SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the quarter ended March 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-640
NL INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 13-5267260
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16825 Northchase Drive, Suite 1200, Houston, Texas 77060-2544
- -------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 423-3300
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) had been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of common stock outstanding on May 3, 2000: 50,560,640
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1999
and March 31, 2000 3-4
Consolidated Statements of Income - Three
months ended March 31, 1999 and 2000 5
Consolidated Statements of Comprehensive Income
- Three months ended March 31, 1999 and 2000 6
Consolidated Statement of Shareholders' Equity
- Three months ended March 31, 2000 7
Consolidated Statements of Cash Flows - Three
months ended March 31, 1999 and 2000 8-9
Notes to Consolidated Financial Statements 10-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20-21
Item 6. Exhibits and Reports on Form 8-K 21
- 2 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1999 2000
----------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................ $ 134,224 $ 133,698
Restricted cash equivalents ...................... 17,565 17,208
Accounts and notes receivable .................... 143,768 151,152
Receivable from affiliates ....................... 747 392
Refundable income taxes .......................... 4,473 1,252
Inventories ...................................... 191,184 173,926
Prepaid expenses ................................. 2,492 3,111
Deferred income taxes ............................ 11,974 10,343
---------- ----------
Total current assets ......................... 506,427 491,082
---------- ----------
Other assets:
Marketable securities ............................ 15,055 24,664
Investment in TiO2 manufacturing joint venture ... 157,552 154,052
Prepaid pension cost ............................. 23,271 22,373
Other ............................................ 5,410 4,845
---------- ----------
Total other assets ........................... 201,288 205,934
---------- ----------
Property and equipment:
Land ............................................. 23,678 22,618
Buildings ........................................ 133,682 128,487
Machinery and equipment .......................... 550,842 530,016
Mining properties ................................ 71,952 68,959
Construction in progress ......................... 6,805 9,742
---------- ----------
786,959 759,822
Less accumulated depreciation and depletion ...... 438,501 427,563
---------- ----------
Net property and equipment ................... 348,458 332,259
---------- ----------
$1,056,173 $1,029,275
========== ==========
</TABLE>
- 3 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 2000
------------ -----------
<S> <C> <C>
Current liabilities:
Notes payable ................................ $ 57,076 $ 54,075
Current maturities of long-term debt ......... 212 162
Accounts payable and accrued liabilities ..... 190,360 188,399
Payable to affiliates ........................ 11,240 10,422
Income taxes ................................. 5,605 6,477
Deferred income taxes ........................ 326 777
----------- -----------
Total current liabilities ................ 264,819 260,312
----------- -----------
Noncurrent liabilities:
Long-term debt ............................... 244,266 244,207
Deferred income taxes ........................ 108,226 107,069
Accrued pension cost ......................... 32,946 29,884
Accrued postretirement benefits cost ......... 37,105 36,372
Other ........................................ 93,821 85,502
----------- -----------
Total noncurrent liabilities ............. 516,364 503,034
----------- -----------
Minority interest .............................. 3,903 3,976
----------- -----------
Shareholders' equity:
Common stock ................................. 8,355 8,355
Additional paid-in capital ................... 774,304 774,322
Retained earnings ............................ 19,150 35,263
Accumulated other comprehensive loss ......... (158,921) (174,172)
Treasury stock ............................... (371,801) (381,815)
----------- -----------
Total shareholders' equity ............... 271,087 261,953
----------- -----------
$ 1,056,173 $ 1,029,275
=========== ===========
</TABLE>
Commitments and contingencies (Note 12)
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 1999 and 2000
(In thousands, except per share data)
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Revenues and other income:
Net sales .............................................. $201,569 $231,009
Other, net ............................................. 6,413 4,500
-------- --------
207,982 235,509
-------- --------
Costs and expenses:
Cost of sales .......................................... 147,040 159,265
Selling, general and administrative .................... 32,562 33,390
Interest ............................................... 9,779 7,856
-------- --------
189,381 200,511
-------- --------
Income before income taxes and minority interest ... 18,601 34,998
