SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2005 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.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
-------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No
--- ---
Number of shares of the Registrant's common stock outstanding on April 29, 2005:
48,550,134.
Explanatory Note Regarding Amendment No. 1
The Registrant hereby files this Report on Form 10-Q/A ("Form 10-Q/A") to
amend its Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, as
filed with the Securities and Exchange Commission ("SEC") on May 10, 2005
("Original Form 10-Q"). As discussed in Note 1 to the Consolidated Financial
Statements, on December 21, 2005, the Registrant and its audit committee
concluded that the Registrant would file this Form 10-Q/A to restate the
Registrant's consolidated balance sheet as of December 31, 2004 and March 31,
2005, and the Registrant's consolidated statements of income, comprehensive
income, cash flows and stockholders' equity for the interim periods ended March
31, 2004 and 2005, in each case as contained in the Original Form 10-Q.
As previously disclosed, prior to December 2003 Kronos Worldwide, Inc. was
a wholly-owned subsidiary of the Company. In December 2003, the Registrant
completed the distribution of approximately 48.8% of Kronos' common stock on a
pro-rata basis to its shareholders, and during 2004 the Registrant paid each of
its four $.20 per share regular quarterly dividends in the form of shares of
Kronos common stock. Consequently, effective in July 2004 the Registrant's
ownership of Kronos was reduced to less than 50%, and the Registrant commenced
to account for its interest in Kronos by the equity method.
The Registrant is a majority-owned subsidiary of Valhi, Inc., and majority
ownership of Kronos continues to reside with Valhi and its subsidiaries,
including the Registrant. Valhi is a majority-owned subsidiary of Contran
Corporation. The Registrant and Valhi are members of the Contran Tax Group, and
the Registrant computes its provision for income taxes on a separate company
basis.
In its previously-issued consolidated financial statements, the Registrant
accounted for any current income tax resulting from the distribution of shares
of Kronos common stock to its shareholders as a direct charge to equity. In
addition, the Registrant commenced to recognize deferred income taxes with
respect to the excess of the financial reporting carrying value of its
investment in Kronos over the adjusted income tax basis of such shares starting
in July 2004, concurrent with the Registrant beginning to account for its
interest in Kronos by the equity method, on a prospective basis. The Registrant
has now concluded, among other things, that (i) a portion of the current income
taxes resulting from the distribution of shares of Kronos common stock to its
shareholders should be included in the Registrant's provision for income taxes
included in the determination of net income and (ii) the Registrant should have
commenced to recognize deferred income taxes with respect to the excess of the
financial reporting carrying value of its investment in Kronos over the adjusted
income tax basis of such shares starting with such excess that existed in
December 2003, concurrent with its distribution of 48.8% of Kronos' common stock
in December 2003.
Accordingly, during the Registrant's close process for its fiscal quarter
ended September 30, 2005, the Registrant concluded that:
o its provision for income taxes included in the determination of income from
continuing operations was misstated by an aggregate of $413,000, or nil per
diluted share, in the first quarter of 2004, and by $1.3 million, or $.03
per diluted share, in the first quarter of 2005;
o its provision for deferred income taxes included in the determination of
total other comprehensive income related to foreign currency translation
was misstated by an aggregate of $82,000 in the first quarter of 2004 and
by $4,000 in the first quarter of 2005;
o its provision for income taxes accounted for as a direct reduction to
stockholders' equity was misstated by $913,000 in the first quarter of
2005; and
o with respect to its statement of changes in stockholders' equity, and in
addition to the effect of the items noted above, total stockholders' equity
was misstated by $58.1 million as of December 31, 2004
in each case as they related to the appropriate provision for income taxes and
related items (including a $174.5 million increase to stockholders' equity in
2004 resulting from the settlement of a $227 million income tax liability by
using 5.5 million shares of Kronos common stock with an aggregate $52.5 million
carrying amount) which should have been recognized in accordance with accounting
principles generally accepted in the United States of America ("GAAP") as
provided by the guidance contained in Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, with respect to the following
items:
o Deferred income taxes with respect to the income tax effect of the excess
of the GAAP book basis over the income tax basis of the Registrant's
investment in Kronos Worldwide, Inc., which investment the Registrant
accounts for by the equity method, giving consideration to NL's investment
in Kronos on a pure stand-alone separate company basis without regard to
tax group membership with other affiliated companies;
o Current and deferred income taxes related to the Registrant's distributions
or transfer of shares of Kronos common stock to its stockholders (including
entities under common control); and
o Current and deferred income tax provisions related to other items.
This amendment was required to correct for the aggregate effect of these
misstatements. See Note 1 to the Consolidated Financial Statements for a summary
of financial statement amounts that are affected by this restatement. While the
effect of these misstatements have no effect on the Registrant's
previously-reported total cash flows from operating, investing and financing
activities, these misstatements do have a significant effect on the Registrant's
provision for income taxes, related income tax accounts (principally deferred
income taxes) and stockholders' equity.
The guidance set forth in Auditing Standards No. 2 of the Public Company
Accounting Oversight Board states that a restatement of previously-issued
financial statements to reflect the correction of a misstatement should be
regarded as at least a significant control deficiency and as a strong indicator
that a material weakness in internal control over financial reporting exists. As
a result of this amendment, the Registrant has concluded that a material
weakness existed at March 31, 2005 that precludes the Registrant from concluding
that its internal control over financial reporting was effective as of such
date. Therefore, the Company's previous conclusion that it maintained effective
internal control over financial reporting as of March 31, 2005, as set forth in
the Original Form 10-Q, has been restated. See Item 4 - "Controls and
Procedures."
For the convenience of the reader, this Form 10-Q/A sets forth the Original
Form 10-Q, as amended hereby, in its entirety. However, this Form 10-Q/A only
amends and restates Items 1, 2 and 4 of the Original Form 10-Q, in each case
solely as a result of and to reflect the corrections discussed above, and no
other information in the Original Form 10-Q is amended hereby. The foregoing
items have not been updated to reflect other events occurring after the filing
of the Original Form 10-Q, or to modify or update those disclosures affected by
other subsequent events. In addition, pursuant to the rules of the SEC, Exhibits
31.1, 31.2 and 32.1 have been updated to contain currently-dated certifications
of the Registrant's Chief Executive Officer and Chief Financial Officer.
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 2004 (Restated); March 31, 2005
(Unaudited and Restated) 5
Consolidated Statements of Income -
Three months ended March 31, 2004 and 2005
(Unaudited and Restated) 7
Consolidated Statements of Comprehensive Income (Loss) -
Three months ended March 31, 2004 and 2005
(Unaudited and Restated) 8
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 2005
(Unaudited and Restated) 9
Consolidated Statements of Cash Flows -
Three months ended March 31, 2004 and 2005
(Unaudited and Restated) 10
Notes to Consolidated Financial Statements (Unaudited) 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 29
Item 4. Controls and Procedures 42
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 45
Item 6. Exhibits 45
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, March 31,
2004 2005
------------ -----------
(Restated) (Unaudited)
(Restated)
Current assets:
Cash and cash equivalents $ 99,185 $ 127,426
Restricted cash and cash equivalents 7,810 5,128
Restricted marketable debt securities 9,446 9,916
Accounts and other receivables 24,302 24,063
Refundable income taxes 32 222
Receivable from affiliates 1,681 1,037
Inventories 28,781 20,838
Prepaid expenses 1,332 881
Deferred income taxes 13,604 4,065
---------- ----------
Total current assets 186,173 193,576
---------- ----------
Other assets:
Marketable equity securities 75,793 92,568
Restricted marketable debt securities 3,848 2,441
Investment in Kronos Worldwide, Inc. 175,578 172,664
Receivable from affiliate 10,000 10,000
Deferred income taxes 545 -
Goodwill 20,772 19,387
Other 3,715 7,735
---------- ----------
Total other assets 290,251 304,795
---------- ----------
Property and equipment:
Land 5,356 8,810
Buildings 26,877 27,076
Equipment 127,044 104,529
Construction in progress 2,431 3,841
---------- ----------
161,708 144,256
Less accumulated depreciation and amortization 86,490 74,626
---------- ----------
Net property and equipment 75,218 69,630
---------- ----------
$ 551,642 $ 568,001
========== ==========
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, March 31,
2004 2005
------------ -----------
(Restated) (Unaudited)
(Restated)
Current liabilities:
Current maturities of long-term debt $ 42 $ 42
Accounts payable 14,649 11,257
Accrued liabilities 23,134 18,994
Accrued environmental costs 16,570 18,144
Payable to affiliates 391 4,358
Income taxes 3,661 1,982
Deferred income taxes 23,842 24,392
---------- ----------
Total current liabilities 82,289 79,169
---------- ----------
Noncurrent liabilities:
Long-term debt 85 75
Accrued pension costs 7,968 7,573
Accrued postretirement benefits costs 10,572 10,283
Accrued environmental costs 51,247 48,698
Deferred income taxes 103,420 102,380
Other 4,028 4,010
---------- ----------
Total noncurrent liabilities 177,320 173,019
---------- ----------
Minority interest 58,404 58,829
---------- ----------
Stockholders' equity:
Common stock 6,054 6,068
Additional paid-in capital 369,728 372,127
Retained earnings - 8,829
Accumulated other comprehensive income (loss):
Marketable securities 26,783 37,588
Currency translation (135,729) (134,421)
Pension liabilities (33,207) (33,207)
---------- ----------
Total stockholders' equity 233,629 256,984
---------- ----------
$ 551,642 $ 568,001
========== ==========
Commitments and contingencies (Notes 10 and 12)
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2004 and 2005
(In thousands, except per share data)
(Unaudited)
2004 2005
------------ -----------
(Restated) (Restated)
Net sales $ 306,843 $ 46,843
Cost of sales 237,407 36,560
---------- ----------
Gross margin 69,436 10,283
Selling, general and administrative expense 41,310 6,122
Other operating income (expense):
Currency transaction gains (losses), net 398 (54)
Disposition of property and equipment (23) (4)
Other income 86 265
Corporate expense (6,708) (5,837)
---------- ----------
Income (loss) from operations 21,879 (1,469)
Equity in earnings of Kronos Worldwide, Inc. - 7,790
Other income (expense):
Trade interest income 203 21
Interest and dividend income from affiliates 842 619
Other interest income 357 866
Securities transactions, net (22) 14,578
Interest expense (9,426) (80)
---------- ----------
Income from continuing operations before
income taxes and minority interest 13,833 22,325
Provision for income taxes 3,059 6,778
Minority interest in after-tax earnings 5,282 731
---------- ----------
Income from continuing operations 5,492 14,816
Discontinued operations 5 (326)
---------- ----------
Net income $ 5,497 $ 14,490
========== ==========
Basic and diluted net income per share $ .11 $ .30
========== ==========
Weighted-average shares used in the calculation
of net income per share:
Basic 48,140 48,490
Dilutive impact of stock options 139 71
---------- ----------
Diluted 48,279 48,561
========== ==========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three months ended March 31, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
------------ -----------
(Restated) (Restated)
Net income $ 5,497 $ 14,490
---------- ----------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment -
unrealized holding gains (losses)
arising during the period (7,130) 10,805
Currency translation adjustment, net of tax (865) 1,308
---------- ----------
Total other comprehensive income (loss) (7,995) 12,113
---------- ----------
Comprehensive income (loss) $ (2,498) $ 26,603
========== ==========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2005
(In thousands)
(Unaudited)
Accumulated other
comprehensive income (loss)
Additional ---------------------------------------------
Common paid-in Retained Marketable Currency Pension
stock capital earnings securities translation liabilities Total
------- ----------- -------- ---------- ----------- ----------- ---------
(Restated) (Restated) (Restated) (Restated) (Restated)
Balance at December 31, 2004:
Previously reported $6,054 $417,760 $ 10,970 $ 26,783 $(136,648) $ (33,191) $291,728
Prior period adjustments - (48,032) (10,970) - 919 (16) (58,099)
------ -------- -------- --------- --------- --------- --------
Balance, as restated 6,054 369,728 - 26,783 (135,729) (33,207) 233,629
Net income (Restated) - - 14,490 - - - 14,490
Issuance of common stock 14 2,399 - - - - 2,413
Distribution of shares of
Kronos Worldwide, Inc. common stock - - (2,637) - - - (2,637)
Income tax on distribution - - (3,024) - - - (3,024)
Other comprehensive income, net (Restated) - - - 10,805 1,308 - 12,113
------ -------- -------- --------- --------- --------- --------
Balance at March 31, 2005 (Restated) $6,068 $372,127 $ 8,829 $ 37,588 $(134,421) $ (33,207) $256,984
====== ======== ======== ========= ========= ========= ========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
------------ -----------
(Restated) (Restated)
Cash flows from operating activities:
Net income $ 5,497 $ 14,490
Depreciation and amortization 14,883 2,807
Deferred income taxes:
Continuing operations (2,545) 3,012
Discontinued operations 2 (187)
Minority interest:
Continuing operations 5,282 731
Discontinued operations (2) (151)
Equity in earnings of Kronos Worldwide, Inc. - (7,790)
Distributions from Kronos Worldwide, Inc. - 4,456
Distributions from TiO2 manufacturing joint venture 1,800 -
Net (gains) losses from securities transactions 22 (14,578)
Other, net 1,975 369
Change in assets and liabilities:
Accounts and other receivables (32,873) (4,246)
Inventories 35,276 (46)
Prepaid expenses 152 216
Accrued environmental costs (3,300) (975)
Accounts payable and accrued liabilities (31,381) (2,930)
Income taxes 22,339 3,509
Accounts with affiliates 437 589
Other, net (764) (3,162)
---------- ----------
Net cash provided (used) by operating activities 16,800 (3,886)
---------- ----------
Cash flows from investing activities:
Capital expenditures (5,127) (5,253)
Change in restricted cash equivalents and marketable
debt securities, net 1,689 2,058
Proceeds from disposal of:
Business unit - 18,094
Kronos common stock - 19,047
Cash of disposed business unit - (4,006)
Other, net 40 6
---------- ----------
Net cash provided (used) by investing activities (3,398) 29,946
---------- ----------
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
------------ -----------
(Restated) (Restated)
Cash flows from financing activities:
Indebtedness:
Borrowings $ 100,220 $ -
Principal payments (79,532) (10)
Deferred financing costs paid (28) (28)
Distributions to minority interest (5,974) (602)
Proceeds from issuance of common stock:
NL common stock 7,664 2,413
CompX common stock - 191
---------- ----------
Net cash provided by financing activities 22,350 1,964
---------- ----------
Cash and cash equivalents - net change from:
Operating, investing and financing activities 35,752 28,024
Currency translation (1,265) 217
Cash and cash equivalents at beginning of period 89,525 99,185
---------- ----------
Cash and cash equivalents at end of period $ 124,012 $ 127,426
========== ==========
Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized $ 1,337 $ 55
Income taxes, net (16,431) 3,050
Noncash investing activity - note receivable
received upon disposal of business segment $ - $ 4,179
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Restatements, organization and basis of presentation and other:
Restatement of financial statements
On December 21, 2005, the Company and its audit committee concluded that
the Company would file this Quarterly Report on Form 10-Q/A for the quarter
ended March 31, 2005 to restate the Company's consolidated balance sheet as of
December 31, 2004 and March 31, 2005, and the Company's consolidated statements
of income, comprehensive income, cash flows and stockholders' equity for the
interim periods ended March 31, 2004 and 2005.
