SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 2)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the fiscal year ended December 31, 2004
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Commission file number 1-640
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NL INDUSTRIES, INC.
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(Exact name of Registrant as specified in its charter)
New Jersey 13-5267260
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common stock New York Stock Exchange
($.125 par value) Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act). Yes X No
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The aggregate market value of the 7.7 million shares of voting stock held by
nonaffiliates of NL Industries, Inc. as of June 30, 2004 (the last business day
of the Registrant's most recently-completed second fiscal quarter) approximated
$112 million.
As of February 28, 2005, 48,515,284 shares of the Registrant's common stock were
outstanding.
Documents incorporated by reference
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The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
Explanatory Note Regarding Amendment No. 2
The Registrant hereby files this Amendment No. 2 on Form 10-K/A ("Form
10-K/A") to amend its Annual Report on Form 10-K for the year ended December 31,
2004, as filed with the Securities and Exchange Commission ("SEC") on March 30,
2005 and as subsequently amended on May 31, 2005 ("Original Form 10-K"). 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-K/A to restate the Registrant's consolidated balance sheet as
of December 31, 2003 and 2004, and the Registrant's consolidated statements of
income, comprehensive income, cash flows and stockholders' equity for each of
the three years in the period ended December 31, 2004, in each case as contained
in the Original Form 10-K.
As discussed in Notes 1 and 2 to the Consolidated Financial Statements,
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 $1.7 million, or
$.03 per diluted share, in 2002, by $85.7 million, or $1.79 per diluted
share, in 2003 and by $51.8 million, or $1.07 per diluted share, in 2004;
o its provision for deferred income taxes included in the determination of
total other comprehensive income related to foreign currency translation
and pension liabilities was misstated by an aggregate of $408,000 in 2002,
by $25,000 in 2003 and by $1.5 million in 2004;
o its provision for income taxes accounted for as a direct reduction to
stockholders' equity was misstated by $90.7 million in 2003 and by $26.6
million in 2004; 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 $19.4 million as of December 31, 2001, and its changes in
stockholders' equity was misstated by $174.5 million in 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 compaines;
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 December 31, 2004 that precludes the Registrant from
concluding that its internal control over financial reporting was effective as
of such date. However, in the Original Form 10-K the Registrant had previously
concluded that it did not maintain effective internal control over financial
reporting as of December 31, 2004.
For the convenience of the reader, this Form 10-K/A sets forth the Original
Form 10-K, as amended hereby, in its entirety. However, this Form 10-K/A only
amends and restates Items 6, 7, 8 and 9A of the Original Form 10-K, in each case
solely as a result of and to reflect the corrections discussed above, and no
other information in the Original Form 10-K is amended hereby. The foregoing
items have not been updated to reflect other events occurring after the filing
of the Original Form 10-K, 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.
PART I
ITEM 1. BUSINESS
NL Industries, Inc. (NYSE: NL) organized as a New Jersey corporation in
1891, has operations through majority-owned subsidiaries and less than
majority-owned affiliates in the component products and chemicals industries.
Information regarding the Company's business segments and the companies
conducting such businesses is set forth below. Business and geographic segment
financial information is included in Note 3 to the Consolidated Financial
Statements, which information is incorporated herein by reference. The Company
is based in Dallas, Texas.
Component Products CompX is a leading manufacturer of precision ball bearing
CompX International Inc.- 68% slides, security products and ergonomic computer support
owned at December 31, 2004 systems used in office furniture, computer-related
applications and a variety of other industries. CompX has
production facilities in North America and Asia.
Chemicals Kronos is a leading global producer and marketer of
Kronos Worldwide, Inc. - 37% value-added titanium dioxide pigments ("TiO2"), which are
owned at December 31, 2004 used for imparting whiteness, brightness and opacity to a
diverse range of customer applications and end-use markets,
including coatings, plastics, paper and other industrial
and consumer "quality-of-life" products. Kronos has
production facilities in Europe and North America. Sales
of TiO2 represent about 90% of Kronos' total sales in 2004,
with sales of other products that are complementary to
Kronos' TiO2 business comprising the remainder.
At December 31, 2004, (i) Valhi (NYSE: VHI) directly and through a
wholly-owned subsidiary held approximately 83% of NL's outstanding common stock,
(ii) Contran Corporation and its subsidiaries held approximately 91% of Valhi's
outstanding common stock, (iii) Valhi and its wholly-owned subsidiary held an
additional 57% of Kronos' outstanding common stock and (iv) Titanium Metals
Corporation ("TIMET") (NYSE:TIE), an affiliate of Valhi, held an additional 17%
of CompX'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. See
Notes 1 and 17 to the Consolidated Financial Statements.
On September 24, 2004, the Company completed the acquisition of 10,374,000
shares of CompX common stock, representing approximately 68% of the outstanding
shares of CompX common stock. The CompX common stock was purchased from Valhi
and Valcor, a wholly-owned subsidiary of Valhi, at a purchase price of $16.25
per share, or an aggregate of approximately $168.6 million. The purchase price
was paid by NL's transfer to Valhi and Valcor of $168.6 million of NL's $200
million long-term note receivable from Kronos. The acquisition was approved by a
special committee of NL's board of directors comprised of directors who were not
affiliated with Valhi, and such special committee retained their own legal and
financial advisors who rendered an opinion to the special committee that the
purchase price was fair, from a financial point of view, to NL. NL's acquisition
was accounted for under accounting principles generally accepted in the United
States of America ("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. See Note 2 to the
Consolidated Financial Statements.
Prior to July 2004, the Company owned a majority of Kronos' outstanding
common stock, and the Company accounted for its ownership interest in Kronos as
a consolidated subsidiary. 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 two quarters of 2004. See Note 2 to the Consolidated Financial
Statements.
CompX and Kronos each file periodic reports with the Securities and
Exchange Commission ("SEC"). The information set forth below with respect to
such companies has been derived from such reports.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Annual Report on Form 10-K relating to matters that are not historical facts,
including, but not limited to, statements found in this Item 1 - "Business,"
Item 3 - "Legal Proceedings," Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 7A - "Quantitative and
Qualitative Disclosures About Market Risk," 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,"
"expects" 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. Among the factors that could cause actual future results to
differ materially are the risks and uncertainties discussed in this Annual
Report and those described from time to time in the Company's other filings with
the SEC including, but 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 The introduction of trade barriers,
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 - COMPX INTERNATIONAL INC.
General. CompX is a leading manufacturer of precision ball bearing slides,
security products (cabinet locks and other locking mechanisms) and ergonomic
computer support systems used in office furniture, computer-related applications
and a variety of other industries. CompX's products are principally designed for
use in medium- to high-end product applications, where design, quality and
durability are critical to CompX's customers. CompX believes that it is among
the world's largest producers of precision ball bearing slides, security
products and ergonomic computer support systems. In 2004, precision ball bearing
slides, security products and ergonomic computer support systems accounted for
approximately 43%, 42% and 15%, respectively, of net sales related to continuing
operations, respectively.
In January 2005, CompX completed the disposition of all of the net assets
of its Thomas Regout operations conducted in the Netherlands. Thomas Regout's
results of operations are classified as discontinued operations in the Company's
Consolidated Financial Statements. See Note 24 to the Consolidated Financial
Statements.
Products, product design and development. Precision ball bearing slides
manufactured to stringent industry standards are used in such applications as
office furniture, computer-related equipment, file cabinets, desk drawers,
automated teller machines, tool storage cabinets and imaging equipment. These
products include CompX's patented Integrated Slide Lock in which a file cabinet
manufacturer can reduce the possibility of multiple drawers being opened at the
same time, the adjustable patented Ball Lock which reduces the risk of
heavily-filled drawers, such as auto mechanic tool boxes, from opening while in
movement, and the Butterfly Take Apart System, which is designed to easily
disengage drawers from cabinets.
Security products are used in various applications including ignition
systems, office furniture, vending and gaming machines, parking meters,
electrical circuit panels, storage compartments, security devices for laptop and
desktop computers as well as mechanical and electronic locks for the toolbox
industry. These products include CompX's KeSet high security system, which has
the ability to change the keying on a single lock 64 times without removing the
lock from its enclosure and its patented, high-security TuBar locking system.
CompX believes it is a North American market leader in the manufacture and sale
of cabinet locks and other locking mechanisms.
Ergonomic computer support systems include articulating computer keyboard
support arms (designed to attach to desks in the workplace and home office
environments to alleviate possible strains and stress and maximize usable
workspace), CPU storage devices which minimize adverse effects of dust and
moisture and a number of complimentary accessories, including ergonomic wrist
rest aids, mouse pad supports and computer monitor support arms. These products
include CompX's Leverlock keyboard arm, which is designed to make the adjustment
of an ergonomic keyboard arm easier. In addition, CompX offers its engineering
and design capabilities for the design and manufacture of products on a
proprietary basis for key customers for those Canadian manufactured products.
CompX's precision ball bearing slides and ergonomic computer support
systems are sold under the CompX Waterloo, Waterloo Furniture Components and
Dynaslide brand names. Security products are sold under the CompX Security
Products, National Cabinet Lock, Fort Lock, Timberline Lock, Chicago Lock, Stock
Locks, KeSet and TuBar brand names. Ergonomic products are sold under the CompX
ErgonomX and CompX Waterloo brand names. CompX believes that its brand names are
well recognized in the industry.
Sales, marketing and distribution. CompX sells components to original
equipment manufacturers ("OEMs") and to distributors through a dedicated sales
force. The majority of CompX's sales are to OEMs, while the balance represents
standardized products sold through distribution channels. Sales to large OEM
customers are made through the efforts of factory-based sales and marketing
professionals and engineers working in concert with field salespeople and
independent manufacturers' representatives. Manufacturers' representatives are
selected based on special skills in certain markets or relationships with
current or potential customers.
A significant portion of CompX's sales are made through distributors. CompX
has a significant market share of cabinet lock sales to the locksmith
distribution channel. CompX supports its distributor sales with a line of
standardized products used by the largest segments of the marketplace. These
products are packaged and merchandised for easy availability and handling by
distributors and the end users. Based on CompX's successful STOCK LOCKS
inventory program, similar programs have been implemented for distributor sales
of ergonomic computer support systems and to some extent precision ball bearing
slides. CompX also operates a small tractor/trailer fleet associated with its
Canadian facilities to provide an industry-unique service response to major
customers for those Canadian manufactured products.
CompX does not believe it is dependent upon one or a few customers, the
loss of which would have a material adverse effect on its operations. In 2004,
the ten largest customers accounted for about 43% of component products sales
(2003 - 44%; 2002 - 38%). In 2004, one customer accounted for 11% of CompX's
sales. No single customer accounted for more than 10% of CompX's sales in either
2002 or 2003.
Manufacturing and operations. At December 31, 2004, CompX operated five
manufacturing facilities in North America related to its continuing operations
(two in Illinois and one in each of Canada, South Carolina and Michigan) and two
in Taiwan. Precision ball bearing slides are manufactured in the facilities
located in Canada, Michigan and Taiwan. Security products are manufactured in
the facilities located in South Carolina and Illinois. Ergonomic products are
manufactured in the facility located in Canada. The Company owns all of these
facilities except for one of the Taiwan facilities which is leased. See also
Item 2 - "Properties." CompX also leases a distribution center in California and
a warehouse in Taiwan. CompX believes that all of its facilities are well
maintained and satisfactory for their intended purposes.
Raw materials. Coiled steel is the major raw material used in the
manufacture of precision ball bearing slides and ergonomic computer support
systems. Plastic resins for injection molded plastics are also an integral
material for ergonomic computer support systems. Purchased components and zinc
are the principal raw materials used in the manufacture of security products.
These raw materials are purchased from several suppliers and are readily
available from numerous sources.
CompX occasionally enters into raw material purchase arrangements to
mitigate the short-term impact of future increases in raw material costs. While
these arrangements do not commit CompX to a minimum volume of purchases, they
generally provide for stated unit prices based upon achievement of specified
volume purchase levels. This allows CompX to stabilize raw material purchase
prices, provided the specified minimum monthly purchase quantities are met.
Materials purchased outside of these arrangements are sometimes subject to
unanticipated and sudden price increases, such as rapidly increasing worldwide
steel prices in 2002 through 2004. Due to the competitive nature of the markets
served by CompX's products, it is often difficult to recover such increases in
raw material costs through increased product selling prices. Consequently,
overall operating margins can be affected by such raw material cost pressures.
Competition. The office furniture and security products markets are highly
competitive. CompX competes primarily on the basis of product design, including
ergonomic and aesthetic factors, product quality and durability, price, on-time
delivery, service and technical support. CompX focuses its efforts on the
middle- and high-end segments of the market, where product design, quality,
durability and service are placed at a premium.
CompX competes in the precision ball bearing slide market primarily on the
basis of product quality and price with two large manufacturers and a number of
smaller domestic and foreign manufacturers. CompX competes in the security
products market with a variety of relatively small domestic and foreign
competitors. CompX competes in the ergonomic computer support system market
primarily on the basis of product quality, features and price with one major
producer and a number of smaller domestic unique manufacturers, and primarily on
the basis of price with a number of smaller domestic and foreign manufacturers.
Although CompX believes that it has been able to compete successfully in its
markets to date, price competition from foreign-sourced products has intensified
in the current economic market. There can be no assurance that CompX will be
able to continue to successfully compete in all of its existing markets in the
future.
Patents and trademarks. CompX holds a number of patents relating to its
component products, certain of which are believed to be important to CompX and
its continuing business activity and owns a number of trademarks and brand names
including CompX, CompX Security Products, CompX Waterloo, CompX ErgonomX,
National Cabinet Lock, KeSet, Fort Lock, Timberline Lock, Chicago Lock, ACE II,
TuBar, STOCK LOCKS, ShipFast, Waterloo Furniture Components Limited and
Dynaslide, are protected by registration in the United States and elsewhere with
respect to the products CompX manufactures and sells. CompX believes such
trademarks are well recognized in the component products industry.
Regulatory and environmental matters. CompX's operations are subject to
federal, state, local and foreign laws and regulations relating to the use,
storage, handling, generation, transportation, treatment, emission, discharge,
disposal and remediation of, and exposure to, hazardous and non-hazardous
substances, materials and wastes. CompX's operations are also subject to
federal, state, local and foreign laws and regulations relating to worker health
and safety. CompX believes that it is in substantial compliance with all such
laws and regulations. The costs of maintaining compliance with such laws and
regulations have not significantly impacted CompX to date, and CompX has no
significant planned costs or expenses relating to such matters. There can be no
assurance, however, that compliance with future laws and regulations will not
require CompX to incur significant additional expenditures, or that such
additional costs would not have a material adverse effect on CompX's
consolidated financial condition, results of operations or liquidity.
Employees. As of December 31, 2004, CompX employed approximately 1,450
persons, including 800 in the United States, 470 in Canada, and 180 in Taiwan.
Approximately 76% of CompX's employees in Canada are represented by a labor
union covered by a collective bargaining agreement which provides for annual
wage increases from 1% to 2.5% over the term of the contract expiring in January
2006. Wage increases for these Canadian employees historically have also been in
line with overall inflation indices. CompX believes its labor relations are
satisfactory.
CHEMICALS - KRONOS WORLDWIDE, INC.
General. Kronos is a leading global producer and marketer of value-added
TiO2, an inorganic chemical used for imparting whiteness, brightness and opacity
to a diverse range of customer applications and end-use markets, including
paints, paper, plastics, paper, ink, textiles, ceramics, food and cosmetics.
TiO2 is considered to be a "quality-of-life" product with demand affected by the
gross domestic product in various regions of the world. TiO2, the largest
commercially used whitening pigment by volume, derives its value from its
whitening properties and opacifying ability (commonly referred to as hiding
power). As a result of TiO2's high refractive index rating, it can provide more
hiding power than any other commercially produced white pigment. In addition,
TiO2 demonstrates excellent resistance to chemical attack, good thermal
stability and resistance to ultraviolet degradation. TiO2 is supplied to
customers in either a powder or slurry form.
By volume, approximately one-half of Kronos' 2004 sales volumes were
attributable to markets in Europe with approximately 38% to North America and
the balance to export markets. Kronos is the second-largest producer of TiO2 in
Europe, with an estimated 20% share of European TiO2 sales volumes in 2004.
Kronos has an estimated 14% share of North American TiO2 sales volumes.
Per capita consumption TiO2 in the United States and Western Europe far
exceeds consumption in other areas of the world and these regions are expected
to continue to be the largest consumers of TiO2. Significant markets for TiO2
consumption could emerge in Eastern Europe, the Far East or China, as the
economies in these regions continue to develop to the point that quality-of-life
products, including TiO2, experience greater demand.
Products and operations. TiO2 is produced in two crystalline forms: rutile
and anatase. Both the chloride and sulfate production processes (discussed
below) produce rutile TiO2. Chloride process rutile is preferred for the
majority of customer applications. From a technical standpoint, chloride process
rutile has a bluer undertone and higher durability than sulfate process rutile
TiO2. Although many end-use applications can use either form of TiO2, chloride
process rutile TiO2 is the preferred form for use in coatings and plastics, the
two largest end-use markets. Anatase TiO2, which is produced only through the
sulfate production process, represents a much smaller percentage of annual
global TiO2 production and is preferred for use in selected paper, ceramics,
rubber tires, man-made fibers, food and cosmetics.
Kronos believes that there are no effective substitutes for TiO2.
Extenders, such as kaolin clays, calcium carbonate and polymeric opacifiers, are
used in a number of end-use markets; however the opacity in these products is
not able to duplicate the performance characteristics of TiO2, and Kronos
believes these products are unlikely to replace TiO2.
Kronos currently produces over 40 different TiO2 grades, sold under the
Kronos trademark, which provide a variety of performance properties to meet
customers' specific requirements. Kronos' major customers include domestic and
international paint, plastics and paper manufacturers.
Kronos and its distributors and agents sell and provide technical services
for its products to over 4,000 customers in over 100 countries with the majority
of sales in Europe and North America. TiO2 is distributed by rail, truck and
ocean carrier in either dry or slurry form. Kronos and its predecessors have
produced and marketed TiO2 in North America and Europe for over 80 years, and
Kronos is the only leading TiO2 producer committed to producing TiO2 and related
products as its sole business. Kronos believes that it has developed
considerable expertise and efficiency in the manufacture, sale, shipment and
service of its products in domestic and international markets.
Sales of TiO2 represented about 90% of Kronos' total sales in 2004. Sales
of other products, complementary to Kronos' TiO2 business, are comprised of the
following:
o Kronos operates an ilmenite mine in Norway pursuant to a governmental
concession with an unlimited term. Ilmenite is a raw material used directly
as a feedstock by some sulfate-process TiO2 plants, including all of
Kronos' European sulfate-process plants. The mine has estimated reserves
that are expected to last at least 20 years. Ilmenite sales to
third-parties represented approximately 4% of Kronos' consolidated net
sales in 2004.
o Kronos manufactures and sells iron-based chemicals, which are by-products
and processed by-products of the TiO2 pigment production process. These
co-product chemicals are marketed through Kronos' Ecochem division, and are
used primarily as treatment and conditioning agents for industrial
effluents and municipal wastewater as well as in the manufacture of iron
pigments, cement and agricultural products. Sales of iron based chemical
products were about 3% of chemical sales in 2004.
o Kronos manufactures and sells certain titanium chemical products (titanium
oxychloride and titanyl sulfate), which are side-stream products from the
production of TiO2. Titanium oxychloride is used in specialty applications
in the formulation of pearlescent pigments, production of electroceramic
capacitors for cell phones and other electronic devices. Titanyl sulfate
products are used primarily in pearlescent pigments. Sales of these
products were about 1% of chemical sales in 2004.
Manufacturing process, properties and raw materials. Kronos manufactures
TiO2 using both the chloride process and the sulfate process. Approximately 73%
of Kronos' current production capacity is based on the chloride process. The
chloride process is a continuous process in which chlorine is used to extract
rutile TiO2. The chloride process typically has lower manufacturing costs than
the sulfate process due to higher yield and production of less waste and lower
energy requirements and labor costs. Because much of the chlorine is recycled
and feedstock bearing a higher titanium content is used, the chloride process
produces less waste than the sulfate process. The sulfate process is a batch
chemical process that uses sulfuric acid to extract TiO2. Sulfate technology can
produce either anatase or rutile pigment. Once an intermediate TiO2 pigment has
been produced by either the chloride or sulfate process, it is 'finished' into
products with specific performance characteristics for particular end-use
applications through proprietary processes involving various chemical surface
treatments and intensive micronizing (milling). Due to environmental factors and
customer considerations, the proportion of TiO2 industry sales represented by
chloride-process pigments has increased relative to sulfate-process pigments
and, in 2004, chloride-process production facilities represented approximately
64% of industry capacity.
During 2004, Kronos operated four TiO2 facilities in Europe (one in each of
Leverkusen, Germany, Nordenham, Germany, Langerbrugge, Belgium and Fredrikstad,
Norway). In North America, Kronos has a TiO2 facility in Varennes, Quebec and,
through a manufacturing joint venture discussed below, a one-half interest in a
TiO2 plant in Lake Charles, Louisiana. TiO2 is produced using the chloride
process at the Leverkusen, Langerbrugge, Varennes and Lake Charles facilities,
while TiO2 is produced using the sulfate process at the Nordenham, Leverkusen,
Fredrikstad and Varennes facilities. Kronos operates an ilmenite mine in Norway
pursuant to a governmental concession with an unlimited term, and Kronos also
owns a TiO2 slurry facility in Louisiana and leases various corporate and
administrative offices in the U.S. and various sales offices in the U.S. and
Europe. Kronos' co-products are produced at its Norwegian, Belgian and German
facilities, and its titanium chemicals are produced at its Belgian and Canadian
facilities.
All of Kronos' principal production facilities are owned, except for the
land under the Leverkusen and Fredrikstad facilities. The Fredrikstad plant is
located on public land and is leased until 2013, with an option to extend the
lease for an additional 50 years. Kronos leases the land under its Leverkusen
TiO2 production facility pursuant to a lease expiring in 2050. The Leverkusen
facility, representing about one-third of Kronos' current TiO2 production
capacity, is located within an extensive manufacturing complex owned by Bayer
AG. Rent for the Leverkusen facility is periodically established by agreement
with Bayer AG for periods of at least two years at a time. Under a separate
supplies and services agreement expiring in 2011, Bayer provides some raw
materials (including chlorine and certain amounts of sulfuric acid), auxiliary
and operating materials and utilities services necessary to operate the
Leverkusen facility. The lease and the supplies and services agreement have
certain restrictions regarding ownership and use of the Leverkusen facility.
Kronos produced a new company record 484,000 metric tons of TiO2 in 2004,
compared to the prior records of 476,000 metric tons in 2003 and 442,000 metric
tons in 2002. Such production amounts include the Company's one-half interest in
the joint-venture owned Louisiana plant discussed below. The Company's average
production capacity utilization rates in 2003 and 2004 were near full capacity,
up from 96% in 2002. Kronos production capacity has increased by approximately
30% over the past ten years due to debottlenecking programs, with only moderate
capital expenditures. The Company believes its annual attainable production
capacity for 2005 is approximately 500,000 metric tons, with some slight
additional capacity available in 2006 through Kronos' continued debottlenecking
efforts.
The primary raw materials used in the TiO2 chloride production process are
titanium-containing feedstock, chlorine and coke. Chlorine and coke are
available from a number of suppliers. Titanium-containing feedstock suitable for
use in the chloride process is available from a limited but increasing number of
suppliers around the world, principally in Australia, South Africa, Canada,
India and the United States. Kronos purchased approximately 410,000 metric tons
of chloride feedstock in 2004, of which the vast majority was slag. The Company
purchased chloride process grade slag in 2004 from a subsidiary of Rio Tinto plc
UK - Richards Bay Iron and Titanium Limited South Africa under a long-term
supply contract that expires at the end of 2007. Natural rutile ore is purchased
primarily from Iluka Resources, Limited (Australia), a company formed through
the merger of Westralian Sands Limited (Australia) and RGC Mineral Sands, Ltd.,
under a long-term supply contract that expires at the end of 2007. The Company
does not expect to encounter difficulties obtaining long-term extensions to
existing supply contracts prior to the expiration of the contracts. Raw
materials purchased under these contracts and extensions thereof are expected to
meet the Company's chloride process feedstock requirements over the next several
years.
The primary raw materials used in the TiO2 sulfate production process are
titanium-containing feedstock, derived primarily from rock and beach sand
ilmenite, and sulfuric acid. Sulfuric acid is available from a number of
suppliers. Titanium-containing feedstock suitable for use in the sulfate process
is available from a limited number of suppliers around the world. Currently, the
principal active sources are located in Norway, Canada, Australia, India and
South Africa. As one of the few vertically integrated producers of
sulfate-process pigments, Kronos operates a rock ilmenite mine in Norway, which
provided all of Kronos' feedstock for its European sulfate-process pigment
plants in 2004. Kronos produced approximately 867,000 metric tons of ilmenite in
2004, of which approximately 311,000 metric tons were used internally with the
remainder sold to third parties. For its Canadian sulfate-process plant, Kronos
also purchases sulfate grade slag (approximately 20,000 metric tons in 2004)
primarily from Q.I.T. Fer et Titane Inc. Canada, a subsidiary of Rio Tinto plc
UK, under a long-term supply contract that expires at the end of 2009. Raw
materials purchased under these contracts and extensions thereof are expected to
meet the Company's sulfate process feedstock requirements over the next several
years.
Kronos has sought to minimize the impact of potential changes in the price
of its feedstock raw materials by entering into the contracts discussed above
which fix, to a large extent, the price of its raw materials. The contracts
contain fixed quantities that Kronos is required to purchase, although certain
of these contracts allow for an upward or downward adjustment in the quantity
purchased, generally no more than 10%, based on Kronos' feedstock requirements.
The quantities under these contracts do not require Kronos to purchase feedstock
in excess of amounts that Kronos would reasonably consume in any given year. The
pricing under these agreements is generally based on a fixed price with price
escalation clauses primarily based on consumer price indices, as defined in the
respective contracts.
The number of sources of, and availability of, certain raw materials is
specific to the particular geographic region in which a facility is located. As
noted above, Kronos purchases titanium-bearing ore from three different
suppliers in different countries under multiple-year contracts. Political and
economic instability in certain countries from which Kronos purchases its raw
material supplies could adversely affect the availability of such feedstock.
Should Kronos' vendors not be able to meet their contractual obligations or
should Kronos be otherwise unable to obtain necessary raw materials, Kronos may
incur higher costs for raw materials or may be required to reduce production
levels, which may have a material adverse effect on Kronos' consolidated
financial position, results of operations or liquidity.
TiO2 manufacturing joint venture. Subsidiaries of Kronos and Huntsman
Holdings LLC ("Huntsman") each own a 50%-interest in a manufacturing joint
venture, Louisiana Pigment Company ("LPC"). LPC owns and operates a
chloride-process TiO2 plant located in Lake Charles, Louisiana. Production from
the plant is shared equally by Kronos and Huntsman (the "Partners") pursuant to
separate offtake agreements.
A supervisory committee, composed of four members, two of which are
appointed by each Partner, directs the business and affairs of LPC including
production and output decisions. Two general managers, one appointed and
compensated by each Partner, manage the operations of the joint venture acting
under the direction of the supervisory committee.
Kronos is required to purchase one-half of the TiO2 produced by the joint
venture. The manufacturing joint venture operates on a break-even basis, and
accordingly Kronos does not report any equity in earnings of the joint venture.
With the exception of raw material costs for the pigment grades produced, Kronos
and Huntsman share all costs and capital expenditures of the joint venture
equally. Kronos' share of the net costs of the joint venture is reported as a
component of its cost of sales as the related TiO2 acquired from the joint
venture is sold.
Competition. The TiO2 industry is highly competitive. Kronos competes
primarily on the basis of price, product quality and technical service, and the
availability of high performance pigment grades. Although certain TiO2 grades
are considered specialty pigments, the majority of Kronos' grades and
substantially all of Kronos' production are considered commodity pigments with
price generally being the most significant competitive factor. During 2004
Kronos had an estimated 12% share of worldwide TiO2 sales volume, and Kronos
believes that it is the leading seller of TiO2 in several countries, including
Germany and Canada. Overall, Kronos is the world's fifth largest producer of
TiO2.
Kronos' principal competitors are E.I. du Pont de Nemours & Co. ("DuPont");
Millennium Chemicals, Inc.; Huntsman; Kerr-McGee Corporation; and Ishihara
Sangyo Kaisha, Ltd. Kronos' five largest competitors have estimated individual
shares of TiO2 production capacity ranging from 24% to 4%, and an estimated
aggregate 70% share of worldwide TiO2 production volume. DuPont has about
one-half of total North American TiO2 production capacity and is Kronos'
principal North American competitor.
Worldwide capacity additions in the TiO2 market resulting from construction
of greenfield plants require significant capital expenditures and substantial
lead time (typically three to five years in Kronos' experience). No greenfield
plants are currently under construction in North America or Europe, and Kronos
does not expect additional greenfield capacity will come on-stream in the next
three to five years. Kronos does expect that industry capacity will increase as
Kronos and its competitors continue to debottleneck their existing facilities.
In addition to the potential capacity additions through debottlenecking, certain
competitors have recently either idled or shut down facilities. In the past
year, Huntsman, Millennium and Kerr-McGee have announced the idling or shut down
of an aggregate of approximately 135,000 metric tons of sulfate production
capacity by early 2005. Based on the factors described above, Kronos expects
that the average annual increase in industry capacity from announced
debottlenecking projects will be less than the average annual demand growth for
TiO2 during the next three to five years. However, no assurance can be given
that future increases in the TiO2 industry production capacity and future
average annual demand growth rates for TiO2 will conform to Kronos'
expectations. If actual developments differ from Kronos' expectations, Kronos
and the TiO2 industry's performances could be unfavorably affected.
Research and development. Kronos' expenditures for research and development
process technology and quality assurance activities were approximately $6
million in 2002, $7 million in 2003 and $8 million in 2004. Research and
development activities are conducted principally at the Leverkusen, Germany
facility. Such activities are directed primarily toward improving both the
chloride and sulfate production processes, improving product quality and
strengthening Kronos' competitive position by developing new pigment
applications.
Kronos continually seeks to improve the quality of its grades, and has been
successful at developing new grades for existing and new applications to meet
the needs of customers and increase product life cycle. Over the last five
years, ten new grades have been added for plastics, coatings, fiber and paper
laminate applications.
Patents and trademarks. Patents held for products and production processes
are important to Kronos and its continuing business activities. Kronos seeks
patent protection for its technical developments, principally in the United
States, Canada and Europe, and from time to time enters into licensing
arrangements with third parties. Kronos' existing patents generally have a term
of 20 years from the date of filing, and have remaining terms ranging from one
to 19 years. Kronos seeks to protect its intellectual property rights, including
its patent rights, and from time to time Kronos is engaged in disputes relating
to the protection and use of intellectual property relating to its products.
Kronos' major trademarks, including Kronos, are protected by registration
in the United States and elsewhere with respect to those products it
manufactures and sells. Kronos also relies on unpatented proprietary know-how
and continuing technological innovation and other trade secrets to develop and
maintain its competitive position. Kronos' proprietary chloride production
process is an important part of Kronos' technology, and Kronos' business could
be harmed if Kronos should fail to maintain confidentiality of its trade secrets
used in this technology.
Customer base and annual seasonality. Kronos believes that neither its
aggregate sales nor those of any of its principal product groups are
concentrated in or materially dependent upon any single customer or small group
of customers. Kronos' largest ten customers accounted for approximately 25% of
net sales in 2004. Neither Kronos' business as a whole nor that of any of its
principal product groups is seasonal to any significant extent. Due in part to
the increase in paint production in the spring to meet the spring and summer
painting season demand, TiO2 sales are generally higher in the first half of the
year than in the second half of the year.
Employees. As of December 31, 2004, Kronos employed approximately 2,420
persons (excluding employees of the Louisiana joint venture), with 50 employees
in the United States, 420 employees in Canada and 1,950 employees in Europe.
Hourly employees in production facilities worldwide, including the TiO2
joint venture, are represented by a variety of labor unions, with labor
agreements having various expiration dates. In Europe, union employees are
covered by master collective bargaining agreements in the chemicals industry
that are renewed annually. In Canada, Kronos' union employees are covered by a
collective bargaining agreement that expires in June 2007. Kronos believes its
labor relations are good.
Regulatory and environmental matters. Kronos' operations are governed by
various environmental laws and regulations. Certain of Kronos' operations are,
or 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 and regulations. As with other companies engaged
in similar businesses, certain past and current operations and products of
Kronos have the potential to cause environmental or other damage. Kronos has
implemented and continues to implement various policies and programs in an
effort to minimize these risks. Kronos' policy is to maintain compliance with
applicable environmental laws and regulations at all its facilities and to
strive to improve its environmental performance. It is possible that future
developments, such as stricter requirements in environmental laws and
enforcement policies thereunder, could adversely affect Kronos' production,
handling, use, storage, transportation, sale or disposal of such substances as
well as Kronos' consolidated financial position, results of operations or
liquidity.
Kronos' U.S. manufacturing operations are governed by federal environmental
and worker health and safety laws and regulations, principally the Resource
Conservation and Recovery Act ("RCRA"), the Occupational Safety and Health Act,
the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the Toxic
Substances Control Act and the Comprehensive Environmental Response,
Compensation and Liability Act, as amended by the Superfund Amendments and
Reauthorization Act ("CERCLA"), as well as the state counterparts of these
statutes. Kronos believes the TiO2 plant owned by the LPC joint venture and a
TiO2 slurry facility owned by Kronos in Lake Charles, Louisiana are in
substantial compliance with applicable requirements of these laws or compliance
orders issued thereunder. Kronos has no other U.S. plants.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory framework is provided by the
European Union (the "EU"). Germany and Belgium are members of the EU and follow
its initiatives. Norway, although not a member of the EU, generally patterns its
environmental regulatory actions after the EU. Kronos believes that it has
obtained all required permits and is in substantial compliance with applicable
EU requirements.
At its sulfate plant facilities in Germany, Kronos recycles weak sulfuric
acid either through contracts with third parties or using its own facilities. At
Kronos' Fredrikstad, Norway plant, Kronos ships its spent acid to a third party
location where it is treated and disposed. Kronos' Canadian sulfate plant
neutralizes its spent acid and sells its gypsum by-product to a local wallboard
manufacturer. Kronos has a contract with a third party to treat certain
sulfate-process effluents at its German sulfate plant. Either party may
terminate the contract after giving four years advance notice with regard to
Kronos' Nordenham, Germany plant.
From time to time, Kronos' facilities may be subject to environmental
regulatory enforcement under U.S. and foreign statutes. Resolution of such
matters typically involves the establishment of compliance programs.
Occasionally, resolution may result in the payment of penalties, but to date
such penalties have not involved amounts having a material adverse effect on
Kronos' consolidated financial position, results of operations or liquidity.
Kronos believes that all its plants are in substantial compliance with
applicable environmental laws.
Kronos' capital expenditures related to its ongoing environmental
protection and improvement programs in 2004 were approximately $7 million, and
are currently expected to be approximately $7 million in 2005.
OTHER
NL Industries, Inc. In addition to its 68% ownership of CompX and its 37%
ownership of Kronos at December 31, 2004, NL also holds certain marketable
securities and other investments. In addition, NL owns 100% of EWI Re. Inc., an
insurance brokerage and risk management services company. See Notes 5 and 17 to
the Consolidated Financial Statements.
Foreign operations. Through its subsidiaries and affiliates, the Company
has substantial operations and assets located outside the United States,
principally chemicals operations in Germany, Belgium and Norway, chemicals and
component products operations in Canada and component products operations in
Taiwan. See Note 3 to the Consolidated Financial Statements. Approximately 72%
of Kronos' 2004 aggregate TiO2 sales were to non-U.S. customers, including 9% to
customers in areas other than Europe and Canada. Approximately 24% of CompX's
2004 sales were to non-U.S. customers located principally in Canada and Europe.
Foreign operations are subject to, among other things, currency exchange rate
fluctuations and the Company's results of operations have in the past been both
favorably and unfavorably affected by fluctuations in currency exchange rates.
See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 7A - "Quantitative and Qualitative Disclosures
About Market Risk."
CompX's Canadian component products subsidiary has, from time to time,
entered into currency forward contracts to mitigate exchange rate fluctuation
risk for a portion of its receivables denominated in currencies other than the
Canadian dollar (principally the U.S. dollar) or for similar risks associated
with future sales. See Note 20 to the Consolidated Financial Statements.
Otherwise, the Company does not generally engage in currency derivative
transactions.
Political and economic uncertainties in certain of the countries in which
the Company operates may expose the Company to risk of loss. The Company does
not believe that there is currently any likelihood of material loss through
political or economic instability, seizure, nationalization or similar event.
The Company cannot predict, however, whether events of this type in the future
could have a material effect on its operations. The Company's manufacturing and
mining operations are also subject to extensive and diverse environmental
regulations in each of the foreign countries in which they operate, as discussed
in the respective business sections elsewhere herein.
Regulatory and environmental matters. Regulatory and environmental matters
are discussed in the respective business sections contained elsewhere herein and
in Item 3 - "Legal Proceedings." In addition, the information included in Note
19 to the Consolidated Financial Statements under the captions "Legal
proceedings -- lead pigment litigation" and - "Environmental matters and
litigation" is incorporated herein by reference.
Acquisition and restructuring activities. 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 unconsolidated
affiliates, 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 policy, consider
the sale of interests in subsidiaries, 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. From time to time,
the Company and related entities also evaluate the restructuring of ownership
interests among its subsidiaries and related companies and expects to continue
this activity in the future.
The Company and other entities that may be deemed to be controlled by or
affiliated with Mr. Harold C. Simmons 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. In a number of instances, the Company has actively managed the
businesses acquired with a focus on maximizing return-on-investment through cost
reductions, capital expenditures, improved operating efficiencies, selective
marketing to address market niches, disposition of marginal operations, use of
leverage and redeployment of capital to more productive assets. In other
instances, the Company has disposed of the acquired interest in a company prior
to gaining control. The Company intends to consider such activities in the
future and may, in connection with such activities, consider issuing additional
equity securities and increasing the indebtedness of NL, its subsidiaries and
related companies.
