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 September 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 October 31, 2001: 114,766,417.
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 2000
and September 30, 2001 3
Consolidated Statements of Income -
Three months and nine months ended
September 30, 2000 and 2001 5
Consolidated Statements of Comprehensive Income -
Nine months ended September 30, 2000 and 2001 6
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and 2001 7
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 2001 9
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 21
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 40
Item 6. Exhibits and Reports on Form 8-K. 40
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, September 30,
2000 2001
------ ------
Current assets:
Cash and cash equivalents .................. $ 135,017 $ 121,938
Restricted cash equivalents ................ 69,242 80,198
Marketable securities ...................... -- 11,609
Accounts and other receivables ............. 182,991 186,268
Refundable income taxes .................... 14,470 1,913
Receivable from affiliates ................. 885 20,889
Inventories ................................ 242,994 222,792
Prepaid expenses ........................... 7,272 16,254
Deferred income taxes ...................... 14,236 13,049
---------- ----------
Total current assets ................... 667,107 674,910
---------- ----------
Other assets:
Marketable securities ...................... 268,006 184,691
Investment in affiliates ................... 235,791 244,467
Loans and other receivables ................ 100,540 104,512
Mining properties .......................... 13,971 12,096
Prepaid pension costs ...................... 22,789 22,516
Goodwill ................................... 359,420 349,632
Deferred income taxes ...................... 2,046 1,930
Other ...................................... 49,604 43,815
---------- ----------
Total other assets ..................... 1,052,167 963,659
---------- ----------
Property and equipment:
Land ....................................... 29,644 29,893
Buildings .................................. 167,653 166,099
Equipment .................................. 543,915 543,169
Construction in progress ................... 14,865 38,870
---------- ----------
756,077 778,031
Less accumulated depreciation .............. 218,530 249,808
---------- ----------
Net property and equipment ............. 537,547 528,223
---------- ----------
$2,256,821 $2,166,792
========== ==========
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30,
2000 2001
----------- ----------
Current liabilities:
Notes payable .............................. $ 70,039 $ 47,435
Current maturities of long-term debt ....... 34,284 1,551
Accounts payable ........................... 81,572 70,489
Accrued liabilities ........................ 162,431 177,350
Payable to affiliates ...................... 32,042 45,438
Income taxes ............................... 15,693 15,627
Deferred income taxes ...................... 1,922 3,419
----------- -----------
Total current liabilities .............. 397,983 361,309
----------- -----------
Noncurrent liabilities:
Long-term debt ............................. 595,354 555,455
Accrued OPEB costs ......................... 50,624 50,185
Accrued pension costs ...................... 26,697 22,581
Accrued environmental costs ................ 66,224 50,790
Deferred income taxes ...................... 294,371 281,838
Other ...................................... 41,055 35,852
----------- -----------
Total noncurrent liabilities ........... 1,074,325 996,701
----------- -----------
Minority interest ............................ 156,278 161,133
----------- -----------
Stockholders' equity:
Common stock ............................... 1,257 1,258
Additional paid-in capital ................. 44,345 44,946
Retained earnings .......................... 591,030 659,706
Accumulated other comprehensive income:
Marketable securities .................... 132,580 90,665
Currency translation ..................... (60,811) (68,428)
Pension liabilities ...................... (4,517) (4,849)
Treasury stock ............................. (75,649) (75,649)
----------- -----------
Total stockholders' equity ............. 628,235 647,649
----------- -----------
$ 2,256,821 $ 2,166,792
=========== ===========
Commitments and contingencies (Note 1)
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
------------------- ----------------
2000 2001 2000 2001
---- ---- ---- ----
Revenues and other income:
Net sales ........................... $ 308,122 $ 262,488 $ 929,794 $827,593
Other, net .......................... 12,649 16,011 90,530 123,742
--------- ----------- ----------- --------
320,771 278,499 1,020,324 951,335
--------- ----------- ----------- --------
Costs and expenses:
Cost of sales ....................... 212,155 193,252 643,195 595,953
Selling, general and administrative . 49,627 46,236 152,840 144,186
Interest ............................ 17,443 14,910 52,464 47,686
--------- ----------- ----------- --------
279,225 254,398 848,499 787,825
--------- ----------- ----------- --------
41,546 24,101 171,825 163,510
Equity in earnings (losses) of:
Titanium Metals Corporation ("TIMET") (1,486) 3,170 (7,997) 16,172
Other ............................... 554 (76) 823 446
--------- ----------- ----------- --------
Income before income taxes ........ 40,614 27,195 164,651 180,128
Provision for income taxes ............ 17,634 11,246 72,698 66,921
Minority interest in after-tax earnings 9,963 5,639 33,481 23,668
--------- ----------- ----------- --------
Net income ........................ $ 13,017 $ 10,310 $ 58,472 $ 89,539
