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, 1999
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 12, 1999: 51,826,139
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1998
and March 31, 1999 3-4
Consolidated Statements of Income - Three
months ended March 31, 1998 and 1999 5-6
Consolidated Statements of Comprehensive Income
- Three months ended March 31, 1998 and 1999 7
Consolidated Statement of Shareholders' Equity
- Three months ended March 31, 1999 8
Consolidated Statements of Cash Flows - Three
months ended March 31, 1998 and 1999 9-10
Notes to Consolidated Financial Statements 11-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24-25
- 2 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, March 31,
ASSETS 1998 1999
------------ ----------
Current assets:
Cash and cash equivalents ...................... $ 154,953 $ 135,265
Restricted cash equivalents .................... 8,164 17,211
Accounts and notes receivable .................. 133,769 147,973
Refundable income taxes ........................ 15,919 13,896
Inventories .................................... 228,611 209,251
Prepaid expenses ............................... 2,724 4,274
Deferred income taxes .......................... 1,955 2,274
---------- ----------
Total current assets ....................... 546,095 530,144
---------- ----------
Other assets:
Marketable securities .......................... 17,580 16,133
Investment in TiO2 manufacturing joint
venture ....................................... 171,202 164,702
Prepaid pension cost ........................... 23,990 24,096
Other .......................................... 13,927 12,070
---------- ----------
Total other assets ......................... 226,699 217,001
---------- ----------
Property and equipment:
Land ........................................... 19,626 18,301
Buildings ...................................... 144,228 135,795
Machinery and equipment ........................ 586,400 554,211
Mining properties .............................. 84,015 82,866
Construction in progress ....................... 4,385 7,112
---------- ----------
838,654 798,285
Less accumulated depreciation and depletion .... 456,495 438,484
---------- ----------
Net property and equipment ................. 382,159 359,801
---------- ----------
$1,154,953 $1,106,946
========== ==========
- 3 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
December 31, March 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1999
------------ ------------
Current liabilities:
Notes payable ................................ $ 36,391 $ 33,293
Current maturities of long-term debt ......... 64,826 41,573
Accounts payable and accrued liabilities ..... 187,661 185,628
Payable to affiliates ........................ 10,625 9,013
Income taxes ................................. 9,224 5,817
Deferred income taxes ........................ 1,236 1,906
----------- -----------
Total current liabilities ................ 309,963 277,230
----------- -----------
Noncurrent liabilities:
Long-term debt ............................... 292,803 302,211
Deferred income taxes ........................ 196,180 189,183
Accrued pension cost ......................... 44,649 41,043
Accrued postretirement benefits cost ......... 41,659 40,754
Other ........................................ 116,732 104,523
----------- -----------
Total noncurrent liabilities ............. 692,023 677,714
----------- -----------
Minority interest .............................. 633 616
----------- -----------
Shareholders' equity:
Common stock ................................. 8,355 8,355
Additional paid-in capital ................... 774,288 774,288
Accumulated deficit .......................... (133,379) (121,253)
Accumulated other comprehensive loss ......... (132,129) (145,320)
Treasury stock ............................... (364,801) (364,684)
----------- -----------
Total shareholders' equity ............... 152,334 151,386
----------- -----------
$ 1,154,953 $ 1,106,946
=========== ===========
Commitments and contingencies (Note 13)
See accompanying notes to consolidated financial statements.
