes. As a percentage of net sales,
cost of sales increased in 1996 and decreased in 1995 primarily due to the
impact on net sales of changes in the average selling price during the
respective years.
Kronos' selling, general and administrative expenses declined in 1996 from
the previous year, as a result of continuing cost containment efforts, while
1995's expense was higher than 1994 due to the unfavorable effect of changes in
currency exchange rates.
Record sales volume of 388,000 metric tons of TiO2 in 1996 increased 6%
compared to 1995, with improvements in all major markets, including a 10%
increase in North America. Sales volumes in the second half of 1996 were 16%
higher than the same period in 1995. In response to soft demand in the first
half of 1996 and its high inventory levels at the end of 1995, Kronos curtailed
production rates in early 1996. As demand increased during the last half of 1996
and inventories declined, Kronos' production rates were increased to near full
capacity in late 1996 and the average capacity utilization was 95% for the year.
Kronos' production rates were 94% of its capacity in 1994 and at full capacity
in 1995. Approximately one-half of Kronos' 1996 TiO2 sales, by volume, were
attributable to markets in Europe with approximately 37% attributable to North
America and the balance to other regions.
Demand, supply and pricing of TiO2 have historically been cyclical. Kronos
anticipates its TiO2 operating margins will begin to improve in the second
quarter of 1997 as the impact of recently-announced TiO2 price increases takes
effect; however, Kronos expects its 1997 operating income will be below that of
1996, primarily because of lower anticipated average TiO2 prices for 1997
compared to 1996 and lower technology fee income. Demand for TiO2 in 1996
increased over 1995 and Kronos expects demand to remain strong in 1997. Kronos
believes continued growth in demand should result in significant improvement in
average selling prices over the longer term.
Rheox's operating income improved in 1996 compared to 1995 due to 5%
higher sales volumes, lower selling, general and administrative expenses and a
$2.7 million gain related to the curtailment of certain U.S. employee pension
benefits, partially offset by slightly higher manufacturing costs. Operating
income increased in 1995 over 1994 due to 5% higher sales volumes and higher
average selling prices, partially offset by higher raw material costs. Rheox's
cost of sales increased in 1995 and 1996 over the respective prior year
primarily due to higher sales volumes, and cost of sales as a percentage of net
sales were approximately the same level in 1994, 1995 and 1996. Selling, general
and administrative expenses decreased slightly in 1996 compared to 1995 due to
lower variable compensation expense, and selling, general and administrative
expenses in 1995 approximated 1994 amounts.
-25-
The Company has substantial operations and assets located outside the
United States (principally Germany, Norway, Belgium and Canada). The U.S. dollar
value of the Company's foreign sales and operating costs is subject to currency
exchange rate fluctuations which may slightly impact reported earnings and may
affect the comparability of period-to-period operating results. A significant
amount of the Company's sales are denominated in currencies other than the U.S.
dollar (61% in 1996), principally major European currencies and the Canadian
dollar. Certain purchases of raw materials, primarily titanium-containing
feedstocks, are denominated in U.S. dollars, while labor and other production
costs are primarily denominated in local currencies. Fluctuations in the value
of the U.S. dollar relative to other currencies decreased 1996 sales by $14
million compared to 1995 and increased 1995 sales by $54 million compared to
1994.
General corporate
The following table sets forth certain information regarding general
corporate income (expense).
Years ended December 31, Change
1994 1995 1996 1995-94 1996-95
------ ------ ------ ------- -------
(In millions)
Securities earnings .............. $ 3.9 $ 7.4 $ 4.7 $ 3.5 $ (2.7)
Corporate expenses, net .......... (44.7) (26.6) (17.4) 18.1 9.0
Interest expense ................. (83.9) (81.6) (75.0) 2.3 6.6
------ ------ ------ ------ ------
$(124.7) $(100.8) $(87.7) $ 23.9 $ 12.9
====== ====== ====== ====== ======
Securities earnings fluctuate in part based upon the amount of funds
invested and yields thereon. Corporate expenses, net in 1996 were lower than
1995 due to lower provisions for environmental remediation cost. Corporate
expenses, net were significantly lower in 1995 compared to 1994 due to lower
provisions for environmental remediation and litigation costs. The Company
expects corporate expenses, net in 1997 will exceed that of 1996, primarily due
to approximately $30 million of additional environmental remediation accruals
related to the adoption of a new accounting standard. See Note 2 to the
Consolidated Financial Statements.
Interest expense
Interest expense in 1996 declined compared to 1995 principally due to
lower interest rates on variable rate debt, principally Kronos' Deutsche
mark-denominated debt, partially offset by higher levels of such DM-denominated
debt. Interest expense in 1995 declined compared to 1994 due to lower levels of
debt, principally DM-denominated debt, and lower interest rates on such
DM-denominated debt. In January 1997, the Company refinanced certain U.S. debt
and prepaid certain DM-denominated debt, as discussed in "Liquidity and Capital
Resources," and expects its interest expense will be higher in 1997 compared to
1996 as a result of higher anticipated interest rates and average debt levels.
-26-
Provision for income taxes
The principal reasons for the difference between the U.S. federal
statutory income tax rates and the Company's effective income tax rates are
explained in Note 13 to the Consolidated Financial Statements. The Company's
operations are conducted on a worldwide basis and the geographic mix of income
can significantly impact the Company's effective income tax rate. In 1994 and
1996, the geographic mix of income, including losses in certain jurisdictions
for which no current refund was available and recognition of a deferred tax
asset was not considered appropriate, contributed to the Company's effective tax
rate varying from a normally-expected rate.
Due to the Company's higher U.S. earnings before taxes in 1995, the
Company's valuation allowance was reduced by approximately $10 million due to a
change in estimate of the future tax benefit of certain U.S. tax credits which
the Company believes satisfies the "more-likely-than-not" recognition criteria.
During 1995, the Company also recorded deferred tax benefits of $6.6 million due
to the reduction in dividend withholding tax rates pursuant to ratification of
the U.S./Canada income tax treaty. The Company's deferred income tax status at
December 31, 1996 is discussed in "Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows provided by operating, investing and
financing activities for each of the past three years are presented below.
Years ended December 31,
-----------------------------
1994 1995 1996
------ ------ ------
(In millions)
Net cash provided (used) by:
Operating activities ....................... $181.7 $ 71.5 $ 16.5
Investing activities ....................... (32.8) (62.2) (67.6)
Financing activities ....................... (132.1) (3.3) 26.6
------ ------ ------
Net cash provided (used) by operating,
investing and financing activities .......... $ 16.8 $ 6.0 $(24.5)
====== ====== ======
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 1996, declining TiO2 selling prices unfavorably impacted Kronos'
operating income and cash flows from operations compared to 1995. Average
selling prices began a downward trend in the last half of 1995 and continued
throughout 1996. The Company expects prices will begin to increase in the second
quarter of 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.
Changes in the Company's inventories, receivables and payables (excluding
the effect of currency translation) also contributed to the cash provided by
operations in 1994 and 1996; however, such changes used cash in 1995 primarily
due to increased inventory levels. In 1994 and 1995, net proceeds of $15 million
and $26 million, respectively, from the sale of trading securities are
components of the cash provided from operations. Certain German income tax
refunds and
-27-
payments, discussed below, significantly increased cash flows from operating
activities during 1994 and decreased cash flows from operating activities in
1996.
The Company's capital expenditures during the past three years include an
aggregate of $67 million ($26 million in 1996) for the Company's ongoing
environmental protection and compliance programs, including a Canadian waste
acid neutralization facility, a Norwegian onshore tailings disposal system and
German and Norwegian off-gas desulfurization systems. The Company's estimated
1997 and 1998 capital expenditures are $35 million and $36 million,
respectively, and include $3 million and $5 million, respectively, in the area
of environmental protection and compliance primarily related to the off-gas
desulfurization systems. The Company spent $9 million in 1995, $18 million in
1996 and plans to spend an additional $8 million in 1997 in capital expenditures
related to a debottlenecking project at its Leverkusen, Germany chloride-process
TiO2 facility that is expected to increase the Company's worldwide annual
attainable production to approximately 410,000 metric tons in 1998. Capital
expenditures of the manufacturing joint venture are not included in the
Company's capital expenditures. Rheox acquired the minority interests of certain
of its non-U.S. subsidiaries for $5.2 million in 1996.
In 1996, the Company borrowed DM 144 million ($96 million when borrowed)
under its DM credit facility and used DM 49 million ($32 million) to fund the
German tax settlement payments described below, and used the remainder of the
proceeds primarily to fund operations. Repayments of indebtedness in 1996
included payments of $23 million on the Rheox bank term loan, $15 million in
payments on the joint venture term loan and DM 16 million ($10 million when
repaid) in payments on DM-denominated notes payable. Net repayments of
indebtedness in 1995 included $30 million in payments on the Rheox bank term
loan and $15 million in payments on the joint venture term loan. In addition,
the Company borrowed a net DM 56 million ($40 million when borrowed) under
DM-denominated short-term credit lines. In 1994, the Company borrowed DM 75
million ($45 million when borrowed) under the DM credit facility, and repayments
of indebtedness included DM 225 million ($140 million when paid) in payments on
the DM credit facility, $15 million in payments on the Rheox bank term loan and
$15 million in payments on the joint venture term loan.
In order to improve its near-term liquidity, during January 1997, the
Company refinanced its Rheox subsidiary, obtaining a net $125 million of new
long-term financing. The net proceeds, along with other available funds, were
used to prepay DM 207 million ($127 million when paid) of the Company's DM term
loan and to repay DM 43 million ($26 million when paid) of the Company's DM
revolving credit facility, leaving DM 130 million ($80 million) available for
borrowing at January 31, 1997. As a result of the refinancing and prepayment,
the Company's aggregate scheduled debt payments for 1997 and 1998 decreased by
$103 million ($64 million in 1997 and $39 million in 1998). In connection with
the prepayment, the Company and its lenders modified certain financial covenants
of the DM credit agreement and NL guaranteed the facility.
At December 31, 1996, the Company had cash and cash equivalents
aggregating $114 million (44% held by non-U.S. subsidiaries) including
restricted cash and cash equivalents of $11 million. At December 31, 1996, after
giving pro forma
-28-
effect for the refinancing discussed above, the Company had cash and cash
equivalents aggregating $87 million and the Company's subsidiaries had $9
million and $102 million available for borrowing under U.S. and non-U.S. credit
facilities, respectively. At December 31, 1996, the Company had complied with,
or had obtained waivers for, all financial covenants governing its debt
agreements.
Dividends paid during 1996 totaled $15.3 million. No dividends were paid
in 1994 or 1995. In October 1996, the Company's Board of Directors suspended the
Company's quarterly dividend and the Company is currently unable to pay
dividends due to certain restrictions under the indentures of the Senior Notes.
Based upon the Company's expectations for the TiO2 industry and
anticipated demands on the Company's cash resources as discussed herein, the
Company expects to have sufficient liquidity to meet its near-term obligations
including operations, capital expenditures and debt service. To the extent that
actual developments differ from Company's expectations, the Company's liquidity
could be adversely affected.
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. During 1994, the German tax authorities withdrew
certain proposed tax deficiencies of DM 100 million and remitted tax refunds
aggregating DM 225 million ($136 million when received), including interest, on
a tentative basis while examination of the Company's German income tax returns
continued. The Company subsequently reached an agreement with the German tax
authorities regarding such examinations which resolved certain significant tax
contingencies for years through 1990. The Company received final assessments and
paid certain tax deficiencies of approximately DM 50 million ($32 million),
including interest, in settlement of these issues in 1996. The Company considers
the agreement to be a favorable resolution of the contingencies and the payment
was within previously-accrued amounts for such matters.
Certain other German tax contingencies remain outstanding and will
continue to be litigated. Although the Company believes that it will ultimately
prevail in the litigation, the Company has granted a DM 100 million ($64 million
at December 31, 1996) lien on its Nordenham, Germany TiO2 plant in favor of the
German tax authorities until the litigation is resolved. No assurances 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.
At December 31, 1996, the Company had net deferred tax liabilities of $152
million. The Company operates in numerous tax jurisdictions, in certain of which
it has temporary differences that net to deferred tax assets (before valuation
allowance). The Company has provided a deferred tax valuation allowance of $207
million at December 31, 1996, principally related to the U.S. and Germany,
-29-
partially offsetting deferred tax assets which the Company believes do not
currently meet the "more-likely-than-not" recognition criteria.
In addition to the chemicals businesses conducted through Kronos and
Rheox, the Company also has certain interests and associated liabilities
relating to certain discontinued or divested businesses and other holdings of
marketable equity securities including securities issued by Valhi and other
Contran subsidiaries.
