SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the quarter ended March 31, 1997
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) had been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of common stock outstanding on May 14, 1997: 51,144,014
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1996
and March 31, 1997 3-4
Consolidated Statements of Operations - Three
months ended March 31, 1996 and 1997 5
Consolidated Statement of Shareholders' Deficit
- Three months ended March 31, 1997 6
Consolidated Statements of Cash Flows - Three
months ended March 31, 1996 and 1997 7-8
Notes to Consolidated Financial Statements 9-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17-18
Item 6. Exhibits and Reports on Form 8-K 19
- 2 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, March 31,
ASSETS 1996 1997
------------ ----------
Current assets:
Cash and cash equivalents, including
restricted cash of $10,895 and $9,343 ......... $ 114,115 $ 77,662
Accounts and notes receivable .................. 138,538 162,547
Refundable income taxes ........................ 9,267 3,761
Inventories .................................... 232,510 194,033
Prepaid expenses ............................... 4,219 5,485
Deferred income taxes .......................... 1,597 1,234
---------- ----------
Total current assets ....................... 500,246 444,722
---------- ----------
Other assets:
Marketable securities .......................... 23,718 25,297
Investment in joint ventures ................... 181,479 179,347
Prepaid pension cost ........................... 24,821 24,898
Deferred income taxes .......................... 223 223
Other .......................................... 24,825 25,634
---------- ----------
Total other assets ......................... 255,066 255,399
---------- ----------
Property and equipment:
Land ........................................... 21,963 20,589
Buildings ...................................... 165,479 157,246
Machinery and equipment ........................ 660,333 628,269
Mining properties .............................. 95,891 94,062
Construction in progress ....................... 13,231 13,360
---------- ----------
956,897 913,526
Less accumulated depreciation and depletion .... 490,851 472,279
---------- ----------
Net property and equipment ................. 466,046 441,247
---------- ----------
$1,221,358 $1,141,368
========== ==========
- 3 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
December 31, March 31,
LIABILITIES AND SHAREHOLDERS' DEFICIT 1996 1997
------------- ------------
Current liabilities:
Notes payable ................................ $ 25,732 $ 23,776
Current maturities of long-term debt ......... 91,946 31,626
Accounts payable and accrued liabilities ..... 153,904 150,733
Payable to affiliates ........................ 10,204 9,619
Income taxes ................................. 5,664 5,860
Deferred income taxes ........................ 2,895 2,892
----------- -----------
Total current liabilities ................ 290,345 224,506
----------- -----------
Noncurrent liabilities:
Long-term debt ............................... 737,100 746,605
Deferred income taxes ........................ 151,221 143,239
Accrued pension cost ......................... 57,941 54,093
Accrued postretirement benefits cost ......... 55,935 54,822
Other ........................................ 132,048 155,061
----------- -----------
Total noncurrent liabilities ............. 1,134,245 1,153,820
----------- -----------
Minority interest .............................. 249 237
Shareholders' deficit:
Common stock ................................. 8,355 8,355
Additional paid-in capital ................... 759,281 759,281
Adjustments:
Currency translation ....................... (118,629) (117,879)
Pension liabilities ........................ (1,822) (1,822)
Marketable securities ...................... 1,278 2,304
Accumulated deficit .......................... (485,948) (521,669)
Treasury stock ............................... (365,996) (365,765)
----------- -----------
Total shareholders' deficit .............. (203,481) (237,195)
----------- -----------
$ 1,221,358 $ 1,141,368
=========== ===========
Commitments and contingencies (Note 13)
See accompanying notes to consolidated financial statements.