- 4 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 1998 and 1999
(In thousands, except per share data)
1998 1999
--------- ---------
Revenues and other income:
Net sales ........................................... $ 222,629 $ 201,569
Other, net .......................................... 5,981 6,413
--------- ---------
228,610 207,982
--------- ---------
Costs and expenses:
Cost of sales ....................................... 156,915 147,040
Selling, general and administrative ................. 32,639 32,562
Interest ............................................ 16,399 9,779
--------- ---------
205,953 189,381
--------- ---------
Income from continuing operations before
income taxes and minority interest ............. 22,657 18,601
Income tax expense .................................... 6,342 4,650
--------- ---------
Income from continuing operations before
minority interest .............................. 16,315 13,951
Minority interest ..................................... 15 11
--------- ---------
Income from continuing operations ............... 16,300 13,940
Discontinued operations ............................... 287,060 --
Extraordinary item - early extinguishment of debt,
net of tax benefit of $1,263 ......................... (2,345) --
--------- ---------
Net income ...................................... $ 301,015 $ 13,940
========= =========
- 5 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
Three months ended March 31, 1998 and 1999
(In thousands, except per share data)
1998 1999
---------- ----------
Basic earnings per share:
Continuing operations ............................. $ .32 $ .27
Discontinued operations ........................... 5.60 --
Extraordinary item ................................ (.05) --
---------- ----------
Net income ...................................... $ 5.87 $ .27
========== ==========
Diluted earnings per share:
Continuing operations ............................. $ .31 $ .27
Discontinued operations ........................... 5.54 --
Extraordinary item ................................ (.05) --
---------- ----------
Net income ...................................... $ 5.80 $ .27
========== ==========
Shares used in the calculation of earnings per share:
Basic ............................................. 51,282 51,819
Dilutive impact of stock options .................. 570 51
---------- ----------
Diluted ......................................... 51,852 51,870
========== ==========
See accompanying notes to consolidated financial statements.
- 6 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, 1998 and 1999
(In thousands)
1998 1999
-------- --------
Net income .......................................... $301,015 $ 13,940
-------- --------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment .................. 492 (940)
Currency translation adjustment ................... 400 (12,251)
-------- --------
Total other comprehensive income (loss) ......... 892 (13,191)
-------- --------
Comprehensive income .......................... $301,907 $ 749
======== ========
See accompanying notes to consolidated financial statements.
- 7 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three months ended March 31, 1999
(In thousands)
Accumulated other
comprehensive income (loss)
Additional ------------------------------------
Common paid-in Accumulated Currency Pension Marketable Treasury
stock capital deficit translation liabilities securities stock Total
--------- ---------- ----------- ----------- ----------- ---------- ---------- ---------
Balance at December 31, 1998 $ 8,355 $ 774,288 $(133,379) $(133,440) $ (3,187) $ 4,498 $(364,801) $ 152,334
Net income .................. -- -- 13,940 -- -- -- -- 13,940
Other comprehensive loss, net -- -- -- (12,251) -- (940) -- (13,191)
Dividends ................... -- -- (1,814) -- -- -- -- (1,814)
Treasury stock reissued ..... -- -- -- -- -- -- 117 117
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 1999 ... $ 8,355 $ 774,288 $(121,253) $(145,691) $ (3,187) $ 3,558 $(364,684) $ 151,386
========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
- 8 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 1998 and 1999
(In thousands)
1998 1999
--------- ---------
Cash flows from operating activities:
Net income ....................................... $ 301,015 $ 13,940
Depreciation, depletion and amortization ......... 8,463 8,662
Noncash interest expense ......................... 5,909 512
Deferred income taxes ............................ (789) 1,518
Distribution from TiO2 manufacturing joint
venture ......................................... -- 6,500
Discontinued operations:
Net gain from sale of Rheox .................... (285,735) --
Income from operations of Rheox ................ (1,325) --
Other, net ....................................... (4,518) (2,901)
--------- ---------
23,020 28,231
Change in assets and liabilities:
Accounts and notes receivable .................. (32,685) (21,213)
Inventories .................................... 3,552 8,570
Prepaid expenses ............................... (2,307) (2,018)
Accounts payable and accrued liabilities ....... 873 (6,459)
Income taxes ................................... (3,399) (1,937)
Other, net ..................................... 24,088 (2,374)
Rheox, net ....................................... (1,193) --
--------- ---------
Net cash provided by operating activities .... 11,949 2,800
--------- ---------
Cash flows from investing activities:
Change in restricted cash equivalents, net ....... 4,009 (9,047)
Capital expenditures ............................. (2,430) (7,846)
Investment in joint venture ...................... (371) --
Proceeds from disposition of property and
equipment ....................................... 11 2,114
Proceeds from sale of Rheox ...................... 435,080 --
Rheox, net ....................................... (26) --
--------- ---------
Net cash provided (used) by investing
activities .................................. 436,273 (14,779)
--------- ---------
- 9 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 1998 and 1999
(In thousands)
1998 1999
--------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ....................................... $ 30,491 $ 56,271
Principal payments ............................... (98,499) (60,599)
Dividends paid ..................................... -- (1,814)
Other, net ......................................... 220 117
Rheox, net ......................................... (117,500) --
--------- ---------
Net cash used by financing activities .......... (185,288) (6,025)
--------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities .... 262,934 (18,004)
Currency translation ............................. (660) (1,684)
Sale of Rheox .................................... (7,630) --
Balance at beginning of period ..................... 96,394 154,953
--------- ---------
Balance at end of period ........................... $ 351,038 $ 135,265
========= =========
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized ............... $ 4,322 $ 1,990
Income taxes, net .................................. 8,830 5,064
See accompanying notes to consolidated financial statements.