Income tax expense ....................................... 4,650 11,199
-------- --------
Income before minority interest .................... 13,951 23,799
Minority interest ........................................ 11 91
-------- --------
Net income ......................................... $ 13,940 $ 23,708
======== ========
Earnings per share - net income:
Basic .................................................. $ .27 $ .47
======== ========
Diluted ................................................ $ .27 $ .46
======== ========
Shares used in the calculation of earnings per share:
Basic .................................................. 51,819 50,920
Dilutive impact of stock options ....................... 51 234
-------- --------
Diluted .............................................. 51,870 51,154
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
- 5 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, 1999 and 2000
(In thousands)
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Net income ......................................... $ 13,940 $ 23,708
-------- --------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment ................. (940) 58
Currency translation adjustment .................. (12,251) (15,309)
-------- --------
Total other comprehensive loss ................. (13,191) (15,251)
-------- --------
Comprehensive income ......................... $ 749 $ 8,457
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
- 6 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three months ended March 31, 2000
(In thousands)
<TABLE>
<CAPTION>
Accumulated other
comprehensive income (loss)
Additional -----------------------------------
Common paid-in Retained Currency Pension Marketable Treasury
stock capital earnings translation liabilities securities stock Total
--------- ---------- --------- ----------- ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 ......... $ 8,355 $ 774,304 $ 19,150 $(160,022) $ (1,756) $ 2,857 $(371,801) $ 271,087
Net income ........................... -- -- 23,708 -- -- -- -- 23,708
Other comprehensive income (loss), net -- -- -- (15,309) -- 58 -- (15,251)
Dividends ............................ -- -- (7,595) -- -- -- -- (7,595)
Other ................................ -- 18 -- -- -- -- -- 18
Treasury stock:
Acquired (713 shares) .............. -- -- -- -- -- -- (10,331) (10,331)
Reissued (22 shares) ............... -- -- -- -- -- -- 317 317
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 2000 ............ $ 8,355 $ 774,322 $ 35,263 $(175,331) $ (1,756) $ 2,915 $(381,815) $ 261,953
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
- 7 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 1999 and 2000
(In thousands)
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................... $ 13,940 $ 23,708
Depreciation, depletion and amortization ............. 8,662 7,875
Deferred income taxes ................................ 1,518 3,368
Distribution from TiO2 manufacturing joint venture ... 6,500 3,500
Other, net ........................................... (2,389) (1,428)
-------- --------
28,231 37,023
Change in assets and liabilities:
Accounts and notes receivable ...................... (21,213) (12,517)
Inventories ........................................ 8,570 11,092
Prepaid expenses ................................... (2,018) (712)
Accounts payable and accrued liabilities ........... (6,459) (4,145)
Income taxes ....................................... (1,937) 4,309
Other, net ......................................... (2,374) (1,287)
-------- --------
Net cash provided by operating activities ........ 2,800 33,763
-------- --------
Cash flows from investing activities:
Capital expenditures ................................. (7,846) (6,153)
Change in restricted cash equivalents, net ........... (9,047) 357
Purchase of Tremont Corporation common stock ......... -- (9,520)
Proceeds from disposition of property and equipment .. 2,114 57
-------- --------
Net cash used by investing activities ............ (14,779) (15,259)
-------- --------
</TABLE>
- 8 -
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 1999 and 2000
(In thousands)
<TABLE>
<CAPTION>
1999 2000
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Indebtedness:
Borrowings ....................................... $ 56,271 $ --
Principal payments ............................... (60,599) (89)
Dividends paid ..................................... (1,814) (7,595)
Treasury stock purchased ........................... -- (10,331)
Other, net ......................................... 117 317
--------- ---------
Net cash used by financing activities .......... (6,025) (17,698)
--------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities .... (18,004) 806
Currency translation ............................. (1,684) (1,332)
Balance at beginning of period ..................... 154,953 134,224
--------- ---------
Balance at end of period ........................... $ 135,265 $ 133,698
========= =========
Supplemental disclosures - cash paid for:
Interest ........................................... $ 1,990 $ 141
Income taxes, net .................................. 5,064 3,505
</TABLE>
See accompanying notes to consolidated financial statements.