- 4 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31, 1996 and 1997
(In thousands, except per share data)
1996 1997
--------- ---------
Revenues and other income:
Net sales ...................................... $ 240,440 $ 239,476
Other, net ..................................... 10,548 2,242
--------- ---------
250,988 241,718
--------- ---------
Costs and expenses:
Cost of sales .................................. 169,816 185,035
Selling, general and administrative ............ 42,891 71,146
Interest ....................................... 19,139 18,958
--------- ---------
231,846 275,139
--------- ---------
Income (loss) before income taxes and
minority interest ......................... 19,142 (33,421)
Income tax expense ............................... 5,740 2,292
--------- ---------
Income (loss) before minority interest ..... 13,402 (35,713)
Minority interest ................................ (42) 8
--------- ---------
Net income (loss) .......................... $ 13,444 $ (35,721)
========= =========
Net income (loss) per share of common stock ...... $ .26 $ (.70)
========= =========
Weighted average common and common equivalent
shares outstanding .............................. 51,510 51,144
========= =========
See accompanying notes to consolidated financial statements.
- 5 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
Three months ended March 31, 1997
(In thousands)
Adjustments
Additional -------------------------------------
Common paid-in Currency Pension Marketable Accumulated Treasury
stock capital translation liabilities securities deficit stock Total
--------- ---------- ----------- ----------- ---------- ----------- ---------- ----------
Balance at December 31, 1996 $ 8,355 $ 759,281 $(118,629) $ (1,822) $ 1,278 $(485,948) $(365,996) $(203,481)
Net loss ................... - - - - - (35,721) - (35,721)
Adjustments ................ - - 750 - 1,026 - - 1,776
Treasury stock reissued .... - - - - - - 231 231
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 1997 .. $ 8,355 $ 759,281 $(117,879) $ (1,822) $ 2,304 $(521,669) $(365,765) $(237,195)
========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
- 6 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 1996 and 1997
(In thousands)
1996 1997
-------- --------
Cash flows from operating activities:
Net income (loss) ................................ $ 13,444 $(35,721)
Depreciation, depletion and amortization ......... 10,125 9,786
Noncash interest expense ......................... 5,026 5,483
Deferred income taxes ............................ (4,065) (198)
Change in accounting for environmental
remediation liabilities ......................... - 30,000
Other, net ....................................... (4,155) (1,990)
-------- --------
20,375 7,360
Change in assets and liabilities:
Accounts and notes receivable .................. (24,052) (30,706)
Inventories .................................... (10,213) 28,377
Prepaid expenses ............................... (3,433) (1,478)
Accounts payable and accrued liabilities ....... (14,573) 57
Income taxes ................................... 3,153 6,335
Other, net ..................................... (2,514) (2,633)
-------- --------
Net cash provided (used) by operating
activities .................................. (31,257) 7,312
-------- --------
Cash flows from investing activities:
Capital expenditures ............................. (12,250) (8,868)
Purchase of minority interest .................... (5,168) -
Investment in joint ventures, net ................ 1,379 2,379
Other, net ....................................... 82 64
-------- --------
Net cash used by investing activities ........ (15,957) (6,425)
-------- --------
- 7 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 1996 and 1997
(In thousands)
1996 1997
--------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ....................................... $ 35,079 $ 140,000
Principal payments ............................... (10,002) (172,577)
Deferred financing costs ......................... - (3,434)
Dividends .......................................... (5,109) -
Other, net ......................................... (406) 231
--------- ---------
Net cash provided (used) by financing
activities .................................... 19,562 (35,780)
--------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities .... (27,652) (34,893)
Currency translation ............................. (623) (1,560)
Balance at beginning of period ..................... 141,333 114,115
--------- ---------
Balance at end of period ........................... $ 113,058 $ 77,662
========= =========
Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized ............... $ 6,557 $ 7,153
Income taxes, net .................................. 6,637 (4,385)
See accompanying notes to consolidated financial statements.
- 8 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
NL Industries, Inc. conducts its operations primarily through its wholly-
owned subsidiaries, Kronos, Inc. (titanium dioxide pigments, or "TiO2") and
Rheox, Inc. (specialty chemicals). Valhi, Inc. and Tremont Corporation, each
affiliates of Contran Corporation, hold approximately 56% and 18%, respectively,
of NL's outstanding common stock, and together may be deemed to control NL.