- 10 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
NL Industries, Inc. conducts its titanium dioxide pigments ("TiO2")
operations through its wholly-owned subsidiary, Kronos, Inc. At March 31, 1999,
Valhi, Inc. and Tremont Corporation, each affiliates of Contran Corporation,
held approximately 58% and 20%, respectively, of NL's outstanding common stock,
and together they may be deemed to control NL. At March 31, 1999, Contran and
its subsidiaries held approximately 92% of Valhi's outstanding common stock, and
Valhi and other entities related to Harold C. Simmons held approximately 53% of
Tremont's outstanding common stock.
The consolidated balance sheet of NL Industries, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 1998 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 1999 and the consolidated statements of
income, comprehensive income, shareholders' equity and cash flows for the
interim periods ended March 31, 1998 and 1999 have been prepared by the Company,
without audit. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows have been made. The
results of operations for the interim periods are not necessarily indicative of
the operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. Certain prior-year amounts have been
reclassified to conform to the current year presentation. The accompanying
consolidated financial statements should be read in conjunction with the
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 (the "1998 Annual Report").
The Company will adopt Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
no later than the first quarter of 2000. SFAS No. 133 establishes accounting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Under SFAS No. 133, all
derivatives will be recognized as either assets or liabilities and measured at
fair value. The accounting for changes in fair value of derivatives will depend
upon the intended use of the derivative. The impact of adopting SFAS No. 133, if
any, has not been determined but will be dependent upon the extent to which the
Company is then a party to derivative contracts or engaged in hedging
activities.
- 11 -
NOTE 2 - EARNINGS PER SHARE:
Basic earnings per share is based on the weighted average number of common
shares outstanding during each period. Diluted earnings per share is based on
the weighted average common shares outstanding and the dilutive impact of
outstanding stock options.
NOTE 3 - BUSINESS SEGMENT INFORMATION:
The Company's operations are conducted by Kronos in one operating business
segment - TiO2.
Three months ended
March 31,
-----------------------
1998 1999
--------- ---------
(In thousands)
Net sales .......................................... $ 222,629 $ 201,569
Other income, excluding corporate .................. 1,348 3,693
--------- ---------
223,977 205,262
Cost of sales ...................................... 156,915 147,040
Selling, general and administrative, excluding
corporate ......................................... 27,663 27,261
--------- ---------
Operating income ................................. 39,399 30,961
General corporate income (expense):
Securities earnings, net ......................... 3,848 1,600
Expenses, net .................................... (4,191) (4,181)
Interest expense ................................. (16,399) (9,779)
--------- ---------
$ 22,657 $ 18,601
========= =========
NOTE 4 - INVENTORIES:
December 31, March 31,
1998 1999
------------ ---------
(In thousands)
Raw materials ............................ $ 46,114 $ 37,084
Work in process .......................... 11,530 8,547
Finished products ........................ 136,225 130,937
Supplies ................................. 34,742 32,683
-------- --------
$228,611 $209,251
======== ========
- 12 -
NOTE 5 - NONCURRENT MARKETABLE SECURITIES:
December 31, March 31,
1998 1999
------------ ---------
(In thousands)
Available-for-sale - marketable equity securities:
Unrealized gains ................................... $ 8,512 $ 7,921
Unrealized losses .................................. (1,591) (2,447)
Cost ............................................... 10,659 10,659
-------- --------
Aggregate market ............................... $ 17,580 $ 16,133
======== ========
NOTE 6 - OTHER NONCURRENT ASSETS:
December 31, March 31,
1998 1999
------------ ---------
(In thousands)
Deferred financing costs, net .................. $ 4,124 $ 3,470
Restricted cash equivalents .................... 4,225 4,225
Intangible assets, net ......................... 1,985 1,362
Other .......................................... 3,593 3,013
------- -------
$13,927 $12,070
======= =======
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