As discussed below in Notes 1 and 2, prior to December 2003 Kronos
Worldwide, Inc. was a wholly-owned subsidiary of the Company. In December 2003,
NL completed the distribution of approximately 48.8% of Kronos' common stock on
a pro-rata basis to its shareholders, and during 2004 NL paid each of its four
$.20 per share regular quarterly dividends in the form of shares of Kronos
common stock. Consequently, effective in July 2004 the Company's ownership of
Kronos was reduced to less than 50%, and the Company commenced to account for
its interest in Kronos by the equity method.
The Company is a majority-owned subsidiary of Valhi, Inc., and majority
ownership of Kronos continues to reside with Valhi and its subsidiaries,
including the Company. Valhi is a majority-owned subsidiary of Contran
Corporation. The Company and Valhi are members of the Contran Tax Group, and the
Company computes its provision for income taxes on a separate company basis.
In its previously-issued consolidated financial statements, the Company
accounted for any current income tax resulting from the distribution of shares
of Kronos common stock to its shareholders as a direct charge to equity. In
addition, the Company commenced to recognize deferred income taxes with respect
to the excess of the financial reporting carrying value of its investment in
Kronos over the adjusted income tax basis of such shares starting in July 2004,
concurrent with the Company beginning to account for its interest in Kronos by
the equity method, on a prospective basis. The Company has now concluded, among
other things, that (i) a portion of the current income taxes resulting from the
distribution of shares of Kronos common stock to its shareholders should be
included in the Company's provision for income taxes included in the
determination of net income and (ii) the Company should have commenced to
recognize deferred income taxes with respect to the excess of the financial
reporting carrying value of its investment in Kronos over the adjusted income
tax basis of such shares starting with such excess that existed in December
2003, concurrent with its distribution of 48.8% of Kronos' common stock in
December 2003.
During the Company's close process for its fiscal quarter ended September
30, 2005, the Company concluded that:
o its provision for income taxes included in the determination of income from
continuing operations was misstated by an aggregate of $413,000, or nil per
diluted share, in the first quarter of 2004, and by $1.3 million, or $.03
per diluted share, in the first quarter of 2005;
o its provision for deferred income taxes included in the determination of
total other comprehensive income related to foreign currency translation
was misstated by an aggregate of $82,000 in the first quarter of 2004 and
by $4,000 in the first quarter of 2005;
o its provision for income taxes accounted for as a direct reduction to
stockholders' equity was misstated by $913,000 in the first quarter of
2005; and
o with respect to its statement of changes in stockholders' equity, and in
addition to the effect of the items noted above, total stockholders' equity
was misstated by $58.1 million as of December 31, 2004,
in each case as they related to the appropriate provision for income taxes
and related items (including a $174.5 million increase to stockholders' equity
in 2004 resulting from the settlement of a $227 million income tax liability by
using 5.5 million shares of Kronos common stock with an aggregate $52.5 million
carrying amount) which should have been recognized in accordance with accounting
principles generally accepted in the United States of America ("GAAP") as
provided by the guidance contained in Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, with respect to the following
items:
o Deferred income taxes with respect to the income tax effect of the excess
of the GAAP book basis over the income tax basis of the Registrant's
investment in Kronos Worldwide, Inc., which investment the Registrant
accounts for by the equity method, giving consideration to NL's investment
in Kronos on a pure stand-alone separate company basis without regard to
tax group membership with other affiliated companies;
o Current and deferred income taxes related to the Registrant's distributions
or transfer of shares of Kronos common stock to its stockholders (including
entities under common control); and
o Current and deferred income tax provisions related to other items.
On December 21, 2005, the Company and its audit committee concluded that
the Company had failed to properly apply the guidance contained in SFAS No. 109
in so far as it related to these items. This amendment was required to correct
for the aggregate effect of these misstatements. While the effect of these
misstatements have no effect on the Company's previously-reported total cash
flows from operating, investing and financing activities, these misstatements do
have a significant effect on the Company's provision for income taxes, related
income tax accounts (principally deferred income taxes) and stockholders'
equity.
The following tables show (i) selected consolidated balance sheet data as
of December 31, 2004 and March 31, 2005, and selected consolidated statements of
income, comprehensive income, stockholders' equity and cash flow data for the
interim periods ended March 31, 2004 and 2005, in each case as previously
reported, (ii) adjustments to such consolidated financial statement data to
reflect the aggregate effect of this restatement and (iii) such consolidated
financial statement data, as restated to reflect the aggregate effect of this
restatement.
December 31, 2004
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
(In thousands)
Selected balance sheet items:
Current receivable from affiliates $ 1,634 $ 47 $ 1,681
========= ======== =========
Total current assets $ 186,126 $ 47 $ 186,173
========= ======== =========
Noncurrent deferred income taxes $ 45,274 $ 58,146 $ 103,420
========= ======== =========
Total noncurrent liabilities $ 119,174 $ 58,146 $ 177,320
========= ======== =========
Stockholders' equity:
Common stock $ 6,054 $ - $ 6,054
Additional paid-in capital 417,760 (48,032) 369,728
Retained earnings 10,970 (10,970) -
Accumulated other comprehensive
income (loss)
Marketable securities 26,783 - 26,783
Currency translation (136,648) 919 (135,729)
Pension liabilities (33,191) (16) (33,207)
--------- -------- ---------
Total stockholders' equity $ 291,728 $(58,099) $ 233,629
========= ======== =========
March 31, 2005
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
(In thousands)
Selected balance sheet items:
Current payable to affiliates $ 4,405 $ (47) $ 4,358
Total current liabilities $ 79,216 $ (47) $ 79,169
Noncurrent deferred income taxes $ 46,454 $ 55,926 $ 102,380
Total noncurrent liabilities $ 117,093 $ 55,926 $ 173,019
========= ======== =========
Stockholders' equity:
Common stock $ 6,068 $ - $ 6,068
Additional paid-in capital 420,159 (48,032) 372,127
Retained earnings 17,575 (8,746) 8,829
Accumulated other comprehensive
income (loss)
Marketable securities 37,588 - 37,588
Currency translation (135,336) 915 (134,421)
Pension liabilities (33,191) (16) (33,207)
--------- -------- ---------
Total stockholders' equity $ 312,863 $(55,879) $ 256,984
========= ======== =========
Three months ended Three months ended
March 31, 2004 March 31, 2005
------------------------------------------- ------------------------------------------
Previously Previously
reported Adjustments As restated reported Adjustments As restated
------------ ------------ ----------- ----------- ----------- -----------
(In thousands, except per share data)
Income from continuing operations
before income tax and minority
interest $ 13,833 $ - $ 13,833 $ 22,325 $ - $ 22,325
Provision for income taxes 3,472 (413) 3,059 8,089 (1,311) 6,778
Minority interest in after tax earnings 5,282 - 5,282 731 - 731
--------- --------- --------- --------- --------- ---------
Income from
continuing operations 5,079 413 5,492 13,505 1,311 14,816
Discontinued operations 5 - 5 (326) - (326)
--------- --------- --------- --------- --------- ---------
Net income $ 5,084 $ 413 $ 5,497 $ 13,179 $ 1,311 $ 14,490
========= ========= ========= ========= ========= =========
Earnings per share:
Basic net income per share $ .11 $ - $ .11 $ .27 $ .03 $ .30
========= ========= ========= ========= ========= =========
Diluted net income per share $ .11 $ - $ .11 $ .27 $ .03 $ .30
========= ========= ========= ========= ========= =========
Weighted average shares used:
Basic 48,140 48,140 48,490 48,490
Diluted 48,279 48,279 48,561 48,561
Three months ended March 31, 2004
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
(In thousands)
Consolidated other comprehensive income:
Net income $ 5,084 $ 413 $ 5,497
========= ======== =========
Other comprehensive income, net of tax:
Marketable securities adjustment (7,130) - (7,130)
Currency translation adjustment (947) 82 (865)
--------- -------- ---------
Total other comprehensive income (8,077) 82 (7,995)
--------- -------- ---------
Comprehensive income $ (2,993) $ 495 $ (2,498)
========= ======== =========
Three months ended March 31, 2005
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
(In thousands)
Consolidated other comprehensive income:
Net income $ 13,179 $ 1,311 $ 14,490
========= ======== =========
Other comprehensive income, net of tax:
Marketable securities adjustment 10,805 - 10,805
Currency translation adjustment 1,312 (4) 1,308
--------- -------- ---------
Total other comprehensive income 12,117 (4) 12,113
--------- -------- ---------
Comprehensive income $ 25,296 $ 1,307 $ 26,603
========= ======== =========
Total stockholders equity -
Three months ended March 31, 2005
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
Balance at December 31, 2004 $ 291,728 $(58,099) $ 233,629
Net income 13,179 1,311 14,490
Other comprehensive income, net 12,117 (4) 12,113
Income tax on distribution (3,937) 913 (3,024)
Other, net (224) - (224)
--------- -------- ---------
Balance at March 31, 2005 $ 312,863 $(55,879) $ 256,984
========= ======== =========
Three months ended March 31, 2004
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
Items comprising cash flow from
operating activities:
Net income $ 5,084 $ 413 $ 5,497
========= ======== =========
Deferred income taxes from
continuing operations $ (1,745) $ (800) $ (2,545)
========= ======== =========
Accounts with affiliates $ 50 $ 387 $ 437
========= ======== =========
Net cash provided by operating activities $ 16,800 $ - $ 16,800
========= ======== =========
Three months ended March 31, 2005
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
Items comprising cash flow from
operating activities:
Net income $ 13,179 $ 1,311 $ 14,490
========= ======== =========
Deferred income taxes from
continuing operations $ 5,236 $ (2,224) $ 3,012
========= ======== =========
Accounts with affiliates $ (324) $ 913 $ 589
========= ======== =========
Net cash used by operating activities $ (3,886) $ - $ (3,886)
========= ======== =========
As previously disclosed, on May 9, 2005 the Company and its audit committee
also concluded to restate the Company's consolidated financial statements as of
December 31, 2004 and for the year then ended, to reflect an additional $4.2
million, or $.08 per diluted share, noncash deferred income tax benefit in its
results of operations for the year ended December 31, 2004. Such $4.2 million
relates to recognition of an additional noncash deferred income tax benefit
related to discontinued operations in the fourth quarter of 2004. This
restatement was included in the Company's Amendment No. 1 on Form 10-K/A of the
Company's Annual Report on Form 10-K for the year ended December 31, 2004, filed
with the SEC on May 31, 2005. The previously-reported amounts shown in the
tables above reflect, as applicable, the effect of this $4.2 million
restatement.