- 9 -
<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 March 31, 2000,
Valhi, Inc. and Tremont Corporation, each affiliates of Contran Corporation,
held approximately 60% and 20%, respectively, of NL's outstanding common stock.
At March 31, 2000, Contran and its subsidiaries held approximately 93% of
Valhi's outstanding common stock, and Valhi and other entities related to Harold
C. Simmons held approximately 73% of Tremont's outstanding common stock. See
Note 5.
The consolidated balance sheet of NL Industries, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 1999 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 2000 and the consolidated statements of
income, comprehensive income, shareholders' equity and cash flows for the
interim periods ended March 31, 1999 and 2000 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, 1999 (the "1999 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, including derivatives embedded in nonderivative host
contacts. As permitted by the transition requirements of SFAS No. 133, as
amended, the Company will exempt from the scope of SFAS No. 133 all host
contracts containing embedded derivatives which were issued or acquired prior to
January 1, 1999.
- 10 -
<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 - the production and sale of TiO2.
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
1999 2000
--------- ---------
(In thousands)
<S> <C> <C>
Net sales .............................................. $ 201,569 $ 231,009
Other income, excluding corporate ...................... 3,693 1,670
--------- ---------
205,262 232,679
Cost of sales .......................................... 147,040 159,265
Selling, general and administrative, excluding corporate 27,261 27,179
--------- ---------
Operating income ..................................... 30,961 46,235
General corporate income (expense):
Securities earnings, net ............................. 1,600 1,718
Expenses, net ........................................ (4,181) (5,099)
Interest expense ..................................... (9,779) (7,856)
--------- ---------
$ 18,601 $ 34,998
========= =========
</TABLE>
Note 4 - Inventories:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ---------
(In thousands)
<S> <C> <C>
Raw materials ............................ $ 54,861 $ 42,900
Work in process .......................... 8,065 7,328
Finished products ........................ 100,824 97,567
Supplies ................................. 27,434 26,131
-------- --------
$191,184 $173,926
======== ========
</TABLE>
- 11 -
<PAGE>
Note 5 - Marketable securities:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ---------
(In thousands)
<S> <C> <C>
Available-for-sale marketable equity securities:
Unrealized gains ................................... $ 6,700 $ 7,623
Unrealized losses .................................. (2,304) (3,138)
Cost ............................................... 10,659 20,179
-------- --------
Aggregate fair value ........................... $ 15,055 $ 24,664
======== ========
</TABLE>
In March 2000 the Company purchased 500,000 shares of Tremont's common
stock in market transactions for $9.5 million. At March 31, 2000, the Company
held approximately 9% of Tremont's outstanding common stock and 1% of Valhi's
outstanding common stock. The Company accounts for investments in parent
companies as "available-for-sale" marketable securities carried at fair value.
Note 6 - Other noncurrent assets:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ---------
(In thousands)
<S> <C> <C>
Deferred financing costs, net .................. $2,278 $2,128
Other .......................................... 3,132 2,717
------ ------
$5,410 $4,845
====== ======
</TABLE>
Note 7 - Accounts payable and accrued liabilities:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ---------
(In thousands)
<S> <C> <C>
Accounts payable ......................... $ 56,597 $ 43,112
-------- --------
Accrued liabilities:
Environmental costs .................... 47,228 53,023
Employee benefits ...................... 35,243 32,006
Interest ............................... 6,761 14,334
Deferred income ........................ 4,000 4,000
Other .................................. 40,531 41,924
-------- --------
133,763 145,287
-------- --------
$190,360 $188,399
======== ========
</TABLE>
- 12 -
<PAGE>
Note 8 - Other noncurrent liabilities:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ---------
(In thousands)
<S> <C> <C>
Environmental costs ............................ $64,491 $57,398
Insurance claims and expenses .................. 11,688 11,807
Employee benefits .............................. 7,816 7,859
Deferred income ................................ 8,333 7,333
Other .......................................... 1,493 1,105
------- -------
$93,821 $85,502
======= =======
</TABLE>
Note 9 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ---------
(In thousands)
<S> <C> <C>
Notes payable - Kronos (Euro 56,511) ................... $ 57,076 $ 54,075
======== ========
Long-term debt:
NL Industries, Inc. - 11.75% Senior Secured Notes ... $244,000 $244,000
Kronos ............................................... 478 369
-------- --------
244,478 244,369
Less current maturities ................................ 212 162
-------- --------
$244,266 $244,207
======== ========
</TABLE>
- 13 -
<PAGE>
Note 10 - Income taxes:
The difference between the provision for income tax expense attributable
to income before income taxes and minority interest and the amount that would be
expected using the U.S. federal statutory income tax rate of 35% is presented
below.