December 31, March 31,
1998 1999
------------ ---------
(In thousands)
Accounts payable ......................... $ 55,270 $ 44,731
-------- --------
Accrued liabilities:
Environmental costs .................... 44,122 53,910
Employee benefits ...................... 37,399 32,873
Interest ............................... 7,346 14,619
Other .................................. 43,524 39,495
-------- --------
132,391 140,897
-------- --------
$187,661 $185,628
======== ========
- 13 -
NOTE 8 - OTHER NONCURRENT LIABILITIES:
December 31, March 31,
1998 1999
------------ ---------
(In thousands)
Environmental costs .......................... $ 81,454 $ 69,453
Insurance claims and expenses ................ 10,872 10,846
Deferred income .............................. 12,333 11,333
Employee benefits ............................ 9,778 9,822
Other ........................................ 2,295 3,069
-------- --------
$116,732 $104,523
======== ========
NOTE 9 - NOTES PAYABLE AND LONG-TERM DEBT:
December 31, March 31,
1998 1999
------------ ---------
(In thousands)
Notes payable - Kronos (DM 60,500) ................... $ 36,391 $ 33,293
======== ========
Long-term debt:
NL Industries - 11.75% Senior Secured Notes ........ $244,000 $244,000
-------- --------
Kronos:
DM bank credit facility (DM 187,322 and
DM 180,072, respectively) ....................... 112,674 99,094
Other ............................................ 955 690
-------- --------
113,629 99,784
-------- --------
357,629 343,784
Less current maturities .............................. 64,826 41,573
-------- --------
$292,803 $302,211
======== ========
- 14 -
NOTE 10 - INCOME TAXES:
The difference between the provision for income tax expense attributable
to income from continuing operations 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,
-------------------
1998 1999
------- -------
(In thousands)
Expected tax expense ................................... $ 7,930 $ 6,510
Non-U.S. tax rates ..................................... (52) (304)
German solidarity income taxes ......................... 558 223
Incremental tax on income of companies not included
in NL's consolidated U.S. federal income tax return ... 926 458
Valuation allowance .................................... (3,406) (1,942)
U.S. state income taxes ................................ 100 90
Other, net ............................................. 286 (385)
------- -------
Income tax expense ............................... $ 6,342 $ 4,650
======= =======
NOTE 11 - OTHER INCOME, NET:
Three months ended
March 31,
----------------------
1998 1999
------- -------
(In thousands)
Corporate interest and dividend income ............ $ 3,848 $ 1,600
Currency transaction gains, net ................... 583 1,569
Noncompete agreement income ....................... 667 1,000
Disposition of property and equipment ............. (24) 979
Trade interest income ............................. 581 948
Other, net ........................................ 326 317
------- -------
$ 5,981 $ 6,413
======= =======
- 15 -
NOTE 12 - DISCONTINUED OPERATIONS:
The Company sold the net assets of its Rheox specialty chemicals business
for $465 million cash (before fees and expenses) in January 1998, including $20
million attributable to a five-year agreement by the Company not to compete in
the rheological products business. The Company recognized an after-tax gain of
approximately $286 million on the sale of this business segment.
Condensed income statement and cash flow data for Rheox (excluding
dividends paid to, contributions received from and intercompany loans with NL)
is presented below. Interest expense has been allocated to discontinued
operations based on the amount of debt specifically attributed to Rheox's
operations.
Three months
ended
March 31, 1998
--------------
(In thousands)
Operations:
Net sales .................................................... $ 12,630
=========
Operating income ............................................. $ 2,900
Interest and other expenses .................................. 797
---------
Income before income taxes ............................... 2,103
Income tax expense ........................................... 778
---------
1,325
Gain from sale of Rheox, net of tax expense of $86,222 ......... 285,735
---------
$ 287,060
=========
Cash flows from:
Operating activities ......................................... $ (1,193)
Investing activities - capital expenditures .................. (26)
Financing activities - indebtedness, net ..................... (117,500)
---------
$(118,719)
=========
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 1998 Annual
Report.