Organization and basis of presentation
NL Industries, Inc. (NYSE: NL) is a subsidiary of Valhi, Inc. (NYSE: VHI).
At March 31, 2005, Valhi held approximately 83% of NL's outstanding common stock
and Contran Corporation and its subsidiaries held approximately 91% of Valhi's
outstanding common stock. Substantially all of Contran's outstanding voting
stock is held by trusts established for the benefit of certain children and
grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee, or is
held by Mr. Simmons or persons or other entities related to Mr. Simmons.
Consequently, Mr. Simmons may be deemed to control each of such companies.
The consolidated balance sheet at March 31, 2005, and the consolidated
statements of income, comprehensive income (loss), stockholders' equity and cash
flows for the interim periods ended March 31, 2004 and 2005, have been prepared
by the Company, without audit, in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to state 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 normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted. The accompanying
consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2004, as
filed on March 30, 2005 as amended by Amendment No. 1 on Form 10-K/A filed on
May 31, 2003 and as further amended by Amendment No. 2 on Form 10-K/A filed with
the SEC on December 22, 2005 (the "2004 Annual Report").
On September 24, 2004, the Company completed the acquisition of 10,374,000
shares of CompX International Inc. (NYSE: CIX) common stock, representing
approximately 68% of the outstanding shares of CompX common stock. NL's
acquisition was accounted for under GAAP as a transfer of net assets among
entities under common control, and accordingly resulted in a change in reporting
entity. The Company has retroactively restated its consolidated financial
statements to reflect the consolidation of CompX for all periods presented.
Other
Prior to July 2004, Kronos Worldwide, Inc. (NYSE: KRO) was a majority-owned
subsidiary of the Company. Following the Company's July 2004 dividend in the
form of shares of Kronos common stock distributed to NL shareholders, the
Company's ownership of Kronos was reduced to less than 50%. Consequently,
effective July 1, 2004 the Company ceased to consolidate Kronos' financial
position, results of operations and cash flows and the Company commenced
accounting for its interest in Kronos by the equity method. The Company
continues to report Kronos as a consolidated subsidiary through June 30, 2004,
including the consolidation of Kronos' results of operations and cash flows for
the first quarter of 2004.
As disclosed in the 2004 Annual Report, the Company accounts for
stock-based employee compensation in accordance with Accounting Principles Board
Opinion ("APBO") No. 25, "Accounting for Stock Issued to Employees," and its
various interpretations. See Note 15. Under APBO No. 25, no compensation cost is
generally recognized for fixed stock options in which the exercise price is
greater than or equal to the market price on the grant date. Prior to 2004, and
following the cash settlement of certain stock options held by employees of NL,
the Company commenced accounting for its stock options using the variable
accounting method of APBO No. 25, because NL could not overcome the presumption
that it would not similarly cash settle its remaining stock options. Under the
variable accounting method, the intrinsic value of all unexercised stock options
(including stock options with an exercise price at least equal to the market
price on the date of grant) is accrued as an expense, with subsequent increases
(decreases) in the Company's market price resulting in the recognition of
additional compensation expense (income). Net compensation cost recognized by
the Company in accordance with APBO No. 25 was approximately $1.1 million in the
first quarter of 2004, and net compensation cost recognized by the Company was
not significant in the first quarter of 2005.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in the first quarter of 2004 and
2005 if the Company and its subsidiaries and affiliates had each elected to
account for their respective stock-based employee compensation related to stock
options in accordance with the fair value-based recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," for all awards granted subsequent to January 1, 1995.
Three months
ended March 31,
2004 2005
---- ----
(Restated) (Restated)
---------- ---------
(In millions, except
per share amounts)
Net income as reported $ 5.5 $14.5
Adjustments, net of applicable income
tax effects and minority interest:
Stock-based employee compensation expense
determined under APBO No. 25 .6 -
Stock-based employee compensation expense
determined under SFAS No. 123 (.1) -
----- -----
Pro forma net income $ 6.0 $14.5
===== =====
Basic and diluted net income per share:
As reported $ .11 $ .30
Pro forma $ .12 $ .30
Note 2 - Business segment information:
% owned at
Business segment Entity March 31, 2005
------------------- ------------------------ -----------------
Component products CompX International Inc. 68%
Chemicals Kronos Worldwide, Inc. 36%
The Company's ownership of CompX is held directly by CompX Group, Inc, an
82.4%-owned subsidiary of the Company. An affiliate of Valhi owns the remaining
17.6% of CompX Group. CompX Group's sole asset consists of shares of CompX
common stock representing approximately 83% of the total number of CompX shares
outstanding, and the percentage ownership of CompX shown above represents NL's
ownership interest in CompX Group multiplied by CompX Group's ownership interest
in CompX.
In March 2005, NL paid its $.25 per share regular quarterly dividend in the
form of shares of Kronos common stock in which approximately 266,000 shares, or
approximately .5% of Kronos' outstanding common stock, were distributed to NL
shareholders in the form of a pro-rata dividend. NL's distribution of such
shares of Kronos common stock is taxable to NL, and NL is required to recognize
a taxable gain equal to the difference between the fair market value of the
shares of Kronos common stock distributed and NL's adjusted tax basis in such
stock at the date of distribution. The Company recognized an aggregate $3.9
million tax liability in the first quarter of 2005 related to the Kronos shares
distributed. In accordance with GAAP, the amount of such income tax represented
by the excess of the carrying value of such stock for financial reporting
purposes and the adjusted tax basis of such stock is included in the
determination of net income in the period the shares were distributed, and the
amount of such income tax represented by the excess of the fair market value of
such stock and the carrying value of such stock for financial reporting purposes
is accounted for as a direct reduction to the Company's stockholders' equity
(retained earnings). The amount of such income tax included in the determination
of net income aggregated $913,000, while the amount of such income tax accounted
for as a direct reduction to equity aggregated $3.0 million.
During the first quarter of 2005, NL also sold approximately 467,000 shares
of Kronos common stock in market transactions for an aggregate of $19.0 million.
The Company recognized a $14.6 million securities transaction gain related to
such sales.
CompX (NYSE: CIX) and Kronos (NYSE: KRO) each file periodic reports with
the Securities and Exchange Commission ("SEC") pursuant to the Securities
Exchange Act of 1934, as amended.
Three months
ended March 31,
2004 2005
---- ----
(In millions)
Net sales:
Chemicals $263.3 $ -
Component products 43.5 46.8
------ ------
Total net sales $306.8 $ 46.8
====== ======
Segment profit:
Chemicals $ 26.2 $ -
Component products 2.5 4.2
------ ------
Total segment profit 28.7 4.2
General corporate items:
Interest and dividend income from affiliates .8 .6
Other interest income .4 .9
Securities transactions, net - 14.6
Other income - .1
General corporate expenses, net (6.7) (5.8)
Interest expense (9.4) (.1)
------ ------
13.8 14.5
Equity in Kronos - 7.8
------ ------
Income from continuing operations before
income taxes and minority interest $ 13.8 $ 22.3
====== ======
Component products segment profit, as presented above, may differ from
amounts separately reported by CompX because the Company defines segment profit
differently than CompX.
Note 3 - Accounts and other receivables:
December 31, March 31,
2004 2005
------------ ---------
(In thousands)
Trade receivables $ 24,759 $ 21,979
Recoverable VAT and other receivables 551 2,457
Allowance for doubtful accounts (1,008) (373)
--------- --------
$ 24,302 $ 24,063
========= ========
Note 4 - Inventories:
December 31, March 31,
2004 2005
------------ ---------
(In thousands)
Raw materials $ 8,193 $ 4,774
Work in process 10,827 9,776
Finished products 9,696 6,214
Supplies 65 74
--------- --------
$ 28,781 $ 20,838
========= ========
Note 5 - Marketable equity securities:
December 31, March 31,
2004 2005
------------ ---------
(In thousands)
Valhi common stock $ 75,770 $ 92,535
Other 23 33
--------- --------
$ 75,793 $ 92,568
========= ========
At March 31, 2005, the Company owned approximately 4.7 million shares of
Valhi common stock with a quoted market price of $19.65 per share (December 31,
2004 quoted market price - $16.09 per share).
Note 6 - Other noncurrent assets:
December 31, March 31,
2004 2005
------------ ---------
(In thousands)
Intangible assets $ 3,190 $ 3,041
Note receivable - 4,179
Other 525 515
--------- --------
$ 3,715 $ 7,735
========= ========
The note receivable relates to part of the consideration received by CompX
from the January 2005 sale of its Thomas Regout operations in Europe. See Note
13.
Note 7 - Accrued liabilities:
December 31, March 31,
2004 2005
------------ ---------
(In thousands)
Employee benefits $ 14,775 $ 11,141
Other 8,359 7,853
--------- --------
$ 23,134 $ 18,994
========= ========
Note 8 - Other noncurrent liabilities:
December 31, March 31,
2004 2005
------------ ---------
(In thousands)
Insurance $ 2,507 $ 2,498
Other 1,521 1,512
--------- --------
$ 4,028 $ 4,010
========= ========
Note 9 - Minority interest:
December 31, March 31,
2004 2005
------------ ---------
(In thousands)
Minority interest in net assets:
CompX International Inc. $ 49,154 $ 49,549
NL Environmental Management Services, Inc. 9,250 9,280
--------- --------
$ 58,404 $ 58,829
========= ========
Three months
ended March 31,
2004 2005
---- ----
(In thousands)
Minority interest in net earnings:
Kronos Worldwide, Inc. $ 4,786 $ -
CompX International Inc. 488 701
NL Environmental Management Services, Inc. - 30
Subsidiary of Kronos Worldwide, Inc. 8 -
------- -------
$ 5,282 $ 731
======= =======
Note 10 - Provision for income taxes:
Three months
ended March 31,
2004 2005
---- ----
(Restated) (Restated)
---------- ---------
(In millions, except
Expected tax expense $ 4.9 $ 7.8
Non-U.S. tax rates .1 (.1)
Incremental U.S. tax and rate differences on
equity in earnings (.8) (3.8)
Change in deferred income tax valuation -
allowance, net (3.0)
Nondeductible expenses 1.0 .1
U.S. state income taxes, net - .1
Excess of book basis over tax basis of Kronos
common stock sold or distributed .4 2.5
Other, net .5 .2
------ ------
$ 3.1 $ 6.8
====== ======
Certain U.S. and non-U.S. tax returns of the Company and Kronos are being
examined and tax authorities have or may propose tax deficiencies, including
penalties and interest. For example:
o NL's and NL's majority-owned subsidiary, NL Environmental Management
Services, Inc. ("EMS"), U.S. federal income tax returns for the years 1998
through 2000 have been audited by the U.S. tax authorities. During the
course of the audit, the IRS proposed a substantial tax deficiency,
including interest, related to a restructuring transaction. To avoid
protracted litigation, minimize the hazards of such litigation and other
considerations, NL and EMS applied to take part in an IRS settlement
initiative applicable to transactions similar to the restructuring
transaction. In April 2003, the IRS notified NL and EMS that they had been
accepted into such settlement initiative. NL has reached an agreement with
the IRS concerning the settlement of this matter pursuant to which, among
other things, the Company paid approximately $21 million, including
interest, up front as a partial payment of the settlement amount (which
amount was paid in April 2005 and is classified as a current liability at
March 31, 2005), and NL will be required to recognize the remaining
settlement amount (approximately $15 million) ratably over a 15-year time
period beginning in 2004. NL and the IRS have signed the settlement
agreement, and the case is now closed.
o Kronos has received a preliminary tax assessment related to 1993 from the
Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately euro 6 million ($8 million at March 31, 2005).