The Company has been named as a defendant, PRP, or both, in a number of
legal proceedings associated with environmental matters, including waste
disposal sites, mining locations and facilities currently or previously owned,
operated or used by the Company, certain of which are on the U.S. EPA's
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
for reasonably estimable costs of such matters, but the Company's ultimate
liability may be affected by a number of factors, including changes in remedial
alternatives and costs and the allocation of such costs among PRPs. The Company
is also a defendant in a number of legal proceedings seeking damages for
personal injury and property damage arising out of the sale of lead pigments and
lead-based paints. There is no assurance that the Company will not incur future
liability in respect of this pending litigation in view of the inherent
uncertainties involved in court and jury rulings in pending and possible future
cases. However, 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 reasonably be estimated.
The Company currently believes the disposition of all claims and disputes,
individually or in the aggregate, should not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity. There can be no assurance that additional matters of these types will
not arise in the future. See Item 3. "Legal Proceedings" and Note 17 to the
Consolidated Financial Statements.
As discussed above, the Company has substantial operations located outside
the United States for which the functional currency is not the U.S. dollar. As a
result, the reported amount of the Company's assets and liabilities related to
its non-U.S. operations, and therefore the Company's consolidated net assets,
will fluctuate based upon changes in currency exchange rates. The carrying value
of the Company's net investment in its German operations is a net liability due
principally to its DM credit facility, while its net investment in its other
non-U.S. operations are net assets.
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
in the past has sought and in the future may seek to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, issue
additional securities, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps
-30-
to manage its liquidity and capital resources. In the normal course of its
business, the Company may review opportunities for the acquisition, divestiture,
joint venture or other business combinations in the chemicals 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. See Note 10 to the
Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of
the fiscal year covered by this report (the "NL Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
NL Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
NL Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
NL Proxy Statement. See also Note 16 to the Consolidated Financial Statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
-31-
The consolidated financial statements and schedules listed by the
Registrant on the accompanying Index of Financial Statements and
Schedules (see page F-1) are filed as part of this Annual Report.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended December 31, 1996 and
thereafter through the date of this report.
October 23, 1996 - reported Items 5 and 7.
January 30, 1997 - reported Items 5 and 7.
(c) Exhibits
Included as exhibits are the items listed in the Exhibit Index.
NL will furnish a copy of any of the exhibits listed below upon
payment of $4.00 per exhibit to cover the costs to NL of
furnishing the exhibits. Instruments defining the rights of
holders of long-term debt issues which do not exceed 10% of
consolidated total assets will be furnished to the Securities and
Exchange Commission upon request.
-32-
Item No. Exhibit Index
3.1 By-Laws, as amended on June 28, 1990 - incorporated by reference to
Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1990.
3.2 Certificate of Amended and Restated Certificate of Incorporation
dated June 28, 1990 - incorporated by reference to Exhibit 1 to the
Registrant's Proxy Statement on Schedule 14A for the annual meeting
held on June 28, 1990.
4.1 Registration Rights Agreement dated October 30, 1991, by and between
the Registrant and Tremont Corporation - incorporated by reference
to Exhibit 4.3 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.
4.2 Indenture dated October 20, 1993 governing the Registrant's 11.75%
Senior Secured Notes due 2003, including form of Senior Note
incorporated by reference to Exhibit 4.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
4.3 Senior Mirror Notes dated October 20, 1993 - incorporated by
reference to Exhibit 4.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
4.4 Senior Note Subsidiary Pledge Agreement dated October 20, 1993
between Registrant and Kronos, Inc. - incorporated by reference to
Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993.
4.5 Third Party Pledge and Intercreditor Agreement dated October 20,
1993 between Registrant, Chase Manhattan Bank (National Association)
and Chemical Bank - incorporated by reference to Exhibit 4.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
4.6 Indenture dated October 20, 1993 governing the Registrant's 13%
Senior Secured Discount Notes due 2005, including form of Discount
Note - incorporated by reference to Exhibit 4.6 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
4.7 Discount Mirror Notes dated October 20, 1993 - incorporated by
reference to Exhibit 4.8 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
4.8 Discount Note Subsidiary Pledge Agreement dated October 20, 1993
between Registrant and Kronos, Inc. - incorporated by reference to
Exhibit 4.9 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993.
-33-
10.1 Amended and Restated Loan Agreement dated as of October 15, 1993
among Kronos International, Inc., the Banks set forth therein,
Hypobank International S.A., as Agent and Banque Paribas, as
Co-agent - incorporated by reference to Exhibit 10.17 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.2 Second Amended and Restated Loan Agreement dated as of January 31,
1997 among Kronos International, Inc., Hypobank International S.A.,
as Agent, and the Banks set forth therein.
10.3 Amended and Restated Liquidity Undertaking dated October 15, 1993 by
the Registrant, Kronos, Inc. and Kronos International, Inc. to
Hypobank International S.A., as agent, and the Banks set forth
therein - incorporated by reference to Exhibit 10.18 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.4 Second Amended and Restated Liquidity Undertaking dated January 31,
1997 by the Registrant, Kronos, Inc. and Kronos International, Inc.
to and in favor of Hypobank International S.A., as Agent, and the
Banks set forth therein.
10.5 Guaranty dated as of January 31, 1997 made by the Registrant in
favor of Hypobank International S.A., as Agent.
10.6 Credit Agreement dated as of March 20, 1991 between Rheox, Inc. and
Subsidiary Guarantors and The Chase Manhattan Bank (National
Association) and the Nippon Credit Bank, Ltd., as Co-agents
incorporated by reference to Exhibit 10.4 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1990.
10.7 Amendments 1 and 2 dated May 1, 1991 and February 15, 1992,
respectively, to the Credit Agreement between Rheox, Inc. and
Subsidiary Guarantors and the Chase Manhattan Bank (National
Association) and the Nippon Credit Bank, Ltd. as Co-agents
incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on form 10-Q for the quarter ended June 30, 1992.
10.8 Third amendment to the Credit Agreement, dated March 5, 1993 between
Rheox, Inc. and Subsidiary Guarantors and the Chase Manhattan Bank
(National Association) and the Nippon Credit Bank, Ltd as Co-agents
- incorporated by reference to Exhibit 10.7 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992.
10.9 Fourth and Fifth Amendments to the Credit Agreement, dated September
23, 1994 and December 15, 1994, respectively, between Rheox, Inc.
and Subsidiary Guarantors and the Chase Manhattan Bank (National
Association) and the Nippon Credit Bank, Ltd. as Co-agents
incorporated by reference to Exhibit 10.6 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994.
-34-
10.10 Sixth and Seventh Amendments to the Credit Agreement, dated
September 23, 1995 and February 2, 1996, respectively, between
Rheox, Inc. and Subsidiary Guarantors and the Chase Manhattan Bank
(National Association) and the Nippon Credit Bank, Ltd. as Co-agents
- incorporated by reference to Exhibit 10.7 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995.
10.11 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 - incorporated by reference to Exhibit 10.1 to the
Registrants' Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
10.12 Amended and Restated Credit Agreement dated as of January 30, 1997
between Rheox, Inc., the Subsidiary Guarantors Party thereto, the
Lenders Party thereto, the Chase Manhattan Bank, as Administrative
Agent, and Bankers Trust Company, as Documentation Agent.
10.13 Credit Agreement dated as of October 18, 1993 among Louisiana
Pigment Company, L.P., as Borrower, the Banks listed therein and
Citibank, N.A., as Agent - incorporated by reference to Exhibit
10.11 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993.
10.14 Security Agreement dated October 18, 1993 from Louisiana Pigment
Company, L.P., as Borrower, to Citibank, N.A., as Agent incorporated
by reference to Exhibit 10.12 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1993.
10.15 Security Agreement dated October 18, 1993 from Kronos Louisiana,
Inc. as Grantor, to Citibank, N.A., as Agent - incorporated by
reference to Exhibit 10.13 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
10.16 KLA Consent and Agreement dated as of October 18, 1993 between
Kronos Louisiana, Inc. and Citibank, N.A., as Agent - incorporated
by reference to Exhibit 10.14 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1993.
10.17 Guaranty dated October 18, 1993, from Kronos, Inc., as guarantor, in
favor of Lenders named therein, as Lenders, and Citibank, N.A., as
Agent - incorporated by reference to Exhibit 10.15 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.18 Mortgage by Louisiana Pigment Company, L.P. dated October 18, 1993
in favor of Citibank, N.A. - incorporated by reference to Exhibit
10.16 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993.
-35-
10.19 Lease Contract dated June 21, 1952, between Farbenfabrieken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung
(German language version and English translation thereof)
incorporated by reference to Exhibit 10.14 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1985.
10.20 Contract on Supplies and Services among Bayer AG, Kronos Titan-GmbH
and Kronos International, Inc. dated June 30, 1995 (English
translation from German language document) - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995.
10.21 Richards Bay Slag Sales Agreement dated May 1, 1995 between Richards
Bay Iron and Titanium (Proprietary) Limited and Kronos, Inc.
incorporated by reference to Exhibit 10.17 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995.
10.22 Formation Agreement dated as of October 18, 1993 among Tioxide
Americas Inc., Kronos Louisiana, Inc. and Louisiana Pigment Company,
L.P. - incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.23 Joint Venture Agreement dated as of October 18, 1993 between Tioxide
Americas Inc. and Kronos Louisiana, Inc. - incorporated by reference
to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993.
10.24 Amendment No. 1 to Joint Venture Agreement dated as of December 20,
1995 between Tioxide Americas Inc. and Kronos Louisiana, Inc. -
incorporated by reference to Exhibit 10.20 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995.
10.25 Kronos Offtake Agreement dated as of October 18, 1993 between Kronos
Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated
by reference to Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
10.26 Amendment No. 1 to Kronos Offtake Agreement dated as of December 20,
1995 between Kronos Louisiana, Inc. and Louisiana Pigment Company,
L.P. - incorporated by reference to Exhibit 10.22 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1995.
10.27 Tioxide Americas Offtake Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Louisiana Pigment Company, L.P. -
incorporated by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.28 Amendment No. 1 to Tioxide Americas Offtake Agreement dated as of
December 20, 1995 between Tioxide Americas Inc. and Louisiana
-36-
Pigment Company, L.P. - incorporated by reference to Exhibit 10.24
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.29 TCI/KCI Output Purchase Agreement dated as of October 18, 1993
between Tioxide Canada Inc. and Kronos Canada, Inc. - incorporated
by reference to Exhibit 10.6 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
10.30 TAI/KLA Output Purchase Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Kronos Louisiana, Inc. -
incorporated by reference to Exhibit 10.7 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.31 Master Technology Exchange Agreement dated as of October 18, 1993
among Kronos, Inc., Kronos Louisiana, Inc., Kronos International,
Inc., Tioxide Group Limited and Tioxide Group Services Limited
incorporated by reference to Exhibit 10.8 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.32 Parents' Undertaking dated as of October 18, 1993 between ICI
American Holdings Inc. and Kronos, Inc. - incorporated by reference
to Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993.
10.33 Allocation Agreement dated as of October 18, 1993 between Tioxide
Americas Inc., ICI American Holdings, Inc., Kronos, Inc. and Kronos
Louisiana, Inc. - incorporated by reference to Exhibit 10.10 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.34* 1985 Long Term Performance Incentive Plan of NL Industries, Inc., as
adopted by the Board of Directors on February 27, 1985 incorporated
by reference to Exhibit A to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held on April
24, 1985.
10.35 Form of Director's Indemnity Agreement between NL and the
independent members of the Board of Directors of NL - incorporated
by reference to Exhibit 10.20 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1987.
10.36* 1989 Long Term Performance Incentive Plan of NL Industries, Inc. -
incorporated by reference to Exhibit B to the Registrant's Proxy
Statement on Schedule 14A for the annual meeting of shareholders
held on May 8, 1996.
10.37* NL Industries, Inc. Variable Compensation Plan - incorporated by
reference to Exhibit A to the Registrant's Proxy Statement on
-37-
Schedule 14A for the annual meeting of shareholders held on May 8,
1996.
10.38* NL Industries, Inc. Retirement Savings Plan, as amended and restated
effective April 1, 1996.
10.39* NL Industries, Inc. 1992 Non-Employee Director Stock Option Plan, as
adopted by the Board of Directors on February 13, 1992 incorporated
by reference to Appendix A to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held April 30,
1992.
10.40 Intercorporate Services Agreement by and between Valhi, Inc. and the
Registrant effective as of January 1, 1996.
10.41 Intercorporate Services Agreement by and between Contran Corporation
and the Registrant effective as of January 1, 1996.
10.42 Intercorporate Services Agreement by and between Tremont Corporation
and the Registrant effective as of January 1, 1996.
