SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the quarter ended June 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-640
NL INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 13-5267260
- ------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16825 Northchase Drive, Suite 1200, Houston, Texas 77060-2544
- -------------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 423-3300
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) had been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of common stock outstanding on August 6, 1998: 51,370,314
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1997
and June 30, 1998 3-4
Consolidated Statements of Income - Three
months and six months ended June 30, 1997 and 1998 5-6
Consolidated Statements of Comprehensive Income
- Three months and six months ended June 30, 1997
and 1998 7
Consolidated Statement of Shareholders' Equity
- Six months ended June 30, 1998 8
Consolidated Statements of Cash Flows - Six
months ended June 30, 1997 and 1998 9-10
Notes to Consolidated Financial Statements 11-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
- 2 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1997 1998
------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents, including
restricted cash of $9,751 and $5,858 .......... $ 106,145 $ 355,320
Accounts and notes receivable .................. 148,676 165,210
Refundable income taxes ........................ 1,941 6,370
Inventories .................................... 192,780 169,377
Prepaid expenses ............................... 3,348 5,402
Deferred income taxes .......................... 1,642 1,561
---------- ----------
Total current assets ....................... 454,532 703,240
---------- ----------
Other assets:
Marketable securities .......................... 17,270 18,652
Investment in joint ventures ................... 172,721 171,202
Prepaid pension cost ........................... 23,848 23,787
Other .......................................... 18,592 13,202
---------- ----------
Total other assets ......................... 232,431 226,843
---------- ----------
Property and equipment:
Land ........................................... 19,479 18,589
Buildings ...................................... 150,090 137,293
Machinery and equipment ........................ 616,309 556,267
Mining properties .............................. 88,617 81,528
Construction in progress ....................... 2,577 5,231
---------- ----------
877,072 798,908
Less accumulated depreciation and depletion .... 465,843 430,110
---------- ----------
Net property and equipment ................. 411,229 368,798
---------- ----------
$1,098,192 $1,298,881
========== ==========
</TABLE>
- 3 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1998
------------ -----------
<S> <C> <C>
Current liabilities:
Notes payable ................................ $ 13,968 $ 33,680
Current maturities of long-term debt ......... 77,374 191,610
Accounts payable and accrued liabilities ..... 161,730 167,097
Payable to affiliates ........................ 11,512 11,128
Income taxes ................................. 10,910 25,662
Deferred income taxes ........................ 891 607
----------- -----------
Total current liabilities ................ 276,385 429,784
----------- -----------
Noncurrent liabilities:
Long-term debt ............................... 666,779 338,868
Deferred income taxes ........................ 132,797 184,275
Accrued pension cost ......................... 44,389 41,206
Accrued postretirement benefits cost ......... 50,951 44,757
Other ........................................ 148,903 148,631
----------- -----------
Total noncurrent liabilities ............. 1,043,819 757,737
----------- -----------
Minority interest .............................. 257 589
Shareholders' equity:
Common stock ................................. 8,355 8,355
Additional paid-in capital ................... 759,281 770,492
Accumulated deficit .......................... (495,421) (172,218)
Accumulated other comprehensive loss ......... (129,513) (131,686)
Treasury stock ............................... (364,971) (364,172)
----------- -----------
Total shareholders' equity (deficit) ..... (222,269) 110,771
----------- -----------
$ 1,098,192 $ 1,298,881
=========== ===========
</TABLE>
Commitments and contingencies (Note 14)
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
-------------------- --------------------
June 30, June 30,
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues and other income:
Net sales $214,354 $241,645 $418,743 $464,274
Other, net 6,339 7,288 8,762 13,269
-------- -------- -------- --------
220,693 248,933 427,505 477,543
-------- -------- -------- --------
Costs and expenses:
Cost of sales 172,679 167,329 339,854 324,244
Selling, general and
administrative 35,568 33,629 99,601 66,268
Interest 16,540 15,452 32,715 31,851
-------- -------- -------- --------
224,787 216,410 472,170 422,363
-------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes and
minority interest (4,094) 32,523 (44,665) 55,180
Income tax expense (benefit) (702) 9,105 (1,106) 15,447
-------- -------- -------- --------
Income (loss) from
continuing operations
before minority
interest (3,392) 23,418 (43,559) 39,733
Minority interest 36 4 49 19
-------- -------- -------- --------
Income (loss) from
continuing operations (3,428) 23,414 (43,608) 39,714
Discontinued operations 5,683 336 10,142 287,396
Extraordinary item - early
extinguishment of debt, net
of tax benefit of $12 and
$1,275, respectively - (21) - (2,366)
-------- -------- -------- --------
Net income (loss) $ 2,255 $ 23,729 $(33,466) $324,744
======== ======== ======== ========
</TABLE>
- 5 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------- ------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic earnings per share:
