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, 2002
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.
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(Exact name of registrant as specified in its charter)
New Jersey 13-5267260
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16825 Northchase Drive, Suite 1200, Houston, Texas 77060-2544
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 423-3300
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common stock ($.125 par value) New York Stock Exchange
Pacific 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
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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.
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
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As of June 28, 2002, 48,831,984 shares of common stock were outstanding. The
aggregate market value of the 8,345,399 shares of voting stock held by
non-affiliates of the registrant at June 28, 2002, approximated $127 million.
There were 47,693,884 shares of common stock outstanding at March 12, 2003.
Documents incorporated by reference:
Certain of 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 "Industry," "Products and operations,"
"Manufacturing process and raw materials," "Competition," "Patents and
Trademarks," "Foreign Operations," and "Regulatory and Environmental Matters,"
all contained in Item 1. Business; (ii) under the captions "Lead pigment
litigation," "Environmental matters and litigation," and "Other Litigation," all
contained in Item 3. Legal Proceedings; (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; (iv) under the captions "Currency exchange rates," "Marketable
equity security prices," and "Other," all contained in Item 7A. Quantitative and
Qualitative Disclosures About Market Risk; and (v) in Note 23, "Commitments and
contingencies - Legal proceedings" to the Consolidated Financial Statements, 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," "could" or comparable terminology or by
discussions of strategy or trends. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve risks and uncertainties that could
significantly affect expected results, and actual future results could differ
materially from those described in such forward-looking statements.
Among the factors that could cause actual future results to differ
materially are the risks and uncertainties discussed in this Annual Report and
those described from time to time in the Company's other filings with the
Securities and Exchange Commission ("SEC"). While it is not possible to identify
all factors, the Company continues to face many risks and uncertainties
including, but not limited to, the cyclicality of the titanium dioxide industry,
global economic and political conditions, global productive capacity, customer
inventory levels, changes in product pricing, changes in product costing,
changes in foreign currency exchange rates, competitive technology positions,
operating interruptions (including, but not limited to, labor disputes, leaks,
fires, explosions, unscheduled downtime, transportation interruptions, war and
terrorist activities), recoveries from insurance claims and the timing thereof,
the ultimate resolution of pending or possible future lead pigment litigation
and legislative developments related to the lead paint litigation, the outcome
of other litigation and tax controversies, and other risks and uncertainties
included in the Company's filings with the SEC. Should one or more of these
risks materialize (or the consequences of such a development worsen), or should
the underlying assumptions prove incorrect, actual results could differ
materially from those forecasted or expected. The Company disclaims any
intention or obligation to update publicly or revise such statements whether as
a result of new information, future events or otherwise.
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 subsidiary, Kronos,
Inc. Kronos is the world's fifth largest producer of titanium dioxide pigments
("TiO2") with an estimated 12% share of worldwide TiO2 sales volume in 2002.
Approximately one-half of Kronos' 2002 sales volume was in Europe, where Kronos
is the second largest producer of TiO2. NL and its consolidated subsidiaries are
sometimes referred to herein collectively as the "Company."
The Company's primary objective is to maximize total shareholder return.
The Company continues to take steps towards achieving its objective, including
(i) controlling costs, (ii) investing in certain cost effective debottlenecking
projects to increase TiO2 production capacity and efficiency, (iii) improving
its capital structure, and (iv) continuing to pay cash dividends. The Company
periodically considers mergers or acquisitions, which may be within or outside
the chemical industry, and acquisitions of additional TiO2 production capacity
to meet its objective.
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 a "quality-of-life"
product with demand affected by gross domestic product in various regions of the
world.
Pricing within the global TiO2 industry is cyclical, and changes in
industry economic conditions can significantly impact the Company's earnings and
operating cash flows. The Company's average TiO2 selling price on a billing
currency basis increased from the preceding quarter during the third and fourth
quarters of 2002, reversing the downward trend in prices that began in the first
quarter of 2001 and continued through the first quarter of 2002. Industry-wide
demand for TiO2 strengthened throughout 2002, with full year demand estimated as
9% higher than the previous year. This is believed to have been the result of
economic growth and restocking of customer inventory levels. Volume demand in
2003 is expected to increase moderately over 2002 levels.
Kronos has an estimated 18% share of European TiO2 sales volume and an
estimated 14% share of North American TiO2 sales volume. Per capita consumption
of TiO2 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. Significant regions for TiO2 consumption could emerge in
Eastern Europe, the Far East or China if the economies in these regions develop
to the point that 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 consumption of TiO2 in Eastern
Europe. Geographic segment information is contained in Note 4 to the
Consolidated Financial Statements.
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Products and operations
TiO2 is produced in two crystalline forms: rutile and anatase. Rutile
TiO2 is a more tightly bound crystal that has a higher refractive index than
anatase TiO2 and, therefore, provides better opacification and tinting strength
in many applications. Although many end-use applications can use either form of
TiO2, rutile TiO2 is the preferred form for use in coatings, plastics and ink.
Anatase TiO2 has a bluer undertone and is less abrasive than rutile TiO2, and it
is often preferred for use in paper, ceramics, rubber and man-made fibers.
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 changed TiO2 consumption over the past decade
because, to date, extenders generally have failed to match the performance
characteristics of TiO2. As a result, 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 trademark, 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. TiO2 is distributed by rail, truck and ocean carrier in either
dry or slurry form. Kronos' manufacturing facilities are located in Germany,
Canada, Belgium and Norway and Kronos owns a one-half interest in a TiO2
manufacturing joint venture located in Louisiana, U.S.A. Kronos has 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 80 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' 2002 TiO2 sales were to Europe, with 39% 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 as a feedstock by sulfate-process TiO2 plants) and has estimated
ilmenite reserves that are expected to last at least 20 years. Kronos is also
engaged in the manufacture and sale of iron-based water treatment chemicals
(derived from co-products of the pigment production processes). Kronos' water
treatment chemicals (marketed under the name Ecochem) 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 72% of Kronos' current production capacity is
based on its chloride process which generates less waste than the sulfate
process. The chloride process is a continuous process in which chlorine is used
to extract rutile TiO2. In general, the chloride process is also less intensive
than the sulfate process in terms of capital investment, labor and energy.
Because much of the chlorine is recycled and higher titanium-containing
feedstock is used, the chloride process produces less waste. The sulfate process
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is a batch chemical process that uses sulfuric acid to extract TiO2. Sulfate
technology normally produces either anatase or rutile pigment. Once an
intermediate TiO2 pigment has been produced by either the chloride or sulfate
process, it is `finished' into products with specific performance
characteristics for particular end-use applications through proprietary
processes involving various chemical surface treatments and intensive milling
and micronizing.
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 and, in 2002, chloride-process production
facilities represented approximately 62% of industry capacity.
Kronos produced a Company record 442,000 metric tons of TiO2 in 2002,
compared to 412,000 metric tons produced in 2001 and 441,000 metric tons in
2000. Kronos' average production capacity utilization rate in 2002 was 96%, up
from 91% in 2001. Capacity utilization rates in 2001 were down due in part to
lost sulfate production volume resulting from the Leverkusen fire. Kronos
believes its current annual attainable production capacity is approximately
470,000 metric tons, including its one-half interest in the joint venture-owned
Louisiana plant (see "TiO2 manufacturing joint venture"). The Company expects
its production capacity will be increased by approximately 10,000 metric tons
primarily at its chloride facilities, with moderate capital expenditures,
bringing Kronos' capacity to approximately 480,000 metric tons during 2005.
The primary raw materials used in the TiO2 chloride production process
are titanium-containing feedstock derived from beach sand ilmenite, natural
rutile ore, chlorine and coke. 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, South Africa, Canada, India and the United States.
Kronos purchases slag refined from ilmenite sand from Richards Bay Iron
and Titanium (Proprietary) Limited (South Africa), a 51%-owned subsidiary of Rio
Tinto plc (U.K.), under a long-term supply contract that expires at the end of
2007. Natural rutile ore is purchased primarily from Iluka Resources, Limited
(Australia), a company formed through the merger of Westralian Sands Limited
(Australia) and RGC Mineral Sands, Ltd., under a long-term supply contract that
expires at the end of 2004. The Company does not expect to encounter
difficulties obtaining long-term extensions to existing supply contracts prior
to the expiration of the contracts. Raw materials purchased under these
contracts and extensions thereof are expected to meet Kronos' chloride feedstock
requirements over the next several years.
The primary raw materials used in the TiO2 sulfate production process
are titanium-containing feedstock derived primarily from rock and beach sand
ilmenite and sulfuric acid. Sulfuric acid is available from a number of
suppliers. Titanium-containing feedstock suitable for use in the sulfate process
is 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 rock ilmenite mine in Norway, which
provided all of Kronos' feedstock for its European sulfate-process pigment
plants in 2002. For its Canadian sulfate-process plant, Kronos also purchases
sulfate grade slag primarily from Q.I.T. Fer et Titane Inc. (Canada), a wholly
owned subsidiary of Rio Tinto Iron & Titanium, Inc., under a long-term supply
contract that expires at the end of 2006.
Kronos believes the availability of titanium-containing feedstock for
both the chloride and sulfate processes is adequate for the next several years.
Kronos does not expect to experience any interruptions of its raw material
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supplies because of its long-term supply contracts. However, political and
economic instability in certain countries from which the Company purchases its
raw material supplies could adversely affect the availability of such feedstock.
Should Kronos' vendors not be able to meet their contractual obligations or
should Kronos be otherwise unable to obtain necessary raw materials, the Company
may incur higher costs for raw materials or may be required to reduce production
levels, which may have a material adverse effect on the Company's financial
position, results of operations or liquidity.
TiO2 manufacturing joint venture
Subsidiaries of Kronos and Huntsman International Holdings LLC
("Huntsman") each own a 50%-interest in a manufacturing joint venture, Louisiana
Pigment Company ("LPC"). LPC owns and operates a chloride-process TiO2 plant
located in Lake Charles, Louisiana. Production from the plant is shared equally
by Kronos and Huntsman (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 LPC including
production and output decisions. Two general managers, one appointed and
compensated by each Partner, manage the operations of the joint venture acting
under the direction of the supervisory committee.
The manufacturing joint venture operates on a break-even basis and,
accordingly, the Company reports no equity in earnings of the joint venture.
Kronos' cost for its share of the TiO2 produced is equal to its share of the
joint venture's costs. Kronos' share of net costs is reported as cost of sales
as the related TiO2 acquired from the joint venture is sold. See Note 10 to the
Consolidated Financial Statements.
Competition
The TiO2 industry is highly competitive. 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 Kronos' grades and substantially all of
Kronos' production are considered commodity pigments with price generally being
the most significant competitive factor. During 2002 Kronos had an estimated 12%
share of worldwide TiO2 sales volume, and Kronos believes that it is the leading
seller of TiO2 in several countries, including Germany and Canada.
Kronos' principal competitors are E.I. du Pont de Nemours & Co.
("DuPont"); Millennium Chemicals, Inc.; Huntsman; Kerr-McGee Corporation; and
Ishihara Sangyo Kaisha, Ltd. Kronos' five largest competitors have estimated
individual shares of TiO2 production capacity ranging from 24% to 5%, and an
estimated aggregate 70% share of worldwide TiO2 production volume. DuPont has
about one-half of total U.S. TiO2 production capacity and is Kronos' principal
North American competitor.
Capacity additions that are the result of construction of greenfield
plants in the worldwide TiO2 market require significant capital and substantial
lead time, typically three to five years in the Company's experience. As no new
plants are currently under construction, additional greenfield capacity is not
expected in the next three to five years, but industry capacity can be expected
to increase as Kronos and its competitors debottleneck existing plants. In
addition to potential capacity additions, certain competitors have either idled
or shut down facilities. Based on the factors described under the caption
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"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 over the next three to five years.
No assurance can be given that future increases in the TiO2 industry
production capacity and future average annual demand growth rates for TiO2 will
conform to the Company's expectations. If actual developments differ from the
Company's expectations, the Company and the TiO2 industry's performance could be
unfavorably affected.
Research and Development
The Company's expenditures for research and development and certain
technical support programs have averaged approximately $6 million annually
during the past three years. Research and development activities 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.
Patents and Trademarks
Patents held for products and production processes are believed to be
important to the Company and to the continuing business activities of Kronos.
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.
The Company's major trademarks, including Kronos, 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 non-U.S. markets
since the 1920s. Most of Kronos' current production capacity is located in
Europe and Canada with non-U.S. net property and equipment aggregating
approximately $372 million at December 31, 2002. Net property and equipment in
the U.S., including 50% of the property and equipment of LPC, was approximately
$124 million at December 31, 2002. Kronos' European operations include
production facilities in Germany, Belgium and Norway. Approximately $603 million
of the Company's 2002 consolidated sales were to non-U.S. customers, including
$93 million to customers in areas other than Europe and Canada. Sales to
customers in the U.S. aggregated $272 million in 2002. 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" and Item 7A. "Quantitative and Qualitative
Disclosures about Market Risk."
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.
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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. Kronos' largest ten customers
accounted for approximately 25% of net sales in 2002. 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
generally higher in the first half of the year than in the second half of the
year.
Employees
As of December 31, 2002, the Company employed approximately 2,500
persons, excluding LPC employees, with approximately 100 employees in the United
States and approximately 2,400 at sites outside the United States. Hourly
employees in production facilities worldwide, including LPC, 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 maintain 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 ("RCRA"), 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 LPC and a slurry facility owned by the Company in
Lake Charles, Louisiana are in substantial compliance with applicable
requirements of these laws or compliance orders issued thereunder. The Company
has no other U.S. plants. 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.
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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
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 and Belgium are members of the EU and follow
its initiatives. Norway, although not a member, generally patterns its
environmental regulatory actions after the EU. The Company believes that Kronos
has obtained all required permits and is in substantial compliance with
applicable EU requirements, including EU Directive 92/112/EEC regarding
establishment of procedures for reduction and eventual elimination of pollution
caused by waste from the TiO2 industry.
At all of the Company's sulfate plant facilities other than Fredrikstad,
Norway, the Company recycles spent acid either through contracts with third
parties or using the Company's own facilities. At its Fredrikstad, Norway plant,
the Company ships its spent acid to a third party location where it is treated
and disposed. The Company has a contract with a third party to treat certain
by-products of its German sulfate-process plants. Either party may terminate the
contract after giving four years advance notice with regard to its Nordenham,
Germany plant. Under certain circumstances, Kronos may terminate the contract
after giving six months notice with respect to treatment of by-products from the
Leverkusen, Germany plant.
The Company's capital expenditures related to its ongoing environmental
protection and improvement programs in 2002 were approximately $5 million, and
are currently expected to be approximately $5 million in 2003.
The Company has been named as a defendant, potentially responsible party
("PRP"), or both, pursuant to CERCLA and similar state laws in approximately 70
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."
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Principal Shareholders
At December 31, 2002, Valhi, Inc. ("Valhi") and Tremont Corporation
("Tremont"), each affiliates of Contran Corporation ("Contran"), held
approximately 63% and 21%, respectively, of NL's outstanding common stock. At
December 31, 2002, Contran and its subsidiaries held approximately 93% of
Valhi's outstanding common stock, and a company 80% owned by Valhi and 20% owned
by NL held approximately 80% of Tremont's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is the sole trustee. Mr. Simmons, the Chairman of
the Board of each of Contran, Valhi and NL and a director of Tremont, may be
deemed to control each of such companies. See Notes 7, 8 and 22 to the
Consolidated Financial Statements.
Website and other available information
The Company maintains a website on the Internet with the address of
www.nl-ind.com. Copies of this Annual Report on Form 10-K for the year ended
December 31, 2002 and copies of the Company's Quarterly Reports on Form 10-Q for
2002 and 2003 and any Current Reports on Form 8-K for 2002 and 2003, and any
amendments thereto, are or will be available free of charge as soon as
reasonably practical after they are filed with the SEC at such website.
Information contained on the Company's website is not part of this report.
The general public may read and copy any materials the Company files
with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company is
an electronic filer, and the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC, including the Company. The
Internet address of the SEC's website is www.sec.gov.
ITEM 2. PROPERTIES
Kronos currently operates five TiO2 plants in Europe (two in Leverkusen,
Germany; one in Nordenham, Germany; one in Langerbrugge, Belgium; and one in
Fredrikstad, Norway). In North America, Kronos has a TiO2 plant in Varennes,
Quebec, Canada and, through the manufacturing joint venture described above, a
one-half interest in a TiO2 plant in Lake Charles, Louisiana. The Company
operates an ilmenite ore mine in Hauge i Dalane, Norway and also owns a TiO2
slurry plant in Lake Charles, Louisiana. See Note 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. Rent for the Leverkusen facility is periodically established by agreement
with Bayer AG for periods of at least two years at a time. Under a separate
supplies and services agreement expiring in 2011, Bayer provides some raw
materials, including chlorine and certain amounts of sulfuric acid, auxiliary
and operating materials and utilities services necessary to operate the
Leverkusen facility. Both the lease and the supplies and services agreement have
certain restrictions regarding Kronos' ability to transfer ownership or use of
the Leverkusen facility.
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Kronos owns all of its principal production facilities described above,
except for the land under the Leverkusen and Fredrikstad facilities. Kronos has
a governmental concession with an unlimited term to operate its ilmenite mine in
Norway.
The Company has under lease various corporate and administrative offices
located in the U.S. and various sales offices located in the U.S., France, the
Netherlands, Denmark and the U.K. In 2002 the Company closed its New York
administrative office.
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. During the past 15 years, the Company has
been named as a defendant or third party defendant in various legal proceedings
alleging that the Company and approximately seven other companies that formerly
manufactured lead pigments for use in paint (together, the "former pigment
manufacturers") and lead-based paint are responsible for personal injury,
property damage and governmental expenditures allegedly associated with the use
of these products. These cases assert a combination of claims that generally
include negligent product design, negligent failure to warn, supplier
negligence, fraud and deceit, public and private nuisance, restitution,
indemnification, conspiracy, concert of action, aiding and abetting, strict
liability/failure to warn, and strict liability/defective design, violations of
state consumer protection statutes, enterprise liability, market share
liability, and similar claims. The Company has neither lost nor settled any of
these cases. Considering the Company's previous involvement in the lead pigment
and lead-based paint businesses, the Company expects that additional lead
pigment and lead-based paint litigation, asserting similar or different legal
theories and seeking similar or different types of damage and relief to that
described below, may be filed. In addition, various other cases are pending (in
which the Company is not a defendant) seeking recovery for injury allegedly
caused by lead pigment and lead-based paint. Although the Company is not a
defendant in these cases, the outcome of these cases may have an impact on
additional cases being filed against the Company.
The Company has not accrued any amounts for this 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 cases are without merit and will continue to defend the cases
vigorously. 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 against the former 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. All but two of these actions, Hall v. HANO, et al. (No. 89-3552)
and Allen v. HANO, et al. (No. 89-427) Civil District Court for the Parish of
Orleans, State of Louisiana, have been dismissed. These two cases have been
inactive since 1992.
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In June 1989 a complaint was filed in the Supreme Court of the State of
New York, County of New York, against the former pigment manufacturers and the
LIA. Plaintiffs sought damages 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 New York City and the New York
City 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). As a result of pre-trial motions, the New York City Housing Authority
is the only remaining plaintiff in the case and is pursuing damage claims only
with respect to two housing projects. Discovery is proceeding.
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 trial court has denied plaintiffs' motion for class certification.
Discovery and pre-trial proceedings are continuing with respect to the
individual plaintiffs. Defendants have filed a motion for summary judgment on
all claims. The court has not yet ruled on the motion.
In December 1998 the Company was served with a complaint on behalf of
four children and their guardians in Sabater, et al. v. Lead Industries
Association, et al. (Supreme Court of the State of New York, County of Bronx,
Index No. 25533/98). Plaintiffs purport to represent a class of all children and
mothers similarly situated in New York State. The complaint seeks damages from
the LIA and other former pigment manufacturers for establishment of property
abatement and medical monitoring funds and compensatory damages for alleged
injuries to plaintiffs. Discovery regarding class certification is proceeding.
In September 1999 an amended complaint was filed in Thomas v. Lead
Industries Association, et al. (Circuit Court, Milwaukee, Wisconsin, Case No.
99-CV-6411), adding as defendants the former pigment manufacturers to a suit
originally filed against plaintiff's landlords. Plaintiff, a minor, alleges
injuries purportedly caused by lead on the surfaces of premises in homes in
which he resided. Plaintiff seeks compensatory and punitive damages, and the
Company has denied liability. In January 2003 the trial court granted
defendants' motion for summary judgment, dismissing all counts of the complaint.
The time for plaintiff to appeal has not yet expired.
In October 1999 the Company was served with a complaint in State of
Rhode Island v. Lead Industries Association, et al. (Superior Court of Rhode
Island, No. 99-5226). The State seeks compensatory and punitive damages for
medical and educational expenses, and public and private building abatement
expenses that the State alleges were caused by lead paint, and for funding of a
public education campaign and health screening programs. Plaintiff seeks
judgments of joint and several liability against the former pigment
manufacturers and the LIA. Trial began in phase I of this case before a Rhode
Island state court jury on September 4, 2002 on the question of whether lead
pigment in paint on Rhode Island buildings is a public nuisance. On October 29,
2002 the trial judge declared a mistrial in the case when the jury was unable to
reach a verdict on the question, with the jury reportedly deadlocked 4-2 in the
defendants' favor. No date has been set for any further proceedings, including
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any possible retrial of the public nuisance issue. Other claims made by the
Attorney General, including violation of the Rhode Island Unfair Trade Practices
and Consumer Protection Act, strict liability, negligence, negligent and
fraudulent misrepresentation, civil conspiracy, indemnity, and unjust enrichment
remain pending and were not the subject of this trial. Post-trial motions by
plaintiff and defendants for judgment notwithstanding the mistrial are pending.
In October 1999 the Company was served with a complaint in Smith, et al.
v. Lead Industries Association, et al. (Circuit Court for Baltimore City,
Maryland, Case No. 24-C-99-004490). Plaintiffs, seven minors from four families,
each seek compensatory damages of $5 million and punitive damages of $10 million
for alleged injuries due to lead-based paint. Plaintiffs allege that the former
pigment manufacturers and other companies alleged to have manufactured paint
and/or gasoline additives, the LIA, and the National Paint and Coatings
Association are jointly and severally liable. The Company has denied liability,
and all defendants filed motions to dismiss various of the claims. In February
2002 the trial court dismissed all claims except those relating to product
liability for lead paint and the Maryland Consumer Protection Act. In November
2002 the trial court granted summary judgment against the children from the
first of the plaintiff families and plaintiffs have appealed. Pre-trial
proceedings and discovery against the other plaintiffs are continuing.
In February 2000 the Company was served with a complaint in City of St.
Louis v. Lead Industries Association, et al. (Missouri Circuit Court 22nd
Judicial Circuit, St. Louis City, Cause No. 002-245, Division 1). Plaintiff
seeks compensatory and punitive damages for its expenses discovering and abating
lead-based paint, detecting lead poisoning and providing medical care and
educational programs for City residents, and the costs of educating children
suffering injuries due to lead exposure. Plaintiff seeks judgments of joint and
several liability against the former pigment manufacturers and the LIA. In
November 2002 defendants' motion to dismiss was denied. Discovery is proceeding.
In April 2000 the Company was served with a complaint in County of Santa
Clara v. Atlantic Richfield Company, et al. (Superior Court of the State of
California, County of Santa Clara, Case No. CV788657), brought against the
former pigment manufacturers, the LIA and certain paint manufacturers. The
County of Santa Clara seeks to represent a class of California governmental
entities (other than the state and its agencies) to recover compensatory damages
for funds the plaintiffs have expended or will in the future expend for medical
treatment, educational expenses, abatement or other costs due to exposure to, or
potential exposure to, lead paint, disgorgement of profit, and punitive damages.
Santa Cruz, Solano, Alameda, San Francisco, and Kern counties, the cities of San
Francisco and Oakland, the Oakland and San Francisco unified school districts
and housing authorities and the Oakland Redevelopment Agency have joined the
case as plaintiffs. Pre-trial proceedings and discovery are continuing. In
February 2003 defendants filed a motion for summary judgment.
In June 2000 two complaints were filed in Texas state court, Spring
Branch Independent School District v. Lead Industries Association, et al.
(District Court of Harris County, Texas, No. 2000-31175), and Houston
Independent School District v. Lead Industries Association, et al. (District
Court of Harris County, Texas, No. 2000-33725). The School Districts seek past
and future damages and exemplary damages for costs they have allegedly incurred
or will incur due to the presence of lead-based paint in their buildings from
the former pigment manufacturers and the LIA . The Company has denied all
liability. In June 2002, the trial court granted the Company's motion for
summary judgment in the Spring Branch Independent School District case.
Plaintiffs have appealed. The Houston Independent School District case has been
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abated, or stayed, pending appellate review of the trial court's dismissal of
the Spring Branch Independent School District case or certain other events.
In June 2000 a complaint was filed in Illinois state court, Lewis, et
al. v. Lead Industries Association, et al. (Circuit Court of Cook County,
Illinois, County Department, Chancery Division, Case No. 00CH09800). Plaintiffs
seek to represent two classes, one of all minors between ages six months and six
years who resided in housing in Illinois built before 1978, and one of all
individuals between ages six and twenty years who lived between ages six months
and six years in Illinois housing built before 1978 and had blood lead levels of
10 micrograms/deciliter or more. The complaint seeks damages jointly and
severally from the former pigment manufacturers and the LIA to establish a
medical screening fund for the first class to determine blood lead levels, a
medical monitoring fund for the second class to detect the onset of latent
diseases, and a fund for a public education campaign. In March 2002 the trial
court dismissed all claims. Plaintiffs have appealed.
In October 2000 the Company was served with a complaint filed in
California state court, Justice, et al. v. Sherwin-Williams Company, et al.
(Superior Court of California, County of San Francisco, No. 314686). Plaintiffs
are two minors who seek general, special and punitive damages from the former
pigment manufacturers and the LIA for injuries alleged to be due to ingestion of
paint containing lead in their residence. The Company has denied all liability.
In February 2003, plaintiffs moved to dismiss the case without prejudice.
In February 2001 the Company was served with a complaint in Borden, et
al. v. The Sherwin-Williams Company, et al. (Circuit Court of Jefferson County,
Mississippi, Civil Action No. 2000-587). The complaint seeks joint and several
liability for compensatory and punitive damages from more than 40 manufacturers
and retailers of lead pigment and/or paint, including the Company, on behalf of
18 adult residents of Mississippi who were allegedly exposed to lead during
their employment in construction and repair activities. One plaintiff has
dropped his claims and the court has ordered that the claims of nine of the
plaintiffs be transferred to Holmes County, Mississippi, state court. Pre-trial
proceedings are continuing with respect to the eight plaintiffs remaining in
Jefferson County. Trial is scheduled to begin in October 2003.
In May 2001 the Company was served with a complaint in City of Milwaukee
v. NL Industries, Inc. and Mautz Paint (Circuit Court, Civil Division, Milwaukee
County, Wisconsin, Case No. 01CV003066). The City of Milwaukee seeks
compensatory and equitable relief for lead hazards in Milwaukee homes,
restitution for amounts it has spent to abate lead, and punitive damages. The
Company has denied all liability. Pre-trial proceedings are continuing. Trial is
scheduled to begin in October 2003.
In May 2001 the Company was served with a complaint in Harris County,
Texas v. Lead Industries Association, et al. (District Court of Harris County,
Texas, No. 2001-21413). The complaint seeks actual and punitive damages and
asserts claims jointly and severally against the former pigment manufacturers
and the LIA for past and future damages due to the presence of lead paint in
County-owned buildings. The Company has denied all liability. The case has been
abated, or stayed, pending appellate review of the trial court's dismissal of
the Spring Branch Independent School District case or certain other events.