- 16 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Three months ended %
March 31, Change
---------------------- ------
1998 1999
-------- --------
(In millions)
Net sales - Kronos ..................... $ 222.6 $ 201.6 -9%
Operating income - Kronos .............. $ 39.4 $ 31.0 -21%
Percent changes in TiO2:
Sales volume ......................... -16%
Average selling prices
(in billing currencies) ............. +5%
Kronos' operating income in the first quarter of 1999 decreased from the
first quarter of 1998 due to lower production and sales volumes, partially
offset by higher average selling prices. Kronos' first quarter sales volume was
16% lower than the record sales volume in the first quarter of 1998 as worldwide
demand weakened, particularly in Europe. In response to this lower demand, the
Company reduced its production rates to more closely match its sales volumes.
Average TiO2 selling prices for the first quarter of 1999 were 5% higher than
the first quarter of 1998 and were even with the third and fourth quarters of
1998. Kronos expects its full-year 1999 operating income will be below that of
1998 primarily because of lower production volumes. Kronos anticipates its TiO2
sales volume for full-year 1999 will approximate that of 1998. Kronos' outlook
for TiO2 prices during the remainder of 1999 is uncertain.
Kronos' cost of sales as a percentage of net sales increased in the first
quarter of 1999 primarily due to lower production volume, partially offset by
higher average selling prices. Kronos' selling, general and administrative
expenses decreased in the first quarter of 1999 due to lower distribution
expenses associated with lower first-quarter 1999 sales volume, partially offset
by unfavorable effects of foreign currency translation.
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 increased the dollar value of sales for the first quarter of 1999 by
$4 million compared to the first quarter of 1998. Fluctuations in the value of
the U.S. dollar relative to other currencies similarly impacted the Company's
operating expenses and the net impact of currency exchange rate fluctuations on
the operating income comparison was not significant in the first quarter of
1999.
- 17 -
The following table sets forth certain information regarding general
corporate income (expense).
Three months ended
March 31,
---------------------
1998 1999 Difference
------- ------- ----------
(In millions)
Securities earnings ................... $ 3.8 $ 1.6 $ (2.2)
Corporate expenses, net ............... (4.2) (4.2) --
Interest expense ...................... (16.4) (9.8) 6.6
------- ------- -------
$ (16.8) $ (12.4) $ 4.4
======= ======= =======
Securities earnings decreased due to lower average balances available for
investment. Interest expense decreased $6.6 million due to lower levels of
outstanding debt. The Company expects its full-year 1999 securities earnings and
interest expense will be lower than 1998, primarily due to lower average
balances available for investment and lower levels of outstanding debt,
respectively.
In the first quarter of 1999, the Company reduced its deferred income tax
valuation allowance by $1.9 million primarily as a result of utilization of
certain tax attributes for which the benefit had not been previously recognized
under the "more-likely-than-not" recognition criteria.
Discontinued operations in 1998 represent the Company's former specialty
chemicals operations which were sold in January 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows from operating, investing and
financing activities for the three months ended March 31, 1998 and 1999 are
presented below.
Three months ended
March 31,
------------------
1998 1999
------ ------
(In millions)
Net cash provided (used) by:
Operating activities:
Before changes in assets and liabilities .............. $ 23.0 $ 28.2
Changes in assets and liabilities ..................... (11.1) (25.4)
------ ------
11.9 2.8
Investing activities .................................... 436.3 (14.8)
Financing activities .................................... (185.3) (6.0)
------ ------
Net cash provided (used) by operating, investing,
and financing activities ........................... $262.9 $(18.0)
====== ======
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 flow from operations, before changes in assets and liabilities, in
the 1999 period increased from the comparable period in 1998 primarily due to
- 18 -
a $6.5 million cash distribution from the Company's TiO2 manufacturing joint
venture, partially offset by 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 1998 and 1999 primarily due
to increases in receivables in each respective period. Cash provided by
operations in 1998 also includes $20 million related to an agreement not to
compete in the rheological products business.
