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, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-640
NL INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 13-5267260
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16825 Northchase Drive, Suite 1200, Houston, Texas 77060-2544
- -------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 423-3300
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) had been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of common stock outstanding on August 12, 1999: 51,826,139
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1998
and June 30, 1999 3-4
Consolidated Statements of Income - Three months
and six months ended June 30, 1998 and 1999 5-6
Consolidated Statements of Comprehensive Income
- Three months and six months ended June 30, 1998
and 1999 7
Consolidated Statement of Shareholders' Equity
- Six months ended June 30, 1999 8
Consolidated Statements of Cash Flows - Six
months ended June 30, 1998 and 1999 9-10
Notes to Consolidated Financial Statements 11-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 26
- 2 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1998 1999
------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................... $ 154,953 $ 122,456
Restricted cash equivalents .................... 8,164 24,605
Accounts and notes receivable .................. 133,769 161,428
Refundable income taxes ........................ 15,919 6,146
Inventories .................................... 228,611 206,196
Prepaid expenses ............................... 2,724 4,460
Deferred income taxes .......................... 1,955 10,688
---------- ----------
Total current assets ....................... 546,095 535,979
---------- ----------
Other assets:
Marketable securities .......................... 17,580 16,340
Investment in TiO2 manufacturing joint
venture ....................................... 171,202 160,052
Prepaid pension cost ........................... 23,990 24,002
Other .......................................... 13,927 6,830
---------- ----------
Total other assets ......................... 226,699 207,224
---------- ----------
Property and equipment:
Land ........................................... 19,626 17,868
Buildings ...................................... 144,228 133,680
Machinery and equipment ........................ 586,400 544,307
Mining properties .............................. 84,015 82,498
Construction in progress ....................... 4,385 12,522
---------- ----------
838,654 790,875
Less accumulated depreciation and depletion .... 456,495 436,480
---------- ----------
Net property and equipment ................. 382,159 354,395
---------- ----------
$1,154,953 $1,097,598
========== ==========
</TABLE>
- 3 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1999
------------ ------------
<S> <C> <C>
Current liabilities:
Notes payable ................................ $ 36,391 $ 32,132
Current maturities of long-term debt ......... 64,826 29,508
Accounts payable and accrued liabilities ..... 187,661 178,255
Payable to affiliates ........................ 10,625 8,451
Income taxes ................................. 9,224 5,891
Deferred income taxes ........................ 1,236 1,731
----------- -----------
Total current liabilities ................ 309,963 255,968
----------- -----------
Noncurrent liabilities:
Long-term debt ............................... 292,803 300,147
Deferred income taxes ........................ 196,180 106,097
Accrued pension cost ......................... 44,649 39,629
Accrued postretirement benefits cost ......... 41,659 39,101
Other ........................................ 116,732 100,418
----------- -----------
Total noncurrent liabilities ............. 692,023 585,392
----------- -----------
Minority interest .............................. 633 2,839
----------- -----------
Shareholders' equity:
Common stock ................................. 8,355 8,355
Additional paid-in capital ................... 774,288 774,288
Accumulated deficit .......................... (133,379) (11,244)
Accumulated other comprehensive loss ......... (132,129) (153,316)
Treasury stock ............................... (364,801) (364,684)
----------- -----------
Total shareholders' equity ............... 152,334 253,399
----------- -----------
$ 1,154,953 $ 1,097,598
=========== ===========
</TABLE>
Commitments and contingencies (Note 13)
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,
---------------------- ----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues and other income:
Net sales .................. $ 241,645 $ 232,568 $ 464,274 $ 434,137
Other, net ................. 7,288 9,660 13,269 16,073
--------- --------- --------- ---------
248,933 242,228 477,543 450,210
--------- --------- --------- ---------
Costs and expenses:
Cost of sales .............. 167,329 167,779 324,244 314,819
Selling, general and
administrative ............ 33,629 33,079 66,268 65,641
Interest ................... 15,452 9,298 31,851 19,077
--------- --------- --------- ---------
216,410 210,156 422,363 399,537
--------- --------- --------- ---------
Income from continuing
operations before
income taxes and
minority interest ...... 32,523 32,072 55,180 50,673
Income tax benefit (expense) . (9,105) 81,990 (15,447) 77,340
--------- --------- --------- ---------
Income from continuing
operations before
minority interest ...... 23,418 114,062 39,733 128,013
Minority interest ............ 4 2,239 19 2,250
--------- --------- --------- ---------
Income from continuing
operations ............. 23,414 111,823 39,714 125,763
Discontinued operations ...... 336 -- 287,396 --
Extraordinary item - early
extinguishment of debt, net
of tax benefit of $12 and
$1,275, respectively ........ (21) -- (2,366) --
--------- --------- --------- ---------
Net income ............. $ 23,729 $ 111,823 $ 324,744 $ 125,763
========= ========= ========= =========
</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,
----------------------- ------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic earnings per share:
Continuing operations .......... $ .46 $ 2.16 $ .77 $ 2.43
Discontinued operations ........ -- -- 5.61 --
Extraordinary item ............. -- -- (.05) --
---------- ---------- ---------- ----------
Net income ................... $ .46 $ 2.16 $ 6.33 $ 2.43
========== ========== ========== ==========
Diluted earnings per share:
Continuing operations .......... $ .45 $ 2.16 $ .77 $ 2.42
Discontinued operations ........ .01 -- 5.53 --
Extraordinary item ............. -- -- (.05) --
---------- ---------- ---------- ----------
Net income ................... $ .46 $ 2.16 $ 6.25 $ 2.42
========== ========== ========== ==========
Shares used in the calculation of
earnings per share:
Basic .......................... 51,341 51,826 51,311 51,823
Dilutive impact of stock options 689 57 636 48
---------- ---------- ---------- ----------
Diluted ........................ 52,030 51,883 51,947 51,871
========== ========== ========== ==========