In December 2001 the Company was served with a complaint in Quitman
County School District v. Lead Industries Association, et al. (Circuit Court of
Quitman County, Mississippi, Case No. 2001-0106). The complaint asserts joint
and several liability and seeks compensatory and punitive damages for the
abatement of lead paint in Quitman County schools from the former pigment
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manufacturers, local paint retailers and others. Plaintiffs subsequently
dismissed with prejudice all defendants except NL. The case has been removed to
the United States District Court for the Northern District of Mississippi. The
Company has denied all liability and has filed a motion for summary judgment.
Pre-trial proceedings are continuing.
In January and February 2002 the Company was served with complaints by
25 New Jersey municipalities and counties which have been consolidated as In re:
Lead Paint Litigation, (Superior Court of New Jersey, Middlesex County, Case
Code 702). Each complaint seeks abatement of lead paint from all housing and all
public buildings in each jurisdiction and punitive damages jointly and severally
from the former pigment manufacturers and the LIA. In November 2002 the trial
court dismissed the cases with prejudice. Plaintiffs have appealed.
In January 2002 the Company was served with a complaint in Jackson, et
al., v. Phillips Building Supply of Laurel, et al. (Circuit Court of Jones
County, Mississippi, Dkt. Co. 2002-10-CV1). The complaint seeks joint and
several liability from three local retailers and six non-Mississippi companies
that sold paint for compensatory and punitive damages on behalf of four adults
for injuries alleged to have been caused by the use of lead paint. After removal
to federal court, in February 2003 the case was remanded to state court. The
Company has denied all allegations of liability, and pre-trial proceedings are
continuing.
In February 2002 the Company was served with a complaint in Liberty
Independent School District v. Lead Industries Association, et al. (District
Court of Liberty County, Texas, No. 63,332). The school district seeks
compensatory and punitive damages jointly and severally from the former pigment
manufacturers and the LIA for property damage to its buildings. The complaint
was amended to add Liberty County, the City of Liberty, and the Dayton
Independent School District as plaintiffs and drop the Lead Industries
Association as a defendant. The Company has denied all allegations of liability.
The case has been abated, or stayed, pending appellate review of the trial
court's dismissal of the Spring Branch Independent School District case or
certain other events.
In May 2002 the Company was served with a complaint in Brownsville
Independent School District v. Lead Industries Association, et al. (District
Court of Cameron County, Texas, No. 2002-052081 B), seeking compensatory and
punitive damages jointly and severally from the former lead pigment
manufacturers and LIA for property damage. The Company has denied all
allegations of liability. The case has been abated, or stayed, pending appellate
review of the trial court's dismissal of the Spring Branch Independent School
District case or certain other events.
In September 2002 the Company was served with a complaint in City of
Chicago v. American Cyanamid, et al. (Circuit Court of Cook County, Illinois,
No. 02CH16212), seeking damages to abate lead paint in a single-count complaint
alleging public nuisance against the Company and seven other former
manufacturers of lead pigment. Defendants have filed a motion to dismiss. The
court has not yet ruled on the motion.
In October 2002 the Company was served with a complaint in Walters v.
NL Industries, et al. (Kings County Supreme Court, New York, No. 28087/2002), in
which an adult seeks compensatory and punitive damages from the Company and five
other former lead pigment manufacturers for childhood exposure to lead paint.
The complaint alleges negligence and strict product liability, and seeks joint
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and several liability with claims of civil conspiracy, concert of action,
enterprise liability, and market share or alternative liability. Defendants have
moved to dismiss certain of the counts.
The Company is also aware of three personal injury complaints filed in
state court in LeFlore County Mississippi in December 2002. In Russell v. NL
Industries, Inc., et al. (No. No.2002-0235-CICI), six painters have sued NL,
four paint companies, and a local retailer, alleging strict liability,
negligence, fraudulent concealment, misrepresentation, and conspiracy, and
seeking compensatory and punitive damages for alleged injuries caused by lead
paint. In Stewart v. NL Industries, Inc., et al. (No. 2002-0266-CICI), a child
has sued NL, four paint companies, two local retailers, and two landlords,
alleging strict liability, negligence, fraudulent concealment, and
misrepresentation, and seeking compensatory and punitive damages for alleged
injuries caused by lead paint. In Jones v. NL Industries, Inc., et al. (No.
2002-0241-CICI), fourteen children from five families have sued NL and one
landlord alleging strict liability, negligence, fraudulent concealment, and
misrepresentation, and seeking compensatory and punitive damages for alleged
injuries caused by lead paint. The Company has not been served in any of the
cases.
In addition to the foregoing litigation, various legislation and
administrative regulations have, from time to 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, rather than
requiring plaintiffs to prove that the defendant's product caused the alleged
damage, and bills which would revive actions barred by the statute of
limitations. While no legislation or regulations have been enacted to date which
are expected to have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity, the imposition of market
share liability or other legislation could have such an effect.
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") sought to recover defense costs incurred in the
City of New York lead pigment case and two other lead pigment cases which have
since been resolved in the Company's favor. The action relating to lead paint
litigation defense costs in these specified cases has been settled. The Company
has also settled insurance coverage claims concerning environmental claims with
certain of the defendants in the environmental coverage litigation, including
the Company's principal former carriers, as more fully described below under
"Environmental matters and litigation." The settled claims are to be dismissed
from the New Jersey litigation in accordance with the terms of the settlement
agreements. The Company also continues to negotiate with the remaining insurance
carriers with respect to possible settlement of claims that are being asserted
in the New Jersey environmental litigation, although there can be no assurance
that settlement agreements can be reached with these other carriers. No further
material settlements relating to litigation concerning environmental remediation
coverage are expected.
The issue of whether insurance coverage for defense costs or indemnity
or both will be found to exist for lead pigment litigation depends upon a
variety of factors, and there can be no assurance that such insurance coverage
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will be available. 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 70 governmental and private
actions associated with waste disposal sites, mining locations and facilities
currently or previously owned, operated or used by the Company, or its
subsidiaries, or their predecessors, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. These proceedings
seek cleanup costs, damages for personal injury or property damage, and/or
damages for injury to natural resources. Certain of these proceedings involve
claims for substantial amounts. Although the Company may be jointly and
severally liable for such costs, in most cases it is only one of a number of
PRPs who may also be jointly and severally liable.
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, 2002, the Company had accrued $98
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 reasonably possible costs to the Company. Such costs
include, among other things, expenditures for remedial investigations,
monitoring, managing, studies, certain legal fees, cleanup, removal and
remediation. 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 $140 million. The Company's estimate of such liability
has not been discounted to present value and the Company has not reduced its
accruals for 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 with respect to site cleanup costs or allocation of such costs among
PRPs, the insolvency of other 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. Furthermore, 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.
In June 2000 the Company recognized a $43 million net gain from a
settlement with one of the two principal former insurance carriers, and in
December 2000 the Company recognized a $26.5 million net gain from a settlement
with certain members of the other principal former insurance carrier. The
settlement gains are stated net of $3.1 million in commissions, and the gross
settlement proceeds of $72.6 million were transferred by the carriers to special
purpose trusts established to pay future remediation and other environmental
expenditures of the Company. A settlement with remaining members of the second
carrier group was reached in January 2001, and the Company recognized a $10.3
million gain in the first quarter of 2001. In 2002 and 2001 the Company also
recognized $5.2 million and $1.4 million, respectively, of other litigation
-15-
settlement gains. The settlements resolved court proceedings that the Company
initiated to seek reimbursement for legal defense expenditures and indemnity
coverage for certain of its environmental remediation expenditures. No further
material settlements relating to litigation concerning environmental remediation
coverage are expected. See Note 19 to the Consolidated Financial Statements.
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, Illinois lead smelter formerly owned by the
Company. 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 unlawful. 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. The Company and the
U.S. EPA have entered into a consent decree settling the Company's liability at
the site for $31.5 million, which includes penalties of $1 million. The consent
decree is subject to court approval. The Company expects to pay the settlement
in 2003 with restricted funds held by the Company's environmental trusts.
The Company reached an agreement in 1999 with the other PRPs at a
formerly owned lead smelter site in Pedricktown, New Jersey to settle the
Company's liability for $6 million, all of which has been paid as of December
31, 2002. The settlement does not resolve issues regarding the Company's
potential liability in the event site costs exceed $21 million. The Company does
not presently expect site costs to exceed such amount and has not provided
accruals for such contingency.
In 2000 the Company reached an agreement with the other PRPs at the
Baxter Springs subsite in Cherokee County, Kansas, to resolve the Company's
liability. The Company and others formerly mined lead and zinc in the Baxter
Springs subsite. Under the agreement, the Company agreed to pay a portion of the
cleanup costs associated with the Baxter Springs subsite. The U.S. EPA has
estimated the total cleanup costs in the Baxter Springs subsite to be $5.4
million. The cleanup is underway.
In 1996 the U.S. EPA ordered the Company to perform a removal action at
a formerly owned facility in Chicago, Illinois. The Company has complied with
the order and has completed the on-site work at the facility. The Company is
conducting an investigation regarding potential offsite contamination.
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. In
December 1994 the jury returned a verdict in favor of the Company and the
verdict was affirmed on appeal. Residents also filed consolidated actions in the
United States District Court for the Eastern District of Pennsylvania, Shinozaki
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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 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 above-described state court litigation.
In 2000 the Company reached an agreement with the other PRPs at the
Batavia Landfill Superfund Site in Batavia, New York to resolve the Company's
liability. The Batavia Landfill is a former industrial waste disposal site.
Under the agreement, the Company agreed to pay 40% of the future cleanup costs,
which the U.S. EPA has estimated to be approximately $11 million in total. Under
the settlement, the Company is not responsible for costs associated with the
operation and maintenance of the remedy. In addition, the Company received
approximately $2 million from settling PRPs. The cleanup is underway.
In October 2000 the Company was served with a complaint in Pulliam, et
al. v. NL Industries, Inc., et al, (No. 49F12-0104-CT-001301), filed in superior
court in Marion County, Indiana, on behalf of an alleged class of all persons
and entities who own or have owned property or have resided within a one-mile
radius of an industrial facility formerly owned by a subsidiary of the Company
in Indianapolis, Indiana. Plaintiffs allege that they and their property have
been injured by lead dust and particulates from the facility and seek
unspecified actual and punitive damages and a removal of all alleged lead
contamination under various theories, including negligence, strict liability,
battery, nuisance and trespass. The Company has denied all allegations of
wrongdoing and liability. In 2002, the court dismissed plaintiffs' allegations
that the case should be certified as a class action. The defendants have moved
to dismiss the remainder of the case. The court has not yet ruled on this
motion. Discovery is proceeding.
In November 2001, the Company was named as a defendant in Herd v.
ASARCO, et al. (Case No. CJ-2001-443), filed in the District Court in and for
Ottawa County, Oklahoma. The complaint was filed on behalf of a minor against
the Company and other defendants and alleges that defendants' former mining
operations near Picher, Oklahoma resulted in damage to the plaintiff as a result
of the ingestion of lead from mining co-products. The Company has denied the
material allegations of the complaint. The case was removed to federal court and
the United States was added as a third-party defendant. Discovery is proceeding.
Trial is scheduled for August 2003. In 2002, the Company was named as a
defendant in four additional cases with substantially similar allegations to
those in the Herd case. (Reeves v. ASARCO et al., Case No. CJ-02-8; Carr v.
ASARCO et al., Case No. CJ-02-59; Edens v. ASARCO et al., Case No. CJ-02-245;
and Koger v. ASARCO et al., Case No. CJ-02-284.) Each of these cases has been
removed to federal court and the United States added as a third-party defendant.
These cases have been consolidated with the Herd case for purposes of discovery.
Discovery is proceeding.
See Item 1. "Business - Regulatory and Environmental Matters."
Other litigation
The Company has been named as a defendant in various lawsuits in a
variety of jurisdictions, alleging personal injuries as a result of occupational
exposure to asbestos, silica and/or mixed dust in connection with formerly owned
operations. Approximately 350 of these cases involving a total of approximately
27,700 plaintiffs and their spouses remain pending. Of these plaintiffs,
-17-
approximately 18,250 are represented by 8 cases pending in Texas and Mississippi
state courts. The Company has not accrued any amounts for this litigation. In
addition, from time to time, the Company has received notices regarding asbestos
or silica claims purporting to be brought against former subsidiaries of the
Company, including notices provided to insurers with which the Company has
entered into settlements extinguishing certain insurance policies. These
insurers may seek indemnification from the Company.
In August and September 2000 the Company and one of its subsidiaries,
NLO, Inc. ("NLO"), were named as defendants in four lawsuits filed in federal
court in the Western District of Kentucky against the Department of Energy
("DOE") and a number of other defendants alleging that nuclear materials
supplied by, among others, the Feed Materials Production Center ("FMPC") in
Fernald, Ohio, owned by the DOE and formerly managed under contract by NLO,
harmed employees and others at the DOE's Paducah, Kentucky Gaseous Diffusion
Plant ("PGDP"). With respect to each of the cases, the Company believes that the
DOE is obligated to provide defense and indemnification pursuant to its contract
with NLO, and pursuant to its statutory obligation to do so, as the DOE has in
several previous cases relating to management of the FMPC and the Company has so
advised the DOE. Three of the cases have been settled and dismissed with
prejudice, with the DOE paying the settlement amount. In the fourth case, Dew,
et al. v. Bill Richardson, et al., described below, the parties have settled the
case, subject to court approval which was granted in March 2003. The DOE has
indicated that it will reimburse the settlement amount. In Dew, et al. v. Bill
Richardson, et al., No. 5:00CV-221-M, plaintiffs purport to represent classes of
all PGDP employees who sustained pituitary tumors or cancer as a result of
exposure to radiation and seek actual and punitive damages of $2 billion each
for alleged violation of constitutional rights, assault and battery, fraud and
misrepresentation, infliction of emotional distress, negligence, ultra-hazardous
activity/strict liability, strict products liability, conspiracy, concert of
action, joint venture and enterprise liability, and equitable estoppel.
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, 2002.
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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 Stock Exchange
and the Pacific Exchange under the symbol "NL." As of March 12, 2003, there were
approximately 5,900 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 12, 2003, the closing price of
NL common stock according to the NYSE Composite Tape was $14.78.
Dividends
High Low Declared
--------- --------- ---------
Year ended December 31, 2002:
First quarter ........................ $ 17.47 $ 13.01 $ .20
Second quarter ....................... 18.80 14.84 .20
Third quarter ........................ 16.10 13.07 .20
Fourth quarter ....................... 18.83 13.80 2.70
Year ended December 31, 2001:
First quarter ........................ $ 24.31 $ 16.25 $ .20
Second quarter ....................... 18.00 11.60 .20
Third quarter ........................ 16.75 13.80 .20
Fourth quarter ....................... 15.70 12.04 .20
The Company paid four quarterly $.20 per share cash dividends and one
additional $2.50 per share cash dividend in 2002. On February 5, 2003, the
Company's Board of Directors declared a regular quarterly dividend of $.20 per
share to shareholders of record as of March 14, 2003 to be paid on March 26,
2003. The declaration and payment of future dividends is discretionary, and the
amount, if any, 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.
Pursuant to its share repurchase program, the Company purchased
1,384,000 shares of its common stock in the open market at an aggregate cost of
$21.3 million in 2002, 1,059,000 shares of its common stock in the open market
at an aggregate cost of $15.5 million in 2001 and 1,682,000 shares of its common
stock at an aggregate cost of $30.9 million in 2000. In October 2002, the
Company's Board of Directors authorized a 1,500,000 share extension of the
repurchase program. Approximately 1,323,000 additional shares are available for
purchase under the Company's share repurchase program. The available shares may
be purchased over an unspecified period of time, and are to be held as treasury
shares available for general corporate purposes.
-19-
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." Certain amounts have been reclassified from amounts previously
reported to conform with the current year's consolidated financial statement
presentation and due to the Company's adoption of Statement of Financial
Accounting Standards No. 145 effective April 1, 2002. See Note 2 to the
Consolidated Financial Statements. Such reclassification had no effect on the
Company's previously reported net income.
Years ended December,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(In millions, except per share amounts)
INCOME STATEMENT DATA:
Net sales ............................. $ 875.2 $ 835.1 $ 922.3 $ 908.4 $ 894.7
Operating income ...................... 96.5 169.2 212.5 145.7 171.2
Income from continuing operations ..... 36.8 121.4 154.6 159.8 80.5
Net income ............................ 36.8 121.4 154.6 159.8 366.7
Earnings per share:
Basic:
Income from continuing operations $ .76 $ 2.44 $ 3.07 $ 3.09 $ 1.56
Net income ...................... .76 2.44 3.07 3.09 7.13
Diluted:
Income from continuing operations $ .76 $ 2.44 $ 3.05 $ 3.08 $ 1.55
Net income ...................... .76 2.44 3.05 3.08 7.05
Cash dividends per share .............. $ 3.30 $ .80 $ .65 $ .14 $ .09
BALANCE SHEET DATA at year end:
Cash, cash equivalents, current and
noncurrent restricted cash
equivalents and current and
noncurrent restricted marketable
debt securities ..................... $ 130.4 $ 199.0 $ 207.6 $ 151.8 $ 163.1
Current assets ........................ 486.3 561.8 554.9 506.4 546.8
Total assets .......................... 1,111.5 1,151.1 1,120.8 1,056.2 1,155.6
Current liabilities ................... 238.0 299.1 298.0 264.8 310.7
Long-term debt including current
maturities .......................... 325.9 196.5 196.1 244.5 357.6
Shareholders' equity .................. 265.3 386.9 344.5 271.1 152.3
CASH FLOW DATA:
Operating activities .................. $ 98.3 $ 129.7 $ 139.7 $ 108.3 $ 45.1
Investing activities .................. (27.2) (57.2) (56.2) (38.4) 417.3
Financing activities .................. (132.5) (75.5) (95.7) (88.0) (396.2)
Operating, investing and financing
activities .......................... (61.4) (3.0) (12.2) (18.1) 66.2
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (1) ............................ $ 107.4 $ 206.7 $ 286.3 $ 162.5 $ 177.1
Net debt at year end (2) .............. 195.5 43.7 58.5 149.8 226.7
Cash interest expense, net (3) ........ 24.0 21.8 23.8 28.6 26.6
-20-
Years ended December,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(In millions, except per share amounts)
OTHER DATA:
Interest expense, net (4) ............. $ 24.0 $ 18.7 $ 24.0 $ 30.3 $ 47.3
Capital expenditures .................. 32.6 53.7 31.1 35.6 22.4
TiO2 OPERATING STATISTICS:
Average selling price in billing
currencies index (1983=100) ....... 142 156 161 153 154
Sales volumes* ...................... 455 402 436 427 408
Production volume* .................. 442 412 441 411 434
Production capacity at beginning of
year* ............................. 455 450 440 440 420
Production rate as a percentage of
capacity ........................ 96% 91% Full 93% Full
* Metric tons in thousands
(1) EBITDA, as presented, represents operating income less corporate
expense, plus (i) litigation settlement gains, net, (ii) other corporate
income, (iii) depreciation, depletion and amortization and (iv)
insurance recoveries, net. 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, operating
income or net income determined under U.S. generally accepted accounting
principles ("GAAP") as an indicator of the Company's operating
performance, or cash flows from operating, investing and financing
activities determined under GAAP 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
13, 17 and 23 to the Consolidated Financial Statements. The Company
believes that the trend of its EBITDA is consistent with the trend of
its GAAP operating income, except in 2000 when $70 million of net
litigation settlement gains are included in EBITDA and excluded from
operating income, which treatment results in a higher percentage
increase over 1999 for EBITDA as compared to the percentage increase
over 1999 for operating income. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" 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, current and noncurrent restricted cash equivalents and
current and noncurrent restricted marketable debt securities.
-21-
(3) Cash interest expense, net represents interest expense, net as defined
in (4) below less noncash interest expense plus noncash interest income.
Noncash interest expense includes amortization of deferred financing
costs and also included the deferred interest expense on the Senior
Secured Discount Notes in 1998. Noncash interest income includes
interest income on restricted cash and restricted marketable debt
securities in 2002, 2001 and 2000.
(4) Interest expense, net represents interest expense less general corporate
interest and dividend income.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon the Company's consolidated
financial statements, which have been prepared in accordance with generally
accepted accounting principles in the U.S. ("GAAP"). The preparation of these
financial statements requires the Company to make estimates and judgments 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 reported period. On an
on-going basis, the Company evaluates its estimates, including those related to
inventory reserves, impairments of investments in marketable equity securities
and investments accounted for by the equity method, the recoverability of other
long-lived assets, pension and other postretirement benefit obligations and the
underlying actuarial assumptions related thereto, and the realization of
deferred income tax assets and accruals for environmental remediation,
litigation, income tax and other contingencies. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the reported amounts of assets, liabilities, revenues and
expenses. Actual results may differ from previously-estimated amounts under
different assumptions or conditions.
The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements:
o Inventory allowances. The Company provides reserves for estimated
obsolescence or unmarketable finished goods inventory equal to the
difference between the cost of inventory and the estimated market value
based upon assumptions about future demand for its products and market
conditions. If actual market conditions are less favorable than those
projected by management, additional finished goods inventory reserves
may be required. The Company provides reserves for tools and supplies
inventory generally based on both historical and expected future usage
requirements.
o Valuation and impairment of marketable equity securities. The Company
owns investments in certain companies that are accounted for either as
marketable equity securities or under the equity method. For all of such
investments, the Company records an impairment charge when it believes
an investment has experienced a decline in fair value that is other than
temporary. Future adverse changes in market conditions or poor operating
-22-
results of underlying investments could result in losses or an inability
to recover the carrying value of the investments that may not be
reflected in an investment's current carrying value, thereby possibly
requiring an impairment charge in the future.
At December 31, 2002, the carrying value of all of the Company's
marketable securities exceeded the cost basis of each of such
investments. With respect to the Company's direct and indirect
investment in Tremont, which represented approximately 75% of the
aggregate carrying value of all of the Company's marketable equity
securities at December 31, 2002, the $30.9 million aggregate carrying
value of such investment exceeded its $26.5 million cost basis by about
17%. In February 2003 Valhi completed a series of merger transactions
pursuant to which, among other things, Tremont Group, Inc. ("Tremont
Group") and Tremont both became wholly owned subsidiaries of Valhi.
Under these merger transactions, (i) Valhi issued 3.5 million shares of
its common stock to the Company in return for the Company's 20%
ownership interest in Tremont Group and (ii) Valhi issued 3.4 shares of
its common stock (plus cash in lieu of fractional shares) to all Tremont
stockholders (other than Valhi and Tremont Group) in exchange for each
share of Tremont common stock held by such stockholders. The Company
received approximately 27,770 shares of Valhi common stock in the second
transaction. The number of shares of Valhi common stock issued to the
Company in exchange for the Company's 20% ownership interest in Tremont
Group was equal to the Company's 20% pro-rata interest in the shares of
Tremont common stock held by Tremont Group, adjusted for the same 3.4
exchange ratio. The Valhi common stock owned by the Company is
restricted under SEC Rule 144.
o Impairments of long-lived assets. The Company recognizes an impairment
charge associated with its long-lived assets, including property and
equipment, whenever it determines that recovery of such long-lived asset
is not probable. Such determination is made in accordance with
applicable GAAP requirement associated with the long-lived asset, and is
based upon, among other things, estimates of the amount of future net
cash flows to be generated by the long-lived asset and estimates of the
current fair value of the asset. Adverse changes in such estimates of
future net cash flows or estimates of fair value could result in an
inability to recover the carrying value of the long-lived asset, thereby
possibly requiring an impairment charge to be recognized in the future.
Under applicable GAAP (Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets"), property and equipment is not assessed for
impairment unless certain impairment indicators, as defined, are
present. During 2002, no such impairment indicators were present with
respect to the Company's net property and equipment.
Under applicable GAAP (SFAS No. 142, "Goodwill and Other Intangible
Assets"), goodwill is required to be reviewed for impairment at least on
an annual basis. The Company's goodwill relates to an acquisition
completed in January 2002, and such goodwill will initially be reviewed
for impairment during 2003.
o Deferred income tax valuation allowance. The Company records a valuation
allowance to reduce its deferred income tax assets to the amount that is
believed to be realizable under the "more-likely-than-not" recognition
criteria. While the Company has considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the
need for a valuation allowance, it is possible that in the future the
Company may change its estimate of the amount of the deferred income tax
assets that would "more-likely-than-not" be realized, resulting in an
-23-
adjustment to the deferred income tax asset valuation allowance that
would either increase or decrease, as applicable, reported net income in
the period such change in estimate was made.
o Defined benefit pension and postretirement benefit plans. The Company's
defined benefit pension and postretirement benefits other than pensions
("OPEB") expenses and obligations are calculated based on several
estimates, including discount rates, expected rates of returns on plan
assets and expected healthcare trend rates. The Company reviews these
rates annually with the assistance of its actuaries. See further
discussion of the potential effect of these estimates in the Assumptions
on defined benefit pension plans and OPEB plans sections in the
Liquidity and Capital Resources section of this MD&A.
o Other contingencies. The Company records an accrual for environmental,
legal, income tax and other contingencies when estimated future
expenditures associated with such contingencies become probable, and the
amounts can be reasonably estimated. However, new information may become
available, or circumstances (such as applicable laws and regulations)
may change, thereby resulting in an increase or decrease in the amount
required to be accrued for such matters (and therefore a decrease or
increase in reported net income in the period of such change).
Other significant accounting policies and use of estimates are described
in the Notes to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
General
The Company's operations are conducted by Kronos in the TiO2 business
segment. As discussed below, average TiO2 selling prices in billing currencies
(which excludes the effects of foreign currency translation) were generally
increasing during most of 2000, were generally decreasing during all of 2001 and
the first quarter of 2002, were flat during the second quarter of 2002 and were
generally increasing during the third and fourth quarters of 2002. Kronos'
operating income declined $72.7 million in 2002 compared with 2001 and declined
$43.3 million in 2001 compared with 2000. Gross profit margins were 23% in 2002
and 31% in 2001.
Many factors influence TiO2 pricing levels, including (i) competitor
actions, (ii) industry capacity, (iii) worldwide demand growth, (iv) customer
inventory levels and purchasing decisions and (v) relative changes in foreign
currency exchange rates. Kronos believes that the TiO2 industry has long-term
growth potential, as discussed in "Item 1. Business - Industry" and "-
Competition."
-24-
Years ended December 31, % Change
--------------------------------- ---------------------
2002 2001 2000 2002-01 2001-00
---------- ---------- ----------- ---------- ----------
(In millions)
Net sales and operating income
Net sales ........................ $875.2 $835.1 $922.3 +5% -9%
Operating income ................. $ 96.5 $169.2 $212.5 -43% -20%
Operating income margin percentage 11% 20% 23%
TiO2 operating statistics
Percent change in average selling
prices (in billing currencies) . -9% -3%
Sales volume (metric tons in
thousands) ..................... 455 402 436 +13% -8%
Production volume (metric tons in
thousands) ..................... 442 412 441 +7% -6%
Production rate as a percent of
capacity ....................... 96% 91% Full
Operating income for full-year 2002 was $96.5 million compared with
$169.2 million for full-year 2001 due to lower average selling prices, partially
offset by higher sales and production volumes. Operating income for full-year
2001 included $27.3 million of business interruption insurance proceeds related
to losses (unallocated period costs and lost margin) incurred resulting from the
previously disclosed fire at the Company's Leverkusen, Germany plant in March
2001. The lower sales and production volumes in 2001 were due in part to the
effect of the Leverkusen fire. Kronos' operating income in 2001, including
business interruption proceeds of $27.3 million, was lower than 2000, primarily
due to lower average TiO2 selling prices in billing currencies and lower sales
and production volumes.