Website and other available information. NL maintains a website on the
Internet with the address of www.nl-ind.com. Copies of this Annual Report on
Form 10-K for the year ended December 31, 2004 and copies of NL's Quarterly
Reports on Form 10-Q for 2003 and 2004 and any Current Reports on Form 8-K for
2003 and 2004, and any amendments thereto, are or will be available free of
charge at such website as soon as reasonably practical after they are filed with
the SEC. Additional information regarding NL, including NL's Audit Committee
charter and NL's Code of Business Conduct and Ethics, can also be found at this
website as required. Information contained on NL's website is not part of this
report.
The general public may read and copy any materials NL files with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. NL is an electronic filer,
and the SEC maintains an Internet website that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC, including NL. The Internet address of the SEC's
website is www.sec.gov.
ITEM 2. PROPERTIES
NL's principal executive offices are located in an office building located
at 5430 LJB Freeway, Dallas, Texas, 75240-2697. The principal properties used in
the operations of the subsidiaries and affiliates of the Company, including
certain risks and uncertainties related thereto, are described in the applicable
business sections of Item 1 - "Business." The Company believes that its
facilities are generally adequate and suitable for their respective uses.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings. In addition to
information that is included below, certain information called for by this Item
is included in Note 19 to the Consolidated Financial Statements, which
information is incorporated herein by reference.
Lead pigment litigation. NL'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 (together,
the "former pigment manufacturers"), and the Lead Industries Association
("LIA"), 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
NL is not a defendant) seeking recovery for injury allegedly caused by lead
pigment and lead-based paint. Although NL is not a defendant in these cases, the
outcome of these cases may have an impact on cases that might be filed against
NL in the future.
NL believes these actions are without merit, intends to continue to deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. NL has neither lost nor settled any of these cases. NL has not
accrued any amounts for pending lead pigment and lead-based paint litigation.
Liability that may result, if any, cannot reasonably be estimated. There can be
no assurance that NL 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.
In June 1989, a complaint was filed in the Supreme Court of the State of
New York, County of New York, against the former pigment manufacturers and the
LIA. Plaintiffs sought damages in excess of $50 million for monitoring and
abating alleged lead paint hazards in public and private residential buildings,
diagnosing and treating children allegedly exposed to lead paint in city
buildings, the costs of educating city residents to the hazards of lead paint,
and liability in personal injury actions against New York City and the New York
City Housing Authority based on alleged lead poisoning of city residents (The
City of New York, the New York City Housing Authority and the New York City
Health and Hospitals Corp. v. Lead Industries Association, Inc., et al., No.
89-4617). As a result of pre-trial motions, the New York City Housing Authority
is the only remaining plaintiff in the case and is pursuing damage claims only
with respect to two housing projects. No activity has occurred since September
2001.
In August 1992, NL was served with an amended complaint in Jackson, et al.
v. The Glidden Co., et al., Court of Common Pleas, Cuyahoga County, Cleveland,
Ohio (Case No. 236835). Plaintiffs seek compensatory and punitive damages for
personal injury caused by the ingestion of lead, and an order directing
defendants to abate lead-based paint in buildings. Plaintiffs purport to
represent a class of similarly situated persons throughout the State of Ohio.
The trial court has denied plaintiffs' motion for class certification. In 2003,
defendants filed a motion for summary judgment on all claims. The court has not
yet ruled on the motion.
In September 1999, an amended complaint was filed in Thomas v. Lead
Industries Association, et al. (Circuit Court, Milwaukee, Wisconsin, Case No.
99-CV-6411) adding as defendants the former pigment manufacturers to a suit
originally filed against plaintiff's landlords. Plaintiff, a minor, alleges
injuries purportedly caused by lead on the surfaces of premises in homes in
which he resided. Plaintiff seeks compensatory and punitive damages, and NL has
denied liability. In January 2003, the trial court granted defendants' motion
for summary judgment, dismissing all counts of the complaint. The plaintiff
appealed the dismissal, and in June 2004 the appellate court affirmed the
dismissal. The matter is now before the Wisconsin Supreme Court.
In October 1999, NL was served with a complaint in State of Rhode Island v.
Lead Industries Association, et al. (Superior Court of Rhode Island, No.
99-5226). The State seeks compensatory and punitive damages for medical and
educational expenses, and public and private building abatement expenses that
the State alleges were caused by lead paint, and for funding of a public
education campaign and health screening programs. Plaintiff seeks judgments of
joint and several liability against the former pigment manufacturers and the
LIA. Trial began before a Rhode Island state court jury in September 2002 on the
question of whether lead pigment in paint on Rhode Island buildings is a public
nuisance. On October 29, 2002, the trial judge declared a mistrial in the case
when the jury was unable to reach a verdict on the question, with the jury
reportedly deadlocked 4-2 in the defendants' favor. Other claims made by the
Attorney General, including violation of the Rhode Island Unfair Trade Practices
and Consumer Protection Act, strict liability, negligence, negligent and
fraudulent misrepresentation, civil conspiracy, indemnity, and unjust enrichment
were not the subject of the 2002 trial and remain pending. In March 2003, the
court denied motions by plaintiffs and defendants for judgment notwithstanding
the verdict. In January 2004, plaintiff requested the court to dismiss its
claims for state-owned buildings, claiming all remaining claims did not require
a jury and asking the court to reconsider the trial schedule. In February 2004,
the court dismissed the strict liability, negligence, negligent
misrepresentation and fraud claims with prejudice, and the time for the state to
appeal this dismissal has not yet run. In March 2004, the court ruled that the
defendants have a constitutional right to a trial by jury under the Rhode Island
Constitution. Plaintiff appealed such ruling, and in July 2004 the Rhode Island
Supreme Court dismissed plaintiff's appeal of, and plaintiff's petition to
review, the trial court's ruling. The court has set September 2005 as the date
for the retrial of all claims in this case.
In October 1999, NL was served with a complaint in Smith, et al. v. Lead
Industries Association, et al. (Circuit Court for Baltimore City, Maryland, Case
No. 24-C-99-004490). Plaintiffs, seven minors from four families, each seek
compensatory damages of $5 million and punitive damages of $10 million for
alleged injuries due to lead-based paint. Plaintiffs allege that the former
pigment manufacturers and other companies alleged to have manufactured paint
and/or gasoline additives, the LIA and the National Paint and Coatings
Association are jointly and severally liable. NL has denied liability. The trial
court, on defendants' motion, dismissed all claims of the first of the four
families except those relating to product liability for lead paint and the
Maryland Consumer Protection Act. Plaintiffs appealed, and in May 2004 the court
of appeals reinstated certain claims. In September 2004, the court of appeals
granted plaintiffs' petition for review of such court's affirmation of the
dismissal of certain of the plaintiffs' remaining claims. Pre-trial proceedings
and discovery against the other plaintiffs are continuing, but trial dates for
these plaintiffs are stayed pending the appeal of the summary judgment ruling.
In February 2000, NL was served with a complaint in City of St. Louis v.
Lead Industries Association, et al. (Missouri Circuit Court 22nd Judicial
Circuit, St. Louis City, Cause No. 002-245, Division 1). Plaintiff seeks
compensatory and punitive damages for its expenses discovering and abating
lead-based paint, detecting lead poisoning and providing medical care and
educational programs for City residents, and the costs of educating children
suffering injuries due to lead exposure. Plaintiff seeks judgments of joint and
several liability against the former pigment manufacturers and the LIA. In
November 2002, defendants' motion to dismiss was denied. In May 2003, plaintiffs
filed an amended complaint alleging only a nuisance claim. Defendants renewed
motion to dismiss and motion for summary judgment were denied by the trial court
in March 2004, but the trial court limited plaintiff's complaint to monetary
damages from 1990 to 2000, specifically excluding future damages. A trial date
has been set for January 2006.
In April 2000, NL was served with a complaint in County of Santa Clara v.
Atlantic Richfield Company, et al. (Superior Court of the State of California,
County of Santa Clara, Case No. CV788657) brought against the former pigment
manufacturers, the LIA and certain paint manufacturers. The County of Santa
Clara seeks to represent a class of California governmental entities (other than
the state and its agencies) to recover compensatory damages for funds the
plaintiffs have expended or will in the future expend for medical treatment,
educational expenses, abatement or other costs due to exposure to, or potential
exposure to, lead paint, disgorgement of profit, and punitive damages. Santa
Cruz, Solano, Alameda, San Francisco, and Kern counties, the cities of San
Francisco and Oakland, the Oakland and San Francisco unified school districts
and housing authorities and the Oakland Redevelopment Agency have joined the
case as plaintiffs. In February 2003, defendants filed a motion for summary
judgment. In July 2003, the court granted defendants' motion for summary
judgment on all remaining claims. Plaintiffs have appealed.
In June 2000, a complaint was filed in Illinois state court, Lewis, et al.
v. Lead Industries Association, et al. (Circuit Court of Cook County, Illinois,
County Department, Chancery Division, Case No. 00CH09800). Plaintiffs seek to
represent two classes, one of all minors between the ages of six months and six
years who resided in housing in Illinois built before 1978, and one of all
individuals between the ages of six and twenty years who lived between the ages
of six months and six years in Illinois housing built before 1978 and had blood
lead levels of 10 micrograms/deciliter or more. The complaint seeks damages
jointly and severally from the former pigment manufacturers and the LIA to
establish a medical screening fund for the first class to determine blood lead
levels, a medical monitoring fund for the second class to detect the onset of
latent diseases, and a fund for a public education campaign. In March 2002, the
court dismissed all claims. Plaintiffs appealed, and in June 2003 the appellate
court affirmed the dismissal of five of the six counts of plaintiffs, but
reversed the dismissal of the conspiracy count. In May 2004, defendants filed a
motion for summary judgment on plaintiffs' conspiracy count, which was granted
in February 2005. The time for plaintiffs' appeal has not yet run.
In February 2001, NL was served with a complaint in 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.). The complaint seeks joint and several
liability for compensatory and punitive damages from more than 40 manufacturers
and retailers of lead pigment and/or paint, including NL, on behalf of 18 adult
residents of Mississippi who were allegedly exposed to lead during their
employment in construction and repair activities. In 2003, the court ordered
that the claims of ten of the plaintiffs be transferred to Holmes County,
Mississippi state court. In April 2004, the parties jointly petitioned the
Mississippi Supreme Court to transfer these ten plaintiffs to their appropriate
venue, and in May 2004 the Mississippi Supreme Court remanded the case to the
trial court in Holmes County and instructed the court to transfer these ten
plaintiffs to their appropriate venues. Two of these plaintiffs have been
dismissed without prejudice with respect to NL. With respect to the eight
plaintiffs remaining in Jefferson County, one plaintiff has dropped his claim,
and in July 2004 the Mississippi Supreme Court denied plaintiffs' motion to add
additional defendants. Pre-trial proceedings are continuing.
In May 2001, NL was served with a complaint in City of Milwaukee v. NL
Industries, Inc. and Mautz Paint (Circuit Court, Civil Division, Milwaukee
County, Wisconsin, Case No. 01CV003066). Plaintiff seeks compensatory and
equitable relief for lead hazards in Milwaukee homes, restitution for amounts it
has spent to abate lead and punitive damages. NL has denied all liability. In
July 2003, defendants' motion for summary judgment was granted by the trial
court. In November 2004, the appellate court reversed this ruling and remanded
the case. Defendants filed a petition for review of the appellate court's ruling
in December 2004 with the Wisconsin Supreme Court.
In January and February 2002, NL was served with complaints by 25 different
New Jersey municipalities and counties which have been consolidated as In re:
Lead Paint Litigation (Superior Court of New Jersey, Middlesex County, Case Code
702). Each complaint seeks abatement of lead paint from all housing and all
public buildings in each jurisdiction and punitive damages jointly and severally
from the former pigment manufacturers and the LIA. In November 2002, the court
entered an order dismissing this case with prejudice. Plaintiffs have appealed.
In January 2002, NL was served with a complaint in Jackson, et al., v.
Phillips Building Supply of Laurel, et al. (Circuit Court of Jones County,
Mississippi, Dkt. Co. 2002-10-CV1). The complaint seeks joint and several
liability from three local retailers and six non-Mississippi companies that sold
paint for compensatory and punitive damages on behalf of three adults for
injuries alleged to have been caused by the use of lead paint. After removal to
federal court, in February 2003 the case was remanded to state court. NL has
denied all liability and pre-trial proceedings are continuing. In August 2004,
plaintiffs voluntarily agreed to dismiss one plaintiff and to sever the
remaining two plaintiffs.
In June 2000, NL was served with a complaint in Houston Independent School
District v. Lead Industries Association, et al. (District Court of Harris
County, Texas, No. 2000-33725). The complaint seeks actual and punitive damages
resulting from the presence of lead-based paint in the district's buildings from
the former pigment manufacturers and the LIA. NL has denied all liability. This
case has been abated since 2003, and no further proceedings are anticipated.
In May 2001, NL was served with a complaint in Harris County, Texas v. Lead
Industries Association, et al. (District Court of Harris County, Texas, No.
2001-21413). The complaint seeks actual and punitive damages and asserts that
the former pigment manufacturers and the LIA are jointly and severally liable
for past and future damages due to the presence of lead paint in county-owned
buildings. NL has denied all liability. This case has been abated since 2003,
and no further proceedings are anticipated.
In February 2002, NL was served with a complaint in Liberty Independent
School District v. Lead Industries Association, et al. (District Court of
Liberty County, Texas, No. 63,332). The complaint seeks compensatory and
punitive damages jointly and severally from the former pigment manufacturers and
the LIA for property damage to its buildings. The complaint was amended to add
Liberty County, the City of Liberty, and the Dayton Independent School District
as plaintiffs and drop the LIA as a defendant. NL has denied all liability. This
case has been abated since 2003, and no further proceedings are anticipated.
In May 2002, NL was served with a complaint in Brownsville Independent
School District v. Lead Industries Association, et al. (District Court of
Cameron County, Texas, No. 2002-052081 B), seeking compensatory and punitive
damages jointly and severally from NL, other former manufacturers of lead
pigment and the LIA for property damage. NL has denied all liability. This case
has been abated since 2003, and no further proceedings are anticipated.
In September 2002, NL was served with a complaint in City of Chicago v.
American Cyanamid, et al. (Circuit Court of Cook County, Illinois, No.
02CH16212), seeking damages to abate lead paint in a single-count complaint
alleging public nuisance against NL and seven other former manufacturers of lead
pigment. In October 2003, the trial court granted defendants' motion to dismiss.
In January 2005, the appellate court affirmed the trial court's ruling.
Plaintiff has notified the court of its intention to seek review of this
decision by the Illinois Supreme Court.
In October 2002, NL was served with a complaint in Walters v. NL
Industries, et al. (Kings County Supreme Court, New York, No. 28087/2002), in
which an adult seeks compensatory and punitive damages from NL and five other
former manufacturers of lead pigment for childhood exposures to lead paint. The
complaint alleges negligence and strict product liability, and seeks joint and
several liability with claims of civil conspiracy, concert of action, enterprise
liability, and market share or alternative liability. In March 2003, the court
granted defendants' motion to dismiss the product defect allegations in the
negligence and strict liability counts. In December 2004, the case was dismissed
for plaintiff's failure to file a notice of entry.
In April 2003, NL was served with a complaint in Russell v. NL Industries,
Inc., et al. (Circuit Court of LeFlore County, Mississippi, Civil Action No.
No.2002-0235-CICI). Initially, six painters sued NL, four paint companies, and a
local retailer, alleging strict liability, negligence, fraudulent concealment,
misrepresentation, and conspiracy, and seeking compensatory and punitive damages
for alleged injuries caused by lead paint. NL denied all liability, and this
case has been removed to federal court. In May 2004, four of the six defendants
voluntarily dismissed their claims. In November 2004, defendants filed a motion
for summary judgment, and in January 2005, defendants filed a motion to dismiss.
In April 2003, NL was served with a complaint in Jones v. NL Industries,
Inc., et al. (Circuit Court of LeFlore County, Mississippi, Civil Action No.
2002-0241-CICI). The plaintiffs, fourteen children from five families, sued NL
and one landlord alleging strict liability, negligence, fraudulent concealment
and misrepresentation, and seek compensatory and punitive damages for alleged
injuries caused by lead paint. Defendants removed this case to federal court,
and in June 2004 the federal court set a trial date for February 2006. Discovery
is proceeding.
In November 2003, NL was served with a complaint in Lauren Brown v. NL
Industries, Inc., et al. (Circuit Court of Cook County, Illinois, County
Department, Law Division, Case No. 03L 012425). The complaint seeks damages
against NL and two local property owners on behalf of a minor for injuries
alleged to be due to exposure to lead paint contained in the minor's residence.
NL has denied all allegations of liability. Discovery is proceeding.
In December 2004, NL was served with a complaint in Terry, et al. v. NL
Industries, Inc., et al. (United States District Court, Southern District of
Mississippi, Case No. 4:04 CV 269 PB). The plaintiffs, seven children from three
families, sued NL and one landlord alleging strict liability, negligence,
fraudulent concealment and misrepresentation, and seek compensatory and punitive
damages for alleged injuries caused by lead paint. The plaintiffs in the Terry
case are alleged to have resided in the same housing complex as the plaintiffs
in the Jones case. NL has denied all allegations of liability and has filed a
motion to dismiss plaintiffs' fraud claim.
In addition to the foregoing litigation, various legislation and
administrative regulations have, from time to time, been proposed that seek to
(a) impose various obligations on present and former manufacturers of lead
pigment and lead-based paint with respect to asserted health concerns associated
with the use of such products and (b) effectively overturn court decisions in
which 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, the imposition of market share liability or other legislation could
have such an effect.
Environmental matters and litigation.
General. 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 its
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 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.
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 December 31, 2003 and 2004, no receivables for recoveries have 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 that 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 that
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.
NL. Certain properties and facilities used in the Company's former
operations, including divested primary and secondary lead smelters and former
mining locations, are the subject of civil litigation, administrative
proceedings or investigations arising under federal and state environmental
laws. Additionally, in connection with past disposal practices, the Company has
been named as a defendant, PRP, or both, pursuant to CERCLA, and similar state
laws in approximately 60 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.
In addition, the Company is a party to a number of lawsuits filed in various
jurisdictions alleging CERCLA or other environmental claims.
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 the Company's majority-owned environmental management
subsidiary, NL Environmental Management Services, Inc. ("EMS") has contractually
assumed NL's obligation. See Note 19 to the Consolidated Financial Statements.
At December 31, 2004, the Company had accrued $68 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 $93 million. The Company's estimates of such liabilities have not
been discounted to present value.
At December 31, 2004 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.
In July 1991 the United States filed an action in the U.S. District Court
for the Southern District of Illinois against the Company and others (United
States of America v. NL Industries, Inc., et al., Civ. No. 91-CV 00578) with
respect to the Granite City, Illinois lead smelter formerly owned by the
Company. The Company and the U.S. EPA have entered into a consent decree
settling the Company's liability at the site for $31.5 million, which includes
penalties of $1 million. In May 2003, the court entered the consent decree.
Pursuant to the consent decree, in June 2003, the Company paid $30.8 million to
the United States and will pay up to an additional $.7 million upon completion
of an EPA audit of certain response costs.
In 1996, the U.S. EPA ordered NL to perform a removal action at a facility
in Chicago, Illinois formerly owned by NL. NL has complied with the order and
has substantially completed the clean-up work associated with the facility.
In January 2003, NL received a general notice of liability from the U.S.
EPA regarding the site of a formerly owned lead smelting facility located in
Collinsville, Illinois. The U.S. EPA alleges the site contains elevated levels
of lead. In July 2004, NL and the U.S. EPA entered into an administrative order
on consent to perform a removal action at the site.
In December 2003, NL was served with a complaint in The Quapaw Tribe of
Oklahoma et al. v. ASARCO Incorporated et al. (United States District Court,
Northern District of Oklahoma, Case No. 03-CII-846H(J). The complaint alleges
public nuisance, private nuisance, trespass, unjust enrichment, strict liability
and deceit by false representation against NL and six other mining companies
with respect to former operations in the Tar Creek mining district in Oklahoma.
The complaint seeks class action status for former and current owners, and
possessors of real property located within the Quapaw Reservation. Among other
things, the complaint seeks actual and punitive damages from the defendants. NL
has moved to dismiss the complaint and has denied all of plaintiffs'
allegations. In April 2004, plaintiffs filed an amended complaint adding claims
under CERCLA and RCRA, and NL moved to dismiss those claims. In June 2004, the
court dismissed plaintiffs' claims for unjust enrichment and fraud as well as
one of the RCRA claims. In September 2004, the court stayed the case, pending an
appeal by the tribe related to sovereign immunity issues.
In February 2004, NL was served in Evans v. ASARCO (United States District
Court, Northern District of Oklahoma, Case No. 04-CV-94EA(M)), a purported class
action on behalf of two classes of persons living in the town of Quapaw,
Oklahoma: (1) a medical monitoring class of persons who have lived in the area
since 1994, and (2) a property owner class of residential, commercial and
government property owners. Four individuals are named as plaintiffs, together
with the mayor of the town of Quapaw, Oklahoma, and the School Board of Quapaw,
Oklahoma. Plaintiffs allege causes of action in nuisance and seek a medical
monitoring program, a relocation program, property damages, and punitive
damages. NL answered the complaint and denied all of plaintiffs' allegations.
The trial court subsequently stayed all proceedings in this case pending the
outcome of a class certification decision in another case that had been pending
in the same U.S. District Court, a case from which NL has been dismissed with
prejudice.
See Item 1. "Business - Regulatory and Environmental Matters and Note 19 to
the Consolidated Financial Statements."
Insurance coverage claims.
The Company has settled insurance coverage claims concerning environmental
claims with certain of the defendants in the environmental coverage litigation,
including NL's principal former carriers. A portion of the proceeds from these
settlements were placed into special purpose trusts, as discussed below. See
Note 19 to the Consolidated Financial Statements. No further material
settlements relating to litigation concerning environmental remediation coverage
are expected.
At December 31, 2004, NL had $19 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 NL's
future environmental remediation and other environmental expenditures (2003 -
$24 million). Use of such restricted balances does not affect the Company's
consolidated net cash flows. Such restricted balances declined by approximately
$35 million during 2003 due primarily to a $30.8 million payment made by NL
related to the final settlement of the Granite City, Illinois site.
The issue of whether insurance coverage for defense costs or indemnity or
both will be found to exist for NL's lead pigment litigation depends upon a
variety of factors, and there can be no assurance that such insurance coverage
will be available. NL has not considered any potential insurance recoveries for
lead pigment defense costs or environmental litigation in determining related
accruals.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NL's common stock is listed and traded on the New York and Pacific Stock
Exchanges (symbol: NL). As of February 28, 2005, there were approximately 4,300
holders of record of NL common stock. The following table sets forth the high
and low closing per share sales prices for NL common stock for the periods
indicated, according to Bloomberg, and cash dividends paid during such periods.
On February 28, 2005 the closing price of NL common stock according to the NYSE
Composite Tape was $21.90.
Regular
dividends
High Low paid *
---- --- ---------
Year ended December 31, 2003
First Quarter $18.23 $14.51 $ .20
Second Quarter 17.85 15.80 .20
Third Quarter 18.25 16.14 .20
Fourth Quarter - prior to December 8, 2003 18.22 16.35 -
Fourth Quarter - after December 8, 2003 12.10 10.28 .20
Year ended December 31, 2004
First Quarter $15.25 $12.05 $ .20
Second Quarter 15.15 11.00 .20
Third Quarter 19.47 12.32 .20
Fourth Quarter 23.10 18.78 .20
__________________________
* Dividends paid in 2003 were cash dividends. In 2004, the Company paid four
quarterly dividends of $.20 per share using shares of Kronos common stock
in the form of pro-rata dividends, valued as of the respective dividend
declaration dates.
On December 8, 2003, in conjunction with a recapitalization of Kronos, NL
completed the distribution to its stockholders of one share of common stock of
Kronos, previously a wholly-owned subsidiary of NL, for every two shares of NL
common stock outstanding as of the close of business on November 17, 2003. NL
distributed approximately 23.9 million shares of Kronos' common stock,
representing approximately 48.8% of the outstanding stock of Kronos.
The Company paid four quarterly $.20 per share cash dividends in 2003.
During 2004, NL paid its four $.20 per share quarterly dividends in the form of
shares of Kronos common stock in which an aggregate of approximately 1.2 million
shares, or approximately 2% of Kronos' outstanding common stock, were
distributed to NL shareholders in the form of pro-rata dividends. On February
22, 2005, the Company's Board of Directors declared a regular quarterly dividend
of $.25 per share to stockholders of record as of March 14, 2005 to be paid in
the form of shares of common stock of Kronos on March 29, 2005.
The declaration and payment of future dividends, and the amount thereof, is
discretionary and is dependent upon the Company's results of operations,
financial condition, cash requirements for its businesses, contractual
restrictions and other factors deemed relevant by the Company's Board of
Directors. The amount and timing of past dividends is not necessarily indicative
of the amount or timing of any future dividends which might be paid. There are
currently no contractual restrictions on the amount of NL dividends which may be
paid.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Years ended December 31,
----------------------------------------------------------------
2000(3) 2001(3) 2002(3) 2003(3) 2004(3)
-------- -------- -------- -------- --------
(Restated) (Restated) (Restated) (Restated) (Restated)
(In millions, except per share data)
STATEMENTS OF OPERATIONS DATA:
Net sales:
Chemicals (1) $ 922.3 $ 835.1 $ 875.2 $1,008.2 $ 559.1
Component products 217.6 179.7 166.7 173.9 182.6
-------- -------- -------- -------- --------
$1,139.9 $1,014.8 $1,041.9 $1,182.1 $ 741.7
======== ======== ======== ======== ========
Segment profit:
Chemicals (1) $ 212.5 $ 169.2 $ 96.5 $ 137.4 $ 66.4
Component products 33.4 15.7 4.4 9.0 16.3
-------- -------- -------- -------- --------
$ 245.9 $ 184.9 $ 100.9 $ 146.4 $ 82.7
======== ======== ======== ======== ========
Equity in earnings of Kronos (1) $ - $ - $ - $ - $ 9.6
======== ======== ======== ======== ========
Income (loss) from continuing
operations $ 166.7 $ 138.0 $ 39.1 $ (18.3) $ 159.3
Discontinued operations .7 (1.1) (.2) (2.9) 3.5
-------- -------- -------- -------- --------
Net income (loss) $ 167.4 $ 136.9 $ 38.9 $ (21.2) $ 162.8
======== ======== ======== ======== ========
DILUTED EARNINGS PER SHARE DATA:
Income (loss) from continuing
operations $ 3.28 $ 2.77 $ .80 $ (.38) $ 3.29
Discontinued operations .01 (.02) - (.06) .07
-------- -------- -------- -------- --------
Net income (loss) $ 3.29 $ 2.75 $ .80 $ (.44) $ 3.36
======== ======== ======== ======== ========
Dividends per share (2) $ .65 $ .80 $ 3.30 $ .80 $ .80
Weighted average common shares
outstanding 50,749 49,856 48,612 47,795 48,419
BALANCE SHEET DATA (at year end):
Total assets $1,350.3 $1,377.9 $1,315.6 $1,476.5 $ 551.6
Long-term debt 234.4 244.5 355.6 382.5 .1
Stockholders' equity 433.7 485.0 362.9 127.5 233.6
(1) The Company ceased to consolidate the chemicals operations conducted by
Kronos effective July 1, 2004, at which time the Company commenced to
account for its interest in Kronos by the equity method.
(2) Excludes the distribution of shares of Kronos common stock at December 8,
2003. Amounts paid in 2000, 2001, 2002 and 2003 were cash dividends, while
amounts paid in 2004 were in the form of shares of Kronos common stock. See
Note 2 to the Consolidated Financial Statements and Item 5 - "Market For
Registrant's Common Equity and Related Stockholder Matters."
(3) Income (loss) from continuing operations and net income (loss), and the
related per diluted share amounts, as presented above, differs from amounts
previously reported by ($318,000) ($.01 per share) in 2000, $11.1 million
($.22 per diluted share) in 2001, $1.7 million ($.04 per share) in 2002,
($85.7 million) ($1.79 per share) in 2003 and ($51.8 million) ($1.07 per
share) in 2004. Total assets, as presented above, differs from amounts
previously reported by $864,000 at December 31, 2000, by $922,000 at
December 31, 2001 and by $1.0 million at December 31, 2002. Stockholders'
equity, as presented above, differs from amounts previously reported by
$7.9 million at December 31, 2000, by $19.4 million at December 21, 2001,
by $20.7 million at December 31, 2002, by $155.7 million at December 31,
2003 and by $58.1 million at December 31, 2004.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Summary
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 from Valhi and a wholly-owned subsidiary of Valhi, representing
approximately 68% of the outstanding shares of CompX common stock. 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 as discussed in Note 1 to the Consolidated Financial Statements,
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 two quarters of 2004. The
deconsolidation of Kronos effective July 1, 2004 has a significant affect on the
comparability of the Company's consolidated financial statements.
The Company reported income from continuing operations of $159.3 million,
or $3.29 per diluted share, in 2004 compared to a loss of $18.3 million, or
($.38) per diluted share in 2003 and income of $39.1 million, or $.80 per
diluted share, in 2002. 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 2003 to 2004
is due primarily to the net effects of (i) lower chemicals operating income,
(ii) higher component products operating income, (iii) lower environmental
remediation and legal expenses and (iv) certain income tax benefits. The
decrease in the Company's diluted earnings per share from 2002 to 2003 is due
primarily to the net effects of (i) higher chemicals operating income, (ii)
higher component products operating income, (iii) higher environmental
remediation expenses, (iv) certain income tax benefits and (v) current and
deferred provisions for income taxes related to the Company's investment in
Kronos.
Income from continuing operations in 2004 includes (i) a second quarter
income tax benefit related to the reversal of Kronos' deferred income tax asset
valuation allowance in Germany of $2.80 per diluted share, (ii) an income tax
benefit related to the reversal of the deferred income tax asset valuation
allowance related to EMS and the adjustment of estimated income taxes due upon
the IRS settlement related to EMS of $1.00 per diluted share, (iii) income
related to Kronos' contract dispute settlement of $.04 per diluted share and
(iv) income related to NL's fourth quarter sales of Kronos common stock in
market transactions of $.03 per diluted share.
Income from continuing operations in 2003 includes (i) an income tax
benefit relating to Kronos' refund of prior year German income taxes of $.51 per
diluted share and (ii) gains from the disposal of property and equipment
(principally related to certain real property of NL) aggregating $.17 per
diluted share.
Net income in 2002 includes (i) an income tax benefit related to the
reduction in the Belgian corporate income tax rate of $.05 per diluted share and
(ii) income of $.08 per diluted share related to Kronos' foreign currency
transaction gain resulting from the extinguishment of certain intercompany
indebtedness of NL and Kronos.
Each of these items is more fully discussed below and/or in the notes to
the Consolidated Financial Statements.
The Company currently believes its net income in 2005 will be lower
compared to 2004 due primarily to the effects of income tax benefits discussed
above recognized in 2004.
Critical accounting policies and estimates
The accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the reported
period. On an ongoing basis, the Company evaluates its estimates, including
those related to bad debts, inventory reserves, impairments of investments in
marketable securities and investments accounted for by the equity method, the
recoverability of other long-lived assets (including goodwill and other
intangible assets), pension and other post-retirement benefit obligations and
the underlying actuarial assumptions related thereto, the realization of
deferred income tax assets and accruals for environmental remediation,
litigation, income tax and other contingencies. The Company bases its estimates
on historical experience and on various other assumptions that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the reported amounts of assets, liabilities, revenues and
expenses. Actual results may differ from previously-estimated amounts under
different assumptions or conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
o The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments and
other factors. The Company takes into consideration the current financial
condition of its customers, the age of the outstanding balance and the
current economic environment when assessing the adequacy of the allowance.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. During 2002, 2003 and 2004, the net amount
written off against the allowance for doubtful accounts as a percentage of
the balance of the allowance for doubtful accounts as of the beginning of
the year ranged from 8% to 34%.
o The Company provides reserves for estimated obsolescence or unmarketable
inventories equal to the difference between the cost of inventory and the
estimated net realizable value using assumptions about future demand for
its products and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory reserves
may be required.
o The Company owns investments in certain companies that are accounted for
either as marketable securities carried at fair value or accounted for
under the equity method. For all of such investments, the Company records
an impairment charge when it believes an investment has experienced a
decline in fair value below its cost basis (for marketable securities) or
below its carrying value (for equity method investees) that is other than
temporary. Future adverse changes in market conditions or poor operating
results of underlying investments could result in losses or an inability to
recover the carrying value of the investments that may not be reflected in
an investment's current carrying value, thereby possibly requiring an
impairment charge in the future.
At December 31, 2004, the carrying value of all of the Company's marketable
securities exceeded the cost basis of each of such investments. With
respect to the Company's investment in Valhi, which represented over 99% of
the carrying value of all of the Company's marketable equity securities at
December 31, 2004, the $75.8 million carrying value of such investment
exceeded its $34.6 million cost basis by about 119%. At December 31, 2004,
the $40.75 per share quoted market price of the Company's investment in
Kronos (the only one of the Company's equity method investees for which
quoted market prices are available) exceeded its per share net carrying
value by about 324%.
o The Company recognizes an impairment charge associated with its long-lived
assets, including property and equipment, goodwill and other intangible
assets, whenever it determines that recovery of such long-lived asset is
not probable. Such determination is made in accordance with the applicable
GAAP requirements associated with the long-lived asset, and is based upon,
among other things, estimates of the amount of future net cash flows to be
generated by the long-lived asset and estimates of the current fair value
of the asset. Adverse changes in such estimates of future net cash flows or
estimates of fair value could result in an inability to recover the
carrying value of the long-lived asset, thereby possibly requiring an
impairment charge to be recognized in the future.
Under applicable GAAP (SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets"), property and equipment is not assessed for
impairment unless certain impairment indicators, as defined, are present.
During 2004, no such impairment indicators, as defined, were present.
Under applicable GAAP (SFAS No. 142, "Goodwill and other Intangible
Assets"), goodwill is required to be reviewed for impairment at least on an
annual basis. Goodwill will also be reviewed for impairment at other times
during each year when impairment indicators, as defined, are present.
Goodwill attributable to the component products operating segment was
assigned to three reporting units within that operating segment, one
consisting of CompX's security products operations, one consisting of
CompX's European operations and one consisting of CompX's Canadian and
Taiwanese operations. The Company's goodwill also relates to an acquisition
completed in January 2002. No goodwill impairments were deemed to exist as
a result of the Company's annual impairment review completed during the
third quarter of 2004, as the estimated fair value of each such reporting
unit exceeded the net carrying value of the respective reporting unit
(CompX security products reporting unit - 124%, CompX European operations
reporting unit - 61% and CompX Canadian and Taiwanese operations reporting
unit - 395%). The estimated fair values of the three CompX reporting units
are determined based on discounted cash flow projections. Significant
judgment is required in estimating the discounted cash flows for the CompX
reporting units. Such estimated cash flows are inherently uncertain, and
there can be no assurance that CompX will achieve the future cash flows
reflected in its projections. In December 2004, CompX's European operations
met the criteria under GAAP to be classified as "held for sale" and thus
was required to be measured at the lower of its carrying amount or
estimated fair value less cost to sell. At such time, the Company
recognized a $6.5 million impairment of the goodwill related to such
operations, as the carrying amount of the net assets exceed the estimated
fair value less cost to sell of the operations. See Notes 8 and 24 to the
Consolidated Financial Statements.
o The Company maintains various defined benefit pension plans and
postretirement benefits other than pensions ("OPEB"). The amounts
recognized as defined benefit pension and OPEB expenses, and the reported
amounts of prepaid and accrued pension costs and accrued OPEB costs, are
actuarially determined based on several assumptions, including discount
rates, expected rates of returns on plan assets and expected health care
trend rates. Variances from these actuarially assumed rates will result in
increases or decreases, as applicable, in the recognized pension and OPEB
obligations, pension and OPEB expenses and funding requirements. These
assumptions are more fully described below under "Assumptions on defined
benefit pension plans and OPEB plans."
o The Company records a valuation allowance to reduce its deferred income tax
assets to the amount that is believed to be realized under the
"more-likely-than-not" recognition criteria. While the Company has
considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance, it is
possible that in the future the Company may change its estimate of the
amount of the deferred income tax assets that would "more-likely-than-not"
be realized in the future, resulting in an adjustment to the deferred
income tax asset valuation allowance that would either increase or
decrease, as applicable, reported net income in the period such change in
estimate was made. For example, during 2004 the Company concluded that the
more-likely-than-not recognition criteria had been met with respect to the
income tax benefit associated with its German net operating loss
carryforwards. Kronos has substantial net operating loss carryforwards in
Germany (the equivalent of $671 million for German corporate purposes and
$232 million for German trade tax purposes at December 31, 2004). Prior to
the complete utilization of such carryforwards, it is possible that Kronos
might conclude in the future that the benefit of such carryforwards would
no longer meet the more-likely-than-not recognition criteria, at which
point the Company would be required to recognize a valuation allowance
against the then-remaining tax benefit associated with the carryforwards.
o The Company records accruals for environmental, legal, income tax and other
contingencies when estimated future expenditures associated with such
contingencies become probable, and the amounts can be reasonably estimated.
However, new information may become available, or circumstances (such as
applicable laws and regulations) may change, thereby resulting in an
increase or decrease in the amount required to be accrued for such matters
(and therefore a decrease or increase in reported net income in the period
of such change).
Segment profit for each of the Company's two operating segments are
impacted by certain of these significant judgments and estimates, as summarized
below:
o Chemicals - allowance for doubtful accounts, reserves for obsolete or
unmarketable inventories, impairment of equity method investees, goodwill
and other long-lived assets, defined benefit pension and OPEB plans and
loss accruals.
o Component products - allowance for doubtful accounts, reserves for obsolete
or unmarketable inventories, impairment of long-lived assets and loss
accruals.