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
1999 2000
-------- --------
(In thousands)
<S> <C> <C>
Expected tax expense ...................................... $ 6,510 $ 12,249
Non-U.S. tax rates ........................................ (81) 9
Incremental tax on income of companies not included in NL's
consolidated U.S. federal income tax return .............. 458 281
Valuation allowance ....................................... (1,942) (1,291)
U.S. state income taxes ................................... 90 141
Other, net ................................................ (385) (190)
-------- --------
Income tax expense .................................. $ 4,650 $ 11,199
======== ========
</TABLE>
Note 11 - Other income, net:
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
1999 2000
------- -------
(In thousands)
<S> <C> <C>
Corporate interest and dividend income ............ $ 1,600 $ 1,718
Currency transaction gains, net ................... 1,569 1,241
Noncompete agreement income ....................... 1,000 1,000
Disposition of property and equipment ............. 979 (402)
Trade interest income ............................. 948 357
Other, net ........................................ 317 586
------- -------
$ 6,413 $ 4,500
======= =======
</TABLE>
Note 12 - Commitments and contingencies:
For descriptions of certain legal proceedings, income tax and other
commitments and contingencies related to the Company, reference is made to (i)
Management's Discussion and Analysis of Financial Condition and Results of
Operations, (ii) Part II, Item 1 -"Legal Proceedings" and (iii) the 1999 Annual
Report.
- 14 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net sales and operating income
<TABLE>
<CAPTION>
Three months ended %
March 31, Change
------------------ ------
1999 2000
---- ----
(In millions)
<S> <C> <C> <C>
Net sales ............................................. $201.6 $231.0 +15%
Operating income ...................................... $ 31.0 $ 46.2 +49%
Percent changes in TiO2:
Sales volume ........................................ +24%
Average selling prices (in billing currencies) ...... N/C
</TABLE>
Kronos' operating income in the first quarter of 2000 increased from the
first quarter of 1999 due to record first-quarter sales volume and strong
production volume. Kronos' first-quarter sales volume increased 24% from the
first quarter of 1999 and was even with the fourth quarter of 1999, reflecting
sustained strong demand in all major regions. Kronos' first-quarter 2000
production volume was 16% higher than the comparable 1999 period with operating
rates near full capacity compared to 86% capacity utilization in the first
quarter of 1999.
Average TiO2 selling prices in billing currencies (which excludes the
effects of foreign currency translation) for the first quarter of 2000 were even
with the first quarter of 1999 and were 3% higher than the fourth quarter of
1999. During the first quarter of 2000, Kronos announced additional price
increases in Europe, effective in the second quarter of 2000. The Company
believes demand for TiO2 will remain strong in the near-term as a result of
seasonally high sales to the coatings industry, resulting in continued upward
pressure on selling prices. Should demand in the second half of 2000 remain
robust, additional price increases could be announced later in 2000. The
successful implementation of any such price increase will depend on market
conditions.
Kronos anticipates its TiO2 sales volume for full-year 2000 will be
slightly higher than that of 1999. Kronos expects its full-year 2000 operating
income will be higher than 1999 primarily because of higher average selling
prices, higher production volume and its continued focus on controlling costs.
