SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2001 Commission file number 1-5467
----------------- ------
VALHI, INC.
- ------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 87-0110150
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- -
Number of shares of common stock outstanding on July 31, 2001: 114,707,317.
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 2000
and June 30, 2001 3
Consolidated Statements of Income -
Three months and six months ended
June 30, 2000 and 2001 5
Consolidated Statements of Comprehensive Income -
Six months ended June 30, 2000 and 2001 6
Consolidated Statements of Cash Flows -
Six months ended June 30, 2000 and 2001 7
Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2001 9
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 20
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 37
Item 4. Subsmission of Matters to a Vote of Security Holders 37
Item 6. Exhibits and Reports on Form 8-K. 38
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, June 30,
2000 2001
---- ----
Current assets:
Cash and cash equivalents .................. $ 135,017 $ 108,928
Restricted cash equivalents ................ 69,242 78,187
Marketable securities ...................... -- 18,332
Accounts and other receivables ............. 182,991 195,682
Refundable income taxes .................... 14,470 11,232
Receivable from affiliates ................. 885 21,526
Inventories ................................ 242,994 212,403
Prepaid expenses ........................... 7,272 7,182
Deferred income taxes ...................... 14,236 13,190
---------- ----------
Total current assets ................... 667,107 666,662
---------- ----------
Other assets:
Marketable securities ...................... 268,006 193,230
Investment in affiliates ................... 235,791 239,243
Loans and other receivables ................ 100,540 102,943
Mining properties .......................... 13,971 12,265
Prepaid pension costs ...................... 22,789 22,446
Goodwill ................................... 359,420 350,383
Deferred income taxes ...................... 2,046 1,930
Other ...................................... 49,604 48,812
---------- ----------
Total other assets ..................... 1,052,167 971,252
---------- ----------
Property and equipment:
Land ....................................... 29,644 28,842
Buildings .................................. 167,653 158,248
Equipment .................................. 543,915 523,641
Construction in progress ................... 14,865 26,795
---------- ----------
756,077 737,526
Less accumulated depreciation .............. 218,530 230,090
---------- ----------
Net property and equipment ............. 537,547 507,436
---------- ----------
$2,256,821 $2,145,350
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30,
2000 2001
---- ----
Current liabilities:
Notes payable .............................. $ 70,039 $ 58,999
Current maturities of long-term debt ....... 34,284 37,221
Accounts payable ........................... 81,572 66,474
Accrued liabilities ........................ 162,431 156,725
Payable to affiliates ...................... 32,042 38,619
Income taxes ............................... 15,693 16,732
Deferred income taxes ...................... 1,922 5,384
----------- -----------
Total current liabilities .............. 397,983 380,154
----------- -----------
Noncurrent liabilities:
Long-term debt ............................. 595,354 525,631
Accrued OPEB costs ......................... 50,624 50,696
Accrued pension costs ...................... 26,697 23,181
Accrued environmental costs ................ 66,224 56,526
Deferred income taxes ...................... 294,371 273,564
Other ...................................... 41,055 36,197
----------- -----------
Total noncurrent liabilities ........... 1,074,325 965,795
----------- -----------
Minority interest ............................ 156,278 159,656
----------- -----------
Stockholders' equity:
Common stock ............................... 1,257 1,257
Additional paid-in capital ................. 44,345 44,508
Retained earnings .......................... 591,030 656,353
Accumulated other comprehensive income:
Marketable securities .................... 132,580 101,443
Currency translation ..................... (60,811) (83,318)
Pension liabilities ...................... (4,517) (4,849)
Treasury stock ............................. (75,649) (75,649)
----------- -----------
Total stockholders' equity ............. 628,235 639,745
----------- -----------
$ 2,256,821 $ 2,145,350
=========== ===========
Commitments and contingencies (Note 1)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
------------------- -----------------
2000 2001 2000 2001
---- ---- ---- ----
Revenues and other income:
Net sales ........................................ $ 319,944 $ 276,270 $ 621,672 $565,105
Other, net ....................................... 62,009 63,640 77,881 107,731
--------- --------- --------- --------
381,953 339,910 699,553 672,836
--------- --------- --------- --------
Costs and expenses:
Cost of sales .................................... 216,437 200,010 431,040 402,701
Selling, general and administrative .............. 53,240 48,757 103,213 97,950
Interest ......................................... 17,673 15,666 35,021 32,776
--------- --------- --------- --------
287,350 264,433 569,274 533,427
--------- --------- --------- --------
94,603 75,477 130,279 139,409
Equity in earnings (losses) of:
Titanium Metals Corporation ("TIMET") ............ (2,190) 12,877 (6,511) 13,002
Other ............................................ (7) (136) 269 522
--------- --------- --------- --------
Income before income taxes ..................... 92,406 88,218 124,037 152,933
Provision for income taxes ......................... 40,292 31,953 55,064 55,675
Minority interest in after-tax earnings ............ 17,144 8,597 23,518 18,029
--------- --------- --------- --------
Net income ..................................... $ 34,970 $ 47,668 $ 45,455 $ 79,229
========= ========= ========= ========
Earnings per share:
Basic ............................................ $ .30 $ .41 $ .39 $ .69
========= ========= ========= ========
Diluted .......................................... $ .30 $ .41 $ .39 $ .68
========= ========= ========= ========
Cash dividends per share ........................... $ .05 $ .06 $ .10 $ .12
========= ========= ========= ========
Shares used in the calculation of per share amounts:
Basic earnings per common share .................. 115,116 115,169 115,103 115,166
Dilutive impact of outstanding
stock options ................................... 1,124 931 1,115 886
--------- --------- --------- --------
Diluted earnings per share ....................... 116,240 116,100 116,218 116,052
========= ========= ========= ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Six months ended June 30, 2000 and 2001
(In thousands)
2000 2001
---- ----
Net income ........................................... $ 45,455 $ 79,229
-------- --------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment:
Unrealized gains arising during the period ....... 2,080 2,053
Less reclassification for gains
included in net income .......................... (25) (33,190)
-------- --------
2,055 (31,137)
Currency translation adjustment .................... (14,691) (22,507)
Pension liabilities adjustment ..................... 941 (332)
-------- --------
Total other comprehensive income (loss), net ..... (11,695) (53,976)
-------- --------
Comprehensive income ........................... $ 33,760 $ 25,253
======== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2000 and 2001
(In thousands)
2000 2001
---- ----
Cash flows from operating activities:
Net income ......................................... $ 45,455 $ 79,229
Depreciation, depletion and amortization ........... 36,070 37,132
Legal settlements, net ............................. (43,000) (10,307)
Securities transactions ............................ (5,591) (50,803)
Noncash interest expense ........................... 4,628 4,179
Deferred income taxes .............................. 29,654 10,147
Minority interest .................................. 23,518 18,029
Other, net ......................................... (4,332) (3,634)
Equity in:
TIMET ............................................ 6,511 (13,002)
Other ............................................ (269) (522)
Distributions from:
Manufacturing joint venture ...................... 5,250 4,950
Other ............................................ 81 1,300
-------- --------
97,975 76,698
Change in assets and liabilities:
Accounts and other receivables ................... (33,551) (23,797)
Inventories ...................................... 24,836 20,994
Accounts payable and accrued liabilities ......... (10,575) (22,453)
Accounts with affiliates ......................... 10,277 15,662
Income taxes ..................................... 8,091 4,347
Other, net ....................................... 621 (2,400)
-------- --------
Net cash provided by operating activities .... 97,674 69,051
-------- --------
Cash flows from investing activities:
Capital expenditures ............................... (23,928) (27,150)
Purchases of:
Business unit .................................... (9,475) --
Tremont common stock ............................. (20,681) (198)
NL common stock .................................. (13,958) (2,718)
CompX common stock ............................... -- (2,650)
Loans to affiliates ................................ -- (20,000)
Property damaged by fire:
Insurance proceeds ............................... -- 5,500
Other, net ....................................... -- (1,000)
Proceeds from disposal of marketable securities .... -- 16,802
Change in restricted cash equivalents, net ......... 426 428
Other, net ......................................... 2,012 (573)
-------- --------
Net cash used by investing activities ........ (65,604) (31,559)
-------- --------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six months ended June 30, 2000 and 2001
(In thousands)
2000 2001
---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings ....................................... $ 29,795 $ 41,356
Principal payments ............................... (35,937) (75,303)
Loans from affiliate:
Loans ............................................ 2,329 60,753
Repayments ....................................... (3,082) (68,631)
Valhi dividends paid ............................... (11,582) (13,906)
Distributions to minority interest ................. (4,901) (5,360)
Other, net ......................................... 1,357 766
--------- ---------
Net cash used by financing activities .......... (22,021) (60,325)
--------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities ...... 10,049 (22,833)
Currency translation ............................... (1,327) (3,256)
Cash and equivalents at beginning of period .......... 152,707 135,017
--------- ---------
Cash and equivalents at end of period ................ $ 161,429 $ 108,928
========= =========
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized ............. $ 30,679 $ 28,868
Income taxes, net ................................ 6,162 25,861
Business unit acquired - net assets consolidated:
Cash and cash equivalents ........................ $ -- $ --
Goodwill and other intangible assets ............. 2,539 --
Other noncash assets ............................. 8,458 --
Liabilities ...................................... (1,522) --
--------- ---------
Cash paid ........................................ $ 9,475 $ --
========= =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2001
(In thousands)
Additional Accumulated other comprehensive income Total
Common paid-in Retained Marketable Currency Pension Treasury stockholders'
stock capital earnings securities translation liabilities stock equity
---- ------- -------- ---------- ----------- ----------- ----- ------
Balance at December 31, 2000 .. $1,257 $44,345 $ 591,030 $ 132,580 $(60,811) $(4,517) $(75,649) $ 628,235
Net income .................... -- -- 79,229 -- -- -- -- 79,229
Dividends ..................... -- -- (13,906) -- -- -- -- (13,906)
Other comprehensive income, net -- -- -- (31,137) (22,507) (332) -- (53,976)
Other, net .................... -- 163 -- -- -- -- -- 163
------ ------- --------- --------- -------- ------- -------- ---------
Balance at June 30, 2001 ...... $1,257 $44,508 $ 656,353 $ 101,443 $(83,318) $(4,849) $(75,649) $ 639,745
====== ======= ========= ========= ======== ======= ======== =========
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation:
The consolidated balance sheet of Valhi, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2000 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 2001, and the consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended June 30, 2000 and 2001, have been prepared by the Company,
without audit. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows have been made. The
results of operations for the interim periods are not necessarily indicative of
the operating results for a full year or of future operations. Certain prior
year amounts have been reclassified to conform to the current year presentation,
and certain information normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America has been condensed or omitted. The accompanying consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 (the "2000 Annual Report").