In addition, general corporate and other items are impacted by the
significant judgments and estimates for impairment of marketable securities and
equity method investees, defined benefit pension and OPEB plans, deferred income
tax asset valuation allowances and loss accruals.
Component products
Years ended December 31, % Change
------------------------------------- -----------------------
2002 2003 2004 2002-03 2003-04
---- ---- ---- ------- -------
(In $ millions)
Net sales $166 $ 173.9 $ 182.6 + 4% +5%
Segment profit 4.4 9.0 16.3 +100% +81%
Segment profit margin 3% 5% 9%
Component products sales were higher in 2004 as compared to 2003 due in
part to the favorable effect of fluctuations in foreign currency exchange rates.
Fluctuations in the value of the U.S. dollar relative to other currencies, as
discussed below, increased component products sales by $2.5 million in 2004 as
compared to 2003. Component products sales comparisons were also impacted by
increases in product prices for precision slides and ergonomic products which
were primarily a pass through of raw material steel cost increases to customers.
During 2004, sales of slide products increased 13% as compared to 2003,
while sales of security products decreased less than 1% and sales of ergonomic
products increased 1% during the same period. 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 segment profit comparisons in 2004 were favorably
impacted by the effect of certain cost reduction initiatives undertaken in 2003.
Component products segment profit comparisons were also impacted by the net
effects of increases in the cost of steel (the primary raw material for CompX's
products) and continued reductions in manufacturing, fixed overhead and other
overhead costs.
Component products sales were higher in 2003 as compared to 2002 due
primarily to the favorable effect of fluctuations in foreign currency exchange
rates. Fluctuations in the value of the U.S. dollar relative to other
currencies, as discussed below, increased net sales by $3.3 million in 2003 as
compared to 2002. In addition to the favorable impact of changes in foreign
currency exchange rates, component products sales increased in 2003 as compared
to 2002 due to the net effects of higher sales volumes of security products, and
precision slide products in North American markets partially offset by lower
sales volumes of ergonomic products.
During 2003, sales of slide and security products increased 10% and 4%,
respectively, as compared to 2002, while sales of ergonomic products decreased
6%. The percentage changes in both slide and ergonomic products include the
impact resulting from changes in foreign currency exchange rates.
Component products segment profit income increased in 2003 as compared to
2002 due in part to the favorable effect of cost improvement initiatives, such
as consolidating CompX's two Canadian facilities into one facility. Component
products segment profit comparisons were negatively affected by the expenses
associated with such facility consolidation (approximately $900,000) and
increases in the cost for steel. Fluctuations in the value of the U.S. dollar
relative to other currencies, as discussed below, decreased segment profit by
$3.1 million in 2003 as compared to 2002. In addition, component products
segment profit in 2002 includes charges aggregating $3.5 million related to the
re-tooling of one of CompX's manufacturing facilities and provisions for changes
in estimate with respect to obsolete and slow-moving inventories, overhead
absorption rates and other items.
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 2004, currency
exchange rate fluctuations positively impacted component products sales
comparisons with 2003, while currency exchange rate fluctuations did not
significantly impact component products segment profit comparisons for the same
periods. During 2003, currency exchange rate fluctuations of the Canadian dollar
positively impacted component products sales comparisons with 2002 (principally
with respect to slide products), but currency exchange rate fluctuations of the
Canadian dollar negatively impacted component products segment profit
comparisons for the same periods.
While demand has improved in 2004 across most of CompX's 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
its 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 has responded to the competitive pricing
pressure in part by 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 has
also emphasized and focused on opportunities where it can provide value-added
customer support services that Asian-based manufacturers are generally unable to
provide. CompX believes its combination of cost control initiatives together
with its value-added approach to development and marketing of products helps to
mitigate the impact of competitive pricing pressures.
Additionally, CompX's cost for steel continues to rise dramatically due to
the continued high demand and shortages worldwide. 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 it 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's profitability.
Chemicals - Kronos
Relative changes in Kronos' TiO2 sales and income from operations during
the past three years are primarily due to (i) relative changes in TiO2 sales and
production volumes, (ii) relative changes in TiO2 average selling prices and
(iii) relative changes in foreign currency exchange rates. Selling prices (in
billing currencies) were generally: decreasing during the first quarter of 2002,
flat during the second quarter of 2002, increasing during the last half of 2002
and the first quarter of 2003, flat during the second quarter of 2003,
decreasing during the third and fourth quarters of 2003 and the first quarter of
2004, flat during the second quarter of 2004 and increasing during the last half
of 2004.
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 two quarters of 2004. The following table shows information about
Kronos' sales and segment profit for the 2003 and 2004 periods, including the
second half of 2004 for which the Company did not consolidate Kronos' results of
operations.
Years ended December 31, % Change
------------------------------ -------------------- Six months ended
2002 2003 2004 2002-03 2003-04 June 30,2004
---- ---- ---- ------- ------- --------------
(In $ millions)
Net sales $875.2 $1,008.2 $1,128.6 +15% +12% $559.1
Segment profit 96.5 137.4 119.6 +42% -13% 66.4
Segment profit margin 11% 14% 11% 12%
TiO2 operating
statistics:
Average selling price
index (1990=100) 81 84 82
Sales volume* 455 462 500
Production volume* 442 476 484
Production capacity
at beginning of
year* 455 470 480
Production rate as a
percentage of
capacity 96% Full Full
Percent change in TiO2 average selling prices:
Using actual foreign currency exchange rates +13% + 4%
Impact of changes in foreign exchange rates -10% - 6%
---- ----
+ 3% - 2%
==== ====
* Metric tons, in thousands
Kronos' sales increased $120.4 million (12%) in 2004 as compared to 2003 as
the favorable effect of fluctuations in foreign currency exchange rates, which
increased chemicals sales by approximately $60 million as further discussed
below, and higher sales volumes more than offset the impact of lower average
TiO2 selling prices. 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 were 2% lower in 2004 as compared to 2003. When translated
from billing currencies into U.S. dollars using actual foreign currency exchange
rates prevailing during the respective periods, Kronos' average TiO2 selling
prices in 2004 increased 4% in 2004 as compared to 2003.
Kronos' sales increased $133.0 million (15%) in 2003 compared to 2002 due
primarily to higher average TiO2 selling prices, higher TiO2 sales volumes and
the favorable effect of fluctuations in foreign currency exchange rates which
increased sales by approximately $93 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
2003 were 3% higher than 2002, with the greatest improvement in European and
export markets. 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 2003 increased 13% compared to 2002.
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% and 4%
increases in Kronos' average TiO2 selling prices during 2003 and 2004,
respectively, as compared to the respective prior year using actual foreign
currency exchange rates prevailing during the respective periods (the GAAP
measure), and the 3% increase and 2% decrease 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).
Chemicals segment profit in 2004 includes $6.3 million of income related to
the settlement of a contract dispute with a customer. As part of the settlement,
the customer agreed to make payments to Kronos through 2007 aggregating $7.3
million. The $6.3 million gain recognized represents the present value of the
future payments to be paid by the customer to Kronos. The dispute with the
customer concerned the customer's alleged past failure to purchase the required
amount of TiO2 from Kronos under the terms of Kronos' contract with the
customer. Under the settlement, the customer agreed to pay an aggregate of $7.3
million to Kronos through 2007 to resolve such dispute. See Note 18 to the
Consolidated Financial Statements.
Kronos' segment profit decreased $17.8 million (13%) in 2004 as compared to
2003, as the effect of lower average TiO2 selling prices and higher raw material
and maintenance costs more than offset the impact of higher sales and production
volumes and income from the contract dispute settlement. Kronos' segment profit
increased $40.9 million (42%) in 2003 compared to 2002 due primarily to higher
average TiO2 selling prices and higher TiO2 sales and production volumes.
Kronos' TiO2 sales volumes in 2004 increased 8% compared to 2003, as higher
volumes in European and export markets more than offset lower volumes in Canada.
Approximately one-half of Kronos' 2004 TiO2 sales volumes were attributable to
markets in Europe, with 38% attributable to North America and the balance to
export markets. Demand for TiO2 has remained strong throughout 2004, 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 2%. Kronos' operating rates were near full capacity in both
periods, and Kronos' sales and production volumes in 2004 were both new records
for Kronos, setting new volume records for Kronos for the third consecutive
year.
Kronos' TiO2 sales volumes in 2003 increased 2% from 2002, with higher
volumes in European and North American markets more than offsetting lower
volumes in export markets. Kronos' TiO2 production volumes in 2003 were 8%
higher than 2002, with operating rates near full capacity in both years.
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 Kronos' TiO2 sales by a net $60 million in 2004 as
compared to 2003, and increased sales by a net $93 million in 2003 as compared
to 2002. 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 2004 and 2003 compared to the
same periods of the respective prior years. Overall, currency exchange rate
fluctuations resulted in a net $6 million increase in Kronos' income from
operations in 2004 as compared to 2003, and resulted in a net decrease in
Kronos' income from operations in 2003 of approximately $6 million as compared
to 2002.
Reflecting the impact of partial implementation of prior price increase
announcements, Kronos' average TiO2 selling prices in billing currencies in the
fourth quarter of 2004 were 2% higher than the third quarter of 2004. In 2005,
Kronos expects income from operations will be higher than 2004, primarily due to
higher expected selling prices in 2005. The anticipated higher selling prices in
2005 reflects the expected continued implementation of price increase
announcements, including Kronos' latest price increases announced in March 2005.
The extent to which any of such price increases which have previously been
announced, and any additional price increases which may be announced
subsequently in 2005, will be realized will depend on, among other things,
economic factors.
Kronos' efforts to debottleneck its production facilities to meet long-term
demand continue to prove successful. Kronos' production capacity has increased
by approximately 30% over the past ten years due to debottlenecking programs,
with only moderate capital investment. Kronos believes its annual attainable
production capacity for 2005 is approximately 500,000 metric tons, with some
slight additional capacity available in 2006 through Kronos' continued
debottlenecking efforts.
Kronos expects its TiO2 production volumes in 2005 will be slightly higher
than its 2004 volumes, with sales volumes comparable to slightly lower in 2005
as compared to 2004. Kronos' average TiO2 selling prices, which started to
increase during the second half of 2004, are expected to continue to increase
during 2005, and consequently Kronos currently expects its average TiO2 selling
prices, in billing currencies, will be higher in 2005 as compared to 2004.
Overall, Kronos expects it 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.
Equity in earnings of Kronos - second half of 2004
Six months ended
December 31,
2004
----
(In millions)
Kronos historical:
Net sales $ 569.5
=======
Segment profit $ 53.3
Other general corporate, net (1.6)
Interest expense (25.9)
-------
25.8
Income tax expense 5.5
-------
Net income $ 20.3
=======
Equity in earnings of Kronos Worldwide, Inc. $ 9.6
=======
See above for a discussion relating to Kronos' operations during 2004.
Kronos' interest expense in the second half of 2004 relates principally to
Kronos International, Inc.'s Senior Secured Notes and Kronos' $200 million of
long-term notes payable to affiliates which were prepaid in the fourth quarter
of 2004.
General corporate and other items
General corporate interest and dividend income. Interest and dividend
income fluctuates in part based upon the amount of funds invested and yields
thereon. Aggregate interest and dividend income increased $4.6 million in 2004
compared to 2003 primarily due to interest on NL's note receivable from Kronos
which was not eliminated upon consolidation in the last six months of 2004.
Aggregate interest and dividend income declined $2.5 million in 2003 as compared
with 2002 primarily due to lower average yields on invested funds. In addition,
average funds invested in 2002 were higher compared with the subsequent years
primarily due to the decrease in the balance of restricted cash and marketable
debt securities over the past three years as such funds were used to pay for
certain environmental remediation expenditures of the Company. See Note 19 to
the Consolidated Financial Statements. The Company expects interest income will
be lower in 2005 than 2004 due to lower average yields and lower average levels
of funds available for investment.
Securities transactions. Net securities transactions gains in 2004 includes
a $2.2 million gain ($1.4 million, or $.03 per diluted share, net of income
taxes) related to NL's sale of shares of Kronos common stock in market
transactions. See Note 2 to the Consolidated Financial Statements. Net
securities transactions gains in 2003 included a $2.3 million noncash securities
gain related to the exchange of the Company's holdings of Tremont Corporation
common stock for shares of Valhi, Inc. common stock as a result of a series of
merger transactions completed in February 2003. See Note 5 to the Consolidated
Financial Statements.
Other general corporate income items. The gain on disposal of fixed assets
in 2003 relates primarily to the sale of certain real property of NL not
associated with any operations. NL has certain other real property, including
some subject to environmental remediation, which could be sold in the future for
a profit. The $6.3 million currency transaction gain in 2002 relates to the
extinguishment of intercompany indebtedness of NL. See Note 12 to the
Consolidated Financial Statements. Noncompete income relates to NL's $20 million
of proceeds from the disposal of its specialty chemicals business unit in
January 1998 related to its agreement not to compete in the rheological products
business, which was recognized as a component of general corporate income
ratably over the five-year non-compete period ended in January 2003 ($4 million
recognized in 2002 and $333,000 recognized in 2003). See Note 18 to the
Consolidated Financial Statements.
Legal settlement gains. Net legal settlement gains of $5.2 million in 2002,
$823,000 in 2003 and $552,000 in 2004 relate to NL's settlements with certain of
its former insurance carriers. These settlements, as well as similar prior
settlements NL reached in 2000 and 2001, resolved court proceedings in which NL
had sought reimbursement from the carriers for legal defense costs and indemnity
coverage for certain of its environmental remediation expenditures. No further
material settlements relating to litigation concerning environmental remediation
coverages are expected. See Note 18 to the Consolidated Financial Statements.
General corporate expenses. Net general corporate expenses in 2004 were
$40.3 million lower than 2003 due primarily to lower environmental remediation
and legal expenses. Net general corporate expenses in 2003 were $19.5 million
higher than 2002 due primarily to higher environmental remediation expenses
(principally related to one formerly-owned site of NL for which the remediation
process is expected to occur over the next several years). Net general corporate
expenses in calendar 2005 are currently expected to be higher as compared to
2004, primarily due to higher expected legal expenses of NL resulting from an
increase in litigation and related expenses. However, obligations for
environmental remediation obligations 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 in the future with respect to sites for which no
estimate of liability can presently be made. See Note 19 to the Consolidated
Financial Statements.
Interest expense. Interest expense in 2004 decreased $16.0 million compared
to 2003 primarily due to the deconsolidation of Kronos effective July 1, 2004.
See Note 1 to the Consolidated Financial Statements. Interest expense in 2003
increased $2.7 million compared with 2002 primarily due to higher levels of
outstanding debt of Kronos and associated currency effects. The Company does not
currently expect to report a material amount of interest expense in 2005.
Provision for income taxes. 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. The principal reasons for the difference between the
Company's effective income tax rates and the U.S. federal statutory income tax
rates are explained in Note 15 to the Consolidated Financial Statements. Income
tax rates vary by jurisdiction (country and/or state), and relative changes in
the geographic mix of the Company's pre-tax earnings can result in fluctuations
in the effective income tax rate.
As more fully described in Note 15 to the Consolidated Financial
Statements, Kronos had previously provided a deferred income tax asset valuation
allowance against substantially all of its tax loss carryforwards and other
deductible temporary differences in Germany because Kronos did not believe they
met the "more-likely-than-not" recognition criteria. During the first six months
of 2004, Kronos reduced its deferred income tax asset valuation allowance by
approximately $8.7 million, primarily as a result of utilization of its German
net operating loss carryforwards, the benefit of which had not previously been
recognized. At June 30, 2004, after considering all available evidence, Kronos
concluded that these German tax loss carryforwards and other deductible
temporary differences now met the "more-likely-than-not" recognition criteria.
Under applicable GAAP related to accounting for income taxes at interim periods,
a change in estimate at an interim period resulting in a decrease in the
valuation allowance is segregated into two components, the portion related to
the remaining interim periods of the current year and the portion related to all
future years. The portion of the valuation allowance reversal related to the
former is recognized over the remaining interim periods of the current year, and
the portion of the valuation allowance related to the latter is recognized at
the time the change in estimate is made. Accordingly, as of June 30, 2004,
Kronos reversed $268.6 million of the valuation allowance (the portion related
to future years), and Kronos reversed the remaining $3.4 million during the last
six months of 2004. Because the benefit of such net operating loss carryforwards
and other deductible temporary differences in Germany has now been recognized,
Kronos' effective income tax rate in 2005 is expected to be higher than what it
would have otherwise been, although its future cash income tax rate will not be
affected by the reversal of the valuation allowance. Prior to the complete
utilization of such carryforwards, it is possible that the Company might
conclude in the future that the benefit of such carryforwards would no longer
meet the "more-likely-than-not" recognition criteria, at which point the Company
would be required to recognize a valuation allowance against the then-remaining
tax benefit associated with the carryforwards.
Also during 2004, NL recognized a second quarter $43.1 million income tax
benefit related to income tax attributes of EMS. This income tax benefit
resulted from a settlement agreement reached with the U.S. IRS concerning the
IRS' previously-reported examination of a certain restructuring transaction
involving EMS, and included (i) a $18.0 million tax benefit related to a
reduction in the amount of additional income taxes and interest which NL
estimates it will be required to pay related to this matter as a result of the
settlement agreement and (ii) a $31.1 million tax benefit related to the
reversal of a deferred income tax asset valuation allowance related to certain
tax attributes of EMS (including a U.S. net operating loss carryforward) which
NL now believes meet the "more-likely-than-not" recognition criteria.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforwards
effective January 1, 2004 to 60% of taxable income after the first euro 1
million of taxable income. The new law will have a significant effect on Kronos'
cash tax payments in Germany going forward, the extent of which will be
dependent upon the level of taxable income earned in Germany.
During 2003, NL and Kronos reduced their deferred income tax asset
valuation allowance by an aggregate of approximately $7.2 million, primarily as
a result of utilization of certain income tax attributes for which the benefit
had not previously been recognized. In addition, Kronos recognized a $38.0
million income tax benefit related to the net refund of certain prior year
German income taxes.
During 2002, NL and Kronos reduced their deferred income tax asset
valuation allowance by an aggregate of approximately $3.4 million, primarily as
a result of utilization of certain income tax attributes for which the benefit
had not previously been recognized. The provision for income taxes in 2002 also
includes a $2.3 million deferred income tax benefit related to certain changes
in the Belgian tax law.
As discussed in Note 1 to the Consolidated Financial Statements, 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-data
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 $39.5 million in 2003 and $23.2 million in 2004.
In addition, the Company's provision for income taxes in 2003 and 2004 includes
an aggregate $30.3 million and $21.2 million, respectively, for the current
income tax effect related to NL's distribution of such shares of Kronos common
stock to its shareholders.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law contains several provisions that could impact the Company.
These provisions provide for, among other things, a special deduction from U.S.
taxable income equal to a stipulated percentage of qualified income from
domestic production activities (as defined) beginning in 2005, and a special 85%
dividends received deduction for certain dividends received from controlled
foreign corporations. Both of these provisions are complex and subject to
numerous limitations. See Note 15 to the Consolidated Financial Statements.
Minority interest. The Company commenced recognizing minority interest in
Kronos following the Company's December 2003 distribution of a portion of the
shares of Kronos common stock to its stockholders, and ceased reporting minority
interest in Kronos effective July 1, 2004 upon the deconsolidation of Kronos.
See Note 13 to the Consolidated Financial Statements.
Minority interest in NL's subsidiary also relates to EMS. EMS was
established in 1998, at which time EMS contractually assumed certain of NL's
environmental liabilities. EMS' earnings are based, in part, upon its ability to
favorably resolve these liabilities on an aggregate basis. The stockholders of
EMS, other than NL, actively manage the environmental liabilities and share in
39% of EMS' cumulative earnings. NL 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 24 to the Consolidated Financial Statements.
Related party transactions. The Company is a party to certain transactions
with related parties. See Notes 2 and 17 to the Consolidated Financial
Statements.
Accounting principles newly adopted in 2002, 2003 and 2004. See Note 21 to
the Consolidated Financial Statements.
Accounting principles not yet adopted. See Note 23 to the Consolidated
Financial Statements.
Assumptions on defined benefit pension plans and OPEB plans
Defined benefit pension plans. NL maintains various defined benefit pension
plans in the U.S., and Kronos maintains various defined benefit pension plans in
Europe, Canada and the U.S. See Note 16 to the Consolidated Financial
Statements.
The Company accounts for its defined benefit pension plans using SFAS No.
87, "Employer's Accounting for Pensions." Under SFAS No. 87, defined benefit
pension plan expense and prepaid and accrued pension costs are each recognized
based on certain actuarial assumptions, principally the assumed discount rate,
the assumed long-term rate of return on plan assets and the assumed increase in
future compensation levels. The Company recognized consolidated defined benefit
pension plan expense of $7.0 million in 2002, $8.9 million in 2003 and $6.8
million in 2004. Such expense in 2004 includes one-half of the defined benefit
pension expense attributable to Kronos' plans for the period during which the
Company consolidated Kronos' results of operations. The amount of funding
requirements for these defined benefit pension plans is generally based upon
applicable regulations (such as ERISA in the U.S.), and will generally differ
from pension expense recognized under SFAS No. 87 for financial reporting
purposes. Contributions made by the Company to all of its plans aggregated $9.3
million in 2002, $14.1 million in 2003 and $9.1 million in 2004. Such
contributions in 2004 includes one-half of the contributions attributable to
Kronos' plans for the period during which the Company consolidated Kronos'
results of operations.
The discount rates the Company utilizes for determining defined benefit
pension expense and the related pension obligations are based on current
interest rates earned on long-term bonds that receive one of the two highest
ratings given by recognized rating agencies in the applicable country where the
defined benefit pension benefits are being paid. In addition, the Company
receives advice about appropriate discount rates from the Company's third-party
actuaries, who may in some cases utilize their own market indices. The discount
rates are adjusted as of each valuation date (September 30th) to reflect
then-current interest rates on such long-term bonds. Such discount rates are
used to determine the actuarial present value of the pension obligations as of
December 31st of that year, and such discount rates are also used to determine
the interest component of defined benefit pension expense for the following
year.
At December 31, 2004, approximately 83% of the projected benefit obligation
related to NL plans in the U.S, with the remainder related to an immaterial plan
in the United Kingdom associated with a former disposed business unit of the
Company. The Company uses several different discount rate assumptions in
determining its consolidated defined benefit pension plan obligations and
expense because the Company maintains defined benefit pension plans in the
United States and the United Kingdom and the interest rate environment differs
from country to country.
The Company used the following discount rates for its defined benefit
pension plans:
Discount rates used for:
---------------------------------------------------------------------------------------------
Obligations at Obligations at Obligations at
December 31, 2002 and expense December 31, 2003 and expense December 31, 2004 and
in 2003 in 2004 expense in 2005
----------------------------- ----------------------------- ---------------------
U.S. 6.5% 5.9% 5.8%
Germany 5.5% 5.3% *
Canada 7.0% 6.3% *
Norway 6.0% 5.5% *
__________________________
* Not applicable, as effective July 1, 2004, the Company no longer
consolidates Kronos.
The assumed long-term rate of return on plan assets represents the
estimated average rate of earnings expected to be earned on the funds invested
or to be invested in the plans' assets provided to fund the benefit payments
inherent in the projected benefit obligations. Unlike the discount rate, which
is adjusted each year based on changes in current long-term interest rates, the
assumed long-term rate of return on plan assets will not necessarily change
based upon the actual, short-term performance of the plan assets in any given
year. Defined benefit pension expense each year is based upon the assumed
long-term rate of return on plan assets for each plan and the actual fair value
of the plan assets as of the beginning of the year. Differences between the
expected return on plan assets for a given year and the actual return are
deferred and amortized over future periods based either upon the expected
average remaining service life of the active plan participants (for plans for
which benefits are still being earned by active employees) or the average
remaining life expectancy of the inactive participants (for plans for which
benefits are not still being earned by active employees).
At December 31, 2004, approximately 87% of the plan assets related to plan
assets for NL's plans in the U.S., with the remainder related to the United
Kingdom plan. The Company uses several different long-term rates of return on
plan asset assumptions in determining its consolidated defined benefit pension
plan expense because the Company maintains defined benefit pension plans the
United States and the United Kingdom, the plan assets in different countries are
invested in a different mix of investments and the long-term rates of return for
different investments differ from country to country.
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets for each of its plans and the expected long-term
rates of return for such asset components. In addition, the Company receives
advice about appropriate long-term rates of return from the Company's
third-party actuaries. Such assumed asset mixes are summarized below:
o During 2003 and 2004, the plan assets in the U.S. were invested in the
Combined Master Retirement Trust ("CMRT"), a collective investment trust
established by Valhi to permit the collective investment by certain master
trusts which fund certain employee benefits plans sponsored by Contran and
certain of its affiliates. Harold Simmons is the sole trustee of the CMRT.
The CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices
(including the S&P 500 and certain Russell indices) utilizing both
third-party investment managers as well as investments directed by Mr.
Simmons. During the 17-year history of the CMRT, through December 31, 2004
the average annual rate of return has been approximately 13%. Prior to
2003, the Company's U.S. plan assets were invested with a combination of
equity and fixed income managers.
The Company regularly reviews its actual asset allocation for each of its
plans, and will periodically rebalance the investments in each plan to more
accurately reflect the targeted allocation when considered appropriate.
The Company's assumed long-term rates of return on plan assets for 2002,
2003 and 2004 were as follows:
2002 2003 2004
---- ---- ----
U.S. 8.5% 10.0% 10.0%
Germany 6.8% 6.5% *
Canada 7.0% 7.0% *
Norway 7.0% 6.0% *
__________________________
* Not applicable, as effective July 1, 2004, the Company no longer
consolidates Kronos.
The Company currently expects to utilize the same long-term rate of return
on plan asset assumptions in 2005 as it used in 2004 for purposes of determining
the 2005 defined benefit pension plan expense.
To the extent that a plan's particular pension benefit formula calculates
the pension benefit in whole or in part based upon future compensation levels,
the projected benefit obligations and the pension expense will be based in part
upon expected increases in future compensation levels. For all of the Company's
plans for which the benefit formula is so calculated, the Company generally
bases the assumed expected increase in future compensation levels upon average
long-term inflation rates for the applicable country.
In addition to the actuarial assumptions discussed above, because NL
maintains defined benefit pension plans outside the U.S., the amount of
recognized defined benefit pension expense and the amount of prepaid and accrued
pension costs will vary based upon relative changes in foreign currency exchange
rates.
Based on the actuarial assumptions described above and NL's current
expectation for what actual average foreign currency exchange rates will be
during 2005, NL expects its defined benefit pension income will approximate
$900,000 in 2005. In comparison, NL expects to be required to make approximately
$400,000 of contributions to such plans during 2005.
As noted above, defined benefit pension expense and the amounts recognized
as accrued pension costs are based upon the actuarial assumptions discussed
above. The Company believes all of the actuarial assumptions used are reasonable
and appropriate. If NL had lowered the assumed discount rate by 25 basis points
for all of its plans as of December 31, 2004, NL's aggregate projected benefit
obligations would have increased by approximately $1.1 million at that date.
Such a change would not materially impact NL's defined benefit pension expense
for 2005. Similarly, if NL lowered the assumed long-term rate of return on plan
assets by 25 basis points for all of its plans, NL's defined benefit pension
expense would be expected to increase by approximately $100,000 during 2005.
OPEB plans. Certain subsidiaries of the Company in the U.S. and Canada
currently provide certain health care and life insurance benefits for eligible
retired employees. See Note 16 to the Consolidated Financial Statements. The
Company accounts for such OPEB costs under SFAS No. 106, Employers Accounting
for Postretirement Benefits other than Pensions. Under SFAS No. 106, OPEB
expense and accrued OPEB costs are based on certain actuarial assumptions,
principally the assumed discount rate and the assumed rate of increases in
future health care costs. The Company recognized consolidated OPEB expense of
$80,000 in 2002, $329,000 in 2003 and $1.1 million in 2004. Such expense in 2004
includes one-half of the OPEB expense attributable to Kronos' plans for the
period during which the Company consolidated Kronos' results of operations.
Similar to defined benefit pension benefits, the amount of funding will differ
from the expense recognized for financial reporting purposes, and contributions
to the plans to cover benefit payments aggregated $3.5 million in 2002, $3.8
million in 2003 and $3.5 million in 2004. Such contributions in 2004 include
one-half of the contributions attributable to Kronos' plans for the period
during which the Company consolidated Kronos' results of operations.
Substantially all of the Company's accrued OPEB cost relates to benefits being
paid to current retirees and their dependents, and no material amount of OPEB
benefits are being earned by current employees. As a result, the amount
recognized for OPEB expense for financial reporting purposes has been, and is
expected to continue to be, significantly less than the amount of OPEB benefit
payments made each year. Accordingly, the amount of accrued OPEB expense has
been, and is expected to continue to, decline gradually.
The assumed discount rates the Company utilizes for determining OPEB
expense and the related accrued OPEB obligations are generally based on the same
discount rates the Company utilizes for its U.S. and Canadian defined benefit
pension plans.
In estimating the health care cost trend rate, the Company considers its
actual health care cost experience, future benefit structures, industry trends
and advice from its third-party actuaries. In certain cases, NL has the right to
pass on to retirees all or a portion of increases in health care costs. During
each of the past three years, the Company has assumed that the relative increase
in health care costs will generally trend downward over the next several years,
reflecting, among other things, assumed increases in efficiency in the health
care system and industry-wide cost containment initiatives. For example, at
December 31, 2004, the expected rate of increase in future health care costs
ranges from 9% in 2005, declining to 5.5% in 2009 and thereafter.
Based on the actuarial assumptions described above and NL's current
expectation for what actual average foreign currency exchange rates will be
during 2004, the Company expects its consolidated OPEB expense will approximate
$600,000 in 2005. In comparison, the Company expects the employer contribution
portion of costs to approximate $2.0 million during 2005.
As noted above, OPEB expense and the amount recognized as accrued OPEB
costs are based upon the actuarial assumptions discussed above. The Company
believes all of the actuarial assumptions used are reasonable and appropriate.
If the Company had lowered the assumed discount rate by 25 basis points for all
of its OPEB plans as of December 31, 2004, the Company's aggregate projected
benefit obligations would have increased by approximately $300,000 at that date,
and the Company's OPEB expense would be expected to increase by less than
$50,000 during 2005. Similarly, if the assumed future health care cost trend
rate had been increased by 100 basis points, the Company's accumulated OPEB
obligations would have increased by approximately $900,000 at December 31, 2004,
and OPEB expense would have increased by $100,000 in 2004.
Foreign operations
Kronos. Kronos has substantial operations located outside the United States
(principally Europe and Canada) for which the functional currency is not the
U.S. dollar. As a result, the reported amount of the Company's net investment in
Kronos will fluctuate based upon changes in currency exchange rates. At December
31, 2004, Kronos had substantial net assets denominated in the euro, Canadian
dollar, Norwegian kroner and British pound sterling.
CompX. CompX has substantial operations and assets located outside the
United States, principally slide and/or ergonomic product operations in Canada
and Taiwan.
LIQUIDITY AND CAPITAL RESOURCES
Summary
The Company's primary source of liquidity on an ongoing 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
(including dividends paid to NL by its subsidiaries). 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.
Based upon the Company's expectations for the industries in which its
subsidiaries and affiliates operate, and the anticipated demands on the
Company's cash resources as discussed herein, the Company expects to have
sufficient liquidity to meet its obligations including operations, capital
expenditures, debt service and current dividend policy. To the extent that
actual developments differ from the Company's expectations, the Company's
liquidity could be adversely affected.
The deconsolidation of Kronos effective July 1, 2004 has a significant
effect on the comparability of the Company's consolidated cash flows.
Consolidated cash flows
Operating activities. 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 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.
Cash flows from operating activities decreased from $114.9 million provided
by operating activities in 2003 to $92.7 million of cash provided by operating
activities in 2004. This $22.2 million decrease was due primarily to the
deconsolidation of Kronos, effective July 1, 2004. As such, cash from operating
activities in 2003 is not comparable to 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.
Cash flows from operating activities increased from $114.7 million in 2002
to $114.9 million in 2003. This $.2 million increase was due primarily to the
net effect of (i) a net loss of $21.2 million in 2003 compared to net income of
$38.9 million in 2002, (ii) higher depreciation expense of $8.7 million, (iii)
$10.5 million of higher losses on disposition of property and equipment in 2003
as compared to 2002, (iv) lower net distributions from the TiO2 manufacturing
joint venture of $875,000 in 2003 compared to $8.0 million in 2002, (v) a higher
amount of net cash generated from relative changes in the Company's inventories,
receivables, payables and accruals and accounts with affiliates of $1.3 million
in 2003 as compared to 2002 and (vi) lower cash paid for income taxes of $14.4
million. Relative changes in accounts receivable are affected by, among other
things, the timing of sales and the collection of the resulting receivable.
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 volume
and sales volume. 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.
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).
Years ended December 31,
---------------------------------------------
2002 2003 2004
---- ---- ----
(In millions)
Cash provided by operating activities:
Kronos $ 111.1 $ 107.7 $ 67.5
CompX 16.9 24.4 30.2
NL Parent 88.2 (19.9) 7.1
Other 9.5 9.7 1.6
Eliminations (111.0) (7.0) (13.7)
------- ------- -------
$ 114.7 $ 114.9 $ 92.7
======= ======= =======
Investing activities. The Company's capital expenditures were $45.3
million, $44.3 million and $16.2 million in 2002, 2003 and 2004, respectively
and are disclosed by business segment in Note 3 to the Consolidated Financial
Statements. Such capital expenditures in 2004 include the first six months of
Kronos' capital expenditures for the period during which the Company
consolidated Kronos' cash flows. Capital expenditures in 2002 included an
aggregate of $3.1 million for the rebuilding of the Company's Leverkusen,
Germany sulfate plant.
At December 31, 2004, the estimated cost to complete capital projects in
process approximated $3 million, all of which relates to CompX's component
products facilities. Aggregate capital expenditures for 2005 are expected to
approximate $13 million for CompX. Capital expenditures in 2005 are expected to
be financed primarily from operations or existing cash resources and credit
facilities.
In January 2005, CompX received a net $18.4 million from the sale of its
Thomas Regout operations. See Note 24 to the Consolidated Financial Statements.
During 2004, (i) NL sold shares of Kronos common stock in market
transactions for net proceeds of $2.7 million, (ii) Kronos repaid $31.4 million
of its note payable to NL in the fourth quarter of 2004 and (iii) EMS collected
$4 million of its loan to one of the Contran family trusts described in Note 1
to the Consolidated Financial Statements.
During 2003, (i) EMS collected $4 million on its loan to one of the Contran
family trusts and (ii) the Company generated approximately $12.8 million from
the sale of property and equipment, primarily certain real property of NL
discussed above.
During 2002, (i) the Company purchased the EWI insurance brokerage services
operations for $9.2 million, (ii) EMS collected $2 million on its loan to one of
the Contran family trusts and (iii) NL collected $12.6 million on a loan to
another affiliate. See Notes 2 and 17 to the Consolidated Financial Statements.
Financing activities. During 2004, (i) CompX repaid a net $26.0 million
under its revolving bank credit facility and (ii) Kronos borrowed and repaid a
net of euro 26 million ($32 million when borrowed) under its European revolving
bank credit facility during the first six months of 2004. Distributions to
minority interest in 2004 are primarily comprised of Kronos' cash dividends in
the first half of 2004 and CompX's fourth quarter cash dividend, in both cases
paid to shareholders other than NL. Other cash flows from financing activities
relate primarily to proceeds from the sale of NL common stock issued upon
exercise of stock options.
During 2003, (i) CompX repaid a net $5 million under its revolving bank
credit facility and (ii) Kronos borrowed an aggregate of euro 15 million ($16
million when borrowed) under its European revolving bank credit facility and
repaid kroner 80 million ($11 million) and euro 30 million ($34 million) under
such facility. NL paid cash dividends aggregating $38.2 million for 2003.
Distributions to minority interest in 2002 are primarily comprised of CompX
dividends paid to its shareholders other than Valhi and Valcor, and capital
transactions with affiliates during 2003 relates principally to CompX dividends
paid to Valhi and Valcor.
During 2002, (i) CompX repaid a net $18 million of its revolving bank
credit facility, (ii) Kronos repaid all of its existing short-term notes payable
denominated in euros and Norwegian kroner ($53 million when repaid) using
primarily proceeds from borrowings ($39 million) under KII's new revolving bank
credit facility, (iii) NL redeemed $194 million principal amount of its Senior
Secured Notes, primarily using the proceeds from the new euro 285 million ($280
million when issued) borrowing of KII and (iv) Kronos repaid an aggregate of
euro 13 million ($13 million when repaid) of borrowings under KII's revolving
bank credit facility. NL paid cash dividends aggregating $158.0 million in 2002.
Distributions to minority interest in 2002 are primarily comprised of CompX
dividends paid to its shareholders other than Valhi and Valcor, and capital
transactions with affiliates during 2002 relates principally to CompX dividends
paid to Valhi and Valcor.
Provisions contained in CompX's revolving bank credit facility could result
in the acceleration of such indebtedness prior to its stated maturity for
reasons other than defaults from failing to comply with typical financial
covenants. For example, the credit agreement allows the lender to accelerate the
maturity of the indebtedness upon a change of control (as defined) of the
borrower. The terms of the credit agreement could result in the acceleration of
all or a portion of the indebtedness following a sale of assets outside of the
ordinary course of business, which provision was waived in conjunction with
CompX's sale of its Thomas Regout operations. See Note 12 to the Consolidated
Financial Statements. Other than operating lease commitments disclosed in Note
19 to the Consolidated Financial Statements, the Company is not party to any
material off-balance sheet financing arrangements.
On February 22, 2005, the Company's Board of Directors declared a regular
quarterly dividend of $.25 per share to be paid in the form of shares of common
stock of Kronos to stockholders of record as of March 14, 2005 to be paid on
March 29, 2005.
Component products - CompX International
CompX's capital expenditures during the past three years aggregated $27.0
million. Such capital expenditures included manufacturing equipment that
emphasizes improved production efficiency and increased production capacity.