Average TiO2 selling prices in billing currencies during 2002 were 9%
lower than 2001, with lower prices in all major regions. Pigment prices
decreased from the preceding quarter in each quarter of 2001 and during the
first quarter of 2002. Second quarter 2002 pigment prices were comparable to the
first quarter of 2002 and prices trended upward in the second half of 2002.
Average selling prices in the fourth quarter of 2002 were 2% higher than the
third quarter of the year, with increases in all major markets. The average
selling price in billing currencies in December 2002 was 2% higher than the
December 2001 average selling price. Average TiO2 selling prices have continued
to trend upward in the first quarter of 2003 and the Company expects higher
average selling prices for full-year 2003 compared to full-year 2002. Average
TiO2 selling prices in billing currencies in 2001 were 3% lower than 2000, with
lower prices in all major regions.
Industry-wide demand was strong in 2002 as compared to 2001 due in part
to customers restocking inventory levels ahead of first and second quarter 2002
price increases. Record Company sales volume of 455,000 metric tons in 2002 was
13% higher than 2001, primarily due to higher sales in Europe and North America.
Kronos' sales volume in the fourth quarter of 2002 increased 12% from the fourth
quarter of 2001 and seasonally decreased 13% from the third quarter of 2002. The
increase from the comparable prior-year period was due in part to lost sales
volume in 2001 as a result of the Leverkusen fire in 2001. Approximately
one-half of Kronos' 2002 TiO2 sales volume was attributable to markets in Europe
with approximately 39% attributable to North America, and the balance to other
regions. Industry demand was weak throughout 2001 and Kronos' sales volume in
2001 was 8% lower than 2000, primarily due to lower sales in Europe and North
America. Industry-wide demand was strong in the first three quarters of 2000 and
weakened in the fourth quarter of 2000.
-25-
The Company's production volume was a record 442,000 metric tons in
2002, an increase of 7% from 412,000 metric tons produced in 2001. Operating
rates were at 96% in 2002 up from 91% in 2001. Operating rates in 2001 were
lower, compared with 2000, primarily due to lost production resulting from the
Leverkusen fire. Kronos' production volume in 2001 decreased 6% compared with
the 441,000 metric tons produced in 2000. Operating rates were near full
capacity in 2000. Finished goods inventory levels increased in the fourth
quarter of 2002 and at the end of 2002 represented approximately two months of
sales. Compared with year-end 2001, inventory levels decreased 13,000 metric
tons, or 15%.
The Company settled the insurance coverage claim involving the
Leverkusen fire for $56.4 million during the fourth quarter of 2001 ($46.9
million received as of December 31, 2001, with the remaining $9.5 million
received in January 2002), of which $27.3 million related to business
interruption and $29.1 million related to property damage, clean-up costs and
other extra expenses. The Company recognized a $17.5 million pre-tax gain in
2001 related to the property damage recovery after deducting $11.6 million of
clean-up costs and other extra expenses incurred and the carrying value of
assets destroyed in the fire. The gain was excluded from the determination of
operating income. The $27.3 million of business interruption proceeds recognized
in 2001 were allocated between other income, excluding corporate, which reflects
recovery of lost margin ($7.2 million) and as a reduction of cost of sales to
offset unallocated period costs ($20.1 million). The business interruption
insurance proceeds distorted Kronos' operating income margin percentage in 2001
as there were no sales associated with the lost margin operating income
recognized. No additional insurance recoveries related to the Leverkusen fire
are expected to be received. See Notes 18 and 20 to the Consolidated Financial
Statements.
The Company expects TiO2 industry demand in 2003 to increase slightly
over 2002 levels. Kronos' TiO2 production volume in 2003 is expected to
approximate Kronos' 2003 TiO2 sales volume. In December 2002 and January 2003,
Kronos announced additional price increases in Europe and North America which
averaged 8% in Europe and 7% in North America. Kronos is hopeful that it will
realize prices increases, but the extent to which Kronos can realize price
increases during 2003 will depend on improving market conditions and global
economic recovery, which may be negatively impacted by the potential for
international conflict. Overall, the Company expects its TiO2 operating income
in 2003 will be higher than 2002, primarily due to higher average TiO2 selling
prices. The Company's expectations as to the future prospects of the Company and
the TiO2 industry are based upon a number of factors beyond the Company's
control, including worldwide growth of gross domestic product, competition in
the market place, unexpected or earlier-than-expected capacity additions and
technological advances. If actual developments differ from the Company's
expectations, the Company's results of operations could be unfavorably affected.
The Company's efforts to debottleneck Kronos' production facilities to
meet long-term demand continue to prove successful. The Company expects Kronos'
production capacity of 470,000 metric tons will be increased to approximately
480,000 metric tons during 2005, primarily at its chloride facilities, with
moderate capital expenditures.
Excluding the effects of foreign currency translation, which increased
the Company's expenses in 2002 and decreased the Company's expenses in 2001,
Kronos' cost of sales in 2002 was higher than 2001 due to higher sales volume
partially offset by lower unit costs, which resulted primarily from higher
production levels. The effects of lower TiO2 sales and production volumes in
2001 were partially offset by business interruption proceeds. Kronos' cost of
sales in 2001 was lower than 2000 primarily due to lower sales volume, partially
-26-
offset by higher unit costs, which resulted primarily from lower production
levels. Cost of sales, as a percentage of net sales, increased in 2002 primarily
due to the impact on net sales of lower average selling prices partially offset
by lower unit costs. Cost of sales, as a percentage of net sales, increased in
2001 compared with the prior year primarily due to the impact on net sales of
lower average selling prices and higher unit costs, partially offset by business
interruption insurance recoveries.
Excluding the effects of foreign currency translation, which increased
the Company's expense in 2002 and reduced the Company's expense in 2001 compared
to the year-earlier periods, selling, general and administrative expenses
("SG&A"), excluding corporate expenses for 2002, was higher than 2001 primarily
due to higher selling and distribution expenses associated with higher sales
volume and higher administrative expenses. SG&A decreased in 2001 from the
year-earlier period due to lower variable compensation expense and lower selling
and distribution expenses associated with lower 2001 sales volume. SG&A,
excluding corporate expenses, as a percentage of net sales, was 12% in each of
2002, 2001 and 2000. See discussion of corporate expenses below.
The Company has substantial operations and assets located outside the
United States (particularly in Germany, Norway, Belgium and Canada). The
Company's non-U.S. sales and operating costs are subject to currency exchange
rate fluctuations which may impact reported earnings and may affect the
comparability of period-to-period revenues and expenses expressed in U.S.
dollars. A significant amount of the Company's sales (approximately 58% in 2002)
are denominated in currencies other than the U.S. dollar, principally the euro,
other major European currencies, and the Canadian dollar. Certain purchases of
raw materials, primarily titanium-containing feedstocks for the Company's
chloride facilities, 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 increased sales by $21
million in 2002 compared to 2001 primarily due to a weaker U.S. dollar compared
to the euro and decreased sales by $19 million in 2001 compared to 2000
primarily as a result of a stronger U.S. dollar compared to the euro. When
translated to U.S. dollars using currency exchange rates prevailing during the
respective periods, Kronos' average selling prices for 2002 decreased 7% from
2001. Kronos' average selling prices in U.S. dollars for 2001 decreased 5% from
2000. The effect of the weaker U.S. dollar on Kronos' operating costs, that are
not denominated in U.S. dollars, increased operating costs in 2002 compared with
2001. The effect of the stronger U.S. dollar on Kronos' operating costs that are
not denominated in U.S. dollars reduced operating costs in 2001 compared with
2000. In addition, sales to export markets are typically denominated in U.S.
dollars and a weaker U.S. dollar decreases margins on these sales at the
Company's non-U.S. subsidiaries. The unfavorable margin on export sales tends to
offset the favorable effect of translating local currency profits to U.S.
dollars when the dollar is weaker. As a result, the net impact of currency
exchange rate fluctuations on operating income in 2002 and 2001 was not
significant when compared to the year-earlier periods.
-27-
General corporate
The following table sets forth certain information regarding general
corporate income (expense).
Years ended December 31, Change
----------------------------- -------------------
2002 2001 2000 2002-01 2001-00
------- ------- ------- ------- -------
(In millions)
Securities earnings:
Interest and dividends .............. $ 5.7 $ 8.9 $ 8.3 $ (3.2) $ .6
Securities transactions, net ........ (.1) (1.1) 2.5 1.0 (3.6)
Currency transaction gains .............. 6.3 -- -- 6.3 --
Corporate income:
Litigation settlement gains ......... 5.2 11.7 69.5 (6.5) (57.8)
Noncompete agreement income ......... 4.0 4.0 4.0 -- --
Other ............................... .1 .6 .2 (.5) .4
Corporate expense ....................... (37.8) (25.9) (29.6) (11.9) 3.7
Interest expense ........................ (29.8) (27.6) (31.2) (2.2) 3.6
------- ------- ------- ------- -------
$ (46.4) $ (29.4) $ 23.7 $ (17.0) $ (53.1)
======= ======= ======= ======= =======
Corporate interest and dividend income, including noncash interest
income on restricted cash balances and restricted marketable debt securities,
fluctuate in part based upon the amount of funds invested and yields thereon.
Interest and dividend income in 2002 compared with 2001 was $3.2 million lower
primarily due to lower average yields on invested funds. Average funds invested
in 2001 and 2000 were higher compared with the respective prior year primarily
due to the increase in restricted cash related to litigation settlement proceeds
received in January 2001 and July 2000. See Note 19 to the Consolidated
Financial Statements. The Company expects security earnings to be lower in 2003
than 2002 due to lower average yields and lower average levels of funds
available for investment.
Securities transactions, net in 2001 related to a second-quarter $1.1
million noncash securities loss related to an other-than-temporary decline in
value of certain available-for-sale securities held by the Company. Securities
transactions, net in 2000 included a second-quarter $5.6 million securities gain
related to common stock received from the demutualization of an insurance
company from which the Company had purchased certain insurance policies and a
fourth-quarter $3.1 million noncash securities loss related to an
other-than-temporary decline in value of certain available-for-sale securities
held by the Company. See Note 7 to the Consolidated Financial Statements.
In June 2002 Kronos International, Inc. ("KII"), an indirect wholly
owned subsidiary of the Company, completed a private placement offering of
(euro)285 million 8.875% Senior Secured Notes (the "Notes") due 2009. KII used
the net proceeds of the Notes offering to repay certain intercompany
indebtedness owed to the Company, a portion of which the Company used to redeem
at par all of its outstanding 11.75% Senior Secured Notes due 2003, plus accrued
interest. As a result of the refinancing, the Company recognized a foreign
currency transaction gain of $6.3 million in 2002 related to the extinguishment
of certain intercompany indebtedness. See Note 13 to the Consolidated Financial
Statements.
Corporate income in 2002, 2001 and 2000 included gains of $5.2 million,
$11.7 million and $69.5 million, respectively, related principally to
settlements with former insurance carrier groups. No further material
-28-
settlements relating to litigation concerning environmental remediation coverage
are expected. See Note 19 to the Consolidated Financial Statements. The Company
recognized $4.0 million in each of 2002, 2001, 2000 of income related to the
straight-line, five-year amortization of $20 million of proceeds received in
conjunction with the 1998 sale of its specialty chemicals business attributable
to a five-year agreement by the Company not to compete in the rheological
products business. The agreement became fully amortized in January 2003 with
2003 income totaling $.3 million.
During the fourth quarter of 2002, following the cash settlement of
certain stock options held by employees of the Company, the Company commenced
accounting for its remaining stock options using the variable accounting method,
which requires the intrinsic value of the stock option to be accrued as an
expense. The Company recognized $3.2 million of compensation expense in the
fourth quarter of 2002 related to its stock options (including those options
which were cash settled during the quarter), of which $1.6 million was charged
to operating income and $1.6 million was charged to general corporate expenses.
Subsequent increases or decreases in the price of the Company's stock will
result in an adjustment to the previously accrued compensation expense until all
stock options are exercised, cancelled or forfeited. See Notes 2 and 22 to the
Consolidated Financial Statements.
Corporate expense in 2002 increased from 2001, primarily as a result of
higher legal expenses related to lead paint defense costs and the stock option
compensation expense discussed above. Corporate expenses are expected to be
higher in 2003 as compared to 2002 due to higher expected legal expenses
associated with the defense of lead pigment litigation, including two trials
scheduled for 2003.
Interest expense in 2002 increased $2.2 million compared with the prior
year primarily due to $2.0 million of additional second-quarter 2002 interest
expense related to the early extinguishment of the Company's 11.75% Senior
Secured Notes. See Note 13 to the Consolidated Financial Statements. Excluding
this item, interest expense in 2002 was comparable to 2001. Interest expense in
2001 declined compared to 2000 due to reduced levels of its outstanding 11.75%
Senior Secured Notes and lower euro-denominated debt. Assuming no significant
change in interest rates, interest expense in 2003 is expected to be higher
compared with 2002 due to higher levels of outstanding indebtedness, partially
offset by lower average interest rates.
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 17 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 2002 the
Company's effective income tax rate varied from the normally expected rate in
part due to a reduction in the Belgian income tax rate and the recognition of
certain deductible tax assets which previously did not meet the
"more-likely-than-not" recognition criteria. In 2001 the Company's effective
income tax rate varied from the normally expected rate primarily due to the
recognition of certain German income tax attributes which previously did not
meet the "more-likely-than-not" recognition criteria and incremental U.S. taxes
on undistributed earnings of certain non-U.S. subsidiaries. In 2000 the
Company's effective income tax rate varied from the normally expected rate
primarily due to the geographic mix of income, changes in the German income tax
"base" rate and the recognition of certain deductible tax assets which
-29-
previously did not meet the "more-likely-than-not" recognition criteria. Also in
2000 the Company recognized certain one-time benefits related to German tax
settlements.
Effective January 1, 2001, the Company and its qualifying subsidiaries
were included in the consolidated U.S. federal tax return of Contran (the
"Contran Tax Group"). As a member of the Contran Tax Group, the Company is a
party to a tax sharing agreement (the "Contran Tax Agreement"). The Contran Tax
Agreement provides that the Company compute its provision for U.S. income taxes
on a separate-company basis using the tax elections made by Contran. Pursuant to
the Contran Tax Agreement and using the tax elections made by Contran, the
Company makes payments to or receives payments from Valhi in amounts it would
have paid to or received from the U.S. Internal Revenue Service had it not been
a member of the Contran Tax Group. Refunds are limited to amounts previously
paid under the Contran Tax Agreement unless the Company was entitled to a refund
from the U.S. Internal Revenue Service on a separate-company basis. Pursuant to
the Contran Tax Agreement, the Company received $2.3 million from Valhi in 2002
related to capital loss carrybacks which would have been recoverable from the
U.S. Internal Revenue Service. See Note 17 to the Consolidated Financial
Statements.
Other
Minority interest
Minority interest primarily relates to the Company's majority-owned
environmental management subsidiary, NL Environmental Management Services, Inc.
("EMS"). EMS was established in 1998, at which time EMS contractually assumed
certain of the Company's environmental liabilities. EMS' earnings are based, in
part, upon its ability to favorably resolve these liabilities on an aggregate
basis. The minority interest shareholders of EMS actively manage the
environmental liabilities and share in 39% of EMS' cumulative earnings, as
defined in the formation documents. The Company includes liabilities
contractually assumed by EMS in its consolidated balance sheet.
Related party transactions
The Company is a party to certain transactions with related parties. See
"Liquidity and Capital Resources - Investing Cash Flows" and Note 22 to the
Consolidated Financial Statements.
-30-
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows for each of the past three years
are presented below.
Years ended December 31,
----------------------------
2002 2001 2000
-------- -------- --------
(In millions)
Operating activities:
Before changes in assets and liabilities .. $ 75.8 $ 135.3 $ 153.5
Changes in assets and liabilities ......... 22.5 (5.6) (13.8)
-------- -------- --------
98.3 129.7 139.7
Investing activities .......................... (27.2) (57.2) (56.2)
Financing activities .......................... (132.5) (75.5) (95.7)
-------- -------- --------
Net cash used by operating, investing and financing
activities ...................................... $ (61.4) $ (3.0) $ (12.2)
======== ======== ========
Operating cash flows
Certain items included in the determination of net income do not
represent current inflows or outflows of cash. For example, the net litigation
settlement proceeds of $10.3 million received in 2001 that were transferred by
the insurance carriers to special purpose trusts did not result in an increase
in operating cash flow. Further, insurance recoveries, net of $17.5 million in
2001 are excluded from the determination of operating cash flow. These insurance
proceeds are shown in the statement of cash flows under investing activities to
partially offset the cash outflow impact of capital expenditures related to the
Leverkusen sulfate plant reconstruction. Noncash interest income consists of
earnings on restricted cash and restricted marketable debt securities which is
not available for general corporate purposes. Certain other items included in
the determination of net income have an impact on cash flows from operating
activities, but the impact of such items on cash will differ from their impact
on net income. For example, the amount of income or expense recorded for pension
and OPEB assets and obligations (which depend upon a number of factors,
including actuarial assumptions used to value obligations) will generally differ
from the outflows of cash for such benefits. See Note 14 to the Consolidated
Financial Statements.
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 is considered the primary source of liquidity
for the Company. Changes in TiO2 pricing, production volume and customer demand,
among other things, could significantly affect the liquidity of the Company.
Cash flow from operations, before changes in assets and liabilities, decreased
$59.5 million in 2002 and decreased $17.8 million in 2001 from the preceding
year.
Cash flows from operations, before changes in assets and liabilities, in
2002 compared with 2001 were unfavorably affected by $72.7 million of lower
operating income, $3.4 million of lower distributions from LPC, $12.0 million of
higher corporate expenses and $3.9 million, net higher payments to fund OPEB
expenses, partially offset by $21.1 million of lower current tax expense and
$5.2 million of litigation settlement gains.
Operating cash flows in 2001 compared with 2000 were unfavorably
affected by $43.3 million lower operating income, partially offset by $9.0
million of lower payments to fund the Company's pension plans, $6.6 million of
-31-
lower current tax expense, $3.8 million of higher distributions from LPC, $3.8
million of lower corporate expenses and $2.0 million of lower cash interest
expense, net.
Changes in the Company's assets and liabilities, excluding the effect of
currency translation in 2002 compared to 2001, were favorably affected by lower
accounts and notes receivable of $3.9 million, higher accounts with affiliates,
net of $9.5 million and lower inventories. In 2002 the Company reduced finished
goods inventory by approximately 13,000 metric tons from year end 2001, versus
an increase in finished goods inventory from 2000 to 2001 of approximately
10,000 metric tons. Also, in 2002 the Company reduced its commitment for raw
materials accrual by $26.7 million versus an increase in the raw materials
accrual of $16.3 million in 2001 from 2000. These changes in the inventory
balances resulted in a net $74.9 million reduction in inventories. The Company's
assets and liabilities were unfavorably affected primarily by lower accounts
payable and accrued liabilities of $63.4 million which included the reduction in
the accrual for raw material commitments in 2002 and the increase of such
accrual in 2001 referred to above.
Changes in the Company's assets and liabilities (excluding the effect of
currency translation) in 2001 compared with 2000 were favorably affected by
higher accounts payable of $21.8 million and a net decrease in accrued
environmental costs of $8.4 million primarily related to the use of assets from
the Company's special purpose trusts. The Company's assets and liabilities were
unfavorably affected by higher inventories of $9.3 million, lower accounts with
affiliates, net of $5.5 million, and payment of accrued supplemental retirement
benefits of $4.5 million.
In 2002, 2001 and 2000, pursuant to terms of certain titanium ore
contracts (discussed above), the Company purchased, in advance of receipt, $4.9
million, $31.6 million and $15.3 million, respectively, of titanium ore, a raw
material, which is reflected in both inventory and accounts payable and had no
net effect on operating cash flow.
Investing cash flows
The Company's capital expenditures were $32.6 million, $53.7 million and
$31.1 million in 2002, 2001 and 2000, respectively. Capital expenditures in 2002
and 2001 included an aggregate of $3.1 million and $22.3 million, respectively,
for the rebuilding of the Company's Leverkusen, Germany sulfate plant. In 2001
the Company received $23.4 million of insurance proceeds for property damage
resulting from the Leverkusen fire and paid $3.2 million of expenses related to
repairs and clean-up costs. Capital expenditures at LPC were approximately $4.0
million in each of 2002, 2001 and 2000 and are not included in the Company's
capital expenditures.
The Company's capital expenditures during the past three years include
an aggregate of approximately $18.2 million ($5.0 million in 2002) for the
Company's ongoing environmental protection and compliance programs. The
Company's estimated 2003 capital expenditures are $34.0 million and include
approximately $5.0 million in the area of environmental protection and
compliance.
In February 2001 EMS loaned $13.4 million to Tremont under a reducing
revolving loan agreement that matured in March 2003. See Notes 1 and 8 to the
Consolidated Financial Statements. The loan was approved by special committees
of the Company's and EMS's Boards of Directors. In October 2002 a special
committee of the Company's Board of Directors approved new loan terms proposed
by Tremont, whereby Tremont repaid the outstanding principal and interest
-32-
balance on the EMS loan with proceeds from a new $15 million revolving loan
agreement with the Company. As such, the EMS loan was extinguished and
cancelled. Similar to the EMS loan, the Company's loan to Tremont bears interest
at prime plus 2% (6.25% at December 31, 2002 with interest payable quarterly),
and is collateralized by 10.2 million shares of NL common stock owned by
Tremont. The loan is due December 31, 2004, with no principal payments required
prior to that date. The maximum amount available to Tremont under the revolving
loan agreement is $15 million. The creditworthiness of Tremont is dependent in
part on the value of the Company as Tremont's interest in the Company is
Tremont's most substantial asset. At December 31, 2002, no amounts were
outstanding under this facility and Tremont had $15 million of borrowing
availability. As a result of the merger of Tremont with Valhi in February 2003,
the revolving loan agreement is now between Tremont LLC (a wholly owned
subsidiary of Valhi and successor to Tremont) and NL. See Note 7 to the
Consolidated Financial Statements.
In May 2001 a wholly owned subsidiary of EMS loaned $20.0 million to the
Harold C. Simmons Family Trust No. 2 (the "Family Trust"), one of the trusts
described in Notes 1 and 8 to the Consolidated Financial Statements, under a
$25.0 million revolving credit agreement. The loan was approved by special
committees of the Company's and EMS's Boards of Directors. The loan bears
interest at prime (4.25% at December 31, 2002), is due on demand with 60 days
notice and is collateralized by 13,749 shares, or approximately 35%, of
Contran's outstanding Class A voting common stock and 5,000 shares, or 100%, of
Contran's Series E Cumulative preferred stock, both of which are owned by the
Family Trust. The value of the collateral is dependent, in part, on the value of
the Company as Contran's interest in the Company, through its beneficial
ownership of Valhi, is one of Contran's more substantial assets. In November
2002 the Family Trust repaid $2 million principal amount of the revolving credit
agreement. At December 31, 2002, $7.0 million was available for additional
borrowing by the Family Trust. The loan was classified as noncurrent at December
31, 2002, as the Company does not expect to demand repayment within one year.
In November 2001 $7.9 million of restricted cash related to certain
letters of credit supporting certain insurance related contracts was released.
In January 2002 the Company acquired all of the stock and limited
liability company units of EWI RE, Inc. and EWI RE, Ltd. (collectively "EWI"),
respectively, for an aggregate of $9.2 million in cash, including capitalized
acquisition costs of $.2 million. See Note 3 to the Consolidated Financial
Statements.
During 2000 the Company purchased 1,000,000 shares of Tremont's common
stock in market transactions for an aggregate of $26 million. At December 31,
2002, Tremont owned 10.2 million shares, or 21%, of NL's outstanding common
stock. See Notes 1 and 7 to the Consolidated Financial Statements.
-33-
Financing cash flows
In March 2002 the Company redeemed $25 million principal amount of its
11.75% Senior Secured Notes using available cash on hand, and in June 2002 the
Company redeemed the remaining $169 million principal amount of such 11.75%
Senior Secured Notes using a portion of the proceeds from the June 2002 issuance
of the (euro)285 million principal amount of the KII 8.875% Senior Secured Notes
($280 million when issued). Also in June 2002, KII's operating subsidiaries in
Germany, Belgium and Norway entered into a new three-year (euro)80 million
secured revolving credit facility ("European Credit Facility") and borrowed
(euro)13 million ($13 million) and NOK 200 million ($26 million) which, along
with available cash, was used to repay and terminate KII's short term notes
payable ($53.2 million when repaid). In the third and fourth quarters of 2002,
the Company repaid a net euro-equivalent 12.7 million ($12.4 million when
repaid) and 1.7 million ($1.6 million when repaid), respectively, of the
European Credit Facility. See Note 13 to the Consolidated Financial Statements.
In September 2002 the Company's U.S. operating subsidiaries entered into
a three-year $50 million asset-based revolving credit facility ("U.S. Credit
Facility"). As of December 31, 2002, no borrowings were outstanding under the
U.S. Credit Facility and Borrowing Availability was approximately $30 million.
See Note 13 to the Consolidated Financial Statements.
Deferred financing costs of $10.7 million for the Notes, the European
Credit Facility and the U.S. Credit Facility are being amortized over the life
of the respective agreements and are included in other noncurrent assets as of
December 31, 2002.
In 2001 the Company repaid (euro)7.6 million ($6.5 million when paid)
and (euro)16.4 million ($14.9 million when paid), respectively, of its
euro-denominated short-term debt with excess cash flow from operations.
In 2000 the Company repaid (euro)17.9 million ($16.7 million when paid)
and (euro)13.0 million ($12.2 million when paid), respectively, of its
euro-denominated short-term debt with cash flow from operations. In December
2000 the Company borrowed $43 million of short-term non-U.S. dollar-denominated
bank debt and used the proceeds along with cash on hand to redeem $50 million
(par value) of the Company's 11.75% Senior Secured Notes.
Other than operating lease commitments disclosed in Note 23 to the
Consolidated Financial Statements, the Company is not party to any off-balance
sheet financing arrangements.
Dividends paid during 2002, 2001 and 2000 totaled $158.0 million
(including an additional $2.50 per share cash dividend paid in December 2002
aggregating $119.2 million), $39.8 million and $32.7 million, respectively. On
February 5, 2003, the Company's Board of Directors declared a regular quarterly
dividend of $.20 per share to shareholders of record as of March 14, 2003 to be
paid on March 26, 2003. Pursuant to its share repurchase program, the Company
purchased 1,384,000 shares of its common stock in the open market at an
aggregate cost of $21.3 million in 2002, 1,059,000 shares of its common stock at
an aggregate cost of $15.5 million in 2001 and 1,682,000 shares of its common
stock in the open market at an aggregate cost of $30.9 million in 2000. In
October 2002 the Company's Board of Directors authorized a 1,500,000 share
extension of the repurchase program. Approximately 1,323,000 additional shares
-34-
are available for purchase under the Company's share repurchase program. The
available shares may be purchased over an unspecified period of time, and are to
be held as treasury shares available for general corporate purposes.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability
At December 31, 2002, the Company had cash and cash equivalents
aggregating $58 million ($25 million held by non-U.S. subsidiaries) and $72
million of restricted cash equivalents and restricted marketable debt securities
held by U.S. and non-U.S. subsidiaries, of which $11 million was classified as a
noncurrent asset. At December 31, 2002, certain of the Company's subsidiaries
had approximately $87 million available for borrowing with approximately $57
million available under non-U.S. credit facilities (including approximately $54
million under the European Credit Facility) and approximately $30 million
available under the U.S. Credit Facility (based on Borrowing Availability). At
December 31, 2002, KII had approximately $36 million available for payment of
dividends and other restricted payments as defined in the Notes indenture. At
December 31, 2002, the Company had complied with all financial covenants
governing its debt agreements.
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, debt service and current dividend
policy. To the extent that actual developments differ from Company's
expectations, the Company's liquidity could be adversely affected.