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.
Commitments and contingencies are discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Legal Proceedings"
and the 2000 Annual Report.
Contran Corporation holds, directly or through subsidiaries, approximately
93% 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. Mr. Simmons, the Chairman of the Board and Chief Executive Officer
of Valhi and Contran, may be deemed to control such companies.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended, effective January 1, 2001. Under SFAS No. 133, all derivatives are
recognized as either assets or liabilities and measured at fair value. 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, as amended, the Company has exempted from the scope of SFAS No. 133 all
host contracts containing embedded derivatives which were issued or acquired
prior to January 1, 1999. Other than certain currency forward contracts, the
Company was not a party to any significant derivative or hedging instrument
covered by SFAS No. 133 during the first six months of 2001. The accounting for
such currency forward contracts under SFAS No. 133 is not materially different
from the accounting for such contracts under prior accounting rules, and
therefore the impact to the Company of adopting SFAS No. 133 was not material.
Note 2 - Business segment information:
% owned at
Business Entity June 30, 2001
Chemicals NL Industries, Inc. 60%
Component products CompX International Inc. 69%
Waste management Waste Control Specialists 90%
Titanium metals Tremont Group, Inc. 80%
Tremont Group is a holding company which owns 80% of Tremont
Corporation ("Tremont") at June 30, 2001. NL owns the other 20% of Tremont
Group. Tremont is also a holding company and owns an additional 20% of NL and
39% of Titanium Metals Corporation ("TIMET") at June 30, 2001.
Three months ended Six months ended
June 30, June 30,
------------------ ------------
2000 2001 2000 2001
---- ---- ---- ----
(In millions)
Net sales:
Chemicals ........................ $251.1 $220.1 $482.1 $446.2
Component products ............... 65.1 53.3 131.2 112.9
Waste management ................. 3.8 2.9 8.4 6.0
------ ------ ------ ------
Total net sales ................ $320.0 $276.3 $621.7 $565.1
====== ====== ====== ======
Operating income:
Chemicals ........................ $ 56.5 $ 38.8 $ 96.3 $ 84.2
Component products ............... 11.5 5.3 22.4 12.3
Waste management ................. (1.4) (4.4) (3.0) (7.6)
------ ------ ------ ------
Total operating income ......... 66.6 39.7 115.7 88.9
General corporate items:
Legal settlement gain, net ....... 43.0 -- 43.0 30.7
Securities transactions .......... 5.6 50.8 5.6 50.8
Interest and dividend income ..... 8.8 9.4 20.3 19.7
Insurance gain ................... -- .7 -- .7
Expenses, net .................... (11.8) (9.4) (19.4) (18.6)
Interest expense ................... (17.7) (15.7) (35.0) (32.8)
------ ------ ------ ------
94.5 75.5 130.2 139.4
Equity in:
TIMET ............................ (2.2) 12.9 (6.5) 13.0
Other ............................ -- (.2) .3 .5
------ ------ ------ ------
Income before income taxes ..... $ 92.3 $ 88.2 $124.0 $152.9
====== ====== ====== ======
During the first six months of 2001, NL and CompX each purchased shares of
their common stocks in market transactions for an aggregate of $2.7 million and
$2.6 million, respectively, and Valhi purchased shares of Tremont common stock
in market transactions for an aggregate of $198,000. The Company accounted for
such increases in its ownership of NL, CompX and Tremont by the purchase method
(step acquisitions).
NL (NYSE: NL), CompX (NYSE: CIX), Tremont (NYSE: TRE) and TIMET (NYSE: TIE)
each file periodic reports pursuant to the Securities Exchange Act of 1934, as
amended.
Note 3 - Marketable securities:
December 31, June 30,
2000 2001
---- ----
(In thousands)
Current assets:
Halliburton Company common stock (trading) ......... $ -- $ 8,082
Halliburton Company common stock
(available-for-sale) .............................. -- 10,250
-------- --------
$ -- $ 18,332
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC .................. $170,000 $170,000
Halliburton Company common stock ................... 97,108 22,119
Other common stocks ................................ 898 1,111
-------- --------
$268,006 $193,230
======== ========
At June 30, 2001, Valhi held 1.1 million shares of Halliburton common stock
(aggregate cost of $9 million) with a quoted market price of $35.60 per share,
or an aggregate market value of $40.5 million. Of such 1.1 million Halliburton
shares, approximately 288,000, 621,000 and 227,000 Halliburton shares are
classified as current available-for-sale securities, noncurrent
available-for-sale securities and current trading securities, respectively.
Valhi's LYONs debt obligation are exchangeable at any time, at the option of the
LYON holder, for the shares of Halliburton common stock classified as
available-for-sale, and the carrying value of such Halliburton shares is limited
to the accreted LYONs obligation. A portion of the available-for-sale
Halliburton shares is classified as a current asset at June 30, 2001 because the
related LYONs obligation is classified as a current liability at such date. The
Halliburton shares classified as available-for-sale are held in escrow for the
benefit of the holders of the LYONs. Valhi receives the regular quarterly
dividend on all of the Halliburton shares held, including shares held in escrow.
The shares classified as trading securities were reclassified from
available-for-sale in June 2001 when they became eligible to, and were, released
from the escrow for the benefit of the holders of the LYONs. During the first
six months of 2001, certain LYONs holders exchanged their LYONs for 1.2 million
Halliburton shares, and Valhi sold an additional 390,000 Halliburton shares in
market transactions for aggregate proceeds of $16.8 million. See Notes 8 and 10.
See the 2000 Annual Report for a discussion of the Company's investment in
The Amalgamated Sugar Company LLC. The aggregate cost of other
available-for-sale common stocks is nominal at June 30, 2001. See Note 10.
Note 4 - Inventories:
December 31, June 30,
2000 2001
---- ----
(In thousands)
Raw materials:
Chemicals .................................. $ 66,061 $ 39,827
Component products ......................... 11,866 13,209
-------- --------
77,927 53,036
-------- --------
In process products:
Chemicals .................................. 7,117 6,652
Component products ......................... 11,454 12,004
-------- --------
18,571 18,656
-------- --------
Finished products:
Chemicals .................................. 107,895 105,181
Component products ......................... 12,811 10,582
-------- --------
120,706 115,763
-------- --------
Supplies (primarily chemicals) ............... 25,790 24,948
-------- --------
$242,994 $212,403
======== ========
Note 5 - Investment in affiliates:
December 31, June 30,
2000 2001
---- ----
(In thousands)
TiO2 manufacturing joint venture ............... $150,002 $144,791
TIMET .......................................... 72,655 82,095
Other .......................................... 13,134 12,357
-------- --------
$235,791 $239,243
======== ========
At June 30, 2001, Tremont held 12.3 million shares of TIMET common stock
with a quoted market price of $10.00 per share, or an aggregate of $123 million.
At June 30, 2001, TIMET reported total assets and stockholders' equity of
$736.3 million and $376.6 million, respectively. TIMET's total assets at such
date include current assets of $271.3 million, property and equipment of $274.6
million and goodwill and other intangible assets of $57.7 million. TIMET's total
liabilities at such date include current liabilities of $99.8 million, long-term
debt of $13.2 million, accrued OPEB costs of $17.4 million and convertible
preferred securities of $201.3 million.
During the first six months of 2001, TIMET reported net sales of $244.0
million, operating income of $46.8 million and net income of $25.9 million (2000
first six months - net sales of $213.5 million, an operating loss of $27.9
million and a net loss of $24.6 million).