CompX received approximately $18.4 million cash in January 2005 upon the
sale of its Thomas Regout operations in the Netherlands. See Note 24 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.
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 December 31, 2004, Kronos had cash, cash equivalents and marketable debt
securities of $65.2 million, including restricted balances of $4.4 million, and
Kronos had approximately $139 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 December 31, 2004, Kronos' outstanding debt was comprised of (i) $519.2
million related to KII's Senior Secured Notes, (ii) $13.6 million related to
KII's European revolving bank credit facility and (iii) approximately $348,000
of other indebtedness. Prior to December 31, 2004, Kronos had $200 million of
long-term notes payable to NL, $168.6 million of which was subsequently assigned
to affiliates upon the acquisition of 10,374,000 shares of CompX. See Note 1 to
the Consolidated Financial Statements. The entire $200 million of long-term
notes, including the remaining balance owed to NL, was prepaid by Kronos in the
fourth quarter of 2004.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions significantly impact Kronos' earnings and operating cash
flows. Cash flow from operations is considered the primary source of liquidity
for Kronos. Changes in TiO2 pricing, production volume and customer demand,
among other things, could significantly affect the liquidity of Kronos.
Kronos' capital expenditures during the past three years aggregated $107.1
million, including $18 million ($7 million in 2004) for Kronos' ongoing
environmental protection and compliance programs and $3.1 million in 2002
related to reconstruction of the Leverkusen facility destroyed by fire in March
2001. Kronos' estimated 2005 capital expenditures are $41 million, including $7
million in the area of environmental protection and compliance.
See Note 15 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 19 to the
Consolidated Financial Statements with respect to certain legal proceedings and
environmental matters with respect to Kronos.
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' and the Company's consolidated net assets, will fluctuate
based upon changes in currency exchange rates.
NL Industries Parent
At December 31, 2004, NL (exclusive of CompX and Kronos) had cash, cash
equivalents and marketable debt securities of $99.3 million, including
restricted balances of $21.1 million. Of such restricted balances, $19 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 19 to the Consolidated Financial Statements.
See Note 15 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 19 to the Consolidated Financial Statements with respect
to certain legal proceedings and environmental matters with respect to NL.
In addition to those legal proceedings described in Note 19 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.
In December 2003, NL completed the distribution of approximately 48.8% of
Kronos' outstanding common stock to its shareholders under which NL shareholders
received one share of Kronos' common stock for every two shares of NL common
stock held. Approximately 23.9 million shares of Kronos common stock were
distributed. Immediately prior to the distribution of shares of Kronos common
stock, Kronos distributed a $200 million promissory note payable by Kronos to NL
(of which NL transferred an aggregate of $168.6 million to Valhi and Valcor in
connection with NL's acquisition of the shares of CompX common stock previously
held by Valhi and Valcor, as discussed in Note 3 to the Consolidated Financial
Statements).
During 2004, NL paid each of its $.20 per share regular quarterly dividends
in the form of shares of Kronos common stock in which an aggregate of
approximately 2.5% of Kronos' outstanding common stock was distributed to NL
shareholders in the form of pro-rata dividends. Following the second of such
quarterly dividends in 2004, NL no longer owned a majority of Kronos'
outstanding common stock, and accordingly NL ceased to consolidate Kronos as of
July 1, 2004. During the fourth quarter of 2004, NL transferred approximately
5.5 million shares of Kronos common stock to Valhi in satisfaction of a tax
liability and the tax liability generated from the use of such Kronos shares to
settle such tax liability. The transfer of such 5.5 million shares of Kronos
common stock, accounted for under GAAP as a transfer of net assets among
entities under common control at carryover basis, resulting in a reduction of
the Company's paid-in capital of approximately $52.5 million. See Note 3 to the
Consolidated Financial Statements. In the fourth quarter of 2004, NL also sold
64,500 shares of Kronos common stock in market transactions for an aggregate of
approximately $2.7 million.
On September 24, 2004, NL completed the acquisition of the CompX shares
previously held by Valhi and Valcor at a purchase price of $16.25 per share, or
an aggregate of approximately $168.6 million. The purchase price was paid by
NL's transfer to Valhi and Valcor of $168.6 million of NL's $200 million
long-term note receivable from Kronos (which long-term note was eliminated in
the preparation of the Company's Consolidated Financial Statements). See Note 1
to the Consolidated Financial Statements. 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 and the Company has
retroactively restated its consolidated financial statements to reflect the
consolidation of CompX for all periods presented. After such acquisition, NL
retained a $31.4 million note receivable from Kronos, which note receivable
Kronos prepaid in November 2004 using funds from KII's November 2004 issuance of
euro 90 million principal amount of KII Senior Secured Notes.
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 acquisitions,
divestitures, joint ventures 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 February 2004,
Kronos announced it would pay its first regular quarterly cash dividend of $.25
per share. At that rate, and based on the 18.3 million shares of Kronos held by
NL at December 31, 2004, NL would directly receive aggregate annual dividends
from Kronos of $18.3 million. In addition, CompX resumed paying quarterly
dividends in the fourth quarter of 2004 at $.125 per share. At that rate, and
based on the 10.4 million shares of CompX held indirectly by NL (through its
ownership interest in CompX Group) at December 31, 2004, NL would directly or
indirectly receive aggregate annual dividends from CompX of $5.2 million. See
Note 2 to the Consolidated Financial Statements.
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.
Summary of debt and other contractual commitments
As more fully described in the notes to the Consolidated Financial
Statements, the Company is a party to various debt, lease and other agreements
which contractually and unconditionally commit the Company to pay certain
amounts in the future. See Notes 12 and 19 to the Consolidated Financial
Statements. The following table summarizes such contractual commitments of the
Company and its consolidated subsidiaries as of December 31, 2004 by the type
and date of payment.
Payment due date
-------------------------------------------
2010 and
Contractual commitment 2005 2006/2007 2008/2009 after Total
---------------------- ---- --------- --------- --------- -----
(In millions)
Third-party indebtedness $ .1 $ - $ - $ - $ .1
Estimated tax obligations 2.1 - - - 2.1
Operating leases .9 1.1 .3 .5 2.8
Raw material and other purchase
obligations 12.6 - - - 12.6
Fixed asset acquisitions 3.3 - - - 3.3
------- ------- ------- ------- -------
$ 19.0 $ 1.1 $ .3 $ .5 $ 20.9
======= ======= ======= ======= =======
The timing and amount shown for the Company's commitments related to
indebtedness (principal and interest), operating leases, raw material and other
purchase obligations and fixed asset acquisitions are based upon the contractual
payment amount and the contractual payment date for such commitments. The amount
shown for income taxes is the consolidated amount of income taxes payable at
December 31, 2004, which is assumed to be paid during 2005.
The above table does not reflect any amounts that the Company might pay to
fund its defined benefit pension plans and OPEB plans, as the timing and amount
of any such future fundings are unknown and dependent on, among other things,
the future performance of defined benefit pension plan assets, interest rate
assumptions and actual future retiree medical costs. Such defined benefit
pension plans and OPEB plans are discussed above in greater detail.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The Company is exposed to market risk from changes in foreign
currency exchange rates, interest rates and equity security prices. In the past,
the Company has periodically entered into interest rate swaps or other types of
contracts in order to manage a portion of its interest rate market risk. The
Company has also periodically entered into currency forward contracts to either
manage a nominal portion of foreign exchange rate market risk associated with
receivables denominated in a currency other than the holder's functional
currency or similar risk associated with future sales, or to hedge specific
foreign currency commitments. Otherwise, the Company does not generally enter
into forward or option contracts to manage such market risks, nor does the
Company enter into any such contract or other type of derivative instrument for
trading or speculative purposes. Other than as described below, the Company was
not a party to any material forward or derivative option contract related to
foreign exchange rates, interest rates or equity security prices at December 31,
2003 and 2004. See Notes 1 and 20 to the Consolidated Financial Statements. The
following discussion relates to NL and its consolidated subsidiaries at each
date indicated.
Interest rates. The Company is exposed to market risk from changes in
interest rates, primarily related to indebtedness. NL had no indebtedness at
December 31, 2003 or 2004. Outstanding indebtedness at December 31, 2003 relates
to Kronos and CompX, and outstanding indebtedness at December 31, 2004 relates
solely to CompX.
At December 31, 2004, no amounts were outstanding under CompX's
variable-rate revolving bank credit agreement. CompX's outstanding borrowings at
December 31, 2003 related principally to $26 million in borrowings under such
CompX credit facility. The outstanding balances at December 31, 2003 (which
approximate fair value) had a weighted-average interest rate of 3.2%. The
remaining variable rate indebtedness outstanding at December 31, 2003 and 2004
is not material.
At December 31, 2003, outstanding fixed rate indebtedness, all of which
relates to Kronos, aggregated $356.7 million (fair value - $356.7 million) with
a weighted-average interest rate of 8.9%. All of such fixed rate indebtedness
was denominated in euros.
Foreign currency exchange rates. The Company is exposed to market risk
arising from changes in foreign currency exchange rates as a result of
manufacturing and selling its products worldwide. Earnings are primarily
affected by fluctuations in the value of the U.S. dollar relative to the euro,
the Canadian dollar and the New Taiwan dollar.
Certain of CompX's sales generated by its Canadian operations are
denominated in U.S. dollars. To manage a portion of the foreign exchange rate
market risk associated with receivables, or similar exchange rate risk
associated with future sales, at December 31, 2004 CompX held a series of
short-term forward exchange contracts maturing through March 2005 to exchange an
aggregate of $7.2 million for an equivalent amount of Canadian dollars at
exchange rates of Cdn. $1.19 to Cdn. $1.23 per U.S. dollar. At each balance
sheet date, outstanding currency forward contracts are marked-to-market with any
resulting gain or loss recognized in income currently. The difference between
the estimated fair value and the face value of all such outstanding forward
contracts at December 31, 2004 is not material. At December 31, 2004, the actual
exchange rate was Cdn. $1.21 per U.S. dollar. At December 31, 2003 CompX had
entered into a series of short-term forward exchange contracts maturing through
February 2004 to exchange an aggregate of $4.2 million for an equivalent amount
of Canadian dollars at exchange rates of Cdn. $1.30 to Cdn. $1.33 per U.S.
dollar. The estimated fair value of such contracts is not material at December
31, 2003 and 2004.
At December 31, 2003, Kronos had also entered into a short-term currency
forward contract maturing on January 2, 2004 to exchange an aggregate of 40
million into U.S. dollars at an exchange rate of U.S. $1.25 per euro. Such
contract was entered into in conjunction with the January 2004 payment of an
intercompany dividend from one of Kronos' European subsidiaries. At December 31,
2004, the actual exchange rate was U.S. $1.25 per euro. The estimated fair value
of such foreign currency forward contract was not material at December 31, 2003.
As described above, at December 31, 2003 Kronos had the equivalent of
$356.1 million of outstanding euro-denominated indebtedness. The potential
increase in the U.S. dollar equivalent of the principal amount outstanding
resulting from a hypothetical 10% adverse change in exchange rates at such date
would be approximately $35.6 million.
Marketable equity and debt security prices. The Company is exposed to
market risk due to changes in prices of the marketable securities, which are
owned. The fair value of such debt and equity securities at December 31, 2003
and 2004 was $70.5 million and $75.8 million, respectively. The potential change
in the aggregate fair value of these investments, assuming a 10% change in
prices, would be $7.1 million at December 31, 2003 and $7.6 million at December
31, 2004. The fair value of restricted marketable debt securities at December
31, 2003 and 2004 was $13.0 million and $13.3 million, respectively. The
potential change in the aggregate fair value of these investments assuming a 10%
change in prices would be $1.3 million at each of December 31, 2003 and 2004.
Other. The Company believes there may be a certain amount of incompleteness
in the sensitivity analyses presented above. For example, the hypothetical
effect of changes in interest rates discussed above ignores the potential effect
on other variables which affect the Company's results of operations and cash
flows, such as demand for the Company's products, sales volumes and selling
prices and operating expenses. Contrary to the above assumptions, changes in
interest rates rarely result in simultaneous parallel shifts along the yield
curve. Accordingly, the amounts presented above are not necessarily an accurate
reflection of the potential losses the Company would incur assuming the
hypothetical changes in market prices were actually to occur.
The above discussion and estimated sensitivity analysis amounts include
forward-looking statements of market risk which assume hypothetical changes in
market prices. Actual future market conditions will likely differ materially
from such assumptions. Accordingly, such forward-looking statements should not
be considered to be projections by the Company of future events, gains or
losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" (page
F-1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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, 2003 and 2004,
and for each of the three years in the period ended December 31, 2004. The
restatement relates to misstatements of the Company's provision for income taxes
for each of the three years in the period ended December 31, 2004, and the
Company's related income tax accounts (current and deferred) as of December 31,
2003 and 2004.
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 design and
operating effectiveness of the Company's disclosure controls and procedures as
of December 31, 2004. Based upon their evaluation, and as a result of the
material weaknesses 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.
Scope of Management's Report on Internal Control Over Financial Reporting.
The Company also maintains internal control over financial reporting. The term
"internal control over financial reporting," as defined by regulations of the
SEC, means a process designed by, or under the supervision of, the Company's
principal executive and principal financial officers, or persons performing
similar functions, and effected by the Company's board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and
includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
Company,
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company,
and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's Consolidated Financial
Statements.
Section 404 of the Sarbanes-Oxley Act of 2002 requires the Company to
annually include a management report on internal control over financial
reporting starting in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004. The Company's independent registered public accounting
firm is also required to annually audit the Company's internal control over
financial reporting.
As permitted by the SEC, the Company's assessment of internal control over
financial reporting excludes (i) internal control over financial reporting at
its equity method investees and (ii) internal control over the preparation of
the Company's financial statement schedules required by Article 12 of Regulation
S-X. However, our assessment of internal control over financial reporting with
respect to the Company's equity method investees did include our controls over
the recording of amounts related to our investment that are recorded in our
consolidated financial statements, including controls over the selection of
accounting methods for our investments, the recognition of equity method
earnings and losses and the determination, valuation and recording of our
investment account balances.
Management's Report on Internal Control Over Financial Reporting
(Restated). The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rule 13a-15(f). The Company's evaluation of the
effectiveness of its internal control over financial reporting is based upon the
framework established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO ).
A material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
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 weakness in internal control over financial reporting
as of December 31, 2004:
(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 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
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 the Company's consolidated financial statements or interim
financial information for the interim periods ended September 30, 2003,
December 31, 2003, March 31, 2004, June 30, 2004, September 30, 2004 and
December 31, 2004. Additionally, this control deficiency could result in a
misstatement of the aforementioned accounts that would result in a material
misstatement to the Company's annual or interim consolidated financial
statements that would not be prevented or detected.
Management of the Company determined that each of these control
deficiencies constitutes a material weaknesses.
Because of the material weaknesses described above, management of the
Company has concluded that the Company did not maintain effective internal
control over financial reporting at December 31, 2004, based on the criteria in
the COSO framework.
As discussed in Notes 1 and 2 to the Consolidated Financial Statements, in
September 2004 the Company acquired 68% of CompX's common stock from Valhi and a
wholly-owned subsidiary of Valhi. We have excluded CompX from our assessment of
the Company's internal control over financial reporting because it was acquired
in a transaction accounted for as a transfer of net assets among entities under
common control during 2004. CompX is a majority subsidiary of the Company whose
total assets, total sales and net assets represent 31%, 25% and 39%,
respectively, of the related consolidated financial statement amounts as of and
for the year ended December 31, 2004.
Management of the Company had previously concluded that the Company did not
maintain effective internal control over financial reporting as of December 31,
2004 because of the material weakness described in (a) above, identified in
connection with the Original Restatement. In connection with the Current
Restatement of the Company's consolidated financial statements described in Note
1 to the consolidated financial statements, management has determined that the
material weakness described in (b) above, also existed as of December 31, 2004.
Accordingly, management has restated this Report on Internal Control over
Financial Reporting to include this additional material weakness.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included herein.
Remediation In order to remediate these material weaknesses, the Company
intends to increase its financial reporting staff, with particular emphasis on
obtaining additional personnel with a background in the financial reporting
requirements and the determination of the provision for income taxes in
accordance with SFAS No. 109 and related generally accepted accounting
principles. 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 generally accepted accounting principles have been appropriately and
consistently applied with respect to the 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 December 31, 2004 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Certifications. The Company's chief executive officer is required to
annually file a certification with the New York Stock Exchange ("NYSE"),
certifying the Company's compliance with the corporate governance listing
standards of the NYSE. During 2004, the Company's chief executive officer filed
such annual certification with the NYSE, indicating that he was not aware of any
violations by the Company of the NYSE corporate governance listing standards.
The Company's chief executive officer and chief financial officer are also
required to, among other things, quarterly file certifications with the SEC
regarding the quality of the Company's public disclosures, as required by
Section 302 of the Sarbanes-Oxley Act of 2002. The certifications for the
quarter ended December 31, 2004 have been filed as exhibits 31.1 and 31.2 to
this Annual Report on Form 10-K/A.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
Company's definitive Proxy Statement to be filed with the SEC pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
report (the "NL Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
NL Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
NL Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
NL Proxy Statement. See also Note 17 to the Consolidated Financial Statements.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Information required by the Item is incorporated by reference to the NL
Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
The Registrant
The consolidated financial statements and schedules of the
Registrant listed on the accompanying Index of Financial
Statements and Schedules (see page F-1) are filed as part of this
Annual Report.
50%-or-less persons
The consolidated financial statements of Kronos (37%-owned at
December 31, 2004) are filed as Exhibit 99.1 of this Annual
Report pursuant to Rule 3-09 of Regulation S-X. Management's
Report on Internal Control Over Financial Reporting of Kronos is
not included as part of Exhibit 99.1. The Registrant is not
required to provide any other consolidated financial statements
pursuant to Rule 3-09 of Regulation S-X
(b) Reports on Form 8-K
Reports on Form 8-K filed for the quarter ended December 31,
2004.
October 8, 2004 - Reported Item 8.01 and Item 9.
October 22, 2004 - Reported Item 7.01 and Item 9.
October 27, 2004 - Reported Item 9.01.
November 9, 2004 - Reported Item 2.02, Item 7 and Item 9.
December 3, 2004 - Reported Item 1.01 and Item 9.
December 22, 2004 - Reported Item 2.05 and Item 2.06.
(c) Exhibits
Included as exhibits are the items listed in the Exhibit Index.
NL will furnish a copy of any of the exhibits listed below upon
payment of $4.00 per exhibit to cover the costs to NL of
furnishing the exhibits. Pursuant to Item 601(b)(4)(iii) of
Regulation S-K, any instrument defining the rights of holders of
long-term debt issues and other agreements related to
indebtedness which do not exceed 10% of consolidated total assets
as of December 31, 2004 will be furnished to the Commission upon
request.
The Company will also furnish, without charge, a copy of its Code
of Business Conduct and Ethics, as adopted by the board of
directors on February 19, 2004, upon request. Such requests
should be directed to the attention of the Company's Corporate
Secretary at the Company's corporate offices located at 5430 LBJ
Freeway, Suite 1700, Dallas, Texas 75240.
Item No. Exhibit Index
2.1 Form of Distribution Agreement between NL Industries, Inc. and Kronos
Worldwide, Inc. - incorporated by reference to Exhibit 2.1 to the
Kronos Worldwide, Inc. Registration Statement on Form 10 (File No.
001-31763).
3.1 By-Laws, as amended on June 28, 1990 - incorporated by reference to
Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1990.
3.2 Amendment to the Amended and Restated By-Laws, as of June 28, 1990,
executed December 8, 2003 - incorporated by reference to Exhibit 3.2
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003.
3.3 Certificate of Amended and Restated Certificate of Incorporation dated
June 28, 1990 - incorporated by reference to Exhibit 1 to the
Registrant's Proxy Statement on Schedule 14A for the annual meeting
held on June 28, 1990.
4.1 Indenture governing the 8.875% Senior Secured Notes due 2009, dated
June 28, 2002, between Kronos International, Inc. and The Bank of New
York, as Trustee - incorporated by reference to Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2002.
4.2 Form of certificate of 8.875% Senior Secured Notes due 2009 of Kronos
International, Inc. (included as Exhibit A to Exhibit 4.1) -
incorporated by reference to Exhibit 4.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002.
4.3 Form of certificate of 8.875% Senior Secured Notes due 2009 of Kronos
International, Inc. (included as Exhibit B to Exhibit 4.1) -
incorporated by reference to Exhibit 4.3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002.
4.4 Purchase Agreement, dated June 19, 2002, among Kronos International,
Inc., Deutsche Bank AG London, Dresdner Bank AG London Branch and
Commerzbank Aktiengesellschaft, London Branch - incorporated by
reference to Exhibit 4.4 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002.
4.5 Purchase Agreement dated November 18, 2004 between Kronos
International, Inc. and Deutsche Bank AG London - incorporated by
reference to Exhibit 4.4 to the Current Report on Form 8-K of Kronos
International, Inc. (File No. 333-100047) dated November 24, 2004.
4.6 Form of Registration Rights Agreement, dated as of November 26, 2004
between Kronos International, Inc. and Deutsche Bank AG London -
incorporated by reference to Exhibit 4.5 to the Current Report on Form
8-K of Kronos International, Inc. (File No. 333-100047) dated November
24, 2004.
4.7 Collateral Agency Agreement, dated June 28, 2002, among The Bank of
New York, U.S. Bank, N.A. and Kronos International, Inc. -
incorporated by reference to Exhibit 4.6 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002.
4.8 Security Over Shares Agreement, dated June 28, 2002, between Kronos
International, Inc. and The Bank of New York - incorporated by
reference to Exhibit 4.7 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002.
4.9 Pledge of Shares (shares in Kronos Denmark ApS), dated June 28, 2002,
between Kronos International, Inc. and U.S. Bank, N.A. - incorporated
by reference to Exhibit 4.8 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002.
4.10 Pledge Agreement (shares in Societe Industrielle du Titane S.A.),
dated June 28, 2002, between Kronos International, Inc. and U.S. Bank,
N.A. - incorporated by reference to Exhibit 4.9 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
4.11 Partnership Interest Pledge Agreement (relating to fixed capital
contribution in Kronos Titan GmbH & Co.), dated June 28, 2002, between
Kronos International, Inc. and U.S. Bank, N.A. - incorporated by
reference to Exhibit 4.10 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002.
4.12 Stock Purchase Agreement dated September 24, 2004 between Valhi, Inc.
and Valcor, Inc., as sellers, and NL Industries, Inc. as purchaser -
incorporated by reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K as of September 24, 2004. (The disclosure schedule
attachment to this Exhibit 4.12 has not been filed; upon request, the
Registrant will furnish supplementally to the Securities and Exchange
Commission a copy of this attachment.)
10.1 Euro 80,000,000 Facility Agreement, dated June 25, 2002, among Kronos
Titan GmbH & Co. OHG, Kronos Europe S.A./N.V., Kronos Titan A/S and
Titania A/S, as borrowers, Kronos Titan GmbH & Co. OHG, Kronos Europe
S.A./N.V. and Kronos Norge AS, as guarantors, Kronos Denmark ApS, as
security provider, Deutsche Bank AG, as mandated lead arranger,
Deutsche Bank Luxembourg S.A., as agent and security agent, and KBC
Bank NV, as fronting bank, and the financial institutions listed in
Schedule 1 thereto, as lenders - incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002.
10.2 Lease Contract dated June 21, 1952, between Farbenfabriken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung
(German language version and English translation thereof) -
incorporated by reference to Exhibit 10.14 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1985.
10.3 Contract on Supplies and Services among Bayer AG, Kronos Titan-GmbH
and Kronos International, Inc. dated June 30, 1995 (English
translation from German language document) - incorporated by reference
to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995.
10.4** Richards Bay Slag Sales Agreement dated May 1, 1995 between Richards
Bay Iron and Titanium (Proprietary) Limited and Kronos, Inc. -
incorporated by reference to Exhibit 10.17 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
10.5** Amendment to Richards Bay Slag Sales Agreement dated May 1, 1999
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1999.
10.6** Amendment to Richards Bay Slag Sales Agreement dated June 1, 2001
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.5 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2001.
10.7** Amendment to Richards Bay Slag Sales Agreement dated December 20,
2002 between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.7 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2002.
10.8* Amendment to Richards Bay Slag Sales Agreement dated October 31, 2003
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.17 to Kronos
Worldwide, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2004.
10.9 Agreement between Sachtleben Chemie GmbH and Kronos Titan-GmbH
effective December 30, 1986 - incorporated by reference to Exhibit
10.1 of KII's Quarterly Report on Form 10-Q (File No. 333-100047) for
the quarter ended September 30, 2002.
10.10 Supplementary Agreement to the Agreement of December 30, 1986 between
Sachtleben Chemie GmbH and Kronos Titan-GmbH dated May 3, 1996 -
incorporated by reference to Exhibit 10.2 of KII's Quarterly Report on
Form 10-Q (File No. 333-100047) for the quarter ended September 30,
2002.
10.11 Second Supplementary Agreement to the Contract dated December 30,
1986 between Sachtleben Chemie GmbH and Kronos Titan-GmbH dated
January 8, 2002 - incorporated by reference to Exhibit 10.3 of KII's
Quarterly Report on Form 10-Q (File No. 333-100047) for the quarter
ended September 30, 2002.
10.12 Formation Agreement dated as of October 18, 1993 among Tioxide
Americas Inc., Kronos Louisiana, Inc. and Louisiana Pigment Company,
L.P. - incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.13 Joint Venture Agreement dated as of October 18, 1993 between Tioxide
Americas Inc. and Kronos Louisiana, Inc. - incorporated by reference
to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993.
10.14 Kronos Offtake Agreement dated as of October 18, 1993 between Kronos
Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993.
10.15 Amendment No. 1 to Kronos Offtake Agreement dated as of December 20,
1995 between Kronos Louisiana, Inc. and Louisiana Pigment Company,
L.P. - incorporated by reference to Exhibit 10.22 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995.
10.16 Tioxide Americas Offtake Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Louisiana Pigment Company, L.P. -
incorporated by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.17 Amendment No. 1 to Tioxide Americas Offtake Agreement dated as of
December 20, 1995 between Tioxide Americas Inc. and Louisiana Pigment
Company, L.P. - incorporated by reference to Exhibit 10.24 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1995.
10.18 TCI/KCI Output Purchase Agreement dated as of October 18, 1993
between Tioxide Canada Inc. and Kronos Canada, Inc. - incorporated by
reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993.
10.19 TAI/KLA Output Purchase Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Kronos Louisiana, Inc. -
incorporated by reference to Exhibit 10.7 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.20 Master Technology Exchange Agreement dated as of October 18, 1993
among Kronos, Inc., Kronos Louisiana, Inc., Kronos International,
Inc., Tioxide Group Limited and Tioxide Group Services Limited -
incorporated by reference to Exhibit 10.8 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.21 Parents' Undertaking dated as of October 18, 1993 between ICI
American Holdings Inc. and Kronos, Inc. - incorporated by reference to
Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993.
10.22 Allocation Agreement dated as of October 18, 1993 between Tioxide
Americas Inc., ICI American Holdings, Inc., Kronos, Inc. and Kronos
Louisiana, Inc. - incorporated by reference to Exhibit 10.10 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.23 Form of Director's Indemnity Agreement between NL and the independent
members of the Board of Directors of NL - incorporated by reference to
Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1987.
10.24* 1989 Long Term Performance Incentive Plan of NL Industries, Inc. -
incorporated by reference to Exhibit B to the Registrant's Proxy
Statement on Schedule 14A for the annual meeting of shareholders held
on May 8, 1996.
10.25* NL Industries, Inc. Variable Compensation Plan - incorporated by
reference to Exhibit B to the Registrant's Proxy Statement on Schedule
14A for the annual meeting of shareholders held on May 9, 2001.
10.26* NL Industries, Inc. 1992 Non-Employee Director Stock Option Plan, as
adopted by the Board of Directors on February 13, 1992 - incorporated
by reference to Appendix A to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held April 30,
1992.
10.27* NL Industries, Inc. 1998 Long-Term Incentive Plan - incorporated by
reference to Appendix A to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held on May 6,
1998.
10.28* Form of Kronos Worldwide, Inc. 2003 Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.4 to the Kronos Worldwide,
Inc. Registration Statement on Form 10 (File No. 001-31763).
10.29* Amended and Restated Supplemental Executive Retirement Plan for
Executives and Officers of NL Industries, Inc. effective as of May 1,
2001 - incorporated by reference to Exhibit 10.30 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2001.
10.30 Insurance Sharing Agreement, effective January 1, 1990, by and
between the Registrant, NL Insurance, Ltd. (an indirect subsidiary of
Tremont Corporation) and Baroid Corporation - incorporated by
reference to Exhibit 10.20 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1991.
10.31 Amended Tax Agreement among NL Industries, Inc., Valhi, Inc. and
Contran Corporation effective November 30, 2004 - incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report on Form
8-K as of November 30, 2004.
10.32 Intercorporate Services Agreement by and between Contran Corporation
and the Registrant effective as of January 1, 2004 - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2004.
10.33 Intercorporate Services Agreement by and between Contran Corporation
and Kronos Worldwide, Inc. - incorporated by reference to Exhibit 10.1
to the Kronos Worldwide, Inc. Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004.
10.34 Intercorporate Services Agreement between CompX International Inc.
and Contran Corporation effective as of January 1, 2004 - incorporated
by reference to Exhibit 10.2 to the CompX International Inc. Annual
Report on Form 10-K for the year ended December 31, 2004.
10.35 Revolving Loan Note dated May 4, 2001 with Harold C. Simmons Family
Trust No. 2 and EMS Financial, Inc. - incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001.
10.36 Security Agreement dated May 4, 2001 by and between Harold C. Simmons
Family Trust No. 2 and EMS Financial, Inc. - incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001.
10.37 Revolving Loan Note Agreement dated October 22, 2002 with Tremont
Corporation as Maker and NL Industries, Inc. as Payee - incorporated
by reference to Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002.
10.38 Security Agreement dated October 22, 2002 by and between Tremont
Corporation and NL Industries, Inc. - incorporated by reference to
Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002.
10.39 Purchase Agreement dated January 4, 2002 by and among Kronos, Inc. as
the Purchaser, and Big Bend Holdings LLC and Contran Insurance
Holdings, Inc., as Sellers regarding the sale and purchase of EWI RE,
Inc. and EWI RE, Ltd. - incorporated by reference to Exhibit 10.40 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001.
10.40 Form of Tax Agreement between Valhi, Inc. and Kronos Worldwide, Inc -
incorporated by reference to Exhibit 10.1 to the Kronos Worldwide,
Inc. Registration Statement on Form 10 (File No. 001-31763).
10.41 Amendment dated August 11, 2003 to the Contract on Supplies and
Services among Bayer AG, Kronos Titan-GmbH & Co. OHG and Kronos
International (English translation of German language document) -
incorporated by reference to Exhibit 10.32 to the Kronos Worldwide,
Inc. Registration Statement on Form 10 (File No. 001-31763).
10.42 Insurance sharing agreement dated October 30, 2003 by and among CompX
International Inc., Contran Corporation, Keystone Consolidated
Industries, Inc., Kronos Worldwide, Inc., Titanium Metals Corp.,
Valhi, Inc. and the Registrant - incorporated by reference to Exhibit
10.48 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2003.
10.43* Consulting Agreement dated July 23, 2003 between J. Landis Martin
and NL Industries, Inc. - incorporated by reference to Exhibit 10.49
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003.
10.44* Summary of Consulting Arrangement beginning August 1, 2003, as
amended between Lawrence A. Wigdor and Kronos Worldwide, Inc. -
incorporated by reference to Exhibit 10.2 to the Kronos Worldwide,
Inc. Quarterly Report on Form 10-Q for the period ended March 31,
2004.
10.45* Separation Agreement dated September 3, 2003, as amended, between
David B. Garten and NL Industries, Inc. - incorporated by reference to
Exhibit 10.51 to the Registrant's Annual Report on Form 10-K for the
year ended December 30, 2003.
10.46* Separation Agreement dated July 16, 2003 between NL Industries, Inc.
and Robert D. Hardy - incorporated by reference to Exhibit 10.52 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003.
10.47 First Amendment Agreement, dated September 3, 2004, Relating to a
Facility Agreement dated June 25, 2002 among Kronos Titan GmbH, Kronos
Europe S.A./N.V., Kronos Titan AS and Titania A/S, as borrowers,
Kronos Titan GmbH, Kronos Europe S.A./N.V. and Kronos Norge AS, as
guarantors, Kronos Denmark ApS, as security provider, with Deutsche
Bank Luxembourg S.A., acting as agent - incorporated by reference to
Exhibit 10.8 to the Registration Statement on Form S-1 of Kronos
Worldwide, Inc. (File No. 333-119639).
10.48 Stock Purchase Agreement dated September 24, 2004 between Valhi, Inc.
and Valcor, Inc., as sellers, and NL Industries, Inc. as purchaser -
incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K of the Registrant dated September 24, 2004.
10.49 Promissory Note dated September 24, 2004 in the original principal
amount of $31,422,500.00 payable to the order of NL Industries, Inc.
and executed by Kronos Worldwide, Inc. - incorporated by reference to
Exhibit 10.2 to the Current Report on Form 8-K of the Registrant dated
September 24, 2004.
10.50 Promissory Note dated September 24, 2004 in the original principal
amount of $162,500,000.00 payable to the order of Valcor, Inc. and
executed by Kronos Worldwide, Inc. - incorporated by reference to
Exhibit 99.1 to the Current Report on Form 8-K of the Registrant dated
September 24, 2004.
10.51 Promissory Note dated September 24, 2004 in the original principal
amount of $6,077,500.00 payable to the order of Valhi, Inc. and
executed by Kronos Worldwide, Inc. - incorporated by reference to
Exhibit 99.2 to the Current Report on Form 8-K of the Registrant dated
September 24, 2004.
10.52 Subscription agreement executed on October 5, 2004 but effective as
of October 1, 2004 among NL Industries, Inc., TIMET Finance Management
Company and CompX Group, Inc. - incorporated by reference to Exhibit
99.1 to the Current Report on Form 8-K of the Registrant dated October
5, 2004.
10.53 Voting agreement executed on October 5, 2004 but effective as of
October 1, 2004 among NL Industries, Inc., TIMET Finance Management
Company and CompX Group, Inc. - incorporated by reference to Exhibit
99.2 to the Current Report on Form 8-K of the Registrant dated October
5, 2004.
10.54 Subscription Agreement executed on October 5, 2004 but effective as
of October 1, 2004 among NL Industries, Inc., TIMET Finance Management
Company and CompX Group, Inc. - incorporated by reference to Exhibit
99.1 to the Registrant's Current Report on Form 8-K as of October 5,
2004. (Not all of the exhibits to this Exhibit 10.60 have been filed;
upon request, the Registrant will furnish supplementally to the
Securities and Exchange Commission a copy of the omitted exhibits.)
10.55 Voting Agreement executed on October 5, 2004 but effective as of
October 1, 2004 among NL Industries, Inc., TIMET Finance Management
Company and CompX Group, Inc. - incorporated by reference to Exhibit
99.2 to the Registrant's Current Report on Form 8-K as of October 5,
2004.
10.56 Certificate of Incorporation of CompX Group, Inc. - incorporated by
reference to Exhibit 99.3 to the Registrant's Current Report on Form
8-K as of October 5, 2004.
10.57 Tax Agreement executed on October 5, 2004 but effective as of October
1, 2004 among NL Industries, Inc., Contran Corporation and CompX
International Inc. - incorporated by reference to Exhibit 99.4 to the
Registrant's Current Report on Form 8-K as of October 5, 2004.
10.58 Intercorporate Services Agreement between CompX International Inc.
and Contran Corporation effective as of January 1, 2003 - incorporated
by reference to Exhibit 10.1 to the CompX International Inc. Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003 (File No.
1-13905).
10.59* CompX International Inc. 1997 Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.2 to the CompX International
Inc. Registration Statement on Form S-1 (File No. 1-13905).
10.60 Tax Sharing Agreement among CompX International Inc., Valcor, Inc.
and Valhi, Inc. dated as of January 2, 1998 - incorporated by
reference to Exhibit 10.4 to the Registration Statement of CompX
International Inc. on Form S-1 (File No. 1-13905).
21.1 *** Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP with respect to NL's
consolidated financial statements.
23.2 *** Consent of PricewaterhouseCoopers LLP with respect to Kronos'
consolidated financial statements.
31.1 Certification
31.2 Certification
32.1 Certification
99.1*** Consolidated financial statements of Kronos Worldwide, Inc. -
incorporated by reference to Kronos' Annual Report on Form 10-K (File
No. 1-31763) for the year ended December 31, 2004.
All documents in the Exhibit Index above that have been incorporated by
reference were previously filed by the Registrant under SEC File Number 1-640.
* Management contract, compensatory plan or arrangement.
** Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
*** Previously filed.
*** Previously filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NL Industries, Inc.
(Registrant)
By:/s/Harold C. Simmons
------------------------
Harold C. Simmons
December 23, 2005
(Chairman of the Board
and Chief Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Harold C. Simmons /s/ Steven L. Watson
------------------------------------ ------------------------------------
Harold C. Simmons, December 23, 2005 Steven L. Watson, December 23, 2005
(Chairman of the Board and Chief (Director)
Executive Officer)
/s/ Thomas P. Stafford /s/ Glenn R. Simmons
------------------------------------ ------------------------------------
Thomas P. Stafford, December 23, 2005 Glenn R. Simmons, December 23, 2005
(Director) (Director)
/s/ C. H. Moore, Jr. /s/ Gregory M. Swalwell
------------------------------------ ------------------------------------
C. H. Moore, Jr., December 23, 2005 Gregory M. Swalwell, December 23, 2005
(Director) (Vice President, Chief Financial
Officer, Principal Financial Officer)
/s/ Terry N. Worrell /s/ James W. Brown
------------------------------------ ------------------------------------
Terry N. Worrell, December 23, 2005 James W. Brown, December 23, 2005
(Director) (Vice President and Controller
Principal Accounting Officer)
NL Industries, Inc.