Kronos has filed a protest to this assessment, and believes that a
significant portion of the assessment is without merit. The Belgian tax
authorities have filed a lien on the fixed assets of Kronos' Belgian TiO2
operations in connection with this assessment. In April 2003, Kronos
received a notification from the Belgian tax authorities of their intent to
assess a tax deficiency related to 1999 that, including interest, is
expected to be approximately euro 9 million ($12 million). Kronos believes
the proposed assessment is substantially without merit, and Kronos has
filed a written response.
o The Norwegian tax authorities have notified Kronos of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million)
relating to the years 1998 through 2000. Kronos has objected to this
proposed assessment.
o Kronos has received a preliminary tax assessment from the Canadian tax
authorities related to the years 1998 and 1999 proposing tax deficiencies
of Cdn. $11 million ($9 million). Kronos has filed a protest and believes a
significant portion of the assessment is without merit.
No assurance can be given that these unresolved tax matters will be
resolved in the Company's favor in view of the inherent uncertainties involved
in settlement initiatives, court and tax proceedings. The Company believes that
it has provided adequate accruals for additional taxes and related interest
expense which may ultimately result from all such examinations and believes that
the ultimate disposition of such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
Note 11 - Employee benefit plans:
The components of net periodic defined benefit pension cost (income) are
presented in the table below.
Three months
ended March 31,
2004 2005
---- ----
(In thousands)
Service cost $ 1,669 $ -
Interest cost 5,031 760
Expected return on plan assets (4,722) (1,017)
Amortization of prior service cost 141 -
Amortization of net transition obligations 143 (17)
Recognized actuarial losses 962 100
------- -------
$ 3,224 $ (174)
======= =======
The components of net periodic postretirement benefits other than pensions
("OPEB") cost are presented in the table below.
Three months
ended March 31,
2004 2005
---- ----
(In thousands)
Service cost $ 57 $ -
Interest cost 471 211
Amortization of prior service credit (255) (72)
Recognized actuarial losses 71 -
------- -------
$ 344 $ 139
======= =======
Note 12 - Commitments and contingencies:
Lead pigment litigation. The Company's former operations included the
manufacture of lead pigments for use in paint and lead-based paint. NL, other
former manufacturers of lead pigments for use in paint, and lead-based paint,
and the Lead Industries Association (which discontinued business operations in
2002) have been named as defendants in various legal proceedings seeking damages
for personal injury, property damage and governmental expenditures allegedly
caused by the use of lead-based paints. Certain of these actions have been filed
by or on behalf of states, large U.S. cities or their public housing authorities
and school districts, and certain others have been asserted as class actions.
These lawsuits seek recovery under a variety of theories, including public and
private nuisance, negligent product design, negligent failure to warn, strict
liability, breach of warranty, conspiracy/concert of action, aiding and
abetting, enterprise liability, market share liability, intentional tort, fraud
and misrepresentation, violations of state consumer protection statutes,
supplier negligence and similar claims.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and health concerns associated with the
use of lead-based paints, including damages for personal injury, contribution
and/or indemnification for medical expenses, medical monitoring expenses and
costs for educational programs. A number of cases are inactive or have been
dismissed or withdrawn. Most of the remaining cases are in various pre-trial
stages. Some are on appeal following dismissal or summary judgment rulings in
favor of the defendants. In addition, various other cases are pending (in which
the Company is not a defendant) seeking recovery for injury allegedly caused by
lead pigment and lead-based paint. Although the Company is not a defendant in
these cases, the outcome of these cases may have an impact on additional cases
being filed against the Company in the future.
The Company believes these actions are without merit, intends to continue
to deny all allegations of wrongdoing and liability and to defend against all
actions vigorously. The Company has neither lost nor settled any of these cases.
The Company has not accrued any amounts for the pending lead pigment and
lead-based paint litigation. Liability that may result, if any, cannot
reasonably be estimated. There can be no assurance that the Company will not
incur liability in the future in respect of this pending litigation in view of
the inherent uncertainties involved in court and jury rulings in pending and
possible future cases. If any such future liability were to be incurred, it
could be material to the Company's consolidated financial statements, results of
operations and liquidity.
NL previously filed an action against certain of its former insurance
carriers for coverage with respect to defense costs related to certain specific
lead pigment litigation matters. This action was settled in 2000. The Company is
continuing discussions with certain former insurance carriers for coverage with
respect to defense costs related to the Company's remaining past and present
lead pigment litigation matters. Whether insurance coverage for defense costs
will be found to exist for lead pigment litigation depends on a variety of
factors, and there can be no assurance that the Company will be successful in
obtaining reimbursement for past or future defense costs incurred. The Company
has not considered any potential insurance recoveries for lead pigment
litigation in determining related accruals.
Environmental matters and litigation. The Company's operations are governed
by various environmental laws and regulations. Certain of the Company's
businesses are and have been engaged in the handling, manufacture or use of
substances or compounds that may be considered toxic or hazardous within the
meaning of applicable environmental laws. As with other companies engaged in
similar businesses, certain past and current operations and products of the
Company have the potential to cause environmental or other damage. The Company
has implemented and continues to implement various policies and programs in an
effort to minimize these risks. The Company's policy is to maintain compliance
with applicable environmental laws and regulations at all of its plants and to
strive to improve environmental performance. From time to time, the Company may
be subject to environmental regulatory enforcement under U.S. and foreign
statutes, resolution of which typically involves the establishment of compliance
programs. It is possible that future developments, such as stricter requirements
of environmental laws and enforcement policies thereunder, could adversely
affect the Company's production, handling, use, storage, transportation, sale or
disposal of such substances. The Company believes all of its plants are in
substantial compliance with applicable environmental laws.
Certain properties and facilities used in the Company's former businesses,
including divested primary and secondary lead smelters and former mining
locations of NL, are the subject of civil litigation, administrative proceedings
or investigations arising under federal and state environmental laws.
Additionally, in connection with past disposal practices, the Company has been
named as a defendant, potential responsible party ("PRP") or both, pursuant to
the Comprehensive Environmental Response, Compensation and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act ("CERCLA") and
similar state laws in various governmental and private actions associated with
waste disposal sites, mining locations, and facilities currently or previously
owned, operated or used by the Company or its subsidiaries, or their
predecessors, certain of which are on the U.S. EPA's Superfund National
Priorities List or similar state lists. These proceedings seek cleanup costs,
damages for personal injury or property damage and/or damages for injury to
natural resources. Certain of these proceedings involve claims for substantial
amounts. Although the Company may be jointly and severally liable for such
costs, in most cases it is only one of a number of PRPs who may also be jointly
and severally liable.
Environmental obligations are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of governmental
regulations, the number of PRPs and the PRPs' ability or willingness to fund
such allocation of costs, their financial capabilities and the allocation of
costs among PRPs, the solvency of other PRPs, the multiplicity of possible
solutions, and the years of investigatory, remedial and monitoring activity
required. In addition, the imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs or allocation of such costs among PRPs,
solvency of other PRPs, the results of future testing and analysis undertaken
with respect to certain sites 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. In addition, with respect to other PRPs and the fact
that the Company may be jointly and severally liable for the total remediation
cost at certain sites, the Company could ultimately be liable for amounts in
excess of its accruals due to, among other things, reallocation of costs among
PRPs or the insolvency of one or more PRPs. 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. If any such future liability
were to be incurred, it could be material to the Company's consolidated
financial statements, results of operations and liquidity.
The Company records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are generally not
discounted to their present value. Recoveries of remediation costs from other
parties, if any, are recognized as assets when their receipt is deemed probable.
At March 31, 2005, no receivables for recoveries had been recognized.
The exact time frame over which the Company makes payments with respect to
its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process which in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs which
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
is classified as a noncurrent liability.
A summary of the activity in the Company's accrued environmental costs
during the first quarter of 2005 is presented in the table below.
Amount
--------------
(In thousands)
Balance at the beginning of the period $ 67,817
Additions charged to expense 1,993
Payments (2,968)
--------
Balance at the end of the period $ 66,842
========
Amounts recognized in the balance sheet
at the end of the period:
Current liability $ 18,144
Noncurrent liability 48,698
--------
$ 66,842
========
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. At March
31, 2005, the Company had accrued $66.8 million for those environmental matters
which the Company believes are reasonably estimable. The Company believes 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 the
Company believes it is possible to estimate costs is approximately $91 million.
The Company's estimates of such liabilities have not been discounted to present
value.
At March 31, 2005, there are approximately 20 sites for which the Company
is unable to estimate a range of costs. For these sites, generally the
investigation is in the early stages, and it is either unknown as to whether or
not the Company actually had any association with the site, or if the Company
had association with the site, the nature of its responsibility, if any, for the
contamination at the site and the extent of contamination. The timing on when
information would become available to the Company to allow the Company to
estimate a range of loss is unknown and dependent on events outside the control
of the Company, such as when the party alleging liability provides information
to the Company.
At March 31, 2005, the Company had $14 million in restricted cash,
restricted cash equivalents and restricted marketable debt securities held by
special purpose trusts, the assets of which can only be used to pay for certain
of the Company's future environmental remediation and other environmental
expenditures (December 31, 2004 - $19 million). Use of such restricted balances
does not affect the Company's consolidated net cash flows.
Other litigation. Reference is made to the 2004 Annual Report for a
discussion of certain other legal proceedings to which the Company is a party.
NL has been named as a defendant in various lawsuits in a variety of
jurisdictions, alleging personal injuries as a result of occupational exposure
primarily to products manufactured by formerly-owned operations of NL containing
asbestos, silica and/or mixed dust. Approximately 500 of these types of cases
involving a total of approximately 22,000 plaintiffs and their spouses remain
pending. Of these plaintiffs, approximately 4,700 are represented by five cases
pending in Mississippi state courts and approximately 5,000 are represented by
three cases that have been removed to federal court in Mississippi, where they
have been, or are in the process of being, transferred to the multi-district
litigation pending in the United States District Court for the Eastern District
of Pennsylvania. NL has not accrued any amounts for this litigation because
liability that might result to NL, if any, cannot be reasonably estimated. To
date, NL has not been adjudicated liable in any of these matters. Based on
information available to NL, including facts concerning its historical
operations, the rate of new claims, the number of claims from which NL has been
dismissed and NL's prior experience in the defense of these matters, NL believes
that the range of reasonably possible outcomes of these matters will be
consistent with NL's historical costs with respect to these matters (which are
not material), and no reasonably possible outcome is expected to involve amounts
that are material to NL. NL has and will continue to vigorously seek dismissal
from each claim and/or a finding of no liability by NL in each case. In
addition, from time to time, NL has received notices regarding asbestos or
silica claims purporting to be brought against former subsidiaries of NL,
including notices provided to insurers with which NL has entered into
settlements extinguishing certain insurance policies. These insurers may seek
indemnification from NL.