10.43 Insurance Sharing Agreement, effective January 1, 1990, by and
between the Registrant, NL Insurance, Ltd. (an indirect subsidiary
of Tremont Corporation) and Baroid Corporation - incorporated by
reference to Exhibit 10.20 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1991.
10.44* Executive severance agreement effective as of February 16, 1994 by
and between the Registrant and Joseph S. Compofelice - incorporated
by reference to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996.
10.45* Executive severance agreement effective as of March 9, 1995 by and
between the Registrant and Lawrence A. Wigdor - incorporated by
reference to Exhibit 10.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996.
10.46* Executive Severance Agreement effective as of December 31, 1991 by
and between the Registrant and J. Landis Martin - incorporated by
reference to Exhibit 10.22 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1991.
10.47* Supplemental Executive Retirement Plan for Executives and Officers
of NL Industries, Inc. effective as of January 1, 1991 incorporated
by reference to Exhibit 10.26 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992.
10.48* Agreement to Defer Bonus Payment dated December 28, 1995 between the
Registrant and Lawrence A. Wigdor and related trust agreement
incorporated by reference to Exhibit 10.43 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995.
-38-
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedules for the year ended December 31, 1996.
99.1 Annual Report of Savings Plan for Employees of NL Industries, Inc.
(Form 11-K) to be filed under Form 10-K/A to the Registrant's Annual
Report on Form 10-K within 180 days after December 31, 1996.
* Management contract, compensatory plan or arrangement.
-39-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NL Industries, Inc.
(Registrant)
By /s/ J. Landis Martin
J. Landis Martin, March 20, 1997
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
/s/ J. Landis Martin /s/ Harold C. Simmons
- ----------------------------------- ----------------------------------------
J. Landis Martin, March 20, 1997 Harold C. Simmons, March 20, 1997
Director, President and Chairman of the Board
Chief Executive Officer
/s/ Glenn R. Simmons /s/ Joseph S. Compofelice
- ----------------------------------- ----------------------------------------
Glenn R. Simmons, March 20, 1997 Joseph S. Compofelice, March 20, 1997
Director Director, Vice President and
Chief Financial Officer
/s/ Kenneth R. Peak /s/ Dr. Lawrence A. Wigdor
- ----------------------------------- ----------------------------------------
Kenneth R. Peak, March 20, 1997 Dr. Lawrence A. Wigdor, March 20, 1997
Director Director, President and Chief
Executive Officer of Kronos and Rheox
/s/ Elmo R. Zumwalt, Jr. /s/ Dennis G. Newkirk
- ----------------------------------- ----------------------------------------
Elmo R. Zumwalt, Jr., March 20,1997 Dennis G. Newkirk, March 20, 1997
Director Vice President and Controller
(Principal Accounting Officer)
-40-
NL INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
Items 8, 14(a) and 14(d)
Index of Financial Statements and Schedules
Financial Statements Pages
Report of Independent Accountants ............................. F-2
Consolidated Balance Sheets - December 31, 1995 and 1996 ...... F-3 / F-4
Consolidated Statements of Operations - Years ended
December 31, 1994, 1995 and 1996 ............................. F-5
Consolidated Statements of Shareholders' Deficit - Years
ended December 31, 1994, 1995 and 1996 ....................... F-6
Consolidated Statements of Cash Flows - Years ended
December 31, 1994, 1995 and 1996 ............................. F-7 / F-9
Notes to Consolidated Financial Statements .................... F-10 / F-36
Financial Statement Schedules
Report of Independent Accountants ............................. S-1
Schedule I - Condensed Financial Information of Registrant .... S-2 / S-7
Schedule II - Valuation and qualifying accounts ............... S-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of NL Industries, Inc.:
We have audited the accompanying consolidated balance sheets of NL
Industries, Inc. as of December 31, 1995 and 1996, and the related consolidated
statements of operations, shareholders' deficit, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NL Industries,
Inc. as of December 31, 1995 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 7, 1997
F-2
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1996
(In thousands, except per share data)
ASSETS
1995 1996
---------- ----------
Current assets:
Cash and cash equivalents, including
restricted cash of $10,104 and $10,895 ........ $ 141,333 $ 114,115
Accounts and notes receivable, less
allowance of $4,039 and $3,813 ................ 147,428 138,538
Refundable income taxes ........................ 4,941 9,267
Inventories .................................... 251,630 232,510
Prepaid expenses ............................... 3,217 4,219
Deferred income taxes .......................... 2,522 1,597
---------- ----------
Total current assets ....................... 551,071 500,246
---------- ----------
Other assets:
Marketable securities .......................... 20,944 23,718
Investment in joint ventures ................... 185,893 181,479
Prepaid pension cost ........................... 22,576 24,821
Deferred income taxes .......................... 788 223
Other .......................................... 31,165 24,825
---------- ----------
Total other assets ......................... 261,366 255,066
---------- ----------
Property and equipment:
Land ........................................... 22,902 21,963
Buildings ...................................... 166,349 165,479
Machinery and equipment ........................ 648,458 660,333
Mining properties .............................. 97,190 95,891
Construction in progress ....................... 11,187 13,231
---------- ----------
946,086 956,897
Less accumulated depreciation and depletion .... 486,870 490,851
---------- ----------
Net property and equipment ................. 459,216 466,046
---------- ----------
$1,271,653 $1,221,358
========== ==========
F-3
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1995 and 1996
(In thousands, except per share data)
LIABILITIES AND SHAREHOLDERS' DEFICIT
1995 1996
----------- -----------
Current liabilities:
Notes payable ................................ $ 39,247 $ 25,732
Current maturities of long-term debt ......... 43,369 91,946
Accounts payable and accrued liabilities ..... 165,985 153,904
Payable to affiliates ........................ 10,181 10,204
Income taxes ................................. 40,088 5,664
Deferred income taxes ........................ 3,555 2,895
----------- -----------
Total current liabilities ................ 302,425 290,345
----------- -----------
Noncurrent liabilities:
Long-term debt ............................... 740,334 737,100
Deferred income taxes ........................ 157,192 151,221
Accrued pension cost ......................... 69,311 57,941
Accrued postretirement benefits cost ......... 60,235 55,935
Other ........................................ 148,511 132,048
----------- -----------
Total noncurrent liabilities ............. 1,175,583 1,134,245
----------- -----------
Minority interest .............................. 3,066 249
----------- -----------
Shareholders' deficit:
Preferred stock - 5,000 shares authorized,
no shares issued or outstanding ............. -- --
Common stock - $.125 par value; 150,000
shares authorized; 66,839 shares issued ..... 8,355 8,355
Additional paid-in capital ................... 759,281 759,281
Adjustments:
Currency translation ....................... (126,934) (118,629)
Pension liabilities ........................ (1,908) (1,822)
Marketable securities ...................... (525) 1,278
Accumulated deficit .......................... (481,432) (485,948)
Treasury stock, at cost (15,748 and 15,721
shares) ..................................... (366,258) (365,996)
----------- -----------
Total shareholders' deficit .............. (209,421) (203,481)
----------- -----------
$ 1,271,653 $ 1,221,358
=========== ===========
Commitments and contingencies (Notes 13 and 17)
See accompanying notes to consolidated financial statements.
F-4
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1994, 1995 and 1996
(In thousands, except per share data)
1994 1995 1996
----------- ----------- -----------
Revenues and other income:
Net sales ........................... $ 887,954 $ 1,023,939 $ 986,074
Other, net .......................... 44,828 22,241 30,480
----------- ----------- -----------
932,782 1,046,180 1,016,554
----------- ----------- -----------
Costs and expenses:
Cost of sales ....................... 649,745 676,184 738,438
Selling, general and administrative . 212,516 189,477 177,464
Interest ............................ 83,926 81,617 75,039
----------- ----------- -----------
946,187 947,278 990,941
----------- ----------- -----------
Income (loss) before income
taxes and minority interest ...... (13,405) 98,902 25,613
Income tax expense .................... 9,734 12,671 14,833
----------- ----------- -----------
Income (loss) before minority
interest ......................... (23,139) 86,231 10,780
Minority interest ..................... 843 622 (37)
----------- ----------- -----------
Net income (loss) ................ $ (23,982) $ 85,609 $ 10,817
=========== =========== ===========
Net income (loss) per share of common
stock and common stock equivalents ... $ (.47) $ 1.66 $ .21
=========== =========== ===========
Weighted average common shares and
common stock equivalents outstanding . 51,022 51,512 51,350
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
Years ended December 31, 1994, 1995 and 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, 1993 $ 8,355 $ 759,281 $(115,803) $ (3,442) $ (2,164) $(543,059) $(367,963) $(264,795)
Net loss ................... -- -- -- -- -- (23,982) -- (23,982)
Treasury stock reissued .... -- -- -- -- -- -- 1,427 1,427
Adjustments ................ -- -- (9,691) 1,807 2,152 -- -- (5,732)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1994 8,355 759,281 (125,494) (1,635) (12) (567,041) (366,536) (293,082)
Net income ................. -- -- -- -- -- 85,609 -- 85,609
Treasury stock reissued .... -- -- -- -- -- -- 278 278
Adjustments ................ -- -- (1,440) (273) (513) -- -- (2,226)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 8,355 759,281 (126,934) (1,908) (525) (481,432) (366,258) (209,421)
Net income ................. -- -- -- -- -- 10,817 -- 10,817
Common dividends declared -
$.30 per share ............ -- -- -- -- -- (15,333) -- (15,333)
Treasury stock reissued .... -- -- -- -- -- -- 262 262
Adjustments ................ -- -- 8,305 86 1,803 -- -- 10,194
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 $ 8,355 $ 759,281 $(118,629) $ (1,822) $ 1,278 $(485,948) $(365,996) $(203,481)
========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1994, 1995 and 1996
(In thousands)
1994 1995 1996
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) ..................... $ (23,982) $ 85,609 $ 10,817
Depreciation, depletion and
amortization ......................... 34,592 38,989 39,664
Noncash interest expense .............. 18,071 19,396 20,959
Deferred income taxes ................. 11,907 (29,248) 2,802
Minority interest ..................... 843 622 (37)
Net (gains) losses from:
Securities transactions ............. 1,220 (1,175) --
Disposition of property and
equipment .......................... 1,981 2,713 2,312
Pension cost, net ..................... (2,753) (7,248) (12,893)
Other postretirement benefits, net .... (3,437) (4,169) (5,086)
Other, net ............................ 68 (477) (126)
--------- --------- ---------
38,510 105,012 58,412
Change in assets and liabilities:
Accounts and notes receivable ....... (13,152) (1,483) 2,798
Inventories ......................... 17,778 (57,378) 8,401
Prepaid expenses .................... 3,221 1,148 (1,426)
Accounts payable and accrued
liabilities ........................ (17,343) (17,700) (3,311)
Income taxes ........................ 109,243 14,861 (39,424)
Accounts with affiliates ............ (2,024) (4,059) 3,229
Other noncurrent assets ............. 2,219 1,587 684
Other noncurrent liabilities ........ 28,706 3,233 (12,825)
Marketable trading securities:
Purchases ......................... (870) (762) --
Dispositions ...................... 15,530 27,102 --
--------- --------- ---------
Net cash provided by operating
activities ......................... 181,818 71,561 16,538
--------- --------- ---------
F-7
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
(In thousands)
1994 1995 1996
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures .................. $ (36,931) $ (64,196) $ (66,906)
Purchase of minority interest ......... -- -- (5,168)
Investment in joint ventures, net ..... 3,133 1,793 4,359
Proceeds from disposition of
property and equipment ............... 598 182 108
Other, net ............................ 362 -- --
--------- --------- ---------
Net cash used by investing
activities ....................... (32,838) (62,221) (67,607)
--------- --------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings .......................... 44,490 57,556 97,503
Principal payments .................. (175,886) (61,128) (55,403)
Dividends paid ........................ -- -- (15,333)
Other, net ............................ (742) 264 (202)
--------- --------- ---------
Net cash provided (used) by
financing activities ............. (132,138) (3,308) 26,565
--------- --------- ---------
Net change during the year from
operating, investing and
financing activities ............. $ 16,842 $ 6,032 $ (24,504)
========= ========= =========
F-8
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
(In thousands)
1994 1995 1996
--------- --------- ---------
Cash and cash equivalents:
Net change during the year from:
Operating, investing and financing
activities ......................... $ 16,842 $ 6,032 $ (24,504)
Currency translation ................ 7,689 4,177 (2,714)
--------- --------- ---------
24,531 10,209 (27,218)
Balance at beginning of year .......... 106,593 131,124 141,333
--------- --------- ---------
Balance at end of year ................ $ 131,124 $ 141,333 $ 114,115
========= ========= =========
Supplemental disclosures - cash paid
(received) for:
Interest, net of amounts capitalized .. $ 66,801 $ 62,078 $ 51,678
Income taxes, net ..................... (111,418) 27,965 50,400
See accompanying notes to consolidated financial statements.