Annual Report on Form 10-K/A
Items 8, 15(a) and 15(d)
Index of Financial Statements and Schedules
Financial Statements Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets - December 31, 2003 (restated);
December 31, 2004 (restated) F-5
Consolidated Statements of Operations -
Year ended December 31, 2002 (restated);
Year ended December 31, 2003 (restated);
Year ended December 31, 2004 (restated) F-7
Consolidated Statements of Comprehensive Income -
Year ended December 31, 2002 (restated);
Year ended December 31, 2003 (restated);
Year ended December 31, 2004 (restated) F-9
Consolidated Statements of Stockholders' Equity -
Year ended December 31, 2002 (restated);
Year ended December 31, 2003 (restated);
Year ended December 31, 2004 (restated) F-10
Consolidated Statements of Cash Flows -
Year ended December 31, 2002 (restated);
Year ended December 31, 2003 (restated);
Year ended December 31, 2004 (restated) F-11
Notes to Consolidated Financial Statements F-14
Financial Statement Schedules
Report of Independent Registered Public Accounting Firm S-1
Schedule I - Condensed Financial Information of Registrant (Restated) S-2
Schedule II - Valuation and Qualifying Accounts S-7
Schedules III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of NL Industries, Inc.:
We have completed an integrated audit of NL Industries, Inc.'s 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2002 and 2003 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of NL Industries, Inc. and its subsidiaries at December 31, 2003 and
2004, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the
Company has restated its consolidated balance sheets at December 31, 2003 and
2004, and its 2002, 2003, and 2004 consolidated financial statements.
Internal control over financial reporting
Also, we have audited management's assessment, included in Management's
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that the Company did not maintain effective internal control over financial
reporting as of December 31, 2004 because the Company did not maintain effective
controls over the accounting for income taxes, because, (a) the Company did not
have effective controls over the consideration of the effect of subsequent
events on certain income tax attributes and related deferred income tax asset
valuation allowances in the preparation of its consolidated financial
statements, and (b) did not have adequate personnel with sufficient knowledge of
income tax accounting and reporting, based on the criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express opinions on management's assessment
and on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company, (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses have been identified and included
in management's assessment as of December 31, 2004:
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 weakness in internal control over financial reporting
as of December 31, 2004:
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
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 the Company's consolidated financial statements or interim
financial information for the interim periods ended September 30, 2003,
December 31, 2003, March 31, 2004, June 30, 2004, September 30, 2004 and
December 31, 2004. Additionally, this control deficiency could result in a
misstatement of the aforementioned accounts that would result in a material
misstatement to the Company's annual or interim consolidated financial
statements that would not be prevented or detected.
Management of the Company determined that each of these control
deficiencies constitutes a material weakness.
These material weaknesses were considered in evaluating the nature, timing
and extent of audit tests applied to our audit of the 2004 consolidated
financial statements, and our opinion regarding the effectiveness of the
Company's internal control over financial reporting does not affect our opinion
on those consolidated financial statements.
As described in Management's Report on Internal Control Over Financial
Reporting, management has excluded CompX International Inc. from its assessment
of internal control over financial reporting because it was acquired in a
transaction accounted for as a transfer of net assets among entities under
common control during 2004. We have also excluded CompX from our audit of
internal control over financial reporting. CompX is a majority owned subsidiary
of the Company whose total assets, total sales and net assets represent 31%, 25%
and 39%, respectively, of the related consolidated financial statement amounts
as of and for the year ended December 31, 2004.
In our opinion, management's assessment that NL Industries, Inc. did not
maintain effective internal control over financial reporting as of December 31,
2004 is fairly stated, in all material respects, based on criteria established
in Internal Control - Integrated Framework issued by the COSO. Also, in our
opinion, because of the effect of the material weaknesses described above on the
achievement of the objectives of the control criteria, the Company did not
maintain effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the COSO.
Management of the Company and we previously concluded that the Company did
not maintain effective internal control over financial reporting as of December
31, 2004 because of the material weakness described in (a) above, identified in
connection with the Original Restatement. In connection with the Current
Restatement of the Company's consolidated financial statements described in Note
1 to the consolidated financial statements, management has determined that the
material weakness described in (b) above also existed as of December 31, 2004.
Accordingly, Management's Report on Internal Control Over Financial Reporting
and our opinion on the effectiveness of internal control over financial
reporting have been restated to include this additional material weakness.
PricewaterhouseCoopers LLP
Dallas, Texas
March 30, 2005, except for the Original Restatement discussed in Note 1 to
the consolidated financial statements and the matter related to the Original
Restatement discussed in the penultimate paragraph of Management's Report on
Internal Control Over Financial Reporting as to which date is May 31, 2005, and
except for the Current Restatement discussed in Note 1 to the consolidated
financial statements and the matter related to the Current Restatement discussed
in the penultimate paragraph of Management's Report on Internal Control Over
Financial Reporting as to which date is December 23, 2005
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2004
(In thousands, except per share data)
ASSETS
2003 2004
------------ -----------
(Restated) (Restated)
Current assets:
Cash and cash equivalents $ 89,525 $ 99,185
Restricted cash and cash equivalents 19,029 7,810
Restricted marketable debt securities 6,147 9,446
Accounts and other receivables 182,557 24,302
Refundable income taxes 37,712 32
Receivable from affiliates 361 1,681
Inventories 292,337 28,781
Prepaid expenses 7,097 1,332
Deferred income taxes 12,718 13,604
---------- ----------
Total current assets 647,483 186,173
---------- ----------
Other assets:
Marketable equity securities 70,487 75,793
Restricted marketable debt securities 6,870 3,848
Investment in Kronos Worldwide, Inc. - 175,578
Investment in TiO2 manufacturing joint venture 129,011 -
Receivable from affiliate 14,000 10,000
Deferred income taxes 7,033 545
Goodwill 52,715 20,772
Other assets 30,018 3,715
---------- ----------
Total other assets 310,134 290,251
---------- ----------
Property and equipment:
Land 37,727 5,356
Buildings 208,077 26,877
Equipment 886,846 127,044
Mining properties 63,701 -
Construction in progress 10,302 2,431
---------- ----------
1,206,653 161,708
Less accumulated depreciation 687,725 86,490
---------- ----------
Net property and equipment 518,928 75,218
---------- ----------
$1,476,545 $ 551,642
========== ==========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2003 and 2004
(In thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2003 2004
------------ -----------
(Restated) (Restated)
Current liabilities:
Current maturities of long-term debt $ 288 $ 42
Accounts payable 111,777 14,649
Accrued liabilities 96,539 23,134
Accrued environmental costs 19,627 16,570
Payable to affiliates 138,871 391
Income taxes 12,726 3,661
Deferred income taxes 3,941 23,842
---------- ----------
Total current liabilities 383,769 82,289
---------- ----------
Noncurrent liabilities:
Long-term debt 382,451 85
Accrued pension costs 81,180 7,968
Accrued postretirement benefits cost 23,411 10,572
Accrued environmental costs 57,854 51,247
Deferred income taxes 265,656 103,420
Other 19,474 4,028
---------- ----------
Total noncurrent liabilities 830,026 177,320
---------- ----------
Minority interest 135,215 58,404
---------- ----------
Stockholders' equity:
Preferred stock, no par value; 5,000 shares
authorized; none issued - -
Common stock, $.125 par value; 150,000 shares
authorized; 66,845 and 48,440 shares issued 8,355 6,054
Additional paid-in capital 719,768 369,728
Retained earnings - -
Accumulated other comprehensive income:
Marketable securities 23,323 26,783
Currency translation (152,623) (135,729)
Pension liabilities (36,846) (33,207)
Treasury stock, at cost - 19,054 and nil shares (434,442) -
---------- ----------
Total stockholders' equity 127,535 233,629
---------- ----------
$1,476,545 $ 551,642
---------- ----------
Commitments and contingencies (Notes 12, 15 and 19)
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2002, 2003 and 2004
(In thousands, except per share data)
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
Net sales $1,041,860 $1,182,143 $ 741,687
Cost of sales 809,422 882,114 572,541
---------- ---------- ----------
Gross margin 232,438 300,029 169,146
Selling, general and administrative expense 130,629 146,043 94,346
Other operating income (expense):
Currency transaction gains (losses), net (1,274) (8,289) 741
Disposition of property and equipment (1,818) 9,845 (2)
Noncompete agreement income 4,000 333 -
Legal settlement gains, net 5,225 823 552
Other income 377 436 6,953
Corporate expense (37,860) (57,430) (17,094)
---------- ---------- ----------
Income from operations 70,459 99,704 65,950
Equity in earnings of Kronos Worldwide, Inc. - - 9,613
Other income (expense):
Currency transaction gain 6,271 - -
Trade interest income 1,912 932 493
Interest and dividend income from affiliates 3,775 3,319 7,986
Other interest income 3,374 1,351 1,303
Securities transactions, net (105) 2,402 2,113
Interest expense (31,638) (34,303) (18,305)
---------- ---------- ----------
Income from continuing operations before
income taxes and minority interest 54,048 73,405 69,153
Provision for income taxes (benefit) 13,333 87,854 (239,704)
Minority interest 1,563 3,858 149,596
---------- ---------- ----------
Income (loss) from continuing operations 39,152 (18,307) 159,261
Discontinued operations (206) (2,874) 3,552
---------- ---------- ----------
Net income (loss) $ 38,946 $ (21,181) $ 162,813
========== ========== ==========
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Years ended December 31, 2002, 2003 and 2004
(In thousands, except per share data)
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
Basic earnings (loss) per share:
Income (loss) from continuing operations $ .80 $ (.38) $ 3.30
Discontinued operations - (.06) .07
---------- ---------- ----------
Net income (loss) $ .80 $ (.44) $ 3.37
========== ========== ==========
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ .80 $ (.38) $ 3.29
Discontinued operations - (.06) .07
---------- ---------- ----------
Net income (loss) $ .80 $ (.44) $ 3.36
========== ========== ==========
Weighted-average shares used in the calculation
of net income per share:
Basic 48,530 47,721 48,333
Dilutive impact of stock options 82 74 86
---------- ---------- ----------
Diluted 48,612 47,795 48,419
========== ========== ==========
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
Net income (loss) $ 38,946 $ (21,181) $ 162,813
---------- ---------- ----------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment:
Unrealized holding gains (losses)
arising during the period (2,454) 18,901 3,460
Reclassification for realized net gain
(loss) included in net income - (1,474) -
(2,454) 17,427 3,460
Minimum pension liabilities adjustment (15,503) (14,737) 3,639
Currency translation adjustment 40,229 22,491 16,894
---------- ---------- ----------
Total other comprehensive income 22,272 25,181 23,993
---------- ---------- ----------
Comprehensive income $ 61,218 $ 4,000 $ 186,806
========== ========== ==========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES , INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2002, 2003 and 2004
(In thousands, except per share data)
Accumulated other
comprehensive income (loss)
Additional -----------------------------------
Common paid-in Retained Marketable Currency Pension Treasury
stock capital earnings securities translation liabilities stock Total
------- ----------- -------- ---------- ----------- ----------- --------- ---------
(Restated) (Restated) (Restated) (Restated) (Restated)
Balance at December 31, 2001,
as originally reported $8,355 $ 784,084 $ 301,913 $ 8,350 $ (215,343) $ (6,352) $(415,380) $465,627
Adjustment to reflect prior
period restatements - - 19,631 - - (254) - 19,377
Balance at December 31, 2001 (Restated) 8,355 784,084 321,544 8,350 (215,343) (6,606) (415,380) 485,004
Net income (Restated) - - 38,946 - - - - 38,946
Other comprehensive loss,
net of tax (Restated) - - - (2,454) 40,229 (15,503) - 22,272
Common dividends declared -
$3.30 per share - - (157,978) - - - - (157,978)
Tax benefit of stock options exercised - 222 - - - - - 222
Treasury stock:
Acquired - - - - - - (21,254) (21,254)
Reissued - - - - - - 454 454
Other capital transactions
with affiliates - - (4,745) - - - - (4,745)
------ --------- --------- ------- ---------- ---------- --------- ---------
Balance at December 31, 2002 (Restated) 8,355 784,306 197,767 5,896 (175,114) (22,109) (436,180) 362,921
Net income (Restated) - - (21,181) - - - - (21,181)
Other comprehensive income (loss),
net of tax (Restated) - - - 17,427 22,491 (14,737) - 25,181
Distribution of 48.8% of Kronos
Worldwide, Inc. - - (88,532) - - - - (88,532)
Income tax on distribution (Restated) - (64,538) (48,664) - - - - (113,202)
Common dividends declared -
$.80 per share - - (38,183) - - - - (38,183)
Treasury stock - reissued - - - - - 1,738 1,738
Other capital transactions
with affiliates - - (1,207) - - - - (1,207)
------ --------- --------- ------- ---------- ---------- --------- ---------
Balance at December 31, 2003 (Restated) 8,355 719,768 - 23,323 (152,623) (36,846) (434,442) 127,535
Net income (Restated) - - 162,813 - - - - 162,813
Other comprehensive income,
net of tax (Restated) - - - 3,460 16,894 3,639 - 23,993
Distribution of shares of Kronos
Worldwide, Inc. - - (8,741) - - - - (8,741)
Income tax on distribution (Restated) - (52,464) (34,765) - - - - (87,229)
Settlement of tax liability using
shares of Kronos Woldwide, Inc.
common stock with a net book
value in excess of the amount
of tax liability settled (Restated) - 174,486 - - - - - 174,486
Issuance of common stock 6 909 - - - - - 915
Acquisition of 10,374 shares of CompX
International Inc. - (102,963) (65,615) - - - - (168,578)
Treasury stock:
Reissued - - - - - - 8,354 8,354
Retired (Restated) (2,307) (370,089) (53,692) - - - 426,088 -
Other - 81 - - - - - 81
------ --------- --------- -------- ---------- ---------- --------- ---------
Balance at December 31, 2004 (Restated)$6,054 $ 369,728 $ - $26,783 $ (135,729) $ (33,207) $ - $233,629
====== ========= --------- ------- ---------- ---------- --------- ---------
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
Cash flows from operating activities:
Net income (loss) $ 38,946 $ (21,181) $162,813
Depreciation and amortization 46,225 54,875 36,402
Goodwill impairment - - 6,500
Noncash interest expense 1,768 2,197 1,222
Deferred income taxes:
Continuing operations (1,066) 91,888 (265,062)
Discontinued operations (222) (2,590) (3,691)
Minority interest:
Continuing operations 1,563 3,858 149,596
Discontinued operations (101) (1,414) (3,944)
Net losses (gains) from:
Securities transactions 105 (2,402) (2,113)
Disposition of property and equipment 625 (9,845) 2
Pension cost, net (2,316) (5,478) 244
Other postretirement benefits, net (3,385) (3,468) (2,090)
Equity in Kronos Worldwide, Inc. - - (9,613)
Distributions from Kronos Worldwide, Inc. - - 10,731
Distributions from TiO2 manufacturing
joint venture, net 7,950 875 8,300
Other, net (1,158) 1,053 2,254
Change in assets and liabilities:
Accounts and other receivable 6,089 2,541 (44,994)
Inventories 45,301 (20,938) 50,062
Prepaid expenses (545) 3,186 1,769
Accounts payable and accrued liabilities (35,108) (9,732) (31,110)
Income taxes (475) (25,726) 34,076
Accounts with affiliates 3,690 34,138 7,958
Accrued environmental costs 8,913 24,137 (9,665)
Other noncurrent assets and liabilities, net (2,052) (1,091) (6,916)
---------- ---------- ----------
Net cash provided by operating activities 114,747 114,883 92,731
---------- ---------- ----------
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
Cash flows from investing activities:
Capital expenditures $ (45,303) $ (44,262) $ (16,209)
Collection of loans to affiliates 14,650 4,000 35,423
Acquisition of business (9,149) - -
Change in restricted cash equivalents and restricted
marketable debt securities, net (960) (654) 10,367
Proceeds from disposition of property and equipment 873 12,801 2,222
Proceeds from sales of securities - - 2,745
Other, net 32 671 -
---------- ---------- ----------
Net cash provided (used) by investing activities (39,857) (27,444) 34,548
---------- ---------- ----------
Cash flows from financing activities:
Indebtedness:
Borrowings 336,768 17,106 102,225
Principal payments (297,864) (52,012) (128,091)
Deferred financing costs paid (10,706) - (28)
Cash dividends paid (157,978) (38,183) -
Treasury stock:
Purchased (21,254) - -
Reissued 454 1,738 -
Proceeds from issuance of stock:
NL common stock - - 9,201
CompX common stock 120 - 617
Capital transactions with affiliates (4,745) (1,207) -
Distributions to minority interests (2,379) (606) (12,635)
Other, net - (426) -
---------- ---------- ----------
Net cash used by financing activities (157,584) (73,590) (28,711)
---------- ---------- ----------
Net increase (decrease) $ (82,694) $ 13,849 $ 98,568
========== ========== ==========
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
Cash and cash equivalents-net change from:
Operating, investing and financing activities $ (82,694) $ 13,849 $ 98,568
Currency translation 3,650 5,178 (474)
Kronos cash balance at June 30, 2004 - - (88,434)
Acquisition of business 196 - -
---------- ---------- ----------
(78,848) 19,027 9,660
Balance at beginning of year 149,346 70,498 89,525
---------- ---------- ----------
Balance at end of year $ 70,498 $ 89,525 $ 99,185
========== ========== ==========
Supplemental disclosures:
Cash paid (received) for:
Interest $ 34,773 $ 30,000 $ 17,119
Income taxes 12,503 (1,848) (17,000)
Acquisition of business - net assets consolidated
Cash and cash equivalents $ 196 $ - $ -
Restricted cash 2,685 - -
Goodwill 6,406 - -
Other intangible assets 2,601 - -
Other noncash assets 1,259 - -
Liabilities (3,998) - -
---------- ---------- ----------
Cash paid $ 9,149 $ - $ -
========== ========== ==========
Net assets of Kronos Worldwide, Inc. deconsolidated as of July
1, 2004:
Cash and cash equivalents $ 88,434
Accounts and other receivables 200,845
Inventories 209,816
Other current assets 9,344
Investment in TiO2 manufacturing joint venture 120,711
Net property and equipment 413,171
Other assets 209,105
Current liabilities (156,701)
Long-term debt (346,682)
Note payable to affiliates (200,000)
Accrued pension costs (66,227)
Accrued postretirement benefits costs (10,677)
Deferred income taxes (50,730)
Other liabilities (13,408)
Minority interest (201,842)
----------
Net assets $ 205,159
==========
See accompanying notes to consolidated financial statements.
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Restatements, organization and basis of presentation:
Restatement of financial statements
Current restatement
On December 21, 2005, the Company and its audit committee concluded that
the Company would file this Annual Report on Form 10-K/A for the year ended
December 31, 2004 to restate the Company's consolidated balance sheets as of
December 31, 2003 and 2004, and the Company's consolidated statements of income,
comprehensive income, cash flows and stockholders' equity for each of the three
years in the period ended December 31, 2004.
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.
Accordingly, 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 $1.7
million, or $.03 per diluted share, in 2002, by $85.7 million, or
$1.79 per diluted share, in 2003 and by $51.8 million, or $1.07 per
diluted share, in 2004;
o its provision for deferred income taxes included in the determination
of total other comprehensive income related to foreign currency
translation and pension liabilities was misstated by an aggregate of
$408,000 in 2002, by $25,000 in 2003 and by $1.5 million in 2004;
o its provision for income taxes accounted for as a direct reduction to
stockholders' equity was misstated by $90.7 million in 2003 and by
$26.6 million in 2004; 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 $19.4 million as of December 31,
2001 and its changes in stockholders' equity was misstated by $174.5
million in 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, 2003 and 2004, and selected consolidated statements of income,
comprehensive income, stockholders' equity and cash flow data for each of the
three years in the period ended December 31, 2004, 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, 2003
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
(In thousands)
Selected balance sheet items:
Current payable to affiliates $ 19,537 $ 119,334 $ 138,871
========= ========= ==========
Total current liabilities $ 264,435 $ 119,334 $ 383,769
========= ========= ==========
Noncurrent deferred income taxes: $ 229,336 $ 36,320 $ 265,656
========= ========= ==========
Total noncurrent liabilities $ 793,706 $ 36,320 $ 830,026
========= ========= ==========
Stockholders' equity:
Common stock $ 8,355 $ - $ 8,355
Additional paid-in capital 784,306 (64,538) 719,768
Retained earnings 90,479 (90,479) -
Accumulated other comprehensive
income (loss)
Marketable securities 23,323 - 23,323
Currency translation (152,623) - (152,623)
Pension liabilities (36,209) (637) (36,846)
Treasury stock (434,442) - (434,442)
--------- --------- ----------
Total stockholders' equity $ 283,189 $(155,654) $ 127,535
========= ========= ==========
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
========= ========= ==========
Year ended Year ended
December 31, 2002 December 31, 2003
------------------------------------------- ------------------------------------------
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 $ 54,048 $ - $ 54,048 $ 73,405 $ - $ 73,405
Provision for income taxes 15,062 (1,729) 13,333 2,201 85,653 87,854
Minority interest in after tax earnings 1,563 - 1,563 3,858 - 3,858
--------- --------- --------- --------- --------- ---------
Income (loss) from
continuing operations 37,423 1,729 39,152 67,346 (85,653) (18,307)
Discontinued operations (206) - (206) (2,874) - (2,874)
Net income (loss) $ 37,217 $ 1,729 $ 38,946 $ 64,472 $ (85,653) $ (21,181)
Earnings per share:
Basic net income (loss) per share $ .77 $ .03 $ .80 $ 1.35 $ (1.79) $ (.44)
========= ========= ========= ========= ========= =========
Diluted net income (loss) per share $ .77 $ .03 $ .80 $ 1.35 $ (1.79) $ (.44)
========= ========= ========= ========= ========= =========
Weighted average shares used:
Basic 48,530 48,530 47,721 47,721
Diluted 48,612 48,612 47,795 47,795
Year ended
December 31, 2004
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
(In thousands, except per share data)
Selected Statement of Operations data:
Income from continuing operations before
income tax and minority interest $ 69,153 $ - $ 69,153
Provision for income taxes
(benefit) (291,510) 51,806 (239,704)
Minority interest in after tax earnings 149,596 - 149,596
--------- -------- ---------
Income from continuing operations 211,067 (51,806) 159,261
Discontinued operations 3,552 - 3,552
--------- -------- ---------
Net income $ 214,619 $(51,806) $ 162,813
========= ======== =========
Earnings per share:
Basic net income (loss) per share $ 4.44 $ (1.07) $ 3.37
========= ======== =========
Diluted net income (loss) per share $ 4.43 $ (1.07) $ 3.36
========= ======== =========
Weighted average shares used:
Basic 48,333 48,333
Diluted 48,419 48,419
Year ended December 31, 2002
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
(In thousands)
Consolidated other comprehensive income:
Net income $ 37,217 $ 1,729 $ 38,946
========= ======== =========
Other comprehensive income, net of tax:
Marketable securities adjustment (2,454) - (2,454)
Pension liabilities (15,095) (408) (15,503)
Currency translation adjustment 40,229 - 40,229
--------- -------- ---------
Total other comprehensive income 22,680 (408) 22,272
--------- -------- ---------
Comprehensive income (loss) $ 59,897 $ 1,321 $ 61,218
========= ======== =========
Year ended December 31, 2003
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
(In thousands)
Consolidated other comprehensive income:
Net income (loss) $ 64,472 $(85,653) $ (21,181)
========= ======== =========
Other comprehensive income, net of tax:
Marketable securities adjustment 17,427 - 17,427
Pension liabilities (14,762) 25 (14,737)
Currency translation adjustment 22,491 - 22,491
--------- -------- ---------
Total other comprehensive income 25,156 25 25,181
--------- -------- ---------
Comprehensive income (loss) $ 89,628 $(85,628) $ 4,000
========= ======== =========
Year ended December 31, 2004
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
(In thousands)
Consolidated other comprehensive income:
Net income (loss) $ 214,619 $(51,806) $ 162,813
========= ======== =========
Other comprehensive income, net of tax:
Marketable securities adjustment 3,460 - 3,460
Pension liabilities 3,018 621 3,639
Currency translation adjustment 15,975 919 16,894
--------- -------- ---------
Total other comprehensive income 22,453 1,540 23,993
--------- -------- ---------
Comprehensive income (loss) $ 237,072 $(50,266) $ 186,806
========= ======== =========
Total stockholders equity -
year ended December 31, 2002
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
Balance at December 31, 2001 $ 465,627 $ 19,377 $ 485,004
Net income 37,217 1,729 38,946
Other comprehensive income, net 22,680 (408) 22,272
Other, net (183,301) - (183,301)
--------- -------- ---------
Balance at December 31, 2002 $ 342,223 $ 20,698 $ 362,921
========= ======== =========
Total stockholders equity -
year ended December 31, 2003
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
Balance at December 31, 2002 $ 342,223 $ 20,698 $ 362,921
Net income (loss) 64,472 (85,653) (21,181)
Other comprehensive income, net 25,156 25 25,181
Income tax on distribution (22,478) (90,724) (113,202)
Other, net (126,184) - (126,184)
--------- --------- ---------
Balance at December 31, 2003 $ 283,189 $(155,654) $ 127,535
========= ========= =========
Total stockholders equity -
year ended December 31, 2004
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
Balance at December 31, 2003 $ 283,189 $(155,654) $ 127,535
Net income (loss) 214,619 (51,806) 162,813
Other comprehensive income, net 22,453 1,540 23,993
Income tax on distribution (60,633) (26,596) (87,229)
Paid-in capital adjustment - settlement
of tax liability using shares of
Kronos common stock with a GAAP net
book value in excess of the amount of
the tax liability settled - 174,486 174,486
Other, net (167,900) (69) (167,969)
--------- --------- ---------
Balance at December 31, 2004 $ 291,728 $ (58,099) $ 233,629
========= ========= =========
Year ended December 31, 2002
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
Items comprising cash flow from
operating activities:
Net income $ 37,217 $ 1,729 $ 38,946
========= ========= =========
Deferred income taxes from
continuing operations $ 569 $ (1,635) $ (1,066)
========= ========= =========
Accounts with affiliates $ 3,784 $ (94) $ 3,690
========= ========= =========
Net cash provided by operating activities $ 114,747 $ - $ 114,747
========= ========= =========
Year ended December 31, 2003
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
Items comprising cash flow from
operating activities:
Net income (loss) $ 64,472 $ (85,653) $ (21,181)
========= ========= =========
Deferred income taxes from
continuing operations $ 35,861 $ 56,027 $ 91,888
========= ========= =========
Accounts with affiliates $ 4,512 $ 29,626 $ 34,138
========= ========= =========
Net cash provided by operating activities $ 114,883 $ - $ 114,883
========= ========= =========
Year ended December 31, 2004
----------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
Items comprising cash flow from
operating activities:
Net income $ 214,619 $ (51,806) $ 162,813
========= ========= =========
Deferred income taxes from
continuing operations $(288,359) $ 23,297 $(265,062)
========= ========= =========
Accounts with affiliates $ (20,551) $ 28,509 $ 7,958
========= ========= =========
Net cash provided by operating activities $ 92,731 $ - $ 92,731
========= ========= =========
Original restatement
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 December 31, 2004, (i) Valhi and a wholly-owned subsidiary of Valhi held
approximately 83% of NL's outstanding common stock and (ii) 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.
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. The CompX
common stock was purchased from Valhi and Valcor, a wholly-owned subsidiary of
Valhi, at a purchase price of $16.25 per share, or an aggregate of approximately
$168.6 million. The purchase price was paid by NL's transfer to Valhi and Valcor
of $168.6 million of NL's $200 million long-term note receivable from Kronos.
The acquisition was approved by a special committee of NL's board of directors
comprised of directors who were not affiliated with Valhi, and such special
committee retained their own legal and financial advisors who rendered an
opinion to the special committee that the purchase price was fair, from a
financial point of view, to NL. NL's acquisition was accounted for under
accounting principles generally accepted in the United States of America
("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. The excess of the aggregate
$168.6 million principal amount of NL's note receivable Kronos transferred to
Valhi and Valcor over the net carrying value of Valhi's and Valcor's investment
in CompX was accounted for as a reduction of NL's consolidated stockholders'
equity.
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 two quarters of 2004. Certain disclosures contained in these
consolidated financial statements for 2004 related to Kronos' results of
operations and cash flows include amounts related to the first six months of
2004.
Management's estimates. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reporting period. Actual
results may differ from previously-estimated amounts under different assumptions
or conditions.
Principles of consolidation. The consolidated financial statements include
the accounts of NL and its wholly-owned and majority-owned subsidiaries. All
material intercompany accounts and balances have been eliminated. The effect of
decreases in the Company's ownership interest of its consolidated subsidiaries
through the Company's sale of the subsidiary's common stock to third parties are
reflected in net income, with a gain or loss recognized equal to the difference
between the proceeds from such sale and the carrying value of the shares sold.
The effect of other decreases in the Company's ownership interest of its
consolidated subsidiaries, which usually result from the exercise of options
granted by such subsidiaries to purchase their shares of common stock to
employees, is generally not material.
Translation of foreign currencies. Assets and liabilities of subsidiaries
and affiliates whose functional currency is other than the U.S. dollar are
translated at year-end rates of exchange and revenues and expenses are
translated at average exchange rates prevailing during the year. Resulting
translation adjustments are accumulated in stockholders' equity as part of
accumulated other comprehensive income, net of related deferred income taxes and
minority interest. Currency transaction gains and losses are recognized in
income currently. In 2002, a $6.3 million currency transaction gain is
classified as a component of other income (expense) in the accompanying
Consolidated Statement of Income. Such gain related to the extinguishment of
certain intercompany indebtedness of NL. Prior to June 28, 2002, Kronos
International, Inc. ("KII"), a wholly-owned subsidiary of Kronos which conducts
Kronos' operations in Europe, had certain intercompany indebtedness payable to
Kronos, a portion of which was denominated in U.S. dollars, and a portion of
which was denominated in euro. Through June 19, 2002, such intercompany
indebtedness was deemed to be of a long-term nature for which settlement was not
planned or anticipated in the foreseeable future, and in accordance with GAAP,
the foreign currency transaction gains and losses related to such intercompany
indebtedness were not recognized in net income, but instead were reported as
part of accumulated other comprehensive income. On June 19, 2002, when the
purchase agreement was entered into in connection with KII's 2002 issuance of
the KII Senior Secured Notes discussed in Note 12, the expectation that such
intercompany indebtedness was of a long-term nature was no longer applicable, as
KII had stated that it intended to use a portion of the net proceeds of such
offering to repay such intercompany indebtedness owed to Kronos. Accordingly,
from the time period of June 19, 2002 (the date the purchase agreement related
to KII Senior Secured Notes was executed) until June 28, 2002 (the closing date
for the 2002 issuance of the KII Senior Secured Note offering, and the date such
intercompany indebtedness was repaid), the foreign currency transaction gains
and losses related to such intercompany indebtedness during such time period,
which aggregated a net gain of $6.3 million, was recognized in net income in
accordance with GAAP.
Derivatives and hedging activities. Derivatives are recognized as either
assets or liabilities and measured at fair value in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. The accounting for changes in
fair value of derivatives depends upon the intended use of the derivative, and
such changes are recognized either in net income or other comprehensive income.
As permitted by the transition requirements of SFAS No. 133, the Company has
exempted from the scope of SFAS No. 133 all host contracts containing embedded
derivatives that were issued or acquired prior to January 1, 1999.
Cash and cash equivalents. Cash equivalents include bank time deposits and
U.S. Treasury securities purchased under short-term agreements to resell with
original maturities of three months or less.
Restricted cash equivalents and restricted marketable debt securities.
Restricted cash equivalents and restricted marketable debt securities, primarily
invested in U.S. government securities and money market funds that invest
primarily in U.S. government securities, include amounts restricted pursuant to
outstanding letters of credit ($5 million at each of December 31, 2003 and
2004), and at December 31, 2004 also includes $19 million held by special
purpose trusts (2003 - $24 million) formed by NL, the assets of which can only
be used to pay for certain of NL's future environmental remediation and other
environmental expenditures. Such restricted amounts are generally classified as
either a current or noncurrent asset depending on the classification of the
liability to which the restricted amount relates. Additionally, the restricted
marketable debt securities are generally classified as either a current or
noncurrent asset depending upon the maturity date of each such debt security.
Use of such restricted balances does not affect the Company's Consolidated
Statements of Cash Flows. See Note 19.
Marketable securities and securities transactions. Marketable debt and
equity securities are carried at fair value based upon quoted market prices.
Unrealized gains and losses on available-for-sale securities are accumulated in
stockholders' equity as part of accumulated other comprehensive income, net of
related deferred income taxes and minority interest. Realized gains and losses
are based upon the specific identification of the securities sold.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of these accounts.
Investment in Kronos Worldwide, Inc. 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 two quarters of 2004.
Investment in TiO2 manufacturing joint venture. Through June 30, 2004,
Kronos' investment in its 50%-owned manufacturing joint venture was accounted
for by the equity method.
Goodwill and other intangible assets. Goodwill represents the excess of
cost over fair value of individual net assets acquired in business combinations
accounted for by the purchase method. Goodwill is not subject to periodic
amortization. Other intangible assets are amortized by the straight-line method
over their estimated lives. Other intangible assets are stated net of
accumulated amortization, and goodwill and other intangible assets are assessed
for impairment in accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets." See Notes 8, 9 and 21.
Property and equipment and depreciation. Property and equipment are stated
at cost. At December 31, 2003, the Company consolidated the property and
equipment of Kronos, including Kronos mining properties. Mining properties
consist of buildings and equipment used in the Kronos' Norwegian ilmenite mining
operations. Kronos does not own the ilmenite reserves associated with the mine.
Depreciation of property and equipment for financial reporting purposes
(including mining properties) is computed principally by the straight-line
method over the estimated useful lives of ten to 40 years for buildings and
three to 20 years for equipment. Accelerated depreciation methods are used for
income tax purposes, as permitted. Upon sale or retirement of an asset, the
related cost and accumulated depreciation are removed from the accounts and any
gain or loss is recognized in income currently.
Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized. The Company performs
certain planned major maintenance activities during the year, primarily with
respect to the chemicals segment. Repair and maintenance costs estimated to be
incurred in connection with planned major maintenance activities are accrued in
advance and are included in cost of sales. Accrued repair and maintenance costs,
included in other current liabilities and consisting primarily of materials and
supplies, see Note 10, was $6.3 million and nil at December 31, 2003 and 2004,
respectively.
Interest costs related to major long-term capital projects and renewals are
capitalized as a component of construction costs. Interest costs capitalized
related to the Company's consolidated business segments were not significant in
2002, 2003 or 2004.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. Effective January 1, 2002, the Company commenced assessing impairment
of other long-lived assets (such as property and equipment and mining
properties) in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which among other things provided certain
implementation guidance in relation to prior GAAP. See Note 21.
Long-term debt. Amortization of deferred financing costs, included in
interest expense, is computed by the interest method over the term of the
applicable issue.
Employee benefit plans. Accounting and funding policies for retirement and
post retirement benefits other than pensions ("OPEB") plans are described in
Note 16.
Income taxes. The Company and its qualifying subsidiaries are included in
the consolidated U.S. federal tax return of Contran (the "Contran Tax Group").
As a member of the Contran Tax Group, the Company is a party to a tax sharing
agreement (the "Contran Tax Agreement"). The Contran Tax Agreement provides that
the Company computes its provision for U.S. income taxes on a separate-company
basis using the tax elections made by Contran. Kronos is also a member of the
Contran Tax Group. CompX, previously a separate U.S. federal income taxpayer,
became a member of the Contran Tax Group for federal income tax purposes in
October 2004 with the formation of CompX Group, Inc. See Note 2. As a member of
the Contran Tax Group, the Company is jointly and severally liable for the
federal income tax liability of Contran and the other companies included in the
Contran Tax Group for all periods in which the Company is included in the
Contran Tax Group. See Note 19. Pursuant to the Contran Tax Agreement and using
the tax elections made by Contran, the Company generally makes payments to or
receives payments from Valhi in amounts it would have paid to or received from
the U.S. Internal Revenue Service had it not been a member of the Contran Tax
Group. Refunds are limited to amounts previously paid under the Contran Tax
Agreement unless the Company was entitled to a refund from the U.S. Internal
Revenue Service on a separate company basis. Most members of the Contran Tax
Group also file consolidated unitary state income tax returns in qualifying U.S.
jurisdictions. See Note 15. The Company made net cash payments to (or collected
net cash receipts from) Valhi for income taxes of ($2.2) million in 2002, $3.9
million in 2003 and $1.8 million in 2004. See also Note 2 regarding the
Company's payment of certain income taxes to Valhi using shares of Kronos common
stock.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
investments in the Company's subsidiaries and affiliates who would not be
members of a NL consolidated U.S. federal income tax group on an NL separate
company basis and undistributed earnings of foreign subsidiaries which are not
deemed to be permanently reinvested. In this regard, the Company commenced
recognizing deferred income taxes with respect to the excess of the financial
reporting carrying amount over the income tax basis of the Company's investment
in Kronos effective in December 2003 following the Company's distribution of
approximately 48.8% of Kronos' common stock on a pro-rata basis to NL
shareholders. Earnings of foreign subsidiaries deemed to be permanently
reinvested aggregated $653.5 million at December 31, 2003 (related to NL and
Kronos) and $24.4 million at December 31, 2004 (related to CompX). The Company
periodically evaluates its deferred tax assets in the various taxing
jurisdictions in which it operates and adjusts any related valuation allowance
based on the estimate of the amount of such deferred tax assets that the Company
believes does not meet the "more-likely-than-not" recognition criteria.
Environmental remediation costs. 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 December 31, 2003 and 2004, no receivables
for recoveries have been recognized. See Note 19.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed. Shipping terms of products shipped are generally FOB shipping point,
although in some instances shipping terms are FOB destination point (for which
sales are not recognized until the product is received by the customer). Amounts
charged to customers for shipping and handling are included in net sales. Sales
are stated net of price, early payment and distributor discounts and volume
rebates.