</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,
---------------------- ----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income .................. $ 23,729 $ 111,823 $ 324,744 $ 125,763
--------- --------- --------- ---------
Other comprehensive income
(loss), net of tax:
Marketable securities
adjustment ............... 407 135 899 (805)
Currency translation
adjustment ............... (3,472) (8,131) (3,072) (20,382)
--------- --------- --------- ---------
Total other comprehensive
loss ................... (3,065) (7,996) (2,173) (21,187)
--------- --------- --------- ---------
Comprehensive income ...... $ 20,664 $ 103,827 $ 322,571 $ 104,576
========= ========= ========= =========
</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, 1999
(In thousands)
<TABLE>
<CAPTION>
Accumulated other
comprehensive income (loss)
Additional -------------------------------------
Common paid-in Accumulated Currency Pension Marketable Treasury
stock capital deficit translation liabilities securities stock Total
--------- ---------- ----------- ----------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 8,355 $ 774,288 $(133,379) $(133,440) $ (3,187) $ 4,498 $(364,801) $ 152,334
Net income .................. -- -- 125,763 -- -- -- -- 125,763
Other comprehensive loss, net -- -- -- (20,382) -- (805) -- (21,187)
Dividends ................... -- -- (3,628) -- -- -- -- (3,628)
Treasury stock reissued ..... -- -- -- -- -- -- 117 117
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 1999 .... $ 8,355 $ 774,288 $ (11,244) $(153,822) $ (3,187) $ 3,693 $(364,684) $ 253,399
========= ========= ========= ========= ========= ========= ========= =========
</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, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................... $ 324,744 $ 125,763
Depreciation, depletion and amortization ......... 16,989 17,024
Noncash interest expense ......................... 11,919 898
Deferred income taxes ............................ 1,496 (88,415)
Distribution from TiO2 manufacturing joint
venture ......................................... -- 11,150
Discontinued operations:
Net gain from sale of Rheox .................... (286,071) --
Income from operations of Rheox ................ (1,325) --
Other, net ....................................... (5,948) (2,325)
--------- ---------
61,804 64,095
Change in assets and liabilities:
Accounts and notes receivable .................. (39,273) (37,743)
Inventories .................................... 2,019 8,485
Prepaid expenses ............................... (2,563) (2,375)
Accounts payable and accrued liabilities ....... 2,807 (8,964)
Income taxes ................................... (7,186) 5,830
Other, net ..................................... 20,547 (13,119)
Rheox, net ....................................... (20,791) --
--------- ---------
Net cash provided by operating activities .... 17,364 16,209
--------- ---------
Cash flows from investing activities:
Capital expenditures ............................. (8,210) (17,235)
Change in restricted cash equivalents, net ....... 3,893 (12,516)
Proceeds from disposition of property and
equipment ....................................... 179 2,128
Collection of note receivable .................... 6,875 --
Investment in joint venture ...................... (371) --
Proceeds from sale of Rheox ...................... 435,080 --
Rheox, net ....................................... (26) --
--------- ---------
Net cash provided (used) by investing
activities .................................. 437,420 (27,623)
--------- ---------
</TABLE>
- 9 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six months ended June 30, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Indebtedness:
Borrowings ....................................... $ 30,491 $ 56,271
Principal payments ............................... (116,672) (71,563)
Dividends paid ..................................... (1,541) (3,628)
Settlement of shareholder derivative lawsuit, net .. 11,211 --
Other, net ......................................... 797 111
Rheox, net ......................................... (117,500) --
--------- ---------
Net cash used by financing activities .......... (193,214) (18,809)
--------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities .... 261,570 (30,223)
Currency translation ............................. (872) (2,274)
Sale of Rheox .................................... (7,630) --
Balance at beginning of period ..................... 96,394 154,953
--------- ---------
Balance at end of period ........................... $ 349,462 $ 122,456
========= =========
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized ............... $ 20,850 $ 18,672
Income taxes, net .................................. 39,019 5,238
</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. At June 30, 1999,
Valhi, Inc. and Tremont Corporation, each affiliates of Contran Corporation,
held approximately 58% and 20%, respectively, of NL's outstanding common stock,
and together they may be deemed to control NL. At June 30, 1999, Contran and its
subsidiaries held approximately 92% of Valhi's outstanding common stock, and
Valhi and other entities related to Harold C. Simmons held approximately 55% of
Tremont's outstanding common stock.
The consolidated balance sheet of NL Industries, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 1998 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 1999 and the consolidated statements of
income, comprehensive income, shareholders' equity and cash flows for the
interim periods ended June 30, 1998 and 1999 have been prepared by the Company,
without audit. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows have been made. The
results of operations for the interim periods are not necessarily indicative of
the operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. Certain prior-year amounts have been
reclassified to conform to the current year presentation. The accompanying
consolidated financial statements should be read in conjunction with the
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 (the "1998 Annual Report").
The Company will adopt Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, no later than the first quarter of 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 will be recognized as either assets or liabilities and
measured at fair value. The accounting for changes in fair value of derivatives
will depend upon the intended use of the derivative. The impact of adopting SFAS
No. 133, if any, has not been determined but will be dependent upon the extent
to which the Company is then a party to derivative contracts or engaged in
hedging activities.
- 11 -
<PAGE>
NOTE 2 - EARNINGS PER SHARE:
Basic earnings per share is based on the weighted average number of common
shares outstanding during each period. Diluted earnings per share is based on
the weighted average common shares outstanding and the dilutive impact of
outstanding stock options.