Income taxes
A reduction in the German "base" income tax rate from 30% to 25%,
enacted in October 2000, became effective January 1, 2001. The reduction in the
German income tax rate resulted in $5.7 million of additional deferred income
tax expense in the fourth quarter of 2000 due to a reduction of the Company's
deferred income tax asset related to certain German tax attributes.
A reduction in the Belgian income tax rate from 40.17% to 33.99%,
enacted in December 2002, became effective January 1, 2003. The reduction in the
Belgian income tax rate resulted in a $2.3 million decrease in deferred income
tax expense in the fourth quarter of 2002 due to a reduction of the Company's
deferred income tax liabilities related to certain Belgian temporary
differences.
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 penalties and interest. See Note 17 to the
Consolidated Financial Statements.
The Company's and EMS' 1998 U.S. federal income tax returns are
currently being examined by the U.S. Internal Revenue Service ("IRS"), and the
Company and EMS have each granted extensions of the statute of limitations for
assessment of such returns until September 30, 2003. Based upon the course of
the examination to date, the Company anticipates that the IRS may propose a
substantial tax deficiency.
-35-
The Company has received a notification from the Norwegian tax
authorities of their intent to assess tax deficiencies of approximately NOK 12.2
million ($1.7 million at December 31, 2002) relating to 1998 through 2000. The
Company has objected to this proposed assessment in a written response to the
Norwegian tax authorities.
The Company has received preliminary tax assessments for the years 1991
to 1997 from the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately (euro)10.4 million ($10.8 million at December
31, 2002). The Company has filed protests to the assessments for the years 1991
to 1997. The Company is in discussions with the Belgian tax authorities and
believes that a significant portion of the assessments is without merit.
No assurance can be given that the Company's tax matters will be
favorably resolved due to the inherent uncertainties involved in court and tax
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
At December 31, 2002, the Company had net deferred tax liabilities of
$134 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 $185 million at December 31, 2002, principally related to Germany,
partially offsetting deferred tax assets which the Company believes do not
currently meet the "more-likely-than-not" recognition criteria.
At December 31, 2002, the Company had the equivalent of approximately
$414 million of income tax loss carryforwards in Germany with no expiration
date. However, the Company has provided a deferred tax valuation allowance
against substantially all of these income tax loss carryforwards because the
Company currently believes they do not meet the "more-likely-than-not"
recognition criteria. The German federal government has proposed certain changes
to its income tax law, including certain changes that would impose limitations
on the annual utilization of income tax loss carryforwards that, as proposed,
would become effective retroactively to January 1, 2003. Since the Company has
provided a deferred income tax asset valuation allowance against substantially
all of the German tax loss carryforwards, any limitation on the Company's
ability to utilize such carryforwards resulting from enactment of any of these
proposals would not have a material impact on the Company's net deferred income
tax liability. However, if enacted, the proposed changes could have a material
impact on the Company's ability to make full annual use of its German income tax
loss carryforwards, which would significantly affect the Company's future income
tax expense and future income tax payments.
At December 31, 2002, the Company had, for U.S. federal income tax
purposes, a net operating loss carryforward of approximately $45 million, of
which $3 million expires in 2019, $23 million expires in 2021 and $19 million
expires in 2022 and approximately $7.4 million of alternative minimum tax credit
carryforwards with no expiration date.
-36-
Environmental matters and litigation
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, including sites for which EMS has
contractually assumed the Company's obligation. 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, the allocation of such costs among
PRPs, and the solvency of other 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 and in the aggregate, should not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity. Considering the Company's previous involvement in the lead pigment
and lead-based paint businesses, the Company expects that additional lead
pigment and lead-based paint litigation, asserting similar or different legal
theories and seeking similar or different types of damage and relief to that
described in Item 3. "Legal Proceedings," may be filed. See Item 3. "Legal
Proceedings" and Note 23 to the Consolidated Financial Statements.
Foreign operations
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. As of
January 1, 2001, the functional currency of the Company's German, Belgian, Dutch
and French operations have been converted to the euro from their respective
national currencies. At December 31, 2002, the Company had substantial net
assets denominated in the euro, Canadian dollar, Norwegian kroner and United
Kingdom pound sterling.
New accounting principles not yet adopted
See Note 2 to the Consolidated Financial Statements.
Other
The Company periodically evaluates its liquidity requirements,
alternative uses of capital, capital needs and availability of resources in view
of, among other things, its dividend policy, its debt service and capital
expenditure requirements and estimated future operating cash flows. As a result
of this process, the Company in the past has sought, and in the future may seek,
-37-
to reduce, refinance, repurchase or restructure indebtedness; raise additional
capital; issue additional securities; repurchase shares of its common stock;
modify its dividend policy; restructure ownership interests; sell interests in
subsidiaries or other assets; or take a combination of such steps or other steps
to manage its liquidity and capital resources. In the normal course of its
business, the Company may review opportunities for the acquisition, divestiture,
joint venture or other business combinations in the chemicals or other
industries, as well as the acquisition of interests in related companies. 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.
See Note 13 to the Consolidated Financial Statements.
Summary of debt and other contractual commitments
As more fully described in the Notes to the Consolidated Financial
Statements, the Company is a party to various debt, lease and other agreements
which contractually and unconditionally commit the Company to pay certain
amounts in the future. See Notes 13 and 23 to the Consolidated Financial
Statements. The following table summarizes such contractual commitments that are
unconditional both in terms of timing and amount by the type and date of
payment.
Unconditional Payment Due Date
--------------------------------------------------------
2004 - 2006 - 2008 and
Contractual Commitment 2003 2005 2007 after Total
- ---------------------- ------- ------- -------- -------- --------
(In millions)
Indebtedness ......... $ 1.3 $ 27.5 $ .2 $ 296.9 $ 325.9
------- ------- -------- -------- --------
Property and equipment 6.4 -- -- -- 6.4
------- ------- -------- -------- --------
Operating leases ..... 4.7 7.0 3.8 19.4 34.9
------- ------- -------- -------- --------
$ 12.4 $ 34.5 $ 4.0 $ 316.3 $ 367.2
======= ======= ======== ======== ========
In addition, the Company is a party to certain other agreements that
contractually and unconditionally commit the Company to pay certain amounts in
the future. However, while the Company believes it is probable that amounts will
be spent in the future under such contracts, the amount and/or the timing of
such future payments will vary depending on certain provisions of the applicable
contract. Agreements to which the Company is a party that fall into this
category, more fully described in Note 23 to the Consolidated Financial
Statements, includes the Company's long-term supply contracts for the purchase
of chloride-process TiO2 feedstock.
Assumptions on defined benefit pension plans and OPEB plans
Defined benefit pension plans. The Company maintains various defined
benefit pension plans in the U.S., Europe and Canada. The Company accounts for
its defined benefit pension plans using SFAS No. 87, "Employer's Accounting for
Pensions." Under SFAS No. 87, defined benefit pension plan expense and prepaid
and accrued pension cost are each recognized based on certain actuarial
assumptions, principally the assumed discount rate, the assumed long-term rate
of return on plan assets and the assumed increase in future compensation levels.
The Company recognized consolidated defined benefit pension plan expense of $7.0
-38-
million in 2002, $4.6 million in 2001 and $4.7 million in 2000. The amount of
funding requirements for these defined benefit pension plans is generally based
upon applicable regulation (such as ERISA in the U.S.), and will generally
differ from pension expense recognized under SFAS No. 87 for financial reporting
purposes. Contributions made by the Company to all of its defined benefit
pension plans aggregated $9.3 million in 2002, $7.6 million in 2001 and $16.6
million in 2000.
The discount rates the Company utilizes for determining defined benefit
pension expense and the related pension obligations are based on current
interest rates earned on long-term bonds that receive one of the two highest
ratings given by recognized rating agencies in the applicable country where the
defined benefit pension benefits are being paid. In addition, the Company
receives advice about appropriate discount rates to use based upon discussions
with the Company's third-party actuaries, who may in some cases utilize their
own market indices. The discount rates are adjusted as of each valuation date
(September 30th for the Company's plans) to reflect then-current interest rates
on such long-term bonds. Such discount rates are used to determine the actuarial
present value of the pension obligations as of December 31st of that year, and
such discount rates are also used to determine the interest component of defined
benefit pension expense for the following year.
At December 31, 2002, approximately 17%, 53%, 10% and 14% of the
projected benefit obligations for all of the Company's defined benefit pension
plans were attributable to the U.S., Germany, Canada and Norway, respectively.
Because the Company maintains defined benefit pension plans in several different
countries in North America and Europe, and because the interest rate environment
differs from country to country, the Company uses several different discount
rate assumptions in determining its defined benefit pension plan obligations and
expense.
The Company used the following discount rates for its defined benefit
pension plans:
Discount rates used for the following periods:
-------------------------------------------------------------------------
Obligation at Obligation at Obligation at
December 31, 2002 and December 31, 2001 and December 31, 2000 and
expense in 2003 expense in 2002 expense in 2001
--------------------- --------------------- ---------------------
U.S. .......... 6.5% 7.3% 7.8%
Germany ....... 5.5% 5.8% 6.0%
Canada ........ 7.0% 7.3% 7.5%
Norway ........ 6.0% 6.0% 6.0%
The assumed long-term rate of return on plan assets represents the
estimated average rate of earnings expected to be earned on the funds invested
or to be invested in the plans' assets provided to fund the benefit payments
inherent in the projected benefit obligation. Unlike the discount rate, which is
adjusted each year based on changes in current long-term interest rates, the
assumed long-term rate of return on plan assets will not necessarily change
based upon the actual, short-term performance of the plan assets in any given
year. Defined benefit pension expense each year is based upon the assumed
long-term rate of return on plan assets for each plan and the actual fair value
of the plan assets as of the beginning of the year. Differences between the
expected return on plan assets for a given year and the actual return are
deferred and amortized over future periods based either upon the expected
average remaining service life of the active plan participants (for plans for
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which benefits are still being earned by active employees) or the average
remaining life expectancy of the inactive participants (for plans for which
benefits are not still being earned by active employees).
At December 31, 2002, approximately 19%, 50%, 8% and 18% related to plan
assets for the Company's plans in the U.S., Germany, Canada and Norway,
respectively. Because the Company maintains defined benefit pension plans in
several different countries in North America and Europe, because the plan assets
in different countries are invested in a different mix of investments and
because the long-term rates of return for different investments differs from
country to country, the Company uses several different long-term rate of return
on plan asset assumptions in determining its defined benefit pension plan
expense.
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets for each of its plans and the expected long-term
rates of return for such asset components. In addition, the Company receives
advice about appropriate long-term rates of return to use based upon discussions
with the Company's third-party actuaries. Such assumed asset mixes are
summarized below:
o In the U.S., the Company currently has a plan asset target allocation of
50% to equity managers and 50% to fixed income managers (current plan
asset allocation at December 31, 2002 was 39% to equity managers and 61%
to fixed income managers), with an expected long-term rate of return for
such investments of approximately 10% and 6%, respectively.
o In Germany, the composition of plan assets is established to satisfy the
requirements of the German insurance commissioner. The current plan
asset allocation at December 31, 2002 was 30% to equity managers and 70%
to fixed income managers.
o In Canada, the Company currently has a plan asset target allocation of
65% to equity managers and 35% to fixed income managers, with an
expected long-term rate of return for such investments to average
approximately 125 basis points above the applicable equity or fixed
income index. The current plan asset allocation at December 31, 2002 was
54% to equity managers and 46% to fixed income managers.
o In Norway, the Company currently has a plan asset target allocation of
15% to equity managers and 85% to fixed income managers, with an
expected long-term rate of return for such investments of approximately
8% and 6%, respectively. The current plan asset allocation at December
31, 2002 was 13% to equity managers and 87% to fixed income managers.
The Company regularly reviews its actual asset allocation for each of
its plans, and will periodically rebalance the investments in each plan to more
accurately reflect the targeted allocation when considered appropriate.
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The Company's assumed long-term rates of return on plan assets for 2002,
2001 and 2000 were as follows:
2002 2001 2000
------ ------ ------
U.S. 8.5% 8.5% 9.0%
Germany 6.8% 7.3% 7.5%
Canada 7.0% 7.8% 8.0%
Norway 7.0% 7.0% 7.0%
The Company currently expects to utilize the same long-term rate of
return on plan asset assumptions in 2003 as it used in 2002 for purposes of
determining the 2003 defined benefit pension plan expense.
To the extent that a plan's particular pension benefit formula
calculates the pension benefit in whole or in part based upon future
compensation levels, the projected benefit obligation and the pension expense
will be based in part upon expected increases in future compensation levels. For
all of the Company's plans for which the benefit formula is so calculated, the
Company generally bases the assumed expected increase in future compensation
levels based upon average long-term inflation rates for the applicable country.
In addition to the actuarial assumptions discussed above, because the
Company maintains defined benefit pension plans outside the U.S. the amount of
recognized defined benefit pension expense and the amount of prepaid and accrued
pension cost will vary based upon relative changes in foreign currency exchange
rates.
Based on the actuarial assumptions described above and the Company's
current expectation for what actual average foreign currency exchange rates will
be during 2003, the Company expects its defined benefit pension expense will
approximate $8 million in 2003. In comparison, the Company expects to be
required to make approximately $12 million of contributions to such plans during
2003.
Defined benefit pension expense and the amount recognized as prepaid and
accrued pension costs are based upon the actuarial assumptions discussed above.
The Company believes all of the actuarial assumptions used are reasonable and
appropriate. If the Company had lowered the assumed discount rate by 25 basis
points for all of its plans as of December 31, 2002, the Company's aggregate
projected benefit obligation would have increased by approximately $10.5 million
at that date, and the Company's defined benefit pension expense would be
expected to increase by approximately $1.4 million during 2003. Similarly, if
the Company lowered the assumed long-term rate of return on plan assets by 25
basis points for all of its plans, the Company's defined benefit pension expense
would be expected to increase by approximately $.6 million during 2003.
OPEB plans. Certain subsidiaries of the Company currently provide
certain health care and life insurance benefits for eligible retired employees.
The Company provides such OPEB benefits to retirees in the U.S. and Canada. The
Company accounts for such OPEB costs under SFAS No. 106, "Employers Accounting
for Postretirement Benefits other than Pensions." Under SFAS No. 106, OPEB
expense and accrued OPEB costs are based on certain actuarial assumptions,
principally the assumed discount rate and the assumed rate of increases in
future health care costs. The Company recognized consolidated OPEB expense
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(income) of $.1 million in 2002, $(.2) million in 2001 and $.2 million in 2000.
Similar to defined benefit pension benefits, the amount of funding will differ
from the expense recognized for financial reporting purposes, and contributions
to the plans to cover benefit payments aggregated $3.5 million in 2002, $.5
million in 2001 and $7.8 million in 2000. Company contributions were lower in
2002 and 2001 compared with 2000 due to the contribution by the Company to a
trust in 2000 of shares of common stock received from demutualization of an
insurance company from which the Company had purchased certain insurance
policies. The shares were sold by the trust for $7.8 million in 2000 and the
proceeds were used to pay OPEB benefit claims in 2002, 2001 and 2000.
The assumed discount rates the Company utilizes for determining OPEB
expense and the related accrued OPEB obligation is generally based on the same
discount rates the Company utilizes for its U.S. and Canadian defined benefit
pension plans.
In estimating the health care cost trend rate, the Company considers its
actual healthcare cost experience, future benefit structures, industry trends
and advice from its third-party actuaries. During each of the past three years,
the Company has assumed that the relative increase in health care costs will
generally trend downward over the next several years, reflecting, among other
things, assumed increases in efficiency in the health care system and
industry-wide cost containment initiatives. For example, at December 31, 2002,
the expected rate of increase in future health care costs ranges from 9% in
2003, declining to 5.5% in 2007 and thereafter.
Based on the actuarial assumptions described above and the Company's
current expectation for what actual average foreign currency exchange rates will
be during 2003, the Company expects its OPEB expense will approximate $.3
million in 2003. In comparison, the Company expects to be required to make
approximately $4.8 million of contributions to such plans during 2003.
OPEB expense and the amount recognized as accrued OPEB costs are based
upon the actuarial assumptions discussed above. The Company believes all of the
actuarial assumptions used are reasonable and appropriate. If the Company had
lowered the assumed discount rate by 25 basis points for all of its OPEB plans
as of December 31, 2002, the Company's aggregate accumulated OPEB obligation
would have increased by approximately $.7 million at that date, and the
Company's OPEB expense would be expected to increase by a nil amount during
2003. Similarly, if the assumed future health care cost trend rate had been
increased by 100 basis points, the Company's accumulated OPEB obligation would
have increased by approximately $2.1 million at December 31, 2002, and OPEB
expense would have increased by $.1 million in 2002.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
The Company is exposed to market risk from changes in currency exchange
rates, interest rates and equity security prices. In the past, the Company has
periodically entered into interest rate swaps or other types of contracts in
order to manage a portion of its interest rate market risk. Otherwise, the
Company has not generally entered into forward or option contracts to manage
such market risks, nor has the Company entered into any such contract or other
type of derivative instrument for trading purposes. The Company was not a party
to any forward or derivative option contracts related to currency exchange
rates, interest rates or equity security prices at December 31, 2002 or 2001.
See Notes 2 and 24 to the Consolidated Financial Statements.
Interest rates
The Company is exposed to market risk from changes in interest rates,
primarily related to indebtedness. At December 31, 2002, the Company's aggregate
indebtedness was split between 92% of fixed-rate instruments and 8% of
variable-rate borrowings (2001 - 81% fixed-rate and 19% variable-rate). The
large percentage of fixed-rate debt instruments minimizes earnings volatility
which would result from changes in interest rates. The following table presents
principal amounts and weighted-average interest rates, by contractual maturity
dates, for the Company's aggregate indebtedness at December 31, 2002 and 2001.
At December 31, 2002, all outstanding fixed-rate indebtedness was denominated in
euros (2001-all fixed-rate indebtedness denominated in U.S. dollars), and all
outstanding variable-rate indebtedness was denominated in either euros or
Norwegian kroner. Information shown below for such euro- and Norwegian
kroner-denominated indebtedness is presented in its U.S. dollar equivalent at
December 31, 2002 using that date's exchange rate of .96 euro per U.S. dollar
(2001 - 1.13 euro per U.S. dollar) and 6.99 Norwegian kroner per U.S. dollar
(2001 - 9.02 Norwegian kroner per U.S. dollar). Certain Norwegian
kroner-denominated capital leases totaling $1.9 million in 2002 have been
excluded from the table below.
Amount
------------------------
Carrying Fair Interest Maturity
Indebtedness value value rate date
------------ ------------ ----------- ------------ --------
(In millions)
Fixed-rate indebtedness (euro-denominated):
KII Notes ............................. $ 296.9 $ 299.9 8.875% 2009
------------ ----------- ------
296.9 299.9 8.875%
------------ ----------- ------
Variable-rate indebtedness (non U.S. dollar
denominated):
European Credit Facility:
euro-denominated ...................... 15.6 15.6 4.8% 2005
Norwegian kroner-denominated .......... 11.5 11.5 8.9% 2005
------------ ----------- ------
27.1 27.1 6.5%
------------ ----------- ------
$ 324.0 $ 327.0 8.7%
============ =========== ======
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At December 31, 2001, fixed-rate indebtedness aggregated $194.0 million
(fair value - $194.9 million) with a weighted-average interest rate of 11.75%;
variable rate indebtedness at such date aggregated $46.2 million, which
approximated fair value, with a weighted-average interest rate of 5.45%. All of
such fixed rate indebtedness was denominated in U.S. dollars. Such variable rate
indebtedness was denominated in the euro (52%) and the Norwegian kroner (48%).
Certain Norwegian kroner-denominated capital leases totaling $2.5 million at
December 31, 2001 have been excluded from the above analysis.
Currency exchange rates
The Company is exposed to market risk arising from changes in currency
exchange rates as a result of manufacturing and selling its products worldwide.
Earnings are primarily affected by fluctuations in the value of the U.S. dollar
relative to the euro, Canadian dollar, Norwegian kroner and the United Kingdom
pound sterling. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of risks and uncertainties
related to the conversion of certain of these currencies to the euro.
At December 31, 2002, the Company had $312.5 million of indebtedness
denominated in euros (2001 - $24.0 million) and $11.5 million of indebtedness
denominated in Norwegian kroner (2001 - $22.2 million). The potential increase
in the U.S. dollar equivalent of the principal amount outstanding resulting from
a hypothetical 10% adverse change in exchange rates would be approximately $32.4
million (2001 - $4.6 million).
Marketable equity and marketable debt security prices
The Company is exposed to market risk due to changes in prices of the
marketable equity securities which are held. The fair value of such equity
securities at December 31, 2002 and 2001 was $40.9 million and $45.2 million,
respectively. The potential change in the aggregate fair value of these
investments, assuming a 10% change in prices, would be $4.1 million and $4.5
million, respectively. The fair value of restricted marketable debt securities
at December 31, 2002 and 2001 was $18.9 million and $19.7 million, respectively.
The potential change in the aggregate fair value of these investments assuming a
10% change in prices would be $1.9 million and $2.0 million, respectively.
Other
The Company believes there are certain shortcomings in the sensitivity
analyses presented above, which analyses are required under the SEC's
regulations. For example, the hypothetical effect of changes in interest rates
discussed above ignores the potential effect on other variables which affect the
Company's results of operations and cash flows, such as demand for the Company's
products, sales volumes and selling prices and operating expenses. Contrary to
the above assumptions, changes in interest rates rarely result in simultaneous
parallel shifts along the yield curve. Accordingly, the amounts presented above
are not necessarily an accurate reflection of the potential losses the Company
would incur assuming the hypothetical changes in market prices were actually to
occur.
The above discussion and estimated sensitivity analysis amounts include
forward-looking statements of market risk which assume hypothetical changes in
market prices. Actual future market conditions could differ materially from such
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assumptions. Accordingly, such forward-looking statements should not be
considered to be projections by the Company of future events, gains or losses.
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 SEC 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 22 to the Consolidated Financial
Statements.
ITEM 14. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures.
The term "disclosure controls and procedures," as defined by regulations of the
SEC, means controls and other procedures that are designed to ensure that
information required to be disclosed in the reports that the Company files or
submits to the SEC under the Securities Exchange Act of 1934, as amended (the
"Act"), is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it files
or submits to the SEC under the Act is accumulated and communicated to the
Company's management, including its principal executive officer and its
principal financial officer, as appropriate to allow timely decisions to be made
regarding required disclosure. Each of J. Landis Martin, the Company's Chief
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Executive Officer, and Robert D. Hardy, the Company's Chief Financial Officer,
have evaluated the Company's disclosure controls and procedures as of a date
within 90 days of the filing date of this Form 10-K. Based upon their
evaluation, these executive officers have concluded that the Company's
disclosure controls and procedures are effective as of the date of such
evaluation.
The Company also maintains a system of internal controls. The term
"internal controls," as defined by the American Institute of Certified Public
Accountants' Codification of Statement on Auditing Standards, AU Section 319,
means controls and other procedures designed to provide reasonable assurance
regarding the achievement of objectives in the reliability of the Company's
financial reporting, the effectiveness and efficiency of the Company's
operations and the Company's compliance with applicable laws and regulations.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date of their last evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
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
There were no Reports on Form 8-K filed during the quarter
ended December 31, 2002.
January 31, 2003 - 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 debt issues which do not exceed 10% of
consolidated total assets will be furnished to the Securities
and Exchange Commission upon request.
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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 governing the 8.875% Senior Secured Notes due 2009,
dated June 28, 2002, between Kronos International, Inc. and The
Bank of New York, as Trustee - incorporated by reference to
Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002.
4.3 Form of certificate of 8.875% Senior Secured Notes due 2009 of
Kronos International, Inc. (included as Exhibit A to Exhibit 4.1)
- incorporated by reference to Exhibit 4.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002.
4.4 Form of certificate of 8.875% Senior Secured Notes due 2009 of
Kronos International, Inc. (included as Exhibit B to Exhibit 4.1)
- incorporated by reference to Exhibit 4.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002.
4.5 Purchase Agreement, dated June 19, 2002, among Kronos
International, Inc., Deutsche Bank AG London, Dresdner Bank AG
London Branch and Commerzbank Aktiengesellschaft, London Branch -
incorporated by reference to Exhibit 4.4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002.
4.6 Registration Rights Agreement, dated June 28, 2002, among Kronos
International, Inc., Deutsche Bank AG London, Dresdner Bank AG
London and Commerzbank Aktiengesellschaft, London Branch -
incorporated by reference to Exhibit 4.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002.
4.7 Collateral Agency Agreement, dated June 28, 2002, among The Bank
of New York, U.S. Bank, N.A. and Kronos International, Inc. -
incorporated by reference to Exhibit 4.6 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002.
4.8 Security Over Shares Agreement, dated June 28, 2002, between
Kronos International, Inc. and The Bank of New York -
incorporated by reference to Exhibit 4.7 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002.
4.9 Pledge of Shares (shares in Kronos Denmark ApS), dated June 28,
2002, between Kronos International, Inc. and U.S. Bank, N.A. -
incorporated by reference to Exhibit 4.8 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002.
4.10 Pledge Agreement (shares in Societe Industrielle du Titane S.A.),
dated June 28, 2002, between Kronos International, Inc. and U.S.
Bank, N.A. - incorporated by reference to Exhibit 4.9 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002.
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4.11 Partnership Interest Pledge Agreement(relating to fixed capital
contribution in Kronos Titan GmbH & Co.), dated June 28, 2002,
between Kronos International, Inc. and U.S. Bank, N.A. -
incorporated by reference to Exhibit 4.10 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002.
4.12 Deposit Agreement, dated June 28, 2002, among NL Industries, Inc.
and JP Morgan Chase Bank, as trustee - incorporated by reference
to Exhibit 4.11 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002.
4.13 Satisfaction and Discharge of Indenture, Release, Assignment and
Transfer, dated June 28, 2002, made by JP Morgan Chase Bank
pursuant to the Indenture for NL Industries, Inc.'s 11 3/4%
Senior Secured Notes due 2003 - incorporated by reference to
Exhibit 4.12 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002.
10.1 (euro)80,000,000 Facility Agreement, dated June 25, 2002, among
Kronos Titan GmbH & Co. OHG, Kronos Europe S.A./N.V., Kronos
Titan A/S and Titania A/S, as borrowers, Kronos Titan GmbH & Co.
OHG, Kronos Europe S.A./N.V. and Kronos Norge AS, as guarantors,
Kronos Denmark ApS, as security provider, Deutsche Bank AG, as
mandated lead arranger, Deutsche Bank Luxembourg S.A., as agent
and security agent, and KBC Bank NV, as fronting bank, and the
financial institutions listed in Schedule 1 thereto, as lenders -
incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002.
10.2 Lease Contract dated June 21, 1952, between Farbenfabriken 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.
10.3 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.
10.4** 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.
10.5** Amendment to Richards Bay Slag Sales Agreement dated May 1, 1999
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999.
10.6** Amendment to Richards Bay Slag Sales Agreement dated June 1, 2001
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.5 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001.
10.7** Amendment to Richards Bay Slag Sales Agreement dated December 20,
2002 between Richards Bay Iron and Titanium (Proprietary) Limited
and Kronos, Inc.
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10.8 Agreement between Sachtleben Chemie GmbH and Kronos Titan-GmbH
effective December 30, 1986 - incorporated by reference to
Exhibit 10.1 of KII's Quarterly Report on Form 10-Q (File No.
333-100047) for the quarter ended September 30, 2002.
10.9 Supplementary Agreement to the Agreement of December 30, 1986
between Sachtleben Chemie GmbH and Kronos Titan-GmbH dated May 3,
1996 - incorporated by reference to Exhibit 10.2 of KII's
Quarterly Report on Form 10-Q (File No. 333-100047) for the
quarter ended September 30, 2002.