Contran and its subsidiaries and other entities related to Harold C. Simmons
hold approximately 91% of Valhi's and 45% of Tremont's outstanding common stock.
The consolidated balance sheet of NL Industries, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 1996 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 1997 and the consolidated statements of
operations, shareholders' deficit and cash flows for the interim periods ended
March 31, 1996 and 1997 have been prepared by the Company, without audit. In the
opinion of management, all adjustments necessary to present fairly the
consolidated financial position, results of operations and cash flows have been
made. The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The accompanying consolidated
financial statements should be read in conjunction with the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 (the "1996 Annual Report").
The Company adopted a new method of accounting as required by the AICPA's
Statement of Position ("SOP") No. 96-1, "Environmental Remediation Liabilities,"
in the first quarter of 1997. The SOP, among other things, expands the types of
costs which must be considered in determining environmental remediation
accruals. As a result of adopting the SOP, the Company recognized a noncash
cumulative charge of $30 million in the first quarter of 1997. The charge is not
expected to materially change the Company's 1997 income tax expense because the
Company believes the resulting deferred income tax asset does not currently
satisfy the more-likely-than-not realization criteria and, accordingly, the
Company has established an offsetting valuation allowance. 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. Previously, such expenditures were expensed as
incurred.
- 9 -
Note 2 - Net income (loss) per share of common stock:
Net income (loss) per share of common stock is based on the weighted
average number of common shares and equivalents outstanding. Common stock
equivalents, consisting of nonqualified stock options, are excluded from the
computation when their effect is antidilutive. The Company will retroactively
adopt Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share," effective December 31, 1997. Basic earnings per share pursuant to
SFAS No. 128 will not be materially different from earnings per share presented
herein and diluted earnings per share pursuant to SFAS No. 128 is not expected
to be materially different from basic earnings per share.
Note 3 - Business segment information:
The Company's operations are conducted in two business segments - TiO2
conducted by Kronos and specialty chemicals conducted by Rheox.
Three months ended
March 31,
--------------------------
1996 1997
--------- ---------
(In thousands)
Net sales:
Kronos ..................................... $ 206,368 $ 204,389
Rheox ...................................... 34,072 35,087
--------- ---------
$ 240,440 $ 239,476
========= =========
Operating income:
Kronos ..................................... $ 29,472 $ 8,689
Rheox ...................................... 12,466 10,136
--------- ---------
41,938 18,825
General corporate income (expense):
Securities earnings, net ................... 1,307 699
Expenses, net .............................. (4,964) (33,987)
Interest expense ........................... (19,139) (18,958)
--------- ---------
$ 19,142 $ (33,421)
========= =========
Corporate expenses, net increased in the first quarter of 1997 due to the
$30 million noncash charge related to the adoption of a new method of accounting
for certain environmental remediation costs, as described in Note 1.