NOTE 3 - BUSINESS SEGMENT INFORMATION:
The Company's operations are conducted by Kronos in one operating business
segment - TiO2.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Net sales ......................... $ 241,645 $ 232,568 $ 464,274 $ 434,137
Other income, excluding
corporate ........................ 1,335 6,909 2,683 10,602
--------- --------- --------- ---------
242,980 239,477 466,957 444,739
Cost of sales ..................... 167,329 167,779 324,244 314,819
Selling, general and
administrative, excluding
corporate ........................ 28,926 27,562 56,589 54,823
--------- --------- --------- ---------
Operating income .................. 46,725 44,136 86,124 75,097
General corporate income (expense):
Securities earnings, net ........ 4,554 1,545 8,402 3,145
Expenses, net ................... (3,304) (4,311) (7,495) (8,492)
Interest expense ................ (15,452) (9,298) (31,851) (19,077)
--------- --------- --------- ---------
$ 32,523 $ 32,072 $ 55,180 $ 50,673
========= ========= ========= =========
</TABLE>
NOTE 4 - INVENTORIES:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ --------
(In thousands)
<S> <C> <C>
Raw materials ............................ $ 46,114 $ 44,171
Work in process .......................... 11,530 7,164
Finished products ........................ 136,225 126,073
Supplies ................................. 34,742 28,788
-------- --------
$228,611 $206,196
======== ========
</TABLE>
- 12 -
<PAGE>
NOTE 5 - NONCURRENT MARKETABLE SECURITIES:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ ---------
(In thousands)
<S> <C> <C>
Available-for-sale - marketable equity securities:
Unrealized gains ................................... $ 8,512 $ 7,761
Unrealized losses .................................. (1,591) (2,080)
Cost ............................................... 10,659 10,659
-------- --------
Aggregate market ............................... $ 17,580 $ 16,340
======== ========
</TABLE>
NOTE 6 - OTHER NONCURRENT ASSETS:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ --------
(In thousands)
<S> <C> <C>
Deferred financing costs, net .................. $ 4,124 $ 3,124
Restricted cash equivalents .................... 4,225 300
Intangible assets, net ......................... 1,985 877
Other .......................................... 3,593 2,529
------- -------
$13,927 $ 6,830
======= =======
</TABLE>
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ --------
(In thousands)
<S> <C> <C>
Accounts payable ......................... $ 55,270 $ 48,156
-------- --------
Accrued liabilities:
Environmental costs .................... 44,122 51,501
Employee benefits ...................... 37,399 28,748
Interest ............................... 7,346 6,805
Other .................................. 43,524 43,045
-------- --------
132,391 130,099
-------- --------
$187,661 $178,255
======== ========
</TABLE>
- 13 -
<PAGE>
NOTE 8 - OTHER NONCURRENT LIABILITIES:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ --------
(In thousands)
<S> <C> <C>
Environmental costs ................................ $ 81,454 $ 67,560
Insurance claims and expenses ...................... 10,872 11,312
Deferred income .................................... 12,333 10,333
Employee benefits .................................. 9,778 8,378
Other .............................................. 2,295 2,835
-------- --------
$116,732 $100,418
======== ========
</TABLE>
NOTE 9 - NOTES PAYABLE AND LONG-TERM DEBT:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ --------
(In thousands)
<S> <C> <C>
Notes payable - Kronos (DM 60,500) ................... $ 36,391 $ 32,132
======== ========
Long-term debt:
Kronos:
DM bank credit facility (DM 187,322 and
DM 160,072, respectively) ....................... $112,674 $ 85,015
Other ............................................ 955 640
-------- --------
113,629 85,655
NL Industries - 11.75% Senior Secured Notes ........ 244,000 244,000
-------- --------
357,629 329,655
Less current maturities .............................. 64,826 29,508
-------- --------
$292,803 $300,147
======== ========
</TABLE>
- 14 -
<PAGE>
NOTE 10 - INCOME TAXES:
The difference between the income tax benefit (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,
--------------------
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Expected tax expense ................................... $(19,313) $(17,736)
Non-U.S. tax rates ..................................... 70 824
German solidarity and trade income taxes ............... (1,151) (4,186)
Change in German income tax law ........................ -- (24,070)
Incremental tax on income of companies not included
in NL's consolidated U.S. federal income tax return ... (1,519) (1,169)
Valuation allowance .................................... 6,407 85,108
U.S. state income taxes ................................ (200) 803
Settlement of German income tax audits ................. -- 36,490
Other, net ............................................. 259 1,276
-------- --------
Income tax benefit (expense) ..................... $(15,447) $ 77,340
======== ========
</TABLE>
The Company recognized a $90 million noncash income tax benefit in the
second quarter of 1999 related to (i) a favorable resolution of the Company's
previously reported tax contingency in Germany ($36 million) and (ii) a net
reduction in the Company's deferred income tax valuation allowance due to a
change in estimate of the Company's ability to utilize certain income tax
attributes under the "more-likely-than-not" recognition criteria ($54 million).
With respect to the German tax contingency, the German government has
conceded substantially all of its income tax claims against the Company and has
released a DM 94 million ($50 million) lien on the Company's Nordenham, Germany
TiO2 plant that secured the government's claim.
The $54 million net decrease in the Company's deferred income tax
valuation allowance is comprised of (i) a $78 million decrease in the valuation
allowance to recognize the benefit of certain deductible income tax attributes
which the Company now believes meets the recognition criteria as a result of,
among other things, a legal restructuring of the Company's German subsidiaries
offset by (ii) a $24 million increase in the valuation allowance to reduce the
previously recognized benefit of certain other deductible income tax attributes
which the Company now believes do not meet the recognition criteria due to a
change in German tax law. The German tax law change, enacted on April 1, 1999,
was effective retroactive to January 1, 1999 and resulted in an additional $3.8
million of current tax expense during the first six months of 1999.
During the first six months of 1999, the Company also reduced its deferred
income tax valuation allowance by $7 million primarily as a result of
utilization of certain tax attributes for which the benefit had not been
previously recognized under the "more-likely-than-not" recognition criteria.