10.10 Second Supplementary Agreement to the Contract dated December 30,
1986 between Sachtleben Chemie GmbH and Kronos Titan-GmbH dated
January 8, 2002 - incorporated by reference to Exhibit 10.3 of
KII's Quarterly Report on Form 10-Q (File No. 333-100047) for the
quarter ended September 30, 2002.
10.11 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.
10.12 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.
10.13 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.
10.14 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.
10.15 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.
10.16 Amendment No. 1 to Tioxide Americas Offtake Agreement dated as of
December 20, 1995 between Tioxide Americas Inc. and Louisiana
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.
10.17 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.
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10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23* 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.
10.24* NL Industries, Inc. Variable Compensation Plan - incorporated by
reference to Exhibit A to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held on May
8, 1996.
10.25* NL Industries, Inc. Variable Compensation Plan - incorporated by
reference to Exhibit B to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held on May
9, 2001.
10.26* 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.
10.27* NL Industries, Inc. 1998 Long-Term Incentive Plan - incorporated
by reference to Appendix A to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held on May
6, 1998.
-50-
10.28* 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.
10.29* Executive severance agreement effective as of July 24, 1996 by
and between the Registrant and J. Landis Martin - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997.
10.30* 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.
10.31* Amended and Restated Supplemental Executive Retirement Plan for
Executives and Officers of NL Industries, Inc. effective as of
May 1, 2001 - incorporated by reference to Exhibit 10.30 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001.
10.32* Agreement to Defer Bonus Payment dated February 20, 1998 between
the Registrant and Lawrence A. Wigdor and related trust agreement
- incorporated by reference to Exhibit 10.48 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
10.33* Agreement to Defer Bonus Payment dated January 10, 2002 between
the Registrant and Lawrence A. Wigdor and related trust
agreements - incorporated by reference to Exhibit 10.32 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001.
10.34* Agreement to Defer Bonus Payment dated February 20, 1998 between
the Registrant and J. Landis Martin and related trust agreement -
incorporated by reference to Exhibit 10.49 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
10.35 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.
10.36 Tax Agreement between Valhi, Inc. and NL Industries, Inc.
effective as of January 1, 2001- incorporated by reference to
Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2000.
10.37 Subscription Agreement by and among Valhi, Inc., Tremont
Holdings, LLC and Tremont Group, Inc. effective as of December
31, 2000 - incorporated by reference to Exhibit 10.37 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000.
10.38 Intercorporate Services Agreement by and between Contran
Corporation and the Registrant effective as of January 1, 2002 -
incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2002.
-51-
10.39 Intercorporate Services Agreement by and between Tremont
Corporation and the Registrant effective as of January 1, 2002 -
incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2002.
10.40 Intercorporate Services Agreement by and between Titanium Metals
Corporation and the Registrant effective as of January 1, 2002 -
incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2002.
10.41 Revolving Loan Note dated May 4, 2001 with Harold C. Simmons
Family Trust No. 2 and EMS Financial, Inc. - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001.
10.42 Security Agreement dated May 4, 2001 by and between Harold C.
Simmons Family Trust No. 2 and EMS Financial, Inc. - incorporated
by reference to Exhibit 10.2 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001.
10.43 Revolving Loan Note Agreement dated October 22, 2002 with Tremont
Corporation as Maker and NL Industries, Inc. as Payee -
incorporated by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002.
10.44 Security Agreement dated October 22, 2002 by and between Tremont
Corporation and NL Industries, Inc. - incorporated by reference
to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002.
10.45 Purchase Agreement dated January 4, 2002 by and among Kronos,
Inc. as the Purchaser, and Big Bend Holdings LLC and Contran
Insurance Holdings, Inc., as Sellers regarding the sale and
purchase of EWI RE, Inc. and EWI RE, Ltd. - incorporated by
reference to Exhibit 10.40 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2001.
10.46* Stock Option Purchase Agreement dated November 20, 2002 between
the Registrant (Purchaser) and J. Landis Martin (Seller).
10.47* Stock Option Purchase Agreement dated November 20, 2002 between
the Registrant (Purchaser) and Dr. Lawrence A. Wigdor (Seller).
10.48* Stock Option Purchase Agreement dated November 20, 2002 between
the Registrant (Purchaser) and David B. Garten (Seller).
10.49* Stock Option Purchase Agreement dated November 20, 2002 between
the Registrant (Purchaser) and Robert D. Hardy (Seller).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
-52-
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.3 Annual Report of NL Industries, Inc. Retirement Savings Plan
(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,
2002.
All documents in the Exhibit Index above that have been incorporated by
reference were previously filed by the Registrant under SEC File Number 1-640.
* Management contract, compensatory plan or arrangement.
** Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
-53-
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 12, 2003
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/ Robert D. Hardy
- ------------------------------------------ ---------------------------------
J. Landis Martin, March 12, 2003 Robert D. Hardy, March 12, 2003
Director, President and Chief Executive Vice President, Chief Financial
Officer Officer
(Principal Executive Officer) (Principal Financial Officer and
Principal Accounting Officer)
/s/ Glenn R. Simmons /s/ Harold C. Simmons
- ------------------------------------------ ---------------------------------
Glenn R. Simmons, March 12, 2003 Harold C. Simmons, March 12, 2003
Director Chairman of the Board
/s/ George E. Poston /s/ Steven L. Watson
- ------------------------------------------ ---------------------------------
George E. Poston, March 12, 2003 Steven L. Watson, March 12, 2003
Director Director
/s/ General Thomas P. Stafford /s/ Ann Manix
- ------------------------------------------ ---------------------------------
General Thomas P. Stafford, March 12, 2003 Ann Manix, March 12, 2003
Director Director
-54-
CERTIFICATIONS
I, J. Landis Martin, the Chief Executive Officer of NL Industries, Inc., certify
that:
1) I have reviewed this annual report on Form 10-K of NL Industries, Inc.
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 12, 2003
/s/ J. Landis Martin
- -----------------------
J. Landis Martin
Chief Executive Officer
-55-
CERTIFICATIONS
I, Robert D. Hardy, the Chief Financial Officer of NL Industries, Inc., certify
that:
1) I have reviewed this annual report on Form 10-K of NL Industries, Inc.
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 12, 2003
/s/ Robert D. Hardy
- -----------------------
Robert D. Hardy
Chief Financial Officer
-56-
NL INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
Items 8, 15(a) and 15(d)
Index of Financial Statements and Schedules
Financial Statements Pages
- -------------------- -----
Report of Independent Accountants F-2
Consolidated Balance Sheets - December 31, 2002 and 2001 F-3 / F-4
Consolidated Statements of Income - Years ended
December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Comprehensive Income - Years
ended December 31, 2002, 2001 and 2000 F-6
Consolidated Statements of Shareholders' Equity - Years
ended December 31, 2002, 2001 and 2000 F-7
Consolidated Statements of Cash Flows - Years ended
December 31, 2002, 2001 and 2000 F-8 / F-10
Notes to Consolidated Financial Statements F-11 / F-50
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.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, shareholders'
equity and cash flows present fairly, in all material respects, the consolidated
financial position of NL Industries, Inc. at December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Houston, Texas
February 12, 2003
F-2
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(In thousands, except per share data)
ASSETS 2002 2001
---------- ----------
Current assets:
Cash and cash equivalents ........................ $ 58,091 $ 116,037
Restricted cash equivalents ...................... 52,089 63,257
Restricted marketable debt securities ............ 9,670 3,583
Accounts and notes receivable .................... 136,858 125,721
Receivable from affiliates ....................... 207 3,698
Refundable income taxes .......................... 1,782 1,530
Inventories ...................................... 209,882 231,056
Prepaid expenses ................................. 7,207 5,912
Deferred income taxes ............................ 10,511 11,011
---------- ----------
Total current assets ......................... 486,297 561,805
---------- ----------
Other assets:
Marketable equity securities ..................... 40,901 45,227
Receivable from affiliates ....................... 18,000 31,650
Investment in TiO2 manufacturing joint venture ... 130,009 138,428
Prepaid pension cost ............................. 17,572 18,411
Restricted marketable debt securities ............ 9,232 16,121
Other ............................................ 30,671 9,699
---------- ----------
Total other assets ........................... 246,385 259,536
---------- ----------
Property and equipment:
Land ............................................. 29,072 24,579
Buildings ........................................ 150,406 130,710
Machinery and equipment .......................... 640,297 537,958
Mining properties ................................ 84,778 67,649
Construction in progress ......................... 8,702 5,071
---------- ----------
913,255 765,967
Less accumulated depreciation and depletion ...... 534,436 436,217
---------- ----------
Net property and equipment ................... 378,819 329,750
---------- ----------
$1,111,501 $1,151,091
========== ==========
F-3
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2002 and 2001
(In thousands, except per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001
----------- -----------
Current liabilities:
Notes payable ...................................... $ -- $ 46,201
Current maturities of long-term debt ............... 1,298 1,033
Accounts payable and accrued liabilities ........... 167,574 176,223
Payable to affiliates .............................. 8,027 6,919
Accrued environmental costs ........................ 51,307 59,891
Income taxes ....................................... 6,624 7,277
Deferred income taxes .............................. 3,219 1,530
----------- -----------
Total current liabilities ...................... 238,049 299,074
----------- -----------
Noncurrent liabilities:
Long-term debt ..................................... 324,608 195,465
Deferred income taxes .............................. 143,518 143,256
Accrued environmental costs ........................ 47,189 47,589
Accrued pension cost ............................... 43,757 26,985
Accrued postretirement benefits cost ............... 26,477 29,842
Other .............................................. 14,060 14,729
----------- -----------
Total noncurrent liabilities ................... 599,609 457,866
----------- -----------
Minority interest ...................................... 8,516 7,208
----------- -----------
Shareholders' equity:
Preferred stock - 5,000 shares authorized, no shares
issued or outstanding ............................ -- --
Common stock - $.125 par value; 150,000 shares
authorized; 66,845 and 66,845 shares issued ...... 8,355 8,355
Additional paid-in capital ......................... 777,819 777,597
Retained earnings .................................. 101,554 222,722
Accumulated other comprehensive income (loss):
Currency translation ........................... (170,670) (208,349)
Marketable securities .......................... 5,896 8,350
Pension liabilities ............................ (21,447) (6,352)
Treasury stock, at cost (19,155 and 17,808 shares) . (436,180) (415,380)
----------- -----------
Total shareholders' equity ..................... 265,327 386,943
----------- -----------
$ 1,111,501 $ 1,151,091
=========== ===========
Commitments and contingencies (Notes 8, 17 and 23)
See accompanying notes to consolidated financial statements.
F-4
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2002, 2001 and 2000
(In thousands, except per share data)
2002 2001 2000
---------- ---------- ----------
Revenues and other income:
Net sales ....................................... $ 875,188 $ 835,099 $ 922,319
Litigation settlement gains, net ................ 5,225 11,730 69,465
Insurance recoveries, net ....................... -- 17,468 --
Other income, net ............................... 16,814 23,136 23,283
---------- ---------- ----------
897,227 887,433 1,015,067
---------- ---------- ----------
Costs and expenses:
Cost of sales ................................... 671,830 578,060 610,449
Selling, general and administrative ............. 145,535 124,512 137,178
Interest ........................................ 29,752 27,569 32,369
---------- ---------- ----------
847,117 730,141 779,996
---------- ---------- ----------
Income before income taxes and minority
interest .................................. 50,110 157,292 235,071
Income tax expense .................................. 12,036 34,925 78,026
---------- ---------- ----------
Income before minority interest ............. 38,074 122,367 157,045
Minority interest ................................... 1,264 960 2,436
---------- ---------- ----------
Net income .................................. $ 36,810 $ 121,407 $ 154,609
========== ========== ==========
Net income per share:
Basic ........................................... $ .76 $ 2.44 $ 3.07
========== ========== ==========
Diluted ......................................... $ .76 $ 2.44 $ 3.05
========== ========== ==========
Weighted average shares used in the
calculation of net income per share:
Basic ........................................... 48,530 49,732 50,415
Dilutive impact of stock options ................ 82 124 334
---------- ---------- ----------
Diluted ......................................... 48,612 49,856 50,749
========== ========== ==========
See accompanying notes to consolidated financial statements
F-5
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
--------- --------- ---------
Net income ................................... $ 36,810 $ 121,407 $ 154,609
--------- --------- ---------
Other comprehensive (loss) income, net of tax:
Marketable securities adjustment:
Unrealized holding (losses) gains
arising during the period .......... (2,454) (1,275) 4,064
Add: reclassification adjustment
for loss included in net income .... -- 740 1,964
--------- --------- ---------
(2,454) (535) 6,028
Minimum pension liabilities adjustment ... (15,095) (6,352) 1,756
Currency translation adjustment .......... 37,679 (17,592) (30,735)
--------- --------- ---------
Total other comprehensive income
(loss) ............................. 20,130 (24,479) (22,951)
--------- --------- ---------
Comprehensive income ..................... $ 56,940 $ 96,928 $ 131,658
========= ========= =========
See accompanying notes to consolidated financial statements
F-6
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2002, 2001 and 2000
(In thousands, except per share data)
Accumulated other
comprehensive income (loss)
Additional -------------------------------------
Common paid-in Retained Currency Pension Marketable
stock capital earnings translation liabilities securities
--------- ---------- --------- ----------- ----------- ------------
Balance at December 31, 1999 ................ $ 8,355 $ 774,304 $ 19,150 $(160,022) $ (1,756) $ 2,857
Net income .................................. -- -- 154,609 -- -- --
Other comprehensive income (loss), net of tax -- -- -- (30,735) 1,756 6,028
Common dividends declared - $.65 per share .. -- -- (32,686) -- -- --
Tax benefit of stock options exercised ...... -- 3,224 -- -- -- --
Treasury stock:
Acquired ................................ -- -- -- -- -- --
Reissued ................................ -- -- -- -- -- --
--------- --------- --------- ---------- --------- ---------
Balance at December 31, 2000 ................ 8,355 777,528 141,073 (190,757) -- 8,885
Net income .................................. -- -- 121,407 -- -- --
Other comprehensive loss, net of tax ........ -- -- -- (17,592) (6,352) (535)
Common dividends declared - $.80 per share .. -- -- (39,758) -- -- --
Tax benefit of stock options exercised ...... -- 69 -- -- -- --
Treasury stock:
Acquired ................................ -- -- -- -- -- --
Reissued ................................ -- -- -- -- -- --
--------- --------- --------- ---------- --------- ---------
Balance at December 31, 2001 ................ 8,355 777,597 222,722 (208,349) (6,352) 8,350
Net income .................................. -- -- 36,810 -- -- --
Other comprehensive income (loss), net of tax -- -- -- 37,679 (15,095) (2,454)
Common dividends declared - $3.30 per share -- -- (157,978) -- -- --
Tax benefit of stock options exercised ...... -- 222 -- -- -- --
Treasury stock:
Acquired ................................ -- -- -- -- -- --
Reissued ................................ -- -- -- -- -- --
--------- --------- --------- ---------- --------- ---------
Balance at December 31, 2002 ................ $ 8,355 $ 777,819 $ 101,554 $ (170,670) $(21,447) $ 5,896
========= ========= ========= ========== ========= =========
Treasury
stock Total
--------- ---------
Balance at December 31, 1999 ................ $(371,801) $ 271,087
Net income .................................. -- 154,609
Other comprehensive income (loss), net of tax -- (22,951)
Common dividends declared - $.65 per share .. -- (32,686)
Tax benefit of stock options exercised ...... -- 3,224
Treasury stock:
Acquired ................................ (30,886) (30,886)
Reissued ................................ 2,091 2,091
--------- ---------
Balance at December 31, 2000 ................ (400,596) 344,488
Net income .................................. -- 121,407
Other comprehensive loss, net of tax ........ -- (24,479)
Common dividends declared - $.80 per share .. -- (39,758)
Tax benefit of stock options exercised ...... -- 69
Treasury stock:
Acquired ................................ (15,502) (15,502)
Reissued ................................ 718 718
--------- ---------
Balance at December 31, 2001 ................ (415,380) 386,943
Net income .................................. -- 36,810
Other comprehensive income (loss), net of tax -- 20,130
Common dividends declared - $3.30 per share -- (157,978)
Tax benefit of stock options exercised ...... -- 222
Treasury stock:
Acquired ................................ (21,254) (21,254)
Reissued ................................ 454 454
--------- ---------
Balance at December 31, 2002 ................ $(436,180) $ 265,327
========= =========
See accompanying notes to consolidated financial statements
F-7
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net income ................................ $ 36,810 $ 121,407 $ 154,609
Depreciation, depletion and amortization .. 33,221 29,599 29,733
Noncash interest income on restricted cash
and restricted marketable debt securities (1,762) (3,580) (1,531)
Noncash interest expense .................. 1,768 467 1,725
Deferred income taxes ..................... 1,506 3,256 40,186
Minority interest ......................... 1,264 960 2,436
Net losses (gains) from:
Securities transactions ............... 105 1,133 (2,531)
Disposition of property and equipment . 625 735 1,562
Pension cost, net ......................... (2,316) (2,967) (11,816)
Other postretirement benefits, net ........ (3,385) 531 1,062
Distributions from TiO2 manufacturing joint
venture ................................. 7,950 11,313 7,550
Litigation settlement gains, net .......... -- (10,307) (69,465)
Insurance recoveries, net ................. -- (17,468) --
Other, net ................................ -- 261 --
--------- --------- ---------
75,786 135,340 153,520
Change in assets and liabilities:
Accounts and notes receivable ........... 4,788 902 1,417
Inventories ............................. 42,249 (32,698) (23,395)
Prepaid expenses ........................ (545) (2,200) (617)
Accounts payable and accrued liabilities (32,310) 31,091 9,301
Income taxes ............................ (2,036) 4,107 4,449
Accounts with affiliates ................ 3,800 (5,670) (123)
Accrued environmental costs ............. 8,913 7,068 (1,279)
Other noncurrent assets ................. 150 (263) 205
Other noncurrent liabilities ............ (2,544) (7,944) (3,723)
--------- --------- ---------
Net cash provided by operating
activities ........................ 98,251 129,733 139,755
--------- --------- ---------
F-8
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
------------- ------------ -------------
Cash flows from investing activities:
Capital expenditures ......................... $ (32,600) $ (53,669) $ (31,089)
Loans to affiliates:
Loans .................................... -- (33,400) --
Collections .............................. 14,650 750 --
Acquisition of business ...................... (9,149) -- --
Property damaged by fire:
Insurance proceeds ....................... -- 23,361 --
Other, net ............................... -- (3,205) --
Purchase of Tremont Corporation common stock . -- -- (26,040)
Change in restricted cash equivalents and
restricted marketable debt securities, net . (960) 8,509 630
Proceeds from disposition of property and
equipment .................................. 873 419 139
Proceeds from disposition of marketable
securities ................................. -- 4 158
Other, net ................................... -- -- (33)
--------- --------- ---------
Net cash used by investing activities .... (27,186) (57,231) (56,235)
--------- --------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ............................... 335,768 1,437 44,923
Principal payments ....................... (278,814) (22,428) (79,162)
Deferred financing fees .................. (10,706) -- --
Dividends paid ............................... (157,978) (39,758) (32,686)
Treasury stock:
Purchased ................................ (21,254) (15,502) (30,886)
Reissued ................................. 454 718 2,091
Distributions to minority interests .......... (11) (5) (6)
--------- --------- ---------
Net cash used by financing activities .... (132,541) (75,538) (95,726)
--------- --------- ---------
Net change during the year from operating,
investing and financing activities ..... $ (61,476) $ (3,036) $ (12,206)
========= ========= =========
F-9
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
--------- --------- ---------
Cash and cash equivalents:
Net change during the year from:
Operating, investing and financing activities. $ (61,476) $ (3,036) $ (12,206)
Currency translation ......................... 3,334 (1,305) (1,640)
Acquisition of business ...................... 196 -- --
--------- --------- ---------
(57,946) (4,341) (13,846)
Balance at beginning of year ................. 116,037 120,378 134,224
--------- --------- ---------
Balance at end of year ....................... $ 58,091 $ 116,037 $ 120,378
========= ========= =========
Supplemental disclosures - cash paid for:
Interest ......................................... $ 32,896 $ 27,143 $ 32,354
Income taxes ..................................... 9,715 29,770 33,398
Acquisition of business:
Cash and cash equivalents .................... $ 196 $ -- $ --
Restricted cash .............................. 2,685 -- --
Goodwill and other intangible assets ......... 9,007 -- --
Other noncash assets ......................... 1,259 -- --
Liabilities .................................. (3,998) -- --
--------- --------- ---------
Cash paid ................................ $ 9,149 $ -- $ --
========= ========= =========
See accompanying notes to consolidated financial statements.
F-10
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
NL Industries, Inc. ("NL") conducts its titanium dioxide pigments
("TiO2") operations through its wholly owned subsidiary, Kronos, Inc.
("Kronos"). At December 31, 2002, Valhi, Inc. ("Valhi") and Tremont Corporation
("Tremont"), each affiliates of Contran Corporation ("Contran"), held
approximately 63% and 21%, respectively, of NL's outstanding common stock. At
December 31, 2002, Contran and its subsidiaries held approximately 93% of
Valhi's outstanding common stock, and Tremont Group, Inc. ("Tremont Group"),
which is 80% owned by Valhi and 20% owned by NL, held approximately 80% of
Tremont's outstanding common stock. Substantially all of Contran's outstanding
voting stock is held by trusts established for the benefit of certain children
and grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee.
Mr. Simmons, the Chairman of the Board of each of Contran, Valhi and NL and a
director of Tremont, may be deemed to control each of such companies. See Notes
7, 8 and 22.
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. Certain
prior-year amounts have been reclassified to conform to the current year
presentation. The preparation of financial statements in conformity with
generally accepted accounting principles in the U.S. ("GAAP") 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. Actual results may differ from previously
estimated amounts under different assumptions or conditions. The Company has no
involvement with any variable interest entity covered by the scope of FASB
Interpretation ("FIN") No. 46, " Consolidation of Variable Interest Entities."
Translation of foreign currencies
Assets and liabilities of subsidiaries whose functional currency is
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 are included in
other comprehensive income (loss), net of related income taxes. Currency
transaction gains and losses are recognized in income currently.
Cash equivalents
Cash equivalents include U.S. Treasury securities purchased under
short-term agreements to resell and bank deposits with original maturities of
three months or less.
F-11
Restricted cash equivalents and restricted marketable debt securities
Restricted cash equivalents and restricted marketable debt securities
are primarily invested in U.S. government securities and money market funds that
invest primarily in U.S. government securities. At December 31, 2002 and 2001,
restricted cash equivalents and restricted marketable debt securities of
approximately $9.6 million and $8.6 million, respectively, collateralized
undrawn letters of credit, and restricted cash equivalents and restricted
marketable debt securities of approximately $59.0 million and $74.4 million,
respectively, were held by trusts established to pay future environmental
remediation obligations and other environmental expenditures of the Company.
Generally, restricted cash and restricted marketable debt securities are
classified as either a current or noncurrent asset depending upon the
classification of the liability to which the restricted amount relates.
Additionally, restricted marketable debt securities are generally classified as
either current or noncurrent assets depending upon the maturity date of each
restricted marketable debt security and are carried at market which approximates
cost. Unrealized gains and losses on available-for-sale debt securities are
included in other comprehensive income (loss), net of related deferred income
taxes. See Note 7. Gains and losses on available-for-sale debt securities are
recognized in income upon realization and are computed based on specific
identification of the debt securities sold.
Marketable equity securities and securities transactions
Marketable equity securities are carried at market based on quoted
market prices. Unrealized gains and losses on available-for-sale equity
securities are included in other comprehensive income (loss), net of related
deferred income taxes. See Note 7. Gains and losses on available-for-sale equity
securities are recognized in income upon realization and are computed based on
specific identification of the equity securities sold. Declines in value that
are judged to be other-than-temporary are reported in other income, net.
Inventories
Inventories are stated at the lower of cost (principally average cost)
or market. Amounts are removed from inventories at average cost.
Investment in TiO2 manufacturing joint venture
Investment in a 50%-owned manufacturing joint venture is accounted for
by the equity method.
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. Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for 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-12
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. Effective January 1, 2002, the Company commenced accounting for
impairment of other long-lived assets (such as property and equipment and mining
properties) in accordance with Statement of Financial Accounting Standards
("SFAS") No. 144 as discussed under "Accounting principles adopted in 2002."
Long-term debt
Where applicable, 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 14.
The Company has elected the disclosure alternative prescribed by SFAS
No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," and to
account for its stock-based employee compensation related to stock options 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.
During the fourth quarter of 2002, following the cash settlement of certain
stock options held by employees of the Company, the Company commenced accounting
for its remaining stock options using the variable accounting method, which
requires the intrinsic value of the stock option to be accrued as an expense.
Compensation cost recognized by the Company in accordance with APBO No. 25 was
$3.2 million in 2002, nil in 2001 and $1.7 million in 2000.
F-13
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation.
Years ended December 31,
---------------------------------------------
2002 2001 2000
-------------- ------------- -------------
(In thousands except per share amounts)
Net income - as reported $ 36,810 $ 121,407 $ 154,609
Add back: Stock-based compensation cost, net of
tax, included in reported net income 2,137 - 1,143
Deduct: Stock-based compensation cost, net of
tax, determined under fair value based method
for all awards (1,082) (1,651) (1,616)
-------------- ------------- -------------
Net income - pro forma $ 37,865 $ 119,756 $ 154,136
============== ============= =============
Net income per basic common share:
As reported $ .76 $ 2.44 $ 3.07
Pro forma $ .78 2.41 3.06
Net income per diluted common share:
As reported $ .76 $ 2.44 $ 3.05
Pro forma $ .78 $ 2.40 $ 3.04
Environmental remediation costs
Environmental remediation costs are accrued when estimated future
expenditures are probable and reasonably estimable. The estimated future
expenditures are generally 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, 2002 and 2001, no receivables
for recoveries have been recognized.
Net sales
The Company adopted the Securities and Exchange Commission's ("SEC")
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," as amended, in 2000. Revenue generally is realized or realizable
and earned when all of the requirements of SAB No. 101 are met, including when
title and the risks and rewards of ownership passes to the customer (generally
at the time the product is shipped to the customer). The impact of adopting SAB
No. 101 was not material. Amounts charged to customers for shipping and handling
are included in net sales.
Repair and maintenance costs
The Company performs planned major maintenance activities during the
year. Repair and maintenance costs estimated to be incurred in connection with
planned major maintenance activities are accrued in advance and are included in
cost of goods sold.
Shipping and handling costs
Shipping and handling costs are included in selling, general and
administrative expense and were $51 million in 2002, $49 million in 2001 and $50
million in 2000.
F-14
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
Company's U.S. tax group (the "NL Tax Group"). The Company periodically
evaluates its deferred tax assets in the various taxing jurisdictions in which
it operates 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" recognition criteria.
Effective January 1, 2001, the Company and its qualifying subsidiaries
were included in the consolidated U.S. federal tax return of Contran (the
"Contran Tax Group"). As a member of the Contran Tax Group, the Company is a
party to a tax sharing agreement (the "Contran Tax Agreement"). The Contran Tax
Agreement provides that the Company compute its provision for U.S. income taxes
on a separate-company basis using the tax elections made by Contran. Pursuant to
the Contran Tax Agreement and using the tax elections made by Contran, the
Company makes payments to or receives payments from Valhi in amounts it would
have paid to or received from the U.S. Internal Revenue Service had it not been
a member of the Contran Tax Group. Refunds are limited to amounts previously
paid under the Contran Tax Agreement unless the Company was entitled to a refund
from the U.S. Internal Revenue Service on a separate company basis. Pursuant to
the Contran Tax Agreement, the Company received $2.3 million in 2002 from Valhi
related to capital loss carrybacks generated in 2001 which would have been
recoverable from the U.S. Internal Revenue Service.