The extent of the improvement will be determined primarily by the magnitude of
realized price increases.
Kronos' cost of sales as a percentage of net sales decreased in the
first quarter of 2000 primarily due to higher production volume. Excluding the
effects of foreign currency translation, which decreased the Company's expenses
in the first quarter of 2000 compared to the first quarter of 1999, Kronos'
selling, general and administrative expenses increased in the first quarter of
2000 due to higher distribution expenses associated with higher first-quarter
2000 sales volume.
- 15 -
<PAGE>
A significant amount of Kronos' sales and operating costs are
denominated in currencies other than the U.S. dollar. Fluctuations in the value
of the U.S. dollar relative to other currencies, primarily a stronger U.S.
dollar compared to the euro, decreased the dollar value of sales in the first
quarter of 2000 by a net $14 million compared to the first quarter of 1999. When
translated from billing currencies to U.S. dollars using currency exchange rates
prevailing during the respective periods, Kronos' first-quarter 2000 average
selling price in U.S. dollars was approximately 6% lower than in the first
quarter of 1999. Kronos' operating costs that are not denominated in U.S.
dollars were also lower when translated to U.S. dollars in the first quarter of
2000 compared to the first quarter of 1999, and accordingly, Kronos' per unit
costs were lower in the first quarter of 2000 compared to the same period last
year. As a result, the net impact of currency exchange rate fluctuations on
operating income in the first quarter of 2000 was not significant when compared
to the first quarter of 1999.
General corporate
The following table sets forth certain information regarding general
corporate income (expense).
<TABLE>
<CAPTION>
Three months ended
March 31, Difference
--------------------- ----------
1999 2000
------- -------
(In millions)
<S> <C> <C> <C>
Securities earnings ................... $ 1.6 $ 1.7 $ .1
Corporate expenses, net ............... (4.2) (5.0) (.8)
Interest expense ...................... (9.8) (7.9) 1.9
------- ------- ------
$ (12.4) $ (11.2) $ 1.2
======= ======= ======
</TABLE>
Interest expense in the first quarter of 2000 decreased 20% from the
comparable 1999 period primarily due to lower levels of outstanding debt and
lower European borrowing rates. The Company expects its full-year 2000 interest
expense will be lower than 1999, primarily due to lower levels of outstanding
debt and lower European borrowing rates.
Provision for income taxes
The Company reduced its deferred income tax valuation allowance by $1.9
million in the first quarter of 1999 and $1.3 million in the first quarter of
2000 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.
Other
Minority interest primarily relates to the Company's majority-owned
environmental management subsidiary, NL Environmental Management Services, Inc.
("EMS").
- 16 -
<PAGE>
Liquidity and capital resources
The Company's consolidated cash flows from operating, investing and
financing activities for the three months ended March 31, 1999 and 2000 are
presented below.
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1999 2000
------ -------
(In millions)
<S> <C> <C>
Net cash provided (used) by:
Operating activities:
Before changes in assets and liabilities ............... $ 28.2 $ 37.0
Changes in assets and liabilities ...................... (25.4) (3.2)
------ -------
2.8 33.8
Investing activities ..................................... (14.8) (15.3)
Financing activities ..................................... (6.0) (17.7)
------ -------
Net cash provided (used) by operating, investing,
and financing activities ............................ $(18.0) $ .8
====== =======
</TABLE>
Operating activities
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 2000 period increased from the comparable period in 1999 primarily due to
higher operating income, partially offset by lower cash distributions from the
Company's TiO2 manufacturing joint venture. Changes in the Company's
inventories, receivables and payables (excluding the effect of currency
translation) used cash in both the first quarter of 1999 and 2000 primarily due
to increases in receivables in each period; however, the net cash used in the
first quarter of 2000 was significantly less than the first quarter of 1999 due
to a greater amount of cash being provided from reductions in inventory levels
and lower income tax payments in the first quarter of 2000.