Continuing operations .......... $ (.07) $ .46 $ (.85) $ .77
Discontinued operations ........ .11 -- .20 5.61
Extraordinary item ............. -- -- -- (.05)
---------- ---------- ---------- ----------
Net income (loss) ............ $ .04 $ .46 $ (.65) $ 6.33
========== ========== ========== ==========
Diluted earnings per share:
Continuing operations .......... $ (.07) $ .45 $ (.85) $ .77
Discontinued operations ........ .11 .01 .20 5.53
Extraordinary item ............. -- -- -- (.05)
---------- ---------- ---------- ----------
Net income (loss) ............ $ .04 $ .46 $ (.65) $ 6.25
========== ========== ========== ==========
Shares used in the calculation of
earnings per share:
Basic .......................... 51,144 51,341 51,142 51,311
Dilutive impact of stock options -- 689 -- 636
---------- ---------- ---------- ----------
Diluted ........................ 51,144 52,030 51,142 51,947
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
- 6 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) ........... $ 2,255 $ 23,729 $ (33,466) $ 324,744
--------- --------- --------- ---------
Other comprehensive income
(loss), net of tax:
Marketable securities
adjustment ............... 941 407 1,967 899
Currency translation
adjustment ............... (8,255) (3,472) (7,505) (3,072)
--------- --------- --------- ---------
Total other comprehensive
income (loss) .......... (7,314) (3,065) (5,538) (2,173)
--------- --------- --------- ---------
Comprehensive income (loss) $ (5,059) $ 20,664 $ (39,004) $ 322,571
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
- 7 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Six months ended June 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Accumulated other
comprehensive
income (loss)
Additional -----------------------
Common paid-in Accumulated Currency Marketable Treasury
stock capital deficit translation securities stock Total
--------- ----------- ----------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 ......... $ 8,355 $ 759,281 $(495,421) $(133,810) $ 4,297 $(364,971) $(222,269)
Net income ........................... -- -- 324,744 -- -- -- 324,744
Other comprehensive income (loss), net -- -- -- (3,072) 899 -- (2,173)
Dividends ............................ -- -- (1,541) -- -- -- (1,541)
Cash received upon settlement of
shareholder derivative lawsuit, net
of $3,198 in legal fees and expenses -- 11,211 -- -- -- -- 11,211
Treasury stock reissued .............. -- -- -- -- -- 799 799
--------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 1998 ............. $ 8,355 $ 770,492 $(172,218) $(136,882) $ 5,196 $(364,172) $ 110,771
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
- 8 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................ $ (33,466) $ 324,744
Depreciation, depletion and amortization ......... 17,496 16,989
Noncash interest expense ......................... 11,210 11,919
Deferred income taxes ............................ (803) 1,496
Change in accounting for environmental
remediation costs ............................... 30,000 --
Discontinued operations:
Net gain from sale of Rheox .................... -- (286,071)
Income from operations of Rheox ................ (10,142) (1,325)
Other, net ....................................... (7,287) (5,948)
--------- ---------
7,008 61,804
Change in assets and liabilities:
Accounts and notes receivable .................. (34,137) (39,273)
Inventories .................................... 30,284 2,019
Prepaid expenses ............................... (1,899) (2,563)
Accounts payable and accrued liabilities ....... (4,142) 2,807
Income taxes ................................... 7,230 (7,186)
Other, net ..................................... (4,867) 20,547
Rheox, net ....................................... 14,843 (20,791)
--------- ---------
Net cash provided by operating activities .... 14,320 17,364
--------- ---------
Cash flows from investing activities:
Proceeds from sale of Rheox ...................... -- 435,080
Capital expenditures ............................. (15,589) (8,210)
Collection of note receivable .................... -- 6,875
Investment in joint venture, net ................. 3,507 (371)
Proceeds from disposition of property
and equipment ................................... 2,906 179
Rheox, net ....................................... (733) (26)
--------- ---------
Net cash provided (used) by investing
activities .................................. (9,909) 433,527
--------- ---------
</TABLE>
- 9 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six months ended June 30, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Indebtedness:
Borrowings ....................................... $ -- $ 30,491
Principal payments ............................... (163,599) (116,672)
Deferred financing costs ......................... (2,343) --
Settlement of shareholder derivative lawsuit, net .. -- 11,211
Dividends .......................................... -- (1,541)
Rheox, net ......................................... 123,678 (117,500)
Other, net ......................................... 240 797
--------- ---------
Net cash used by financing activities .......... (42,024) (193,214)
--------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities .... (37,613) 257,677
Currency translation ............................. (1,923) (872)
Sale of Rheox .................................... -- (7,630)
Balance at beginning of period ..................... 114,115 106,145
--------- ---------
Balance at end of period ........................... $ 74,579 $ 355,320
========= =========
Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized ............... $ 27,049 $ 20,850
Income taxes, net .................................. (2,739) 39,019
</TABLE>
See accompanying notes to consolidated financial statements.