Inventories and cost of sales. Inventories are stated at the lower of cost
or market, net of allowance for slow-moving inventories. Inventories are based
on average cost or the first-in, first-out method. Cost of sales includes costs
for materials, packing and finishing, shipping and handling, utilities, salary
and benefits, maintenance and depreciation.
Selling, general and administrative expenses; shipping and handling costs.
Selling, general and administrative expenses include costs related to marketing,
sales, distribution, shipping and handling, research and development, legal,
environmental remediation and administrative functions such as accounting,
treasury and finance, and includes costs for salaries and benefits, travel and
entertainment, promotional materials and professional fees. Shipping and
handling costs of the Company's chemicals segment are included in selling,
general and administrative expense and were $51 million in 2002, $63 million in
2003 and $34 million in 2004. Shipping and handling costs of the Company's
component products segment are not material. Advertising costs are expensed as
incurred and were $2 million in 2002 and $1 million in each of 2003 and 2004.
Research, development and certain sales technical support costs are expensed as
incurred and approximated $6 million in 2002, $7 million in 2003 and $4 million
in 2004.
Corporate expenses. Corporate expenses include environmental, legal and
other costs attributable to formerly owned business units.
Earnings per share. Basic earnings per share of common stock is based upon
the weighted average number of common shares actually outstanding during each
period. Diluted earnings per share of common stock includes the impact of
outstanding dilutive stock options. The weighted average number of outstanding
stock options excluded from the calculation of diluted earnings per share
because their impact would have been antidilutive aggregated approximately
788,000 in 2002 and nil in 2003 and 2004. There were no adjustments to net
income in the computation of the diluted earnings per share amounts.
Stock options. The Company has elected the disclosure alternative
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure," and to account for its stock-based employee compensation
related to stock options in accordance with Accounting Principles Board Opinion
("APBO") No. 25, "Accounting for Stock Issued to Employees," and its various
interpretations. Under APBO No. 25, no compensation cost is generally recognized
for fixed stock options in which the exercise price is not less than the market
price on the grant date. During 2002 and following the Company's cash settlement
of options to purchase NL common stock held by certain individuals, the Company
commenced accounting for its stock options using the variable accounting method
because the Company 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 those
with an exercise price at least equal to the market price on the date of grant)
are accrued as an expense over their vesting period, with subsequent increases
(decreases) in NL's market price resulting in additional compensation expense
(income). Aggregate compensation cost related to NL stock options recognized by
the Company was $3.2 million in 2002, $1.9 million in 2003 and $1.7 million in
2004.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in 2002, 2003 and 2004 if the
Company and its subsidiaries and affiliates had each elected to account for
their respective stock-based employee compensation related to all stock options
in accordance with the fair value-based recognition provisions of SFAS No. 123,
for all awards granted subsequent to January 1, 1995.
Years ended December 31,
--------------------------------------------
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
(In millions, except
per share amounts)
Net income (loss) as reported $ 38.9 $ (21.2) $ 162.8
Adjustments, net of applicable income
tax effects and minority interest:
Stock-based employee compensation expense
determined under APBO No. 25 2.1 1.1 1.1
Stock-based employee compensation expense
determined under SFAS No. 123 (2.5) (1.3) (.2)
------- -------- -------
Pro forma net income (loss) $ 38.5 $ (21.4) $ 163.7
======= ======== =======
Basic earnings (loss) per share:
As reported $ .80 $ (.44) $ 3.37
Pro forma $ .79 $ (.45) $ 3.39
Diluted earnings (loss) per share:
As reported $ .80 $ (.44) $ 3.36
Pro forma $ .79 $ (.45) $ 3.38
The pro forma information required by SFAS No. 123 is based on an
estimation of the fair value of options issued subsequent to January 1, 1995. No
options were granted in 2003 or 2004. The weighted-average fair values of
options granted during 2002 was $5.71 per share. The fair value of employee
stock options were calculated using the Black-Scholes stock option valuation
model with the following weighted average assumptions for grants in 2002: stock
price volatility of 47%; risk-free rate of return of 4%; dividend yield of 5.8%;
and an expected term of 7 years. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period.
Note 2 - Business combinations and related transactions:
CompX International, Inc. As discussed in Note 1, 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.
Effective October 1, 2004, the Company contributed such 10,374,000 shares
of CompX common stock to newly-formed CompX Group in return for a 82.4%
ownership interest in CompX Group. Concurrently, Titanium Metals Corporation
("TIMET"), a less-than-majority owned affiliate of Valhi, contributed shares of
CompX common stock representing approximately 15% of CompX's outstanding common
shares in return for the remaining 17.6% ownership interest in CompX Group. At
that time, CompX Group became the owner of the 83% of CompX that NL and TIMET
had previously owned in the aggregate. These CompX shares are the sole asset of
CompX Group. CompX Group recorded the shares of CompX received from NL at NL's
carryover basis.
Kronos Worldwide, Inc. Prior to December 2003, Kronos 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 NL
shareholders (including Valhi and Tremont LLC) in the form of a pro-rata
dividend. Shareholders of NL received one share of Kronos common stock for every
two shares of NL held. During 2004, NL paid each of its four $.20 per share
regular quarterly dividend in the form of shares of Kronos common stock in which
an aggregate of approximately 2.5% of Kronos' outstanding common stock were
distributed to NL shareholders in the form of pro-rata dividends. In accordance
with GAAP, the carrying amount of such shares of Kronos common stock distributed
were accounted for as a reduction of the Company's retained earnings and
aggregated $88.5 million in 2003 and $8.7 million in 2004.
NL's December 2003 and 2004 quarterly distributions of shares of common
stock of Kronos are 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 on the various dates of distribution and NL's
adjusted tax basis in such stock at such dates of distribution. In accordance
with GAAP, the amount of such current 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 current 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 current income tax included in the determination of net
income aggregated $30.3 million in 2003 and $21.2 million in 2004, while the
amount of such current income tax accounted for as a direct reduction to equity
aggregated $113.2 million in 2003 and $87.2 million in 2004. In accordance with
GAAP, the amount of the deferred income tax recognized by the Company with
respect to Kronos (see Note 1) are adjusted as of the date of each distribution.
With respect to such shares of Kronos distributed to Valhi and Tremont,
effective December 1, 2003, Valhi and NL amended the terms of their tax sharing
agreement to not require NL to pay up to Valhi the tax liability generated from
the distribution of such Kronos shares to Valhi and Tremont, although for
financial reporting purposes the Company was required to recognize such tax
liability. On November 30, 2004, Valhi and NL agreed to further amend the terms
of their tax sharing agreement to provide that NL would now be required to pay
up to Valhi the tax liability generated from the distribution of shares of
Kronos common stock to Valhi and Tremont, including the tax related to such
shares distributed to Valhi and Tremont in December 2003 and the tax related to
the shares distributed to Valhi during all of 2004. In determining to so amend
the terms of the tax sharing agreement, NL and Valhi considered, among other
things, the changed expectation for the generation of taxable income at the NL
level resulting from the inclusion of CompX in NL's consolidated taxable income
effective in the fourth quarter of 2004, as discussed in Note 1. Valhi and NL
further agreed that in lieu of a cash income tax payment, such tax liability
could be paid by NL to Valhi in the form of shares of Kronos common stock held
by NL. Such tax liability related to the shares of Kronos distributed to Valhi
and Tremont in December 2003 and 2004, including the tax liability resulting
from the use of Kronos common stock to settle such liability, aggregated
approximately $227 million. Accordingly, in the fourth quarter of 2004 NL
transferred approximately 5.5 million shares of Kronos common stock to Valhi in
satisfaction of such tax liability and the tax liability generated from the use
of such Kronos shares to settle such tax liability. In agreeing to settle such
tax liability with such 5.5 million shares of Kronos common stock, the Kronos
shares were valued at an agreed-upon price of $41 per share. Kronos' average
closing market price during the months of November and December 2004 was $41.53
and $41.77, respectively. NL also considered the fact that the shares of Kronos
held by non-affiliates are very thinly traded, and consequently an average price
over a period of days mitigates the effect of the thinly-traded nature of
Kronos' common stock. In accordance with GAAP, the excess of the $227 million
tax liability settled by transfer of the 5.5 million shares of Kronos and the
aggregate $52.5 million carrying amount of such shares transferred (or $174.5
million) was recorded as a direct increase in the Company's stockholders' equity
(additional paid-in capital). This aggregate $227 million tax liability has not
been paid by Valhi to Contran, nor has Contran paid such tax liability to the
applicable tax authority, because the related taxable gain is currently deferred
at the Valhi and Contran levels due to Valhi, Tremont and NL all being members
of the Valhi tax group on a separate company basis and of the Contran Tax Group.
Such income tax liability would become payable by Valhi to Contran, and by
Contran to the applicable tax authority, when the shares of Kronos transferred
or distributed by NL to Valhi and Tremont are sold or otherwise transferred
outside the Contran Tax Group or in the event of certain restructuring
transactions involving NL and Valhi.
During the fourth quarter of 2004, NL sold shares of Kronos common stock in
market transactions for an aggregate of $2.7 million, and the Company recognized
a $2.2 million pre-tax gain related to the reduction of its ownership interest
in Kronos related to such sales. See Note 25.
As a result of all of the foregoing transactions, the Company's ownership
of Kronos was reduced to approximately 37% as of December 31, 2004. See Note 7.
At December 31, 2004, Valhi and a wholly-owned subsidiary of Valhi owned an
additional 57% of Kronos' outstanding common stock.
Other. In January 2002, the Company acquired all of the stock and limited
liability company units of EWI RE, Inc. and EWI RE, Ltd. (collectively "EWI"),
respectively, for an aggregate of $9.2 million in cash, including acquisition
costs of $.2 million. An entity controlled by one of Harold C. Simmons'
daughters owned a majority of EWI, and a wholly-owned subsidiary of Contran
owned the remainder of EWI. EWI provides reinsurance brokerage services for
insurance policies of the Company, its joint venture and other affiliates of
Contran as well as external third-party customers. The purchase was approved by
a special committee of the Company's Board of Directors consisting of two of its
directors unrelated to Contran, and the purchase price was negotiated by the
special committee based upon its consideration of relevant factors, including
but not limited to due diligence performed by independent consultants and an
appraisal of EWI conducted by an independent third party selected by the special
committee.
EWI's results of operations and cash flows are included in the Company's
consolidated results of operations and cash flows beginning January 2002. The
aggregate cash purchase price has been allocated to the assets acquired and
liabilities assumed.
Note 3 - Business segment information
% owned at
Business segment Entity December 31, 2004
--------------------- ------------------------ -----------------
Component products CompX International Inc. 68%
Chemicals Kronos Worldwide, Inc. 37%
The Company's ownership of CompX is held directly by CompX Group, Inc. The
Company owns 82.4% of CompX Group, and TIMET 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.
See Note 2.
As a result of the restatement of the Company's consolidated financial
statements to reflect the consolidation of CompX's results of operations, the
Company has, for certain periods presented, more than one operating segment (as
that term is defined in SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. Accordingly, the following information is
presented to comply with the disclosure requirements of SFAS No. 131, including
disclosures with respect to each year in the three-year period ended December
31, 2004.
The Company is organized based on its operating subsidiaries. The Company's
operating segments are defined as components of our consolidated operations
about which separate financial information is available that is regularly
evaluated by the chief operating decision maker in determining how to allocate
resources and in assessing performance. The Company's chief operating decision
maker is Mr. Harold C. Simmons. Each operating segment is separately managed,
and each operating segment represents a strategic business unit offering
different products.
The Company's reportable operating segments are comprised of the component
products business conducted by CompX and, for all periods through June 30, 2004,
the chemicals business conducted by Kronos. As discussed in Note 1, effective
July 1, 2004, the Company ceased to consolidate Kronos and commenced accounting
for its interest in Kronos by the equity method.
CompX produces and sells component products (precision ball-bearing slides,
security products and ergonomic computer support systems) for office furniture,
computer related applications and a variety of other applications. CompX has
production facilities in North America and Asia.
Kronos manufactures and sells titanium dioxide pigments ("TiO2"). TiO2 is
used to impart whiteness, brightness and opacity to a wide variety of products,
including paints, plastics, paper, fibers and ceramics. Kronos has production
facilities located in North America and Europe. Kronos also owns a one-half
interest in a TiO2 production facility located in Louisiana. See Note 7.
The Company evaluates segment performance based on segment operating
income. Segment profit is defined as income from continuing operations before
income taxes, minority interest, extraordinary items, interest expense, certain
nonrecurring items and certain general corporate items. Corporate items excluded
from segment profit include corporate expense, interest and dividend income not
attributable to the component products business and the chemicals business,
litigation settlement gains, securities transaction gains and losses and losses
from the disposal of long-lived assets outside the ordinary course of business.
The accounting policies of the respective business segments are the same as
those described in Note 1.
Interest income included in the calculation of segment profit is not
material. Amortization of deferred financing costs is included in interest
expense. There are no intersegment sales or any significant intersegment
transactions.
Segment assets are comprised of all assets attributable to each reporting
operating segment. The Company's investment in the TiO2 manufacturing joint
venture is included in the chemicals business segment assets. Corporate assets
are not attributable to any operating segment and consist principally of cash
and cash equivalents, restricted cash equivalents, marketable debt and equity
securities and loans to affiliates. Substantially all corporate assets are
attributable to NL.
For geographic information, net sales are attributed to the place of
manufacture (point of origin) and the location of the customer (point of
destination); property and equipment are attributed to their physical location.
At December 31, 2004, the net assets of non-U.S. subsidiaries included in
consolidated net assets approximated $80 million (2003 - $240 million).
Years ended December 31,
--------------------------------------
2002 2003 2004
---- ---- ----
(In millions)
Net sales:
Chemicals $ 875.2 $1,008.2 $ 559.1
Component products 166.7 173.9 182.6
-------- -------- --------
Total net sales $1,041.9 $1,182.1 $ 741.7
======== ======== ========
Segment profit:
Chemicals $ 96.5 $ 137.4 $ 66.4
Component products 4.4 9.0 16.3
Total segment profit 100.9 146.4 82.7
General corporate items:
Interest and dividend income from affiliates 3.8 3.3 8.0
Other interest income 3.3 1.4 1.3
Securities transactions, net (.1) 2.4 2.1
Legal settlement gains, net 5.2 .8 .6
Gain on disposal of fixed assets - 10.4 -
Noncompete agreement income 4.0 .3 -
Currency transaction gain 6.3 - -
Other income .1 .1 .3
General corporate expenses, net (37.9) (57.4) (17.1)
Interest expense (31.6) (34.3) (18.3)
-------- -------- --------
54.0 73.4 59.6
Equity in earnings of Kronos Worldwide, Inc. - - 9.6
-------- -------- --------
Income from continuing operations before
income taxes and minority interest $ 54.0 $ 73.4 $ 69.2
======== ======== ========
Years ended December 31,
--------------------------------------
2002 2003 2004
---- ---- ----
(In millions)
Net sales - point of origin:
United States $ 378.5 $ 404.9 $ 317.5
Germany 404.3 510.1 294.7
Belgium 123.8 150.7 98.8
Norway 111.8 131.5 70.3
Other Europe 89.6 110.4 56.5
Canada 229.2 249.6 157.6
Taiwan 14.7 13.4 9.6
Eliminations (310.0) (388.5) (263.3)
-------- -------- --------
$1,041.9 $1,182.1 $ 741.7
======== ======== ========
Net sales - point of destination:
United States $ 398.0 $ 423.7 $ 294.6
Europe 463.4 574.5 335.3
Canada 82.8 85.5 56.8
Asia and other 97.7 98.4 55.0
-------- -------- --------
$1,041.9 $1,182.1 $ 741.7
======== ======== ========
Years ended December 31,
--------------------------------------
2002 2003 2004
---- ---- ----
(In millions)
Depreciation and amortization:
Chemicals $ 32.2 $ 39.4 $ 21.8
Component products 13.0 14.8 14.2
Corporate 1.0 .7 .4
-------- -------- --------
$ 46.2 $ 54.9 $ 36.4
======== ======== ========
Capital expenditures:
Chemicals $ 32.6 $ 35.3 $ 10.8
Component products 12.7 8.9 5.3
Corporate - .1 .1
-------- -------- --------
$ 45.3 $ 44.3 $ 16.2
======== ======== ========
Years ended December 31,
--------------------------------------
2002 2003 2004
---- ---- ----
(In millions)
Total assets:
Operating segments:
Chemicals $ 988.5 $1,121.9 $ -
Component products 203.1 212.4 169.6
Investment in Kronos Worldwide, Inc. - - 175.6
Corporate and eliminations 124.0 142.2 206.4
-------- -------- -------
$1,315.6 $1,476.5 $ 551.6
======== ======== =======
Net property and equipment:
United States $ 52.6 $ 48.2 $ 42.5
Germany 213.2 252.4 -
Canada 77.8 87.0 19.1
Norway 49.7 50.8 -
Belgium 54.6 64.9 -
Netherlands 10.0 9.6 7.9
Taiwan 5.9 5.7 5.7
Other .2 .3 -
-------- -------- -------
$ 464.0 $ 518.9 $ 75.2
======== ======== =======
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 4 - Accounts and other receivables:
December 31,
--------------------
2003 2004
---- ----
(In thousands)
Trade receivables $ 173,783 $ 24,759
Recoverable VAT and other receivables 12,768 551
Allowance for doubtful accounts (3,994) (1,008)
--------- --------
$ 182,557 $ 24,302
========= ========
Note 5 - Marketable securities:
December 31,
--------------------
2003 2004
---- ----
(In thousands)
Valhi common stock $ 70,450 $ 75,770
Other 37 23
--------- --------
$ 70,487 $ 75,793
========= ========
In February 2003 Valhi completed a series of merger transactions pursuant
to which, among other things, Tremont Group and Tremont both became wholly-owned
subsidiaries of Valhi. Under these merger transactions, (i) Valhi issued 3.5
million shares of its common stock to the Company in return for the Company's
20% ownership interest in Tremont Group and (ii) Valhi issued 3.4 shares of its
common stock (plus cash in lieu of fractional shares) to all Tremont
stockholders (other than Valhi and Tremont Group) in exchange for each share of
Tremont common stock held by such stockholders. The Company received
approximately 27,770 shares of Valhi common stock in the second transaction. The
number of shares of Valhi common stock issued to the Company in exchange for the
Company's 20% ownership interest in Tremont Group was equal to the Company's 20%
pro-rata interest in the shares of Tremont common stock held by Tremont Group,
adjusted for the same 3.4 exchange ratio. The Company reported a pre-tax
securities transaction gain of approximately $2.3 million in the first quarter
of 2003 which represented the difference between the market value of the shares
of Valhi received and the cost basis of the Tremont Group and Tremont shares
exchanged. Following these transactions, the Company owned approximately 4.7
million shares of Valhi's outstanding common stock (approximately 4% of Valhi's
outstanding shares). The Company will continue to account for its shares of
Valhi common stock as available-for-sale marketable equity securities carried at
fair value (based on quoted market prices).
The aggregate cost basis for the Company's investment in Valhi at December
31, 2003 and 2004 was $34.6 million. The Valhi common stock owned by the Company
is subject to the restrictions on resale pursuant to certain provisions of the
Securities and Exchange Commission ("SEC") Rule 144. The shares of Valhi common
stock cannot be voted by the Company under Delaware Corporation Law, but the
Company does receive dividends from Valhi on these shares, when declared and
paid. For financial reporting purposes, Valhi reports its proportional interest
in these shares as treasury stock.
Note 6 - Inventories:
December 31,
--------------------
2003 2004
---- ----
(In thousands)
Raw materials:
Chemicals $ 61,959 $ -
Component products 6,170 8,193
--------- --------
68,129 8,193
--------- --------
In process products:
Chemicals 19,855 -
Component products 10,852 10,827
--------- --------
30,707 10,827
--------- --------
Finished products:
Chemicals 147,270 -
Component products 9,166 9,696
--------- --------
156,436 9,696
--------- --------
Supplies 37,065 65
--------- --------
$ 292,337 $ 28,781
========= ========
Note 7 - Investment in affiliates:
Kronos Worldwide, Inc. At December 31, 2004, the Company held 18.3 million
shares of Kronos with a quoted market price of $40.75 per share, or an aggregate
market value of $744 million. See Note 25.
At December 31, 2004, Kronos reported total assets of $1.4 billion and
stockholders' equity of $470.8 million. Kronos' total assets at December 31,
2004 include current assets of $495.5 million, net property and equipment of
$466.9 million and an investment in a TiO2 manufacturing joint venture of $120.3
million. Kronos' total liabilities at December 31, 2004 include current
liabilities of $212.9 million, long-term debt of $519.4 million, accrued OPEB
and pension costs aggregating $72.6 million and deferred income taxes of $60.1
million.
During the last six months of 2004, Kronos reported net sales of $569.5
million, income from operations of $50.3 million and net income of $20.3
million. Kronos' results of operations for the first six months of 2004, and for
the years ended December 31, 2002 and 2003, are included in the Company's
consolidated results of operations.
TiO2 manufacturing joint venture. Kronos Louisiana, Inc. ("KLA"), a
wholly-owned subsidiary of Kronos, owns a 50% interest in Louisiana Pigment
Company, L.P. ("LPC"). LPC is a manufacturing joint venture that is also
50%-owned by Tioxide Americas Inc. ("Tioxide"), a wholly-owned subsidiary of
Huntsman International Holdings LLC, which through its subsidiaries, is
wholly-owned by Huntsman Holdings LLC. LPC owns and operates a chloride-process
TiO2 plant in Lake Charles, Louisiana.
KLA is required to purchase one-half of the TiO2 produced by LPC. LPC
operates on a break-even basis and, accordingly, the Company reports no equity
in earnings of LPC. Kronos' cost for its share of the TiO2 produced is equal to
its share of LPC's costs. Kronos' share of net costs is reported as cost of
sales as the related TiO2 acquired from LPC is sold. Distributions from LPC,
which generally relate to excess cash generated by LPC from its non-cash
production costs, and contributions to LPC, which generally relate to cash
required by LPC when it builds working capital, are reported as part of cash
generated by operating activities in the Company's Consolidated Statements of
Cash Flows. Such distributions are reported net of any contributions made to LPC
during the periods. Net distributions of $8.0 million in 2002, $.9 million in
2003, and $8.3 million in the first six months of 2004 are stated net of
contributions of $14.2 million in 2002, $13.1 million in 2003 and $8.1 million
in the first half of 2004.
LPC made net cash distributions of $15.9 million in 2002, $1.8 million in
2003 and $16.6 million in the first six months of 2004, equally split between
the partners. Effective July 1, 2004, the Company no longer consolidates the
financial position and results of operations of Kronos and consequently accounts
for Kronos' investment in the TiO2 manufacturing joint venture as part of the
Company's investment in Kronos subsequent to that date.
At December 31, 2003, LPC reported total assets of $284.0 million and
partners' equity of $260.8 million. LPC's total assets at December 31, 2003
include current assets of $57.0 million and property and equipment of $227.0
million. LPC's liabilities at December 31, 2003 include other liabilities of
$23.2 million, comprised primarily of current liabilities. During the first six
months of 2004, LPC reported revenues of $102.0 million (for the years ended
December 31, 2002 and 2003, $186.3 million and $203.0 million, respectively)
with approximately one-half attributable to each partner for each period. LPC
operates on a break-even basis, consequently net income is nil for all periods.
Note 8 - Goodwill:
Substantially all of the goodwill is related to the component products
operating segment and was generated principally from CompX's acquisitions of
certain business units completed prior to 2001. The remaining goodwill resulted
from the acquisition of EWI in January 2002 and totaled approximately $6.4
million in 2002, 2003 and 2004. Changes in the carrying amount of goodwill
related to the components products operating segment during the past three years
is presented in the table below.
Component products
operating segment
------------------
(In millions)
Balance at December 31, 2001 $41.9
Changes in foreign exchange rates 1.8
-----
Balance at December 31, 2002 43.7
Changes in foreign exchange rates 2.6
-----
Balance at December 31, 2003 46.3
Impairment related to discontinued operations (6.5)
Deferred tax adjustment (26.9)
Changes in foreign exchange rates 1.5
-----
Balance at December 31, 2004 $14.4
=====
Upon adoption of SFAS No. 142 effective January 1, 2002 (see Note 21), the
goodwill related to the components product operating segment was assigned to
three reporting units (as that term is defined in SFAS No. 142) within that
operating segment, one consisting of CompX's security products operations, one
consisting of CompX's European operations and one consisting of CompX's Canadian
and Taiwanese operations.
As discussed in Note 1, prior to October 2004 CompX was not a member of the
Contran Tax Group, and the Company provided deferred income taxes with respect
to its investment in CompX. Effective October 2004, CompX became a member of the
Contran Tax Group, and the Company no longer provides such deferred income
taxes. In accordance with GAAP, and as a result of CompX becoming a member of
the Contran Tax Group, a net $26.9 million deferred tax liability, previously
provided with respect to the Company's investment in CompX, were eliminated
through a reduction in goodwill at December 31, 2004.
In December 2004, CompX's board of directors committed to a formal plan to
dispose of CompX's European operations. As a result, the Company recognized a
non-cash charge of approximately $6.5 million in the fourth quarter of 2004,
representing an impairment of goodwill associated with such operations, to
write-down the Company's investment in such operations to its estimated
realizable value based upon the expected net proceeds resulting from the sale of
such operations. See Note 24.
Note 9 - Other noncurrent assets:
December 31,
--------------------
2003 2004
---- ----
(In thousands)
Deferred financing costs $ 10,417 $ -
Unrecognized net pension obligations 13,747 -
Definite-lived customer list intangible asset 1,859 1,487
Patents intangible assets 1,945 1,703
Other 2,050 525
--------- --------
$ 30,018 $ 3,715
========= ========
Definite-lived customer list intangible asset resulted from the acquisition
of EWI in January 2002. See Note 2. The intangible asset is amortized on a
straight-line basis over a period of seven years (approximately four years
remaining at December 31, 2004) with no assumed residual value and is presented
net of accumulated amortization of $743,000 and $1.1 million as of December 31,
2003 and 2004, respectively.
Patents intangible assets, consisting of the estimated fair value of
certain patents acquired in connection with the acquisition of certain business
units by CompX. The patents intangible asset was, and continues to be after
adoption of SFAS No. 142, amortized by the straight-line method over the lives
of such patents (approximately 9 years remaining at December 31, 2004), with no
assumed residual value at the end of the life of the patents. Patents intangible
assets are stated net of accumulated amortization of $1.5 million at December
31, 2003 and $1.7 million at December 31, 2004.
Amortization expense of definite-lived customer list and patents intangible
assets was $612,000 in 2002, $606,000 in 2003 and $603,000 in 2004, and is
expected to be approximately $625,000 in each of 2005 through 2008 and $250,000
in 2009.
Note 10 - Accrued liabilities:
December 31,
--------------------
2003 2004
---- ----
(In thousands)
Employee benefits $ 46,028 $ 14,775
Interest 206 1
Restructuring 3,223 -
Planned major maintenance activities 6,327 -
Other 40,755 8,358
--------- --------
$ 96,539 $ 23,134
========= ========
Note 11 - Other noncurrent liabilities:
December 31,
--------------------
2003 2004
---- ----
(In thousands)
Employee benefits $ 4,849 $ -
Insurance 4,331 2,507
Other 10,294 1,521
--------- --------
$ 19,474 $ 4,028
========= ========
Note 12 - Long-term debt:
December 31,
--------------------
2003 2004
---- ----
(In thousands)
Kronos International, Inc. and subsidiaries:
8.875% Senior Secured Notes $ 356,136 $ -
Other 603 -
--------- --------
356,739 -
--------- --------
CompX International Inc. and subsidiaries:
Revolving bank credit facility 26,000 -
Other - 127
--------- --------
26,000 127
--------- --------
382,739 127
Less current maturities 288 42
--------- --------
$ 382,451 $ 85
========= ========
CompX. At December 31, 2004, CompX has a $47.5 million secured revolving
bank credit facility maturing in January 2006 which bears interest at rates
based on either the prime rate or LIBOR. The facility is collateralized by
substantially all of CompX's U.S. tangible assets as well as a pledge of at
least 65% of the ownership interests in CompX's first-tier foreign subsidiaries.
The facility contains certain covenants and restrictions customary in lending
transactions of this type which, among other things, restricts the ability of
CompX and its subsidiaries to incur debt, incur liens, pay dividends or merge or
consolidate with, or transfer all or substantially all of their assets, to
another entity. In the event of a change of control of CompX, as defined, the
lenders would have the right to accelerate the maturity of the facility. CompX
would also be required under certain conditions to use the net proceeds from the
sale of assets outside the ordinary course of business to reduce outstanding
borrowings under the facility, and such a transaction would also result in a
permanent reduction of the size of the facility. At December 31, 2004, there
were no outstanding draws against the facility and the full amount of the
facility was available for borrowing.
Kronos and its subsidiaries. In July 2004, the Company ceased to
consolidate the financial position of
Kronos. See Note 1.
In June 2002, KII issued at par value euro 285 million principal amount
($280 million when issued) of its 8.875% Senior Secured Notes due 2009. The KII
Senior Secured Notes are collateralized by a pledge of 65% of the common stock
or other ownership interests of certain of KII's first-tier operating
subsidiaries. The KII Senior Secured Notes are issued pursuant to an indenture
which contains a number of covenants and restrictions which, among other things,
restricts the ability of KII and its subsidiaries to incur debt, incur liens,
pay dividends or merge or consolidate with, or sell or transfer all or
substantially all of their assets to, another entity. The KII Senior Secured
Notes are redeemable, at KII's option, on or after December 30, 2005 at
redemption prices ranging from 104.437% of the principal amount, declining to
100% on or after December 30, 2008. In addition, on or before June 30, 2005, KII
may redeem up to 35% of its Senior Secured Notes with the net proceeds of a
qualified public equity offering at 108.875% of the principal amount. In the
event of a change of control of KII, as defined, KII would be required to make
an offer to purchase its Senior Secured Notes at 101% of the principal amount.
KII would also be required to make an offer to purchase a specified portion of
its Senior Secured Notes at par value in the event KII generates a certain
amount of net proceeds from the sale of assets outside the ordinary course of
business, and such net proceeds are not otherwise used for specified purposes
within a specified time period. At December 31, 2003 the quoted market price of
the KII Senior Notes was euro 1,000 per euro 1,000 principal amount.
Also in June 2002, KII's operating subsidiaries in Germany, Belgium and
Norway entered into a euro 80 million secured revolving bank credit facility
("European Credit Facility") that matures in June 2005. Borrowings may be
denominated in euros, Norwegian kroner or U.S. dollars, and bear interest at the
applicable interbank market rate plus 1.75%. The facility also provides for the
issuance of letters of credit up to euro 5 million. The KII bank credit facility
is collateralized by the accounts receivable and inventories of the borrowers,
plus a limited pledge of all of the other assets of the Belgian borrower. The
KII bank credit facility contains certain restrictive covenants that, among
other things, restricts the ability of the borrowers to incur debt, incur liens,
pay dividends or merge or consolidate with, or sell or transfer all or
substantially all of their assets to, another entity.
In September 2002, certain of Kronos' U.S. subsidiaries entered into a $50
million revolving credit facility (nil outstanding at December 31, 2004) that
matures in September 2005. The facility is collateralized by the accounts
receivable, inventories and certain fixed assets of the borrowers. Borrowings
under this facility are limited to the lesser of $45 million or a
formula-determined amount based upon the accounts receivable and inventories of
the borrowers. Borrowings bear interest at either the prime rate or rates based
upon the eurodollar rate. The facility contains certain restrictive covenants
which, among other things, restricts the abilities of the borrowers to incur
debt, incur liens, pay dividends in certain circumstances, sell assets or enter
into mergers.
In January 2004, Kronos' Canadian subsidiary entered into a Cdn. $30
million revolving credit facility that matures in January 2009. The facility is
collateralized by the accounts receivable and inventories of the borrower.
Borrowings under this facility are limited to the lesser of Cdn. $26 million or
a formula-determined amount based upon the accounts receivable and inventories
of the borrower. Borrowings bear interest at rates based upon either the
Canadian prime rate, the U.S. prime rate or LIBOR. The facility contains certain
restrictive covenants which, among other things, restricts the ability of the
borrower to incur debt, incur liens, pay dividends in certain circumstances,
sell assets or enter into mergers.
Under the cross-default provisions of the KII Senior Secured Notes, the
Notes may be accelerated prior to their stated maturity if KII or any of KII's
subsidiaries default under any other indebtedness in excess of $20 million due
to a failure to pay such other indebtedness at its due date (including any due
date that arises prior to the stated maturity as a result of a default under
such other indebtedness). Under the cross-default provisions of KII's European
revolving credit facility, any outstanding borrowings under such facility may be
accelerated prior to their stated maturity if the borrowers or KII default under
any other indebtedness in excess of euro 5 million due to a failure to pay such
other indebtedness at its due date (including any due date that arises prior to
the stated maturity as a result of a default under such other indebtedness).
Under the cross-default provisions of the U.S. revolving credit facility, any
outstanding borrowing under such facility may be accelerated prior to their
stated maturity in the event of the bankruptcy of Kronos. The Canadian revolving
credit facility contains no cross-default provisions. The European, U.S. and
Canadian revolving credit facilities each contain provisions that allow the
lender to accelerate the maturity of the applicable facility in the event of a
change of control, as defined, of the applicable borrower. In the event any of
these cross-default or change-of-control provisions become applicable, and such
indebtedness is accelerated, Kronos would be required to repay such indebtedness
prior to their stated maturity.
NL. In 2002, NL redeemed $194 million principal amount of the NL Senior
Secured Notes at par value, using available cash on hand ($25 million) and a
portion of the net proceeds from the issuance of the KII Senior Secured Notes.
In accordance with the terms of the indenture governing the NL Senior Secured
Notes, on June 28, 2002, NL irrevocably placed on deposit with the NL Senior
Secured Note trustee funds in an amount sufficient to pay in full the redemption
price plus all accrued and unpaid interest due on the July 28, 2002 redemption
date for the $169 million of NL Senior Notes redeemed using a portion of the net
proceeds from the issuance of the KII Senior Notes. Immediately thereafter, NL
was released from its obligations under such indenture, the indenture was
discharged and all collateral was released to NL. Because NL had been released
as the primary obligor under the indenture as of June 30, 2002, the NL Senior
Secured Notes were eliminated from the balance sheet as of that date along with
the funds placed on deposit with the trustee to effect the July 28, 2002
redemption. NL recognized a loss on the early extinguishment of debt of
approximately $2 million in the second quarter of 2002, consisting primarily of
the interest on the NL Senior Secured Notes for the period from July 1 to July
28, 2002. Such loss is recognized as a component of interest expense.
Note 13 - Minority interest:
December 31,
--------------------
2003 2004
---- ----
(In thousands)
Minority interest in net assets:
Kronos Worldwide, Inc. $ 77,763 $ -
CompX International, Inc. 48,424 49,154
NL Environmental Management Services, Inc. 8,503 9,250
Subsidiary of Kronos Worldwide, Inc. 525 -
--------- --------
$ 135,215 $ 58,404
========= ========
Years ended December 31,
--------------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Minority interest in net earnings:
Kronos Worldwide, Inc. $ - $ 1,602 $145,837
CompX International, Inc. 299 1,814 2,993
NL Environmental Management Services, Inc. 1,209 370 747
Subsidiary of Kronos Worldwide, Inc. 55 72 19
------- -------- -------
$ 1,563 $ 3,858 $149,596
Kronos Worldwide, Inc. The Company commenced recognizing minority interest
in Kronos' net assets and net earnings following the Company's December 2003
distribution of a portion of the shares of Kronos common stock to its
stockholders and ceased to report minority interest in Kronos' net assets and
net earnings commencing July 1, 2004. See Notes 1 and 2.
Other. Other minority interest relates principally to NL's majority-owned
environmental management subsidiary, NL Environmental Management Services, Inc.
("EMS"). EMS was established in 1998, at which time EMS contractually assumed
certain of NL's environmental liabilities. EMS's earnings are based, in part,
upon its ability to favorably resolve these liabilities on an aggregate basis.
The stockholders of EMS, other than NL, actively manage the environmental
liabilities and share in 39% of EMS's cumulative earnings. NL continues to
consolidate EMS and provides accruals for the reasonably estimable costs for the
settlement of EMS's environmental liabilities, as discussed in Note 19.
Discontinued operations. Minority interest in losses of discontinued
operations was $101,000 in 2002, $1.4 million in 2003 and $3.9 million in 2004.
See Note 24.
Note 14 - Stockholders' equity:
Shares of common stock
-----------------------------------------
Issued Treasury Outstanding
------ -------- -----------
(In thousands)
Balance at December 31, 2001 66,845 (17,808) 49,037
Treasury shares acquired - (1,384) (1,384)
Treasury shares reissued - 37 37
------- ------- -------
Balance at December 31, 2002 66,845 (19,155) 47,690
Treasury shares reissued - 101 101
------- ------- -------
Balance at December 31, 2003 66,845 (19,054) 47,791
Treasury shares reissued 598 598
Treasury shares retired (18,456) 18,456 -
Common stock issued 51 - 51
------- ------- -------
Balance at December 31, 2004 48,440 - 48,440
======= ======= =======
NL common stock options. The NL Industries, Inc. 1998 Long-Term Incentive
Plan (the "NL Option Plan") provides for the discretionary grant of restricted
common stock, stock options, stock appreciation rights ("SARs") and other
incentive compensation to officers and other key employees of the Company and
nonemployee directors. Although certain stock options granted pursuant to a
similar plan which preceded the NL Option Plan ("Predecessor Option Plan")
remain outstanding at December 31, 2004, no additional options may be granted
under the Predecessor Option Plan.
Up to five million shares of NL common stock may be issued pursuant to the
NL Option Plan and, at December 31, 2004, 4,089,600 shares were available for
future grants. The NL Option Plan provides for the grant of options that qualify
as incentive options and for options which are not so qualified. Generally,
stock options and SARs (collectively, "options") are granted at a price equal to
or greater than 100% of the market price at the date of grant, vest over a
five-year period and expire ten years from the date of grant. Restricted stock,
forfeitable unless certain periods of employment are completed, is held in
escrow in the name of the grantee until the restriction period expires. No SARs
have been granted under the NL Option Plan.