F-9
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 56% 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. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of the
children and grandchildren of Harold C. Simmons, of which Mr. Simmons is the
sole trustee. Mr. Simmons, the Chairman of the Board of NL and the Chairman of
the Board, President, and Chief Executive Officer of Contran and Valhi and a
director of Tremont, may be deemed to control each of such companies.
Note 2 - Summary of significant accounting policies:
Principles of consolidation and management's estimates
The accompanying consolidated financial statements include the accounts of
NL and its majority-owned subsidiaries (collectively, the "Company"). All
material intercompany accounts and balances have been eliminated. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reporting period.
Ultimate actual results may in some instances differ from previously estimated
amounts.
Translation of foreign currencies
Assets and liabilities of subsidiaries whose functional currency is deemed
to be other than the U.S. dollar are translated at year-end rates of exchange
and revenues and expenses are translated at weighted average exchange rates
prevailing during the year. Resulting translation adjustments and the related
income tax effects are accumulated in the currency translation adjustment
component of shareholders' deficit. Currency transaction gains and losses are
recognized in income currently.
F-10
Cash and cash equivalents
Cash equivalents, including restricted cash, include U.S. Treasury
securities purchased under short-term agreements to resell, bank deposits, and
government and commercial notes and bills with original maturities of three
months or less. Restricted cash of approximately $6 million in 1995 and 1996 is
restricted under the Company's joint venture indebtedness agreement and
restricted cash of approximately $4 million in 1995 and $5 million in 1996
secures undrawn letters of credit.
Marketable securities and securities transactions
Marketable securities are classified as either "available-for-sale" or
"trading" and are carried at market based on quoted market prices. Unrealized
gains and losses on trading securities are recognized in income currently.
Unrealized gains and losses on available-for-sale securities, and the related
deferred income tax effects, are accumulated in the marketable securities
adjustment component of shareholders' deficit. See Note 4. Realized gains or
losses are computed based on specific identification of the securities sold.
Inventories
Inventories are stated at the lower of cost (principally average cost) or
market. Amounts are removed from inventories at average cost.
Investment in joint ventures
Investments in 20% to 50%-owned entities are accounted for by the equity
method.
Intangible assets
Intangible assets, included in other noncurrent assets, are amortized by
the straight-line method over the periods expected to be benefitted, not
exceeding ten years.
Property, equipment, depreciation and depletion
Property and equipment are stated at cost. Interest costs related to
major, long-term capital projects are capitalized as a component of construction
costs. Maintenance, repairs and minor renewals are expensed; major improvements
are capitalized.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of ten to forty years for buildings and three to twenty
years for machinery and equipment. Depletion of mining properties is computed by
the unit-of-production and straight-line methods.
F-11
Long-term debt
Long-term debt is stated net of unamortized original issue discount
("OID"). OID is amortized over the period during which cash interest payments
are not required and deferred financing costs are amortized over the term of the
applicable issue, both by the interest method.
Employee benefit plans
Accounting and funding policies for retirement plans and postretirement
benefits other than pensions ("OPEB") are described in Note 11.
The Company accounts for stock-based employee compensation in accordance
with Accounting Principles Board Opinion ("APBO") No. 25, "Accounting for Stock
Issued to Employees," and its various interpretations. Under APBO No. 25, no
compensation cost is generally recognized for fixed stock options in which the
exercise price is not less than the market price on the grant date. Compensation
cost recognized by the Company in accordance with APBO No. 25 has not been
significant in each of the past three years.
Environmental remediation costs
Environmental remediation costs are accrued when estimated future
expenditures are probable and reasonably estimable. The estimated future
expenditures are not discounted to present value. Recoveries of remediation
costs from other parties, if any, are reported as receivables when their receipt
is deemed probable. At December 31, 1995 and 1996, no receivables for recoveries
have been recognized.
The Company will adopt the recognition and disclosure requirements of
AICPA's Statement of Position No. 96-1, "Environmental Remediation Liabilities,"
in the first quarter of 1997. The new rule, among other things, expands the
types of costs which must be considered in determining environmental remediation
accruals. As a result of adopting the new Statement of Position, the Company
expects to recognize a noncash cumulative charge of approximately $30 million in
the first quarter of 1997. The charge is not expected to materially change the
Company's 1997 tax expense due to existing net operating losses for which no
benefit is expected to be recognized. Such charge is comprised primarily of
estimated future undiscounted expenditures associated with managing and
monitoring existing environmental remediation sites. The expenditures consist
principally of legal and professional fees, but do not include litigation
defense costs with respect to situations in which the Company asserts that no
liability exists. Currently, such expenditures are expensed as incurred.
Net sales
Sales are recognized as products are shipped.
Income taxes
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
investments in subsidiaries and unconsolidated affiliates not included in the
F-12
Company's U.S. tax group (the "NL Tax Group"). The Company periodically
evaluates its deferred tax assets and adjusts any related valuation allowance.
The Company's valuation allowance is equal to the amount of deferred tax assets
which the Company believes do not meet the "more-likely-than-not" realization
criteria.
Income (loss) per share of common stock
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.
Note 3 - Business and geographic segments:
The Company's operations are conducted in two business segments - TiO2
conducted by Kronos and specialty chemicals conducted by Rheox. Titanium dioxide
pigments are used to impart whiteness, brightness and opacity to a wide variety
of products, including paints, plastics, paper, fibers and ceramics. Specialty
chemicals include rheological additives which control the flow and leveling
characteristics of a variety of products, including paints, inks, lubricants,
sealants, adhesives and cosmetics. General corporate assets consist principally
of cash, cash equivalents and marketable securities. At December 31, 1995 and
1996, the net assets of non-U.S. subsidiaries included in consolidated net
assets approximated $121 million and $124 million, respectively.
Years ended December 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
(In thousands)
Business segments
Net sales:
Kronos .......................... $ 770,077 $ 894,149 $ 851,179
Rheox ........................... 117,877 129,790 134,895
----------- ----------- -----------
$ 887,954 $ 1,023,939 $ 986,074
=========== =========== ===========
Operating income:
Kronos .......................... $ 80,515 $ 161,175 $ 71,606
Rheox ........................... 30,837 38,544 41,767
----------- ----------- -----------
111,352 199,719 113,373
General corporate income (expense):
Securities earnings ............. 3,855 7,419 4,708
Expenses, net ................... (44,686) (26,619) (17,429)
Interest expense ................ (83,926) (81,617) (75,039)
----------- ----------- -----------
$ (13,405) $ 98,902 $ 25,613
=========== =========== ===========
Capital expenditures:
Kronos .......................... $ 34,522 $ 60,699 $ 64,201
Rheox ........................... 2,283 3,464 2,665
General corporate ............... 126 33 40
----------- ----------- -----------
$ 36,931 $ 64,196 $ 66,906
=========== =========== ===========
F-13
Years ended December 31,
1994 1995 1996
----------- ----------- -----------
(In thousands)
Depreciation, depletion and
amortization:
Kronos ........................ $ 31,156 $ 35,706 $ 36,295
Rheox ......................... 3,153 3,089 3,175
General corporate ............. 283 194 194
----------- ----------- -----------
$ 34,592 $ 38,989 $ 39,664
=========== =========== ===========
Geographic areas
Net sales - point of origin:
United States ................. $ 303,475 $ 339,568 $ 348,071
Europe ........................ 587,291 703,206 653,828
Canada ........................ 122,957 139,341 139,346
Eliminations .................. (125,769) (158,176) (155,171)
----------- ----------- -----------
$ 887,954 $ 1,023,939 $ 986,074
=========== =========== ===========
Net sales - point of destination:
United States ................. $ 238,568 $ 258,850 $ 273,110
Europe ........................ 468,915 580,794 523,667
Canada ........................ 64,374 60,472 56,436
Other ......................... 116,097 123,823 132,861
----------- ----------- -----------
$ 887,954 $ 1,023,939 $ 986,074
=========== =========== ===========
Operating income:
United States ................. $ 49,358 $ 75,650 $ 71,914
Europe ........................ 50,273 103,096 27,971
Canada ........................ 11,721 20,973 13,488
----------- ----------- -----------
$ 111,352 $ 199,719 $ 113,373
=========== =========== ===========
December 31,
------------------------------------------
1994 1995 1996
---------- ---------- ----------
(In thousands)
Identifiable assets
Business segments:
Kronos ....................... $ 950,200 $1,063,369 $1,064,285
Rheox ........................ 83,176 83,620 90,095
General corporate ............ 129,034 124,664 66,978
---------- ---------- ----------
$1,162,410 $1,271,653 $1,221,358
========== ========== ==========
Geographic segments:
United States ................ $ 308,017 $ 311,374 $ 303,547
Europe ....................... 594,921 690,353 718,626
Canada ....................... 130,438 145,262 132,207
General corporate ............ 129,034 124,664 66,978
---------- ---------- ----------
$1,162,410 $1,271,653 $1,221,358
========== ========== ==========
F-14
Note 4 - Marketable securities and securities transactions:
December 31,
----------------------
1995 1996
-------- --------
(In thousands)
Available-for-sale securities - noncurrent
marketable equity securities:
Unrealized gains ................................. $ 1,962 $ 3,516
Unrealized losses ................................ (2,770) (1,550)
Cost ............................................. 21,752 21,752
-------- --------
Aggregate market ............................. $ 20,944 $ 23,718
======== ========
Years ended December 31,
----------------------------
1994 1995 1996
------- ------- ----
(In thousands)
Securities transactions gains (losses)
on trading securities:
Unrealized .................................. $(1,177) $ 1,125 $--
Realized .................................... (43) 50 --
------- ------- ---
$(1,220) $ 1,175 $--
======= ======= ===
Note 5 - Inventories:
December 31,
---------------------------
1995 1996
-------- --------
(In thousands)
Raw materials ............................ $ 35,075 $ 43,284
Work in process .......................... 9,132 10,356
Finished products ........................ 172,330 142,091
Supplies ................................. 35,093 36,779
-------- --------
$251,630 $232,510
======== ========
Note 6 - Investment in joint ventures:
December 31,
------------------------
1995 1996
-------- --------
(In thousands)
TiO2 manufacturing joint venture ............... $183,129 $179,195
Other .......................................... 2,764 2,284
-------- --------
$185,893 $181,479
======== ========
Kronos Louisiana, Inc. ("KLA"), a wholly-owned subsidiary of Kronos, owns
a 50% interest in Louisiana Pigment Company, L.P. ("LPC"). LPC is a
manufacturing joint venture that is also 50%-owned by Tioxide Group, Ltd., a
wholly-owned subsidiary of Imperial Chemicals Industries PLC ("Tioxide"). LPC
owns and operates a chloride-process TiO2 plant in Lake Charles, Louisiana.
F-15
LPC has long-term debt that is collateralized by the partnership interests
of the partners and substantially all of the assets of LPC. The long-term debt
consists of two tranches, one attributable to each partner, and each tranche is
serviced through (i) the purchase of the plant's TiO2 output in equal quantities
by the partners and (ii) cash capital contributions. KLA is required to purchase
one-half of the TiO2 produced by LPC. KLA's tranche of LPC's debt is reflected
as outstanding indebtedness of the Company because Kronos has guaranteed the
purchase obligation relative to the debt service of its tranche. See Note 10.
LPC is intended to be operated on a break-even basis and, accordingly,
Kronos' transfer price for its share of the TiO2 produced is equal to its share
of LPC's production costs and interest expense. Kronos' share of the production
costs are reported as cost of sales as the related TiO2 acquired from LPC is
sold, and its share of the interest expense is reported as a component of
interest expense.
Summary balance sheets of LPC are shown below.
December 31,
----------------------
1995 1996
-------- --------
ASSETS (In thousands)
Current assets ..................................... $ 49,398 $ 47,861
Other assets ....................................... 1,553 1,224
Property and equipment, net ........................ 335,254 325,617
-------- --------
$386,205 $374,702
======== ========
LIABILITIES AND PARTNERS' EQUITY
Long-term debt, including current portion:
Kronos tranche ................................... $ 73,286 $ 57,858
Tioxide tranche .................................. 59,400 16,800
Note payable to Tioxide .......................... -- 21,000
Other liabilities, primarily current ............... 17,719 14,084
-------- --------
150,405 109,742
Partners' equity ................................... 235,800 264,960
-------- --------
$386,205 $374,702
======== ========
F-16
Summary income statements of LPC are shown below.