Note 4 - Inventories:
December 31, March 31,
1996 1997
------------ ---------
(In thousands)
Raw materials ............................ $ 43,284 $ 28,529
Work in process .......................... 10,356 10,088
Finished products ........................ 142,091 121,149
Supplies ................................. 36,779 34,267
-------- --------
$232,510 $194,033
======== ========
- 10 -
Note 5 - Marketable securities:
December 31, March 31,
1996 1997
------------ ---------
(In thousands)
Available-for-sale securities -
noncurrent marketable equity securities:
Unrealized gains $ 3,516 $ 4,933
Unrealized losses (1,550) (1,388)
Cost 21,752 21,752
------- -------
Aggregate market $23,718 $25,297
======= =======
Note 6 - Investment in joint ventures:
December 31, March 31,
1996 1997
------------ ---------
(In thousands)
TiO2 manufacturing joint venture ............... $179,195 $176,816
Other .......................................... 2,284 2,531
-------- --------
$181,479 $179,347
======== ========
Note 7 - Other noncurrent assets:
December 31, March 31,
1996 1997
------------ ---------
(In thousands)
Intangible assets, net ......................... $ 7,939 $ 6,683
Deferred financing costs, net .................. 9,791 12,144
Other .......................................... 7,095 6,807
------- -------
$24,825 $25,634
======= =======
Note 8 - Accounts payable and accrued liabilities:
December 31, March 31,
1996 1997
------------ ---------
(In thousands)
Accounts payable ......................... $ 60,648 $ 52,390
-------- --------
Accrued liabilities:
Employee benefits ...................... 34,618 31,437
Environmental costs .................... 6,000 9,000
Interest ............................... 9,429 14,890
Miscellaneous taxes .................... 4,073 3,736
Other .................................. 39,136 39,280
-------- --------
93,256 98,343
-------- --------
$153,904 $150,733
======== ========
- 11 -
Note 9 - Other noncurrent liabilities:
December 31, March 31,
1996 1997
------------ ---------
(In thousands)
Environmental costs .......................... $106,849 $130,918
Employee benefits ............................ 11,960 11,087
Insurance claims and expenses ................ 11,673 11,603
Other ........................................ 1,566 1,453
-------- --------
$132,048 $155,061
======== ========
Note 10 - Notes payable and long-term debt:
December 31, March 31,
1996 1997
------------ ---------
(In thousands)
Notes payable - Kronos (DM 40,000) ................. $ 25,732 $ 23,776
======== ========
Long-term debt:
NL Industries:
11.75% Senior Secured Notes .................... $250,000 $250,000
13% Senior Secured Discount Notes .............. 149,756 154,493
-------- --------
399,756 404,493
-------- --------
Kronos:
DM bank credit facility (DM 539,971 and
DM 288,322, respectively) ..................... 347,362 171,379
Joint venture term loan ........................ 57,858 54,000
Other .......................................... 9,125 8,111
-------- --------
414,345 233,490
-------- --------
Rheox:
Bank term loan ................................. 14,659 140,000
Other .......................................... 286 248
-------- --------
14,945 140,248
-------- --------
829,046 778,231
Less current maturities ............................ 91,946 31,626
-------- --------
$737,100 $746,605
======== ========
- 12 -
Note 11 - Income taxes:
The difference between the provision for income tax expense attributable
to income before income taxes and minority interest and the amount that would be
expected using the U.S. federal statutory income tax rate of 35% is presented
below.
Three months ended
March 31,
--------------------
1996 1997
-------- --------
(In thousands)
Expected tax expense (benefit) ......................... $ 6,700 $(11,697)
Non-U.S. tax rates ..................................... (1,462) (207)
Incremental tax on income of companies not included
in NL's consolidated U.S. federal income tax return ... 114 500
Valuation allowance .................................... (709) 12,942
U.S. state income taxes ................................ 364 450
Other, net ............................................. 733 304
-------- --------
Income tax expense ............................... $ 5,740 $ 2,292
======== ========
Note 12 - Other income, net:
Three months ended
March 31,
-----------------------
1996 1997
------- -------
(In thousands)
Interest and dividends ......................... $ 1,307 $ 699
Pension curtailment gain ....................... 4,554 -
Technology fee income .......................... 3,081 -
Currency transaction gains, net ................ 1,046 517
Other, net ..................................... 560 1,026
------- -------
$10,548 $ 2,242
======= =======
Note 13 - Commitments and contingencies:
For descriptions of certain legal proceedings, income tax and other
commitments and contingencies related to the Company, reference is made to (i)
Management's Discussion and Analysis of Financial Condition and Results of
Operations, (ii) Part II, Item 1 -"Legal Proceedings" and (iii) the 1996 Annual
Report.
- 13 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The Company's chemical operations are conducted in two business segments -
TiO2 conducted by Kronos and specialty chemicals conducted by Rheox.