Investing activities
In March 2000 the Company purchased 500,000 shares of Tremont's common
stock in market transactions for $9.5 million. See Note 1 and 5 to the
Consolidated Financial Statements. In the first quarter of 1999 the Company
collateralized letters of credit issued and outstanding on behalf of an
affiliate pursuant to an Insurance Sharing Agreement with $9.7 million of the
Company's cash, and classified such amount as current restricted cash
equivalents.
Financing activities
In the first quarter of 2000, the Company's Board of Directors increased
the regular quarterly dividend from $.035 per share to $.15 per share and paid
dividends of $7.6 million to shareholders. In 1999 the Company's Board of
Directors authorized a 1.5 million share repurchase program. Pursuant to this
program, the Company purchased in the open market (i) 552,000 shares of its
common stock at an aggregate cost of $7.2 million in 1999, (ii) 713,000
- 17 -
<PAGE>
shares at an aggregate cost of $10.3 million in the first quarter of 2000 and
(iii) 34,000 shares at an aggregate cost of $.5 million in April 2000.
Cash, cash equivalents and borrowing availability
At March 31, 2000, the Company had cash and cash equivalents aggregating
$134 million ($37 million held by non-U.S. subsidiaries) and an additional $17
million of restricted cash equivalents. The Company's subsidiaries had $11
million available for borrowing at March 31, 2000 under existing non-U.S. credit
facilities.
Income tax contingencies
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.
During 1997 the Company received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($6 million at March
31, 2000) relating to 1994. The Company appealed the 1994 assessment to the
Fredrikstad City Court, and in February 2000 the Court ruled in favor of the tax
authorities on the primary issue, but asserted that the tax authorities'
assessment was overstated by NOK 34 million ($4 million at March 31, 2000). In
March 2000 the tax authorities agreed with the Court and reduced the 1994
assessment to NOK 17 million ($2 million at March 31, 2000). The tax authorities
recently issued a NOK 13 million ($2 million at March 31, 2000) assessment for
1996 which has been computed on a similar basis as the revised 1994 assessment.
The Company has appealed the Court's decision on the primary issue related to
the 1994 assessment to a higher court, and the outcome of the 1996 case is
dependent on the eventual outcome of the 1994 case. 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 expects to grant an additional lien on the
plant related to the 1996 assessment.
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.
Environmental matters and litigation
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 ($110 million at March 31, 2000) 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
- 18 -
<PAGE>
of the range of reasonably possible costs to the Company for sites for which it
is possible to estimate costs is approximately $150 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 either accrued amounts or the upper
end of the range for sites for which estimates have been made, and no assurance
can be given that costs will not be incurred with respect to sites as to which
no estimate presently can be made. The imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes with respect to site cleanup costs or allocation of such costs among
PRPs, or a determination that the Company is potentially responsible for the
release of hazardous substances at other sites could result in expenditures in
excess of amounts currently estimated by the Company to be required for such
matters. Furthermore, there can be no assurance that additional environmental
matters will not arise in the future.
Lead pigment litigation
The Company is also a defendant in a number of legal proceedings seeking
damages for personal injury and property damage arising out of the sale of lead
pigments and lead-based paints. There is no assurance that the Company will not
incur future liability in respect of this pending litigation in view of the
inherent uncertainties involved in court and jury rulings in pending and
possible future cases. However, based on, among other things, the results of
such litigation to date, the Company believes that the pending lead pigment and
paint litigation is without merit. The Company has not accrued any amounts for
such pending litigation. Liability that may result, if any, cannot reasonably be
estimated. In addition, various legislation and administrative regulations have,
from time to time, been enacted or proposed that seek to (a) impose various
obligations on present and former manufacturers of lead pigment and lead-based
paint with respect to asserted health concerns associated with the use of such
products and (b) effectively overturn court decisions in which the Company and
other pigment manufacturers have been successful. Examples of such proposed
legislation include bills which would permit civil liability for damages on the
basis of market share, rather than requiring plaintiffs to prove that the
defendant's product caused the alleged damage and bills which would revive
actions barred by the statute of limitations. 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.
Other
On May 3, 2000, a confederation of labor organizations in Norway
implemented a work stoppage directed at various Norwegian employers, including
the Company's 30,000 metric ton TiO2 facility and ilmenite mining operations.