Years ended December 31,
------------------------------------
1994 1995 1996
-------- -------- --------
(In thousands)
Revenues and other income:
Kronos ............................. $ 70,492 $ 76,365 $ 74,916
Tioxide ............................ 67,218 75,241 73,774
Interest income .................... 462 653 518
-------- -------- --------
138,172 152,259 149,208
-------- -------- --------
Cost and expenses:
Cost of sales ...................... 126,972 140,103 140,361
General and administrative ......... 572 385 377
Interest ........................... 10,628 11,771 8,470
-------- -------- --------
138,172 152,259 149,208
-------- -------- --------
Net income ....................... $ -- $ -- $ --
======== ======== ========
Note 7 - Other noncurrent assets:
December 31,
---------------------
1995 1996
------- -------
(In thousands)
Intangible assets, net of accumulated
amortization of $20,562 and $22,207 ............... $11,803 $ 7,939
Deferred financing costs, net ...................... 13,199 9,791
Other .............................................. 6,163 7,095
------- -------
$31,165 $24,825
======= =======
Note 8 - Accounts payable and accrued liabilities:
December 31,
---------------------------
1995 1996
-------- --------
(In thousands)
Accounts payable ......................... $ 68,734 $ 60,648
-------- --------
Accrued liabilities:
Employee benefits ...................... 49,884 34,618
Environmental costs .................... 6,000 6,000
Interest ............................... 6,633 9,429
Miscellaneous taxes .................... 2,557 4,073
Other .................................. 32,177 39,136
-------- --------
97,251 93,256
-------- --------
$165,985 $153,904
======== ========
F-17
Note 9 - Other noncurrent liabilities:
December 31,
----------------------
1995 1996
-------- --------
(In thousands)
Environmental costs ................................ $112,827 $106,849
Employee benefits .................................. 13,148 11,960
Insurance claims expense ........................... 12,088 11,673
Deferred technology fee income ..................... 8,456 --
Other .............................................. 1,992 1,566
-------- --------
$148,511 $132,048
======== ========
Note 10 - Notes payable and long-term debt:
December 31,
----------------------
1995 1996
-------- --------
(In thousands)
Notes payable (DM 56,000 and DM 40,000,
respectively) ..................................... $ 39,247 $ 25,732
======== ========
Long-term debt:
NL Industries:
11.75% Senior Secured Notes .................... $250,000 $250,000
13% Senior Secured Discount Notes .............. 132,034 149,756
-------- --------
382,034 399,756
Kronos:
DM bank credit facility (DM 397,610 and
DM 539,971, respectively) ..................... 276,895 347,362
LPC term loan .................................. 73,286 57,858
Other .......................................... 13,672 9,125
-------- --------
363,853 414,345
Rheox:
Bank term loan ................................. 37,263 14,659
Other .......................................... 553 286
-------- --------
37,816 14,945
783,703 829,046
Less current maturities .......................... 43,369 91,946
-------- --------
$740,334 $737,100
The Company's $250 million principal amount of 11.75% Senior Secured Notes
due 2003 and $188 million principal amount at maturity ($100 million proceeds at
issuance) of 13% Senior Secured Discount Notes due 2005 (collectively, the
"Notes") are collateralized by a series of intercompany notes from Kronos
International, Inc. ("KII"), a wholly-owned subsidiary of Kronos, to NL, the
interest rate and payment terms of which mirror those of the respective Notes
(the "Mirror Notes"). The Senior Secured Notes are also collateralized by a
first priority lien on the stock of Kronos and a second priority lien on the
stock of Rheox. In the event of foreclosure, the Note holders would have access
F-18
to the consolidated assets, earnings and equity of the Company. The Company
believes the collateralization of the Notes, as described above, is the
functional economic equivalent to a full, unconditional and joint and several
guarantee of the Notes by Kronos and Rheox.
The Senior Secured Notes and the Senior Secured Discount Notes are
redeemable, at the Company's option, after October 2000 and October 1998,
respectively. The redemption prices range from 101.5% (starting October 2000)
declining to 100% (after October 2001) of the principal amount for the Senior
Secured Notes and range from 106% (starting October 1998) declining to 100%
(after October 2001) of the accreted value of the Senior Secured Discount Notes.
In the event of a Change of Control, as defined, the Company would be required
to make an offer to purchase the Notes at 101% of the principal amount of the
Senior Secured Notes and 101% of the accreted value of the Senior Secured
Discount Notes. The Notes are issued pursuant to indentures which contain a
number of covenants and restrictions which, among other things, restrict the
ability of the Company and its subsidiaries to incur debt, incur liens, pay
dividends or merge or consolidate with, or sell or transfer all or substantially
all of their assets to, another entity. At December 31, 1996, no amounts were
available for payment of dividends pursuant to the terms of the indentures. The
Senior Secured Discount Notes do not require cash interest payments through
October 1998. The net carrying value of the Senior Secured Discount Notes per
$100 principal amount at maturity was $70.42 and $79.87 at December 31, 1995 and
1996, respectively. At December 31, 1996, the quoted market price of the Senior
Secured Notes was $106.08 per $100 principal amount and the quoted market price
of the Senior Secured Discount Notes was $86.34 per $100 principal amount (1995
- - $107.06 and $80.95, respectively).
At December 31, 1996, the DM credit facility consists of a DM 396 million
term loan and a DM 250 million revolving credit facility, of which DM 144
million is outstanding. Borrowings bear interest at DM LIBOR plus 1.625% (5.5%
and 4.76% at December 31, 1995 and 1996, respectively), and are collateralized
by the stock of certain KII subsidiaries. In January 1997, the Company completed
an amendment to the DM credit facility in which the Company prepaid a net DM 207
million ($127 million) of the term loan and DM 43 million ($26 million) of the
revolver, leaving DM 188 million and DM 100 million outstanding, respectively.
In addition, the aggregate amount available for borrowing under the revolver was
reduced to DM 230 million. The majority of the cash generated from a refinancing
of the Rheox term loan, discussed below, was used for a portion of such
prepayments. As amended, the term loan is due in 1998 and 1999 and the revolver
is due in 2000, borrowings bear interest at DM LIBOR plus 2.75%, additional
collateral in the form of pledges of certain Canadian and German assets was
granted and NL has guaranteed the facility.
At December 31, 1996, Rheox's term loan is due in quarterly installments
through December 1997, and is collateralized principally by the stock of Rheox
and its U.S. subsidiaries. The term loan bears interest, at Rheox's option, at
the prime rate plus 1.5% or LIBOR plus 2.5% (1995 - 8.3% with LIBOR rate
borrowings; 1996 - 9.8% with prime rate borrowings). In January 1997, the
Company completed a refinancing of this facility which increased the term loan
to $125 million and provided for a $25 million revolving facility, generating a
net $135 million in cash proceeds and credit availability. As amended, the term
F-19
loan is due in quarterly installments commencing in September 1997 through
January 2004 and the revolver is due no later than January 2004. The margin on
LIBOR-based borrowings will range from .75% to 1.75%, depending upon the level
of a certain Rheox financial ratio.
After giving effect for the Rheox term loan and the amendment to the DM
credit facility, unused lines of credit available for borrowing under the Rheox
U.S. facility and under the Company's non-U.S. credit facilities, including the
DM facility, approximated $9 million and $102 million, respectively, at December
31, 1996.
Borrowings under KLA's tranche of LPC's term loan bear interest at U.S.
LIBOR plus 1.625% (7.315% and 7.245% at December 31, 1995 and 1996,
respectively) and are repayable in quarterly installments through September
2000. See Note 6.
Notes payable at December 31, 1995 and 1996 consists of DM 56 million and
DM 40 million, respectively, of short-term borrowings due within one year from
non-U.S. banks with interest rates ranging from 4.25% to 4.856% in 1995 and from
3.25% to 3.70% in 1996.
The aggregate maturities of long-term debt at December 31, 1996 on a
historical and a pro forma basis, giving effect for the January 1997 refinancing
described above, are shown in the table below.
Years ending December 31, Historical Pro forma
---------- ---------
(In thousands)
1997 $ 91,946 $ 28,152
1998 103,938 65,040
1999 133,295 120,609
2000 11,855 26,855
2001 215 22,715
2002 and thereafter 525,541 567,937
-------- --------
866,790 831,308
Less unamortized original issue discount
on the Senior Secured Discount Notes 37,744 37,744
-------- --------
$829,046 $793,564
======== ========
Note 11 - Employee benefit plans:
Company-sponsored pension plans
The Company maintains various defined benefit and defined contribution
pension plans covering substantially all employees. Personnel employed by
non-U.S. subsidiaries are covered by separate plans in their respective
countries and U.S. employees are covered by various plans including the
Retirement Programs of NL Industries, Inc. (the "NL Pension Plan").
A majority of U.S. employees are eligible to participate in a contributory
savings plan. The Company partially matches employee contributions to the Plan,
and, beginning April 1996, the Company contributes to each employee's account an
amount equal to approximately 3% of the employee's annual eligible earnings. The
Company also has an unfunded defined contribution plan covering certain
F-20
executives, and contributions are based on a formula involving eligible
earnings. The Company's expense related to these plans was $.8 million in 1994,
and $1.2 million in 1995 and $1.3 million in 1996.
Defined pension benefits are generally based upon years of service and
compensation under fixed-dollar, final pay or career average formulas, and the
related expenses are based upon independent actuarial valuations. The funding
policy for U.S. defined benefit plans is to contribute amounts which satisfy
funding requirements of the Employee Retirement Income Security Act of 1974, as
amended, and the Retirement Protection Act of 1994. Non-U.S. defined benefit
pension plans are funded in accordance with applicable statutory requirements.
Certain actuarial assumptions used in measuring the defined benefit
pension assets, liabilities and expenses are presented below.
Years ended December 31,
1994 1995 1996
---------- ---------- ----------
(Percentages)
Discount rate ..................... 8.5 7.0 to 8.5 6.5 to 8.5
Rate of increase in future
compensation levels .............. 5.0 to 6.0 3.5 to 6.0 3.5 to 6.0
Long-term rate of return on
plan assets ...................... 8.5 to 9.0 8.0 to 9.0 7.0 to 9.0
During 1996, the Company curtailed certain U.S. employee pension benefits
and recognized a $4.6 million gain. Plan assets are comprised primarily of
investments in U.S. and non-U.S. corporate equity and debt securities,
short-term investments, mutual funds and group annuity contracts.
Statement of Financial Accounting Standards ("SFAS") No. 87, "Employers'
Accounting for Pension Costs" requires that an additional pension liability be
recognized when the unfunded accumulated pension benefit obligation exceeds the
unfunded accrued pension liability. Variances from actuarially-assumed rates,
including the rate of return on pension plan assets, will result in additional
increases or decreases in accrued pension liabilities, pension expense and
funding requirements in future periods. At December 31, 1996, 79% of the
projected benefit obligations in excess of plan assets relate to non-U.S. plans.
The funded status of the Company's defined benefit pension plans is set forth
below.
F-21
Assets exceed Accumulated benefits
accumulated benefits exceed assets
---------------------- ----------------------
December 31, December 31,
---------------------- ----------------------
1995 1996 1995 1996
--------- --------- --------- ---------
(In thousands)
Actuarial present value of benefit
obligations:
Vested benefits ................. $ 47,181 $ 48,953 $ 156,275 $ 167,411
Nonvested benefits .............. 3,744 4,075 2,562 9,466
--------- --------- --------- ---------
Accumulated benefit obligations . 50,925 53,028 158,837 176,877
Effect of projected salary
increases ...................... 7,885 7,598 22,373 25,741
--------- --------- --------- ---------
Projected benefit obligations
("PBO") ........................ 58,810 60,626 181,210 202,618
Plan assets at fair value ......... 71,345 78,511 124,632 126,580
--------- --------- --------- ---------
Plan assets over (under) PBO ...... 12,535 17,885 (56,578) (76,038)
Unrecognized net loss (gain) from
experience different from
actuarial assumptions ............ 7,155 3,567 (20,643) 11,414
Unrecognized prior service cost
(credit) ......................... 3,147 3,838 (2,711) 262
Unrecognized transition obligations
(assets) being amortized over 15
to 18 years ...................... (261) (469) 2,517 2,043
Adjustment required to recognize
minimum liability ................ -- -- (1,908) (1,822)
--------- --------- --------- ---------
Total prepaid (accrued)
pension cost ............... 22,576 24,821 (79,323) (64,141)
Less current portion .............. -- -- (10,012) (6,200)
--------- --------- --------- ---------
Noncurrent prepaid (accrued)
pension cost ............... $ 22,576 $ 24,821 $(69,311) $(57,941)
========= ========= ========= =========
The components of the net periodic defined benefit pension cost, excluding
curtailment gain, are set forth below.