Derivatives and hedging activities
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, effective January 1, 2001. 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 are recognized as either assets or
liabilities and measured at fair value. The accounting for changes in fair value
of derivatives is dependent upon the intended use of the derivative. As
permitted by the transition requirements of SFAS No. 133, as amended, the
Company exempted from the scope of SFAS No. 133 all host contracts containing
embedded derivatives which were issued or acquired prior to January 1, 1999. At
December 31, 2002 and 2001, the Company was not a party to any significant
derivative or hedging instrument covered by SFAS No. 133. There was no impact on
the Company's financial statements from adopting SFAS No. 133.
The Company periodically uses interest rate swaps, currency swaps and
other types of contracts to manage interest rate and foreign exchange risk with
respect to financial assets or liabilities. The Company has not entered into
these contracts for trading or speculative purposes in the past, nor does it
currently anticipate doing so in the future. The Company was not a party to any
such contracts during 2002, 2001 and 2000.
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 number of common shares outstanding and the
dilutive impact of outstanding stock options. The weighted average number of
F-15
outstanding stock options, which were excluded from the calculation of diluted
earnings per share because their impact would have been antidilutive, aggregated
788,000, 876,000 and 222,000 in 2002, 2001 and 2000, respectively. There were no
adjustments to net income in the computation of the diluted earnings per share
amounts.
Accounting principles adopted in 2002
The Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," effective January 1, 2002. Under SFAS No. 142, goodwill, including
goodwill arising from the difference between the cost of an investment accounted
for by the equity method and the amount of the underlying equity in net assets
of such equity method investee ("equity method goodwill"), will not be amortized
on a periodic basis. Instead, goodwill (other than equity method goodwill) will
be subject to an impairment test to be performed at least on an annual basis,
and impairment reviews may result in future periodic write-downs charged to
earnings. Equity method goodwill will not be tested for impairment in accordance
with SFAS No. 142; rather, the overall carrying amount of an equity method
investee will continue to be reviewed for impairment in accordance with existing
GAAP. There is currently no equity method goodwill associated with the Company's
equity method investee. All goodwill arising in a purchase business combination
(including step acquisitions) completed on or after July 1, 2001 would not be
periodically amortized from the date of such combination. The Company had
goodwill of $6.4 million at December 31, 2002 which was generated during January
2002. The Company had no goodwill recognized as of the January 1, 2002 date of
adoption of SFAS No. 142. See Note 3.
The Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," effective January 1, 2002. SFAS No. 144 retains
the fundamental provisions of existing GAAP with respect to the recognition and
measurement of long-lived asset impairment contained in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." However, SFAS No. 144 provides new guidance intended to address
certain significant implementation issues associated with SFAS No. 121,
including expanded guidance with respect to appropriate cash flows to be used to
determine whether recognition of any long-lived asset impairment is required,
and if required how to measure the amount of the impairment. SFAS No. 144 also
requires that any net assets to be disposed of by sale to be reported at the
lower of carrying value or fair value less cost to sell, and expands the
reporting of discontinued operations to include any component of an entity with
operations and cash flows that can be clearly distinguished from the rest of the
entity. The adoption of SFAS No. 144 effective January 1, 2002 did not have a
material effect on the Company's consolidated financial position, results of
operations or liquidity.
The Company adopted SFAS No. 145, "Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections"
effective April 1, 2002. SFAS No. 145, among other things, eliminated the prior
requirement that all gains and losses from the early extinguishment of debt were
to be classified as an extraordinary item. Upon adoption of SFAS No. 145, gains
and losses from the early extinguishment of debt are now classified as an
extraordinary item only if they meet the "unusual and infrequent" criteria
contained in APBO No. 30. In addition, upon adoption of SFAS No. 145, all gains
and losses from the early extinguishment of debt that had previously been
classified as an extraordinary item are to be reassessed to determine if they
would have met the "unusual and infrequent" criteria of APBO No. 30; any such
gain or loss that would not have met the APBO No. 30 criteria are retroactively
reclassified and reported as a component of income before extraordinary item.
The Company has concluded that all of its previously-recognized gains and losses
from the early extinguishment of debt that occurred on or after January 1, 1998
would not have met the APBO No. 30 criteria for classification as an
extraordinary item, and accordingly such previously-reported gains and losses
from the early extinguishment of debt have been retroactively reclassified and
F-16
reported as a component of income before extraordinary item. The effect of
adoption for the year ended December 31, 2002 was a second-quarter 2002
reclassification of a first-quarter 2002 loss of $92,000 ($60,000, net of income
tax benefit) from extraordinary item to interest expense. The effect of adoption
for the year ended December 31, 2000 was a reclassification of a $1,126,000 loss
($732,000, net of income tax benefit) from extraordinary item to interest
expense. Previously reported net income did not change as a result of adopting
SFAS No. 145.
In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN No. 45 requires a guarantor to recognize a
liability at the inception of a guarantee covered by the scope of FIN No. 45,
equal to the fair value of the obligation undertaken in issuing the guarantee.
FIN No. 45 also expands the disclosures requirements with respect to certain
guarantees. The initial recognition and measurement provisions of FIN No. 45 are
applicable on a prospective basis for any guarantees issued or modified after
December 31, 2002, while the disclosure requirements were effective upon
issuance. The Company is not a party to any guarantees covered by the scope of
FIN No. 45 as of December 31, 2002.
Accounting principles not yet adopted
The Company will adopt SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective January 1, 2003. Under SFAS No. 143, the fair value of a
liability for an asset retirement obligation covered under the scope of SFAS No.
143 would be recognized in the period in which the liability is incurred, with
an offsetting increase in the carrying amount of the related long-lived asset.
Over time, the liability would be accreted to its present value, and the
capitalized cost would be depreciated over the useful life of the related asset.
Upon settlement of the liability, an entity would either settle the obligation
for its recorded amount or incur a gain or loss upon settlement.
Under the transition provisions of SFAS No. 143, at the date of adoption
on January 1, 2003 the Company will recognize (i) an asset retirement cost
capitalized as an increase to the carrying value of its property, plant and
equipment, (ii) accumulated depreciation on such capitalized cost and (iii) a
liability for the asset retirement obligation. Amounts resulting from the
initial application of SFAS No. 143 are measured using information, assumptions
and interest rates all as of January 1, 2003. The amount recognized as the asset
retirement cost is measured as of the date the asset retirement obligation was
incurred. Cumulative accretion on the asset retirement obligation, and
accumulated depreciation on the asset retirement cost, is recognized for the
time period from the date the asset retirement cost and liability would have
been recognized had the provisions of SFAS No. 143 been in effect at the date
the liability was incurred, through January 1, 2003. The difference, if any,
between the amounts to be recognized as described above and any associated
amounts recognized in the Company's balance sheet as of December 31, 2002 would
be recognized as a cumulative effect of a change in accounting principles as of
the date of adoption. The effect of adopting SFAS No. 143 as of January 1, 2003
as summarized in the table below is not expected to have a material effect on
the Company's consolidated financial position, results of operations or
liquidity:
F-17
Amount
------------
(In millions)
Increase in carrying value of net property, plant and equipment:
Cost ................................................................ $ .4
Accumulated depreciation ............................................ (.1)
Decrease in liabilities previously accrued for closure
and post closure activities ......................................... .2
Asset retirement obligation recognized .................................. (.5)
----
Net impact ...................................................... $ --
====
The Company will adopt SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," effective January 1, 2003 for exit or
disposal activities initiated on or after the date of adoption. Under SFAS No.
146, costs associated with exit activities, as defined, that are covered by the
scope of SFAS No. 146 will be recognized and measured initially at fair value,
generally in the period in which the liability is incurred. Costs covered by the
scope of SFAS No. 146 include termination benefits provided to employees, costs
to consolidate facilities or relocate employees, and costs to terminate
contracts (other than a capital lease). Under existing GAAP, a liability for
such an exit cost is recognized at the date an exit plan is adopted, which may
or may not be the date at which the liability has been incurred. The Company
believes the adoption of SFAS No. 146 will not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
Note 3 - Business combination
In January 2002, the Company acquired all of the stock and limited
liability company units of EWI RE, Inc. and EWI RE, Ltd. (collectively "EWI"),
respectively, for an aggregate of $9.2 million in cash, including acquisition
costs of $.2 million. An entity controlled by one of Harold C. Simmons'
daughters owned a majority of EWI, and a wholly owned subsidiary of Contran
owned the remainder of EWI. Through December 31, 2000, Harold C. Simmons'
son-in-law managed the operations of EWI. Subsequent to December 31, 2000 and
pursuant to an agreement that, as amended, is effective until terminated by
either party with 90 days notice, such son-in-law provides advisory services to
EWI as requested by EWI, for which such son-in-law is paid $11,875 per month and
receives certain other benefits under EWI's benefit plans. EWI provides
reinsurance brokerage services for insurance policies of the Company, its joint
venture and other affiliates of Contran as well as external third-party
customers. The purchase was approved by a special committee of the Company's
Board of Directors consisting of two of its directors unrelated to Contran, and
the purchase price was negotiated by the special committee based upon its
consideration of relevant factors, including but not limited to due diligence
performed by independent consultants and an appraisal of EWI conducted by an
independent third party selected by the special committee.
EWI's results of operations and cash flows are included in the Company's
consolidated results of operations and cash flows beginning January 2002. The
pro forma effect on the Company's results of operations at December 31, 2001,
assuming the acquisition of EWI had occurred as of January 1, 2001, is not
material. The aggregate cash purchase price of $9.2 million (including
acquisition costs of $.2 million) has been allocated to the assets acquired and
liabilities assumed, including definite-lived, customer list intangible asset of
$2.6 million and goodwill of $6.4 million, based upon estimates of fair value.
The intangible asset and goodwill were included in other noncurrent assets at
December 31, 2002. See Note 9. The intangible asset will be amortized on a
straight-line basis over a period of seven years (approximately six years
F-18
remaining at December 31, 2002) with no assumed residual value. Goodwill will
not be amortized on a periodic basis but instead will subject to periodic
impairment tests in accordance with the requirements of SFAS No. 142. See Note
2.
Note 4 - Business and geographic segments:
The Company's operations are conducted by Kronos in one operating
business segment - the production and sale of TiO2. Titanium dioxide pigments
are used to impart whiteness, brightness and opacity to a wide variety of
products, including paints, plastics, paper, fibers and ceramics. At December
31, 2002 and 2001, the net assets of non-U.S. subsidiaries included in
consolidated net assets approximated $159 million and $394 million,
respectively.
The Company evaluates its TiO2 segment performance based on operating
income. Operating income is defined as income before income taxes, minority
interest, extraordinary items, interest expense, certain nonrecurring items and
certain general corporate items. Corporate items excluded from operating income
include corporate expense, interest and dividend income not attributable to TiO2
operations, litigation settlement gains, securities transaction gains and losses
and gains and losses from the disposal of long-lived assets outside the ordinary
course of business. The accounting policies of the TiO2 segment are the same as
those described in Note 2. Interest income included in the calculation of TiO2
operating income is disclosed in Note 18 as "Trade interest income."
Segment assets are comprised of all assets attributable to the
reportable operating segment. The Company's investment in the TiO2 manufacturing
joint venture (see Note 10) is included in TiO2 business segment assets.
Corporate assets are not attributable to the TiO2 operating segment and consist
principally of cash, cash equivalents, restricted cash equivalents, restricted
marketable debt securities, marketable equity securities, EWI reinsurance
brokerage services net assets, and certain receivables from affiliates. For
geographic information, net sales are attributed to the place of manufacture
(point of origin) and the location of the customer (point of destination);
property and equipment are attributed to their physical location.
F-19
Years ended December 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
(In thousands)
Business segment - TiO2
Net sales ................................. $ 875,188 $ 835,099 $ 922,319
Other income, excluding corporate ......... 824 10,815 8,167
--------- --------- ---------
876,012 845,914 930,486
Cost of sales ............................. 671,830 578,060 610,449
Selling, general and administrative,
excluding corporate ..................... 107,675 98,667 107,554
--------- --------- ---------
Operating income ...................... 96,507 169,187 212,483
Insurance recoveries, net ................. -- 17,468 --
--------- --------- ---------
Income before corporate items, income
taxes and minority interest ......... 96,507 186,655 212,483
General corporate income (expense):
Securities earnings:
Interest and dividends ............ 5,739 8,886 8,346
Securities transactions, net ...... (105) (1,133) 2,531
Litigation settlement gains, net and
other income ........................ 15,581 16,298 73,704
Corporate expense ..................... (37,860) (25,845) (29,624)
Interest expense ...................... (29,752) (27,569) (32,369)
--------- --------- ---------
Income before income taxes and minority
interest ............................ $ 50,110 $ 157,292 $ 235,071
========= ========= =========
Capital expenditures:
Kronos ................................ $ 32,571 $ 53,656 $ 31,066
General corporate ..................... 29 13 23
--------- --------- ---------
$ 32,600 $ 53,669 $ 31,089
========= ========= =========
Depreciation, depletion and amortization:
Kronos ................................ $ 32,152 $ 28,907 $ 28,989
General corporate ..................... 1,069 692 744
--------- --------- ---------
$ 33,221 $ 29,599 $ 29,733
========= ========= =========
F-20
Years ended December 31,
-------------------------------------
2002 2001 2000
--------- --------- ---------
(In thousands)
Geographic areas
Net sales - point of origin:
Germany .......................... $ 404,299 $ 398,470 $ 444,050
United States .................... 291,823 278,624 313,426
Canada ........................... 157,773 149,412 154,579
Belgium .......................... 123,760 126,782 137,829
Norway ........................... 111,811 102,843 98,300
Other ............................ 89,560 82,320 92,691
Eliminations ..................... (303,838) (303,352) (318,556)
--------- --------- ---------
$ 875,188 $ 835,099 $ 922,319
========= ========= =========
Net sales - point of destination:
Europe ........................... $ 456,834 $ 425,338 $ 480,388
United States .................... 271,865 258,347 283,327
Canada ........................... 53,371 47,061 53,060
Latin America .................... 19,970 25,514 27,104
Asia ............................. 47,549 46,169 45,922
Other ............................ 25,599 32,670 32,518
--------- --------- ---------
$ 875,188 $ 835,099 $ 922,319
========= ========= =========
December 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
(in thousands)
Identifiable assets
Net property and equipment:
Germany .......................... $ 213,170 $ 182,387 $ 173,385
Canada ........................... 54,719 54,676 57,929
Belgium .......................... 54,625 46,841 46,778
Norway ........................... 49,737 38,549 38,361
Other ............................ 6,568 7,297 7,929
---------- ---------- ----------
$ 378,819 $ 329,750 $ 324,382
========== ========== ==========
Total assets:
Kronos ........................... $ 939,349 $ 900,401 $ 893,340
General corporate ................ 172,152 250,690 227,448
---------- ---------- ----------
$1,111,501 $1,151,091 $1,120,788
========== ========== ==========
F-21
Note 5 - Accounts and notes receivable:
December 31,
-------------------------
2002 2001
--------- ---------
(In thousands)
Trade receivables .............................. $ 124,044 $ 99,989
Insurance claims receivable .................... 2,558 11,505
Recoverable VAT and other receivables .......... 12,861 16,585
Allowance for doubtful accounts ................ (2,605) (2,358)
--------- ---------
$ 136,858 $ 125,721
========= =========
Note 6 - Inventories:
December 31,
---------------------------
2002 2001
-------- --------
(In thousands)
Raw materials ............................ $ 54,077 $ 79,162
Work in process .......................... 15,936 9,675
Finished products ........................ 109,203 117,201
Supplies ................................. 30,666 25,018
-------- --------
$209,882 $231,056
======== ========
Note 7- Marketable equity securities and securities transactions:
December 31,
-------------------
2002 2001
------- -------
(in thousands)
Available-for-sale marketable equity securities:
Tremont Group ...................................... $30,634 $29,709
Valhi .............................................. 9,845 15,065
Tremont ............................................ 243 236
Other .............................................. 179 217
------- -------
Aggregate fair value ........................... $40,901 $45,227
======= =======
At both December 31, 2002 and 2001, the aggregate cost basis of the
Company's investment in Tremont Group, Valhi, Tremont and all other marketable
equity securities was $26.4 million, $5.9 million, $.1 million and nil,
respectively.
At December 31, 2002 and 2001, the Company owned 20% of Tremont Group
and Valhi owned the remaining 80%. Tremont Group's only asset is an 80%
ownership interest in Tremont. The Company's stock of Tremont Group was
redeemable at the option of the Company for fair value based on the value of the
underlying Tremont shares, and the Company accounted for its investment in
Tremont Group as an available-for-sale marketable security carried at fair value
based on the fair value of such underlying Tremont shares. At December 31, 2002
and 2001, the Company also directly held a nominal number of Tremont shares, and
owned 1,186,200 shares of Valhi common stock (approximately 1% of Valhi's
F-22
outstanding shares at each date). The Company accounts for its investment in its
parent companies as available-for-sale marketable securities carried at fair
value. See Note 1.
In February 2003 Valhi completed a series of merger transactions
pursuant to which, among other things, Tremont Group and Tremont both became
wholly owned subsidiaries of Valhi. Under these merger transactions, (i) Valhi
issued 3.5 million shares of its common stock to the Company in return for the
Company's 20% ownership interest in Tremont Group and (ii) Valhi issued 3.4
shares of its common stock (plus cash in lieu of fractional shares) to all
Tremont stockholders (other than Valhi and Tremont Group) in exchange for each
share of Tremont common stock held by such stockholders. The Company received
approximately 27,770 shares of Valhi common stock in the second transaction. The
number of shares of Valhi common stock issued to the Company in exchange for the
Company's 20% ownership interest in Tremont Group was equal to the Company's 20%
pro-rata interest in the shares of Tremont common stock held by Tremont Group,
adjusted for the same 3.4 exchange ratio. The Valhi common stock owned by the
Company is restricted under SEC Rule 144. The Company will report a pre-tax
securities transaction gain of approximately $2.3 million in the first quarter
of 2003 which represents the difference between the market value of the shares
of Valhi received and the cost basis of the Tremont Group and Tremont shares
exchanged. Following these transactions, the Company owns approximately 4.7
million shares of Valhi's outstanding common stock (approximately 4% of Valhi's
outstanding shares). The Company will continue to account for its shares of
Valhi common stock as available-for-sale marketable equity securities carried at
fair value. The shares of Valhi common stock cannot be voted by the Company
under Delaware Corporation Law, but the Company does receive dividends from
Valhi on these shares. For financial reporting purposes, Valhi reports its
proportional interest in these shares as treasury stock.
In 2001 the Company recognized noncash securities losses of $1.1 million
related to other-than-temporary declines in value of certain available-for-sale
marketable equity securities held by the Company. See Note 18.
Note 8 - Receivable from affiliates:
In February 2001 NL Environmental Management Services, Inc. ("EMS"), the
Company's majority-owned environmental management subsidiary, loaned $13.4
million to Tremont under a reducing revolving loan agreement that matured in
March 2003. See Note 1. The loan was approved by special committees of the
Company's and EMS's Boards of Directors. In October 2002 a special committee of
the Company's Board of Directors approved new loan terms proposed by Tremont,
whereby Tremont repaid the outstanding principal and interest balance on the EMS
loan with proceeds from a new $15 million revolving loan agreement with the
Company. As such, the EMS loan was extinguished and cancelled. Similar to the
EMS loan, the Company's loan to Tremont bears interest at prime plus 2% (6.25%
at December 31, 2002 with interest payable quarterly), and is collateralized by
10.2 million shares of NL common stock owned by Tremont. The loan is due
December 31, 2004, with no principal payments required prior to that date. The
maximum amount available to Tremont under the revolving loan agreement is $15
million. The creditworthiness of Tremont is dependent in part on the value of
the Company as Tremont's interest in the Company is Tremont's most substantial
asset. At December 31, 2002, no amounts were outstanding under this facility and
Tremont had $15 million of borrowing availability. As a result of the merger of
Tremont with Valhi in February 2003, the revolving loan agreement is now between
Tremont LLC (a wholly owned subsidiary of Valhi and successor to Tremont) and
NL.
F-23
In May 2001 a wholly owned subsidiary of EMS loaned $20.0 million to the
Harold C. Simmons Family Trust No. 2 (the "Family Trust"), one of the trusts
described in Note 1, under a $25.0 million revolving credit agreement. The loan
was approved by special committees of the Company's and EMS's Boards of
Directors. The loan bears interest at prime (4.25% at December 31, 2002), is due
on demand with 60 days notice and is collateralized by 13,749 shares, or
approximately 35%, of Contran's outstanding Class A voting common stock and
5,000 shares, or 100%, of Contran's Series E Cumulative preferred stock, both of
which are owned by the Family Trust. The value of the collateral is dependent,
in part, on the value of the Company as Contran's interest in the Company,
through its beneficial ownership of Valhi, is one of Contran's more substantial
assets. In November 2002 the Family Trust repaid $2 million principal amount of
the revolving credit agreement. At December 31, 2002, $7.0 million was available
for additional borrowing by the Family Trust. The loan was classified as
noncurrent at December 31, 2002, as the Company does not expect to demand
repayment within one year.
Note 9 - Other noncurrent assets:
December 31,
-----------------
2002 2001
------- -------
(In thousands)
Deferred financing costs, net (see Note 13) ................ $10,550 $ 848
Goodwill (see Note 3) ...................................... 6,406 --
Unrecognized net pension obligations (see Note 14) ......... 5,561 5,901
Intangible asset, net of accumulated amortization of $372
and nil (see Note 3) ..................................... 2,230 --
Restricted cash equivalents ................................ 1,344 --
Other ...................................................... 4,580 2,950
------- -------
$30,671 $ 9,699
======= =======
Note 10 - Investment in TiO2 manufacturing joint venture:
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 Americas Inc.
("Tioxide"), a wholly owned subsidiary of Huntsman International Holdings LLC, a
60%-owned subsidiary of Huntsman Corporation. LPC owns and operates a
chloride-process TiO2 plant in Lake Charles, Louisiana.
KLA is required to purchase one-half of the TiO2 produced by LPC. LPC
operates on a break-even basis and, accordingly, the Company reports no equity
in earnings of LPC. Kronos' cost for its share of the TiO2 produced is equal to
its share of LPC's costs. Kronos' share of net costs is reported as cost of
sales as the related TiO2 acquired from LPC is sold.
LPC made cash distributions of $15.9 million in 2002, $22.6 million in
2001 and $15.1 million in 2000, equally split between the partners.
F-24
Summary balance sheets of LPC are shown below.
December 31,
-----------------------
2002 2001
-------- --------
(In thousands)
ASSETS
Current assets ................................... $ 56,745 $ 45,872
Property and equipment, net ...................... 235,739 250,501
-------- --------
$292,484 $296,373
======== ========
LIABILITIES AND PARTNERS' EQUITY
Other liabilities, primarily current ............. $ 29,716 $ 16,767
Partners' equity ................................. 262,768 279,606
-------- --------
$292,484 $296,373
======== ========
Summary income statements of LPC are shown below.
Years ended December 31,
------------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
Revenues and other income:
Kronos ........................... $ 92,428 $ 93,393 $ 92,530
Tioxide .......................... 93,833 94,009 93,366
Interest ......................... 53 303 578
-------- -------- --------
186,314 187,705 186,474
-------- -------- --------
Cost and expenses:
Cost of sales .................... 185,946 187,295 186,045
General and administrative ....... 368 410 429
-------- -------- --------
186,314 187,705 186,474
-------- -------- --------
Net income ................... $ -- $ -- $ --
======== ======== ========
F-25
Note 11 - Accounts payable and accrued liabilities:
December 31,
---------------------------
2002 2001
-------- --------
(In thousands)
Accounts payable ......................... $ 97,140 $ 99,358
-------- --------
Accrued liabilities:
Employee benefits .................... 34,349 29,722
Interest ............................. 240 4,980
Deferred income ...................... 333 4,000
Other ................................ 35,512 38,163
-------- --------
70,434 76,865
-------- --------
$167,574 $176,223
======== ========
Note 12 - Other noncurrent liabilities:
December 31,
-------------------------
2002 2001
------- -------
(In thousands)
Insurance claims expense ................... $ 7,674 $ 8,789
Employee benefits .......................... 4,025 3,476
Deferred income ............................ -- 333
Other ...................................... 2,361 2,131
------- -------
$14,060 $14,729
======= =======
Note 13 - Notes payable and long-term debt:
December 31,
-------------------
2002 2001
-------- --------
(In thousands)
Notes payable - Kronos International, Inc. and subsidiaries $ -- $ 46,201
======== ========
Long-term debt:
NL Industries, Inc.:
11.75% Senior Secured Notes ....................... $ -- $194,000
Kronos International, Inc. and subsidiaries:
8.875% Senior Secured Notes ....................... 296,942 --
Revolving credit facility ......................... 27,077 --
Other ............................................. 1,887 2,498
-------- --------
325,906 196,498
Less current maturities ................................... 1,298 1,033
-------- --------
$324,608 $195,465
======== ========
F-26
Notes payable at December 31, 2001, consisted of (euro)27 million ($24.0
million) and NOK 200 million ($22.2 million). Notes payable totaling $53.2
million were repaid on June 28, 2002 with proceeds from the revolving credit
facility and available cash and the agreements were terminated. See description
of revolving credit facility below.
In June 2002 Kronos International, Inc. ("KII"), issued (euro)285
million ($280 million when issued and $297 million at December 31, 2002)
principal amount of 8.875% Senior Secured Notes (the "Notes") due 2009. The
Notes are collateralized by first priority liens on 65% of the common stock or
other equity interests of certain of KII's first-tier subsidiaries. The Notes
are issued pursuant to an indenture which contains a number of covenants and
restrictions which, among other things, restricts the ability of KII 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. In addition, the indenture contains customary cross-default provisions
with respect to other debt and obligations of KII or its subsidiaries. The Notes
are redeemable, at KII's option, on or after December 30, 2005 at redemption
prices ranging from 104.437% of the principal amount, declining to 100% on or
after December 30, 2008. In addition, on or before June 30, 2005, KII may redeem
up to 35% of its Notes with the net proceeds of a qualified public equity
offering at 108.875% of the principal amount. In the event of a change of
control of KII, as defined, KII would be required to make an offer to purchase
its Notes at 101% of the principal amount. KII would also be required to make an
offer to purchase a specified portion of its Notes at par value in the event KII
generates a certain amount of net proceeds from the sale of assets outside the
ordinary course of business, and such net proceeds are not otherwise used for
specified purposes within a specified time period. At December 31, 2002, KII was
in compliance with all the covenants, and the quoted market price of the Notes
was (euro)1,010 per (euro)1,000 principal amount. The Notes require cash
interest payments on June 30 and December 30, commencing on December 30, 2002.
KII completed an exchange offer on November 18, 2002 to exchange the Notes for
registered publicly traded notes that have substantially identical terms as the
Notes.
In March 2002 the Company redeemed $25 million principal amount of its
11.75% Senior Secured Notes due October 2003 at par value, using available cash
on hand. In addition, the Company used a portion of the net proceeds from the
issuance of the Notes to redeem in full the remaining $169 million principal
amount of the Company's 11.75% Senior Secured Notes. In accordance with the
terms of the indenture governing the 11.75% Senior Secured Notes, on June 28,
2002, the Company irrevocably placed on deposit with the trustee funds in an
amount sufficient to pay in full the redemption price plus all accrued and
unpaid interest due on the July 28, 2002 redemption date. Immediately
thereafter, the Company was released from its obligations under such indenture,
the indenture was discharged and all collateral was released to the Company.