- 10 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
NL Industries, Inc. conducts its titanium dioxide pigments ("TiO2")
operations through its wholly-owned subsidiary, Kronos, Inc. In January 1998 the
specialty chemicals business of Rheox, Inc., a wholly-owned subsidiary of NL,
was sold. At June 30, 1998 Valhi, Inc. and Tremont Corporation, each affiliates
of Contran Corporation, held approximately 58% and 18%, respectively, of NL's
outstanding common stock, and together may be deemed to control NL. At June 30,
1998 Contran and its subsidiaries held approximately 92% of Valhi's outstanding
common stock, and Valhi and other entities related to Harold C. Simmons held
approximately 53% of Tremont's outstanding common stock.
The consolidated balance sheet of NL Industries, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 1997 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 1998 and the consolidated statements of
income, comprehensive income, shareholders' equity and cash flows for the
interim periods ended June 30, 1997 and 1998 have been prepared by the Company,
without audit. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows have been made. The
results of operations for the interim periods are not necessarily indicative of
the operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. Certain prior-year amounts have been
reclassified to conform to the current year presentation, including reporting
the Company's specialty chemicals business as a discontinued operation. The
accompanying consolidated financial statements should be read in conjunction
with the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 (the "1997 Annual
Report").
The Company will adopt Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
no later than the first quarter of 2000. SFAS No. 133 establishes accounting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Under SFAS No. 133, all
derivatives will be recognized as either assets or liabilities and measured at
fair value. The accounting for changes in fair value of derivatives will depend
upon the intended use of the derivative. The Company is currently studying this
newly-issued accounting rule, and the impact of adopting SFAS No. 133, if any,
has not yet been determined but will be dependent upon the extent to which the
Company is a party to derivative contracts or hedging activities at the time of
adoption. At June 30, 1998 the Company is not a party to any derivative
contracts.
- 11 -
<PAGE>
Note 2 - Earnings per share:
Basic earnings per share are based on the weighted average number of
common shares outstanding during each period. Diluted earnings per share are
based on the weighted average common shares outstanding and the dilutive impact
of outstanding stock options.
Note 3 - Business segment information:
The Company's continuing operations are conducted by Kronos in one
business segment - TiO2.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
1997 1998 1997 1998
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Net sales ......................... $ 214,354 $ 241,645 $ 418,743 $ 464,274
Other income, excluding
corporate ........................ 5,519 1,335 7,170 2,683
--------- --------- --------- ---------
219,873 242,980 425,913 466,957
Cost of sales ..................... 172,679 167,329 339,854 324,244
Selling, general and
administrative, excluding
corporate ........................ 30,379 28,926 60,555 56,589
--------- --------- --------- ---------
Operating income .................. 16,815 46,725 25,504 86,124
General corporate income (expense):
Securities earnings, net ........ 528 4,554 1,227 8,402
Expenses, net ................... (4,897) (3,304) (38,681) (7,495)
Interest expense ................ (16,540) (15,452) (32,715) (31,851)
--------- --------- --------- ---------
$ (4,094) $ 32,523 $ (44,665) $ 55,180
========= ========= ========= =========
</TABLE>
Corporate expenses, net decreased in the first half of 1998 due to the $30
million noncash charge taken in the first quarter of 1997 related to the
adoption of a new method of accounting for certain environmental remediation
costs.