Years ended December 31,
------------------------------------
1994 1995 1996
-------- -------- --------
(In thousands)
Service cost benefits ................ $ 4,905 $ 4,325 $ 3,482
Interest cost on PBO ................. 15,371 17,853 16,577
Return on plan assets ................ (8,039) (16,574) (16,245)
Net amortization and deferrals ....... (5,940) (2,399) (39)
-------- -------- --------
$ 6,297 $ 3,205 $ 3,775
======== ======== ========
F-22
Incentive bonus programs
The Company has incentive bonus programs for certain employees providing
for annual payments, which may be in the form of NL common stock, based on
formulas involving the profitability of Kronos and Rheox in relation to the
annual operating plan of the employee's business unit and, for most of these
employees, individual performance.
Postretirement benefits other than pensions
In addition to providing pension benefits, the Company currently provides
certain health care and life insurance benefits for eligible retired employees.
Certain of the Company's U.S. and Canadian employees may become eligible for
such postretirement health care and life insurance benefits if they reach
retirement age while working for the Company. In 1989, the Company began phasing
out such benefits for currently active U.S. employees over a ten-year period.
The majority of all retirees are required to contribute a portion of the cost of
their benefits and certain current and future retirees are eligible for reduced
health care benefits at age 65. The Company's policy is to fund medical claims
as they are incurred, net of any contributions by the retirees.
For measuring the OPEB liability at December 31, 1996, the expected rate
of increase in health care costs is 8% in 1997, gradually declining to 5% in
2000. Other assumptions used to measure the liability and expense are presented
below.
Years ended December 31,
------------------------
1994 1995 1996
------- ------ -----
(Percentages)
Discount rate ....................................... 8.5 7.5 7.5
Long-term rate for compensation increases ........... 6.0 4.5 6.0
Long-term rate of return on plan assets ............. 9.0 9.0 9.0
Variances from actuarially-assumed rates will result in additional
increases or decreases in accrued OPEB liabilities, net periodic OPEB expense
and funding requirements in future periods. If the health care cost trend rate
was increased by one percentage point for each year, postretirement benefit
expense would have increased approximately $.2 million in 1996, and the
actuarial present value of accumulated benefit obligations at December 31, 1996
would have increased by approximately $2.2 million. During 1996, the Company
curtailed certain Canadian employee OPEB benefits and recognized a $1.3 million
gain.
F-23
December 31,
-------------------
1995 1996
------- -------
(In thousands)
Actuarial present value of accumulated benefit
obligations:
Retiree benefits ..................................... $53,211 $41,768
Other fully eligible active plan participants ........ 1,228 840
Other active plan participants ....................... 2,322 2,152
------- -------
56,761 44,760
Plan assets at fair value .............................. 7,103 6,689
------- -------
Accumulated postretirement benefit obligations
in excess of plan assets .............................. 49,658 38,071
Unrecognized net gain from experience different
from actuarial assumptions ............................ 4,676 7,083
Unrecognized prior service credit ...................... 12,199 16,259
------- -------
Total accrued postretirement benefits cost ......... 66,533 61,413
Less current portion ................................... 6,298 5,478
------- -------
Noncurrent accrued postretirement benefits
cost .............................................. $60,235 $55,935
======= =======
The components of the Company's net periodic postretirement benefit cost,
excluding curtailment gain, are set forth below.
Years ended December 31,
-----------------------------
1994 1995 1996
------- ------- -------
(In thousands)
Interest cost on accumulated benefit
obligations .................................. $ 4,338 $ 4,415 $ 3,995
Service cost benefits earned during the year .. 99 101 112
Return on plan assets ......................... (688) (637) (596)
Net amortization and deferrals ................ (1,495) (1,870) (1,473)
------- ------- -------
$ 2,254 $ 2,009 $ 2,038
======= ======= =======
Note 12 - Shareholders' deficit:
Common stock
Shares of common stock
----------------------------------
Treasury
Issued stock Outstanding
------- -------- -----------
(In thousands)
Balance at December 31, 1993 ........... 66,839 15,949 50,890
Treasury shares reissued ............. -- (162) 162
------- ------- -------
Balance at December 31, 1994 ........... 66,839 15,787 51,052
Treasury shares reissued ............. -- (39) 39
------- ------- -------
Balance at December 31, 1995 ........... 66,839 15,748 51,091
Treasury shares reissued ............. -- (27) 27
------- ------- -------
Balance at December 31, 1996 ........... 66,839 15,721 51,118
======= ======= =======
F-24
Common stock options
The 1989 Long Term Performance Incentive Plan of NL Industries, Inc. (the
"NL Option Plan") provides for the discretionary grant of restricted common
stock, stock options, stock appreciation rights ("SARs") and other incentive
compensation to officers and other key employees of the Company. Although
certain stock options granted pursuant to a similar plan which preceded the NL
Option Plan ("the Predecessor Option Plan") remain outstanding at December 31,
1996, no additional options may be granted under the Predecessor Option Plan.
Up to five million shares of NL common stock may be issued pursuant to the
NL Option Plan and at December 31, 1996, an aggregate of 2.5 million shares were
available for future grants. The NL Option Plan provides for the grant of
options that qualify as incentive options and for options which are not so
qualified. Generally, stock options and SARs (collectively, "options") are
granted at a price equal to or greater than 100% of the market price at the date
of grant, vest over a five year period and expire ten years from the date of
grant. Restricted stock, forfeitable unless certain periods of employment are
completed, is held in escrow in the name of the grantee until the restriction
period expires. No SARs have been granted under the NL Option Plan.
In addition to the NL Option Plan, the Company maintains a stock option
plan for its nonemployee directors. At December 31, 1996, there were options to
acquire 10,000 shares of common stock outstanding of which 8,000 were fully
vested.
Changes in outstanding options granted pursuant to the NL Option Plan, the
Predecessor Option Plan and the nonemployee director plan are summarized in the
table below.
F-25
Exercise price Amount
per share payable
-------------- upon
Shares Low High exercise
-------- ------ ------ --------
(In thousands, except per share amounts)
Outstanding at December 31, 1993 ..... 1,718 $ 4.81 $24.19 $ 20,624
Granted ............................ 675 8.69 10.69 6,315
Exercised .......................... (13) 9.31 10.50 (120)
Forfeited .......................... (6) 5.00 9.31 (46)
-------- ------ ------ --------
Outstanding at December 31, 1994 ..... 2,374 4.81 24.19 26,773
Granted ............................ 94 11.81 14.81 1,150
Exercised .......................... (39) 5.00 10.78 (282)
Forfeited .......................... (36) 5.00 11.81 (320)
-------- ------ ------ --------
Outstanding at December 31, 1995 ..... 2,393 4.81 24.19 27,321
Granted ............................ 218 14.25 17.25 3,316
Exercised .......................... (27) 5.00 10.78 (262)
Forfeited .......................... (10) 5.00 14.25 (91)
Expired ............................ (1) 10.78 10.78 (6)
-------- ------ ------ --------
Outstanding at December 31, 1996 ..... 2,573 $ 4.81 $24.19 $ 30,278
======== ====== ====== ========
At December 31, 1994, 1995 and 1996, options to purchase 850,582,
1,189,907 and 1,660,068 shares, respectively, were exercisable and options to
purchase 298,698 shares become exercisable in 1997. Of the exercisable options
at December 31, 1996, options to purchase 1,161,398 shares had exercise prices
less than the Company's December 31, 1996 quoted market price of $10.875 per
share. Outstanding options at December 31, 1996 expire at various dates through
2006, with a weighted-average remaining life of six years.
The pro forma information required by SFAS No. 123, "Accounting for
Stock-Based Compensation," is based on an estimation of the fair value of
options issued during 1995 and 1996. The weighted average fair values of options
granted during 1995 and 1996 were $6.02 and $8.38 per share, respectively. The
fair values of employee stock options were calculated using the Black-Scholes
stock option valuation model with the following weighted average assumptions for
grants in 1995 and 1996: stock price volatility of 31% and 42% in 1995 and 1996,
respectively; risk-free rate of return of 5%; no dividend yield; and an expected
term of 9 years. If the fair value-based method of accounting in SFAS No. 123
had been applied, the Company's earnings per share would not have changed in
1995 and would have been reduced by $.01 per share in 1996. The pro forma impact
on earnings per share for 1996 is not necessarily indicative of future effects
on earnings per share.
Preferred stock
The Company is authorized to issue a total of five million shares of
preferred stock. The rights of preferred stock as to dividends, redemption,
liquidation and conversion are determined upon issuance.
F-26
Note 13 - Income taxes:
The components of (i) income (loss) before income taxes and minority
interest ("pretax income (loss)"), (ii) the difference between the provision for
income taxes attributable to pretax income (loss) and the amounts that would be
expected using the U.S. federal statutory income tax rate of 35%, (iii) the
provision for income taxes and (iv) the comprehensive tax provision are
presented below.
Years ended December 31,
--------------------------------
1994 1995 1996
-------- -------- --------
(In thousands)
Pretax income (loss):
U.S ...................................... $ (6,241) $ 43,125 $ 50,430
Non-U.S .................................. (7,164) 55,777 (24,817)
-------- -------- --------
$(13,405) $ 98,902 $ 25,613
======== ======== ========
Expected tax expense (benefit) ............. $ (4,692) $ 34,616 $ 8,965
Non-U.S. tax rates ......................... (7,108) (7,016) (206)
Rate change adjustment of deferred taxes ... -- (6,593) --
Valuation allowance ........................ 24,309 (9,588) 3,013
Settlement of U.S. tax audits .............. (5,437) -- --
Incremental tax on income of companies not
included in the NL Tax Group .............. 790 499 3,132
U.S. state income taxes .................... 534 721 468
Other, net ................................. 1,338 32 (539)
-------- -------- --------
$ 9,734 $ 12,671 $ 14,833
======== ======== ========
Provision for income taxes:
Current income tax expense (benefit):
U.S. federal ........................... $ (5,222) $ 249 $ 4,934
U.S. state ............................. 475 2,135 1,136
Non-U.S ................................ 2,574 39,535 5,961
-------- -------- --------
(2,173) 41,919 12,031
-------- -------- --------
Deferred income tax expense (benefit):
U.S. federal ........................... 4,058 (9,005) (4,764)
U.S. state ............................. 347 (1,026) (668)
Non-U.S ................................ 7,502 (19,217) 8,234
-------- -------- --------
11,907 (29,248) 2,802
-------- -------- --------
$ 9,734 $ 12,671 $ 14,833
======== ======== ========
Comprehensive tax provision allocable to:
Pretax income (loss) ..................... $ 9,734 $ 12,671 $ 14,833
Shareholders' deficit, principally
deferred income taxes allocable to
currency translation and marketable
securities adjustments .................. 7 10 971
-------- -------- --------
$ 9,741 $ 12,681 $ 15,804
======== ======== ========
F-27
The components of the net deferred tax liability are summarized below:
December 31,
-------------------------------------------------
1995 1996
---- ----
Deferred tax Deferred tax
----------------------- ----------------------
Assets Liabilities Assets Liabilities
--------- ----------- --------- -----------
(In thousands)
Tax effect of temporary
differences relating to:
Inventories .............. $ 5,277 $ (5,644) $ 4,130 $ (4,967)
Property and equipment ... 574 (109,418) 512 (109,963)
Accrued postretirement
benefits cost ........... 23,200 -- 21,396 --
Accrued (prepaid) pension
cost .................... 8,978 (14,942) 6,308 (17,579)
Accrued environmental
costs ................... 38,214 -- 36,670 --
Other accrued liabilities
and deductible
differences ............. 26,496 -- 33,464 --
Other taxable differences -- (101,621) -- (102,578)
Tax on unremitted earnings
of non-U.S. subsidiaries .. 281 (22,526) -- (18,048)
Tax loss and tax credit
carryforwards ............. 189,263 -- 205,476 --
Valuation allowance ........ (195,569) -- (207,117) --
--------- --------- --------- ---------
Gross deferred tax assets
(liabilities) ........... 96,714 (254,151) 100,839 (253,135)
Reclassification,
principally netting by tax
tax jurisdiction .......... (93,404) 93,404 (99,019) 99,019
--------- --------- --------- ---------
Net total deferred tax
assets (liabilities) .... 3,310 (160,747) 1,820 (154,116)
Net current deferred tax
assets (liabilities) .... 2,522 (3,555) 1,597 (2,895)
--------- --------- --------- ---------
Net noncurrent deferred
tax assets (liabilities) $ 788 $(157,192) $ 223 $(151,221)
========= ========= ========= =========
The Company's valuation allowance increased in the aggregate by $31
million in each of 1994 and 1995 and $12 million in 1996. During 1995, both the
Company's gross deferred tax assets and the offsetting valuation allowance were
increased by $34 million as a result of recharacterizations of certain tax
attributes primarily due to changes in certain tax return elections. In
addition, the valuation allowance increased during 1995 by $6 million due to
foreign currency translation and was reduced by approximately $10 million due to
a change in estimate of the future tax benefit of certain tax credits which the
Company believes satisfies the "more-likely-than-not" recognition criteria. In
1996, both the Company's gross deferred tax assets and the offsetting valuation
allowance were increased by $14 million due to certain non-U.S. tax losses of
its dual resident subsidiary. In addition, the valuation allowance decreased
during
F-28
1996 by $6 million due to foreign currency translation and was increased by $3
million as a result of increases in certain other deductible temporary
differences during the year which the Company believes do not currently satisfy
the "more-likely-than-not" recognition criteria.