In accordance with the provisions of the DM credit agreement and as a
result of the level of operating income in 1998 for Kronos International, Inc.,
the Company prepaid its DM 107 million ($60 million when paid) term loan in full
in March 1999, principally by drawing DM 100 million ($56 million when drawn) on
its DM revolving credit facility. The revolver's balance of DM 180 million ($99
million at March 31, 1999) is scheduled to be reduced to DM 105 million in March
2000, with the remaining balance to be repaid in September 2000.
At March 31, 1999, the Company had cash and cash equivalents aggregating
$135 million ($33 million held by non-U.S. subsidiaries) and an additional $21
million of restricted cash equivalents. The Company's subsidiaries had $41
million available for borrowing at March 31, 1999 under existing non-U.S. credit
facilities.
In the first quarter of 1999, the Company paid a regular quarterly
dividend of $.035 per share to shareholders aggregating $1.8 million. In May
1999 the Company's Board of Directors declared a regular quarterly dividend of
$.035 per share to shareholders of record as of June 1, 1999 to be paid on June
16, 1999.
Certain of the Company's tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies, including non-income tax related items and interest.
In the third quarter of 1998, the Company received a DM 14 million ($8.2 million
when received) refund of 1990 German dividend withholding taxes. The German tax
authorities were required to refund such amounts based on a 1998 German Supreme
Court decision in favor of another taxpayer. No further withholding tax refunds
are expected.
Certain other significant German tax contingencies aggregating an
estimated DM 188 million ($103 million at March 31, 1999) through 1998 remain
outstanding and are in litigation. One primary issue relates to disputed amounts
aggregating DM 181 million ($100 million at March 31, 1999) for years through
1998. The Company has received tax assessments for a substantial portion of
these amounts. No payments of tax or interest deficiencies related to these
assessments are expected until the litigation is resolved. During 1997 a German
tax court proceeding involving a tax issue substantially the same as the
Company's primary dispute was decided in favor of the taxpayer. The German tax
authorities appealed that decision to the German Supreme Court, which in
February 1999 rendered its judgment in favor of the taxpayer. The Company
believes that the German Supreme Court's judgment should determine the outcome
of the Company's primary dispute with the German tax authorities. Based on this
recent favorable judgment, the Company has requested that the tax assessments
related to this issue be withdrawn and expects a decision from the German
authorities regarding
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this request during 1999. The Company has granted a DM 94 million ($52 million
at March 31, 1999) lien on its Nordenham, Germany TiO2 plant in favor of the
City of Leverkusen related to this tax contingency, and a DM 5 million ($3
million at March 31, 1999) lien in favor of the German federal tax authorities
for other tax contingencies. If the German tax authorities withdraw their
assessments based on the German Supreme Court's decision, the Company expects to
request the release of the DM 94 million lien in favor of the City of
Leverkusen.
On April 1, 1999, the German government enacted certain income tax law
changes that were retroactively effective as of January 1, 1999. Based on these
changes, the Company expects its effective cash income tax rate in Germany will
increase beginning in the second quarter of 1999. Through the use of ongoing tax
planning strategies, the Company does not expect the income tax law changes to
materially affect its deferred tax liabilities.
During 1997 the Company received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at March
31, 1999) relating to 1994. The Company has appealed this assessment and has
begun litigation proceedings. During 1998 the Company was informed by the
Norwegian tax authorities that additional tax deficiencies of NOK 39 million ($5
million at March 31, 1999) will likely be proposed for the year 1996. The
Company intends to vigorously contest this issue and litigate, if necessary.
Although the Company believes that it will ultimately prevail, the Company has
granted a lien for the 1994 tax assessment on its Fredrikstad, Norway TiO2 plant
in favor of the Norwegian tax authorities and will be required to grant security
on the 1996 assessment when received.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in court
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
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
($123 million at March 31, 1999) 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 $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
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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. Examples of such proposed
legislation include bills which would permit civil liability for damages on the
basis of market share, rather than requiring plaintiffs to prove that the
defendant's product caused the alleged damage. 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 is in the process of evaluating and upgrading its computer
systems (both information technology ("IT") systems and non-IT systems involving
embedded chip technology) and software applications (collectively referred to as
"systems") to ensure that the systems function properly beginning January 1,
2000. To achieve its year 2000 compliance plan, the Company is utilizing
internal and external resources to identify, correct or reprogram, and test its
systems.