Note 4 - Inventories:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ --------
(In thousands)
<S> <C> <C>
Raw materials ................................ $ 45,844 $ 38,919
Work in process .............................. 8,018 7,233
Finished products ............................ 107,427 90,433
Supplies ..................................... 31,491 32,792
-------- --------
$192,780 $169,377
======== ========
</TABLE>
- 12 -
<PAGE>
Note 5 - Marketable securities:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ---------
(In thousands)
<S> <C> <C>
Available-for-sale securities - noncurrent
marketable equity securities:
Unrealized gains ................................. $ 6,939 $ 8,362
Unrealized losses ................................ (328) (369)
Cost ............................................. 10,659 10,659
-------- --------
Aggregate market ............................. $ 17,270 $ 18,652
======== ========
</TABLE>
Note 6 - Investment in joint ventures:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ---------
(In thousands)
<S> <C> <C>
TiO2 manufacturing joint venture ............... $170,830 $171,202
Other .......................................... 1,891 --
-------- --------
$172,721 $171,202
======== ========
</TABLE>
Note 7 - Other noncurrent assets:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ---------
(In thousands)
<S> <C> <C>
Deferred financing costs, net $ 9,973 $ 6,913
Intangible assets, net 4,228 2,960
Other 4,391 3,329
------- -------
$18,592 $13,202
======= =======
</TABLE>
Note 8 - Accounts payable and accrued liabilities:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ --------
(In thousands)
<S> <C> <C>
Accounts payable ......................... $ 64,698 $ 52,171
-------- --------
Accrued liabilities:
Employee benefits ...................... 40,110 32,380
Environmental costs .................... 9,000 23,000
Interest ............................... 6,966 6,733
Other .................................. 40,956 52,813
-------- --------
97,032 114,926
-------- --------
$161,730 $167,097
======== ========
</TABLE>
- 13 -
<PAGE>
Note 9 - Other noncurrent liabilities:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ --------
(In thousands)
<S> <C> <C>
Environmental costs ................................ $125,502 $110,440
Insurance claims and expenses ...................... 11,436 11,364
Employee benefits .................................. 10,835 9,563
Deferred income .................................... -- 14,333
Other .............................................. 1,130 2,931
-------- --------
$148,903 $148,631
======== ========
</TABLE>
Note 10 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ --------
(In thousands)
<S> <C> <C>
Notes payable - Kronos (DM 25,000 and DM
60,500, respectively) ............................. $ 13,968 $ 33,680
======== ========
Long-term debt:
NL Industries:
11.75% Senior Secured Notes .................... $250,000 $244,000
13% Senior Secured Discount Notes .............. 169,857 168,995
-------- --------
419,857 412,995
-------- --------
Kronos:
DM bank credit facility (DM 288,322 and
DM 207,322, respectively) ..................... 161,085 115,416
Joint venture term loan ........................ 42,429 --
Other .......................................... 3,282 2,067
-------- --------
206,796 117,483
-------- --------
Rheox - bank term loan ........................... 117,500 --
-------- --------
744,153 530,478
Less current maturities ............................ 77,374 191,610
-------- --------
$666,779 $338,868
======== ========
</TABLE>
The Company currently intends to redeem the 13% Senior Secured Discount
Notes on October 15, 1998 at the redemption price of 106% of the principal
amount, in accordance with the terms of the Discount Notes indenture. As a
result, the Discount Notes have been classified as a current liability at June
30, 1998.
- 14 -
<PAGE>
Note 11 - Income taxes:
The difference between the provision for income tax expense attributable
to income from continuing operations before income taxes and minority interest
and the amount that would be expected using the U.S. federal statutory income
tax rate of 35% is presented below.
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Expected tax expense (benefit) ......................... $(15,633) $ 19,313
Non-U.S. tax rates ..................................... (440) (70)
Incremental tax on income of companies not included
in NL's consolidated U.S. federal income tax return ... 1,440 1,519
Change in valuation allowance .......................... 12,775 (5,256)
U.S. state income taxes ................................ 75 200
Other, net ............................................. 677 (259)
-------- --------
Income tax expense (benefit) ..................... $ (1,106) $ 15,447
======== ========
</TABLE>
Note 12 - Other income, net:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- --------------------
1997 1998 1997 1998
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Corporate interest and dividend
income .......................... $ 351 $ 4,554 $ 948 $ 8,402
Noncompete agreement income ...... -- 1,000 -- 1,667
Currency transaction gains, net .. 2,302 1,134 3,065 1,717
Trade interest income ............ 646 456 1,288 1,037
Gain (loss) from disposition of
property and equipment .......... 2,794 (278) 2,763 (302)
Other, net ....................... 246 422 698 748
-------- -------- -------- --------
$ 6,339 $ 7,288 $ 8,762 $ 13,269
======== ======== ======== ========
</TABLE>
Note 13 - Discontinued operations:
The Company sold the net assets of its Rheox specialty chemicals business
for $465 million cash (before fees and expenses) in the first quarter of 1998,
including $20 million attributable to a five-year agreement by the Company not
to compete in the rheological products business. The Company recognized an
after-tax gain of approximately $286 million on the sale of this business
segment. A portion of the after-tax proceeds of about $380 million have been
used to reduce outstanding indebtedness by approximately $177 million.
- 15 -
<PAGE>
Condensed income statement data related to discontinued operations for the
interim periods ended June 30, 1997 and 1998 are as follows. Interest expense
has been allocated to discontinued operations based on the amount of debt
specifically attributed to Rheox's operations.
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Operations:
Net sales ......................................... $ 73,527 $ 12,630
======== ========
Operating income .................................. $ 22,098 $ 2,900
Interest and other expenses ....................... 5,822 797
-------- --------
Income before income taxes and minority
interest ..................................... 16,276 2,103
Income tax expense ................................ 6,155 778
Minority interest ................................. (21) --
-------- --------
10,142 1,325
Gain from sale of Rheox, net of tax expense of
$86,222 - 286,071
------- --------
$10,142 $287,396
======== ========
</TABLE>
Condensed cash flow data for Rheox (excluding dividends paid to,
contributions received from and intercompany loans with NL) is presented below:
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Cash flows from:
Operating activities ........................... $ 14,843 $ (20,791)
Investing activities - capital expenditures
and other ..................................... (733) (26)
Financing activities - indebtedness, net ....... 123,678 (117,500)
--------- ---------
$ 137,788 $(138,317)
========= =========
</TABLE>
Note 14 - Commitments and contingencies:
For descriptions of certain legal proceedings, income tax and other
commitments and contingencies related to the Company, reference is made to (i)
Note 15, (ii) Management's Discussion and Analysis of Financial Condition and
Results of Operations, (iii) Part II, Item 1 -"Legal Proceedings," (iv) the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998,
and (v) the 1997 Annual Report.