Three months ended %
March 31, Change
-------------------- ------
1996 1997
------ ------
(In millions)
Net sales:
Kronos ............................... $206.3 $204.4 -1%
Rheox ................................ 34.1 35.1 +3%
------ ------
$240.4 $239.5 N/C
====== ======
Operating income:
Kronos ............................... $ 29.5 $ 8.7 -70%
Rheox ................................ 12.4 10.1 -19%
------ ------
$ 41.9 $ 18.8 -55%
====== ======
Percent changes in TiO2:
Sales volume ......................... +22%
Average selling prices
(in billing currencies).............. -16%
Kronos' TiO2 operating income in the first quarter of 1997 decreased from
the first quarter of 1996 as lower average selling prices were only slightly
offset by higher production and sales volumes. Kronos' record first quarter
sales volumes improved 22% from the first quarter of 1996, reflecting improved
demand for TiO2 in each of Kronos' major markets. Average TiO2 selling prices
for the first quarter of 1997 were 16% lower than the first quarter of 1996, and
average prices for the quarter were 2% lower than the fourth quarter of 1996.
The Company expects TiO2 prices will begin to increase during the second quarter
of 1997 as the impact of previously-announced price increases begin to take
effect. Kronos anticipates its TiO2 sales volume will exceed year-earlier levels
through the second quarter of 1997 and Kronos expects sales volumes for
full-year 1997 to be slightly higher than full-year 1996.
Kronos expects its full-year 1997 operating income will be below that of
1996, primarily because of lower anticipated average TiO2 prices for 1997
compared to 1996. Kronos' selling, general and administrative expenses decreased
in the first quarter of 1997 due to favorable effects of foreign currency
translation, partially offset by higher distribution expenses associated with
higher first-quarter 1997 sales volume. Kronos' cost of sales as a percentage of
net sales increased in the first quarter of 1997 due to lower average prices in
the first quarter of 1997.
Rheox's operating results for the first quarter of 1997 improved slightly
compared to the first quarter of 1996 on slightly higher sales volumes,
excluding
- 14 -
a first-quarter 1996 $2.7 million gain related to the curtailment of certain
U.S. employee pension benefits. Rheox's cost of sales increased in the first
quarter of 1997 over the prior-year period primarily due to slightly higher
sales volume, and cost of sales as a percentage of net sales was comparable to
the 1996 period. Selling, general and administrative expenses increased in the
first quarter of 1997 compared to the first quarter of 1996 primarily due to
higher variable compensation expense.
A significant amount of sales are denominated in currencies other than the
U.S. dollar, and fluctuations in the value of the U.S. dollar relative to other
currencies decreased the dollar value of sales for the first quarter of 1997 by
$8 million compared to the first quarter of 1996.
The following table sets forth certain information regarding general
corporate income (expense).
Three months ended
March 31, Difference
--------------------- ----------
1996 1997
------ ------
(In millions)
Securities earnings .................. $ 1.3 $ .7 $ (.6)
Corporate expenses, net .............. (5.0) (34.0) (29.0)
Interest expense ..................... (19.1) (19.0) .1
------ ------ ------
$(22.8) $(52.3) $(29.5)
====== ====== ======
Securities earnings declined due to lower average balances available for
investment. Corporate expense, net in the first quarter of 1997 was higher than
the comparable period in 1996 due to the $30 million noncash charge related to
the Company's adoption of SOP No. 96-1, "Environmental Remediation Liabilities."
See Note 1 to the Consolidated Financial Statements. This charge is included in
selling, general and administrative expense in the Company's consolidated
statements of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows from operating, investing and
financing activities for the three months ended March 31, 1996 and 1997 are
presented below.
Three months ended
March 31,
------------------
1996 1997
------- -------
(In millions)
Net cash provided (used) by:
Operating activities ................................. $ (31.3) $ 7.3
Investing activities ................................. (16.0) (6.4)
Financing activities ................................. 19.6 (35.8)
------- -------
Net cash used by operating, investing and
financing activities ............................ $ (27.7) $ (34.9)
======= =======
- 15 -
The TiO2 industry is cyclical and changes in economic conditions within
the industry significantly impact the earnings and operating cash flows of the
Company. Cash flows from operations before change in assets and liabilities in
the 1997 period declined from the comparable period in 1996 due to lower
operating income. Changes in the Company's inventories, receivables and payables
(excluding the effect of currency translation) used cash in both the first
quarter of 1996 and 1997; however, the cash used in the first quarter of 1997
was significantly less than the first quarter of 1996 due to cash provided from
reductions in inventory levels in the 1997 period.