- 15 -
<PAGE>
NOTE 11 - OTHER INCOME, NET:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
1998 1999 1998 1999
------ ------ ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Corporate interest and dividend
income $4,554 $1,545 $ 8,402 $ 3,145
Currency transaction gains, net 1,134 6,272 1,717 7,841
Noncompete agreement income 1,000 1,000 1,667 2,000
Trade interest income 456 357 1,037 1,305
Gain (loss) from disposition of
property and equipment (278) (32) (302) 947
Other, net 422 518 748 835
------ ------ ------- -------
$7,288 $9,660 $13,269 $16,073
====== ====== ======= =======
</TABLE>
NOTE 12 - DISCONTINUED OPERATIONS:
The Company sold the net assets of its Rheox specialty chemicals business
for $465 million cash (before fees and expenses) in January 1998, including $20
million attributable to a five-year agreement by the Company not to compete in
the rheological products business. The Company recognized an after-tax gain of
approximately $286 million on the sale of this business segment.
Condensed income statement and cash flow data for Rheox (excluding
dividends paid to, contributions received from and intercompany loans with NL)
is presented below. Interest expense has been allocated to discontinued
operations based on the amount of debt specifically attributed to Rheox's
operations.
- 16 -
<PAGE>
<TABLE>
<CAPTION>
Six months
ended
June 30, 1998
--------------
(In thousands)
<S> <C>
Operations:
Net sales .................................................... $ 12,630
=========
Operating income ............................................. $ 2,900
Interest and other expenses .................................. 797
---------
Income before income taxes ............................... 2,103
Income tax expense ........................................... 778
---------
1,325
Gain from sale of Rheox, net of tax expense of $86,222 ......... 286,071
---------
$ 287,396
=========
Cash flows from:
Operating activities ......................................... $ (20,791)
Investing activities - capital expenditures .................. (26)
Financing activities - indebtedness, net ..................... (117,500)
---------
$(138,317)
=========
</TABLE>
NOTE 13 - COMMITMENTS AND CONTINGENCIES:
For descriptions of certain legal proceedings, income tax and other
commitments and contingencies related to the Company, reference is made to (i)
Management's Discussion and Analysis of Financial Condition and Results of
Operations, (ii) Part II, Item 1 -"Legal Proceedings", (iii) the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, and (iv) the
1998 Annual Report.
- 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
------------------ ------ ----------------- ------
1998 1999 1998 1999
------ ------ ------ ------
(In millions) (In millions)
<S> <C> <C> <C> <C> <C> <C>
Net sales ..................... $241.6 $232.6 -4% $464.3 $434.1 -6%
Operating income .............. $ 46.7 $ 44.1 -6% $ 86.1 $ 75.1 -13%
Percent changes in TiO2:
Sales volume ................ -1% -8%
Average selling prices
(in billing currencies) .... N/C +3%
</TABLE>
Kronos' operating income in the second quarter and first half of 1999
decreased from the comparable periods in 1998 due to lower production and sales
volumes, partially offset by a second-quarter 1999 $5.3 million currency
exchange transaction gain related to certain of the Company's short-term
intercompany cross-border financings. These intercompany financings were settled
in July 1999. Kronos' second-quarter sales volume decreased 1% from the record
sales volume in the second quarter of 1998 but increased 24% from the first
quarter of 1999. Sales volume in the first six months of 1999 was 8% lower than
the first half of 1998. Kronos anticipates its TiO2 sales volume for full-year
1999 will approximate that of 1998.
Kronos' production volume closely matched sales volume in the second
quarter and first half of 1999, decreasing 2% and 7%, respectively, from the
year-earlier periods. Kronos' average capacity utilization rate was 98% in the
second quarter of 1999 and 91% for the first half of 1999.
Average TiO2 selling prices for the second quarter of 1999 were comparable
to the second quarter of 1998 and were 2% lower than the first quarter of 1999
reflecting weaker prices in European and export markets and, to a lesser degree,
North American markets. Average selling prices at the end of the second quarter
were 1% lower than the average for the quarter. Average selling prices in the
first six months of 1999 were 3% higher than the 1998 period, primarily due to
higher North American prices. Although Kronos expects average TiO2 prices during
the second half of 1999 will be below average prices in the first half of 1999,
the Company does not expect that the downward pressures on prices will be
long-term in nature due to the continuing recovery in Asia and the Company's
positive view of the worldwide economy. Kronos recently announced a 7.5% price
increase in Europe that is expected to improve pricing trends in late 1999.
Kronos expects its full-year 1999 operating income will be below that of
1998 primarily because of lower production volumes and lower average selling
prices.
Kronos' cost of sales as a percentage of net sales in the second quarter
and first half of 1999 increased from the comparable periods in 1998 primarily
due to lower production volume. Kronos' selling, general and administrative
- 18 -
<PAGE>
expenses decreased $1.4 million in the second quarter of 1999 compared to the
second quarter of 1998 due to lower employee benefit expenses, a German
non-income tax refund and the favorable effects of foreign currency translation.
Selling, general and administrative expenses decreased $1.8 million in the first
half of 1999 due to lower distribution expenses associated with lower
first-quarter 1999 sales volume.
A significant amount of sales are denominated in currencies other than the
U.S. dollar. Fluctuations in the value of the U.S. dollar relative to other
currencies decreased the dollar value of sales for the second quarter of 1999 by
$4 million compared to the second quarter of 1998 and increased the dollar value
of sales for the first half of 1999 by $1 million compared to the first half of
1998. Fluctuations in the value of the U.S. dollar relative to other currencies
similarly impacted the Company's operating expenses and the net impact of
currency exchange rate fluctuations on the operating income comparisons to 1998,
excluding the $5.3 million gain described above, were not significant in the
second quarter and first half of 1999.
The following table sets forth certain information regarding general
corporate income (expense).