- 16 -
<PAGE>
Note 15 - Subsequent event:
In July 1998 the Company reached an agreement (the "Tioxide Purchase") to
(i) acquire the North American TiO2 operations of Imperial Chemical Industries
plc's ("ICI") subsidiary, Tioxide Group Limited, and a Tioxide TiO2 plant in
England, and (ii) cancel certain rights to chloride-process technology licensed
to Tioxide by the Company in connection with the formation of Louisiana Pigment
Company ("LPC") in 1993. The aggregate amount to be paid to ICI is approximately
$365 million, including a $30 million fee for the cancellation of technology
rights and approximately $50 million in working capital. The purchase is subject
to regulatory clearances, completion of the purchase by E.I. du Pont de Nemours
& Co. of ICI's non-North American TiO2 business (the "DuPont Purchase"), and
other conditions customary to transactions of this type.
The operations to be acquired include Tioxide's 50%-interest in LPC, a
manufacturing joint venture of the Company and Tioxide that operates a
chloride-process TiO2 plant in Louisiana with capacity of approximately 120,000
metric tons per annum ("mtpa"); Tioxide's 75,000 mtpa sulfate-process TiO2 plant
in Grimsby, England; Tioxide's 52,000 mtpa finishing plant in Tracy, Quebec; and
Tioxide's North American marketing and distribution business.
Upon completion of the DuPont Purchase and the Tioxide Purchase, the
Company expects to become the world's third largest manufacturer of TiO2,
increasing its productive capacity by approximately 135,000 mtpa.
The Company expects the Tioxide Purchase to close by the end of 1998.
- 17 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended % Six months ended %
June 30, Change June 30, Change
------------------- ------- ------------------ ------
1997 1998 1997 1998
-------- -------- -------- --------
(In millions) (In millions)
<S> <C> <C> <C> <C> <C> <C>
Net sales .................. $ 214.4 $ 241.6 +13% $ 418.8 $ 464.3 +11%
Operating income ........... $ 16.8 $ 46.7 +178% $ 25.5 $ 86.1 +238%
Percent changes in TiO2:
Sales volume ............. N/C +1%
Average selling prices
(in billing currencies) . +18% +18%
</TABLE>
Kronos' operating income in the second quarter and first half of 1998
increased from the comparable periods in 1997 due to higher average selling
prices and improved production volume. Kronos expects its second-half 1998
operating income will continue to outpace 1997 operating income, primarily
because of higher average TiO2 selling prices for 1998 compared to 1997.
Average TiO2 selling prices for the second quarter of 1998 were 18% higher
than the second quarter of 1997 and 3% higher than the first quarter of 1998.
Selling prices at the end of the second quarter were 1% higher than the average
for the quarter.
Kronos' second quarter sales volume approximated the record second quarter
of 1997 with higher sales volume in Europe offsetting lower sales volume in
Asia. Sales volume in the first six months of 1998 was 1% higher than the
year-earlier period. Kronos anticipates its TiO2 sales volume for full-year 1998
will approximate volumes for calendar year 1997.
Kronos' cost of sales as a percentage of net sales decreased in the second
quarter and first half of 1998 primarily due to higher average selling prices.
Kronos' selling, general and administrative expenses decreased in the second
quarter and first half of 1998 due to favorable effects of foreign currency
translation.
A significant amount of sales are denominated in currencies other than the
U.S. dollar, and fluctuations in the value of the U.S. dollar relative to other
currencies decreased the dollar value of sales for the second quarter and first
half of 1998 by $7 million and $22 million, respectively, compared to the
comparable 1997 periods.
- 18 -
<PAGE>
The following table sets forth certain information regarding general
corporate income (expense).