In addition to the litigation described above, the Company and its
affiliates are also involved in various other environmental, contractual,
product liability, patent (or intellectual property), employment and other
claims and disputes incidental to its present and former businesses. In certain
cases, the Company has insurance coverage for such items; however the Company
does not currently expect additional material insurance coverage for
environmental claims. The Company currently believes that the disposition of all
claims and disputes, individually or in the aggregate, should not have a
material adverse effect on its consolidated financial position, results of
operations or liquidity.
Note 13 - Discontinued operations:
As discussed in the 2004 Annual Report, in December 2004 CompX's board of
directors committed to a formal plan to dispose of its Thomas Regout operations
in the Netherlands. Such operations, which previously were included in the
Company's component products operating segment (see Note 2), met all of the
criteria under GAAP to be classified as an asset held for sale at December 31,
2004, and accordingly the results of operations of Thomas Regout have been
classified as discontinued operations for all periods presented. The Company has
not reclassified its consolidated balance sheets or statements of cash flows. In
classifying the net assets of the Thomas Regout operations as an asset held for
sale, the Company concluded that the carrying amount of the net assets of such
operations exceeded the estimated fair value less costs to sell of such
operations, and accordingly in the fourth quarter of 2004 the Company recognized
a $6.5 million impairment charge to write-down its investment in the Thomas
Regout operations to its estimated net realizable value. Such charge represented
an impairment of goodwill.
In January 2005, CompX completed the sale of such operations for proceeds
(net of expenses) of approximately $22.3 million. The net proceeds consisted of
approximately $18.1 million in cash at the date of sale and a $4.2 million
principal amount note receivable from the purchaser bearing interest at a fixed
rate of 7% and payable over four years. The note receivable is collateralized by
a secondary lien on the assets sold and is subordinated to certain third-party
indebtedness of the purchaser. Accordingly, the Company no longer includes the
results of operations of Thomas Regout subsequent to December 31, 2004 in its
consolidated financial statements. The net proceeds from the January 2005 sale
of Thomas Regout were approximately $860,000 less than the net realizable value
estimated at the time of the goodwill impairment charge (primarily due to higher
expenses associated with the disposal of the Thomas Regout operations), and
discontinued operations in the first quarter of 2005 includes a charge related
to such differential ($326,000 loss, net of income tax benefit and minority
interest). During the first quarter of 2004, the Thomas Regout operations
reported net sales of $9.9 million, operating income of $400,000, interest
expense of $400,000 and a nominal amount of net income.
Note 14 - Accounting principles not yet implemented:
Inventory costs. The Company will adopt SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs is charged to expense as incurred. Alternatively, in periods of production
above the high end of normal capacity, the amount of fixed overhead costs
allocated to each unit of production is decreased so that inventories are not
measured above cost. SFAS No. 151 also clarifies existing GAAP to require that
abnormal freight and wasted materials (spoilage) are to be expensed as incurred.
The Company believes its production cost accounting already complies with the
requirements of SFAS No. 151, and the Company does not expect adoption of SFAS
No. 151 will have a material effect on its consolidated financial statements.
Stock options. As permitted by regulations of the Securities and Exchange
Commission ("SEC") the Company will adopt SFAS No. 123R, "Share-Based Payment,"
as of January 1, 2006. SFAS No. 123R, among other things, eliminates the
alternative in existing GAAP to use the intrinsic value method of accounting for
stock-based employee compensation under APBO No. 25. Upon adoption of SFAS No.
123R, the Company will generally be required to recognize the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award, with the cost recognized over the period
during which an employee is required to provide services in exchange for the
award (generally, if the vesting period of the award). No compensation cost will
be recognized in the aggregate for equity instruments for which the employee
does not render the requisite service (generally, the instrument is forfeited
before it has vested). The grant-date fair value will be estimated using
option-pricing models (e.g. Black-Scholes or a lattice model). Under the
transition alternatives permitted under SFAS No. 123R, the Company will apply
the new standard to all new awards granted on or after January 1, 2006, and to
all awards existing as of December 31, 2005 which are subsequently modified,
repurchased or cancelled. Additionally, as of January 1, 2006, the Company will
be required to recognize compensation cost for the portion of any non-vested
award existing as of December 31, 2005 over the remaining vesting period.
Because the number of non-vested awards as of December 31, 2005 with respect to
options granted by NL is not expected to be material, the effect of adopting
SFAS No. 123R is not expected to be significant in so far as it relates to
existing stock options. Should NL or its subsidiaries and affiliates, however,
either grant a significant number of options or modify, repurchase or cancel
existing options in the future, the effect on the Company's consolidated
financial statements could be material.
Impairment of investments. In June 2004, the Emerging Issues Task Force
("EITF") issued EITF No. 03-01, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments. EITF No. 03-01, the effective date
of which is still pending based upon a deferral granted by the Financial
Accounting Standards Board, provides guidance for determining when an investment
covered by its scope is considered impaired, whether any impairment is other
than temporary and the date when an impairment loss is to be recognized. The
Company does not currently expect compliance with EITF No. 03-01 will have a
material affect on its consolidated financial statements, whenever it becomes
effective.
Note 15 - Investment in Kronos:
At March 31, 2005, the Company held 17.5 million shares of Kronos with a
quoted market price of $42.51 per share, or an aggregate market value of $745
million.
At March 31, 2005, Kronos reported total assets of $1.3 billion and
stockholder's equity of $482.3 million. Kronos' total assets at March 31, 2005
include current assets of $502.1 million, net property and equipment of $441.8
million and an investment in a TiO2 manufacturing joint venture of $121.1
million. Kronos' total liabilities at March 31, 2005 include current liabilities
of $213.7 million, long-term debt of $493.1 million, accrued OPEB and pension
costs aggregating $68.1 million and deferred income taxes of $58.9 million.
During the three months ended March 31, 2005, Kronos reported net sales of
$291.9 million, income from operations of $46.4 million and net income of $21.4
million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
General
The Company reported net income of $14.5 million, or $.30 per diluted
share, in the first quarter of 2005 compared to income of $5.5 million, or $.11
per diluted share, in the first quarter of 2004. As discussed in Note 1 to the
Consolidated Financial Statements, the Company's consolidated financial
statements have been restated.
The increase in the Company's diluted earnings per share from the first
quarter of 2004 compared to the first quarter of 2005 is due primarily to the
net effects of (i) higher component products segment profit, (ii) higher
earnings attributable to Kronos, (iii) security transactions gains from the sale
of shares of Kronos common stock and (iv) current and deferred provisions for
income taxes related to the Company's investment in Kronos. The Company
currently believes its net income in 2005 will be lower than 2004 due primarily
to the effect of certain income tax benefits recognized primarily in the second
quarter of 2004.
As discussed in Note 1 to the Consolidated Financial Statements, on
September 24, 2004, the Company purchased 10,374,000 shares of CompX common
stock, representing approximately 68% of the outstanding shares of CompX common
stock, from Valhi and a wholly-owned subsidiary of Valhi. Because Valhi, NL and
CompX are all entities under the common control of Contran, the Company's
acquisition of the shares of CompX common stock results in a change in reporting
entity and the Company has retroactively restated its consolidated financial
statements to reflect the consolidation of CompX for all periods presented.
Also discussed in Note 1, prior to July 2004, Kronos was a majority-owned
subsidiary of the Company. Following the Company's July 2004 dividend in the
form of shares of Kronos common stock distributed to NL shareholders, the
Company's ownership of Kronos was reduced to less than 50%. Consequently,
effective July 1, 2004 the Company ceased to consolidate Kronos' financial
position, results of operations and cash flows and the Company commenced
accounting for its interest in Kronos by the equity method. The Company
continues to report Kronos as a consolidated subsidiary through June 30, 2004,
including the consolidation of Kronos' results of operations and cash flows for
the first quarter of 2004.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts,
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,"
"should," "could," "anticipates," "expected" or comparable terminology, or by
discussions of strategies 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 substantial risks and uncertainties that
could significantly impact expected results, and actual future results could
differ materially from those described in such forward-looking statements. While
it is not possible to identify all factors, the Company continues to face many
risks and uncertainties. The factors that could cause actual future results to
differ materially from those described herein are the risks and uncertainties
discussed in this Quarterly Report and those described from time to time in the
Company's other filings with the SEC include, but are not limited to, the
following:
o Future supply and demand for the Company's products,
o The extent of the dependence of certain of the Company's businesses on
certain market sectors,
o The cyclicality of the Company's businesses (such as Kronos' TiO2
operations),
o Customer inventory levels (such as the extent to which Kronos' customers
may, from time to time, accelerate purchases of TiO2 in advance of
anticipated price increases or defer purchases of TiO2 in advance of
anticipated price decreases),
o Changes in raw material and other operating costs (such as energy and steel
costs),
o The possibility of labor disruptions,
o General global economic and political conditions (such as changes in the
level of gross domestic product in various regions of the world and the
impact of such changes on demand for TiO2 and component products),
o Demand for office furniture,
o Competitive products and substitute products, including increased
competition from low-cost manufacturing sources (such as China),
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o Service industry employment levels,
o Fluctuations in currency exchange rates (such as changes in the exchange
rate between the U.S. dollar and each of the euro, the Norwegian kroner,
the New Taiwan dollar and the Canadian dollar),
o Operating interruptions (including, but not limited to, labor disputes,
leaks, fires, explosions, unscheduled or unplanned downtime and
transportation interruptions),
o The ability of the Company to renew or refinance credit facilities,
o The ultimate outcome of income tax audits, tax settlement initiatives or
other tax matters,
o The introduction of trade barriers,
o Potential difficulties in integrating completed or future acquisitions,
o Decisions to sell operating assets other than in the ordinary course of
business,
o Uncertainties associated with new product development,
o The ultimate ability to utilize income tax attributes, the benefit of which
has been recognized under the "more-likely-than-not" recognition criteria,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government laws and regulations and possible changes therein (such as
changes in government regulations which might impose various obligations on
present and former manufacturers of lead pigment and lead-based paint,
including NL, with respect to asserted health concerns associated with the
use of such products),
o The ultimate resolution of pending litigation (such as NL's lead pigment
litigation and litigation surrounding environmental matters), and
o Possible future litigation.
Should one or more of these risks materialize (or the consequences of such
a development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of changes in information, future
events or otherwise.
Component products
Three months ended
March 31,
-------------------- %
2004 2005 Change
---- ---- ------
(In millions)
Net sales $ 43.5 $ 46.8 +8%
Segment profit 2.5 4.2 +68%
Component products sales were higher in the first quarter of 2005 as
compared to the first quarter of 2004 due primarily to an increase in sales
volume and selling prices for certain of CompX's precision slide and ergonomic
products. During the first quarter of 2005, sales of slide and ergonomic
products increased 16% and 10%, respectively, as compared to the first quarter
of 2004, while sales of security products decreased 1%. The percentage changes
in both slide and ergonomic products include the impact resulting from changes
in foreign currency exchange rates. Sales of security products are generally
denominated in U.S. dollars.
Component products operating income comparisons in 2005 were favorably
impacted by the effect of certain cost reduction initiatives previously
undertaken. Component products operating income comparisons were also impacted
by the net effects of increases in the cost of steel (the primary raw material
for CompX's products) and a favorable change in product mix for security
products.
CompX has substantial operations and assets located outside the United
States in Canada and Taiwan. A portion of CompX's sales generated from its
non-U.S. operations are denominated in currencies other than the U.S. dollar,
principally the Canadian dollar and the New Taiwan dollar. In addition, a
portion of CompX's sales generated from its non-U.S. operations (principally in
Canada) are denominated in the U.S. dollar. Most raw materials, labor and other
production costs for such non-U.S. operations are denominated primarily in local
currencies. Consequently, the translated U.S. dollar values of CompX's foreign
sales and operating results are subject to currency exchange rate fluctuations
which may favorably or unfavorably impact reported earnings and may affect
comparability of period-to-period operating results. During the first quarter of
2005, currency exchange rate fluctuations positively impacted component products
sales comparisons with the same period in 2004, while currency exchange rate
fluctuations did not significantly impact component products segment profit
comparisons for the same periods.