Because the Company had been released as being the primary obligor under the
indenture as of June 30, 2002, the 11.75% Senior Secured Notes were derecognized
as of that date along with the funds placed on deposit with the trustee to
effect the July 28, 2002 redemption. The Company recognized a loss on the early
extinguishment of debt of approximately $2 million in the second quarter of
2002, consisting primarily of the interest on the 11.75% Senior Secured Notes
for the period from July 1 to July 28, 2002. Such loss was recognized as a
component of interest expense.
In June 2002 KII's operating subsidiaries in Germany, Belgium and Norway
(the "European Borrowers"), entered into a three-year (euro)80 million secured
revolving credit facility ("European Credit Facility"). The European Credit
Facility is available in multiple currencies, including U.S. dollars, euros and
Norwegian kroner. In addition, the European Credit Facility has a (euro)5.0
million sub limit available for issuance of letters of credit. As of December
31, 2002, (euro)15 million ($15.6 million) and NOK 80 million ($11.5 million)
were outstanding under the European Credit Facility and (euro)1.8 million ($1.8
million) of letters of credit was also outstanding under the European Credit
F-27
Facility. At December 31, 2002, approximately (euro)52 million (approximately
$54 million) was available for additional borrowings. Borrowings bear interest
at the applicable interbank market rate plus 1.75%. As of December 31, 2002, the
interest rate was 4.80% and 8.86% on the euro and Norwegian kroner borrowings,
respectively, and the weighted average interest rate was 6.51%.
The European Credit Facility is collateralized by accounts receivable
and inventory of the European Borrowers, plus a limited pledge of certain other
assets of the Belgian borrower. The European Credit Facility contains, among
others, various restrictive covenants, including restrictions on incurring
liens, asset sales, additional financial indebtedness, mergers, investments and
acquisitions, transactions with affiliates and dividends. In addition, the
European Credit Facility contains customary cross-default provisions with
respect to other debt and obligations of the European Borrowers, KII and its
other subsidiaries. The European Borrowers were in compliance with all the
covenants as of December 31, 2002.
In September 2002 the Company's U.S. operating subsidiaries (the "U.S.
Borrowers") entered into a three-year $50 million asset-based revolving credit
facility ("U.S. Credit Facility"). Under the terms of the U.S. Credit Facility,
the amount available for borrowing is based on a formula-derived borrowing base
using eligible accounts receivable and eligible inventory and is subject to
maintaining $5 million of minimum excess availability ("Borrowing
Availability"). The maximum amount available under the U.S. Credit Facility is
$45 million. Borrowings bear interest at either prime rate or eurodollar rates
plus a margin spread based on average excess availability under the U.S. Credit
Facility or certain levels of EBITDA (as defined) of the U.S. Borrowers. Margin
spreads range from 0.25% to 1.00% for prime rate borrowings and 2.00% to 2.75%
for eurodollar rate borrowings. The U.S. Credit Facility is available for future
working capital requirements and general corporate purposes of the U.S.
Borrowers, including dividend distributions. The U.S. Borrowers were in
compliance with all the covenants as of December 31, 2002. The U.S. Credit
Facility is collateralized by accounts receivable, inventory and certain fixed
assets of the U.S. Borrowers. The U.S. Credit Facility contains, among other
things, various restrictive and financial covenants including restrictions on
incurring liens, asset sales, mergers, and minimum EBITDA (as defined) of the
U.S. Borrowers and Kronos. As of December 31, 2002, no borrowings were
outstanding under the U.S. Credit Facility and Borrowing Availability was
approximately $30 million.
Deferred financing costs of $10.7 million for the Notes, the European
Credit Facility and the U.S. Credit Facility are being amortized over the life
of the respective agreements and are included in other noncurrent assets as of
December 31, 2002.
Unused lines of credit available for borrowing under the Company's
non-U.S. credit facilities approximated $57 million at December 31, 2002
(including approximately $54 million under the European Credit Facility of which
approximately $3.2 million is available for letters of credit).
F-28
The aggregate maturities of long-term debt at December 31, 2002 are
shown in the table below.
Years ending December 31,
Amount
-------------
(In thousands)
2003 .................................................. $ 1,298
2004 .................................................. 279
2005 .................................................. 27,224
2006 .................................................. 145
2007 .................................................. 18
2008 and thereafter ................................... 296,942
--------
$325,906
========
Note 14 - Employee benefit plans:
Company-sponsored pension plans
The Company maintains various defined benefit and defined contribution
pension plans covering substantially all employees. Non-U.S. employees are
covered by plans in their respective countries and a majority of U.S. employees
are eligible to participate in a contributory savings plan. The Company amended
its defined benefit pension plans in Belgium and Norway in 2002 to exclude the
admission of new employees to the plans. New employees of these particular
locations are eligible to participate in Company-sponsored defined contribution
plans.
The Company contributes to eligible U.S. employees' accounts an amount
equal to approximately 4% (in each of 2002, 2001 and 2000) of the employee's
annual eligible earnings and partially matches employee contributions to the
U.S. contributory savings plan. The Company also has a nonqualified defined
contribution plan covering certain executives, and participants receive benefits
based on a formula involving eligible earnings. The Company's expense related to
the U.S. and non-U.S. plans was $.4 million in 2002, $.8 million in 2001 and
$1.6 million in 2000.
Certain actuarial assumptions used in measuring the defined benefit
pension assets, liabilities and expenses are presented below.
December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(Percentages)
Discount rate ................................ 5.5 to 7.0 5.8 to 7.3 6.0 to 7.8
Rate of increase in future compensation levels 2.5 to 4.5 2.8 to 4.5 3.0 to 4.5
Long-term rate of return on plan assets ...... 6.8 to 8.5 6.8 to 8.5 7.0 to 9.0
F-29
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.
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 will change the actuarial valuation of accrued
pension liabilities, pension expense and funding requirements in future periods.
The components of the net periodic defined benefit pension cost are set
forth below.
Years ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
Net periodic pension cost:
Service cost benefits ....................... $ 4,538 $ 3,976 $ 4,063
Interest cost on projected benefit obligation
("PBO") ................................... 16,510 15,605 15,088
Expected return on plan assets .............. (16,099) (16,143) (15,403)
Amortization of prior service cost .......... 307 201 238
Amortization of net transition obligation ... 515 510 530
Recognized actuarial losses ................. 1,223 443 226
-------- -------- --------
$ 6,994 $ 4,592 $ 4,742
======== ======== ========
The funded status of the Company's defined benefit pension plans is set
forth below.
December 31,
-------------------------
2002 2001
--------- ---------
(In thousands)
Change in PBO:
Beginning of year .......................... $ 261,805 $ 248,355
Service cost ............................... 4,538 3,976
Interest ................................... 16,510 15,605
Participant contributions .................. 1,057 1,005
Amendments ................................. -- 1,819
Actuarial loss (gain) ...................... (1,704) 10,149
Benefits paid .............................. (16,862) (15,849)
Change in currency exchange rates .......... 37,033 (3,255)
--------- ---------
End of year ............................ 302,377 261,805
--------- ---------
Change in fair value of plan assets:
Beginning of year .......................... 208,267 216,984
Actual return on plan assets ............... (3,087) 4,711
Employer contributions ..................... 9,310 7,559
Participant contributions .................. 1,057 1,005
Benefits paid .............................. (16,862) (15,849)
Change in currency exchange rates .......... 28,076 (6,143)
--------- ---------
End of year ............................ 226,761 208,267
--------- ---------
F-30
December 31,
-----------------------
2002 2001
-------- --------
(In thousands)
Funded status at year end:
Plan assets less than PBO ...................... $(75,616) $(53,538)
Unrecognized actuarial loss .................... 68,390 44,744
Unrecognized prior service cost ................ 4,881 4,371
Unrecognized net transition obligation ......... 5,011 4,269
-------- --------
$ 2,666 $ (154)
======== ========
Amounts recognized in the balance sheet:
Prepaid pension cost ........................... $ 17,572 $ 18,411
Accrued pension cost:
Current .................................... (7,019) (5,993)
Noncurrent ................................. (43,757) (26,985)
Unrecognized net pension obligations ........... 5,561 5,901
Accumulated other comprehensive loss ........... 30,309 8,512
-------- --------
$ 2,666 $ (154)
======== ========
Selected information related to the Company's defined benefit pension
plans that have accumulated benefit obligations in excess of fair value of plan
assets is presented below. At December 31, 2002 and 2001, 79% and 78%,
respectively, of the projected benefit obligations of such plans relate to
non-U.S. plans.
December 31,
-------------------------
2002 2001
-------- --------
(In thousands)
Projected benefit obligation ................. $252,316 $228,647
Accumulated benefit obligation ............... 229,373 206,669
Fair value of plan assets .................... 179,437 174,832
Incentive bonus programs
Certain employees are eligible to participate in the Company's various
incentive bonus programs. The programs provide for annual payments, which may be
in the form of cash or NL common stock. The amount of the annual payment paid to
an employee, if any, is based on formulas involving the profitability of Kronos
in relation to the annual operating plan 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 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 active U.S. employees over a ten-year period and U.S.
employees retiring after 1998 are not entitled to any such benefits. 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.
F-31
For measuring the OPEB liability at December 31, 2002, the expected rate
of increase in health care costs is 9% in 2003 decreasing to 5.5% in 2007 and
thereafter. Other weighted-average assumptions used to measure the liability and
expense are presented below.
December 31,
----------------------
2002 2001 2000
---- ---- ----
(Percentages)
Discount rate ....................................... 6.5 7.0 7.3
Long-term rate for compensation increases ........... 6.0 6.0 6.0
Long-term rate of return on plan assets ............. 6.0 7.7 7.7
Variances from actuarially assumed rates will change accrued OPEB
liabilities, net periodic OPEB expense and funding requirements in future
periods. If the health care cost trend rate was increased (decreased) by one
percentage point for each year, postretirement benefit expense would have
increased approximately $.1 million (decreased by $.1 million) in 2002, and the
projected benefit obligation at December 31, 2002 would have increased by
approximately $2.1 million (decreased by $1.8 million).
The components of the Company's net periodic postretirement benefit cost
are set forth below.
Years ended December 31,
--------------------------------
2002 2001 2000
------- ------- --------
(In thousands)
Net periodic OPEB cost (benefit):
Service cost benefits .................. $ 103 $ 94 $ 84
Interest cost on PBO ................... 2,028 2,536 2,646
Expected return on plan assets ......... (3) (773) (521)
Amortization of prior service cost ..... (2,075) (2,075) (2,075)
Recognized actuarial losses ............ 27 27 24
------- ------- -------
$ 80 $ (191) $ 158
======= ======= =======
F-32
December 31,
-----------------------
2002 2001
-------- --------
(In thousands)
Change in PBO:
Beginning of year ............................ $ 35,137 $ 37,040
Service cost ................................. 103 94
Interest cost ................................ 2,028 2,536
Actuarial losses ............................. 5,436 792
Release of insurance obligations ............. (5,778) --
Plan asset reimbursements .................... -- 1,197
Benefits paid:
Company funds ............................ (3,464) --
Plan assets .............................. (595) (6,377)
Change in currency exchange rates ............ 32 (145)
-------- --------
End of year .............................. 32,899 35,137
-------- --------
Change in fair value of plan assets:
Beginning of year ............................ 6,400 11,842
Actual return on plan assets ................. (27) 460
Employer contributions ....................... -- 475
Benefits paid ................................ (595) (6,377)
Release of insurance obligations ............. (5,778) --
-------- --------
End of year .............................. -- 6,400
-------- --------
Funded status at year end:
Plan assets less than PBO .................... (32,899) (28,737)
Unrecognized actuarial gain .................. 5,345 (105)
Unrecognized prior service cost .............. (3,708) (5,783)
-------- --------
$(31,262) $(34,625)
======== ========
Amounts recognized in the balance sheet:
Current ...................................... $ (4,785) $ (4,783)
Noncurrent ................................... (26,477) (29,842)
-------- --------
$(31,262) $(34,625)
======== ========
Based on communications with a certain insurance provider of retiree
benefits, and consultations with the Company's actuaries, the Company has been
released from certain life insurance retiree benefit obligations totaling $5.8
million as of December 31, 2002 through the use of an equal amount of plan
assets.
Note 15 - Minority interest:
Minority interest primarily relates to the Company's majority-owned
environmental management subsidiary, EMS. EMS was established in 1998, at which
time EMS contractually assumed certain of the Company's environmental
liabilities. EMS' earnings are based, in part, upon its ability to favorably
resolve these liabilities on an aggregate basis. The minority interest
shareholders of EMS actively manage the environmental liabilities and share in
39% of EMS' cumulative earnings, as defined in the formation documents. The
F-33
Company includes liabilities contractually assumed by EMS in its consolidated
balance sheet.
Note 16 - Shareholders' equity:
Common stock
Shares of common stock
------------------------------------
Treasury
Issued stock Outstanding
------- -------- -----------
(In thousands)
Balance at December 31, 1999 .......... 66,839 15,555 51,284
Treasury shares acquired .......... -- 1,682 (1,682)
Treasury shares reissued .......... -- (450) 450
------- ------- -------
Balance at December 31, 2000 .......... 66,839 16,787 50,052
Treasury shares acquired .......... -- 1,059 (1,059)
Treasury shares reissued .......... -- (38) 38
Other ............................. 6 -- 6
------- ------- -------
Balance at December 31, 2001 .......... 66,845 17,808 49,037
Treasury shares acquired .......... -- 1,384 (1,384)
Treasury shares reissued .......... -- (37) 37
------- ------- -------
Balance at December 31, 2002 .......... 66,845 19,155 47,690
======= ======= =======
Pursuant to its share repurchase program, the Company purchased
1,384,000 shares of its common stock at an aggregate cost of $21.3 million in
2002, 1,059,000 shares of its common stock in the open market at an aggregate
cost of $15.5 million in 2001 and 1,682,000 shares of its common stock at an
aggregate cost of $30.9 million in 2000. Approximately 1,323,000 additional
shares are available for purchase under the Company's share repurchase program.
The available shares may be purchased over an unspecified period of time, and
are to be held as treasury shares available for general corporate purposes.
In February 2000 the Company increased the regular quarterly dividend to
$.15 per share and subsequently paid three quarterly $.15 per share cash
dividends in the first nine months of 2000. In October 2000 the Company
increased the regular quarterly dividend to $.20 per share and subsequently paid
a quarterly $.20 per share cash dividend in the fourth quarter of 2000. The
Company paid four quarterly $.20 per share cash dividends in each of 2001 and
2002. In December 2002 the Company paid an additional cash dividend of $2.50 per
share (aggregating $119.2 million). On February 5, 2003, the Company's Board of
Directors declared a regular quarterly dividend of $.20 per share to
shareholders of record as of March 14, 2003 to be paid on March 26, 2003.
Common stock options
The NL Industries, Inc. 1998 Long-Term Incentive Plan ("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 and non-employee directors. Although
certain stock options granted pursuant to a similar plan which preceded the NL
F-34
Option Plan ("Predecessor Option Plan") remain outstanding at December 31, 2002,
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, 2002, 3,651,000 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.
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.
Weighted
average
Exercise price Amount Weighted fair
per share payable average value
------------------- upon exercise at grant
Shares Low High exercise price date
------ -------- -------- -------- -------- --------
(In thousands, except per share amounts)
Outstanding at December 31, 1999 2,437 $ 5.00 $24.19 $ 34,943 $14.34
Granted .................... 432 14.25 14.44 6,165 14.25 $ 4.83
Exercised .................. (918) 5.00 17.97 (9,508) 10.36
Forfeited .................. (349) 8.69 24.19 (7,237) 21.03
----- ------ ------ -------- ------
Outstanding at December 31, 2000 1,602 5.00 21.97 24,363 15.21
Granted .................... 484 20.11 20.51 9,737 20.12 $ 7.52
Exercised .................. (38) 11.28 21.97 (627) 16.45
Forfeited .................. (34) 11.28 20.11 (513) 15.38
----- ------ ------ -------- ------
Outstanding at December 31, 2001 2,014 5.00 21.97 32,960 16.36
Granted .................... 12 13.81 13.81 166 13.81 $ 5.71
Exercised .................. (545) 5.00 15.75 (7,444) 13.65
Forfeited .................. (220) 11.88 21.97 (3,623) 16.43
----- ------ ------ -------- ------
Outstanding at December 31, 2002 1,261 $ 8.69 $21.97 $ 22,059 $17.50
===== ====== ====== ======== ======
At December 31, 2002, 2001 and 2000 options to purchase 428,400, 658,560
and 363,480 shares, respectively, were exercisable and options to purchase
372,800 shares become exercisable in 2003. Of the exercisable options, options
to purchase 127,000 shares at December 31, 2002 had exercise prices less than
the Company's December 31, 2002 quoted market price of $17.00 per share.
Outstanding options at December 31, 2002 expire at various dates through 2011.
F-35
The following table summarizes the Company's stock options outstanding
and exercisable as of December 31, 2002 by price range.
Options outstanding Options exercisable
- -------------------------------------------------------------------- --------------------------
Weighted-
average Weighted- Weighted-
Outstanding remaining average Exercisable average
Range of at contractual exercise at exercise
exercise prices 12/31/02 life price 12/31/02 price
- --------------------------- ---------------------------------------- --------------------------
$ 7.26 - $ 9.68 2,000 1.1 $ 8.69 2,000 $ 8.69
9.68 - 12.09 72,900 5.5 11.46 47,500 11.56
12.09 - 14.51 350,100 6.6 13.96 52,500 14.14
14.51 - 16.93 57,400 5.4 15.34 25,000 15.55
16.93 - 19.35 168,400 4.6 17.84 141,400 17.81
19.35 - 21.77 515,000 7.5 20.09 84,000 20.02
21.77 - 24.19 95,000 5.1 21.97 76,000 21.97
--------- --- ---------- ------- ----------
1,260,800 6.4 $ 17.50 428,400 $ 17.66
========= === ========== ======= ==========
The pro forma information required by SFAS No. 123 is based on an
estimation of the fair value of options issued subsequent to January 1, 1995.
See Note 2. The weighted-average fair values of options granted during 2002,
2001 and 2000 were $5.71, $7.52 and $4.83 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 2002, 2001 and 2000: stock price volatility of 47%, 46% and 48% in
2002, 2001 and 2000, respectively; risk-free rate of return of 4% in 2002 and 5%
in each of 2001 and 2000; dividend yield of 5.8% in 2002, 4.0% in 2001 and 4.9%
in 2000; and an expected term of 7 years in 2002 and 9 years in each of 2001 and
2000. For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. See Note 22.
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.
Note 17 - Income taxes:
The components of (i) income from continuing operations before income
taxes and minority interest ("pretax income"), (ii) the difference between the
provision for income taxes attributable to pretax income 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.
F-36
Years ended December 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
(In thousands)
Pretax income (loss):
U.S ........................................... $ (17,439) $ 3,267 $ 72,520
Non-U.S ....................................... 67,549 154,025 162,551
--------- --------- ---------
$ 50,110 $ 157,292 $ 235,071
========= ========= =========
Expected tax expense .............................. $ 17,539 $ 55,052 $ 82,275
Non-U.S. tax rates ................................ (3,235) (3,887) (6,445)
Resolution of German income tax audits ............ -- -- (5,500)
Change in valuation allowance:
Corporate restructuring in Germany and other .. -- (23,247) --
Recognition of certain deductible tax
attributes which previously did not meet the
"more-likely-than-not" recognition criteria . (3,382) (1,460) (2,600)
Incremental tax on income of companies not included
in the NL Tax Group ............................. 548 6,009 1,943
Rate change adjustment of deferred taxes .......... (2,332) -- 5,695
U.S. state income taxes ........................... (148) 459 1,348
Tax contingency reserve adjustments, other, net ... 2,860 985 252
Other, net ........................................ 186 1,014 1,058
--------- --------- ---------
Income tax expense ............................ $ 12,036 $ 34,925 $ 78,026
========= ========= =========
Provision for income taxes:
Current income tax expense (benefit):
U.S. federal .............................. $ (453) $ 1,352 $ (8,649)
U.S. state ................................ 558 1,309 622
Non-U.S ................................... 10,425 29,008 45,867
--------- --------- ---------
10,530 31,669 37,840
--------- --------- ---------
Deferred income tax expense (benefit):
U.S. federal .............................. (3,294) 12,369 32,128
U.S. state ................................ (752) (850) 726
Non-U.S ................................... 5,552 (8,263) 7,332
--------- --------- ---------
1,506 3,256 40,186
--------- --------- ---------
$ 12,036 $ 34,925 $ 78,026
========= ========= =========
Comprehensive provision (benefit) for income
taxes allocable to:
Pretax income ................................. $ 12,036 $ 34,925 $ 78,026
Additional paid-in capital .................... (222) (69) (3,224)
Acquired definite-lived intangible asset ...... 908 -- --
Other comprehensive income (loss):
Marketable equity securities .............. (1,318) (287) 3,244
Pension liabilities ....................... (7,171) (2,160) --
--------- --------- ---------
$ 4,233 $ 32,409 $ 78,046
========= ========= =========
F-37
The components of the net deferred tax liability are summarized below:
December 31,
-------------------------------------------------
2002 2001
----------------------- -----------------------
Deferred tax Deferred tax
----------------------- -----------------------
Assets Liabilities Assets Liabilities
--------- ----------- --------- -----------
(In thousands)
Tax effect of temporary differences
relating to:
Inventories ........................... $ 3,427 $ (3,302) $ 3,202 $ (2,849)
Property and equipment ................ 44,255 (59,058) 42,721 (54,084)
Accrued postretirement benefits cost .. 10,594 -- 11,398 --
Accrued (prepaid) pension cost ........ 8,486 (24,785) 2,711 (21,224)
Accrued environmental costs ........... 32,914 -- 35,508 --
Noncompete agreement .................. 117 -- 1,517 --
Other accrued liabilities and
deductible differences .............. 16,368 -- 18,647 --
Other taxable differences ............. -- (137,713) -- (131,094)
Tax on unremitted earnings of non-U.S .....
subsidiaries ............................ -- (4,156) -- (3,933)
Tax loss and tax credit carryforwards ..... 163,844 -- 118,828 --
Valuation allowance ....................... (185,283) -- (154,437) --
--------- --------- --------- ---------
Gross deferred tax assets (liabilities) 94,722 (229,014) 80,095 (213,184)
Reclassification, principally netting by
tax jurisdiction ........................ (82,277) 82,277 (68,398) 68,398
--------- --------- --------- ---------
Net total deferred tax assets
(liabilities) ....................... 12,445 (146,737) 11,697 (144,786)
Net current deferred tax assets
(liabilities) ....................... 10,511 (3,219) 11,011 (1,530)
--------- --------- --------- ---------
Net noncurrent deferred tax assets
(liabilities) ....................... $ 1,934 $(143,518) $ 686 $(143,256)
========= ========= ========= =========
F-38
Changes in the Company's deferred income tax valuation allowance are
summarized below.
Years ended December 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
(In thousands)
Balance at the beginning of year .................... $ 154,437 $ 190,312 $ 233,595
Recognition of certain deductible tax attributes
which previously did not meet the "more-likely-
than-not" recognition criteria ................ (3,382) (24,707) (2,600)
Offset to the change in gross deferred income tax
assets due principally to redeterminations of
certain tax attributes and implementation of
certain tax planning strategies ............... 12,610 (3,681) (24,955)
Foreign currency translation .................... 21,618 (7,487) (15,728)
--------- --------- ---------
Balance at the end of year .......................... $ 185,283 $ 154,437 $ 190,312
========= ========= =========
A reduction in the German "base" income tax rate from 30% to 25%,
enacted in October 2000, became effective January 1, 2001. The reduction in the
German income tax rate resulted in $5.7 million of additional deferred income
tax expense in the fourth quarter of 2000 due to a reduction of the Company's
deferred income tax asset related to certain German tax attributes.
A reduction in the Belgian income tax rate from 40.17% to 33.99%,
enacted in December 2002, became effective January 1, 2003. The reduction in the
Belgian income tax rate resulted in a $2.3 million decrease in deferred income
tax expense in the fourth quarter of 2002 due to a reduction of the Company's
deferred income tax liabilities related to certain Belgian temporary
differences.
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 penalties and interest.
The Company's and EMS' 1998 U.S. federal income tax returns are
currently being examined by the U.S. Internal Revenue Service ("IRS"), and the
Company and EMS have each granted extensions of the statute of limitations for
assessment of such returns until September 30, 2003. Based upon the course of
the examination to date, the Company anticipates that the IRS may propose a
substantial tax deficiency.
The Company has received a notification from the Norwegian tax
authorities of their intent to assess tax deficiencies of approximately NOK 12.2
million ($1.7 million at December 31, 2002) relating to 1998 through 2000. The
Company has objected to this proposed assessment in a written response to the
Norwegian tax authorities.
The Company has received preliminary tax assessments for the years 1991
to 1997 from the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately (euro)10.4 million ($10.8 million at December
31, 2002). The Company has filed protests to the assessments for the years 1991
to 1997. The Company is in discussions with the Belgian tax authorities and
believes that a significant portion of the assessments is without merit.
F-39
No assurance can be given that the Company's tax matters will be
favorably resolved due to the inherent uncertainties involved in court and tax
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
During the fourth quarter of 2001, the Company completed a restructuring
of its German subsidiaries, and as a result recognized a $17.6 million net
income tax benefit. This benefit is comprised of a $23.2 million decrease in the
valuation allowance due to a change in estimate of the Company's ability to
utilize certain German income tax attributes that did not previously meet the
"more-likely-than-not" recognition criteria offset by $5.6 million of
incremental U.S. taxes on undistributed earnings of certain foreign
subsidiaries.
At December 31, 2002, the Company had the equivalent of approximately
$414 million of income tax loss carryforwards in Germany with no expiration
date. However, the Company has provided a deferred tax valuation allowance
against substantially all of these income tax loss carryforwards because the
Company currently believes they do not meet the "more-likely-than-not"
recognition criteria. The German federal government has proposed certain changes
to its income tax law, including certain changes that would impose limitations
on the annual utilization of income tax loss carryforwards that, as proposed,
would become effective retroactively to January 1, 2003. Since the Company has
provided a deferred income tax asset valuation allowance against substantially
all of the German tax loss carryforwards, any limitation on the Company's
ability to utilize such carryforwards resulting from enactment of any of these
proposals would not have a material impact on the Company's net deferred income
tax liability. However, if enacted, the proposed changes could have a material
impact on the Company's ability to make full annual use of its German income tax
loss carryforwards, which would significantly affect the Company's future income
tax expense and future income tax payments.
At December 31, 2002, the Company had, for U.S. federal income tax
purposes, a net operating loss carryforward of approximately $45 million, of
which $3 million expires in 2019, $23 million expires in 2021 and $19 million
expires in 2022 and approximately $7.4 million of alternative minimum tax credit
carryforwards with no expiration date.
F-40
Note 18 - Other income, net:
Years ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
Securities earnings:
Interest and dividends ................. $ 5,739 $ 8,886 $ 8,346
Securities (losses) gains, net ......... (105) (1,133) 2,531
-------- -------- --------
5,634 7,753 10,877
Currency transaction gains, net ............ 5,724 1,188 6,499
Noncompete agreement income ................ 4,000 4,000 4,000
Trade interest income ...................... 1,709 2,332 2,333
Disposition of property and equipment ...... (625) (735) (1,562)
Insurance recoveries, net (See Note 20) .... -- 7,222 --
Other, net ................................. 372 1,376 1,136
-------- -------- --------
$ 16,814 $ 23,136 $ 23,283
======== ======== ========
The Company received a $20 million fee as part of the sale of Rheox in
January 1998 in payment for entering into a five-year covenant not to compete in
the rheological products business. The Company is amortizing the fee to income
using the straight-line method over the five-year noncompete period beginning
January 30, 1998. The agreement became fully amortized in January 2003 with 2003
income totaling $.3 million.