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ------------------
June 30, June 30,
1997 1998 Difference 1997 1998 Difference
------- ------- ---------- ------- ------- ----------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Securities earnings ... $ .5 $ 4.6 $ 4.1 $ 1.2 $ 8.4 $ 7.2
Corporate expenses, net (4.9) (3.3) 1.6 (38.7) (7.5) 31.2
Interest expense ...... (16.5) (15.5) 1.0 (32.7) (31.9) .8
------- ------- ------- ------- ------- -------
$ (20.9) $ (14.2) $ 6.7 $ (70.2) $ (31.0) $ 39.2
======= ======= ======= ======= ======= =======
</TABLE>
Securities earnings increased due to higher average balances available for
investment. Corporate expenses, net in the first half of 1998 was lower than the
comparable period in 1997 due to the $30 million noncash charge taken in the
first quarter of 1997 related to the Company's adoption of SOP No. 96-1,
"Environmental Remediation Liabilities." This charge is included in selling,
general and administrative expense in the Company's consolidated statements of
income. Upon completion of the Tioxide Purchase, the Company expects to charge
to corporate expenses a $30 million fee for the cancellation of certain
chloride-process technology rights licensed to Tioxide by the Company in 1993.
The Company sold the net assets of its Rheox specialty chemicals business
in the first quarter of 1998 and, as a result of the sale, Rheox's results are
reported as discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows from operating, investing and
financing activities for the six months ended June 30, 1997 and 1998 are
presented below.
<TABLE>
<CAPTION>
Six months ended
June 30,
1997 1998
------- --------
(In millions)
<S> <C> <C>
Net cash provided (used) by:
Operating activities .................................... $ 14.3 $ 17.4
Investing activities .................................... (9.9) 433.5
Financing activities .................................... (42.0) (193.2)
------- --------
Net cash provided (used) by operating, investing
and financing activities ........................... $ (37.6) $ 257.7
======= ========
</TABLE>
The TiO2 industry is cyclical and changes in economic conditions within
the industry significantly impact the earnings and operating cash flows of the
Company. Cash flow from operations, before changes in assets and liabilities, in
the 1998 period improved from the comparable period in 1997 due to higher
operating income. Changes in the Company's inventories, receivables and payables
(excluding the effect of currency translation) used cash in both the first half
of 1997 and 1998; however, the cash used in the first half of 1997 was
significantly less than the first half of 1998 due to cash provided from
reductions in inventory levels in the 1997 period.
- 19 -
<PAGE>
The sale of the Company's specialty chemicals business in the first
quarter of 1998 resulted in net proceeds of $380 million after current income
taxes and other expenses. The Company used a portion of the net proceeds to
repay certain indebtedness, as described below, and plans to use a portion of
the net proceeds to redeem the 13% Senior Secured Discount Notes on October 15,
1998 at the redemption price of 106% of the principal amount, in accordance with
the terms of the Discount Notes indenture.
With a portion of the net proceeds, the Company (i) prepaid $118 million
of the Rheox credit facility, (ii) prepaid $42 million of Kronos' share of the
LPC joint venture term loan, (iii) made $15 million of open-market purchases of
the Company's 13% Senior Secured Discount Notes at prices ranging from $101.25
to $104.56 per $100 of their principal amounts, including $4 million purchased
in July 1998, and (iv) purchased $6 million of the Senior Secured Notes and $61
thousand of the Senior Secured Discount Notes at a price of $100 and $96.03 per
$100 of their principal amounts, respectively, pursuant to a pro rata tender
offer to Note holders in June 1998.
The Company prepaid DM 81 million ($44 million when paid) of its DM term
loan in the first quarter of 1998. A portion of the funds for such prepayment of
the DM term loan was provided by a first-quarter DM 35 million ($19 million when
borrowed) increase in outstanding borrowings under the Company's short-term
non-U.S. credit facilities. In the second quarter of 1998, the Company repaid DM
20 million ($11 million when paid) of the DM revolving credit facility.
In order to complete the Tioxide Purchase, the Company expects to arrange
approximately $250 million in bank financing.
At June 30, 1998 the Company had cash and cash equivalents aggregating
$355 million (10% held by non-U.S. subsidiaries), including restricted cash
equivalents of $6 million. The Company's subsidiaries had $75 million available
for borrowing at June 30, 1998 under existing non-U.S. credit facilities.
In the second quarter of 1998 the Company paid a regular quarterly
dividend of $.03 per share to shareholders aggregating $1.5 million. In July
1998 the Company's Board of Directors declared a regular quarterly dividend of
$.03 per share to shareholders of record as of September 16, 1998 to be paid on
September 30, 1998. In June 1998, as a result of the settlement of a shareholder
derivative lawsuit on behalf of the Company, Valhi transferred $14.4 million in
cash to the Company, and the Company agreed to pay plaintiffs' attorneys' fees
and expenses of $3.2 million.
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. The Company previously reached an agreement with the
German tax authorities and paid certain tax deficiencies of approximately DM 44
million ($28 million when paid), including interest, which resolved significant
tax contingencies for years through 1990. During 1997 the Company reached a
tentative agreement with the German tax authorities regarding the years 1991
through 1994, and expects to pay DM 9 million ($5 million at June 30, 1998)
during the second half of 1998 in settlement of certain tax issues. Certain
- 20 -
<PAGE>
other significant German tax contingencies remain outstanding for the years 1990
through 1996 and will continue to be litigated. With respect to these
contingencies, the Company has received certain revised tax assessments
aggregating DM 119 million ($66 million at June 30, 1998), including non-income
tax related items and interest, for years through 1996. The Company expects to
receive tax assessments for an additional DM 20 million ($11 million at June 30,
1998), including non-income tax related items and interest, for the years 1991
through 1994. No payments of tax or interest deficiencies related to these
assessments are expected until the litigation is resolved.