While demand has stabilized across most product segments, certain customers
are seeking lower cost Asian sources as alternatives to CompX's products. CompX
believes the impact of this will be mitigated through ongoing initiatives to
expand both new products and new market opportunities. Asian sourced competitive
pricing pressures are expected to continue to be a challenge as Asian
manufacturers, particularly those located in China, gain market share. CompX's
strategy in responding to the competitive pricing pressure has included reducing
production cost through product reengineering, improvement in manufacturing
processes or moving production to lower-cost facilities, including CompX's own
Asian based manufacturing facilities. CompX also has emphasized and focused on
opportunities where it can provide value-added customer support services that
Asian based manufacturers are generally unable to provide. The combination of
CompX's cost control initiatives together with its value-added approach to
development and marketing of products are believed to help mitigate the impact
of competitive pricing pressures.
Additionally, CompX's cost for steel continues to be unstable due to the
continued high demand and shortages in various parts of the world. While CompX
has thus far been able to pass a majority of its higher raw material costs on to
its customers through price increases and surcharges, there is no assurance that
CompX would be able to continue to pass along any additional higher costs to its
customers. The price increases and surcharges may accelerate the efforts of some
of CompX's customers to find less expensive products from foreign manufacturers.
CompX will continue to focus on cost improvement initiatives, utilizing lean
manufacturing techniques and prudent balance sheet management in order to
minimize the impact of lower sales, particularly to the office furniture
industry, and to develop value-added customer relationships with an additional
focus on sales of CompX's higher-margin ergonomic computer support systems to
improve operating results. These actions, along with other activities to
eliminate excess capacity, are designed to position CompX to expand more
effectively on both new product and new market opportunities to improve CompX'
profitability.
Chemicals
Relative changes in Kronos' TiO2 sales and operating income during the 2004
and 2005 periods presented are primarily due to (i) relative changes in TiO2
average selling prices and (ii) relative changes in foreign currency exchange
rates. Selling prices (in billing currencies) for TiO2, Kronos' principal
product, were generally: decreasing during the first half of 2004 and increasing
in the last half of 2004 and the first quarter of 2005.
Three months ended
March 31,
-------------------- %
2004 2005 Change
---- ---- ------
(In $ millions)
Net sales $263.3 $291.9 +11%
Segment profit 26.2 48.0 +83%
TiO2 operating statistics:
Sales volumes* 118 114 -3%
Production volumes* 117 122 +4%
Percentage change in Ti02
average selling prices:
Using actual foreign currency
exchange rates +13%
Impact of changes in foreign
currency exchange rates -5%
----
In billing currencies +8%
----
_______________________________
* Thousands of metric tons
Kronos' sales increased $28.6 million (11%) in the first quarter of 2005
compared to the first quarter of 2004 due to the net effects of higher average
TiO2 selling prices, lower TiO2 selling volumes and the favorable effect of
fluctuations in foreign currency exchange rates, which increased chemicals sales
by approximately $11 million, as further discussed below. Excluding the effect
of fluctuations in the value of the U.S. dollar relative to other currencies,
Kronos' average TiO2 selling prices in billing currencies in the first quarter
of 2005 were 8% higher as compared to the first quarter of 2004. When translated
from billing currencies to U.S. dollars using actual foreign currency exchange
rates prevailing during the respective periods, Kronos' average TiO2 selling
prices in the first quarter of 2005 increased 13% compared to the first quarter
of 2004.
Kronos' sales are denominated in various currencies, including the U.S.
dollar, the euro, other major European currencies and the Canadian dollar. The
disclosure of the percentage change in Kronos' average TiO2 selling prices in
billing currencies (which excludes the effects of fluctuations in the value of
the U.S. dollar relative to other currencies) is considered a "non-GAAP"
financial measure under regulations of the SEC. The disclosure of the percentage
change in Kronos' average TiO2 selling prices using actual foreign currency
exchange rates prevailing during the respective periods is considered the most
directly comparable financial measure presented in accordance with GAAP ("GAAP
measure"). Kronos discloses percentage changes in its average TiO2 prices in
billing currencies because Kronos believes such disclosure provides useful
information to investors to allow them to analyze such changes without the
impact of changes in foreign currency exchange rates, thereby facilitating
period-to-period comparisons of the relative changes in average selling prices
in the actual various billing currencies. Generally, when the U.S. dollar either
strengthens or weakens against other currencies, the percentage change in
average selling prices in billing currencies will be higher or lower,
respectively, than such percentage changes would be using actual exchange rates
prevailing during the respective periods. The difference between the 13%
increase in Kronos' average TiO2 selling prices during the first quarter of 2005
as compared to the first quarter of 2004 using actual foreign currency exchange
rates prevailing during the respective periods (the GAAP measure), and the 8%
increase in Kronos' average TiO2 selling prices in billing currencies (the
non-GAAP measure) during such periods is due to the effect of changes in foreign
currency exchange rates. The above table presents in a tabular format (i) the
percentage change in Kronos' average TiO2 selling prices using actual foreign
currency exchange rates prevailing during the respective periods (the GAAP
measure), (ii) the percentage change in Kronos' average TiO2 selling prices in
billing currencies (the non-GAAP measure) and (iii) the percentage change due to
changes in foreign currency exchange rates (or the reconciling item between the
non-GAAP measure and the GAAP measure).
Kronos' TiO2 sales volumes in the first quarter of 2005 decreased 3%
compared to the first quarter of 2004, due primarily to lower volumes in export
markets. Demand for TiO2 has remained strong throughout 2004 and 2005, and while
Kronos believes that the strong demand is largely attributable to the end-use
demand of its customers, it is possible that some portion of the strong demand
resulted from customers increasing their inventory levels of TiO2 in advance of
implementation of announced or anticipated price increases. Kronos' operating
income comparisons were also favorably impacted by higher production levels,
which increased 4% in the first quarter of 2005 as compared to the same period
in 2004. Kronos' operating rates were near full capacity in both periods, and
Kronos' production volume in the first quarter of 2005 was a new record for
Kronos for a first quarter.
Kronos has substantial operations and assets located outside the United
States (primarily in Germany, Belgium, Norway and Canada). A significant amount
of Kronos' sales generated from its non-U.S. operations are denominated in
currencies other than the U.S. dollar, principally the euro, other major
European currencies and the Canadian dollar. A portion of Kronos' sales
generated from its non-U.S. operations are denominated in the U.S. dollar.
Certain raw materials, primarily titanium-containing feedstocks, are purchased
in U.S. dollars, while labor and other production costs are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
Kronos' foreign sales and operating results are subject to currency exchange
rate fluctuations which may favorably or adversely impact reported earnings and
may affect the comparability of period-to-period operating results. Overall,
fluctuations in the value of the U.S. dollar relative to other currencies,
primarily the euro, increased TiO2 sales by a net $11 million in the first
quarter of 2005 as compared to the first quarter of 2004. Fluctuations in the
value of the U.S. dollar relative to other currencies similarly impacted Kronos'
foreign currency-denominated operating expenses. Kronos' operating costs that
are not denominated in the U.S. dollar, when translated into U.S. dollars, were
higher in the first quarter of 2005 as compared to the same period in 2004.
Overall, currency exchange rate fluctuations resulted in a net $1 million
increase in Kronos' segment profit in the first quarter of 2005 as compared to
the first quarter of 2004.
Reflecting the continued implementation of price increase announcements,
Kronos' average TiO2 selling prices in billing currencies in the first quarter
of 2005 were 4% higher than the fourth quarter of 2004. Kronos expects its TiO2
production volumes in the remainder of 2005 will be slightly higher than its
2004 volumes, with sales volumes comparable to or slightly lower in 2005 as
compared to 2004. Kronos' average TiO2 selling prices, which started to increase
during the second half of 2004 and continued to increase during the first
quarter of 2005, are expected to continue to increase during the remainder of
2005, and consequently, Kronos currently expects its average TiO2 selling
prices, in billing currencies, will be higher in 2005 as compared to 2004. The
anticipated higher selling prices in 2005 reflect the expected continued
implementation of selling price announcements, including Kronos' latest price
increases announced in March 2005. The extent to which all of such price
increases, and any additional price increases which may be announced
subsequently in 2005, will be realized will depend on, among other things,
economic factors. Overall, Kronos expects its chemicals segment profit in 2005
will be higher than 2004, due primarily to higher expected selling prices.
Kronos' expectations as to the future prospects of Kronos and the TiO2 industry
are based upon a number of factors beyond Kronos' control, including worldwide
growth of gross domestic product, competition in the marketplace, unexpected or
earlier-than-expected capacity additions and technological advances. If actual
developments differ from Kronos' expectations, Kronos' results of operations
could be unfavorably affected.
Kronos' efforts to debottleneck its production facilities to meet long-term
demand continues to prove successful. Such debottlenecking efforts included,
among other things, the addition of back-end finishing capacity to be able to
process a larger quantity of the base TiO2 produced and equipment upgrades and
enhancements to allow for reduced downtime for maintenance activities. Kronos'
production capacity has increased by approximately 30% over the past ten years
due to debottlenecking programs, with only moderate capital expenditures. Kronos
believes its annual attainable production capacity for 2005 is approximately
500,000 metric tons, with some slight additional capacity available in 2006
through its continued debottlenecking efforts.
Equity in earnings of Kronos - first quarter 2005
Three months ended
March 31,
2005
------
(In millions)
Kronos historical:
Net sales $291.9
======
Segment profit 48.0
Other general corporate, net (1.1)
Interest expense (11.8)
------
35.1
Income tax expense 13.7
------
Net income 21.4
======
Equity in earnings of Kronos Worldwide, Inc. $ 7.8
======
See the preceding discussion relating to Kronos' segment profit for the
first quarter of 2005. Kronos' interest expense in the first quarter of 2005
relates principally to Kronos International, Inc.'s ("KII") Senior Secured
Notes.
General corporate items
Securities transactions, net in the first quarter of 2005 relate
principally to a $14.6 million gain ($7.9 million, or $.16 per diluted share,
net of income taxes) related to NL's sale of approximately 467,000 shares of
Kronos common stock in market transactions. See Note 2 to the Consolidated
Financial Statements.
Substantially all of the interest expense in the first quarter of 2004
relates to Kronos. Interest expense related to CompX declined by approximately
$100,000 in the first quarter of 2005 compared to 2004 due primarily to lower
average levels of outstanding debt. CompX expects interest expense will continue
to be lower during the remainder of 2005 as compared to the last three quarters
of 2004 due to lower average levels of outstanding debt.
Net general corporate expenses in the first quarter of 2005 were lower than
the same period of 2004 due primarily to lower environmental remediation and
legal expenses of NL. Net general corporate expenses in calendar 2005 are
currently expected to be higher than 2004, primarily due to higher expected
legal expenses of NL resulting from an increase in litigation and related
expenses. However, obligations for environmental remediation are difficult to
assess and estimate and no assurance can be given that actual costs will not
exceed accrued amounts or that costs will not be incurred with respect to sites
for which no estimate of liability can presently be made. See Note 12 to the
Consolidated Financial Statements.
Provision for income taxes
The principal reasons for the difference between the Company's effective
income tax rate and the U.S. federal statutory income tax rates are explained in
Note 10 to the Consolidated Financial Statements. As discussed in Note 1 to the
Consolidated Financial Statements, the Company's consolidated financial
statements have been restated, including significant changes in the Company's
previously-reported provision for income taxes.
As previously disclosed, the Company commenced to recognize deferred income
taxes with respect to the excess of the financial reporting carrying amount over
the income tax basis of its investment in Kronos beginning in December 2003
following the Company's pro-rata distribution of shares of Kronos common stock
to NL's shareholders. The aggregate amount of such deferred income taxes
included in the Company's provision for income taxes was a $990,000 deferred
income tax benefit in the three months ended March 31, 2004 and a $1.6 million
deferred income tax benefit in the three months ended March 31, 2005. In
addition, the Company's provision for income taxes in the three months ended
March 31, 2004 and 2005 includes an aggregate $387,000 and $913,000,
respectively, for the current income tax effect related to NL's distribution of
such shares of Kronos common stock to its shareholders.