Note 6 - Other assets:
December 31, June 30,
2000 2001
---- ----
(In thousands)
Loans and other receivables:
Snake River Sugar Company:
Principal ................................ $ 80,000 $ 80,000
Interest ................................. 17,526 20,122
Other ...................................... 4,754 5,089
-------- --------
102,280 105,211
Less current portion ....................... 1,740 2,268
-------- --------
Noncurrent portion ......................... $100,540 $102,943
======== ========
Other noncurrent assets:
Restricted cash investments ................ $ 22,897 $ 22,173
Intangible assets .......................... 5,945 5,476
Deferred financing costs ................... 2,527 1,863
Other ...................................... 18,235 19,300
-------- --------
$ 49,604 $ 48,812
======== ========
Note 7 - Accrued liabilities:
December 31, June 30,
2000 2001
---- ----
(In thousands)
Current:
Employee benefits .......................... $ 44,397 $ 33,609
Environmental costs ........................ 56,323 63,908
Interest ................................... 6,172 5,947
Deferred income ............................ 7,241 5,094
Other ...................................... 48,298 48,167
-------- --------
$162,431 $156,725
======== ========
Noncurrent:
Insurance claims and expenses .............. $ 22,424 $ 20,825
Employee benefits .......................... 11,893 10,490
Deferred income ............................ 5,453 3,393
Other ...................................... 1,285 1,489
-------- --------
$ 41,055 $ 36,197
======== ========
Note 8 - Notes payable and long-term debt:
December 31, June 30,
2000 2001
---- ----
(In thousands)
Notes payable -
Kronos - non-U.S. bank credit agreements ........... $ 70,039 $ 58,999
======== ========
Long-term debt:
Valhi:
Snake River Sugar Company ........................ $250,000 $250,000
LYONs ............................................ 100,333 35,633
Bank credit facility ............................. 31,000 25,000
Other ............................................ 2,880 2,880
-------- --------
384,213 313,513
-------- --------
Subsidiaries:
NL Senior Secured Notes .......................... 194,000 194,000
CompX bank credit facility ....................... 39,000 49,000
Waste Control Specialists bank term loan ......... 5,311 --
Valcor Senior Notes .............................. 2,431 2,431
Other ............................................ 4,683 3,908
-------- --------
245,425 249,339
-------- --------
629,638 562,852
Less current maturities ............................ 34,284 37,221
-------- --------
$595,354 $525,631
======== ========
During the first six months of 2001, holders representing $92.2 million
principal amount at maturity exchanged their LYONs debt obligation for shares of
Halliburton common stock. Under the terms of the indenture governing the LYONs,
the Company has the option to deliver, in whole or in part, cash equal to the
market value of the Halliburton shares that are otherwise required to be
delivered to the LYONs holder in an exchange, and a portion of such exchanges
during the first six months of 2001 was so settled. Also during the first six
months of 2001, $30.4 million principal amount at maturity of LYONs were
redeemed by the Company for cash at various redemption prices equal to the
accreted value of the LYONs on the respective redemption dates. A portion of the
LYONs debt obligation outstanding at June 30, 2001 had previously been called
for cash redemption on July 5, 2001, also at a redemption price equal to the
accreted value on the redemption date, and consequently the accreted value of
such LYONs at June 30, 2001 ($10.6 million) was classified as a current
liability at that date.
In February 2001, a wholly-owned subsidiary of Valhi purchased Waste
Control Specialists' bank term loan from the lender at par value, and such debt
became payable to such Valhi subsidiary. Accordingly, such debt is eliminated in
Valhi's consolidated financial statements at June 30, 2001.
Note 9 - Accounts with affiliates:
December 31, June 30,
2000 2001
---- ----
(In thousands)
Receivables from affiliates:
Loan to Contran family trust ................. $ -- $20,000
TIMET ........................................ 599 928
Other ........................................ 286 598
------- -------
$ 885 $21,526
======= =======
Payables to affiliates:
Demand loan from Contran:
Valhi ...................................... $ 8,000 $13,523
Tremont .................................... 13,403 --
Income taxes payable to Contran .............. 1,666 16,730
Louisiana Pigment Company .................... 8,710 7,991
Other, net ................................... 263 375
------- -------
$32,042 $38,619
======= =======
In May 2001, NL Environmental Management Services, Inc ("EMS"), NL's
majority-owned environmental management subsidiary, entered into a $25 million
revolving credit facility with one of the family trusts discussed in Note 1 ($20
million outstanding at June 30, 2001). 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 held by the trust.
In February 2001, Tremont entered into a $13.4 million reducing revolving
credit facility with EMS and used the proceeds to repay its loan from Contran.
Such intercompany loan between EMS and Tremont, collateralized by 10 million
shares of NL common stock owned by Tremont, is eliminated in Valhi's
consolidated financial statements at June 30, 2001.
Note 10 - Other income:
Six months ended
June 30,
2000 2001
---- ----
(In thousands)
Securities earnings:
Interest and dividends ..................... $ 20,353 $ 19,718
Securities transactions, net ............... 5,591 50,803
-------- --------
25,944 70,521
Legal settlement gains, net .................. 43,000 30,723
Noncompete agreement income .................. 2,000 2,000
Currency transactions, net ................... 3,607 1,193
Insurance gain ............................... -- 650
Other, net ................................... 3,330 2,644
-------- --------
$ 77,881 $107,731
======== ========
Net securities transactions gains in the first six months of 2001 are
comprised of (i) a $33.2 million gain related to LYONs exchanges, (ii) a $13.7
million gain related to the sale of 390,000 shares of Halliburton common stock
in market transactions, (iii) a $6.2 million gain related to the
reclassification of 227,000 Halliburton shares from available-for-sale to
trading securities and (iv) a $2.3 million impairment charge for an other than
temporary decline in value of certain marketable securities held by the Company.
See Notes 3 and 8.
In the first quarter of 2001, Waste Control Specialists recognized a $20.1
million net gain from a legal settlement related to certain previously-reported
litigation. Pursuant to the settlement, Waste Control Specialists, among other
things, received a cash payment of approximately $20.1 million, net of attorney
fees.
In the first quarter of 2001, NL recognized $10.6 million of net gains from
legal settlements, substantially all of which ($10.3 million) relates to
settlements with certain of its former insurance carriers. The insurance
settlement, similar to legal settlements NL reached with certain other of its
former insurance carriers during 2000, resolved court proceedings in which NL
sought reimbursement from the carriers for legal defense expenditures and
indemnity coverage for certain of its environmental remediation expenditures.
Proceeds from the first quarter 2001 insurance settlement were transferred by
the carriers in April 2001 to a special purpose trust formed to pay for certain
of NL's future remediation and other environmental expenditures.
The insurance gain is discussed in Note 13.
Note 11 - Provision for income taxes:
Six months ended
June 30,
2000 2001
---- ----
(In millions)
Expected tax expense ..................................... $43.4 $53.5
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies ........... 9.6 1.9
Non-U.S. tax rates ....................................... (3.1) (3.6)
Change in NL's and Tremont's deferred income tax
valuation allowance, net ................................ 1.1 (1.8)
No tax benefit for goodwill amortization ................. 2.7 2.9
U.S. state income taxes, net ............................. 1.1 1.8
Other, net ............................................... .2 1.0
----- -----
$55.0 $55.7
===== =====
Comprehensive provision for
income taxes (benefit) allocated to:
Net income ............................................. $55.0 $55.7
Other comprehensive income:
Marketable securities ................................ 1.0 (16.2)
Currency translation ................................. (11.0) (2.6)
Pension liabilities .................................. .6 (.4)
----- -----
$45.6 $36.5
===== =====
Note 12 - Minority interest:
December 31, June 30,
2000 2001
---- ----
(In thousands)
Minority interest in net assets:
NL Industries ............................ $ 66,761 $ 69,906
Tremont Corporation ...................... 34,235 36,413
CompX International ...................... 49,003 46,134
Subsidiaries of NL ....................... 6,279 7,203
-------- --------
$156,278 $159,656
======== ========
Six months ended
June 30,
2000 2001
---- ----
(In thousands)
Minority interest in net earnings (losses):
NL Industries .............................. $ 17,629 $11,623
Tremont Corporation ........................ 728 3,448
CompX International ........................ 4,878 2,005
Subsidiaries of NL ......................... 201 953
Subsidiaries of Tremont .................... 85 --
Subsidiaries of CompX ...................... (3) --
-------- -------
$ 23,518 $18,029
======== =======
As previously reported, all of Waste Control Specialists aggregate,
inception-to-date net losses have accrued to the Company for financial reporting
purposes, and all of Waste Control Specialists future net income or net losses
will also accrue to the Company until Waste Control Specialists reports positive
equity attributable to its other owner. Accordingly, no minority interest in
Waste Control Specialists' net assets or net earnings (losses) is reported at
June 30, 2001.
Note 13 - Leverkusen fire and insurance claim:
On March 20, 2001, NL suffered a fire at its Leverkusen, Germany titanium
dioxide pigments ("TiO2") facility. Production at the facility's
chloride-process plant returned to full capacity on April 8, 2001, and NL
expects the facility's sulfate-process plant will become over 50% operational in
August 2001 and fully operational in October 2001. In April the undamaged
section of the sulfate-process plant resumed limited production (5% to 20% of
capacity) of an intermediate form of TiO2, which is being transported to NL's
Nordenham, Germany sulfate-process TiO2 plant to be further processed and
finished into certain grades of TiO2. NL's ability to produce the intermediate
form of TiO2 at its Leverkusen facility is limited by the available excess
capacity at its Nordenham plant.
NL believes that the damages to property and the business interruption
losses caused by the fire are covered by insurance, but the effect on the
financial results of the Company on a quarter-to-quarter basis or a year-to-year
basis will depend on the timing and amount of insurance recoveries. Chemicals
operating income in the second quarter of 2001 includes $5 million of business
interruption insurance proceeds as a partial payment for losses caused by the
Leverkusen fire. Such business interruption proceeds were recorded as a
reduction of cost of sales to offset unallocated period costs that resulted from
lost production. NL also recognized a $5.5 million advance payment in the second
quarter of 2001 for property damage and related cleanup cost insurance
recoveries, resulting in a $650,000 insurance gain as the advance payment
received to date exceeded the carrying value of the property destroyed and
cleanup costs incurred. See Note 10. NL continues to negotiate with its
insurance carrier group and expects to receive additional insurance recoveries
for property damage and business interruption losses. Such additional insurance
proceeds have not yet been recognized because the amounts are not presently
determinable.
Note 14 - Accounting principles not yet adopted:
The Company will adopt Statement of Financial Accounting Standards ("SFAS")
No. 141, Business Combinations, for all business combinations initiated on or
after July 1, 2001, and all purchase business combinations completed on or after
July 1, 2001 (including step acquisitions). Under SFAS No. 141, all business
combinations initiated on or after July 1, 2001 will be accounted for by the
purchase method, and the pooling-of-interests method will be prohibited.