During 1997 a German tax court proceeding involving a tax issue
substantially the same as that involved in the Company's primary remaining tax
contingency was decided in favor of the taxpayer. The German tax authorities
have appealed that decision to the German Supreme Court; the Company believes
that the decision by the German Supreme Court will be rendered within two years
and will become a legal precedent which will likely determine the outcome of the
Company's primary dispute with the German tax authorities, which assessments,
including non-income tax related items and interest, aggregate DM 121 million.
Although the Company believes that it will ultimately prevail, the Company has
granted a DM 94 million ($52 million at June 30, 1998) lien on its Nordenham,
Germany TiO2 plant in favor of the City of Leverkusen, and a DM 5 million ($3
million at June 30, 1998) lien in favor of the German federal tax authorities.
During 1997 the Company received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at June 30,
1998) relating to 1994. The Company has appealed this assessment and expects to
litigate this issue. Although the Company believes that it will ultimately
prevail, the Company has granted a lien for the full amount of the tax
assessment on its Fredrikstad, Norway TiO2 plant in favor of the Norwegian tax
authorities.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in court
proceedings. The Company believes that it has adequately provided accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
The Company has been named as a defendant, potentially responsible party
("PRP"), or both, in a number of legal proceedings associated with environmental
matters, including waste disposal sites, mining locations and facilities
currently or previously owned, operated or used by the Company, certain of which
are on the U.S. Environmental Protection Agency's (the "U.S. EPA") Superfund
National Priorities List or similar state lists. On a quarterly basis, the
Company evaluates the potential range of its liability at sites where it has
been named as a PRP or defendant. The Company believes it has adequate accruals
($133 million at June 30, 1998) for reasonably estimable costs of such matters,
but the Company's ultimate liability may be affected by a number of factors,
including changes in remedial alternatives and costs and the allocations of such
costs among PRPs. It is not possible to estimate the range of costs for certain
sites. The upper end of the range of reasonably possible costs to the Company
for sites
- 21 -
<PAGE>
for which it is possible to estimate costs is approximately $165 million. The
Company's estimates of such liabilities have not been discounted to present
value, and the Company has not recognized any potential insurance recoveries. No
assurance can be given that actual costs will not exceed accrued amounts or the
upper end of the range for sites for which estimates have been made, and no
assurance can be given that costs will not be incurred with respect to sites as
to which no estimate presently can be made. Further, there can be no assurance
that additional environmental matters will not arise in the future.
The Company is also a defendant in a number of legal proceedings seeking
damages for personal injury and property damage arising from the sale of lead
pigments and lead-based paints. There is no assurance that the Company will not
incur future liability in respect of this pending litigation in view of the
inherent uncertainties involved in court and jury rulings in pending and
possible future cases. However, based on, among other things, the results of
such litigation to date, the Company believes that the pending lead pigment and
paint litigation is without merit. The Company has not accrued any amounts for
such pending litigation. Liability that may result, if any, cannot be reasonably
estimated. In addition, various legislation and administrative regulations have,
from time to time, been enacted or proposed that seek to impose various
obligations on present and former manufacturers of lead pigment and lead-based
paint with respect to asserted health concerns associated with the use of such
products and to effectively overturn court decisions in which the Company and
other pigment manufacturers have been successful. Examples of such proposed
legislation include bills which would permit civil liability for damages on the
basis of market share, rather than requiring plaintiffs to prove that the
defendant's product caused the alleged damage. The Company currently believes
the disposition of all claims and disputes, individually and in the aggregate,
should not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity. There can be no
assurance that additional matters of these types will not arise in the future.
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and availability of resources in view of, among
other things, its debt service and capital expenditure requirements and
estimated future operating cash flows. As a result of this process, the Company
in the past has sought, and in the future may seek, to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, issue
additional securities, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, the Company may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals industry. 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.
- 22 -
<PAGE>
The statements contained in this Report on Form 10-Q ("Quarterly Report")
which are not historical facts, including, but not limited to, statements found
under the captions "Results of Operations" and "Liquidity and Capital Resources"
above, are forward-looking statements that involve a number of risks and
uncertainties. The actual results of the future events described in such
forward-looking statements in this Quarterly Report could differ materially from
those stated in such forward-looking statements. Among the factors that could
cause actual results to differ materially are the risks and uncertainties
discussed in this Quarterly Report and in the 1997 Annual Report, including,
without limitation, the portions of such reports under the captions referenced
above, and the uncertainties set forth from time to time in the Company's other
public reports and filings and public statements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the 1997 Annual Report and the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998 for descriptions of
certain previously-reported legal proceedings.