Following the December 2003 distribution of a portion of the shares of
Kronos common stock held by the Company, the exercise price for each outstanding
option to purchase NL common stock was reduced by $8.63 (or one-half of the
closing price of Kronos' common stock on December 8, 2003, the distribution
date).
Changes in outstanding options granted pursuant to the NL Option Plan, the
Predecessor Option Plan and the nonemployee director plan are summarized in the
table below.
Amount Weighted- Weighted-
Exercise payable average average fair
price per upon exercise value at
Shares share exercise price grant
-------- ---------- ---------- ---------- ------------
(In thousands, except per share amounts)
Outstanding at December 31, 2001 2,014 $ 5.00-21.97 $ 32,960 $ 16.36
Granted 12 13.81-13.81 166 13.81 $ 5.71
Exercised (545) 5.00-15.75 (7,444) 13.65
Canceled (220) 11.88-21.97 (3,623) 16.43
------- ------------ ----------
Outstanding at December 31, 2002 1,261 8.69-21.97 22,059 17.50
Exercised (95) 11.28-15.19 (1,271) 13.43
Canceled (26) 9.34-20.11 (391) 15.00
Adjusted for Kronos common stock -
distribution - (9,885) 8.63
------- ------------ ----------
Outstanding at December 31, 2003 1,140 0.06-13.34 10,512 9.22
Exercised (643) 0.06-13.34 (6,073) 9.44
Canceled (252) 3.56-13.34 (2,038) 8.10
------- ------------ ----------
Outstanding at December 31, 2004 245 $ 2.66-13.34 $ 2,401 $ 9.80
======= ============ ==========
At December 31, 2002, 2003 and 2004 options to purchase 428,400, 695,700
and 129,500 shares, respectively, were exercisable, and options to purchase
75,200 shares become exercisable in 2005. Of the exercisable options, options to
purchase 129,500 shares at December 31, 2004 had exercise prices less than the
Company's December 31, 2004 quoted market price of $22.10 per share. Outstanding
options at December 31, 2004 expire at various dates through 2011.
The following table summarizes the Company's stock options outstanding and
exercisable as of December 31, 2004 by price range.
Options outstanding Options exercisable
-------------------------------------------------------------------------- ------------------------------
Weighted-
average Weighted- Weighted-
Outstanding remaining average Exercisable Average
Range of at contractual exercise at Exercise
exercise prices 12/31/04 life price 12/31/04 price
----------------------- ----------- ----------- ---------- ----------- -----------
$ 2.66 - $ 3.25 8,550 4.1 $ 2.74 8,550 $ 2.74
$ 5.19 - $ 5.81 66,350 4.7 $ 5.60 31,550 $ 5.58
$ 9.34 - $ 13.34 170,200 5.3 $ 11.79 89,400 $ 12.06
-------- --------
245,100 5.1 $ 9.80 129,500 $ 9.86
======== ========
Stock option plan of subsidiaries and affiliates. Through December 31,
2004, Kronos has not granted any options to purchase its common stock. CompX
maintains a stock option plan that provides for the grant of options to purchase
its common stock. At December 31, 2004, options to purchase 562,000 CompX shares
were outstanding with exercise prices ranging from $10.00 to $20.00 per share,
or an aggregate amount payable upon exercise of $10.0 million.
Treasury stock. During the third quarter of 2004, the Company cancelled
approximately 18.5 million shares of its common stock that previously had been
held in treasury. The aggregate $426.1 million cost of such treasury shares was
allocated to common stock at par value, additional paid in capital and retained
earnings in accordance with GAAP. Such cancellation had no impact on the net NL
shares outstanding for financial reporting purposes.
Note 15 - Income taxes:
Years ended December 31,
--------------------------------------
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
(In millions)
Pre-tax income (loss):
U.S. $ (19.3) $ (15.5) $ 23.8
Non-U.S. 73.3 88.9 45.4
------- -------- -------
$ 54.0 $ 73.4 $ 69.2
======= ======== =======
Expected tax expense (benefit), at U.S.
federal statutory income tax rate of 35% $ 18.9 $ 25.7 $ 24.2
Non-U.S. tax rates (7.1) (1.2) (.5)
Incremental U.S. tax and rate differences
on equity in earnings 1.6 42.3 29.1
Change in deferred income tax valuation allowance, net
(3.4) (7.2) (308.4)
Nondeductible expenses 3.4 3.4 2.3
Change in Belgian income tax law (2.3) - -
U.S. state income taxes, net - .1 .1
Refund of prior year German income taxes - (38.0) (3.0)
Excess of book basis over tax basis of Kronos
common stock sold or distributed - 30.3 21.2
Tax contingency reserve adjustment, net 1.1 30.5 (13.4)
Other, net 1.1 2.0 8.7
------- -------- -------
$ 13.3 $ 87.9 $(239.7)
======= ======== =======
Years ended December 31,
--------------------------------------
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
(In millions)
Components of income tax expense (benefit):
Currently payable (refundable):
U.S. federal and state $ 1.6 $ 30.0 $ 13.6
Non-U.S. 12.8 (34.0) 11.8
------- -------- -------
14.4 (4.0) 25.4
------- -------- -------
Deferred income taxes (benefit):
U.S. federal and state (6.2) 54.3 8.2
Non-U.S. 5.1 37.6 (273.3)
------- -------- -------
(1.1) 91.9 (265.1)
------- -------- -------
$ 13.3 $ 87.9 $(239.7)
======= ======== =======
Years ended December 31,
--------------------------------------
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
(In millions)
Comprehensive provision for
income taxes (benefit) allocable to:
Income from continuing operations $ 13.3 $ 87.9 $(239.7)
Discontinued operations (0.3) (2.6) (4.6)
Retained earnings - 22.5 8.2
Additional paid-in capital (0.2) - 52.4
Other comprehensive income:
Marketable securities (1.3) 9.4 1.9
Pension liabilities (6.8) (12.2) 1.0
Currency translation (0.1) 0.1 (7.2)
------- -------- -------
$ 4.6 $ 105.1 $(188.0)
======= ======== =======
The components of the net deferred tax liability at December 31, 2003 and
2004, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables. At December 31, 2003.
December 31,
----------------------------------------------------
2003 2004
---------------------- ------------------------
(Restated) (Restated)
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(In millions)
Tax effect of temporary differences
related to:
Inventories $ 1.9 $ (4.1) $ - $ -
Marketable securities - - - (12.4)
Property and equipment 46.0 (73.3) - (9.5)
Accrued OPEB costs 9.8 - 4.8 -
Accrued (prepaid) pension cost 25.1 (37.7) 3.2 -
Accrued environmental liabilities and
other deductible differences 28.8 - 24.8 -
Other accrued liabilities and deductible
differences 7.2 4.3 -
Other taxable differences - (179.8) - (71.4)
Investments in subsidiaries and
affiliates - (39.5) 4.5 (70.0)
Tax on unremitted earnings of non-U.S. subsidiaries - (4.3) - -
Tax loss and tax credit carryforwards 163.9 - 8.6 -
Valuation allowance (193.8) - _ -
------- ------- ------ -------
Adjusted gross deferred tax assets
(liabilities) 88.9 (338.7) 50.2 (163.3)
Netting of items by tax jurisdiction (69.1) 69.1 (36.1) 36.1
------- ------- ------ -------
19.8 (269.6) 14.1 (127.2)
Less net current deferred tax asset
(liability) 12.7 (3.9) 13.6 (23.8)
------- ------- ------ -------
Net noncurrent deferred tax asset
(liability) $ 7.1 $(265.7) $ .5 $(103.4)
======= ======= ====== =======
Years ended December 31,
--------------------------------------
2002 2003 2004
---- ---- ----
(Restated)
(In millions)
Decrease (increase) in valuation allowance:
Recognition of certain deductible tax
attributes for which the benefit had not
previously been recognized under the
"more-likely-than-not" recognition criteria $ (3.4) $ (7.2) $ 308.4
Foreign currency translation 21.6 28.2 3.2
Deconsolidation of Kronos - - 3.2
Offset to the change in gross deferred
income tax assets due principally to
redeterminations of certain tax attributes
and implementation of certain tax
planning strategies 12.6 (12.5) (121.0)
------- -------- -------
$ 30.8 $ 8.5 $ 193.8
======= ======== =======
A reduction in the Belgian income tax rate from 40% to 34% was enacted in
December 2002 and became effective in January 2003. This reduction in the
Belgian income tax rate resulted in a $2.3 million decrease in the Company's
income tax expense in 2002 because the Company had previously recognized a net
deferred income tax liability with respect to Belgian temporary differences.
In the first quarter of 2003, KII was notified by the German Federal Fiscal
Court (the "Court") that the Court had ruled in Kronos' favor concerning a claim
for refund suit in which Kronos sought refunds of prior taxes paid during the
periods 1990 through 1997. KII and Kronos' German operating subsidiary were
required to file amended tax returns with the German tax authorities to receive
refunds for such years, and all of such amended returns were filed during 2003.
Such amended returns reflected an aggregate refund of taxes and related interest
to KII and its German operating subsidiary of euro 26.9 million ($32.1 million),
and the Company recognized the benefit for these net funds in its 2003 results
of operations. For the year ended December 31, 2004, Kronos recognized a net
refund of euro 2.5 million ($3.1 million) related to additional net interest
which has accrued on the outstanding refund amount. Assessments and refunds will
be processed by year as the respective returns are reviewed by the tax
authorities. Certain interest components may also be refunded separately. The
German tax authorities have reviewed and accepted the amended returns with
respect to the 1990 through 1994 tax years. Through December 2004, KII's German
operating subsidiary had received net refunds of euro 35.6 million ($44.7
million when received). All refunds relating to the periods 1990 to 1997 were
received by December 31, 2004. In addition to the refunds for the 1990 to 1997
periods, the court ruling also resulted in a refund of 1999 income taxes and
interest, and Kronos received euro 21.5 million ($24.6 million) in 2003.
Certain of the Company's U.S. and non-U.S. tax returns are being examined
and tax authorities have or may propose tax deficiencies, including penalties
and interest. For example:
o NL's and EMS's 1998 U.S. federal income tax returns are being examined
by the U.S. tax authorities, and NL and EMS have granted extensions of
the statute of limitations for assessments of tax with respect to
their 1998, 1999 and 2000 income tax returns until September 30, 2005.
During the course of the examination, the IRS proposed a substantial
tax deficiency, including interest, related to a restructuring
transaction. In an effort to avoid protracted litigation and minimize
the hazards of such litigation, NL applied to take part in an IRS
settlement initiative applicable to transactions similar to the
restructuring transaction, and in April 2003 NL received notification
from the IRS that NL had been accepted into such settlement
initiative. Under the initiative, a final settlement with the IRS is
to be reached through expedited negotiations and, if necessary,
through a specified arbitration procedure. NL has reached an agreement
with the IRS concerning the settlement of this matter pursuant to
which, among other things, the Company agreed to pay approximately $26
million, including interest, up front as a partial payment of the
settlement amount (which amount is expected to be paid in the next 12
months and is classified as a current liability at December 31, 2004),
and NL will be required to recognize the remaining settlement amount
in its taxable income over the 15 year time period beginning in 2004.
NL has signed the settlement agreement that was prepared by the IRS.
The IRS signed the settlement agreement in January 2005, and the case
will be closed after certain procedural matters are concluded, which
procedural matters both NL and its outside legal counsel believe are
perfunctory. NL had previously provided accruals to cover its
estimated additional tax liability (and related interest) concerning
this matter. As a result of the settlement, NL has decreased its
previous estimate of the amount of additional income taxes and
interest it will be required to pay, and NL recognized a $12.6 million
tax benefit in the second quarter of 2004 related to the revised
estimate. In addition, during the second quarter of 2004, the Company
recognized a $31.1 million tax benefit related to the reversal of a
deferred income tax asset valuation allowance related to certain tax
attributes of EMS which NL believes now meet the
"more-likely-than-not" recognition criteria. A majority of the
deferred income tax asset valuation allowance relates to net operating
loss carryforwards of EMS. As a result of the settlement agreement, NL
(which previously was not allowed to utilize such net operating loss
carryforwards of EMS) utilized such carryforwards in its 2003 taxable
year, eliminating the need for a valuation allowance related to such
carryforwards. The remainder of the deferred income tax asset
valuation allowance relates to deductible temporary differences
associated with accrued environmental obligations of EMS which NL now
believes meet the "more-likely-than-not" recognition criteria since,
as a result of the settlement agreement, such obligations and the
related tax deductions have been, or will be, included in NL's taxable
income.
o Kronos has received a preliminary tax assessment related to 1993 from
the Belgian tax authorities proposing tax deficiencies, including
interest, of approximately euro 6 million ($8 million at December 31,
2004). 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
($13 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
at December 31, 2004) relating to the years 1998 to 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. $11.4 million ($7.7 million). Kronos is in the
process of filing a protest and believes a significant portion of the
assessment is without merit.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in 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.
At December 31, 2004, (i) Kronos had the equivalent of $671 million and
$232 million of the net operating loss carryforwards for German corporate and
trade tax purposes, respectively, all of which have no expiration date and (ii)
CompX had $8.4 million of U.S. net operating loss carryforwards expiring in 2007
through 2018. At December 31, 2004, the U.S. net operating loss carryforwards of
CompX may only be used to offset future taxable income of a subsidiary of CompX
acquired prior to 2001, are not available to offset future taxable income of
other members of the Contran Tax Group and are limited in utilization to
approximately $400,000 per year.
At December 31, 2003, Kronos had a significant amount of net operating loss
carryforwards for German corporate and trade tax purposes, all of which have no
expiration date. These net operating loss carryforwards were generated by KII,
principally during the 1990's when KII had a significantly higher level of
outstanding indebtedness than is currently outstanding. For financial reporting
purposes, however, the benefit of such net operating loss carryforwards had not
previously been recognized because Kronos did not believe they met the
"more-likely-than-not" recognition criteria, and accordingly Kronos had a
deferred income tax asset valuation allowance offsetting the benefit of such net
operating loss carryforwards and Kronos' other tax attributes in Germany. KII
had generated positive taxable income in Germany for both German corporate and
trade tax purposes since 2000, and starting with the quarter ended December 31,
2002 and for each quarter thereafter, KII had cumulative taxable income in
Germany for the most recent twelve quarters. However, offsetting this positive
evidence was the fact that prior to the end of 2003, Kronos believed there was
significant uncertainty regarding its ability to utilize such net operating loss
carryforwards under German tax law and, principally because of the uncertainty
caused by this negative evidence, Kronos had concluded the benefit of the net
operating loss carryforwards did not meet the "more-likely-than-not" criteria.
By the end of 2003, and primarily as a result of a favorable German court ruling
in 2003 and the procedures Kronos had completed during 2003 with respect to the
filing of certain amended German tax returns (as discussed below), Kronos had
concluded that the significant uncertainty regarding its ability to utilize such
net operating loss carryforwards under German tax law had been eliminated.
However, at the end of 2003, Kronos believed at that time that it would generate
a taxable loss in Germany during 2004. Such expectation was based primarily upon
then-current levels of prices for TiO2, and the fact that Kronos was
experiencing a downward trend in its TiO2 selling prices and Kronos did not have
any positive evidence to indicate that the downward trend would improve. If the
price trend continued downward throughout all of 2004 (which was a possibility
given Kronos' prior experience), Kronos would likely have a taxable loss in
Germany for 2004. If the downward trend in prices had abated, ceased, or
reversed at some point during 2004, then Kronos would likely have taxable income
in Germany during 2004. Accordingly, Kronos continued to conclude at the end of
2003 that the benefit of the German net operating loss carryforwards did not
meet the "more-likely-than-not" criteria and that it would not be appropriate to
reverse the deferred income tax asset valuation allowance, given the likelihood
that Kronos would generate a taxable loss in Germany during 2004. The
expectation for a taxable loss in Germany continued through the end of the first
quarter of 2004. By the end of the second quarter of 2004, however, Kronos' TiO2
selling prices had started to increase, and Kronos believed its selling prices
would continue to increase during the second half of 2004 after Kronos and its
major competitors announced an additional round of price increases. The fact
that Kronos' selling prices started to increase during the second quarter of
2004, combined with the fact that Kronos and its competitors had announced
additional price increases (which based on past experience indicated to Kronos
that some portion of the additional price increases would be realized in the
marketplace), provided additional positive evidence that was not present at
December 31, 2003. Consequently, Kronos' revised projections now reflected
taxable income for Germany in 2004 as well as 2005. Accordingly, based on all
available evidence, including the fact that (i) KII had generated positive
taxable income in Germany since 2000, and starting with the quarter ended
December 31, 2002 and for each quarter thereafter, KII had cumulative taxable
income in Germany for the most recent twelve quarters, (ii) Kronos was now
projecting positive taxable income in Germany for 2004 and 2005 and (iii) the
German net operating loss carryforwards have no expiration date, Kronos
concluded that the benefit of the net operating loss carryforwards and other
German tax attributes now met the "more-likely-than-not" recognition criteria,
and that reversal of the deferred income tax asset valuation allowance related
to Germany was appropriate. Given the magnitude of the German net operating loss
carryforwards and the fact that current provisions of German law limit the
annual utilization of net operating loss carryforwards to 60% of taxable income
after the first euro 1 million of taxable income, Kronos believes it will take
several years to fully utilize the benefit of such loss carryforwards. However,
given the number of years for which KII has now generated positive taxable
income in Germany, combined with the fact that the net operating loss
carryforwards were generated during a time when KII had a significantly higher
level of outstanding indebtednesss than it currently has outstanding, and the
fact that the net operating loss carryforwards have no expiration date, Kronos
concluded it was now appropriate to reverse all of the valuation allowance
related to the net operating loss carryforwards because the benefit of such
operating loss carryforwards now met the "more-likely-than-not" recognition
criteria. Under applicable GAAP related to accounting from income taxes at
interim periods, a change in estimate at an interim period resulting in a
decrease in the valuation allowance is segregated into two components, the
portion related to the remaining interim periods of the current year and the
portion related to all future years. The portion of the valuation allowance
reversal related to the former is recognized over the remaining interim periods
of the current year, and the portion of the valuation allowance related to the
latter is recognized at the time the change in estimate is made. Accordingly,
Kronos has recognized a $280.7 million income tax benefit in 2004 related to the
complete reversal of such deferred income tax asset valuation allowance
attributable to Kronos' income tax attributes in Germany (principally the net
operating loss carryforwards). Of such $280.7 million, (i) $8.7 million relates
primarily to the utilization of the German net operating loss carryforwards
during the first six months of 2004, the benefit of which had previously not met
the "more-likely-than-not" recognition criteria, (ii) $268.6 million relates to
the valuation allowance reversal recognized as of June 30, 2004 and (iii) $3.4
million relates to the valuation allowance reversal recognized during the last
six months of 2004.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law contains several provisions that could impact the Company.
These provisions provide for, among other things, a special deduction from U.S.
taxable income equal to a stipulated percentage of qualified income from
domestic production activities (as defined) beginning in 2005, and a special 85%
dividends received deduction for certain dividends received from controlled
foreign corporations. Both of these provisions are complex and subject to
numerous limitations. The Company is still studying the new law, including the
technical provisions related to the two complex provisions noted above. The
effect on the Company of the new law, if any, has not yet been determined, in
part because the Company has not definitively determined whether its operations
qualify for the special deduction or whether it would benefit from the special
dividends received deduction. If the Company determines it qualifies for the
special deduction, the tax benefit of such special deduction would be recognized
in the period earned. With respect to the special dividends received deduction
for certain dividends received from controlled foreign corporations, the Company
will likely not be able to complete its evaluation of whether it would benefit
from the special dividends received deduction until sometime after the U.S.
government has issued clarifying regulations regarding this provision of the
Act, the timing for the issuance of which is not known. At December 31, 2004,
the aggregate amount of unremitted earnings that is potentially subject to the
special dividends received deduction is approximately $638 million for Kronos
and $24 million for CompX. The Company is unable to reasonably estimate a range
of income tax effects if such unremitted earnings would be repatriated and
become eligible for the special dividends received deduction, as the calculation
would be extremely complex.
In January 2005, CompX completed its disposition of the Thomas Regout
operations in Europe (see Note 24 to the financial statements). The Company
currently expects to generate a $4.2 million income tax benefit associated with
the U.S. capital loss expected to be realized in the first quarter of 2005 upon
completion of the sale of the Thomas Regout operations. Recognition of the
benefit of such capital loss by the Company is appropriate under GAAP in the
fourth quarter of 2004 at the time such operations were classified as held for
sale. See Notes 1 and 24.
Note 16 - Employee benefit plans:
Defined benefit plans. The Company maintains various defined benefit
pension plans. Non-U.S. employees are covered by plans in their respective
countries and a majority of U.S. employees are eligible to participate in a
contributory savings plan. Variances from actuarially assumed rates will result
in increases or decreases in accumulated pension obligations, pension expense
and funding requirements in future periods. At December 31, 2004, the Company
currently expects to contribute the equivalent of approximately $400,000 to all
of its defined benefit pension plans during 2005.
As discussed in Note 1, effective July 1, 2004 the Company ceased to
consolidate Kronos and commenced accounting for its interest in Kronos by the
equity method. Accordingly, commencing July 1, 2004, the Company ceased to
consolidate the employee benefit obligations and expenses of Kronos.
The funded status of the Company's defined benefit pension plans, the
components of net periodic defined benefit pension cost related to the Company's
consolidated business segments and charged to continuing operations and the
rates used in determining the actuarial present value of benefit obligations are
presented in the tables below. The Company uses a September 30th measurement
date for their defined benefit pension plans.
Years ended December 31,
-------------------------
2003 2004
---- ----
(In thousands)
Change in projected benefit obligations ("PBO"):
Benefit obligations at beginning of the year $ 302,377 $377,634
Service cost 5,347 3,379
Interest cost 18,225 11,655
Participant contributions 1,357 716
Plan amendments 3,200 -
Actuarial losses 25,437 2,832
Change in foreign currency exchange rates 43,514 15,739
Benefits paid (21,823) (12,118)
Adjustment to cease consolidation of Kronos - (347,413)
--------- ---------
Benefit obligations at end of the year $ 377,634 $ 52,424
========= =========
Change in plan assets:
Fair value of plan assets at beginning of the year $ 226,761 $241,235
Actual return on plan assets (6,391) 17,644
Employer contributions 14,082 9,106
Participant contributions 1,357 716
Change in foreign currency exchange rates 27,249 10,198
Benefits paid (21,823) (12,118)
Adjustment to cease consolidation of Kronos - (222,880)
--------- ---------
Fair value of plan assets at end of year $ 241,235 $ 43,901
========= =========
Funded status at end of the year:
Plan assets less than PBO $(136,399) $ (8,523)
Unrecognized actuarial losses 131,172 10,668
Unrecognized prior service cost 8,566 -
Unrecognized net transition obligations 5,079 (141)
--------- ---------
$ 8,418 $ 2,004
========= =========
Amounts recognized in the balance sheet:
Unrecognized net pension obligations $ 13,747 $ -
Accrued pension costs:
Current (8,366) -
Noncurrent (81,180) (8,352)
Accumulated other comprehensive loss 84,217 10,356
--------- ---------
$ 8,418 $ 2,004
========= =========
Years ended December 31,
--------------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Net periodic pension cost:
Service cost benefits $ 4,538 $ 5,347 $ 3,379
Interest cost on PBO 16,510 18,225 11,655
Expected return on plan assets (16,099) (17,580) (11,181)
Amortization of prior service cost 307 354 285
Amortization of net transition obligations 515 733 262
Recognized actuarial losses 1,223 1,800 2,389
-------- -------- -------
$ 6,994 $ 8,879 $ 6,789
======== ======== =======
The weighted-average rate assumptions used in determining the actuarial
present value of benefit obligations as of December 31, 2003 and 2004 are
presented in the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
----------------------
2003 2004
---- ----
Discount rate 5.5% 5.8%
Increase in future compensation levels 2.8% not applicable
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2002, 2003 and 2004 are presented in the table below. The
weighted-average discount rate and the weighted-average increase in future
compensation levels were determined using the projected benefit obligations at
the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets at the beginning of
each year.
December 31,
---------------------------------------
2002 2003 2004
---- ---- ----
Discount rate 6.2% 5.9% 5.9%
Increase in future compensation levels 2.8% 2.6% not applicable
Long-term return on plan assets 7.5% 7.2% 10.0%
As of December 31, 2004, the accumulated benefit obligations for all
defined benefit pension plans was approximately $51 million (2003 - $332
million). At December 31, 2004, the projected benefit obligations for all
defined benefit pension plans was comprised of $42 million related to U.S. plans
and $9 million related to non-U.S. plans (2003 - $57 million and $320 million,
respectively). The Company uses a September 30th measurement date for their
defined benefit pension plans.
At December 31, 2004, the fair value of plan assets for all defined benefit
pension plans was comprised of $38 million related to U.S. plans and $6 million
related to non-U.S. plans (2003 - $44 million and $197 million, respectively).
Selected information related to the Company's defined benefit pension plans
that have accumulated benefit obligations in excess of fair value of plan assets
is presented below. At December 31, 2003 and 2004, 86% and 17%, respectively, of
the projected benefit obligations of such plans relate to non-U.S. plans.
December 31,
----------------------
2003 2004
---- ----
(In thousands)
Projected benefit obligation $377,634 $ 52,424
Accumulated benefit obligation 332,399 50,694
Fair value of plan assets:
U.S. plans 44,356 38,201
Non - U.S. plans 196,879 5,700
At December 31, 2003 and 2004, all of the assets attributable to U.S. plans
were invested in The Combined Master Retirement Trust ("CMRT"), a collective
investment trust established by Valhi to permit the collective investment by
certain master trusts which fund certain employee benefits plans sponsored by
Contran and certain of its affiliates.
At December 31, 2004, the asset mix of the CMRT was 77% in U.S. equity
securities, 14% in U.S. fixed income securities, 7% in international equity
securities and 2% in cash and other investments. At December 31, 2003, the asset
mix of the CMRT was 63% in U.S. equity securities, 24% in U.S. fixed income
securities, 7% in international equity securities and 6% in cash and other
investments.
The CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indicies) utilizing both third-party investment
managers as well as investments directed by Mr. Harold Simmons. Mr. Harold
Simmons is the sole trustee of the CMRT. The trustee of the CMRT, along with the
CMRT's investment committee, of which Mr. Simmons is a member, actively manage
the investments of the CMRT. Such parties have in the past, and may in the
future, periodically change the asset mix of the CMRT based upon, among other
things, advice they receive from third-party advisors and their expectations as
to what asset mix will generate the greatest overall return. For the year ended
December 31, 2004, the assumed long-term rate of return for plan assets invested
in the CMRT was 10%. In determining the appropriateness of such long-term rate
of return assumption, the Company considered, among other things, the historical
rates of return for the CMRT, the current and projected asset mix of the CMRT
and the investment objectives of the CMRT's managers. During the 17-year history
of the CMRT from its inception in 1987 through December 31, 2004, the average
annual rate of return has been approximately 13%.
The Company expects future benefits paid from all defined benefit pension
plans are as follows:
Amount
Years ending December 31, --------------
------------------------- (In thousands)
2005 $ 2,923
2006 2,878
2007 2,873
2008 2,905
2009 2,929
2010 to 2014 15,967
Effective January 1, 2001, CompX ceased providing future defined pension
benefits under its plan in the Netherlands. Certain obligations related to the
terminated plan were not been fully settled until 2002. Upon settling the
remaining obligations, CompX recognized a $677,000 settlement gain in 2002.
Defined contribution plans. The Company maintains various defined
contribution pension plans with Company contributions based on matching or other
formulas. Defined contribution plan expense approximated $2.3 million in 2002,
$2.5 million in 2003 and $2.0 million in 2004, primarily related to CompX.
Postretirement benefits other than pensions. In addition to providing
pension benefits, the Company currently provides certain health care and life
insurance benefits for eligible retired employees. Based on communications with
a certain insurance provider of certain retiree benefits of NL, and
consultations with NL's actuaries, NL has been released from certain life
insurance retiree benefit obligations as of December 31, 2002 through the use of
an equal amount of plan assets. In 1989 the Company began phasing out such
benefits for active U.S. employees over a ten-year period and U.S. employees
retiring after 1998 are not entitled to any such benefits. The majority of all
retirees are required to contribute a portion of the cost of their benefits and
certain current and future retirees are eligible for reduced health care
benefits at age 65. The Company's policy is to fund medical claims as they are
incurred, net of any contributions by the retiree.
The components of the periodic OPEB cost and accumulated OPEB obligations
and the rates used in determining the actuarial present value of benefit
obligations are presented in the tables below. Variances from
actuarially-assumed rates will result in additional increases or decreases in
accumulated OPEB obligations, net periodic OPEB cost and funding requirements in
future periods. At December 31, 2004, the expected rate of increase in future
health care costs is 9% in 2005, declining to 5.5% in 2009 and thereafter. (In
2003 the expected rate of increase in future healthcare costs ranged from 8% to
10% in 2004, declining to 5.5% in 2009 and thereafter.) If the health care cost
trend rate was increased (decreased) by one percentage point for each year, OPEB
expense would have increased by approximately $100,000 (decreased by $100,000)
in 2004, and the actuarial present value of accumulated OPEB obligations at
December 31, 2004 would have increased by $900,000 (decreased by $800,000). At
December 31, 2004, the Company currently expects to contribute the equivalent of
approximately $2.0 million to all of its OPEB plans during 2005, and aggregate
benefit payments to OPEB plan participants are expected to be the equivalent of
approximately $2.0 million in 2005, $1.6 million in 2006, $1.6 million in 2007,
$1.5 million in 2008, $1.5 million in 2009 and $6.5 million during 2010 through
2014.
Years ended December 31,
----------------------
2003 2004
---- ----
(In thousands)
Change in projected OPEB obligations:
Obligations at beginning of the year $ 32,899 $ 33,429
Service cost 152 116
Interest cost 2,063 1,386
Plan amendments - (1,385)
Actuarial losses (gain) 1,355 (2,759)
Change in foreign currency exchange rates 772 206
Benefits paid (3,812) (3,500)
Adjustment to cease consolidation of Kronos - (11,590)
--------- ---------
Obligations at end of the year $ 33,429 $ 15,903
========= =========
Change in plan assets:
Employer contributions $ 3,812 $ 3,500
Benefits paid (3,812) (3,500)
--------- ---------
Fair value of plan assets at end of the year $ - $ -
========= =========
Funded status at end of the year:
Plan assets less than benefit obligations $ (33,429) $ (15,903)
Unrecognized net actuarial losses 6,854 3,284
Unrecognized prior service credit (1,633) (968)
--------- ---------
$ (28,208) $ (13,587)
========= =========
Accrued OPEB costs recognized in the balance sheet:
Current $ 4,797 $ 3,015
Noncurrent 23,411 10,572
--------- ---------
$ 28,208 $ 13,587
========= =========
Years ended December 31,
---------------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Net periodic OPEB cost:
Service cost $ 103 $ 152 $ 116
Interest cost 2,028 2,063 1,386
Expected return on plan assets (3) - -
Amortization of prior service credit (2,075) (2,075) (540)
Recognized actuarial losses 27 189 132
------- ------- ------
$ 80 $ 329 $1,094
======= ======= ======
The weighted average discount rate used in determining the actuarial
present value of benefit obligations as of December 31, 2004 was 5.7% (2003 -
5.9%). Such weighted average rate was determined using the projected benefit
obligation as of such dates. The impact of assumed increases in future
compensation levels does not have a material affect on the actuarial present
value of the benefit obligation as substantially all of such benefits relate
solely to eligible retirees, for which compensation is not applicable.
The weighted average discount rate used in determining the net periodic
OPEB cost for 2004 was 5.9% (2003 - 6.5%; 2002 - 7.0%). Such weighted average
rate was determined using the projected benefit obligation as of the beginning
of each year. The impact of assumed increases in future compensation levels does
not have a material affect on the net periodic OPEB cost as substantially all of
such benefits relate solely to eligible retirees, for which compensation is not
applicable. The impact of assumed rate of return on plan assets also does not
have a material affect on the net periodic OPEB cost as there were no plan
assets as of December 31, 2003 or 2004.
As of December 31, 2004, the accumulated benefit obligations for all OPEB
plans was approximately $15.9 million (2003 - $33.4 million). The Company uses a
September 30th measurement date for their OPEB plans. At December 31, 2004, all
of the Company's consolidated accrued OPEB costs related to the Company's U.S.
plan.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the "Medicare 2003 Act") introduced a prescription drug benefit under Medicare
(Medicare Part D) as well as a federal subsidy to sponsors of retiree health
care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. During the third quarter of 2004, the Company
determined that benefits provided by its plan are actuarially equivalent to the
Medicare Part D benefit and therefore the Company is eligible for the federal
subsidy provided for by the Medicare 2003 Act. The effect of such subsidy, which
is accounted for prospectively from the date actuarial equivalence was
determined, as permitted by and in accordance with FASB Staff Position No.
106-2, did not have a material impact on the accumulated postretirement benefit
obligation, and will not have a material impact on the net periodic OPEB cost
going forward.
Note 17 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. The Company
continuously considers, reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business, tax and other objectives then relevant, it is possible that the
Company might be a party to one or more such transactions in the future.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
Receivables from and payables to affiliates are summarized in the table
below.
December 31,
----------------------
2003 2004
---- ----
(In thousands)
Current receivables from affiliates:
Income taxes refundable from Valhi $ 306 $ 1,681
TIMET 50 -
Other 5 -
--------- ---------
$ 361 $ 1,681
========= ========
Noncurrent receivable from affiliate -
loan to Contran family trust $ 14,000 $ 10,000
========= ========
Current payables to affiliates:
Louisiana Pigment Company $ 8,560 $ -
Income taxes payable to Valhi 129,846 86
Kronos - 16
Tremont 445 289
Other 20 -
--------- ---------
$ 138,871 $ 391
========= ========
Amounts payable to LPC were generally for Kronos' purchases of TiO2.
Purchases of TiO2 from LPC were $92.4 million in 2002, $101.3 million in 2003
and $51.0 million in the first half of 2004. See Note 7.
From time to time, loans and advances are made between the Company and
various related parties, pursuant to term and demand notes. These loans and
advances are entered into principally for cash management purposes. When the
Company loans funds to related parties, the lender is generally able to earn a
higher rate of return on the loan than the lender would earn if the funds were
invested in other instruments. While certain of such loans may be of a lesser
credit quality than cash equivalent instruments otherwise available to the
Company, the Company believes that it has evaluated the credit risks involved,
and that those risks are reasonable and reflected in the terms of the applicable
loans. When the Company borrows from related parties, the borrower is generally
able to pay a lower rate of interest than the borrower would pay if it borrowed
from other parties.
In 2001, EMS, NL's majority-owned environmental management subsidiary,
extended a $25 million revolving credit facility to one of the family trusts
discussed in Note 1 ($14 million and $10 million outstanding at December 31,
2003 and 2004, respectively). The loan bears interest at prime, is due on demand
with 60 days notice and is collateralized by certain shares of Contran's Class A
common stock and Class E cumulative preferred stock held by the trust. The value
of the collateral is dependent, in part, on the value of Valhi as Contran's
beneficial ownership interest in Valhi is one of Contran's more substantial
assets. The terms of this loan were approved by special committees of both NL's
and EMS' respective board of directors composed of independent directors. At
December 31, 2004, $15 million is available for borrowing by the family trust,
and the loan has been classified as a noncurrent asset because EMS does not
presently intend to demand repayment within the next 12 months.
At December 31, 2003, the Company had entered into a revolving credit
facility with Tremont pursuant to which Tremont could borrow up to $15 million
from the Company through December 31, 2004. Borrowings (none at December 31,
2003) bore interest at prime plus 2%, with interest payable quarterly, and were
collateralized by the 10.2 million shares of NL common stock and 5.1 million
shares of Kronos owned by Tremont. This facility was terminated at December 31,
2004.
Interest income on all loans to affiliates was $3.2 million in 2002, $2.2
million in 2003 and $6.9 million in 2004, including $1.3 million in 2002, $1.4
million in 2003 and $1.5 million in 2004 in interest income from CompX's
discontinued operation. Also included in 2004 is $4.7 million in interest income
related to a $200 million note receivable from Kronos that was distributed to NL
in December 2003. A portion of such note was used to acquire CompX in September
2004. See Note 1. The remainder of the note was repaid in 2004. Interest income
earned prior to July 1, 2004 was eliminated upon consolidation.
Under the terms of various intercorporate services agreements ("ISAs")
entered into between the Company and various related parties, including Contran,
employees of one company will provide certain management, tax planning,
financial and administrative services to the other company on a fee basis. Such
charges are based upon estimates of the time devoted by the employees of the
provider of the services to the affairs of the recipient, and the compensation
of such persons. Because of the large number of companies affiliated with
Contran, the Company believes it benefits from cost savings and economies of
scale gained by not having certain management, financial and administrative
staffs duplicated at each entity, thus allowing certain individuals to provide
services to multiple companies but only be compensated by one entity. The net
ISA fees charged to the Company including Kronos and CompX, aggregated
approximately $3.6 million in 2002, $4.1 million in 2003 and $8.1 million in
2004. The increase in the aggregate ISA fee charged to the Company in 2004 is
due primarily to approximately 30 staff positions, who had previously been
compensated by NL and Kronos, who in 2004 commenced being compensated by
Contran. NL had an ISA with TIMET whereby NL provided certain services to TIMET
for approximately $300,000 in 2002 and $14,000 in 2003.