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, Difference June 30, Difference
------------------ ---------- ------------------ ----------
1998 1999 1998 1999
------- ------- ------- -------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Securities earnings ... $ 4.6 $ 1.5 $ (3.1) $ 8.4 $ 3.1 $ (5.3)
Corporate expenses, net (3.3) (4.2) (.9) (7.5) (8.4) (.9)
Interest expense ...... (15.5) (9.3) 6.2 (31.9) (19.1) 12.8
------- ------- ------- ------- ------- -------
$ (14.2) $ (12.0) $ 2.2 $ (31.0) $ (24.4) $ 6.6
======= ======= ======= ======= ======= =======
</TABLE>
Securities earnings decreased due to lower average balances available for
investment. Interest expense in the second quarter and first half of 1999 each
decreased 40% from the comparable periods in 1998 primarily due to lower levels
of outstanding debt. The Company expects its full-year 1999 securities earnings
and interest expense will be lower than 1998, primarily due to lower average
balances available for investment and lower levels of outstanding debt,
respectively.
See Note 10 to the Consolidated Financial Statements for a description of
the Company's $90 million noncash income tax benefit recognized in the second
quarter of 1999. Although the Company's overall cash income tax rate is expected
to continue to be lower than statutory rates, beginning in 2000 the Company
expects its overall income tax rate (current and deferred income tax expense) to
approximate statutory tax rates.
Minority interest in the second quarter of 1999 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. The shareholders of EMS, other than the Company, actively manage
the environmental liabilities and share in 39% of EMS' cumulative earnings. The
- 19 -
<PAGE>
Company continues to consolidate EMS and provides accruals for the reasonably
estimable costs for the settlement of EMS' environmental liabilities, as
discussed below.
Discontinued operations in 1998 represent the Company's former specialty
chemicals operations which were sold in January 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows from operating, investing and
financing activities for the six months ended June 30, 1998 and 1999 are
presented below.
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------
1998 1999
------- ------
(In millions)
<S> <C> <C>
Net cash provided (used) by:
Operating activities:
Before changes in assets and liabilities $ 61.8 $ 64.1
Changes in assets and liabilities (44.4) (47.9)
------- ------
17.4 16.2
Investing activities 437.4 (27.6)
Financing activities (193.2) (18.8)
------- ------
Net cash provided (used) by operating, investing,
and financing activities $ 261.6 $(30.2)
======= ======
</TABLE>
The TiO2 industry is cyclical and changes in economic conditions
significantly impact the earnings and operating cash flows of the Company. Cash
flow from operations, before changes in assets and liabilities, in the 1999
period increased from the comparable period in 1998 primarily due to $11.2
million of cash distributions from the Company's TiO2 manufacturing joint
venture, partially offset by lower operating income. Changes in the Company's
inventories, receivables and payables (excluding the effect of currency
translation) used cash in the first half of both 1998 and 1999, primarily due to
increases in receivables in each respective period. Cash provided by operations
in 1998 also includes $20 million related to an agreement not to compete in the
rheological products business offset by $20 million of tax payments related to
the gain on sale of Rheox.
The Company prepaid its DM 107 million ($60 million when paid) term loan
in full in the first quarter of 1999, principally by drawing DM 100 million ($56
million when drawn) on its DM revolving credit facility. In the second quarter
of 1999, the Company repaid DM 20 million ($11 million when paid) of the DM
revolving credit facility. The revolver's outstanding balance of DM 160 million
($85 million at June 30, 1999) is scheduled to be reduced to DM 105 million ($56
million at June 30, 1999) in March 2000, with the remaining balance to be repaid
in September 2000.
At June 30, 1999, the Company had cash and cash equivalents aggregating
$122 million ($16 million held by non-U.S. subsidiaries) and an additional $25
- 20 -
<PAGE>
million of restricted cash equivalents. The Company's subsidiaries had $56
million available for borrowing at June 30, 1999 under existing non-U.S. credit
facilities, of which $37 million relates to the Company's DM revolving credit
facility.
In the second quarter of 1999, the Company paid a regular quarterly
dividend of $.035 per share to shareholders aggregating $1.8 million. Dividends
paid during the first half of 1999 totaled $3.6 million. In July 1999 the
Company's Board of Directors declared a regular quarterly dividend of $.035 per
share to shareholders of record as of September 16, 1999 to be paid on September
30, 1999.
See Note 10 to the Consolidated Financial Statements for a description of
the Company's $90 million noncash income tax benefit recognized in the second
quarter of 1999. Although the Company's overall cash income tax rate is expected
to continue to be lower than statutory rates, beginning in 2000 the Company
expects its overall income tax rate (current and deferred income tax expense) to
approximate statutory tax rates.
Certain of the Company's tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies, including non-income tax related items and interest.
In the second quarter of 1999, certain significant German tax contingencies
aggregating an estimated DM 188 million ($100 million when resolved) through
1998 were resolved in the Company's favor. See Note 10 to the Consolidated
Financial Statements.
On April 1, 1999, the German government enacted certain income tax law
changes that were retroactively effective as of January 1, 1999. Based on these
changes, the Company's ongoing cash income tax rate in Germany increased
beginning in the second quarter of 1999.
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,
1999) relating to 1994. The Company has appealed this assessment and has begun
litigation proceedings. During 1998 the Company was informed by the Norwegian
tax authorities that additional tax deficiencies of NOK 39 million ($5 million
at June 30, 1999) will likely be proposed for the year 1996. The Company intends
to vigorously contest this issue and litigate, if necessary. Although the
Company believes that it will ultimately prevail, the Company has granted a lien
for the 1994 tax assessment on its Fredrikstad, Norway TiO2 plant in favor of
the Norwegian tax authorities and will be required to grant security on the 1996
assessment when received.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in court
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
- 21 -
<PAGE>
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, including sites for which EMS has
contractually assumed the Company's obligation. The Company believes it has
adequate accruals ($119 million at June 30, 1999) for reasonably estimable costs
of such matters, but the Company's ultimate liability may be affected by a
number of factors, including changes in remedial alternatives and costs and the
allocations of such costs among PRPs. It is not possible to estimate the range
of costs for certain sites. The upper end of the range of reasonably possible
costs to the Company for sites for which it is possible to estimate costs is
approximately $160 million. The Company's estimates of such liabilities have not
been discounted to present value, and the Company has not recognized any
potential insurance recoveries. No assurance can be given that actual costs will
not exceed accrued amounts or the upper end of the range for sites for which
estimates have been made, and no assurance can be given that costs will not be
incurred with respect to sites as to which no estimate presently can be made.