The Company has conducted an inventory of its IT systems worldwide and is
currently testing the systems and applications that have been corrected or
reprogrammed for year 2000 compliance. The Company has completed an inventory of
its non-IT systems and is in the process of correcting or replacing
date-deficient systems. The remediation effort is well under way on all critical
IT and non-IT systems, and the Company anticipates that remediation of such
critical systems will be substantially complete by June 1999, and that
remediation and testing of all remaining systems will be complete by September
1999. Once systems undergo remediation, they are tested for year 2000
compliance. For critical systems, the testing process usually involves
subjecting the remediated system to a simulated change of date from the year
1999 to the year 2000 using, in many cases, computer resources. The Company uses
a number of packaged software products that have been upgraded to a year 2000
compliant version in the normal course of business. Excluding the cost of these
software upgrades, the
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Company's cost of becoming year 2000 compliant is expected to be approximately
$2 million, of which about one-half has been spent through March 31, 1999.
The Company has identified approximately 30 major computer systems and
assessed them for year 2000 compliance. At March 31, 1999, the Company believes
approximately 80% of such systems are year 2000 compliant. Each operating unit
has responsibility for its own conversion, in line with overall guidance and
oversight provided by a corporate-level coordinator, and the status of each of
the remaining systems will be specifically tracked and monitored.
As part of its year 2000 compliance plan, the Company has requested
confirmations from its major domestic and foreign software vendors, hardware
vendors, primary suppliers and major customers, that they are developing and
implementing plans to become, or are, year 2000 compliant. Confirmations
received to date from the Company's software vendors, hardware vendors, primary
suppliers and major customers, indicate that generally they are in the process
of implementing remediation plans to ensure that their systems are compliant by
December 31, 1999. The major software vendors used by the Company have already
delivered year 2000 compliant software. Notwithstanding these efforts, the
ability of the Company to affect the year 2000 preparedness of such vendors,
suppliers and customers is limited.
The Company is developing a contingency plan to address potential year
2000 related business interruptions that may occur on January 1, 2000, or
thereafter. This plan is expected to be completed in the second quarter of 1999.
Although the Company expects its systems to be year 2000 compliant before
December 31, 1999, it cannot predict the outcome or success of the year 2000
compliance programs of its vendors, suppliers, and customers. The Company also
cannot predict whether its major software vendors, who continue to test for year
2000 compliance, will find additional problems that would result in unplanned
upgrades of their applications after December 31, 1999. As a result of these
uncertainties, the Company cannot predict the impact on its financial condition
or results of operations from noncompliant year 2000 systems that the Company
directly or indirectly relies upon. Should the Company's year 2000 compliance
plan not be successful or be delayed beyond January 2000, or should one or more
vendors, suppliers or customers fail to adequately address their year 2000
issues, the consequences to the Company could be far-reaching and material,
including an inability to produce TiO2 at its manufacturing facilities, which
could lead to an indeterminate amount of lost revenue. Other potential negative
consequences could include plant malfunction, impeded communications or power
supplies, or slower transaction processing and financial reporting. Although not
anticipated, the most reasonably likely worst-case scenario of failure by the
Company or its key suppliers or customers to become year 2000 compliant would be
a short-term slowdown or cessation of manufacturing operations at one or more of
the Company's facilities and a short-term inability on the part of the Company
to process orders and billings in a timely manner, and to deliver products to
customers.
Beginning January 1, 1999, eleven of the fifteen members of the European
Union ("EU"), including Germany, Belgium, the Netherlands and France, adopted a
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new European currency unit (the "euro") as their common legal currency.
Following the introduction of the euro, the participating countries' national
currencies remain legal tender as denominations of the euro from January 1, 1999
through January 1, 2002, and the exchange rates between the euro and such
national currency units are fixed.
The Company conducts substantial operations in Europe, including a
significant amount of outstanding DM-denominated indebtedness. The functional
currency of the Company's German, Belgian, Dutch and French operations will
convert to the euro from their respective national currencies over a two-year
period beginning in 1999. The Company has assessed and evaluated the impact of
the euro conversion on its business and made the necessary system conversions.