Certain of the Company's income tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies. The Company has previously reached an agreement with
the German tax authorities, and paid certain tax deficiencies of approximately
DM 44 million ($28 million when paid), including interest, which resolved
significant tax contingencies for years through 1990. Certain other significant
German tax contingencies remain outstanding and will continue to be litigated.
The Company has received certain tax assessments aggregating DM 130 million ($77
million), including interest, for years through 1996 and expects to receive tax
assessments for an additional DM 20 million ($12 million) related to these
remaining tax contingencies. No payments of tax or interest deficiencies related
to these assessments will be required until the litigation is resolved, which
the Company anticipates may take approximately two to five years. Although the
Company believes that it will ultimately prevail, the Company has granted a DM
100 million ($59 million at March 31, 1997) lien on its Nordenham, Germany TiO2
plant in favor of the German tax authorities until the litigation is resolved.
No assurance can be given that this litigation will be resolved in the Company's
favor in view of the inherent uncertainties involved in court proceedings. 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.
In order to improve its near-term liquidity, the Company refinanced its
Rheox subsidiary during January 1997, 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. 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 March 31, 1997, the
Company was in compliance with all financial covenants governing its debt
agreements.
In addition to the above refinancing and prepayment, the Company repaid
$3.9 million of the joint venture term loan in the first quarter of 1997.
At March 31, 1997, the Company had cash and cash equivalents aggregating
$78 million (51% held by non-U.S. subsidiaries), including restricted cash and
- 16 -
cash equivalents of $9 million. The Company's subsidiaries had $9 million and
$94 million available for borrowing at March 31, 1997 under existing U.S. and
non-U.S. credit facilities, respectively.
The Company has been named as a defendant, potentially responsible party
("PRP"), or both, in a number of legal proceedings associated with environmental
matters, including waste disposal sites, mining locations and facilities
currently or previously owned, operated or used by the Company, certain of which
are on the U.S. Environmental Protection Agency's (the "U.S. EPA") Superfund
National Priorities List or similar state lists. On a quarterly basis, the
Company evaluates the potential range of its liability at sites where it has
been named as a PRP or defendant. The Company believes it has adequate accruals
($140 million at March 31, 1997) 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 allocations of such
costs among PRPs. It is not possible to estimate the range of costs for certain
sites. The upper end of the range of reasonably possible costs to the Company
for sites for which it is possible to estimate costs is approximately $185
million. The Company's estimates of such liabilities have not been discounted to
present value, and the Company has not recognized any potential insurance
recoveries. No assurance can be given that actual costs will not exceed accrued
amounts or the upper end of the range for sites for which estimates have been
made, and no assurance can be given that costs will not be incurred with respect
to sites as to which no estimate presently can be made. Further, there can be no
assurance that additional environmental matters will not arise in the future.
The Company is also a defendant in a number of legal proceedings seeking
damages for personal injury and property damage arising from the sale of lead
pigments and lead-based paints. 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 be reasonably
estimated. In addition, various legislation and administrative regulations have,
from time to time, been enacted or proposed that seek to impose various
obligations on present and former manufacturers of lead pigment and lead-based
paint with respect to asserted health concerns associated with the use of such
products and to effectively overturn court decisions in which the Company and
other pigment manufacturers have been successful. The Company currently believes
the disposition of all claims and disputes, individually and in the aggregate,
should not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity. There can be no
assurance that additional matters of these types will not arise in the future.