Minority interest
See Note 9 to the Consolidated Financial Statements.
Minority interest in NL's subsidiaries includes the Company's
majority-owned environmental management subsidiary, EMS. EMS was established in
1998, at which time EMS contractually assumed certain of the Company's
environmental liabilities. EMS' earnings are based, in part, upon its ability to
favorably resolve these liabilities on an aggregate basis. The shareholders of
EMS, other than the Company, actively manage the environmental liabilities and
share in 39% of EMS' cumulative earnings. The 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.
See Note 13 to the Consolidated Financial Statements.
Accounting principles not yet implemented.
See Note 14 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Consolidated cash flows
Summary
The Company's primary source of liquidity on an ongoing short-term and
long-term basis is its cash flows from operating activities, which is generally
used to (i) fund capital expenditures, (ii) repay any short-term indebtedness
incurred primarily for working capital purposes and (iii) provide for the
payment of dividends. In addition, from time-to-time the Company will incur
indebtedness, generally to (i) fund short-term working capital needs, (ii)
refinance existing indebtedness or (iii) fund major capital expenditures or the
acquisition of other assets outside the ordinary course of business. Also, the
Company will from time-to-time sell assets outside the ordinary course of
business, the proceeds of which are generally used to (i) repay existing
indebtedness (including indebtedness which may have been collateralized by the
assets sold), (ii) make investments in marketable and other securities, (iii)
fund major capital expenditures or the acquisition of other assets outside the
ordinary course of business or (iv) pay dividends.
Operating activities
Cash flows from operating activities decreased from $16.8 million provided
by operating activities in the first three months of 2004 to $3.9 million of
cash used by operating activities in the first three months of 2005. This $20.7
million decrease was due primarily to the deconsolidation of Kronos, effective
July 1, 2004. As such, cash from operating activities in the first quarter of
2005 is not comparable to the corresponding period in 2004. Relative changes in
accounts receivable are affected by, among other things, the timing of sales and
the collection of the resulting receivables. Relative changes in inventories and
accounts payable and accrued liabilities are affected by, among other things,
the timing of raw material purchases and the payment for such purchases and the
relative difference between production volumes and sales volumes. Relative
changes in accrued environmental costs are affected by, among other things, the
period in which recognition of the environmental accrual is recognized and the
period in which the remediation expenditure is actually made.
Trends in cash flows from operating activities (excluding the impact of
significant asset dispositions and relative changes in assets and liabilities)
are generally similar to trends in the Company's earnings. However, certain
items included in the determination of net income are non-cash, and therefore
such items have no impact on cash flows from operating activities. Non-cash
items included in the determination of net income include depreciation and
amortization expense, deferred income taxes and non-cash interest expense.
Non-cash interest expense relates principally to Kronos in 2004 and consists of
amortization of deferred financing costs.
Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, equity in earnings of affiliates will generally differ from
the amount of distributions received from such affiliates, and equity in losses
of affiliates does not necessarily result in current cash outlays paid to such
affiliates. The amount of periodic defined benefit pension plan expense and
periodic OPEB expense depends upon a number of factors, including certain
actuarial assumptions, and changes in such actuarial assumptions will result in
a change in the reported expense. In addition, the amount of such periodic
expense generally differs from the outflows of cash required to be currently
paid for such benefits.
Certain other items included in the determination of net income have no
impact on cash flows from operating activities, but such items do impact cash
flows from investing activities (although their impact on such cash flows
differs from their impact on net income). For example, realized gains and losses
from the disposal of long-lived assets are included in the determination of net
income, although the proceeds from any such disposal are shown as part of cash
flows from investing activities.
Relative changes in assets and liabilities generally result from the timing
of production, sales, purchases and income tax payments. Such relative changes
can significantly impact the comparability of cash flow from operations from
period to period, as the income statement impact of such items may occur in a
different period from when the underlying cash transaction occurs. For example,
raw materials may be purchased in one period, but the payment for such raw
materials may occur in a subsequent period. Similarly, inventory may be sold in
one period, but the cash collection of the receivable may occur in a subsequent
period.
NL does not have complete access to the cash flows of its subsidiaries and
affiliates, in part due to limitations contained in certain credit agreements as
well as the fact that certain of such subsidiaries and affiliates are not 100%
owned by NL. A detail of NL's consolidated cash flows from operating activities
is presented in the table below. Eliminations consist of intercompany dividends
(most of which are paid by Kronos to NL in 2004, and by CompX to NL in 2005).
Three months
ended March 31,
2004 2005
---- ----
(In millions)
Cash provided (used) by operating activities:
Kronos $ 19.1 $ -
CompX 3.4 1.9
NL Parent 3.1 (3.4)
Other (2.6) (1.1)
Eliminations (6.2) (1.3)
------- -------
$ 16.8 $ (3.9)
======= =======
Investing and financing activities
In 2005, substantially all of the Company's consolidated capital
expenditures relate to CompX. During the first quarter of 2005, (i) NL sold
shares of Kronos common stock in market transactions for $19.0 million and (ii)
CompX received a net $18.1 million from the sale of its Thomas Regout operations
(which had approximately $4.0 million of cash at the date of disposal). See
Notes 2 and 13 to the Consolidated Financial Statements.
Distributions to minority interest in 2005 consist of CompX dividends paid
to shareholders other than NL. Other cash flows from financing activities in
2005 relate primarily to proceeds from the issuance of NL and CompX common stock
upon exercise of stock options.
At March 31, 2005, unused credit available under existing credit facilities
approximated $47.5 million, all under CompX's revolving credit facility.
Provisions contained in certain of the Company's and its subsidiaries' and
affiliates' credit agreements could result in the acceleration of the applicable
indebtedness prior to its stated maturity for reasons other than defaults from
failing to comply with typical financial covenants. For example, certain credit
agreements allow the lender to accelerate the maturity of the indebtedness upon
a change of control (as defined) of the borrower. In addition, certain credit
agreements could result in the acceleration of all or a portion of the
indebtedness following a sale of assets outside the ordinary course of business,
which provision was waived in connection with CompX's sale of its Thomas Regout
operations. Other than operating leases discussed in the 2004 Annual Report,
neither NL nor any of its subsidiaries or affiliates are parties to any
off-balance sheet financing arrangements.
Component products - CompX
CompX received approximately $18.1 million cash (net of expenses) in
January 2005 upon the sale of its Thomas Regout operations in the Netherlands.
See Note 14 to the Consolidated Financial Statements. CompX believes that its
cash on hand, together with cash generated from operations and borrowing
availability under its bank credit facility, will be sufficient to meet CompX's
liquidity needs for working capital, capital expenditures, debt service and
dividends. To the extent that CompX's actual operating results or developments
differ from CompX's expectations, CompX's liquidity could be adversely affected.
CompX, which had suspended its regular quarterly dividend of $.125 per share in
the second quarter of 2003, reinstated its regular quarterly dividend at the
$.125 per share rate in the fourth quarter of 2004.
Certain of the CompX's sales generated by its non-U.S. operations are
denominated in U.S. dollars. CompX periodically uses currency forward contracts
to manage a very nominal portion of foreign exchange rate risk associated with
receivables denominated in a currency other than the holder's functional
currency or similar exchange rate risk associated with future sales. CompX has
not entered into these contracts for trading or speculative purposes in the
past, nor does CompX currently anticipate entering into such contracts for
trading or speculative purposes in the future. Derivatives used to hedge
forecasted transactions and specific cash flows associated with foreign currency
denominated financial assets and liabilities which meet the criteria for hedge
accounting are designated as cash flow hedges. Consequently, the effective
portion of gains and losses is deferred as a component of accumulated other
comprehensive income and is recognized in earnings at the time the hedged item
affects earnings. Contracts that do not meet the criteria for hedge accounting
are marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. To manage
such exchange rate risk, at March 31, 2005, CompX held a series of contracts,
which matured in May 2005, to exchange an aggregate of U.S. $2.5 million for an
equivalent amount of Canadian dollars at an exchange rates of Cdn. $1.20 to Cdn.
$1.23 per U.S. dollar. At March 31, 2005, the actual exchange rate was Cdn.
$1.21 per U.S. dollar. The estimated fair values of such foreign currency
forward contracts at March 31, 2005 is not material.
CompX periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, dividend policy and estimated
future operating cash flows. As a result of this process, CompX has in the past
and may in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities, modify its dividend policy,
repurchase shares of its common stock or take a combination of such steps or
other steps to manage its liquidity and capital resources. In the normal course
of business, CompX may review opportunities for acquisitions, divestitures,
joint ventures or other business combinations in the component products
industry. In the event of any such transaction, CompX may consider using cash,
issuing additional equity securities or increasing the indebtedness of CompX or
its subsidiaries.
Chemicals - Kronos
At March 31, 2005, Kronos had cash, cash equivalents and marketable debt
securities of $42.1 million, including restricted balances of $3.7 million, and
Kronos had approximately $143 million available for borrowing under its U.S.,
Canadian and European credit facilities. Based upon Kronos' expectations for the
TiO2 industry and anticipated demands on Kronos' cash resources as discussed
herein, Kronos expects to have sufficient liquidity to meet its future
obligations including operations, capital expenditures, debt service and current
dividend policy. To the extent that actual developments differ from Kronos'
expectations, Kronos' liquidity could be adversely affected.
At March 31, 2005, Kronos' outstanding debt was comprised of (i) $493.0
million related to KII's Senior Secured Notes, (ii) $12.9 million related to
KII's European revolving bank credit facility which matures in June 2005 and
(iii) approximately $300,000 of other indebtedness. KII expects to seek to renew
its European revolving bank credit facility during the second quarter of 2005.
Kronos' assets consist primarily of investments in its operating
subsidiaries, and Kronos' ability to service its parent level obligations,
including the Senior Secured Notes, depends in large part upon the distribution
of earnings of its subsidiaries, whether in the form of dividends, advances or
payments on account of intercompany obligation, or otherwise. None of Kronos'
subsidiaries have guaranteed the Senior Secured Notes, although KII has pledged
65% of the common stock or other ownership interest of certain of KII's
first-tier operating subsidiaries as collateral of such Senior Secured Notes.
As disclosed in the 2004 Annual Report, KII may redeem up to 35% of the
Senior Secured Notes on or before June 30, 2005 with the net proceeds of a
qualified public offering of equity securities of either Kronos or KII. KII
currently has no plans to so redeem the Senior Secured Notes, although until the
June 30, 2005 date passes, KII retains the right to so redeem the Senior Secured
Notes.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions significantly impact Kronos' earnings and operating cash
flows. Cash flows from operations is considered the primary source of liquidity
for Kronos. Changes in TiO2 pricing, production volumes and customer demand,
among other things, could significantly affect the liquidity of Kronos.
Based upon Kronos' expectations for the TiO2 industry and anticipated
demand for Kronos' cash resources as discussed herein, Kronos expects to have
sufficient short-term and long-term liquidity to meet its obligations including
operations, capital expenditures, debt service and dividends. To the extent that
actual developments differ from Kronos' expectations, Kronos' liquidity could be
adversely affected.
See Note 11 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of Kronos' income tax
returns in various U.S. and non-U.S. jurisdictions, and see Note 13 to the
Consolidated Financial Statements with respect to certain legal proceedings with
respect to Kronos.
Certain of the Kronos' sales generated by its non-U.S. operations are
denominated in U.S. dollars. Kronos periodically uses currency forward contracts
to manage a very nominal portion of foreign exchange rate risk associated with
receivables denominated in a currency other than the holder's functional
currency or similar exchange rate risk associated with future sales. Kronos has
not entered into these contracts for trading or speculative purposes in the
past, nor does Kronos currently anticipate entering into such contracts for
trading or speculative purposes in the future. Derivatives used to hedge
forecasted transactions and specific cash flows associated with foreign currency
denominated financial assets and liabilities which meet the criteria for hedge
accounting are designated as cash flow hedges. Consequently, the effective
portion of gains and losses is deferred as a component of accumulated other
comprehensive income and is recognized in earnings at the time the hedged item
affects earnings. Contracts that do not meet the criteria for hedge accounting
are marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. To manage
such exchange rate risk, at March 31, 2005, Kronos held a contract, which
matured in April, 2005 to exchange an aggregate of U.S. $5 million for an
equivalent amount of Canadian dollars at an exchange rate of Cdn. $1.24 per U.S.
dollar. At March 31, 2005, the actual exchange rate was Cdn. $1.21 per U.S.
dollar. The estimated fair values of such foreign currency forward contracts at
March 31, 2005 is insignificant.