The euro conversion may impact the Company's operations including, among other
things, changes in product pricing decisions necessitated by cross-border price
transparencies. Such changes in product pricing decisions could impact both
selling prices and purchasing costs and, consequently, favorably or unfavorably
impact results of operations, financial condition or liquidity.
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 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 or other industries. In the event of any acquisition or joint venture
transaction, the Company may consider using available cash, issuing equity
securities or increasing its indebtedness to the extent permitted by the
agreements governing the Company's existing debt.
The statements contained in this Report on Form 10-Q ("Quarterly Report")
which are not historical facts, including, but not limited to, statements found
under the captions "Results of Operations" and "Liquidity and Capital Resources"
above, are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"will," "should," "anticipates," "expects," or comparable terminology or by
discussions of strategy. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurances that these expectations will prove to be correct. Such statements
involve risks and uncertainties, including, but not limited to, the cyclicality
of the titanium dioxide industry, global economic conditions, global productive
capacity, changes in product pricing, "Year 2000" issues, and other risks and
uncertainties included in this Quarterly Report and in the 1998 Annual Report,
and the uncertainties set forth from time to time in the Company's other public
reports and filings. Should one or more of these risks materialize (or the
consequences of such a development worsen), or should the underlying assumptions
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prove incorrect, actual results could differ materially from those forecasted or
expected. The Company assumes no duty to update any forward-looking statements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the 1998 Annual Report for descriptions of certain
previously-reported legal proceedings.
PEDRICKTOWN SITE. In March 1999 the Company executed the previously
reported agreement in principle with certain PRPs with respect to the Company's
liability at the site, settling the matter within previously accrued amounts.
BATAVIA, NEW YORK SITE. In April 1999 the Company received a revised
estimate by the U.S. EPA estimating the cost to remediate operable unit one at
$15.1 million and received a revised claim by the U.S. EPA seeking past costs of
$4.6 million, including interest.
BRENNER, ET AL. V. AMERICAN CYANAMID, ET AL., (NO. 12596-93). In May
1999 defendants appealed the previously reported denial of their motion to
dismiss the market share liability claim.
In April 1999 the Company was served with an amended complaint in
SWEET, ET AL. V. SHEAHAN, ET AL., (U.S. DISTRICT COURT, NORTHERN DISTRICT OF NEW
YORK, CIVIL ACTION NO. 97-CV-1666/LEK-DNH), adding the Company and other
defendants to a suit originally filed against plaintiffs' landlord. Plaintiffs,
a parent and child, allege injuries purportedly caused by lead pigment, and seek
recovery of actual and punitive damages from their landlord, alleged former
manufacturers of lead pigment, and the Lead Industries Association, and purport
to allege causes of action against the former pigment manufacturers based on
negligence, strict products liability, fraud and misrepresentation, concert of
action, civil conspiracy, and market share liability. The time for the Company
to answer or otherwise plead with respect to the complaint has not yet occurred.
The Company intends to deny all allegations of wrongdoing and liability and to
defend the case vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 - Intercorporate Services Agreement by and between Valhi, Inc.
and the Registrant effective as of January 1, 1999.
10.2 - Intercorporate Services Agreement by and between Contran
Corporation and the Registrant effective as of January 1, 1999.
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10.3 - Intercorporate Services Agreement by and between Titanium
Metals Corporation and the Registrant effective as of January 1,
1999.
10.4 - Intercorporate Services Agreement by and between Tremont
Corporation and the Registrant effective as of January 1, 1999.
27.1 - Financial Data Schedule for the three-month period ended
March 31, 1999.
(b) REPORTS ON FORM 8-K
Reports on Form 8-K for the quarter ended March 31, 1999 and
through the date of this report:
January 4, 1999 - reported Items 5 and 7.
January 22, 1999 - reported Items 5 and 7.
February 12, 1999 - reported Items 5 and 7.
March 18, 1999 - reported Items 5 and 7.
April 26, 1999 - reported Items 5 and 7.
May 4, 1999 - 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 12, 1999 By /s/ Susan E. Alderton
- ------------------- ------------------------------
Susan E. Alderton
Vice President and
Chief Financial Officer
Date: May 12, 1999 By /s/ Robert D. Hardy
- ------------------- ------------------------------
Robert D. Hardy
Vice President and Controller
(Principal Accounting Officer)
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