The Company will adopt SFAS No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002. Under SFAS No. 142, goodwill will not be amortized on
a periodic basis, but instead will be subject to an impairment test to be
performed at least annually. Under the transition provisions of SFAS No. 142,
goodwill existing as of June 30, 2001 will cease to be periodically amortized as
of January 1, 2002, but any goodwill arising in a purchase business combination
(including step acquisitions) completed on or after July 1, 2001 would not be
periodically amortized from the date of such combination. The Company would have
reported net income of approximately $87 million, or $.75 per diluted share, in
the first six months of 2001 if the goodwill amortization included in the
Company's net income, as reported, had not been recognized.
The Company will adopt SFAS No. 143, Accounting for Asset Retirement
Obligations, no later than 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 would be 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 present
value, and the capitalized cost would be depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity would either settle
the obligation for its recorded amount or incur a gain or loss upon settlement.
The Company is still studying this newly-issued standard to determine, among
other things, whether it has any asset retirement obligations which are covered
under the scope of SFAS No. 143, and the effect, if any, to the Company of
adopting SFAS No. 143 has not yet been determined.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
The Company reported net income of $47.6 million, or $.41 per diluted
share, in the second quarter of 2001 compared to net income of $35.0 million, or
$.30 per diluted share, in the second quarter of 2000. Excluding the effects of
the unusual items discussed in the next paragraph, the Company would have
reported net income of $6.9 million in the second quarter of 2001 compared to
net income of $15.4 million in the second quarter of 2000. For the first six
months of 2001, the Company reported net income of $79.2 million, or $.68 per
diluted share, compared to net income of $45.5 million, or $.39 per diluted
share, in the first six months of 2000. Excluding the effects of the unusual
items discussed in the next paragraph, the Company would have reported net
income of $20.1 million in the first six months of 2001 compared to net income
of $25.9 million in the first six months of 2000.
The Company's results in the second quarter of 2001 include aggregate net
securities transactions gains of $50.8 million ($33.2 million, or $.29 per
diluted share, net of income taxes and minority interest) related principally to
the disposition of a portion of the shares of Halliburton Company common stock
held by the Company, including dispositions when certain holders of the
Company's LYONs debt obligation exercised their right to exchange such debt for
such Halliburton stock. Also, the Company's equity in earnings of TIMET in the
second quarter of 2001 includes $15.7 million ($7.5 million, or $.06 per diluted
share, net of income taxes and minority interest) related to TIMET's settlement
with Boeing discussed below. The Company's year-to-date results in 2001 also
include previously-reported first quarter pre-tax gains aggregating $30.7
million ($18.4 million, or $.16 per diluted share, net of income taxes and
minority interest) related to NL's legal settlements with certain of its former
insurance carriers and the settlement of certain litigation to which Waste
Control Specialists was a party. See Notes 3, 8 and 10 to the Consolidated
Financial Statements. The Company's results in the second quarter of 2000
include (i) a $43 million pre-tax net gain ($17.3 million, or $.15 per diluted
share, net of income taxes and minority interest) related to NL's legal
settlements with certain other of its former insurance carriers and (ii) net
securities transaction gains of $5.6 million ($2.3 million, or $.02 per diluted
share, net of income taxes and minority interest) related principally to common
stock received by NL from the demutualization of an insurance company from which
NL had purchased certain policies.
Total operating income in the second quarter of 2001 decreased 40% compared
to the second quarter of 2000, and decreased 23% in the first six months of 2001
compared to the same period in 2000, due to lower chemicals earnings at NL,
lower component products operating income at CompX International and a higher
waste management operating loss at Waste Control Specialists.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "could," "anticipates," "expected" or comparable terminology, or by
discussions of strategies or trends. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve substantial risks and uncertainties that
could significantly impact expected results, and actual future results could
differ materially from those described in such forward-looking statements. While
it is not possible to identify all factors, the Company continues to face many
risks and uncertainties. Among the factors that could cause actual future
results to differ materially are the risks and uncertainties discussed in this
Quarterly Report and those described from time to time in the Company's other
filings with the Securities and Exchange Commission including, but not limited
to, future supply and demand for the Company's products, the extent of the
dependence of certain of the Company's businesses on certain market sectors
(such as the dependence of TIMET's titanium metals business on the aerospace
industry), the cyclicality of certain of the Company's businesses (such as NL's
TiO2 operations and TIMET's titanium metals operations), the impact of certain
long-term contracts on certain of the Company's businesses (such as the impact
of TIMET's long-term contracts with certain of its customers and such customers'
performance hereunder and the impact of TIMET's long-term contracts with certain
of its vendors on its ability to reduce or increase supply or achieve lower
costs), customer inventory levels (such as the extent to which NL's 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, or the relationship between inventory levels of TIMET's customers and
such customer's current inventory requirements and the impact of such
relationship on their purchases from TIMET), changes in raw material and other
operating costs (such as energy costs), the possibility of labor disruptions,
general global economic 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, among other things, TiO2), competitive products and substitute
products, customer and competitor strategies, the impact of pricing and
production decisions, competitive technology positions, the introduction of
trade barriers, fluctuations in currency exchange rates (such as changes in the
exchange rate between the U.S. dollar and each of the Euro and the Canadian
dollar), operating interruptions (including, but not limited to, labor disputes,
leaks, fires, explosions, unscheduled downtime and transportation
interruptions), recoveries from insurance claims and the timing thereof (such as
NL's pending insurance claims with respect to the fire it suffered at one of its
German TiO2 production facilities), potential difficulties in integrating
completed acquisitions, uncertainties associated with new product development
(such as TIMET's ability to develop new end-uses for its titanium products),
environmental matters (such as those requiring emission and discharge standards
for existing and new facilities), government laws and regulations and possible
changes therein (such as a change in Texas state law which would allow the
applicable regulatory agency to issue a permit for the disposal of low-level
radioactive wastes to a private entity such as Waste Control Specialists, or
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), the ultimate resolution of pending litigation (such as NL's lead
pigment litigation and litigation surrounding environmental matters of NL,
Tremont and TIMET) and 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 new information, future events or otherwise.
Chemicals
NL's titanium dioxide pigments ("TiO2") operations are conducted through
its wholly-owned subsidiary Kronos, Inc.
Three months ended Six months ended
June 30, June 30,
-------------- % -------------- %
2000 2001 Change 2000 2001 Change
---- ---- ---- ---- ---- ------
(In millions) (In millions)
Net sales ................... $251.1 $220.1 -12% $482.1 $446.2 - 7
Operating income ............ 56.5 38.8 -31% 96.3 84.2 -13%
Chemicals sales and operating income decreased in the second quarter and
first six months of 2001 compared to the same periods in 2000 due primarily to
lower TiO2 sales and production volumes, partially offset by higher TiO2 average
selling prices. Excluding the effect of fluctuations in the value of the U.S.
dollar relative to other currencies, NL's average TiO2 selling prices (in
billing currencies) during the second quarter of 2001 were slightly higher
compared to the second quarter of 2000, and were 3% higher in the first six
months of 2001 compared to the same period in 2000, with higher prices in Europe
partially offset by the effect of lower prices in North America and export
markets.
NL's TiO2 sales volumes in the second quarter of 2001 were 13% lower than
the record second quarter of 2000, with lower sales volumes in all major
markets. NL's TiO2 sales volumes in the first six months of 2001 were 10% lower
than the record first six months of 2000. NL's TiO2 production volumes in the
second quarter of 2001 were 10% lower than the second quarter of 2000, with
operating rates at 87% of capacity in 2001 compared to near full capacity in
2000. The lower production volumes related primarily to lost sulfate-process
production resulting from the previously-reported fire at NL's Leverkusen,
Germany facility. NL's TiO2 production volumes were 4% lower for the first six
months of 2001 compared to the same period in 2000, with operating rates at 93%
of capacity in 2001 compared to near full capacity in 2000.
NL believes that the damage to property and the business interruption
losses caused by the Leverkusen fire are covered by insurance, but the effect on
NL's financial results on a quarter-to-quarter basis or a year-to-year basis
will depend on the timing and amount of insurance recoveries. Chemicals
operating income in the second quarter of 2001 includes $5 million of business
interruption insurance proceeds as a partial payment for losses caused by the
Leverkusen fire. NL also recognized a $5.5 million advance payment in the second
quarter of 2001 for property damage and related cleanup cost insurance
recoveries, resulting in a $650,000 insurance gain as the advance payment
received to date exceeded the carrying value of the property destroyed and
cleanup costs incurred. Such insurance gain is not included in chemicals
operating income but is included in general corporate items. NL continues to
negotiate with its insurance carrier group and expects to receive additional
insurance recoveries for property damage and business interruption losses. Such
additional insurance proceeds have not yet been recognized because the amounts
are not presently determinable. NL expects the Leverkusen sulfate-process plant
will be over 50% operational in August 2001 and fully operational in October
2001.
Demand for TiO2 remains weak, primarily in European and export markets.
Based on the global economic slowdown, NL expects its average TiO2 selling
prices, which were 2% lower in the second quarter of 2001 compared to the first
quarter of 2001, to continue to trend downward into the fourth quarter of this
year. Overall, NL expects its TiO2 operating income during calendar 2001 will be
significantly lower than calendar 2000 primarily because of lower average TiO2
selling prices, lower sales and production volumes and higher energy costs.
NL has substantial operations and assets located outside the United States
(principally Germany, Belgium, Norway and Canada). A significant amount of NL's
sales generated from its non-U.S. operations are denominated in currencies other
than the U.S. dollar, primarily the euro, other major European currencies and
the Canadian dollar. In addition, a portion of NL's 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 NL's 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. Including the effect of fluctuations in
the value of the U.S. dollar relative to other currencies, NL's average TiO2
selling prices (in billing currencies) in the first six months of 2001 decreased
1% compared to the first six months of 2000. Overall, fluctuations in the value
of the U.S. dollar relative to other currencies, primarily the euro, decreased
TiO2 sales in the first six months of 2001 by a net $18 million compared to the
first six months of 2000. Fluctuations in the value of the U.S. dollar relative
to other currencies similarly impacted NL's foreign currency-denominated
operating expenses. NL's operating expenses that are not denominated in the U.S.
dollar, when translated into U.S. dollars, were lower during the first six
months of 2001 compared to the first six months of 2000. Overall, the net impact
of currency exchange rate fluctuations on NL's operating income comparisons was
not significant in the first six months of 2001 compared to the first six months
of 2000.