Further, there can be no assurance that additional environmental matters will
not arise in the future.
The Company is also a defendant in a number of legal proceedings seeking
damages for personal injury and property damage arising from the sale of lead
pigments and lead-based paints. There is no assurance that the Company will not
incur future liability in respect of this pending litigation in view of the
inherent uncertainties involved in court and jury rulings in pending and
possible future cases. However, based on, among other things, the results of
such litigation to date, the Company believes that the pending lead pigment and
paint litigation is without merit. The Company has not accrued any amounts for
such pending litigation. Liability that may result, if any, cannot be reasonably
estimated. In addition, various legislation and administrative regulations have,
from time to time, been enacted or proposed that seek to impose various
obligations on present and former manufacturers of lead pigment and lead-based
paint with respect to asserted health concerns associated with the use of such
products and to effectively overturn court decisions in which the Company and
other pigment manufacturers have been successful. Examples of such proposed
legislation include bills which would permit civil liability for damages on the
basis of market share, rather than requiring plaintiffs to prove that the
defendant's product caused the alleged damage. The Company currently believes
the disposition of all claims and disputes, individually and in the aggregate,
should not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity. There can be no
assurance that additional matters of these types will not arise in the future.
The Company is in the process of evaluating and upgrading its computer
systems (both information technology ("IT") systems and non-IT systems involving
embedded chip technology) and software applications (collectively referred to as
"systems") to ensure that the systems function properly beginning January 1,
2000. To achieve its year 2000 compliance plan, the Company is utilizing
- 22 -
<PAGE>
internal and external resources to identify, correct or reprogram, and test its
systems.
The Company has conducted an inventory of its IT systems worldwide and is
currently testing, where practical, the systems and applications that have been
corrected or reprogrammed for year 2000 compliance. The Company has completed an
inventory of its non-IT systems and is in the process of correcting or replacing
date-deficient systems. The remediation effort is in progress on all critical IT
and non-IT systems, and the Company anticipates that remediation of all such
systems will be substantially complete by September 1999. Once systems undergo
remediation, they are tested for year 2000 compliance. For critical systems, the
testing process usually involves subjecting the remediated system to a simulated
change of date from the year 1999 to the year 2000 using, in many cases,
computer resources. The Company uses a number of packaged software products that
have been upgraded to a year 2000 compliant version in the normal course of
business. Excluding the cost of these software upgrades, the Company's cost of
becoming year 2000 compliant is expected to be approximately $2 million, of
which about 75% has been spent through June 30, 1999.
The Company has approximately 30 major computer systems which have been
assessed for year 2000 compliance. At June 30, 1999, the Company believes
approximately 90% of such systems are year 2000 compliant. Each operating unit
has responsibility for its own conversion, in line with overall guidance and
oversight provided by a corporate-level coordinator, and the status of each of
the remaining systems will be specifically tracked and monitored.
As part of its year 2000 compliance plan, the Company has requested
confirmations from its major domestic and foreign software vendors, hardware
vendors, primary suppliers and major customers, that they are developing and
implementing plans to become, or are, year 2000 compliant. Confirmations
received to date from the Company's software vendors, hardware vendors, primary
suppliers and major customers, indicate that generally they are in the process
of implementing remediation plans to ensure that their systems are compliant by
December 31, 1999. The major software vendors used by the Company have already
delivered year 2000 compliant software. Notwithstanding these efforts, the
ability of the Company to affect the year 2000 preparedness of such vendors,
suppliers and customers is limited.
The Company is in the process of developing a contingency plan to address
potential year 2000 related business interruptions that may occur on January 1,
2000, or thereafter. The contingency plan is expected to be completed in the
third quarter of 1999.
Although the Company expects its systems to be year 2000 compliant before
December 31, 1999, it cannot predict the outcome or success of the year 2000
compliance programs of its vendors, suppliers, and customers. The Company also
cannot predict whether its major software vendors, who continue to test for year
2000 compliance, will find additional problems that would result in unplanned
upgrades of their applications after December 31, 1999. As a result of these
uncertainties, the Company cannot predict the impact on its financial condition
or results of operations from noncompliant year 2000 systems that the Company
- 23 -
<PAGE>
directly or indirectly relies upon. Should the Company's year 2000 compliance
plan not be successful or be delayed beyond January 2000, or should one or more
vendors, suppliers or customers fail to adequately address their year 2000
issues, the consequences to the Company could be far-reaching and material,
including an inability to produce TiO2 at its manufacturing facilities, which
could lead to an indeterminate amount of lost revenue. Other potential negative
consequences could include plant malfunction, impeded communications or power
supplies, or slower transaction processing and financial reporting. Although not
anticipated, the most reasonably likely worst-case scenario of failure by the
Company or its key suppliers or customers to become year 2000 compliant would be
a short-term slowdown or cessation of manufacturing operations at one or more of
the Company's facilities and a short-term inability on the part of the Company
to process orders and billings in a timely manner, and to deliver products to
customers.
Beginning January 1, 1999, eleven of the fifteen members of the European
Union ("EU"), including Germany, Belgium, the Netherlands and France, adopted a
new European currency unit (the "euro") as their common legal currency.
Following the introduction of the euro, the participating countries' national
currencies remain legal tender as denominations of the euro from January 1, 1999
through January 1, 2002, and the exchange rates between the euro and such
national currency units are fixed.
The Company conducts substantial operations in Europe, and has a
significant amount of outstanding DM-denominated indebtedness. The functional
currency of the Company's German, Belgian, Dutch and French operations will
convert to the euro from their respective national currencies over a two-year
period beginning in 1999. The Company has assessed and evaluated the impact of
the euro conversion on its business and made the necessary system conversions.