Kronos periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and availability of resources in view of, among other
things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, Kronos has in the past and may in the future seek to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, repurchase
shares of its common stock, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, Kronos may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals or other industries, as well as the acquisition of interests in, and
loans to, related entities. In the event of any such transaction, Kronos may
consider using available cash, issuing equity securities or increasing
indebtedness to the extent permitted by the agreements governing Kronos'
existing debt.
Kronos has substantial operations located outside the United States for
which the functional currency is not the U.S. dollar. As a result, the reported
amounts of Kronos' assets and liabilities related to its non-U.S. operations,
and therefore Kronos' net assets, will fluctuate based upon changes in currency
exchange rates.
NL Industries
At March 31, 2005, NL (exclusive of CompX) had cash, cash equivalents and
marketable debt securities of $114.5 million, including restricted balances of
$17.5 million. Of such restricted balances, $14 million was held by special
purpose trusts, the assets of which can only be used to pay for certain of NL's
future environmental remediation and other environmental expenditures. See Note
12 to the Consolidated Financial Statements.
See Note 10 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of NL's income tax
returns, and see Note 12 to the Consolidated Financial Statements and Part II,
Item 1, "Legal Proceedings" with respect to certain legal proceedings and
environmental matters with respect to NL.
In addition to those legal proceedings described in Note 12 to the
Consolidated Financial Statements, various legislation and administrative
regulations have, from time to time, been proposed that seek to (i) 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 (ii) effectively overturn court decisions in which NL
and other pigment manufacturers have been successful. Examples of such proposed
legislation include bills which would permit civil liability for damages on the
basis of market share, rather than requiring plaintiffs to prove that the
defendant's product caused the alleged damage, and bills which would revive
actions barred by the statute of limitations. While no legislation or
regulations have been enacted to date that are expected to have a material
adverse effect on NL's consolidated financial position, results of operations or
liquidity, imposition of market share liability or other legislation could have
such an effect.
NL previously filed an action against certain of its former insurance
carriers for coverage with respect to defense costs related to certain specific
lead pigment litigation matters. This action was settled in 2000. The Company is
continuing discussions with certain former insurance carriers for coverage with
respect to defense costs related to the Company's remaining past and present
lead pigment litigation matters. Whether insurance coverage for defense costs
will be found to exist for lead pigment litigation depends on a variety of
factors, and there can be no assurance that the Company will be successful in
obtaining reimbursement for past or future defense costs incurred. The Company
has not considered any potential insurance recoveries for lead pigment
litigation in determining related accruals.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, NL has in the past and may in the future seek to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, repurchase
shares of its common stock, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, NL may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals or other industries, as well as the acquisition of interests in, and
loans to, related entities. In the event of any such transaction, NL may
consider using its available cash, issuing its equity securities or increasing
its indebtedness to the extent permitted by the agreements governing NL's
existing debt.
Because NL's operations are conducted primarily through its subsidiaries
and affiliates, NL's long-term ability to meet its parent company level
corporate obligations is dependent in large measure on the receipt of dividends
or other distributions from its subsidiaries and affiliates. In the fourth
quarter of 2004, CompX reinstated its regular quarterly dividend at the $.125
per share rate. At that rate, and based on the 10.4 million shares of CompX held
indirectly by NL through CompX Group, Inc. ("CGI") (representing NL's pro-rata
ownership of CGI's ownership of CompX) at March 31, 2005, NL would receive
aggregate annual dividends from CompX of $5.2 million. In February 2004, Kronos
announced it would pay its first regular quarterly cash dividend of $.25 per
share. At that rate, and based on the 17.5 million shares of Kronos held by NL
at March 31, 2005, NL would receive aggregate annual dividends from Kronos of
$17.5 million.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policies, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company and related entities routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies.
Non-GAAP financial measures
In an effort to provide investors with additional information regarding the
Company's results of operations as determined by GAAP, the Company has disclosed
certain non-GAAP information which the Company believes provides useful
information to investors.
o The Company discloses percentage changes in Kronos' average TiO2 selling
prices in billing currencies, which excludes the effects of foreign
currency translation. The Company believes disclosure of such percentage
changes allows investors to analyze such changes without the impact of
changes in foreign currency exchange rates, thereby facilitating
period-to-period comparisons of the relative changes in average selling
prices in the actual various billing currencies. Generally, when the U.S.
dollar either strengthens or weakens against other currencies, the
percentage change in average selling prices in billing currencies will be
higher or lower, respectively, than such percentage changes would be using
actual exchange rates prevailing during the respective periods.
ITEM 4. CONTROLS AND PROCEDURES
Restatement. As disclosed in Note 1 to the Consolidated Financial
Statements, the Company and its audit committee concluded to restate the
Company's consolidated financial statements as of December 31, 2004 and March
31, 2005, and for the interim periods ended March 31, 2004 and 2005. The
restatement relates to misstatements of the Company's provision for income taxes
for the interim periods ended March 31, 2004 and 2005, and the Company's related
income tax accounts (current and deferred) as of December 31, 2004 and March 31,
2005.
The guidance set forth in Auditing Standard No. 2 of the Public Company
Accounting Oversight Board states that a restatement of previously-issued
financial statements to reflect the correction of a misstatement should be
regarded as at least a significant control deficiency and as a strong indicator
that a material weakness in internal control over financial reporting exists. As
a result of this restatement, the Company has concluded that a material weakness
existed at December 31, 2004 and March 31, 2005.
Evaluation of Disclosure Controls and Procedures. The Company maintains a
system of disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by regulations of the SEC, means controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of Harold C. Simmons, the Company's
President and Chief Executive Officer, and Gregory M. Swalwell, the Company's
Vice President and Chief Financial Officer, have evaluated the Company's
disclosure controls and procedures as of March 31, 2005. Based upon their
evaluation, and as a result of the material weakness discussed below, these
executive officers have concluded that the Company's disclosure controls and
procedures are not effective as of the date of such evaluation.
A material weakness is a control deficiency, or a combination of control
deficiencies, that results in a more than remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As of March 31, 2005, the Company did not maintain effective
controls over the accounting for income taxes, including the determination and
reporting of income taxes payable to affiliates, deferred income tax assets and
liabilities, deferred income tax asset valuation allowance, and the provision
for income taxes which contributed to the following material weaknesses:
a) The Company did not have effective controls over the proper consideration
of the effect of subsequent events on the evaluation of certain income tax
attributes and related deferred income tax asset valuation allowances in
the preparation of its consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America.
Specifically, the Company did not have effective controls in place to
consider that as a result of the capital gains generated from the Company's
first quarter 2005 sales of certain securities that the Company should not
have recognized a valuation allowance against certain deferred income tax
assets as of December 31, 2004. This control deficiency resulted in the
restatement of the 2004 Company's consolidated financial statements as of
and for the year ended December 31, 2004 included in the Original Form
10-K. Additionally, this control deficiency could result in a misstatement
of deferred income tax assets and liabilities and the related income tax
provision that would result in a material misstatement to the Company's
annual or interim consolidated financial statements that would not be
prevented or detected.
b) The Company did not have adequate personnel with sufficient knowledge of
accounting principles generally accepted in the United States of America
related to income tax accounting and reporting. Additionally, the Company
did not maintain effective controls over the review and monitoring of the
accuracy, completeness and valuation of the components of the income tax
provision and related deferred income taxes, and income taxes payable
resulting in errors in (i) the accounting for the income tax effect of the
difference between book and income tax basis of the Company's investment in
Kronos Worldwide, Inc., an equity-method investment of the Company as of
December 31, 2004, (ii) current and deferred income taxes related to the
Company's distributions of Kronos common stock to the Company's
stockholders and (iii) current and deferred income taxes related to other
items, that were not prevented or detected. This control deficiency
resulted in the restatement of the Company's 2002, 2003 and 2004
consolidated financial statements and 2004 and 2005 interim financial
information. Additionally, this control deficiency could result in a
misstatement of income taxes payable, deferred income tax assets and
liabilities, deferred income tax asset valuation allowance, and the
provision for income taxes that would result in a material misstatement to
the Company's annual or interim consolidated financial statements that
would not be prevented or detected.
Accordingly, management of the Company determined that each of these
control deficiencies constitutes a material weakness.
Remediation.In order to remediate this material weakness, the Company
intends to increase its financial reporting staff, with particular emphasis on
obtaining additional personnel with a background in the financial reporting
requirements for the determination of the provision for income taxes in
accordance with SFAS No. 109 and related GAAP. Such additional staff could be
employees of the Company and/or independent contractors hired by the Company
with qualifications in the required area. As of December 23, 2005, two such
persons have been hired. Management believes that the addition of such staff
with these qualifications will help ensure that GAAP has been appropriately and
consistently applied with respect to the accurate calculation and classification
within the consolidated financial statements of income tax provisions and
related current and deferred income tax accounts.
Changes in Internal Control Over Financial Reporting. There has been no
change to the Company's internal control over financial reporting during the
quarter ended March 31, 2005 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 12 to the Consolidated Financial Statements and
to the 2004 Annual Report for descriptions of certain previously reported legal
proceedings.
State of Rhode Island v. Lead Industries Association, et al. (Superior
Court of Rhode Island, No. 99-5226). In May 2005, the trial court dismissed the
conspiracy claim with prejudice, and the time for the state to appeal this
dismissal has not yet begun to run.
Smith, et al. v. Lead Industries Association, et al. (Circuit Court for
Baltimore City, Maryland, Case No. 24-C-99-004490). In April 2005, the court of
appeals vacated the decision of the intermediate appellate court, stating that
such court should not have accepted the appeal, and remanded the case back to
the trial court for further proceedings.
Lewis, et al. v. Lead Industries Association, et al. (Circuit Court of Cook
County, Illinois, County Department, Chancery Division, Case No. 00CH09800). In
March 2005, the plaintiffs appealed the trial court's dismissal of the case.
Barker, et al. v. The Sherwin-Williams Company, et al. (Circuit Court of
Jefferson County, Mississippi, Civil Action No. 2000-587, and formerly known as
Borden, et al. vs. The Sherwin-Williams Company, et al.). With respect to the
seven plaintiffs remaining in Jefferson County, five of these plaintiffs
voluntarily dismissed their claims without prejudice in March 2005.
Houston Independent School District v. Lead Industries Association, et al.
(District Court of Harris County, Texas, No. 2000-33725). In March 2005, the
plaintiff voluntarily dismissed the case without prejudice.
City of Chicago v. American Cynamid, et al. (Circuit Court of Cook County,
Illinois, No. 02CH16212). In February 2005, the plaintiff filed a petition with
the Illinois Supreme Court seeking review of the appellate court's decision
affirming the dismissal of the case.
Item 6. Exhibits
31.1 - Certification
31.2 - Certification
32.1 - Certification
The Company has retained a signed original of any of the above exhibits
that contains signatures, and the Company will provide such exhibit to the
Commission or its staff upon request. NL will also furnish, without charge, a
copy of its Code of Business Conduct and Ethics, its Audit Committee Charter and
its Corporate Governance Guidelines, each as adopted by the Company's board of
directors, upon request. Such requests should be directed to the attention of
NL's Corporate Secretary at NL's corporate offices located at 5430 LBJ Freeway,
Suite 1700, Dallas, Texas 75240.
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 December 22, 2005 By /s/ Gregory M. Swalwell
-------------------- -----------------------------------
Gregory M. Swalwell
Vice President, Finance and Chief
Financial Officer (Principal
Financial Officer)
Date December 22, 2005 By /s/ James W. Brown
-------------------- -----------------------------------
James W. Brown
Vice President and Controller
(Principal Accounting Officer)