Chemicals operating income, as presented above, is stated net of
amortization of the Company's purchase accounting adjustments made in
conjunction with its acquisitions of its interest in NL. Such adjustments result
in additional depreciation, depletion and amortization expense beyond amounts
separately reported by NL. Such additional non-cash expenses reduced chemicals
operating income, as reported by Valhi, by approximately $12.7 million and $12.9
million in the first six months of 2000 and 2001, respectively, as compared to
amounts separately reported by NL.
Component Products
Three months ended Six months ended
June 30, June 30,
-------------- % -------------- %
2000 2001 Change 2000 2001 Change
---- ---- ---- ---- ---- ------
(In millions) (In millions)
Net sales ................ $ 65.1 $ 53.3 -18% $131.2 $112.9 -14%
Operating income ......... 11.5 5.3 -54% 22.4 12.3 -45%
Component products sales and operating income decreased in the second
quarter and first six months of 2001 compared to the same periods in 2000 due
primarily to continued weak economic conditions in the manufacturing sector in
North America and Europe. During the first six months of 2001, sales of slide
products decreased 21% compared to the first six months of 2000, and sales of
security products decreased 12%. Sales of ergonomic products increased 3% in the
first six months of 2001 compared to the first six months of 2000 due primarily
to increased European sales. CompX's efforts to reduce manufacturing and other
costs partially offset the effect of the decline in sales, although CompX was
unable to reduce fixed costs sufficiently to fully compensate for the lower
level of sales. Operating income and margins were also adversely impacted in
2001 by unfavorable changes in product mix and, to a lesser extent, pricing
pressures from foreign-based manufacturers.
CompX expects the current weak economic cycle will continue to negatively
impact its operating results, and CompX will continue to implement various cost
control initiatives, including certain headcount reductions. These cost
reduction measures are designed to minimize the adverse effect of lower sales
and more favorably position CompX when the economy recovers. Nevertheless, CompX
remains concerned regarding the duration and severity of the weak economic cycle
and its overall impact on CompX's business.
CompX has substantial operations and assets located outside the United
States (principally in Canada, The Netherlands 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, the Dutch guilder, the
euro 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 value of CompX's foreign sales and
operating results are subject to currency exchange rate fluctuations which may
favorably or unfavorably impact reported earnings and may affect comparability
of period-to-period operating results. During the first six months of 2001,
currency exchange rate fluctuations of the Canadian dollar, the New Taiwan
dollar and the euro negatively impacted component products sales compared to the
first six months of 2000 (principally with respect to slide products),
decreasing component products sales by 2% in the first six months of 2001
compared to the first six months of 2000. Currency exchange rate fluctuations
did not materially impact operating income comparisons in 2001.
Waste Management
Three months ended Six months ended
June 30, June 30,
---------------- ----------------
2000 2001 2000 2001
---- ---- ---- ----
(In millions)
Net sales ...................... $3.8 $2.9 $8.4 $6.0
Operating loss ................. (1.4) (4.4) (3.0) (7.6)
Waste Control Specialists' sales decreased in 2001 compared to the same
periods in 2000 due primarily to the effect of continued weak demand for its
waste management services. In addition, mechanical problems with certain new
equipment hampered the treatment and disposal of certain types of hazardous and
toxic waste streams and also contributed to the lower level of sales during
2001.
Waste Control Specialists currently has permits which allow it to treat,
store and dispose of a broad range of hazardous and toxic wastes, and to treat
and store a broad range of low-level and mixed radioactive wastes. The hazardous
waste industry (other than low-level and mixed radioactive waste) currently has
excess industry capacity caused by a number of factors, including a relative
decline in the number of environmental remediation projects generating hazardous
wastes and efforts on the part of generators to reduce the volume of waste
and/or manage wastes onsite at their facilities. These factors have led to
reduced demand and increased price pressure for non-radioactive hazardous waste
management services. While Waste Control Specialists believes its broad range of
permits for the treatment and storage of low-level and mixed radioactive waste
streams provides certain competitive advantages, a key element of Waste Control
Specialists' long-term strategy to provide "one-stop shopping" for hazardous,
low-level and mixed radioactive wastes includes obtaining additional regulatory
authorizations for the disposal of low-level and mixed radioactive wastes.
The current state law in Texas (where Waste Control Specialists' disposal
facility is located) prohibits the applicable Texas regulatory agency from
issuing a permit for the disposal of low-level radioactive waste to a private
enterprise operating a disposal facility in Texas. During the two previous Texas
legislative sessions, which ended in May 1999 and 2001, Waste Control
Specialists was supporting a proposed change in state law that would allow the
regulatory agency to issue a low-level radioactive waste disposal permit to a
private entity. Both legislative sessions ended without any such change in state
law. There can be no assurance that the state law will in the future be changed
or, assuming the state law is changed, that Waste Control Specialists would be
successful in obtaining any future permit modifications.
Waste Control Specialists is continuing its attempts to emphasize its sales
and marketing efforts to increase its sales volumes from waste streams that
conform to Waste Control Specialists' permits currently in place. Waste Control
Specialists is also continuing to identify and attempt to obtain modifications
to its current permits that would allow for treatment, storage and disposal of
additional types of wastes. The ability of Waste Control Specialists to achieve
increased sales volumes of these waste streams, together with improved operating
efficiencies through further cost reductions and increased capacity utilization,
are important factors in Waste Control Specialists' ability to achieve improved
cash flows. The Company currently believes Waste Control Specialists can become
a viable, profitable operation. However, there can be no assurance that Waste
Control Specialists' efforts will prove successful in improving its cash flows.
In the event such efforts are not successful or Waste Control Specialists is not
successful in expanding its disposal capabilities for low-level radioactive
wastes, it is possible that Valhi will consider other strategic alternatives
with respect to Waste Control Specialists.
TIMET
Three months ended Six months ended
June 30, June 30,
---------------- ----------------
2000 2001 2000 2001
---- ---- ---- ----
(In millions)
TIMET historical:
Net sales ...................... $108.8 $120.0 $213.5 $244.0
Operating income (loss) ........ (9.5) 48.6 (27.9) 46.8
Net income (loss) .............. (9.5) 29.5 (24.6) 25.9
Equity in earnings ............... $ (2.2) $ 12.9 $ (6.5) $ 13.0
Tremont accounts for its interests in TIMET by the equity method. Tremont's
equity in earnings of TIMET differs from the amounts that would be expected by
applying Tremont's ownership percentage to TIMET's separately-reported earnings
because of the effect of amortization of purchase accounting adjustments made by
Tremont in conjunction with Tremont's acquisitions of its interests in TIMET.
Amortization of such basis differences generally increases earnings (or reduces
losses) attributable to TIMET as reported by Tremont.
In April 2001, TIMET settled the litigation between TIMET and Boeing
related to their 1997 long-term purchase and supply agreement. Pursuant to the
settlement, TIMET received a cash payment of $82 million. The parties also
entered into an amended long-term agreement that, among other things, allows
Boeing to purchase up to 7.5 million pounds of titanium product annually from
TIMET from 2002 through 2007, subject to certain maximum quarterly volume
levels. In consideration, Boeing will annually advance TIMET $28.5 million for
the upcoming year. The initial advance for calendar year 2002 will be made in
December 2001, with each subsequent advance made in early January of the
applicable calendar year beginning in 2003. The amended long-term agreement is
structured as a take-or-pay agreement such that Boeing will forfeit a
proportionate part of the $28.5 million annual advance in the event that its
orders for delivery for such calendar year are less than 7.5 million pounds.
Under a separate agreement TIMET will establish and hold buffer stock for Boeing
at TIMET's facilities. TIMET's operating income in the second quarter of 2001
includes income of approximately $62.7 million related to this settlement, net
of associated legal, profit sharing and other costs.
During the second quarter of 2001, TIMET's mill products sales volumes
increased 5% compared to the second quarter of 2000, and sales volumes of its
melted products (ingot and slab) increased 15%. TIMET's average selling prices
(in billing currencies) for its mill products decreased 1% in the second quarter
of 2001 compared to the second quarter of 2000, and melted product selling
prices increased 4%. During the first six months of 2001, TIMET's mill products
sales volumes increased 11% compared to the first six months of 2000, and sales
volumes of its melted products increased 38%. TIMET's average selling prices (in
billing currencies) for its mill products decreased 1% in the first six months
of 2001 compared to the same period in 2000, and melted product selling prices
increased 1%. In addition to the Boeing settlement discussed above, TIMET's
operating results in 2001 also include a $10.8 million second quarter pre-tax
asset impairment charge related to certain manufacturing assets and a $3.8
million pre-tax charge ($2.8 million in the second quarter) related to TIMET's
previously-reported tungsten matter, further discussed below. TIMET's operating
results in the first six months of 2000 include a net $8.3 million of
previously-reported special charges.
TIMET's firm order backlog at the end of June 2001 was approximately $300
million compared to $245 million at the end of December 2000.
In March 2001, TIMET was notified by one of its customers that a product
manufactured from standard grade titanium produced by TIMET contained what has
been confirmed to be a tungsten inclusion. TIMET believes that the source of
this tungsten was contaminated silicon purchased from an outside vendor in 1998.