The euro conversion may impact the Company's operations including, among other
things, changes in product pricing decisions necessitated by cross-border price
transparencies. Such changes in product pricing decisions could impact both
selling prices and purchasing costs and, consequently, favorably or unfavorably
impact results of operations, financial condition or liquidity.
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and availability of resources in view of, among
other things, its debt service and capital expenditure requirements and
estimated future operating cash flows. As a result of this process, the Company
in the past has sought, and in the future may seek, to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, issue
additional securities, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, the Company may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals or other industries. In the event of any acquisition or joint venture
transaction, the Company may consider using available cash, issuing equity
securities or increasing its indebtedness to the extent permitted by the
agreements governing the Company's existing debt.
- 24 -
<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 represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"will," "should," "anticipates," "expects," or comparable terminology or by
discussions of strategy. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurances that these expectations will prove to be correct. Such statements
involve risks and uncertainties, including, but not limited to, the cyclicality
of the titanium dioxide industry, global economic conditions, global productive
capacity, changes in product pricing, "Year 2000" issues, and other risks and
uncertainties included in this Quarterly Report and in the 1998 Annual Report,
and the uncertainties set forth from time to time in the Company's other public
reports and filings. Should one or more of these risks materialize (or the
consequences of such a development worsen), or should the underlying assumptions
prove incorrect, actual results could differ materially from those forecasted or
expected. The Company assumes no duty to update any forward-looking statements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the 1998 Annual Report and the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999 for descriptions of
certain previously-reported legal proceedings.
THE CITY OF NEW YORK, ET AL. V. LEAD INDUSTRIES ASSOCIATION, ET AL. In
July 1999 the court heard oral argument on plaintiffs' and defendants' motions
for partial summary judgment in this previously reported case.
SWEET, ET AL. V. SHEAHAN, ET AL. In July 1999 the defendants filed a
motion to dismiss this previously reported case for lack of jurisdiction.
CHEROKEE COUNTY, KANSAS SITE. The Company and other PRPs have entered
into a consent decree agreeing to perform the remedy previously selected in the
Record of Decision at the Baxter Springs subsite and agreeing that the Company
is not responsible for performing the remedy at the Treece subsite.
- 25 -
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 4, 1999. All
the nominees for director were elected with the voting results for each as
follows:
Director Shares For Shares Withheld
-------- ---------- ---------------
Joseph S. Compofelice 49,540,211 952,274
J. Landis Martin 49,527,779 964,706
Kenneth R. Peak 50,078,926 413,559
Glenn R. Simmons 49,524,117 968,368
Harold C. Simmons 49,523,763 968,772
Lawrence A. Wigdor 49,538,638 953,847
Admiral Elmo R. Zumwalt, Jr. 50,072,655 419,830
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 - Intercorporate Services Agreement by and between CompX
International, Inc. and the Registrant effective as of January 1,
1999.
27.1 - Financial Data Schedule for the six-month period ended June
30, 1999.
(b) REPORTS ON FORM 8-K
Reports on Form 8-K for the quarter ended June 30, 1999 and through
the date of this report:
April 26, 1999 - reported Items 5 and 7.
May 4, 1999 - reported Items 5 and 7.
July 20, 1999 - reported Items 5 and 7.
July 26, 1999 - reported Items 5 and 7.
- 26 -
<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 12, 1999 By /s/ Susan E. Alderton
- ---------------------- ------------------------------
Susan E. Alderton
Vice President and
Chief Financial Officer
Date: August 12, 1999 By /s/ Robert D. Hardy
- ---------------------- ------------------------------
Robert D. Hardy
Vice President and Controller
(Principal Accounting Officer)
- 27 -
EXHIBIT 10.1
INTERCORPORATE SERVICES AGREEMENT
This INTERCORPORATE SERVICES AGREEMENT (the "AGREEMENT"), effective as
of January 1, 1999, amends and supersedes that certain Intercorporate Services
Agreement effective as of January 1, 1999 between NL INDUSTRIES, INC., a New
Jersey corporation ("NL"), and COMPX INTERNATIONAL INC., a Delaware corporation
("RECIPIENT").
RECITALS
A. NL provides Recipient (i) certain occupancy and related office
services (the "OCCUPANCY AND RELATED OFFICE SERVICES"), which services include,
without limitation, office space that Recipient's personnel currently occupy at
NL's corporate offices at Two Greenspoint Plaza, 16825 Northchase Drive, Suite
1200, Houston, Texas and mail, telecommunication, computer support, copying and
other reasonable office services related to such occupancy and (ii) certain
insurance, risk management, loss control and internal audit services as set
forth in this Agreement.
B. The terms of this Agreement are no less favorable to Recipient than
could otherwise be obtained from a third party for comparable services.
C. Recipient desires to continue receiving the services presently
provided by NL and affiliates of NL and NL is willing to continue to provide
such services under the terms of this Agreement.
AGREEMENT
For and in consideration of the mutual premises, representations and
covenants herein contained, the parties hereto mutually agree as follows:
SECTION 1. SERVICES TO BE PROVIDED. NL agrees to make available to
Recipient the following services (the "SERVICES") to be rendered by the internal
staff of NL and affiliates of NL:
(a) the Occupancy and Related Office Services (as outlined in
Attachment 1);
(b) certain administration and management services with respect to
Recipient's insurance and risk management needs, including:
(i) management of claims (including insured and self-
insured workers compensation and liability claims);
(ii) budgeting and related activities;
(iii) coordination of property loss control program; and
(iv) administration of Recipient's insurance program,
excluding all employee benefit and welfare related
programs;
<PAGE>
(c) consultation and assistance in performing internal audit
projects, as requested; and
(d) such other services as may be requested by Recipient or deemed
necessary and proper from time to time.