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. During 1994, the German tax authorities withdrew
certain proposed tax deficiencies of DM 100 million and remitted tax refunds
aggregating DM 225 million ($136 million), including interest, on a tentative
basis while examination of the Company's German income tax returns continued.
The Company subsequently reached an agreement with the German tax authorities
regarding such examinations which resolved certain significant tax contingencies
for years through 1990. The Company received final assessments and paid certain
tax deficiencies of approximately DM 50 million ($32 million when paid),
including interest, in settlement of these issues in 1996. The Company considers
the agreement to be a favorable resolution of the contingencies and the payment
was within previously-accrued amounts for such matters.
Certain other German tax contingencies remain outstanding and will
continue to be litigated. Although the Company believes that it will ultimately
prevail in the litigation, the Company has granted a DM 100 million ($64 million
at December 31, 1996) lien on its Nordenham, Germany TiO2 plant in favor of the
German tax authorities until the litigation is resolved. No assurances 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.
During 1995, the Company recorded tax benefits of $6.6 million due to the
reduction in dividend withholding tax rates pursuant to ratification of the
U.S./Canada income tax treaty.
During 1995, the Company utilized $14 million of foreign tax credit
carryforwards and U.S. net operating loss carryforwards from prior years to
reduce its 1995 U.S. federal income tax expense. At December 31, 1996, for U.S.
federal income tax purposes, the Company had approximately $27 million of
foreign tax credit carryforwards expiring during 1997 through 2001 and
approximately $10 million of alternative minimum tax credit carryforwards with
no expiration date. The Company also had approximately $400 million of income
tax loss carryforwards in Germany with no expiration date.
F-29
Note 14 - Other income, net:
Years ended December 31,
--------------------------------
1994 1995 1996
-------- -------- --------
(In thousands)
Securities earnings:
Interest and dividends ................... $ 5,075 $ 6,244 $ 4,708
Securities transactions .................. (1,220) 1,175 --
-------- -------- --------
3,855 7,419 4,708
Litigation settlement gains ................ 22,978 -- 2,756
Technology fee income ...................... 10,344 10,660 8,743
Currency transaction gains, net ............ 1,735 561 5,637
Pension and OPEB curtailment gains ......... -- -- 5,900
Royalty income ............................. 1,508 -- --
Disposition of property and equipment ...... (1,981) (2,713) (2,312)
Other, net ................................. 6,389 6,314 5,048
-------- -------- --------
$ 44,828 $ 22,241 $ 30,480
======== ======== ========
Litigation settlement gains includes $20 million related to the Company's
1994 settlement of its lawsuit against Lockheed Corporation. Technology fee
income was amortized by the straight-line method over a three-year period ending
October 1996.
Note 15 - Other items:
Advertising costs, expensed as incurred, were $2 million in each of 1994,
1995 and 1996.
Research, development and certain sales technical support costs, expensed
as incurred, approximated $10 million in 1994, and $11 million in each of 1995
and 1996.
Interest capitalized in connection with long-term capital projects was $1
million in each of 1994 and 1995, and $2 million in 1996.
Note 16 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. While no
transactions of the type described above are planned or proposed with respect to
the Company other than as set forth in this Annual Report on Form 10-K, the
Company from time to time
F-30
considers, reviews and evaluates and understands that Contran, Valhi and related
entities consider, review and evaluate, such transactions. Depending upon the
business, tax and other objectives then relevant, and restrictions under the
indentures and other agreements, it is possible that the Company might be a
party to one or more such transactions in the future.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
The Company is a party to an intercorporate services agreement with
Contran (the "Contran ISA") whereby Contran provides certain management services
to the Company on a fee basis. Management services fee expense related to the
Contran ISA was $.4 million in each of 1994, 1995 and 1996.
The Company is a party to an intercorporate services agreement with Valhi
(the "Valhi ISA") whereby Valhi and the Company provide certain management,
financial and administrative services to each other on a fee basis. Net
management services fee expense related to the Valhi ISA was $.2 million in
1994, and $.1 million in each of 1995 and 1996.
The Company is party to an intercorporate services agreement with Tremont
(the "Tremont ISA"). Under the terms of the contract, the Company provides
certain management and financial services to Tremont on a fee basis. Management
services fee income related to the Tremont ISA was nil in 1994, and $.1 million
in each of 1995 and 1996.
Baroid Corporation, a former wholly-owned subsidiary of the Company and
currently a subsidiary of Dresser Industries, Inc., and the Company were parties
to an intercorporate services agreement (the "Baroid ISA") pursuant to which, as
amended, Baroid agreed to make certain services available to the Company on a
fee basis. The agreement was terminated in 1994. Management services fee expense
pursuant to the Baroid ISA approximated $.2 million in 1994.
Sales to Baroid in the ordinary course of business were $1.8 million in
1994, $1.6 million in 1995 and $1.1 million in 1996.
Purchases in the ordinary course of business from unconsolidated joint
ventures, including LPC, were approximately $74 million in 1994, $79 million in
1995 and $81 million in 1996.
Certain employees of the Company have been granted options to purchase
Valhi common stock under the terms of Valhi's stock option plans. The Company
and Valhi have agreed that the Company will pay Valhi the aggregate difference
between the option price and the market value of Valhi's common stock on the
exercise date of such options. For financial reporting purposes, the Company
accounts for the related expense (income) ($64,000 in 1994, $(25,000) in 1995
and $1,000 in 1996) in a manner similar to accounting for SARs. At December 31,
1996, employees of the Company held options to purchase 365,000 shares of Valhi
common stock at exercise prices ranging from $4.76 to $14.66 per share. At
December 31, 1996, 30,000 of the vested options were exercisable at prices less
than Valhi's quoted market price per share of $6.375.
F-31
The Company and NLI Insurance, Ltd., a wholly-owned subsidiary of Tremont,
are parties to an Insurance Sharing Agreement with respect to certain loss
payments and reserves established by NLI Insurance, Ltd. that (i) arise out of
claims against other entities for which the Company is responsible and (ii) are
subject to payment by NLI Insurance, Ltd. under certain reinsurance contracts.
Also, NLI Insurance, Ltd. will credit the Company with respect to certain
underwriting profits or credit recoveries that NLI Insurance, Ltd. receives from
independent reinsurers that relate to retained liabilities.
Net amounts payable to affiliates are summarized in the following table.
December 31,
----------------------------
1995 1996
-------- --------
(In thousands)
Tremont Corporation .................... $ 3,525 $ 3,529
LPC .................................... 6,677 6,677
Other .................................. (21) (2)
-------- --------
$ 10,181 $ 10,204
Amounts payable to LPC are generally for the purchase of TiO2 (see Note
6), and amounts payable to Tremont principally relate to the Company's Insurance
Sharing Agreement described above.
Note 17 - Commitments and contingencies:
Leases
The Company leases, pursuant to operating leases, various manufacturing
and office space and transportation equipment. Most of the leases contain
purchase and/or various term renewal options at fair market and fair rental
values, respectively. In most cases management expects that, in the normal
course of business, leases will be renewed or replaced by other leases.
Kronos' principal German operating subsidiary leases the land under its
Leverkusen TiO2 production facility pursuant to a lease expiring in 2050. The
Leverkusen facility, with approximately one-third of Kronos' current TiO2
production capacity, is located within the lessor's extensive manufacturing
complex, and Kronos is the only unrelated party so situated. Under a separate
supplies and services agreement expiring in 2011, the lessor provides some raw
materials, auxiliary and operating materials and utilities services necessary to
operate the Leverkusen facility. Both the lease and the supplies and services
agreements restrict the Company's ability to transfer ownership or use of the
Leverkusen facility.
F-32
Net rent expense aggregated $8 million in 1994, $9 million in 1995 and $12
million in 1996. At December 31, 1996, minimum rental commitments under the
terms of noncancellable operating leases were as follows:
Years ending December 31, Real Estate Equipment
(In thousands)
1997 $ 2,219 $ 2,721
1998 2,086 2,179
1999 2,102 1,197
2000 1,777 119
2001 1,415 17
2002 and thereafter 24,752 -
------- ----
$34,351 $ 6,233
======= =======
Capital expenditures
At December 31, 1996, the estimated cost to complete capital projects in
process approximated $16 million, including a $8 million debottlenecking
expansion project at the Company's Leverkusen, Germany chloride-process TiO2
facility and $2 million related to environmental protection and compliance
programs.
Purchase commitments
The Company has long-term supply contracts that provide for the Company's
chloride feedstock requirements through 2000. The agreements require the Company
purchase certain minimum quantities of feedstock with average minimum annual
purchase commitments aggregating approximately $115 million.
Legal proceedings
Lead pigment litigation. Since 1987, the Company, other past manufacturers
of lead pigments for use in paint and lead-based paint and the Lead Industries
Association have been named as defendants in various legal proceedings seeking
damages for personal injury and property damage allegedly caused by the use of
lead-based paints. Certain of these actions have been filed by or on behalf of
large United States cities or their public housing authorities and certain
others have been asserted as class actions. These legal proceedings seek
recovery under a variety of theories, including negligent product design,
failure to warn, breach of warranty, conspiracy/concert of action, enterprise
liability, market share liability, intentional tort, and fraud and
misrepresentation.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and asserted health concerns associated
with the use of lead-based paints, including damages for personal injury,
contribution and/or indemnification for medical expenses, medical monitoring
expenses and costs for educational programs. Most of these legal proceedings are
in various pre-trial stages; several are on appeal.
The Company believes that these actions are without merit, intends to
continue to deny all allegations of wrongdoing and liability and to defend all
F-33
actions vigorously. The Company has not accrued any amounts for the pending lead
pigment litigation. Considering the Company's previous involvement in the lead
and lead pigment businesses, there can be no assurance that additional
litigation similar to that currently pending will not be filed.
Environmental matters and litigation. Some of the Company's current and
former facilities, including several divested secondary lead smelters and former
mining locations, are the subject of civil litigation, administrative
proceedings or investigations arising under federal and state environmental
laws. Additionally, in connection with past disposal practices, the Company has
been named a potential responsible party ("PRP") pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act, as amended by the
Superfund Amendments and Reauthorization Act ("CERCLA") in approximately 75
governmental and private actions associated with hazardous waste sites and
former mining locations, certain of which are on the U.S. Environmental
Protection Agency's Superfund National Priorities List. These actions seek
cleanup costs and/or damages for personal injury or property damage. While the
Company may be jointly and severally liable for such costs, in most cases it is
only one of a number of PRPs who are also jointly and severally liable. In
addition, the Company is a party to a number of lawsuits filed in various
jurisdictions alleging CERCLA or other environmental claims. At December 31,
1996, the Company had accrued $113 million for those environmental matters which
are reasonably estimable. It is not possible to estimate the range of costs for
certain sites. The upper end of the range of reasonably possible costs to the
Company for sites which it is possible to estimate costs is approximately $160
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. 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, 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. 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. As discussed in Note 2, the
Company will adopt the AICPA's Statement of Position 96-1, "Environmental
Remediation Liabilities," during the first quarter of 1997, increasing its
environmental liability by approximately $30 million.
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 operations and products
of the Company have the potential to cause environmental or other damage. The
Company continues to implement various policies and programs in an effort to
minimize these risks. The Company's policy is to comply with environmental laws
and regulations at all of its facilities and to continually strive to improve
environmental performance in association with applicable industry initiatives.
It is possible that future developments, such as stricter requirements of
F-34
environmental laws and enforcement policies thereunder, could affect the
Company's production, handling, use, storage, transportation, sale or disposal
of such substances as well as the Company's consolidated financial position,
results of operations or liquidity.
Other litigation. The Company is also involved in various other
environmental, contractual, product liability and other claims and disputes
incidental to its present and former businesses.
The Company currently believes the disposition of all claims and disputes
individually or in the aggregate, should not have a material adverse effect on
the Company's consolidated financial condition, results of operations or
liquidity.