The silicon was used as an alloying addition to the titanium at the melting
stage. TIMET is currently investigating the possible scope of this problem,
including an evaluation of the identities of customers who received material
manufactured using this silicon and the applications to which such material has
been placed by such customers. At the present time, TIMET is aware of only four
standard grade ingots that have been demonstrated to contain tungsten
inclusions; however, further investigation may identify other material that has
been similarly affected. The $3.8 million amount accrued through June 30, 2001
represents TIMET's best estimate of the most likely amount of loss it will
incur. However, it does not represent the maximum possible loss, which TIMET is
not presently able to estimate, and the amount accrued may be periodically
revised in the future as more facts become known. Until this investigation is
completed, TIMET is unable to determine the possible remedial steps that may be
required and the ultimate liability TIMET might incur with respect to this
matter. TIMET currently believes that it is unlikely that its insurance policies
will provide coverage for any costs that may be associated with this matter.
However, TIMET seeks full recovery from the silicon supplier for any liability
TIMET might incur in this matter, although no assurances can be given that TIMET
will ultimately be able to recover all or any portion of such amounts.
For the third quarter of 2001, TIMET currently expects its sales will be
approximately $130 million, with mill product sales volumes likely to increase
5% compared to second quarter 2001 levels and melted product sales volumes may
increase up to 15%. Most of the melted product that TIMET produces are consumed
internally in the manufacture of its mill products. Accordingly, TIMET's melted
product sales volumes can vary significantly from period to period and is
influenced by customer order mix and capacity availability.
TIMET currently expects its sales in 2001 will be between $510 million to
$520 million, reflecting the net effects of expected increased sales volumes,
price increases in certain products and changes in mix. TIMET currently expects
its mill product sales volumes will increase between 10% and 15% in 2001
compared to 2000, with melted product sales volumes increasing between 20% and
30%. Certain price increases recently announced by TIMET are expected to
principally affect the second half of 2001 and 2002 due to associated product
lead times.
TIMET expects its gross margins as a percent of its sales will increase
during the rest of 2001, however, energy, raw material and other cost increases
could substantially offset expected realized selling price increases in 2001.
TIMET is experiencing increases in energy cost as a result of higher natural gas
and electricity prices in the U.S. TIMET is also experiencing increases in the
cost for purchased titanium scrap, and TIMET expects such costs will continue to
increase in the future.
Excluding the effect of the settlement with Boeing, TIMET presently
believes it will be near break-even on operating income and report a net loss in
2001, but substantially lower than the net loss TIMET reported in 2000.
General corporate and other items
General corporate. General corporate interest and dividend income increased
slightly in the second quarter of 2001 compared to the second quarter of 2000
due primarily to a higher level of funds available for investment (primarily
related to restricted cash investments of NL generated from its
previously-reported insurance settlements) and a higher level of distributions
from The Amalgamated Sugar Company LLC in 2001, partially offset by a lower
interest rate on the Company's $80 million loan to Snake River Sugar Company
(which rate was reduced from 12.99% to 6.49% effective April 1, 2000). General
corporate interest and dividend income during the first six months of 2001 was
slightly lower compared to the first six months of 2000 as the lower interest
rate on the loan to Snake River more than offset the effect of a slightly higher
level of funds available for investment at NL. General corporate interest and
dividend income for all of 2000 is expected to be somewhat lower than 2000.
The $30.7 million net legal settlement gains in the first quarter of 2001
relate principally to (i) settlement of certain litigation to which Waste
Control Specialists was a party ($20.1 million) and (ii) NL's settlements with
certain former insurance carriers ($10.3 million). See Note 10 to the
Consolidated Financial Statements. No further material settlements relating to
litigation concerning environmental remediation coverages are expected.
Securities transactions gains in the first six months of 2001 relate
principally to exchanges of LYONs. Securities transactions in the first six
months of 2001 also include (i) a $6.2 million gain related to the
reclassification of certain shares of Halliburton common stock from
available-for-sale to trading securities and (ii) Valhi's sale of 390,000
Halliburton shares in market transactions for aggregate proceeds of $16.8
million. See Note 3 to the Consolidated Financial Statements.
Net general corporate expenses decreased in the second quarter and first
six months of 2001 compared to the same periods in 2000 due primarily to lower
environmental and legal expenses of NL, offset in part by higher
compensation-related expenses for Tremont. Net general corporate expenses in
calendar 2001 are currently expected to be somewhat higher compared to calendar
2000.
Interest expense. Interest expense declined in the second quarter and first
six months of 2001 compared to the same periods in 2000 due primarily to lower
interest rates on variable-rate borrowings of NL, offset in part by higher
levels of indebtedness at CompX. Interest expense during the remainder of 2001
is expected to continue to be somewhat lower than the same periods in 2000 due
to lower anticipated interest rates on variable-rate borrowings in the U.S.,
NL's December 2000 redemption of $50 million principal amount of its 11.75%
Senior Secured Notes using funds on hand and proceeds from lower variable-rate
non-U.S. borrowings and a lower level of outstanding LYONs indebtednesss,
partially offset by higher expected borrowing levels at CompX.
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 11 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.
During the first six months of 2001, NL and Tremont reduced their deferred
income tax valuation allowances by $1.1 million and $.7 million, respectively,
primarily as a result of utilization of certain tax attributes for which the
benefit had not been previously recognized under the "more-likely-than-not"
recognition criteria.
Through December 31, 2000, certain subsidiaries, including NL, Tremont and,
beginning in March 1998, CompX, were not members of the consolidated U.S. tax
group of which Valhi is a member (the Contran Tax Group), and the Company
provided incremental income taxes on such earnings. In addition, through
December 31, 2000, Tremont and NL were each in separate U.S. tax groups, and
Tremont provided incremental income taxes on its earnings with respect to NL. As
previously reported, effective January 1, 2001 NL and Tremont each became
members of the Contran Tax Group. Consequently, beginning in 2001 Valhi no
longer provides incremental income taxes on its earnings with respect to NL and
Tremont nor on Tremont's earnings with respect to NL. In addition, beginning in
2001 the Company believes that recognition of an income tax benefit for certain
of Tremont's deductible income tax attributes arising during 2001, while not
appropriate under the "more-likely-than-not" recognition criteria at the Tremont
separate-company level, is appropriate at the Valhi consolidated level as a
result of Tremont becoming a member of the Contran Tax Group. Both of these
factors resulted in a reduction in the Company's consolidated effective income
tax rate in the 2001 periods compared to the same periods in 2000. Such overall
reduction in the Company's consolidated effective income tax rate in the 2001
periods compared to 2000 is expected to continue during the remainder of the
year.
Minority interest. See Note 12 to the Consolidated Financial Statements.
Minority interest in NL's subsidiaries 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' earnings
are based, in part, upon its ability to favorably resolve these liabilities on
an aggregate basis. The shareholders 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.
In December 2000, TRECO LLC, a 75%-owned subsidiary of Tremont, acquired
the 25% interest in TRECO previously held by the other owner of TRECO, and TRECO
became a wholly-owned subsidiary of Tremont. Accordingly, no minority interest
in the earnings of Tremont subsidiaries is reported beginning in the first
quarter of 2001.
As previously reported, Waste Control Specialists was formed by Valhi and
another entity in 1995. Waste Control Specialists assumed certain liabilities of
the other owner and such liabilities exceeded the carrying value of the assets
contributed by the other owner. Since its inception in 1995, Waste Control
Specialists has reported aggregate net losses. Consequently, all of Waste
Control Specialists aggregate, inception-to-date net losses have accrued to the
Company for financial reporting purposes, and all of Waste Control Specialists
future net income or net losses will also accrue to the Company until Waste
Control Specialists reports positive equity attributable to the other owner.
Accordingly, no minority interest in Waste Control Specialists' net assets or
net earnings (losses) is reported during the first six months of 2000 and 2001.
Accounting principles not yet adopted. See Note 14 to the Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Consolidated cash flows
Operating activities. Trends in cash flows from operating annual 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. Changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments.
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.
Noncash items included in the determination of net income include depreciation,
depletion and amortization expense, as well as noncash interest expense. Noncash
interest expense relates principally to Valhi and NL and consists of
amortization of original issue discount on certain indebtedness and amortization
of deferred financing costs. In addition, substantially all of the proceeds
resulting from NL's legal settlements in 2000 and 2001 are shown as restricted
cash, and therefore such settlement had no impact on cash flows from operating
activities. See Note 10 to the Consolidated Financial Statements.
Investing and financing activities. Approximately 65% of the Company's
consolidated capital expenditures during the first six months of 2001 relate to
NL, 26% relate to CompX and substantially all of the remainder relate to Waste
Control Specialists. During the first six months of 2001, NL and CompX each
purchased shares of their respective common stocks in market transactions for an
aggregate of $2.7 million and $2.6 million, respectively, and Valhi purchased
shares of Tremont common stock in market transactions for an aggregate of
$198,000. In addition, EMS loaned a net $20 million to one of the family trusts
discussed in Note 1 to the Consolidated Financial Statements, and Valhi sold
390,000 shares of Halliburton common stock in market transactions for aggregate
proceeds of $16.8 million.
During the first six months of 2001, (i) Valhi repaid a net $6 million
under its revolving bank credit facility and borrowed a net $5.5 million under
short-term demand loans from Contran, (ii) CompX borrowed a net $10 million
under its revolving bank credit facility and (iii) NL repaid euro 7.6 million
($6.5 million when repaid) of its short-term non-U.S. notes payable. In
addition, (i) a wholly-owned subsidiary of Valhi purchased Waste Control
Specialists' bank term loan from the lender at par value, (ii) $122.6 million
principal amount at maturity ($68.6 million accreted value) of Valhi's LYONs
debt obligation were retired either through exchanges or redemptions and (iii)
EMS entered into a $13.4 million reducing revolving intercompany credit facility
with Tremont, the proceeds of which were used to repay Tremont's loan from
Contran. See Notes 8 and 9 to the Consolidated Financial Statements.
At June 30, 2001, unused credit available under existing credit facilities
approximated $82.5 million, which was comprised of $51.0 million available to
CompX under its revolving senior credit facility, $12.0 million available to NL
under non-U.S. credit facilities and $19.5 million available to Valhi under its
revolving bank credit facility.