SECTION 2. MISCELLANEOUS SERVICES. It is the intent of the parties
hereto that NL provide only the Services requested by Recipient in connection
with routine administrative functions related to the ongoing operations of
Recipient and not with respect to special projects, including corporate
investments, acquisitions and divestitures. The parties hereto contemplate that
the Services rendered in connection with the conduct of Recipient's business
will be on a scale compared to that existing on the effective date of this
Agreement but not for major corporate acquisitions or divestitures, and that
adjustments may be required to the terms of this Agreement in the event of such
major corporate acquisitions, divestitures or special projects. Recipient will
continue to bear all other costs required for outside services, and it is
expressly understood that NL assumes no liability for any expenses or services
other than those stated in SECTION 1.
SECTION 3. FEE FOR SERVICES. During the Term (as defined below) of the
Agreement, Recipient shall pay to NL an annual fee of $108,500 for the Services
described in SUBSECTIONS 1(a), 1(b), AND 1(d) above payable in quarterly
installments of $27,125 plus all out-of-pocket expenses incurred in connection
with the performance of such Services described in paragraphs 1(b) and 1(d). In
addition, Recipient will pay to NL within thirty (30) days after receipt of an
invoice (such invoices to occur no more frequently than once per month) an
amount equal to the product of $600 multiplied by the number of days devoted by
NL's internal auditors to providing Services described in SUBSECTION 1(c) above
times the number of internal auditors providing such Services plus all
out-of-pocket expenses incurred in their performance of such Services.
Nothwithstanding the foregoing, in the event that Recipient determines, in its
sole discretion, that it no longer desires certain of the Services or NL
determines, in its sole discretion, that it no longer desires to provide certain
of the Services, then Recipient or NL, as appropriate, shall provide the other
party with a ninety (90) day prior written notice of cancellation describing the
Services to be terminated or discontinued and Recipient and NL during such
ninety-day period shall agree to a pro-rata reduction of the fees due hereunder
for such terminated or discontinued Services.
SECTION 4. ORIGINAL TERM. Subject to the provisions of SUBSECTION 5
hereof, the original term of this Agreement shall be from January 1, 1999 to
December 31, 1999.
SECTION 5. EXTENSIONS. This Agreement shall be extended on a
quarter-to-quarter basis after the expiration of its original term unless
written notification is given by NL or Recipient thirty (30) days in advance of
the first day of each successive quarter or unless it is superseded by a
subsequent written agreement of the parties hereto.
<PAGE>
SECTION 6. LIMITATION OF LIABILITY. In providing its Services
hereunder, NL shall have a duty to act, and to cause its agents to act, in a
reasonably prudent manner, but neither NL nor any officer, director, employee or
agent of NL or its affiliates shall be liable to Recipient for any error of
judgment or mistake of law or for any loss incurred by Recipient in connection
with the matter to which this Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of NL.
SECTION 7. INDEMNIFICATION OF NL BY RECIPIENT. Recipient shall
indemnify and hold harmless NL, its affiliates and their respective officers,
directors and employees from and against any and all losses, liabilities,
claims, damages, costs and expenses (including attorneys' fees and other
expenses of litigation) to which NL or any such person may become subject to
arising out of the Services provided by NL to Recipient hereunder, PROVIDED that
such indemnity shall not protect any person against any liability to which such
person would otherwise be subject to by reason of willful misfeasance, bad faith
or gross negligence on the part of such person.
SECTION 8. FURTHER ASSURANCES. Each of the parties will make, execute,
acknowledge and deliver such other instruments and documents, and take all such
other actions, as the other party may reasonably request and as may reasonably
be required in order to effectuate the purposes of this Agreement and to carry
out the terms hereof.
SECTION 9. NOTICES. All communications hereunder shall be in writing
and shall be addressed, if intended for NL, to Two Greenspoint Plaza, 16825
Northchase Drive, Suite 1200, Houston, Texas 77060, Attention: President, or
such other address as it shall have furnished to Recipient in writing, and if
intended for Recipient, to Two Greenspoint Plaza, 16825 Northchase Drive, Suite
1200, Houston, Texas 77060, Attention: Chairman of the Board, or such other
address as it shall have furnished to NL in writing.
SECTION 10. AMENDMENT AND MODIFICATION. Neither this Agreement nor any
term hereof may be changed, waived, discharged or terminated other than by
agreement in writing signed by the parties hereto.
SECTION 11. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of NL and Recipient and their respective
successors and assigns, except that neither party may assign its rights under
this Agreement without the prior written consent of the other party.
SECTION 12. GOVERNING LAW. This Agreement shall be governed by, and
construed and interpreted in accordance with, the laws of the state of Texas.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date first above written.
NL INDUSTRIES, INC.
By: /s/ ROBERT D. HARDY
-------------------------------------
ROBERT D. HARDY
VICE PRESIDENT
COMPX INTERNATIONAL INC.
By: /s/ JOSEPH S. COMPOFELICE
-------------------------------------
JOSEPH S. COMPOFELICE
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
<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, 1999, 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 122,456
<SECURITIES> 0
<RECEIVABLES> 150,460
<ALLOWANCES> 2,231
<INVENTORY> 206,196
<CURRENT-ASSETS> 535,979
<PP&E> 790,875
<DEPRECIATION> 436,480
<TOTAL-ASSETS> 1,097,598
<CURRENT-LIABILITIES> 255,968
<BONDS> 300,147
0
0
<COMMON> 8,355
<OTHER-SE> 245,044
<TOTAL-LIABILITY-AND-EQUITY> 1,097,598
<SALES> 434,137
<TOTAL-REVENUES> 450,210
<CGS> 314,819
<TOTAL-COSTS> 314,819
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 124
<INTEREST-EXPENSE> 19,077
<INCOME-PRETAX> 50,673
<INCOME-TAX> (77,340)
<INCOME-CONTINUING> 125,763
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 125,763
<EPS-BASIC> 2.43
<EPS-DILUTED> 2.42
</TABLE>