Concentrations of credit risk
Sales of TiO2 accounted for almost 90% of net sales during the past three
years. TiO2 is sold to the paint, plastics and paper industries. Such markets
are generally considered "quality-of-life" markets whose demand for TiO2 is
influenced by the relative economic well-being of the various geographic
regions. TiO2 is sold to over 4,000 customers, none of which represents a
significant portion of net sales. In each of the past three years, approximately
one-half of the Company's TiO2 sales by volume were to Europe and approximately
36% in both 1994 and 1995 and 37% in 1996 of sales were attributable to North
America.
Consolidated cash, cash equivalents and restricted cash includes $103
million and $53 million invested in U.S. Treasury securities purchased under
short-term agreements to resell at December 31, 1995 and 1996, respectively, of
which $88 million and $41 million, respectively, of such securities are held in
trust for the Company by a single U.S. bank.
Note 18 - Financial instruments:
Summarized below is the estimated fair value and related net carrying
value of the Company's financial instruments.
December 31, December 31,
1995 1996
----------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
(In millions)
Cash and cash equivalents, including
restricted cash ......................... $141.3 $141.3 $114.1 $114.1
Marketable securities - classified as
available-for-sale ...................... 20.9 20.9 23.7 23.7
Notes payable and long-term debt:
Fixed rate with market quotes:
Senior Secured Notes ................. $250.0 $267.7 $250.0 $265.2
Senior Secured Discount Notes ........ 132.0 151.8 149.8 161.9
Variable rate debt ..................... 440.9 440.9 455.0 455.0
Common shareholders' equity (deficit) .... $(209.4) $619.5 $(203.5) $555.9
Fair value of the Company's marketable securities and Notes are based upon
quoted market prices and the fair value of the Company's common shareholder's
equity (deficit) is based upon quoted market prices for NL's common stock. The
Company held no derivative financial instruments at December 31, 1995 and 1996.
Note 19 - Quarterly financial data (unaudited):
Quarter ended
---------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
----------- ---------- --------- ---------
(In thousands, except per share amounts)
Year ended December 31, 1995:
Net sales ................. $ 250,875 $ 283,474 $ 255,339 $ 234,251
Cost of sales ............. 169,768 187,896 169,058 149,462
Operating income .......... 41,968 57,549 50,590 49,612
Net income ............ $ 13,062 $ 21,002 $ 17,426 $ 34,119(a)
========= ========= ========= =========
Net income per share of
common stock ............. $ .26 $ .41 $ .34 $ .66(a)
========= ========= ========= =========
Weighted average shares
and common stock
equivalents outstanding .. 51,176 51,552 51,628 51,486
========= ========= ========= =========
Year ended December 31, 1996:
Net sales ................. $ 240,440 $ 263,162 $ 248,462 $ 234,010
Cost of sales ............. 169,816 194,794 193,271 180,557
Operating income .......... 41,938 36,098 19,471 15,866
Net income (loss) ..... $ 13,444 $ 11,919 $ (4,249) $ (10,297)
========= ========= ========= =========
Net income (loss) per
share of common stock .... $ .26 $ .23 $ (.08) $ (.20)
========= ========= ========= =========
Weighted average shares
and common stock
equivalents outstanding .. 51,510 51,493 51,118 51,118
========= ========= ========= =========
(a) Income tax benefits in the fourth quarter of 1995 include the recognition
of $10 million of deferred tax assets related to a change in estimate of
the future tax benefit of certain tax credits which the Company believes
satisfies the "more-likely-than-not" recognition criteria and $6.6 million
related to the reduction in U.S./Canada dividend withholding tax rates.
See Note 13.
F-35
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
Our report on the consolidated financial statements of NL Industries, Inc.
is included on page F-2 of this Annual Report on Form 10-K. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedules listed in the index on page F-1.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 7, 1997
S-1
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31, 1995 and 1996
(In thousands)
1995 1996
--------- ---------
Current assets:
Cash and cash equivalents, including
restricted cash of $4,349 and $4,833 .......... $ 40,080 $ 12,135
Accounts and notes receivable .................. 203 356
Receivable from subsidiaries ................... 4,273 9,542
Refundable income taxes ........................ 1,662 --
Prepaid expenses ............................... 729 445
--------- ---------
Total current assets ....................... 46,947 22,478
--------- ---------
Other assets:
Marketable securities .......................... 20,944 23,718
Notes receivable from subsidiary ............... 382,034 505,557
Investment in subsidiaries ..................... (89,395) (175,063)
Other .......................................... 7,582 6,680
--------- ---------
Total other assets ......................... 321,165 360,892
--------- ---------
Property and equipment, net ...................... 3,562 3,396
--------- ---------
$ 371,674 $ 386,766
========= =========
Current liabilities:
Accounts payable and accrued liabilities ....... $ 28,116 $ 24,929
Payable to affiliates .......................... 3,498 2,813
Income taxes ................................... -- 3,024
Deferred income taxes .......................... 1,905 1,908
--------- ---------
Total current liabilities .................. 33,519 32,674
--------- ---------
Noncurrent liabilities:
Long-term debt ................................. 382,034 399,756
Deferred income taxes .......................... 10,211 9,736
Accrued pension cost ........................... 10,835 10,974
Accrued postretirement benefits cost ........... 37,430 34,396
Other .......................................... 107,066 102,711
--------- ---------
Total noncurrent liabilities ............... 547,576 557,573
--------- ---------
Shareholders' deficit ............................ (209,421) (203,481)
--------- ---------
$ 371,674 $ 386,766
========= =========
Contingencies (Note 4)
S-2
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed Statements of Operations
Years ended December 31, 1994, 1995 and 1996
(In thousands)
1994 1995 1996
--------- --------- ---------
Revenues and other income:
Equity in income of subsidiaries ..... $ 7,925 $ 99,734 $ 18,236
Interest and dividends ............... 2,538 2,739 1,461
Interest income from subsidiary ...... 43,157 45,551 49,738
Securities transactions .............. (1,220) 1,175 --
Other income, net .................... 3,135 460 1,873
--------- --------- ---------
55,535 149,659 71,308
--------- --------- ---------
Costs and expenses:
General and administrative ........... 69,875 27,079 18,094
Interest ............................. 44,003 45,842 47,940
--------- --------- ---------
113,878 72,921 66,034
--------- --------- ---------
Income (loss) before income
taxes ........................... (58,343) 76,738 5,274
Income tax benefit ..................... 34,361 8,871 5,543
--------- --------- ---------
Net income (loss) ................ $ (23,982) $ 85,609 $ 10,817
========= ========= =========
S-3
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed Statements of Cash Flows
Years ended December 31, 1994, 1995 and 1996
(In thousands)
1994 1995 1996
-------- -------- --------
Cash flows from operating activities:
Net income (loss) ........................ $(23,982) $ 85,609 $ 10,817
Equity in income of subsidiaries ......... (7,925) (99,734) (18,236)
Distributions from subsidiaries .......... 30,000 15,000 20,000
Noncash interest expense ................. 845 842 842
Deferred income taxes .................... (20,577) 1,411 (1,443)
Securities transactions .................. 1,220 (1,175) --
Other, net ............................... (3,836) (5,819) (3,291)
-------- -------- --------
(24,255) (3,866) 8,689
Change in assets and liabilities, net .... 23,263 8,042 (8,593)
Marketable trading securities:
Purchases .............................. (870) (762) --
Dispositions ........................... 15,530 27,102 --
-------- -------- --------
Net cash provided by operating
activities .......................... 13,668 30,516 96
-------- -------- --------
Cash flows from investing activities:
Investments in and loans to subsidiaries . (6,630) (9,062) (12,941)
Capital expenditures ..................... (126) (33) (40)
Other, net ............................... 402 10 11
-------- -------- --------
Net cash used by investing
activities .......................... (6,354) (9,085) (12,970)
-------- -------- --------
S-4
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed Statements of Cash Flows (Continued)
Years ended December 31, 1994, 1995 and 1996
(In thousands)
1994 1995 1996
-------- -------- --------
Cash flows from financing activities:
Dividends ................................ $ -- $ -- $(15,333)
Principal payments of borrowings ......... (170) -- --
Other, net ............................... 120 278 262
-------- -------- --------
Net cash provided (used) by
financing activities ................ (50) 278 (15,071)
-------- -------- --------
Cash and cash equivalents:
Increase (decrease) from:
Operating activities ................... 13,668 30,516 96
Investing activities ................... (6,354) (9,085) (12,970)
Financing activities ................... (50) 278 (15,071)
-------- -------- --------
Net change from operating, investing
and financing activities ................ 7,264 21,709 (27,945)
Balance at beginning of year ............. 11,107 18,371 40,080
-------- -------- --------
Balance at end of year ................... $ 18,371 $ 40,080 $ 12,135
======== ======== ========
S-5
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Notes to Condensed Financial Information
Note 1 - Basis of presentation:
The Consolidated Financial Statements of NL Industries, Inc. (the
"Company") and the related Notes to Consolidated Financial Statements are
incorporated herein by reference.
Note 2 - Net receivable from (payable to) subsidiaries and affiliates:
December 31,
--------------------------
1995 1996
--------- ---------
(In thousands)
Current:
Tremont Corporation ........................ $ (3,525) $ (3,529)
Other ...................................... 27 (2)
Kronos and Rheox:
Income taxes ............................. 567 (836)
Other, net ............................... 3,706 11,096
--------- ---------
$ 775 $ 6,729
========= =========
Noncurrent - notes receivable from:
Kronos ..................................... $ 382,034 $ 399,756
Rheox ...................................... -- 105,801
--------- ---------
$ 382,034 $ 505,557
Note 3 - Long-term debt:
December 31,
------------------------
1995 1996
-------- --------
(In thousands)
11.75% Senior Secured Notes .................... $250,000 $250,000
13% Senior Secured Discount Notes .............. 132,034 149,756
-------- --------
$382,034 $399,756
See Note 10 of the Consolidated Financial Statements for a description of
the Notes.
S-6
The aggregate maturities of the Company's long-term debt at December 31,
1996 are shown in the table below.
Amount
--------------
(In thousands)
Senior Secured Notes due 2003 .................................. $250,000
Senior Secured Discount Notes due 2005 ......................... 187,500
--------
437,500
Less unamortized original issue discount on the
Senior Secured Discount Notes ................................. 37,744
$399,756
========
The Company and Kronos have agreed, under certain circumstances, to
provide Kronos' principal international subsidiary with up to DM 125 million
through January 1, 2001. The Company has guaranteed the DM credit facility.
Note 4 - Contingencies:
See Legal proceedings in Note 17 to the Consolidated Financial Statements.
S-7
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged to Currency
beginning costs and translation Balance at
Description of year expenses Deductions adjustments Other end of year
----------- ---------- ---------- ---------- ----------- ------- -----------
Year ended December 31, 1996:
Allowance for doubtful accounts
and notes receivable .......... $ 4,039 $ 1,274 $ (1,331)(a) $ (169) $ -- $ 3,813
======== ======== ======== ======== ======== ========
Amortization of intangibles .... $ 20,562 $ 3,152 $ -- $ (1,507) $ -- $ 22,207
======== ======== ======== ======== ======== ========
Valuation allowance for deferred
income taxes .................. $195,569 $ 3,013 $ -- $ (5,937) $14,472(c) $207,117
======== ======== ======== ======== ======== ========
Year ended December 31, 1995:
Allowance for doubtful accounts
and notes receivable .......... $ 3,749 $ 289 $ (166)(a) $ 167 $ -- $ 4,039
======== ======== ======== ======== ======== ========
Amortization of intangibles .... $ 16,149 $ 3,241 $ -- $ 1,172 $ -- $ 20,562
======== ======== ======== ======== ======== ========
Valuation allowance for deferred
income taxes .................. $164,500 $ (9,588) $ -- $ 6,451 $ 34,206(b) $195,569
======== ======== ======== ======== ======== ========
Year ended December 31, 1994:
Allowance for doubtful accounts
and notes receivable .......... $ 3,008 $ 1,141 $ (616)(a) $ 216 $ -- $ 3,749
======== ======== ======== ======== ======== ========
Amortization of intangibles .... $ 11,941 $ 2,901 $ -- $ 1,307 $ -- $ 16,149
======== ======== ======== ======== ======== ========
Valuation allowance for deferred
income taxes .................. $133,377 $ 24,309 $ -- $ 6,814 $ -- $164,500
======== ======== ======== ======== ======== ========
(a) Amounts written off, less recoveries.
(b) Direct offset to the increase in gross deferred income tax assets
resulting from recharacterization of certain tax attributes due primarily
to changes in certain income tax return elections.
(c) Direct offset to the increase in non-U.S. gross deferred income tax assets
due to dual residency status of a Company subsidiary.
S-8