Chemicals - NL Industries
At June 30, 2001, NL had cash and cash equivalents of $184 million,
including restricted cash balances of $95 million, and NL had $12 million
available for borrowing under its non-U.S. credit facilities.
Certain of NL's U.S. and non-U.S. tax returns are being examined and tax
authorities have or may propose tax deficiencies, including non-income related
items and interest. NL has received tax assessments from the Norwegian tax
authorities proposing tax deficiencies, including interest, of NOK 39 million
pertaining to 1994 and 1996. NL was unsuccessful in appealing these assessment,
and in May 2001 NL paid $4.3 million to the Norwegian tax authorities to settle
this matter. NL had previously adequately reserved for the payment. NL has
requested the release of the lien currently filed on its Norwegian TiO2 plant in
favor of the tax authorities. NL has also received preliminary tax assessments
for the years 1991 to 1997 from the Belgian tax authorities proposing tax
deficiencies, including related interest, of approximately BEF 13 million ($11
million). NL has filed protests to the assessments for the years 1991 to 1996
and expects to file a protest for 1997. NL is in discussions with the Belgian
tax authorities and believes that a significant portion of the assessments is
without merit. No assurance can be given that these tax matters will be resolved
in NL's favor in view of the inherent uncertainties involved in court
proceedings. NL 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.
NL has been named as a defendant, potentially responsible party, or both,
in a number of legal proceedings associated with environmental matters,
including waste disposal sites, mining locations and facilities currently or
previously owned, operated or used by NL, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. On a quarterly basis,
NL 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. NL believes it has provided adequate accruals ($109
million at June 30, 2001) for reasonably estimable costs of such matters, but
NL's ultimate liability may be affected by a number of factors, including
changes in remedial alternatives and costs and the allocation of such costs
among PRPs. It is not possible to estimate the range of costs for certain sites.
The upper end of the range of reasonably possible costs to NL for sites for
which it is possible to estimate costs is approximately $170 million. NL's
estimates of such liabilities have not been discounted to present value, and
other than certain previously-reported settlements with respect to certain of
NL's former insurance carriers, NL has not recognized any insurance recoveries.
No assurance can be given that actual costs will not exceed accrued amounts or
the upper end of the range for sites for which estimates have been made, and no
assurance can be given that costs will not be incurred with respect to sites as
to which no estimate presently can be made. NL is also a defendant in a number
of legal proceedings seeking damages for personal injury and property damage
allegedly arising from the sale of lead pigments and lead-based paints,
including cases in which plaintiffs purport to represent a class and cases
brought on behalf of government entities. NL has not accrued any amounts for the
pending lead pigment and lead-based paint litigation. There is no assurance that
NL will not incur future liability in respect of this pending litigation in view
of the inherent uncertainties involved in court and jury rulings in pending and
possible future cases. However, based on, among other things, the results of
such litigation to date, NL believes that the pending lead pigment and
lead-based paint litigation is without merit. Liability that may result, if any,
cannot reasonably be estimated. In addition, various legislation and
administrative regulations have, from time to time, been enacted or proposed
that seek to impose various obligations on present and former manufacturers of
lead pigment and lead-based paint with respect to asserted health concerns
associated with the use of such products and to effectively overturn court
decisions in which 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 currently barred by statutes of limitations. NL
currently believes the disposition of all claims and disputes, individually or
in the aggregate, should not have a material adverse effect on its consolidated
financial position, results of operations or liquidity. There can be no
assurance that additional matters of these types will not arise in the future.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its debt service and capital expenditure requirements and estimated
future operating cash flows. As a result of this process, NL has in the past and
may in the future seek to reduce, refinance, repurchase or restructure
indebtedness, raise additional capital, issue additional securities, repurchase
shares of its common stock, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, NL may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals industry 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 refinancing
or increasing its indebtedness to the extent permitted by the agreements
governing NL's existing debt. In this regard, the indentures governing NL's
publicly-traded debt contain provisions which limit the ability of NL and its
subsidiaries to incur additional indebtedness or hold noncontrolling interests
in business units.
Component products - CompX International
Certain of CompX's sales generated by its Canadian operations are
denominated in U.S. dollars. CompX periodically uses currency forward contracts
to manage a portion of foreign exchange rate risk associated with such
receivables or similar exchange rate risk associated with future sales. CompX
has not entered into these contracts for trading or speculative purposes in the
past, nor does the Company currently anticipate entering into such contracts for
trading or speculative purposes in the future. To manage such exchange rate
risk, at December 31, 2000, CompX held contracts maturing through March 2001 to
exchange an aggregate of U.S. $9 million for an equivalent amount of Canadian
dollars at an exchange rate of Cdn. $1.48 per U.S. dollar. CompX held no such
contracts at June 30, 2001.
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, capital resources 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
available cash, issuing additional equity securities or increasing the
indebtedness of CompX or its subsidiaries.
Waste management - Waste Control Specialists
At June 30, 2001, Waste Control Specialists' indebtedness consists
principally of (i) a $5.1 million term loan due in installments through November
2004 and (ii) $4.4 million of other borrowings under a $5 million revolving
credit facility that matures in 2004. All of such indebtedness is owed to a
wholly-owned subsidiary of Valhi, and is therefore eliminated in the Company's
consolidated financial statements.
Tremont Corporation and Titanium Metals Corporation
Tremont. Tremont is primarily a holding company which, at June 30, 2001,
owned approximately 39% of TIMET and 20% of NL. At June 30, 2001, the market
value of the 12.3 million shares of TIMET and the 10.2 million shares of NL held
by Tremont was approximately $123 million and $141 million, respectively.
In February 2001, Tremont entered into a $13.4 million reducing revolving
credit facility with EMS (NL's majority-owned environmental management
subsidiary), and Tremont repaid its loan from Contran. Such intercompany loan
between EMS and Tremont, collateralized by 10 million shares of NL common stock
owned by Tremont, is eliminated in Valhi's consolidated financial statements.
Tremont has received a tax assessment from the U.S. federal tax authorities
proposing tax deficiencies of $8.3 million. Tremont has appealed the proposed
deficiencies and believes they are substantially without merit. No assurances
can be given that these tax matters will be resolved in Tremont's favor in view
of the inherent uncertainties involved in tax proceedings. Tremont believes it
has provided adequate accruals for additional taxes 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.
Based upon certain technical provisions of the Investment Company Act of
1940 (the "1940 Act"), Tremont might arguably be deemed to be an "investment
company" under the 1940 Act, despite the fact that Tremont does not now engage,
nor has it engaged or intended to engage, in the business of investing,
reinvesting, owning, holding or trading of securities. In June 2001, Tremont
received an order from the Securities and Exchange Commission confirming that
Tremont is not subject to the 1940 Act.
Tremont periodically evaluates its liquidity requirements, capital needs
and availability of resources in view of, among other things, its alternative
uses of capital, its debt service requirements, the cost of debt and equity
capital and estimated future operating cash flows. As a result of this process,
Tremont has in the past and may in the future seek to obtain financing from
related parties or third parties, raise additional capital, modify its dividend
policy, restructure ownership interests of subsidiaries and affiliates, incur,
refinance or restructure indebtedness, purchase shares of its common stock,
consider the sale of interests in subsidiaries, affiliates, marketable
securities or other assets, or take a combination of such steps or other steps
to increase or manage liquidity and capital resources. In the normal course of
business, Tremont may investigate, evaluate, discuss and engage in acquisition,
joint venture and other business combination opportunities. In the event of any
future acquisition or joint venture opportunities, Tremont may consider using
then-available cash, issuing equity securities or incurring indebtedness.
TIMET. At June 30, 2001, TIMET had net cash of approximately $17.4 million
($7.4 million of debt and $24.8 million of cash and equivalents). TIMET's
receivables and inventory levels are expected to increase during 2001 to support
the anticipated increase in sales. TIMET expects to generate positive cash flow
from operations in 2001 of between $80 million and $90 million, principally due
to the Boeing settlement and the related $28.5 million advance payment
applicable to 2002 purchases that TIMET expects to receive in December 2001. For
U.S. federal income tax purposes, TIMET has net operating loss carryforwards of
approximately $40 million at June 30, 2001 (after considering the effect of the
Boeing settlement) and, accordingly, TIMET does not expect the Boeing settlement
will require TIMET to make any material cash income tax payments.
TIMET's capital expenditures during 2001 are currently expected to be
between $15 million to $20 million, covering principally capacity enhancements,
capital maintenance, and safety and environmental projects. TIMET expects its
current net debt position to change to a net cash position during 2001. TIMET
believes its cash, cash flow from operations, and borrowing availability under
its credit agreements ($148.5 million available for borrowing at June 30, 2001)
will satisfy its expected working capital, capital expenditures and other
requirements in 2001.
During June 2001, TIMET resumed payment of dividends on its outstanding
$201.3 million of 6.625% convertible preferred securities, which had been
suspended in April 2000. TIMET also paid the aggregate amount of dividends that
have been previously deferred on such convertible preferred securities ($13.9
million) in June 2001. Dividends on TIMET's common stock are currently
prohibited under TIMET's U.S. credit agreement.
TIMET used the proceeds from its settlement with Boeing to (i) pay legal
and other costs associated with the Boeing settlement, (ii) pay the deferred
dividends on its convertible preferred securities and (iii) repay a substantial
portion of TIMET's outstanding revolving bank debt.
In October 1998, TIMET purchased for cash $80 million of Special Metals
Corporation 6.625% convertible preferred stock (the "SMC Preferred Stock"), in
conjunction with, and concurrent with, SMC's acquisition of a business unit from
Inco Limited. Dividends on the SMC Preferred Stock are being accrued, but a
portion of the cumulative dividends through June 30, 2001, have not yet been
paid due to limitations imposed by SMC's bank credit agreement. As a result,
TIMET has classified its accrued and unpaid dividends on the SMC preferred
securities ($8.7 million at June 30, 2001) as a noncurrent asset. There can be
no assurance that TIMET will receive additional dividends during 2001.