Brenner, et al. v. American Cyanamid, et al. (No. 12596-93). In June
1998 defendants moved for partial summary judgment dismissing plaintiffs' market
share and alternative liability claims.
Parker v. NL Industries, et al. (No. 97085060 CC915). In July 1998 the
Court granted the Company's motion for summary judgment on all remaining claims.
Plaintiffs have appealed.
Granite City Site. The Company has been informed that the U.S. EPA has
reached an agreement in principle with the other PRPs settling their liabilities
with respect to the site for approximately 50% of the site costs. The Company is
negotiating with the U.S. EPA to settle its liability.
Pedricktown Site. In June 1998 the Company entered into a consent
decree with the U.S. EPA and other PRPs to perform the remedial action phase at
operable unit one. In addition, the Company reached an agreement in principle
with certain PRPs with respect to the Company's liability at the site to settle
this matter within previously-accrued amounts.
State of Illinois v. NL Industries, et al. (No. 88-CH-11618). In June
1998 the Illinois appellate court affirmed the ruling of the trial court
dismissing the case. The State has petitioned the Supreme Court of Illinois to
review the case.
United States v. Peter Gull and NL Industries, Inc. (No. 91-4098). In
June 1998 the Company concluded the previously-reported agreement settling this
matter within previously-accrued amounts.
- 23 -
<PAGE>
Seinfeld v. Simmons, et al. (No. C-336-96). In May 1998 the previously-
reported settlement was approved by the Court. In June 1998, pursuant to the
settlement, Valhi transferred $14.4 million to the Company and the Company has
agreed to reimburse plaintiffs' attorneys $3.2 million for fees and expenses.
DeLeon v. Exide Corp. and NL Industries, Inc. (No. DV98-02669-B). In
May 1998 the Company answered the complaint, denying liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 8, 1998. All
the nominees for director were elected with the voting results for each as
follows:
<TABLE>
<CAPTION>
Director Shares For Shares Withheld
- ---------------------------- ---------- ---------------
<S> <C> <C>
Joseph S. Compofelice 49,246,697 368,524
J. Landis Martin 49,242,703 372,518
Kenneth R. Peak 49,248,164 367,057
Glenn R. Simmons 49,238,257 367,964
Harold C. Simmons 49,238,740 376,481
Lawrence A. Wigdor 49,249,362 365,859
Admiral Elmo R. Zumwalt, Jr. 49,236,213 379,008
</TABLE>
The Company's shareholders also approved the Company's proposed 1998
Long-Term Incentive Plan with the voting results as follows:
Shares For Shares Against Shares Abstained
---------- -------------- ----------------
44,032,247 2,812,268 191,584
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 - Financial Data Schedule for the six-month period ended June
30, 1998.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended June 30, 1998 and through
the date of this report:
May 20, 1998 - reported Items 5 and 7.
June 18, 1998 - reported Items 5 and 7.
July 2, 1998 - reported Items 5 and 7.
July 17, 1998 - reported Items 5 and 7.
July 24, 1998 - reported Items 5 and 7.
- 24 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NL INDUSTRIES, INC.
(Registrant)
Date: August 6, 1998 By /s/ Susan E. Alderton
- --------------------- ---------------------
Susan E. Alderton
Vice President and
Chief Financial Officer
Date: August 6, 1998 By /s/ Dennis G. Newkirk
- --------------------- ---------------------
Dennis G. Newkirk
Vice President and Controller
(Principal Accounting Officer)
- 25 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NL
INDUSTRIES, INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 355,320
<SECURITIES> 0
<RECEIVABLES> 154,857
<ALLOWANCES> 2,669
<INVENTORY> 169,377
<CURRENT-ASSETS> 703,240
<PP&E> 798,908
<DEPRECIATION> 430,110
<TOTAL-ASSETS> 1,298,881
<CURRENT-LIABILITIES> 429,784
<BONDS> 338,868
0
0
<COMMON> 8,355
<OTHER-SE> 102,416
<TOTAL-LIABILITY-AND-EQUITY> 1,298,881
<SALES> 464,274
<TOTAL-REVENUES> 477,543
<CGS> 324,244
<TOTAL-COSTS> 324,244
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 96
<INTEREST-EXPENSE> 31,851
<INCOME-PRETAX> 55,180
<INCOME-TAX> 15,447
<INCOME-CONTINUING> 39,714
<DISCONTINUED> 287,396
<EXTRAORDINARY> (2,366)
<CHANGES> 0
<NET-INCOME> 324,744
<EPS-PRIMARY> 6.33
<EPS-DILUTED> 6.25
</TABLE>