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and availability of resources in view of, among
other things, its debt service and capital expenditure requirements and
estimated future operating cash flows. As a result of this process, the Company
in the past has sought, and in the future may seek, to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, issue
additional securities,
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modify its dividend policy, restructure ownership interests, sell interests in
subsidiaries or other assets, or take a combination of such steps or other steps
to manage its liquidity and capital resources. In the normal course of its
business, the Company may review opportunities for the acquisition, divestiture,
joint venture or other business combinations in the chemicals industry. In the
event of any such transactions, the Company may consider using available cash,
issuing equity securities or increasing its indebtedness to the extent permitted
by the agreements governing the Company's existing debt.
The statements contained in this Report on Form 10-Q ("Quarterly Report")
which are not historical facts, including, but not limited to, statements found
under the captions "Results of Operations" and "Liquidity and Capital Resources"
above, are forward-looking statements that involve a number of risks and
uncertainties. The actual results of the future events described in such
forward-looking statements in this Quarterly Report could differ materially from
those stated in such forward-looking statements. Among the factors that could
cause actual results to differ materially are the risks and uncertainties
discussed in this Quarterly Report and in the 1996 Annual Report, including,
without limitation, the portions of such reports under the captions referenced
above, and the uncertainties set forth from time to time in the Company's other
public reports and filings and public statements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the 1996 Annual Report for descriptions of certain
previously-reported legal proceedings.
In April 1997 the Quebec Court of Appeals dismissed the Canadian
Fisheries Act case (previously reported at page 9 of the 1996 Annual Report)
against one of the individual defendants. In May 1997 the Crown's counsel filed
an order of nolle prosequi effectively terminating the matter as against Kronos
Canada, Inc. and the remaining individual defendant. In May 1998 the matter will
be expunged from the records as if it had never been brought. Kronos Canada and
the individual defendant have agreed not to seek damages for malicious or
improper prosecution.
Ritchie v. NL Industries, et al. (No. 5:96-CV-166). The case was
remanded to state court in April 1997.
In April 1997 the Company was served with a complaint in Parker v. NL
Industries, et al. (Circuit Court, Baltimore City, Maryland, No. 97085060
CC915). Plaintiff, now an adult, and his wife, seek compensatory and punitive
damages from the Company, another former manufacturer of lead paint and a local
paint retailer, based on claims of negligence, strict liability and fraud, for
plaintiff's alleged ingestion of lead paint as a child. In May 1997 the Company
removed the case to federal court.
In March 1997 the Company was served with a complaint filed in the
Fifth Judicial District Court of Cass County, Texas, on behalf of approximately
4,000 plaintiffs and their spouses alleging injury due to exposure to asbestos
and
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seeking compensatory and punitive damages. The Company has filed an answer
denying the material allegations. (Ernest Hughes, et al. v. Owens-Corning
Fiberglass, Corporation, et al., No. 97-C-051).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 - Executive severance agreement effective as of July 24, 1996
by and between the Registrant and J. Landis Martin.
10.2 - Intercorporate Services Agreement by and between Contran
Corporation and the Registrant effective as of January 1, 1997.
10.3 - Intercorporate Services Agreement by and between Valhi, Inc.
and the Registrant effective as of January 1, 1997.
10.4 - Intercorporate Services Agreement by and between Tremont
Corporation and the Registrant effective as of January 1, 1997.
10.5 - Intercorporate Services Agreement by and between Titanium
Metals Corporation and the Registrant effective as of January 1,
1997.
27.1 - Financial Data Schedule for the three-month period ended
March 31, 1997.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended March 31, 1997 and
through the date of this report:
January 30, 1997 - reported Items 5 and 7.
April 22, 1997 - reported Items 5 and 7.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NL INDUSTRIES, INC.
(Registrant)
Date: May 14, 1997 By /s/ Joseph S. Compofelice
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Joseph S. Compofelice
Vice President and
Chief Financial Officer
Date: May 14, 1997 By /s/ Dennis G. Newkirk
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Dennis G. Newkirk
Vice President and Controller
(Principal Accounting Officer)
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