TIMET periodically evaluates its liquidity requirements, capital needs and
availability of resources in view of, among other things, its alternative uses
of capital, its debt service requirements, the cost of debt and equity capital,
and estimated future operating cash flows. As a result of this process, TIMET
has in the past and may in the future seek to raise additional capital, modify
its common and preferred dividend policies, restructure ownership interests,
incur, refinance or restructure indebtedness, repurchase shares of capital
stock, sell assets, or take a combination of such steps or other steps to
increase or manage its liquidity and capital resources. In the normal course of
business, TIMET investigates, evaluates, discusses and engages in acquisition,
joint venture, strategic relationship and other business combination
opportunities in the titanium, specialty metal and other industries. In the
event of any future acquisition or joint venture opportunities, TIMET may
consider using then-available liquidity, issuing equity securities or incurring
additional indebtedness.
General corporate - Valhi
Valhi's operations are conducted primarily through its subsidiaries (NL,
CompX, Tremont and Waste Control Specialists). Accordingly, Valhi'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. NL increased its quarterly dividend from $.035 per share to $.15
per share in the first quarter of 2000, and NL further increased its quarterly
dividend to $.20 per share in the fourth quarter of 2000. At the current $.20
per share quarterly rate, and based on the 30.1 million NL shares held by Valhi
at June 30, 2001, Valhi would receive aggregate annual dividends from NL of
approximately $24.1 million. Tremont Group, Inc. owns 80% of Tremont
Corporation. Tremont Group is owned 80% by Valhi and 20% by NL. Tremont's
quarterly dividend is currently $.07 per share. At that rate, and based upon the
5.1 million Tremont shares owned by Tremont Group at June 30, 2001, Tremont
Group would receive aggregate annual dividends from Tremont of approximately
$1.4 million. Tremont Group intends to pass-through the dividends it receives
from Tremont to its shareholders (Valhi and NL). Based on Valhi's 80% ownership
of Tremont Group, Valhi would receive $1.2 million in annual dividends from
Tremont Group as a pass-through of Tremont Group's dividends from Tremont. CompX
commenced quarterly dividends of $.125 per share in the fourth quarter of 1999.
At this current rate and based on the 10.4 million CompX shares held by Valhi
and its wholly-owned subsidiary Valcor at June 30, 2001, Valhi/Valcor would
receive annual dividends from CompX of $5.2 million. Various credit agreements
to which certain subsidiaries or affiliates are parties contain customary
limitations on the payment of dividends, typically a percentage of net income or
cash flow; however, such restrictions have not significantly impacted Valhi's
ability to service its parent company level obligations. Valhi has not
guaranteed any indebtedness of its subsidiaries or affiliates. At June 30, 2001,
Valhi had $4 million of parent level cash and cash equivalents, had $25 million
of outstanding borrowings under its revolving bank credit agreement and had
$13.5 million of short-term demand loans payable to Contran. In addition, Valhi
had $19.5 million of borrowing availability under its bank credit facility and
227,000 shares of Halliburton common stock with an aggregate market value of
$8.1 million which had been released from the LYONs escrow and could therefore
be sold.
Valhi's LYONs do not require current cash debt service. See Note 8 to the
Consolidated Financial Statements. Exchanges of LYONs for Halliburton stock
result in the Company reporting income related to the disposition of the
Halliburton stock for both financial reporting and income tax purposes, although
no cash proceeds are generated by such exchanges. Valhi's potential cash income
tax liability that would have been triggered at June 30, 2001, assuming
exchanges of all of the outstanding LYONs for Halliburton stock at such date,
was approximately $12 million.
At June 30, 2001, the LYONs had an accreted value equivalent to
approximately $39.20 per Halliburton share, and the market price of the
Halliburton common stock was $35.60 per share. The LYONs, which mature in
October 2007, are redeemable at the option of the LYON holder in October 2002
for an amount equal to $636.27 per $1,000 principal amount at maturity. Such
October 2002 redemption price is equivalent to about $44.10 per Halliburton
share. Assuming the market value of Halliburton common stock exceeds such
equivalent redemption value of the LYONS in October 2002, the Company does not
expect a significant amount of LYONs would be tendered to the Company for
redemption at that date.
During the first six months of 2001, holders representing $92.2 million
principal amount at maturity exchanged their LYONs debt obligation for shares of
Halliburton common stock. Under the terms of the indenture governing the LYONs,
the Company has the option to deliver, in whole or in part, cash equal to the
market value of the Halliburton shares that are otherwise required to be
delivered to the LYONs holder in an exchange, and a portion of such exchanges
during the first six months of 2001 were so settled. Also during the first six
months of 2001, $30.4 million principal amount at maturity of LYONs were
redeemed by the Company for cash at various redemption prices equal to the
accreted value of the LYONs on the respective redemption dates. Valhi may
consider additional partial redemptions or a full redemption of the remaining
notes based on future market conditions and other considerations. There can be
no assurance, however, that Valhi will pursue an additional partial redemption
or a full redemption of the notes.
Based on The Amalgamated Sugar Company LLC's current projections for 2001,
Valhi currently expects that distributions received from the LLC in 2001 will
approximate its debt service requirements under its $250 million loans from
Snake River.
Certain covenants contained in Snake River's third-party senior debt allow
Snake River to pay periodic installments of debt service payments (principal and
interest) under Valhi's $80 million loan to Snake River prior to its maturity in
2010, and such loan is subordinated to Snake River's third-party senior debt.
Such covenants allowed Snake River to pay interest debt service payment to Valhi
on the $80 million loan of $2.9 million in 1998, $7.2 million in 1999 and
$950,000 in 2000. At June 30, 2001, the accrued and unpaid interest on the $80
million loan to Snake River aggregated $20.1 million. Such accrued and unpaid
interest is classified as a noncurrent asset at June 30, 2001. The Company
currently believes it will ultimately realize both the $80 million principal
amount and the accrued and unpaid interest, whether through cash generated from
the future operations of Snake River and the LLC or otherwise (including any
liquidation of Snake River/LLC).
Redemption of the Company's interest in the LLC would result in the Company
reporting income related to the disposition of its LLC interest for both
financial reporting and income tax purposes. The cash proceeds that would be
generated from such a disposition would likely be less than the specified
redemption price due to Snake River's ability to simultaneously call its $250
million loans to Valhi. As a result, the net cash proceeds generated by
redemption of the Company's interest in the LLC could be less than the income
taxes that would become payable as a result of the disposition.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policies, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company and related entities routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies. In this regard, the indentures
governing the publicly-traded debt of NL contain provisions which limit the
ability of NL and its subsidiaries to incur additional indebtedness or hold
noncontrolling interests in business units.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the 2000 Annual Report and prior 2001 periodic reports
for descriptions of certain legal proceedings.
In June 2001, Gutierrez-Palmenberg, Inc. ("GPI") filed a complaint in the
U.S. District Court, District of Arizona, against Waste Control Specialists
(Gutierrez - Palmenberg, Inc. vs. Waste Control Specialists, LLC, No. CIV '01
0981 PHX MS). The complaint alleges, among other things, that Waste Control
Specialists breached its contracts with GPI and owes GPI approximately $640,000
as compensatory damages. Waste Control Specialists believes the complaint is in
error with respect to, among other matters, the amount owed to GPI under the
contracts and intends to defend against the action vigorously.
City of St. Louis v. Lead Industries Association, et al. (No. 002-245). In
June 2001, defendants moved to dismiss all claims. The court has not ruled.
County of Santa Clara v. Atlantic Richfield Company, et al. (No. CV788657).
In June 2001, the court granted the previously-described motions with respect to
privately-owned buildings and with respect to the nuisance claim, with leave to
replead, and otherwise denied the motions.
City of Milwaukee v. N. L. Industries, Inc. and Mautz Paint (No.
01CV003088). NL was served in May 2001 and answered the complaint in August 2001
denying all wrongdoing.
Harris County, Texas v. Lead Industries Association, et al. (No.
2001-21413). NL was served in May 2001, and NL answered the complaint in June
2001 denying all wrongdoing.
In June 2001, a complaint was filed in Jefferson County School District v.
Lead Industries Association, et al. (Circuit Court of Jefferson County,
Mississippi, Case No. 2001-69). The complaint seeks joint and several liability
for compensatory and punitive damages for the abatement of lead paint in
Jefferson County Schools from NL, former manufacturers of lead pigment and paint
and local retailers. The complaint asserts strict liability design defect and
marketing defect, negligent product design and failure to warn, fraudulent
misrepresentation, negligent misrepresentation, concert of action, public
nuisance, restitution, and conspiracy. NL answered the complaint in July 2001,
denying all allegations of wrongdoing, and has removed the case to Federal
Court.
Item 4. Submission of Matters to a Vote of Security Holders.
Valhi's 2001 Annual Meeting of Stockholders was held on May 10, 2001.
Thomas E. Barry, Norman S. Edelcup, Edward J. Hardin, Glenn R. Simmons, Harold
C. Simmons, J. Walter Tucker, Jr. and Steven L. Watson were elected as
directors, each receiving votes "For" their election from over 97% of the 114.7
million common shares eligible to vote at the Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended June 30, 2001.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALHI, INC.
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(Registrant)
Date August 13, 2001 By /s/ Bobby D. O'Brien
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Bobby D. O'Brien
(Vice President and Treasurer,
Principal Financial Officer)
Date August 13, 2001 By /s/ Gregory M. Swalwell
------------------ ------------------------------
Gregory M. Swalwell
(Vice President and Controller,
Principal Accounting Officer)