Tall Pines Insurance Company, Valmont Insurance Company (which merged into
Tall Pines in December 2004, with Tall Pines surviving the merger) and EWI RE,
Inc. provide for or broker certain insurance policies for Contran and certain of
its subsidiaries and affiliates, including the Company. Tall Pines is
wholly-owned by a subsidiary of Valhi, and EWI is currently a wholly-owned
subsidiary of NL. Prior to January 2002, an entity controlled by one of Harold
C. Simmons' daughters owned a majority of EWI, and Contran owned the remainder
of EWI. In January 2002, NL purchased EWI from its previous owners for an
aggregate cash purchase price of approximately $9 million. See Note 2. The
purchase was approved by a special committee of NL's board of directors
consisting of two of its independent directors, and the purchase price was
negotiated by the special committee based upon its consideration of relevant
factors, including but not limited to due diligence performed by independent
consultants and an appraisal of EWI conducted by an independent third party
selected by the special committee. Consistent with insurance industry practices,
Tall Pines, Valmont and EWI receive commissions from the insurance and
reinsurance underwriters for the policies that they provide or broker. The
aggregate premiums paid by the Company to Tall Pines and Valmont were $10.6
million in 2002, $8.2 million in 2003 and $4.3 million in 2004, and the
aggregate premiums paid by affiliates (other than the Company and its joint
venture) for policies provided or brokered by EWI prior to its acquisition by
the Company were $6.5 million in 2002. These amounts principally included
payments for insurance and reinsurance premiums paid to third parties, but also
included commissions paid to Tall Pines, Valmont and EWI. The aggregate premiums
paid by affiliates of the Company for insurance brokered by EWI were
approximately $15 million in both 2003 and 2004. The Company expects that these
relationships with Tall Pines and EWI will continue in 2005.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and affiliates, including the Company, have entered
into a loss sharing agreement under which any uninsured loss is shared by those
entities who have submitted claims under the relevant policy. The Company
believes the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justifies the risk
associated with the potential for any uninsured loss.
During 2002 the Company and certain officers of the Company entered into
agreements whereby stock options held by such officers to purchase an aggregate
of 513,800 shares of the Company's common stock were exercised or canceled for
value. The officers tendered 52,179 shares of their own Company common stock,
held by such officers for at least six months, to pay for a portion of the stock
option exercise price, and such shares were valued at the market price of the
Company's common stock on the date of exercise. The remaining aggregate exercise
price was paid by such officers by tendering of a portion of the shares acquired
upon exercise of the options, also based on the market price of the Company's
common stock on the date of exercise. On a net basis, the Company made aggregate
cash payments to the officers of approximately $2.2 million, of which
approximately $1.7 million was recorded as compensation expense and
approximately $.5 million (equal to the intrinsic value of the options exercised
through the tender of the 52,179 shares) was recorded as a direct reduction to
equity through treasury stock. The aggregate number of treasury shares held by
the Company did not change as a result of these transactions. Payment of
required tax withholding related to these transactions were funded by the
officers using a portion of the cash payments made to them.
Capital transactions with affiliates during 2002 and 2003, as reflected on
the accompanying Consolidated Statements of Cash Flows, relates principally to
CompX dividends paid to Valhi and Valcor.
Note 18 - Other income; noncompete agreement income and litigation settlement
gains:
Other income for the years ended December 31, 2002, 2003 and 2004 is
summarized below:
Years ended December 31,
---------------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Contract dispute settlement $ - $ - $ 6,289
Other 377 436 664
------ ------ -------
$ 377 $ 436 $ 6,953
====== ====== =======
The contract dispute settlement relates to Kronos' settlement with a
customer. As part of the settlement, the customer agreed to make payments to
Kronos through 2007 aggregating $7.3 million. The $6.3 million gain recognized
in 2004 represents the present value of the future payments to be paid by the
customer to Kronos. Of such $7.3 million, $1.5 million was paid to Kronos in the
second quarter of 2004, $1.75 million is due in each of the second quarter of
2005 and 2006 and $2.25 million is due in the second quarter of 2007.
NL's $20 million of proceeds from the disposal of its specialty chemicals
business unit in January 1998 related to its agreement not to compete in the
rheological products business was recognized as a component of general corporate
income (expense) ratably over the five-year non-compete period ended in January
2003 ($4 million recognized in 2002 and $333,000 recognized in 2003).
In 2002, 2003 and 2004, the Company recognized $5.2 million, $823,000 and
$552,000 respectively, of net gains from legal settlements, all of which relates
to settlements with certain of its former insurance carriers. These and similar
settlements from 2000 and 2001 resolved court proceedings in which the Company
sought reimbursement from the carriers for legal defense expenditures and
indemnity coverage for certain of its environmental remediation expenditures.
Proceeds from substantially all of the settlements reached in 2000 and 2001 were
transferred by the carriers to special purpose trusts formed by the Company to
pay for certain of its future remediation and other environmental expenditures.
At December 31, 2003 and 2004, restricted cash equivalents and debt securities
include an aggregate of $24 million and $19 million, respectively, held by such
special purpose trusts.
Note 19 - 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. Since 1987,
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 asserted health concerns associated
with the use of lead-based paints, including damages for personal injury,
contribution and/or indemnification for medical expenses, medical monitoring
expenses and costs for educational programs. 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.
NL believes these actions are without merit, intends to continue to deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. NL has neither lost nor settled any of these cases. NL has not
accrued any amounts for pending lead pigment and lead-based paint litigation.
Liability that may result, if any, cannot reasonably be estimated. There can be
no assurance that NL 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.
Environmental matters and litigation. The Company's operations are governed
by various federal, state, local and foreign 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
comply with 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 approximately 60 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 of 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.
A summary of the activity in the Company's accrued environmental costs
during the past three years is presented in the table below. The amount shown in
the table below for payments against the Company's accrued environmental costs
is net of a $1.5 million recovery of remediation costs previously expended by NL
that was paid to NL by other PRPs in the third quarter of 2004 pursuant to an
agreement entered into by NL and the other PRPs.
Years ended December 31,
---------------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Balance at the beginning of the year $100,748 $ 91,506 $ 77,481
Additions charged to expense 9,388 26,211 1,602
Payments (18,630) (40,236) (11,266)
-------- -------- -------
Balance at the end of the year $ 91,506 $ 77,481 $ 67,817
======== ======== ========
Amounts recognized in the balance sheet:
Current liability $ 19,627 $ 16,570
Noncurrent liability 57,854 51,247
-------- --------
$ 77,481 $ 67,817
======== ========
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 December 31, 2003 and 2004, no receivables from recoveries have been
recognized.
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 NL's obligation. At December 31,
2004, the Company had accrued $68 million for those environmental matters which
are reasonably estimable. It is not possible to estimate the range of costs for
certain sites. The upper end of the range of reasonably possible costs to the
Company for sites which it is possible to estimate costs is approximately $93
million. The Company's estimates of such liabilities have not been discounted to
present value.
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.
At December 31, 2004, 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
did have 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 December 31, 2004, NL had $19 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 NL's
future environmental remediation and other environmental expenditures (2003 -
$24 million). Use of such restricted balances does not affect the Company's
consolidated net cash flows. Such restricted balances declined by approximately
$35 million during 2003 due primarily to a $30.8 million payment made by NL
related to the final settlement of one of NL's sites.
Other litigation. The Company has been named as a defendant in various
lawsuits in a variety of jurisdictions, alleging personal injuries as a result
of occupational exposure primarily to products manufactured by formerly owned
operations containing asbestos, silica and/or mixed dust. Approximately 500 of
these cases involving a total of approximately 22,000 plaintiffs and their
spouses remain pending, down from cases involving approximately 32,000
plaintiffs from one year ago. 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 (MDL) pending in the United States District Court
for the Eastern District of Pennsylvania. The Company has not accrued any
amounts for this litigation because liability that might result to the Company,
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, the Company has
received notices regarding asbestos or silica claims purporting to be brought
against former subsidiaries of the Company, including notices provided to
insurers with which the Company has entered into settlements extinguishing
certain insurance policies. These insurers may seek indemnification from the
Company.
In addition to the litigation described above, the Company and its
subsidiaries may be involved from time to time in various other environmental,
contractual, product liability, patent (or other intellectual property),
employment and other claims and disputes incidental to their present and former
businesses. In certain cases, the Company has insurance coverage for such claims
and disputes. The Company currently believes the disposition of all of these
claims and disputes individually or in the aggregate, should not have a material
adverse effect on the Company's consolidated financial condition, results of
operations or liquidity.
Concentrations of credit risk. Sales of TiO2 accounted for substantially
all of Kronos' net sales from continuing operations during each of 2002, 2003
and 2004. TiO2 is generally sold to the paint, plastics and paper industries.
Such markets are generally considered "quality-of-life" markets whose demand for
TiO2 is influenced by the relative economic well-being of the various geographic
regions. TiO2 is sold to over 4,000 customers, with the top ten customers
accounting for approximately one-fourth of Kronos' net sales in each of the last
three years. By volume, approximately one-half of Kronos' TiO2 sales were to
Europe in each of the past three years with about 40% attributable to North
America.
Component products are sold primarily in North America to original
equipment manufacturers in North America and Europe. In 2004, the ten largest
customers accounted for approximately 43% of component products sales (2003 -
44%; 2002 - 38%).
At December 31, 2004, consolidated cash, cash equivalents and restricted
cash includes $82.8 million invested in U.S. Treasury securities purchased under
short-term agreements to resell (2003 - $38 million), all of which is held in
trust for the Company by a single U.S. bank (2003 - $17 million).
Capital expenditures. Firm purchase commitments for capital projects in
process and for raw material and other purchase commitments at December 31, 2004
approximated $3.3 million and $12.6 million, respectively. The purchase
obligations consist of all open purchase orders and contractual obligations,
primarily commitments to purchase raw materials.
Other. Royalty expense was $708,000 in 2002, $450,000 in 2003 and $222,000
in 2004. Royalties relate principally to certain products manufactured by CompX
in Canada and sold in the United States under the terms of third-party patent
license agreements, one of which expired in 2003 and the remaining agreement
expires in 2021.
Rent expense, principally for Kronos' operating facilities and equipment
was $11 million in 2002, $13 million in 2003 and $6 million in 2004. At December
31, 2004, future minimum rentals under noncancellable operating leases are
approximately $942,000 in 2005, $717,000 in 2006, $338,000 in 2007, $164,000 in
2008, $160,000 in 2009 and $480,000 thereafter.
Income taxes. The Company and Valhi have agreed to a policy providing for
the allocation of tax liabilities and tax payments as described in Note 1. Under
applicable law, the Company, as well as every other member of the Contran Tax
Group, are each jointly and severally liable for the aggregate federal income
tax liability of Contran and the other companies included in the Contran Tax
Group for all periods in which the Company is included in the Contran Tax Group.
Valhi has agreed, however, to indemnify the Company for any liability for income
taxes of the Contran Tax Group in excess of the Company's tax liability
previously computed and paid by NL in accordance with the tax allocation policy.
In this regard, in the event all or a portion of the $227 million income tax
liability related to the shares of Kronos transferred or distributed by NL to
Valhi and Tremont becomes payable by Contran to the applicable tax authority
(See Note 2), NL and every other member of the Contran Tax Group would be
jointly and severally liable for such income tax in the event Contran did not
pay such tax to the applicable tax authority. However, in this event, the
Company would also have the benefit of Valhi's indemnification, as described
above.
Note 20 - Financial instruments:
Summarized below is the estimated fair value and related net carrying value
of the Company's financial instruments.
December 31, December 31,
2003 2004
--------------------------- ---------------------------
Carrying
Carrying Fair Amount Fair
Amount Value (Restated) Value
------------- ------------- ---------------------------
(In millions)
Cash, cash equivalents, current and noncurrent restricted
cash equivalents and current and noncurrent restricted
marketable debt securities $ 121.6 $ 121.6 $ 120.3 $ 120.3
Marketable equity securities - classified as
available-for-sale $ 70.5 $ 70.5 $ 75.8 $ 75.8
Notes payable and long-term debt:
Fixed rate with market quotes-
8.875% Senior Secured Notes $ 356.1 $ 356.1 $ - $ -
Other fixed rate debt .6 .6 - -
Variable rate debt 26.0 26.0 - -
Minority interest in Kronos common stock $ 77.8 $ 530.2 $ - $ -
Minority interest in CompX common stock 48.4 30.4 49.2 79.4
Common stockholders' equity (1) $ 127.5 $ 559.2 $ 233.6 $1,070.5
(1) The carrying amount of common stockholders' equity as of December 31, 2004
and 2005 has been restated. See Note 1.
Fair value of the Company's marketable equity securities, restricted
marketable debt securities and Notes, and the fair value of the Company's common
stockholder's equity and minority interest in Kronos and CompX, are based upon
quoted market prices at each balance sheet date.
Certain of the Company's sales generated by its non-U.S. operations are
denominated in U.S. dollars. The Company 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.
The Company has not entered into these contracts for trading or speculative
purposes in the past, nor does the Company 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 December 31, 2004, CompX
held a series of contracts to exchange an aggregate of U.S. $7.2 million for an
equivalent amount of Canadian dollars at exchange rates of Cdn. $1.19 to Cdn.
$1.23 per U.S. dollar. Such contracts mature through March 2005. The exchange
rate was $1.21 per U.S. dollar at December 31, 2004. At December 31, 2003 CompX
held contracts maturing through February 2004 to exchange an aggregate of U.S.
$4.2 million for an equivalent amount of Canadian dollars at an exchange rates
of Cdn. $1.30 to Cdn. $1.33 per U.S. dollar. At December 31, 2003, the actual
exchange rate was Cdn. $1.31 per U.S. dollar. The estimated fair value of such
contracts is not material at December 31, 2003 and 2004.
At December 31, 2003, Kronos had also entered into a short-term currency
forward contract maturing on January 2, 2004 to exchange an aggregate of euro 40
million into U.S. dollars at an exchange rate of U.S. $1.25 per euro. Such
contract was entered into in conjunction with the January 2004 payment of an
intercompany dividend from one of Kronos' European subsidiaries. At December 31,
2004, the actual exchange rate was U.S. $1.25 per euro. The estimated fair value
of such foreign currency forward contract was not material at December 31, 2003.
The Company periodically uses interest rate swaps and other types of
contracts to manage interest rate risk with respect to financial assets or
liabilities. The Company has not entered into these contracts for trading or
speculative purposes in the past, nor does the Company currently anticipate
entering into such contracts for trading or speculative purposes in the future.
The Company was not a party to any such contract during 2002, 2003 or 2004.
Note 21 - Accounting principles newly adopted in 2002, 2003 and 2004:
Impairment of long-lived assets. The Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," effective
January 1, 2002. SFAS No. 144 retains the fundamental provisions of prior GAAP
with respect to the recognition and measurement of long-lived asset impairment
contained in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Lived-Lived Assets to be Disposed Of." However, SFAS No. 144 provides
new guidance intended to address certain implementation issues associated with
SFAS No. 121, including expanded guidance with respect to appropriate cash flows
to be used to determine whether recognition of any long-lived asset impairment
is required, and if required how to measure the amount of the impairment. SFAS
No. 144 also requires that net assets to be disposed of by sale are to be
reported at the lower of carrying value or fair value less cost to sell, and
expands the reporting of discontinued operations to include any component of an
entity with operations and cash flows that can be clearly distinguished from the
rest of the entity. Adoption of SFAS No. 144 did not have a significant effect
on the Company.
Goodwill. The Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," effective January 1, 2002. Under SFAS No. 142, goodwill, including
goodwill arising from the difference between the cost of an investment accounted
for by the equity method and the amount of the underlying equity in net assets
of such equity method investee ("equity method goodwill"), is no longer
amortized on a periodic basis. Goodwill (other than equity method goodwill) is
subject to an impairment test to be performed at least on an annual basis, and
impairment reviews may result in future periodic write-downs charged to
earnings. Equity method goodwill is not tested for impairment in accordance with
SFAS No. 142; rather, the overall carrying amount of an equity method investee
will continue to be reviewed for impairment in accordance with existing GAAP.
There is currently no equity method goodwill associated with any of the
Company's equity method investees. Under the transition provisions of SFAS No.
142, all goodwill existing as of June 30, 2001 ceased to be periodically
amortized as of January 1, 2002, and all goodwill arising in a purchase business
combination (including step acquisitions) completed on or after July 1, 2001 was
not periodically amortized from the date of such combination.
Goodwill attributable to the component products operating segment was
assigned to three reporting units within that operating segment, one consisting
of CompX's security products operations, one consisting of CompX's European
operations and one consisting of CompX's Canadian and Taiwanese operations. No
goodwill is attributable to the chemicals operating segment. See Note 8. Under
SFAS No. 142, such goodwill will be deemed to not be impaired if the estimated
fair value of the applicable reporting unit exceeds the respective net carrying
value of such reporting unit, including the allocated goodwill. If the fair
value of the reporting unit is less than carrying value, then a goodwill
impairment loss would be recognized equal to the excess, if any, of the net
carrying value of the reporting unit goodwill over its implied fair value (up to
a maximum impairment equal to the carrying value of the goodwill). The implied
fair value of reporting unit goodwill would be the amount equal to the excess of
the estimated fair value of the reporting unit over the amount that would be
allocated to the tangible and intangible net assets of the reporting unit
(including unrecognized intangible assets) as if such reporting unit had been
acquired in a purchase business combination accounted for in accordance with
GAAP as of the date of the impairment testing.
The Company completed its initial, transitional goodwill impairment
analysis under SFAS No. 142 as of January 1, 2002, and no goodwill impairments
were deemed to exist as of such date. In accordance with the requirements of
SFAS No. 142, the Company will review the goodwill of its reporting unit for
impairment during the third quarter of each year starting in 2002. Goodwill will
also be reviewed for impairment at other times during each year when events or
changes in circumstances indicate that an impairment might be present. No
goodwill impairments were deemed to exist as a result of the Company's annual
impairment reviews completed during 2002, 2003 and 2004. However, as a result of
CompX's decision to dispose of its European operations, CompX recognized a
goodwill impairment charge in the fourth quarter of 2004. See Note 8.
Asset retirement obligations. The Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations," on January 1, 2003. Under SFAS No. 143, the
fair value of a liability for an asset retirement obligation covered under the
scope of SFAS No. 143 is recognized in the period in which the liability is
incurred, with an offsetting increase in the carrying amount of the related
long-lived asset. Over time, the liability would be accreted to its future
value, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
Under the transition provisions of SFAS No. 143, at the date of adoption on
January 1, 2003 the Company recognized (i) an asset retirement cost capitalized
as an increase to the carrying value of its property, plant and equipment, (ii)
accumulated depreciation on such capitalized cost and (iii) a liability for the
asset retirement obligation. Amounts resulting from the initial application of
SFAS No. 143 are measured using information, assumptions and interest rates all
as of January 1, 2003. The amount recognized as the asset retirement cost is
measured as of the date the asset retirement obligation was incurred. Cumulative
accretion on the asset retirement obligation, and accumulated depreciation on
the asset retirement cost, is recognized for the time period from the date the
asset retirement cost and liability would have been recognized had the
provisions of SFAS No. 143 been in effect at the date the liability was
incurred, through January 1, 2003. The difference, if any, between the amounts
to be recognized as described above and any associated amounts recognized in the
Company's balance sheet as of December 31, 2002 is recognized as a cumulative
effect of a change in accounting principle as of the date of adoption. The
effect of adopting SFAS No. 143 as of January 1, 2003 was not material, as
summarized in the table below, and is not separately recognized in the
accompanying Statement of Income.
Amount
------------
(in millions)
Increase in carrying value of net property, plant and equipment:
Cost $ .4
Accumulated depreciation (.1)
Decrease in carrying value of previously-accrued closure and
post-closure activities .3
Asset retirement obligation recognized (.6)
----
Net impact $ -
====
The increase in the asset retirement obligations in 2003 and 2004,
approximately $200,000 in each year, is due to accretion expense and the effects
of currency translation. Accretion expense, which is reported as a component of
cost of sales in the accompanying statement of income, was less than $100,000
for each of the years ended December 31, 2003 and 2004. At December 31, 2004,
the Company no longer consolidates the financial position of Kronos and
therefore no longer reports any asset retirement obligations.
Costs associated with exit or disposal activities. The Company adopted SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," on
January 1, 2003 for exit or disposal activities initiated on or after that date.
Under SFAS No. 146, costs associated with exit activities, as defined, that are
covered by the scope of SFAS No. 146 will be recognized and measured initially
at fair value, generally in the period in which the liability is incurred. Costs
covered by the scope of SFAS No. 146 include termination benefits provided to
employees, costs to consolidate facilities or relocate employees, and costs to
terminate contracts (other than a capital lease). Under prior GAAP, a liability
for such an exit cost is recognized at the date an exit plan is adopted, which
may or may not be the date at which the liability has been incurred. The effect
of adopting SFAS No. 146 as of January 1, 2003 was not material as the Company
was not involved in any exit or disposal activities covered by the scope of the
new standard as of such date.
Variable interest entities. The Company complied with the consolidation
requirements of FASB Interpretation ("FIN") No. 46R, "Consolidation of Variable
Interest Entities," an interpretation of ARB No. 51, as amended, as of March 31,
2004. The Company does not have any involvement with any variable interest
entity (as that term is defined in FIN No. 46R) covered by the scope of FIN No.
46R that would require the Company to consolidate such entity under FIN No. 46R
which had not already been consolidated under prior applicable GAAP, and
therefore the impact to the Company of adopting the consolidation requirements
of FIN No. 46R was not material.
Note 22 - Quarterly results of operations (unaudited):
Quarter ended
----------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------- ---------- ---------- ---------
(Restated) (Restated) (Restated) (Restated)
(In millions, except per share data)
Year ended December 31, 2003
Net sales $295.3 $ 308.5 $287.0 $291.3
Cost of sales 222.8 232.2 213.3 213.8
Income (loss) from continuing operations (2) $ 10.2 $ 29.5 $ 15.4 $(73.5)
Discontinued operations (2) (.4) (.5) (1.6) (.3)
------ ------- ------ ------
Net income (loss) (2) $ 9.8 $ 29.0 $ 13.8 $(73.8)
====== ======= ====== ======
Diluted earnings (loss) per
common share $ .20 $ .61 $ .29 $(1.54)
Year ended December 31, 2004
Net sales $306.8 $ 342.0 $ 46.3 $ 46.6
Cost of sales 237.4 262.8 35.9 36.4
Income from continuing operations (1) $ 5.5 $ 146.4 $ 6.8 $ .7
Discontinued operations (2) - .2 .2 3.1
------ ------- ------ ------
Net income (1), (2) $ 5.5 $ 146.6 $ 7.0 $ 3.8
====== ======= ====== ======
Diluted earnings per common share (1), (2)
$ .11 $ 3.03 $ .14 $ .07
(1) During the fourth quarter of 2004, Kronos determined that it should have
recognized an additional $17.3 million net deferred income tax benefit
during the second quarter of 2004, primarily related to the amount of the
valuation allowance related to Kronos' German operations which should have
been reversed. While the additional tax benefit is not material to the
Company's second quarter 2004 results, the quarterly results of operations
for 2004, as presented above, reflects this additional tax benefit.
Accordingly, income from continuing operations for the second quarter of
2004 of $189.6 million ($3.92 per basic share), as reflected above, differs
from the $180.9 million ($3.74 per basic share) that would have been
reported by the Company in the second quarter of 2004, giving effect to the
acquisition of CompX discussed in Note 2. Such $8.7 million increase in
income from continuing operations is comprised of (i) the additional
deferred income tax benefit of $17.3 million and (ii) an additional
minority interest in earnings of $8.6 million.
(2) Income (loss) from continuing operations and net income (loss) and net
income (loss) per share for the third and fourth quarters of 2003 and all
quarters in 2004 have been restated. Income (loss) from continuing
operations and net income (loss), and the related per diluted share
amounts, as presented above, differs from amounts previously reported by
($2.5 million) ($.05 per share) in the quarter ended September 30, 2003 and
by ($83.2 million) ($1.70 per share) in the quarter ended December 31,
2003. Income from discontinued operations have been restated for the fourth
quarter of 2004. See Note 1.
The sum of the quarterly per share amounts may not equal the annual per
share amounts due to relative changes in the weighted average number of shares
used in the per share computations.
Note 23 - Accounting principles not yet adopted:
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 are 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. The Company will adopt SFAS No. 123R, "Share-Based Payment"
as of July 1, 2005. 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, 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 July 1, 2005, and to all awards
existing as of June 30, 2005 which are subsequently modified, repurchased or
cancelled. Additionally, as of July 1, 2005, the Company will be required to
recognize compensation cost for the portion of any non-vested award existing as
of June 30, 2005 over the remaining vesting period. Because the Company has not
granted any options to purchase its common stock and is not expected to grant
any options prior to July 1, 2005 and because the number of non-vested awards as
of June 30, 2005 with respect to options granted by NL to employees of the
Company and its subsidiaries and affiliates 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 the Company or its subsidiaries and
affiliates, however, grant a significant number of 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 24 - Discontinued operations:
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 3), 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
estimated fair value less costs to sell of such operations exceeded the carrying
amount of the related net assets, 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 estimated realizable value. Such
impairment charge represented an impairment of goodwill. See Note 8.
In January 2005, CompX completed the sale of such operations for proceeds
(net of expenses) of approximately $18.4 million in cash 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 will no longer include
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 approximated the net realizable value previously estimated
at the time the goodwill impairment charge was recognized.
Condensed income statement data for Thomas Regout is presented below. The
$6.5 million impairment charge is included in Thomas Regout's operating loss for
2004. Interest expense included in discontinued operations represents interest
on certain intercompany indebtedness with CompX, which indebtedness arose at the
time of CompX's acquisition of such operations prior to 2002 and corresponded to
certain third-party indebtedness CompX incurred at the time such operations were
acquired. Discontinued operations in 2004 includes a $4.2 million income tax
benefit associated with the U.S. capital loss expected to be realized in the
first quarter of 2005 upon completion of the sale of the Thomas Regout
operations. Recognition of the benefit of such capital loss by the Company is
appropriate under GAAP in the fourth quarter of 2004 at the time such operations
were classified as held for sale because the Company concluded that such benefit
meets the more-likely-than-not recognition criteria as of December 31, 2004. See
Note 1.
Years ended December 31,
---------------------------------------
2002 2003 2004
---- ---- ----
(Restated)
Net sales $ 31.3 $ 35.3 $ 41.7
Operating income (loss) $ .1 $ (5.5) $ (3.5)
Settlement gain .7 - -
Interest expense (1.3) (1.4) (1.5)
Income tax benefit .2 2.6 4.6
Minority interest in losses (earnings) .1 1.4 3.9
------ ------ ------
$ (.2) $ (2.9) $ 3.5
====== ====== ======
Condensed balance sheet data for Thomas Regout, included in the Company's
consolidated balance sheets, is presented below.
December 31,
-------------------
2003 2004
---- ----
Current assets $ 12.7 $ 18.0
Noncurrent assets 25.9 11.0
------ -------
$ 38.6 $ 29.0
====== =======
Current liabilities $ 7.1 $ 5.0
Net assets 31.5 24.0
------ -------
$ 38.6 $ 29.0
====== =======
Included in the net assets of Thomas Regout are certain intercompany loans
payable by Thomas Regout to CompX which are eliminated in the Company's
consolidated balance sheet.
Note 25 - Subsequent event:
During the first quarter of 2005, NL sold approximately 467,000 shares of
Kronos common stock, representing approximately 1% of Kronos' outstanding
shares, in market transactions for an aggregate of $19.0 million. The Company
expects to recognize a $14.6 million pre-tax securities transaction gain related
to such sales in the first quarter of 2005. See Note 15.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of NL Industries, Inc.:
Our audits of the consolidated financial statements, of management's
assessment of the effectiveness of internal control over financial reporting and
of the effectiveness of internal control over financial reporting referred to in
our report dated March 30, 2005, except for the Original Restatement discussed
in Note 1 to the consolidated financial statements and the matter related to the
Original Restatement discussed in the penultimate paragraph of Management's
Report on Internal Control Over Financial Reporting as to which date is May 31,
2005, and except for the Current Restatement discussed in Note 1 to the
consolidated financial statements and the matter related to the Current
Restatement discussed in the penultimate paragraph of Management's Report on
Internal Control Over Financial Reporting as to which date is December 23, 2005,
appearing in this Annual Report on Form 10-K/A also included an audit of the
financial statement schedules listed in Item 15(a)(2) of this Form 10-K/A. In
our opinion, these financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas March 30, 2005, except for the Original Restatement discussed in
Note 1 to the consolidated financial statements and the matter related to the
Original Restatement discussed in the penultimate paragraph of Management's
Report on Internal Control Over Financial Reporting as to which date is May 31,
2005, and except for the Current Restatement discussed in Note 1 to the
consolidated financial statements and the matter related to the Current
Restatement discussed in the penultimate paragraph of Management's Report on
Internal Control Over Financial Reporting as to which date is December 23, 2005
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31, 2003 and 2004
(In thousands)
2003 2004
------------ -----------
(Restated) (Restated)
Current assets:
Cash and cash equivalents $ 2,428 $ 45,029
Restricted cash equivalents 14,725 3,131
Restricted marketable debt securities 6,147 6,713
Accounts and notes receivable 536 478
Receivable from subsidiaries 932 2,001
Prepaid expenses 709 151
Deferred income taxes 7,745 12,435
---------- ---------
Total current assets 33,222 69,938
---------- ---------
Other assets:
Marketable securities 52,741 56,707
Restricted marketable debt securities 4,284 3,848
Investment in subsidiaries 187,102 119,278
Investment in Kronos Worldwide, Inc. - 175,578
Note receivable from Kronos Worldwide, Inc. 200,000 -
Other 331 301
Property and equipment, net 647 646
Total other assets 445,105 356,358
---------- ---------
$ 478,327 $ 426,296
========== =========
Current liabilities:
Payable to affiliates $ 131,763 $ 1,644
Accounts payable and accrued liabilities 14,375 11,140
Income taxes 372 1,050
Accrued environmental costs 13,745 11,216
Deferred taxes - 23,842
---------- ---------
Total current liabilities 160,255 48,892
---------- ---------
Noncurrent liabilities:
Notes payable to affiliates 22,320 -
Deferred income tax 111,726 98,157
Accrued environmental costs 26,510 23,050
Accrued pension cost 13,019 7,968
Accrued postretirement benefits cost 12,235 10,572
Other 4,727 4,028
---------- ---------
Total noncurrent liabilities 190,537 143,775
---------- ---------
Stockholders' equity 127,535 233,629
---------- ---------
$ 478,327 $ 426,296
========== =========
Contingencies (Note 3)
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Operations
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
Revenues and other income (expense):
Equity in income from continuing operations of
subsidiaries $ 69,557 $ 92,192 $169,966
Interest and dividends 2,494 1,858 1,420
Interest income from subsidiaries 12,165 1,184 13,649
Securities transactions, net (105) 2,737 2,113
Litigation settlements gains, net 5,225 823 552
Disposition of property & equipment 1 10,325 99
Other income, net 4,080 414 223
-------- -------- --------
93,417 109,533 188,022
-------- -------- --------
Costs and expenses:
General and administrative 35,431 54,154 17,984
Interest 34,217 909 409
-------- -------- --------
69,648 55,063 18,393
-------- -------- --------
Income before income taxes 23,769 54,470 169,629
Provision for income taxes (benefit) (15,383) 72,777 10,368
-------- -------- --------
Income (loss) from continuing operations 39,152 (18,307) 159,261
Discontinued operations (206) (2,874) 3,552
-------- -------- --------
Net income (loss) $ 38,946 $(21,181) $162,813
======== ======== ========
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Cash Flows
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
Cash flows from operating activities:
Net income (loss) $ 38,946 $(21,181) $162,813
Distributions from Kronos 111,000 7,000 23,168
Distributions from CompX - - 1,297
Noncash interest expense (income), net 15,704 (869) -
Deferred income taxes (10,754) 53,220 (3,621)
Equity in earnings of subsidiaries and investments:
Continuing operations (69,557) (92,192) (169,966)
Discontinued operations 206 2,874 684
Securities transactions 105 (2,737) (2,113)
Other, net (1,899) (11,304) (1,203)
Net change in assets and liabilities 4,419 45,244 (3,967)
-------- -------- --------
Net cash provided (used) by operating activities
88,170 (19,945) 7,092
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (2) - -
Repayment of loans by affiliates 194,000 - 31,423
Change in restricted cash equivalents and restricted
marketable debt securities, net 16,622 42,744 14,460
Proceeds from disposition of property and equipment 9 12,420 -
Proceeds from sales of securities - - 2,745
-------- -------- --------
Net cash provided by investing activities 210,629 55,164 48,628
-------- -------- --------
Cash flows from financing activities:
Indebtedness - principal payments (194,000) - -
Loans from affiliates, net 64,600 2,620 (22,320)
Dividends paid (157,978) (38,183) -
Common stock issued - - 915
Treasury stock:
Purchased (21,254) - -
Reissued 454 1,738 8,286
-------- -------- --------
Net cash used by financing activities (308,178) (33,825) (13,119)
-------- -------- --------
Net change during the year from operating investing and
financing activities (9,379) 1,394 42,601
Balance at beginning of year 10,413 1,034 2,428
-------- -------- --------
Balance at end of year $ 1,034 $ 2,428 $ 45,029
======== ======== ========
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Notes to Condensed Financial Information
Note 1 - Basis of presentation:
The Consolidated Financial Statements of NL Industries, Inc. and the
related Notes to Consolidated Financial Statements are incorporated herein by
reference. The accompanying financial statements reflect NL Industries, Inc.'s
investment in Kronos Worldwide, Inc., CompX International, Inc. and NL's other
subsidiaries on the equity method of accounting.
Note 2 - Investment in and advances to subsidiaries:
December 31,
-----------------------
2003 2004
---- ----
(Restated) (Restated)
(In thousands)
Current:
Receivable from:
Kronos $ 384 $ -
EWI - income taxes 89 130
Valhi - income taxes - 1,381
153506 Canada 405 410
TIMET 50 -
CompX - income taxes - 52
Other 4 28
-------- --------
$ 932 $ 2,001
======== ========
Payable to:
Kronos - income taxes $ 1,209 $ -
CompX - income taxes - 1,253
Valhi - income taxes 129,846 86
Tremont 445 288
EMS 217 -
Other 46 17
-------- --------
$131,763 $ 1,644
======== ========
Noncurrent:
Notes receivable from Kronos $200,000 $ -
======== ========
Notes payable to EMS Financial $ 22,320 $ -
======== ========
During 2002 the Company completed certain capital restructuring
transactions whereby Kronos distributed to the Company certain affiliate notes
receivable, net and the Company recorded a corresponding decrease in its
investment in Kronos.
On September 24, 2004, the Company completed the acquisition of 10,374,000
shares of CompX common stock, representing approximately 68% of the outstanding
shares of CompX common stock. The CompX common stock was purchased from Valhi
and Valcor, a wholly-owned subsidiary of Valhi, at a purchase price of $16.25
per share, or an aggregate of approximately $168.6 million. The purchase price
was paid by NL's transfer to Valhi and Valcor of $168.6 million of NL's $200
million long-term note receivable from Kronos. NL's acquisition was accounted
for under accounting principles generally accepted in the United States of
America ("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. Any excess of the aggregate
$168.6 million principal amount of NL's note receivable Kronos transferred to
Valhi and Valcor over the net carrying value of Valhi's and Valcor's investment
in CompX is accounted for as a reduction of NL's consolidated stockholders'
equity.
In December 2003, NL completed the distribution of approximately 48.8% of
the outstanding shares of Kronos' common stock to NL stockholders in the form of
a pro-rata dividend. As part of the plan immediately prior to the distribution
of shares of Kronos common stock, Kronos paid a $200 million dividend to NL in
the form of a long-term note payable. The $200 million long-term note payable to
NL was unsecured and bore interest at 9% per annum, with interest payable
quarterly. A portion of such note was used to acquire CompX in September 2004.
The remainder of the note was repaid in 2004.
December 31,
-----------------------
2003 2004
---- ----
(In thousands)
Investment in:
Kronos $ 81,588 $ -
CompX 82,275 90,045
Other subsidiaries 23,239 29,233
---------- ---------
$ 187,102 $ 119,278
========== =========
Years ended December 31,
------------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Equity in income from continuing operations
of subsidiaries and affiliates:
Kronos $ 66,264 $ 86,642 $158,373
CompX 646 3,747 6,039
Other subsidiaries 2,647 1,803 5,554
--------- -------- --------
$ 69,557 $ 92,192 $169,966
========= ======== ========
Note 3 - Long-term debt:
The Company's $194 million of 11.75% Senior Secured Notes at December 31,
2001 were redeemed at par value in 2002.
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at charged to Balance
beginning costs and Net Currency at end
Description of year expenses deductions translation Other(1) of year
------------------------------------ ------------ ------------ ----------- ------------ ---------- ---------
Year ended December 31, 2002:
Allowance for doubtful accounts $ 3,199 $ 939 $(1,074) $ 353 $ - $ 3,417
======= ======= ======= ======= ======= =======
Accrual for planned major
maintenance activities $ 3,389 $ 3,848 $(3,746) $ 495 $ - $ 3,986
======= ======= ======= ======= ======= =======
Amortization of intangibles $ 1,010 $ 612 $ - $ (1) $ - $ 1,621
======= ======= ======= ======= ======= =======
Year ended December 31, 2003:
Allowance for doubtful accounts $ 3,417 $ 624 $ (537) $ 491 $ - $ 3,995
======= ======= ======= ======= ======= =======
Accrual for planned major
maintenance activities $ 3,986 $ 5,337 $(3,896) $ 900 $ - $ 6,327
======= ======= ======= ======= ======= =======
Amortization of intangibles $ 1,621 $ 605 $ - $ 19 $ - $ 2,245
======= ======= ======= ======= ======= =======
Year ended December 31, 2004:
Allowance for doubtful accounts $ 3,995 $ 188 $ (324) $ (2) $(2,849) $ 1,008
======= ======= ======= ======= ======= =======
Accrual for planned major
maintenance activities $ 6,327 $ 5,311 $(4,993) $ (156) $(6,489) $ -
======= ======= ======= ======= ======= =======
Amortization of intangibles $ 2,245 $ 603 $ - $ 14 $ - $ 2,862
======= ======= ======= ======= ======= =======
Note - Certain information has been omitted from this Schedule because it is
disclosed in the notes to the Consolidated Financial Statements.
(1) Effective July 1, 2004 NL commenced accounting for its investment in Kronos
Worldwide, Inc. using the equity method and ceased consolidation of Kronos'
operations at that time.