Note 19 - Litigation settlement gains, net:
In June 2000 the Company recognized a $43 million net gain from a
settlement with one of its two principal former insurance carriers, and in
December 2000 the Company recognized a $26.5 million net gain from a settlement
with certain members of the other principal former insurance carrier. The
settlement gains are stated net of $3.1 million in commissions, and the gross
settlement proceeds of $72.6 million were transferred by the carriers to trusts
established to pay future remediation and other environmental expenditures of
the Company.
A settlement with remaining members of the second carrier group was
reached in January 2001, and the Company recognized a $10.3 million gain in the
first quarter of 2001. The gross settlement proceeds of $10.7 million were
transferred by the carriers to the above mentioned trusts. In 2002 and 2001 the
Company recognized $5.2 million and $1.4 million, respectively, of other
litigation settlement gains.
The settlements resolved court proceedings that the Company initiated to
seek reimbursement for legal defense expenditures and indemnity coverage for
certain of its environmental remediation expenditures. No further material
settlements relating to litigation concerning environmental remediation coverage
are expected.
Note 20 - Leverkusen fire and insurance claim:
A fire on March 20, 2001 damaged a section of the Company's Leverkusen,
Germany 35,000 metric ton sulfate-process TiO2 plant ("Sulfate Plant") and, as a
result, production of TiO2 at the Leverkusen facility was halted. The fire did
not enter the Company's adjacent 125,000 metric ton chloride-process TiO2 plant
F-41
("Chloride Plant"), but did damage certain support equipment necessary to
operate that plant. The damage to the support equipment resulted in a temporary
shutdown of the Chloride Plant.
On April 8, 2001, repairs to the damaged support equipment were
substantially completed and full production resumed at the Chloride Plant. The
Sulfate Plant became approximately 50% operational in September 2001 and became
fully operational in late October 2001. The damages to property and the business
interruption losses caused by the fire were covered by insurance as noted below,
but the effect on the financial results of the Company on a quarter-to-quarter
basis was impacted by the timing and amount of insurance recoveries.
The Company reached an agreement and settled the coverage claim
involving the Leverkusen fire for $56.4 million during the fourth quarter of
2001 ($46.9 million received as of December 31, 2001, with the remaining $9.5
million received in January 2002), of which $27.3 million related to business
interruption and $29.1 million related to property damage, clean-up costs and
other extra expenses. The Company recognized a $17.5 million pre-tax gain in
2001 related to the property damage recovery after deducting $11.6 million of
clean-up costs and other extra expenses incurred and the carrying value of
assets destroyed in the fire. The gain was excluded from the determination of
operating income. The $27.3 million of business interruption proceeds recognized
in 2001 were allocated between other income, excluding corporate, which reflects
recovery of lost margin ($7.2 million) and as a reduction of cost of sales to
offset unallocated period costs ($20.1 million). No additional recoveries
related to the Leverkusen fire are expected to be received.
Note 21 - Other items:
Advertising costs are expensed as incurred and were $1 million in each
of 2002, 2001 and 2000.
Research, development and certain sales technical support costs are
expensed as incurred and approximated $6 million in each of 2002, 2001 and 2000.
Interest capitalized in connection with long-term capital projects was
nil in each of 2002, 2001 and 2000.
Note 22 - 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, tax
sharing agreements, 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 continuously 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
F-42
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 various intercorporate services agreements
("ISA") with various related parties discussed below. Under the ISA's, employees
of one company will provide certain management, tax planning, financial and
administrative services to the other company on a fee basis. Such charges are
based upon estimates of the time devoted by the employees of the provider of the
services to the affairs of the recipient, and the compensation of such persons.
Because of the number of companies affiliated with Contran, the Company believes
it benefits from cost savings and economies of scale gained by not having
certain management, financial and administrative staffs duplicated at each
entity, thus allowing certain individuals to provide services to multiple
companies but only be compensated by one entity. These ISA's are reviewed and
approved by the Company's Board of Directors including members who are not
officers or directors of any other entity that may be deemed to be related to
the Company.
The Company is a party to an intercorporate services agreement with
Contran ("Contran ISA") whereby Contran provides certain management services to
the Company on a fee basis. Intercorporate services fee expense related to the
Contran ISA was $1.5 million in 2002, $1.2 million in 2001 and $1.0 million in
2000.
The Company was a party in 2000 to an intercorporate services agreement
with Valhi ("Valhi ISA") whereby Valhi and the Company provided certain
management, financial and administrative services to each other on a fee basis.
Net intercorporate services fee expense related to the Valhi ISA was $.2 million
in 2000.
The Company is party to an intercorporate services agreement with
Tremont ("Tremont ISA"). Under the terms of the contract, the Company provides
certain management and financial services to Tremont on a fee basis.
Intercorporate services fee income related to the Tremont ISA was $.1 million in
each of 2002, 2001 and 2000. See Note 7.
The Company is party to an intercorporate services agreement ("TIMET
ISA") with Titanium Metals Corporation ("TIMET"), approximately 39% of the
outstanding common stock of which is currently held by Tremont at December 31,
2002. Under the terms of the contract, the Company provides certain management
and financial services to TIMET on a fee basis. Intercorporate services fee
income related to the TIMET ISA was $.3 million in 2002, $.2 million in 2001 and
$.4 million in 2000.
The Company was party in 2000 to an intercorporate services agreement
("CompX ISA") with CompX International, Inc. ("CompX"), a subsidiary of Valhi,
Under the terms of the contract, the Company provided certain management and
administrative services to CompX on a fee basis. Intercorporate services fee
income related to the CompX ISA was $.2 million in 2000.
Purchases of TiO2 from LPC were $92.4 million in 2002, $93.4 million in
2001 and $92.5 million in 2000.
The Company and Tall Pines Insurance Company ("Tall Pines") (formerly NL
Insurance, Ltd. of Vermont), a wholly owned subsidiary of Tremont, are parties
to an Insurance Sharing Agreement with respect to certain loss payments and
F-43
reserves established by Tall Pines that (i) arise out of claims against other
entities for which the Company is contractually responsible and (ii) are subject
to payment by Tall Pines under certain reinsurance contracts. Also, Tall Pines
will credit the Company with respect to certain underwriting profits or credit
recoveries that Tall Pines receives from independent reinsurers that relate to
retained liabilities. At December 31, 2002, the Company has $1.6 million of
restricted cash that collateralizes certain of Tall Pines' outstanding letters
of credit.
Tall Pines, Valmont Insurance Company ("Valmont") and EWI RE, Inc. and
EWI RE, Ltd. (collectively "EWI") provide for or broker certain of the
Company's, its joint venture's and its affiliates' insurance policies. Valmont
is a wholly owned insurance company of Valhi. An entity controlled by one of
Harold C. Simmons' daughters and Contran owned all of the outstanding common
stock of EWI at December 31, 2001. On January 7, 2002, the Company purchased EWI
for $9.2 million. See Note 3. Through December 31, 2000, Harold C. Simmons'
son-in-law managed the operations of EWI. Subsequent to December 31, 2000 and
pursuant to an agreement that, as amended, is effective until terminated by
either party with 90 days notice, such son-in-law provides advisory services to
EWI as requested by EWI, for which such son-in-law is paid $11,875 per month and
receives certain other benefits under EWI's benefit plans. Consistent with
insurance industry practices, Tall Pines, Valmont and EWI receive commissions
from the insurance and reinsurance underwriters for the policies that they
provide or broker. The Company and its joint venture paid approximately $11.2
million, $10.1 million and $5.7 million in 2002, 2001 and 2000, respectively,
for policies provided or brokered by Tall Pines, Valmont and EWI. The premiums
paid by affiliates (other than the Company and its joint venture) for policies
provided or brokered by EWI in 2002 was approximately $6.5 million. These
amounts principally included payments for reinsurance and insurance premiums
paid to unrelated third parties, but also included commissions paid to Tall
Pines, Valmont and EWI. In the Company's opinion, the amounts that the Company
paid for these insurance policies and the allocation among the Company and its
affiliates of relative insurance premiums are reasonable and similar to those
they could have obtained through unrelated insurance companies and/or brokers.
The Company expects that these relationships with Tall Pines, Valmont and EWI
will continue in 2003.
During 2002 the Company and certain officers of the Company entered into
agreements whereby stock options held by such officers to purchase an aggregate
of 513,800 shares of the Company's common stock were exercised or canceled for
value. The officers tendered 52,179 shares of their own Company common stock,
held by such officers for at least six months, to pay for a portion of the stock
option exercise price, and such shares were valued at the market price of the
Company's common stock on the date of exercise. The remaining aggregate exercise
price was paid by such officers by tendering of a portion of the shares acquired
upon exercise of the options, also based on the market price of the Company's
common stock on the date of exercise. On a net basis, the Company made aggregate
cash payments to the officers of approximately $2.2 million, of which
approximately $1.7 million was recorded as compensation expense and
approximately $.5 million (equal to the intrinsic value of the options exercised
through the tender of the 52,179 shares) was recorded as a direct reduction to
equity through treasury stock. The aggregate number of treasury shares held by
the Company did not change as a result of these transactions. Payment of
required tax withholding related to these transactions were funded by the
officers using a portion of the cash payments made to them.
During 2000 the Company and certain officers and directors of the
Company entered into agreements whereby stock options held by such officers to
purchase an aggregate of 755,800 shares of the Company's common stock were
exercised. The officers and directors tendered 298,709 shares of their own
Company common stock, held by such officers and directors for at least six
months, to pay for a portion of the stock option exercise price, and such shares
F-44
were valued at the market price of the Company's common stock on the date of
exercise. The remaining aggregate exercise price was paid by such officers and
directors through the tendering of 39,721 shares acquired upon exercise of the
options, also based on the market price of the Company's common stock on the
date of exercise. In addition, (i) 139,118 shares acquired upon exercise of the
options were tendered to the Company to pay required tax withholding related to
these transactions, (ii) 150,501 additional shares held by such officers for at
least six months were sold to the Company and (iii) 123,902 shares acquired upon
exercise of the options were also sold to the Company, with such shares valued
in each case at the market price of the Company's common stock on the date of
exercise. On a net basis, the Company made aggregate cash payments to the
officers and directors of approximately $9.4 million, of which approximately
$1.7 million was recorded as compensation expense and approximately $7.7 million
(equal to the sum of (i) the intrinsic value of the options exercised through
the tender of the 298,709 shares and (ii) the market value of the 150,501 shares
sold to the Company) was recorded as a direct reduction to equity through
treasury stock. Overall, these transactions resulted in a net 274,403 increase
in the number of the Company's treasury shares and a net 3,844 increase in the
number of the Company's common shares outstanding. See Note 2.
From time to time, the Company loans funds to related parties. See Note
8. These loans permit the Company to earn a higher rate of return on cash not
needed at the time for use in its operations than it could otherwise earn. While
such loans are of a lesser credit quality than cash equivalent instruments
otherwise available to the Company, the Company believes that it has evaluated
the credit risks involved, and that those risks are reasonable and reflected in
the terms of the loans.
Amounts receivable from and payable to affiliates are summarized in the
following table.
December 31,
-------------------
2002 2001
------- -------
(In thousands)
Current receivable from affiliates:
Tremont ............................................ $ -- $ 1,000
Valhi - income taxes ............................... -- 2,194
TIMET .............................................. 84 459
CompX .............................................. 20 45
Other .............................................. 103 --
------- -------
$ 207 $ 3,698
======= =======
Noncurrent receivable from affiliates (see Note 8):
Family Trust ....................................... $18,000 $20,000
Tremont ............................................ -- 11,650
------- -------
$18,000 $31,650
======= =======
Current payable to affiliates:
Tremont ............................................ $ 181 $ 544
LPC ................................................ 7,614 6,362
Other .............................................. 232 13
------- -------
$ 8,027 $ 6,919
======= =======
F-45
Amounts payable to LPC are generally for the purchase of TiO2 (see Note
10), and amounts payable to Tremont principally relate to the Company's
Insurance Sharing Agreement described above.
Note 23 - 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. Rent for the Leverkusen facility is periodically established by
agreement with the lessor for periods of at least two years at a time. Under a
separate supplies and services agreement expiring in 2011, the lessor provides
some raw materials, including chlorine and certain amounts of sulfuric acid,
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.
Net rent expense aggregated $10 million in 2002 and $9 million in each
of 2001 and 2000. At December 31, 2002, minimum rental commitments under the
terms of noncancellable operating leases were as follows:
Real Estate Equipment
----------- ---------
(In thousands)
Years ending December 31,
2003 ....................................... $ 2,449 $ 2,258
2004 ....................................... 2,406 1,658
2005 ....................................... 1,982 986
2006 ....................................... 1,672 382
2007 ....................................... 1,534 174
2008 and thereafter ........................ 18,706 692
------- -------
$28,749 $ 6,150
======= =======
Approximately $16.5 million of the $28.7 million real estate minimum
rental commitment is attributable to the Leverkusen, Germany facility. The
minimum commitment is determined by taking the current annual rental rate in
effect at December 31, 2002 and extending out the annual rate to the year 2050.
Capital expenditures
At December 31, 2002, the estimated cost to complete capital projects in
process approximated $6 million.
F-46
Purchase commitments
The Company has long-term supply contracts that provide for the
Company's chloride feedstock requirements through 2006. The agreements require
the Company purchase certain minimum quantities of feedstock with average
minimum annual purchase commitments aggregating approximately $156 million.
Legal proceedings
Lead pigment litigation. Since 1987 the Company, other former
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 states, large U.S. cities or their public housing
authorities, school districts and certain others have been asserted as class
actions. These legal proceedings seek recovery under a variety of theories,
including public and private nuisance, negligent product design, failure to
warn, strict liability, 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; some 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
actions vigorously. The Company has not accrued any amounts for the pending lead
pigment litigation. Considering the Company's previous involvement in the lead
pigment and lead-based paint businesses, the Company expects that additional
lead pigment and lead-based paint litigation, asserting similar or different
legal theories and seeking similar or different types of damage and relief to
that described in Item 3. "Legal Proceedings," may 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 as a defendant, potential responsible party ("PRP") or both, pursuant
to the Comprehensive Environmental Response, Compensation and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act ("CERCLA") and
similar state laws in approximately 70 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 Superfund National Priorities List or similar state lists. These
proceedings seek cleanup costs, damages for personal injury or property damage
and/or damages for injury to natural resources. Certain of these proceedings
involve claims for substantial amounts. Although the Company may be jointly and
severally liable for such costs, in most cases it is only one of a number of
PRPs who may also be jointly and severally liable.
At December 31, 2002, the Company had accrued $98 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
F-47
estimate costs is approximately $140 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 other than the settlements in 2001
and 2000 discussed in Note 19.
The imposition of more stringent standards or requirements under
environmental laws or regulations, new developments or changes respecting site
cleanup costs or allocation of such costs among PRPs, solvency of other PRPs, 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.
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 maintain compliance with applicable environmental laws and
regulations at all of 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.
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. See Item 3. "Legal Proceedings."
Concentrations of credit risk
Sales of TiO2 accounted for more than 90% of net sales from continuing
operations during each of the past three years. The remaining sales result from
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 TiO2 production processes). TiO2 is
generally 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, with the top ten customers
approximating 25% of net sales in each of the last three years. Approximately
one-half of the Company's TiO2 sales by volume were to Europe in each of the
past three years and approximately 39% in 2002, 38% in 2001 and 37% in 2000 of
sales were attributable to North America.
F-48
Consolidated cash, cash equivalents, current and noncurrent restricted
cash equivalents includes $80 million and $121 million invested in U.S. Treasury
securities purchased under short-term agreements to resell at December 31, 2002
and 2001, respectively, of which $24 million and $62 million, respectively, of
such securities are held in trust for the Company by a single U.S. bank.
Note 24 - Financial instruments:
Summarized below is the estimated fair value and related net carrying
value of the Company's financial instruments.
December 31, December 31,
2002 2001
----------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- -------- --------- -------
(In millions)
Cash, cash equivalents, current and noncurrent
restricted cash equivalents and current and
noncurrent restricted marketable debt securities $ 130.4 $ 130.4 $ 199.0 $ 199.0
Marketable equity securities - classified as
available-for-sale ............................... 40.9 40.9 45.2 45.2
Notes payable and long-term debt:
Fixed rate with market quotes:
8.875% Senior Secured Notes ................ $ 296.9 $ 299.9 $ -- $ --
11.75% Senior Secured Notes ................ -- -- 194.0 194.9
Variable rate debt ............................. 29.0 29.0 48.7 48.7
Common shareholders' equity ........................ $ 265.3 $ 810.7 $ 386.9 $ 748.8
Fair value of the Company's marketable equity securities, restricted
marketable debt securities, Notes and 11.75% Senior Secured Notes are based upon
quoted market prices and the fair value of the Company's common shareholder's
equity is based upon quoted market prices for NL's common stock at the end of
the year. The Company held no derivative financial instruments at December 31,
2002 or 2001.
F-49
Note 25 - Quarterly financial data (unaudited):
Quarter ended
----------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
---------- ----------- ----------- ----------
(In thousands, except per share amounts)
Year ended December 31, 2002:
Net sales .................... $ 202,357 $ 226,909 $ 234,061 $ 211,861
Cost of sales ................ 156,253 176,247 177,521 161,809
Operating income ............. 22,159 24,665 29,619 20,064
Net income ................... 6,384 14,048(a) 8,782 7,596
Net income per share:
Basic .................... $ .13 $ .29(a) $ .18 $ .16
========== =========== =========== ==========
Diluted .................. $ .13 $ .29(a) $ .18 $ .16
========== =========== =========== ==========
Weighted average common shares
and potential common shares
outstanding:
Basic .................. 48,870 48,827 48,623 47,812
Diluted ................ 48,938 48,953 48,681 47,887
Year ended December 31, 2001:
Net sales .................... $ 226,060 $ 220,105 $ 206,952 $ 181,982
Cost of sales ................ 149,902 151,320 145,945 130,893
Operating income ............. 51,916 45,170 36,222 35,879(b)
Net income ................... 34,559 25,424 20,538 40,886(b)
Net income per share:
Basic .................... $ .69 $ .51 $ .41 $ .83(b)
========== =========== =========== ==========
Diluted .................. $ .69 $ .51 $ .41 $ .83(b)
========== =========== =========== ==========
Weighted average common shares
and potential common shares
outstanding:
Basic .................. 50,079 49,932 49,621 49,304
========== =========== =========== ==========
Diluted ................ 50,349 50,027 49,705 49,339
========== =========== =========== ==========
The sum of the quarterly per share amounts may not equal the annual per share
amounts due to relative changes in the weighted average number of shares used in
the per share computations.
(a) Net income in the second quarter of 2002 included a one-time foreign
currency transaction gain of $6.3 million related to the extinguishment
of certain intercompany indebtedness. Net income in second quarter 2002
also included $2.0 million pretax of additional interest expense related
to the early extinguishment of the Company's 11.75% Senior Secured
Notes.
(b) Operating income in the fourth quarter of 2001 included $16.6 million of
pretax insurance recoveries for business interruption related to prior
2001 quarters due to the Leverkusen fire. Net income in the fourth
quarter of 2001 also included $11.6 million net of pretax insurance
recoveries for property damage related to the Leverkusen fire and a
$17.6 million net income tax benefit related to a restructuring of the
Company's German subsidiaries.
F-50
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of NL Industries, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated February 12, 2003 appearing on page F-2 in the 2002 Annual Report
to Shareholders on Form 10-K of NL Industries, Inc. (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the financial statement schedules
listed in Item 15(a) and (d) of this Form 10-K. In our opinion, these financial
statement schedules present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
Houston, Texas
February 12, 2003
S-1
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31, 2002 and 2001
(In thousands)
2002 2001
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 1,034 $ 10,413
Restricted cash equivalents ...................... 50,798 63,257
Restricted marketable debt securities ............ 9,670 3,583
Accounts and notes receivable .................... 2,476 1,621
Receivable from subsidiaries ..................... 1,467 8,106
Prepaid expenses ................................. 1,055 551
Deferred income taxes ............................ 6,107 6,371
---------- ----------
Total current assets ......................... 72,607 93,902
---------- ----------
Other assets:
Marketable equity securities ..................... 31,056 216
Notes receivable from subsidiary ................. -- 194,000
Investment in subsidiaries ....................... 329,460 1,072,551
Restricted marketable debt securities ............ 6,740 16,121
Prepaid pension cost ............................. -- 2,368
Other ............................................ 2,327 1,318
---------- ----------
Total other assets ........................... 369,583 1,286,574
---------- ----------
Property and equipment, net .......................... 3,033 3,725
---------- ----------
$ 445,223 $1,384,201
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ......... $ 17,344 $ 23,544
Payable to affiliates ............................ 1,656 1,083
Accrued environmental costs ...................... 11,904 10,529
Income taxes ..................................... 325 96
---------- ----------
Total current liabilities .................... 31,229 35,252
---------- ----------
Noncurrent liabilities:
Long-term debt ................................... -- 194,000
Notes payable to affiliates ...................... 44,600 655,918
Deferred income taxes ............................ 64,509 78,708
Accrued environmental costs ...................... 7,989 7,489
Accrued pension cost ............................. 10,659 1,427
Accrued postretirement benefits cost ............. 14,671 16,806
Other ............................................ 6,239 7,658
---------- ----------
Total noncurrent liabilities ................. 148,667 962,006
---------- ----------
Shareholders' equity ................................. 265,327 386,943
---------- ----------
$ 445,223 $1,384,201
========== ==========
Contingencies (Note 5)
S-2
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed Statements of Income
Years ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
--------- --------- ---------
Revenues and other income:
Equity in income from continuing operations of
subsidiaries ............................... $ 68,911 $ 154,410 $ 173,620
Interest and dividends ....................... 2,494 4,354 2,961
Interest income from subsidiaries ............ 12,165 22,969 28,637
Securities transactions, net ................. (105) (1,133) 8,356
Litigation settlement gains, net ............. 5,225 11,730 69,465
Other income, net ............................ 4,081 4,597 4,239
--------- --------- ---------
92,771 196,927 287,278
--------- --------- ---------
Costs and expenses:
General and administrative ................... 35,431 13,831 25,381
Interest ..................................... 34,217 58,263 53,827
--------- --------- ---------
69,648 72,094 79,208
--------- --------- ---------
Income before income taxes ............... 23,123 124,833 208,070
Income tax expense (benefit) ..................... (13,687) 3,426 53,461
--------- --------- ---------
Net income ............................... $ 36,810 $ 121,407 $ 154,609
========= ========= =========
S-3
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed Statements of Cash Flows
Years ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net income ................................... $ 36,810 $ 121,407 $ 154,609
Equity in income of subsidiaries ............. (68,911) (154,410) (173,620)
Distributions from Kronos .................... 111,000 30,500 55,000
Noncash interest expense (income), net ....... 15,704 (3,113) (932)
Deferred income taxes ........................ (9,119) 7,498 71,837
Securities gains, net ........................ 105 1,133 (8,356)
Litigation settlement gains, net ............. -- (10,307) (69,465)
Other, net ................................... (1,899) 1,824 (4,399)
--------- --------- ---------
83,690 (5,468) 24,674
Change in assets and liabilities, net ........ 4,480 1,563 (12,356)
--------- --------- ---------
Net cash provided (used) by operating
activities ............................. 88,170 (3,905) 12,318
--------- --------- ---------
Cash flows from investing activities:
Change in restricted cash equivalents and
restricted marketable debt securities, net . 16,622 18,539 4,480
Capital expenditures ......................... (2) (13) (23)
Purchase of Tremont Corporation common stock . -- -- (26,040)
Repayment of loans to affiliates ............. 194,000 -- 50,000
Investments in subsidiaries .................. -- -- (80)
Proceeds from disposition of marketable equity
securities ................................. -- 4 158
Other, net ................................... 9 20 29
--------- --------- ---------
Net cash provided by investing activities 210,629 18,550 28,524
--------- --------- ---------
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, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
--------- --------- ---------
Cash flows from financing activities:
Dividends ............................... $(157,978) $ (39,758) $ (32,686)
Treasury stock:
Purchased ........................... (21,254) (15,502) (30,886)
Reissued ............................ 454 718 2,091
Indebtedness - principal payments ....... (194,000) -- (50,000)
Loans from affiliates ................... 64,600 46,678 60,856
--------- --------- ---------
Net cash used by financing activities (308,178) (7,864) (50,625)
--------- --------- ---------
Net change from operating, investing and
financing activities .................. (9,379) 6,781 (9,783)
Balance at beginning of year ............ 10,413 3,632 13,415
--------- --------- ---------
Balance at end of year .................. $ 1,034 $ 10,413 $ 3,632
========= ========= =========
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,
---------------------------
2002 2001
--------- ---------
(In thousands)
Current:
Receivable from:
Kronos:
Income taxes ..................... $ -- $ 64
Other, net ....................... 417 4,943
Valhi - income taxes ................. -- 2,194
EWI - income taxes ................... 350 --
153506 Canada ........................ 392 392
TIMET ................................ 84 459
CompX ................................ 20 45
Other ................................ 204 9
--------- ---------
$ 1,467 $ 8,106
========= =========
Payable to:
Kronos - income taxes ................ $ (978) $ --
Tremont .............................. (281) (553)
EMS .................................. (79) (74)
Other ................................ (318) (456)
--------- ---------
$ (1,656) $ (1,083)
========= =========
Noncurrent:
Notes receivable from Kronos ............. $ -- $ 194,000
========= =========
Notes payable to Kronos .................. $ (44,600) $(655,918)
========= =========
During 2002 the Company completed certain capital restructuring
transactions whereby Kronos distributed to the Company certain affiliate notes
receivable, net and the Company recorded a corresponding decrease in its
investment in Kronos. See Note 3.
S-6
Note 3 - Investment in subsidiaries:
December 31,
-------------------------------
2002 2001
---------- ----------
(In thousands)
Investment in:
Kronos ........................... $ 313,479 $1,033,762
Other ............................ 15,981 38,789
---------- ----------
$ 329,460 $1,072,551
========== ==========
Years ended December 31,
------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
Equity in income from continuing operations
of subsidiaries:
Kronos .................................... $ 66,264 $150,742 $131,475
Other ..................................... 2,647 3,668 42,145
-------- -------- --------
$ 68,911 $154,410 $173,620
======== ======== ========
Note 4 - Long-term debt:
The Company's $194 million of 11.75% Senior Secured Notes at December
31, 2001 were redeemed at par value in 2002.
Note 5 - Contingencies:
See Legal proceedings in Note 23 to the Consolidated Financial Statements.
S-7
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Charges
Balance at (credits) Currency
beginning to costs and translation Balance at
Description of year expenses Deductions adjustments end of year
----------- ---------- ------------ ---------- ----------- -----------
Year ended December 31, 2002:
Allowance for doubtful accounts and notes
receivable ............................ $ 2,358 $ 481 $ (533)(a) $ 299 $2,605
========== ========== ========== =========== ======
Amortization of intangibles ............. $ -- $ 372 $ -- $ -- $ 372
========== ========== ========== =========== ======
Year ended December 31, 2001:
Allowance for doubtful accounts and notes
receivable ............................ $ 2,222 $ 485 $ (245)(a) $ (104) $2,358
========== ========== ========== =========== ======
Amortization of intangibles ............. $ -- $ -- $ -- $ -- $ --
========== ========== ========== =========== ======
Year ended December 31, 2000:
Allowance for doubtful accounts and notes
receivable ............................ $ 2,075 $ 342 $ (67)(a) $ (128) $2,222
========== ========== ========== =========== ======
Amortization of intangibles ............. $ 22,095 $ 113 $ (20,429) $ (1,779) $ --
========== ========== ========== =========== ======
(a) Amounts written off, less recoveries.
Certain prior-year amounts have been reclassified to conform to the current year
presentation. Certain information has been omitted because it is included in the
Notes to the Consolidated Financial Statements.
S-8