The Company currently does not expect the work stoppage to be lengthy or to have
a material adverse effect on the Company's consolidated financial position,
results of operations 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;
- 19 -
<PAGE>
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.
Special note regarding forward-looking statements
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 or trends. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it cannot give any assurances that these expectations
will prove to be correct. Such statements by their nature involve risks and
uncertainties, including, but not limited to, the cyclicality of the titanium
dioxide industry, global economic conditions, global productive capacity,
customer inventory levels, changes in product pricing, competitive technology
positions, operating interruptions (including, but not limited to, labor
disputes, leaks, fires, explosions, unscheduled downtime and transportation
interruptions), the ultimate resolution of pending or possible future lead
pigment litigation and legislative developments related to the lead paint
litigation, the outcome of other litigation, and other risks and uncertainties
included in this Quarterly Report and in the 1999 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 1999 Annual Report for descriptions of
certain previously reported legal proceedings.
Brenner, et al. v. American Cyanamid, et al. (No. 12596-93). In March
2000 the Fourth Department intermediate appellate court denied plaintiffs'
request to seek review.
Sweet, et al. v. Sheahan, et al. (No. 97-CV-1666/LEK-DNH). In March
2000 plaintiffs voluntarily dismissed all defendants other than the landlord
without prejudice.
Cofield, et al. v. Lead Industries Association, et al. (No.
24-C-099-004491). In March 2000 the Federal trial court (No. MJG-99-3277) denied
plaintiffs' motion to remand to State Court. In April 2000 defendants filed an
additional motion to dismiss all claims for lack of product identification.
- 20 -
<PAGE>
City of St. Louis v. Lead Industries Association, et al (No. 002-245,
Division 1). In March 2000 defendants removed the case to Missouri federal
court. In April 2000 plaintiff filed a motion to remand to State Court and an
amended complaint seeking to add additional Missouri defendant residents.
In April 2000 the Company was served with a complaint in County of
Santa Clara v. Atlantic Richfield Company, et al. (Superior Court of the State
of California, County of Santa Clara, Case No. CV788657). The County of Santa
Clara seeks to represent a class of all public entities in California. The
County seeks from defendants, eight present or former pigment or paint
manufacturing companies and the Lead Industries Association, compensatory
damages for funds the plaintiffs have expended for medical treatment,
educational expenses, abatement or other costs due to exposure to, or potential
exposure to, lead paint, disgorgement of profit, and punitive damages. Plaintiff
alleges causes of action for violations of the California Business and
Professions Code, strict product liability, negligence, fraud and concealment,
unjust enrichment, and indemnity, and includes market share liability
allegations. The Company intends to deny all allegations of wrongdoing and
liability and to defend the case vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 - Financial Data Schedule for the three-month period ended
March 31, 2000.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended March 31, 2000 and
through the date of this report:
January 26, 2000 - reported Items 5 and 7.
February 9, 2000 - reported Items 5 and 7.
April 18, 2000 - reported Items 5 and 7.
- 21 -
<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: May 3, 2000 By /s/ Susan E. Alderton
- ------------------ -------------------------------
Susan E. Alderton
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 3, 2000 By /s/ Robert D. Hardy
- ------------------ -------------------------------
Robert D. Hardy
Vice President and Controller
(Principal Accounting Officer)
- 22 -
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NL
INDUSTRIES INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 133,698
<SECURITIES> 0
<RECEIVABLES> 138,959
<ALLOWANCES> 2,231
<INVENTORY> 173,926
<CURRENT-ASSETS> 491,082
<PP&E> 759,822
<DEPRECIATION> 427,563
<TOTAL-ASSETS> 1,029,275
<CURRENT-LIABILITIES> 260,312
<BONDS> 244,207
0
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<COMMON> 8,355
<OTHER-SE> 253,598
<TOTAL-LIABILITY-AND-EQUITY> 1,029,275
<SALES> 231,009
<TOTAL-REVENUES> 235,509
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