========= =========== =========== ========
Earnings per share:
Basic ............................... $ .11 $ .09 $ .51 $ .78
========= =========== =========== ========
Diluted ............................. $ .11 $ .09 $ .50 $ .77
========= =========== =========== ========
Cash dividends per share .............. $ .05 $ .06 $ .15 $ .18
========= =========== =========== ========
Shares used in the calculation
of per share amounts:
Basic earnings per common share ..... 115,159 115,201 115,122 115,177
Dilutive impact of outstanding
stock options ...................... 1,199 934 1,143 903
--------- ----------- ----------- --------
Diluted earnings per share .......... 116,358 116,135 116,265 116,080
========= =========== =========== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Nine months ended September 30, 2000 and 2001
(In thousands)
2000 2001
---- ----
Net income ......................................... $ 58,472 $ 89,539
-------- --------
Other comprehensive income (loss),
net of tax:
Marketable securities adjustment:
Unrealized gains (losses) arising during
the period .................................... 3,407 (8,028)
Less reclassification for gains
included in net income ........................ (136) (33,887)
-------- --------
3,271 (41,915)
Currency translation adjustment .................. (26,744) (7,617)
Pension liabilities adjustment ................... 941 (332)
-------- --------
Total other comprehensive
income (loss), net ............................ (22,532) (49,864)
-------- --------
Comprehensive income ......................... $ 35,940 $ 39,675
======== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2000 and 2001
(In thousands)
2000 2001
---- ----
Cash flows from operating activities:
Net income ......................................... $ 58,472 $ 89,539
Depreciation, depletion and amortization ........... 53,609 56,054
Legal settlement gains, net ........................ (43,000) (10,307)
Insurance gain ..................................... -- (4,551)
Securities transactions ............................ (5,763) (51,874)
Noncash interest expense ........................... 6,998 4,893
Deferred income taxes .............................. 38,780 16,257
Minority interest .................................. 33,481 23,668
Other, net ......................................... (11,119) (1,380)
Equity in:
TIMET ............................................ 7,997 (16,172)
Other ............................................ (823) (446)
Distributions from:
Manufacturing joint venture ...................... 7,550 5,513
Other ............................................ 81 1,300
--------- ---------
146,263 112,494
Change in assets and liabilities:
Accounts and other receivables ................... (40,455) (10,181)
Inventories ...................................... 23,091 15,985
Accounts payable and accrued liabilities ......... 10,262 (8,970)
Accounts with affiliates ......................... 8,758 11,012
Income taxes ..................................... 7,979 12,241
Other, net ....................................... (8,343) (13,768)
--------- ---------
Net cash provided by operating activities .... 147,555 118,813
--------- ---------
Cash flows from investing activities:
Capital expenditures ............................... (39,571) (45,248)
Purchases of:
Business unit .................................... (9,497) --
Tremont common stock ............................. (37,482) (198)
NL common stock .................................. (29,180) (9,853)
CompX common stock ............................... -- (2,650)
Loans to affiliates:
Loans ............................................ (21,969) (20,000)
Collections ...................................... 21,969 --
Property damaged by fire:
Insurance proceeds ............................... -- 10,500
Other, net ....................................... -- (2,100)
Proceeds from disposal of marketable securities .... 158 16,802
Change in restricted cash equivalents, net ......... (377) 838
Other, net ......................................... 2,176 (239)
--------- ---------
Net cash used by investing activities ........ (113,773) (52,148)
--------- ---------
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 2000 and 2001
(In thousands)
2000 2001
---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings ....................................... $ 37,797 $ 46,356
Principal payments ............................... (49,294) (101,671)
Loans from affiliate:
Loans ............................................ 6,000 76,666
Repayments ....................................... (8,082) (73,731)
Valhi dividends paid ............................... (17,376) (20,863)
Distributions to minority interest ................. (7,318) (7,950)
Other, net ......................................... 3,571 1,217
--------- ---------
Net cash used by financing activities .......... (34,702) (79,976)
--------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities ...... (920) (13,311)
Currency translation ............................... (3,976) 232
Cash and equivalents at beginning of period .......... 152,707 135,017
--------- ---------
Cash and equivalents at end of period ................ $ 147,811 $ 121,938
========= =========
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized ............. $ 37,805 $ 36,770
Income taxes, net ................................ 16,950 26,880
Business unit acquired - net assets consolidated:
Cash and cash equivalents ........................ $ -- $ --
Goodwill and other intangible assets ............. 2,561 --
Other noncash assets ............................. 8,458 --
Liabilities ...................................... (1,522) --
--------- ---------
Cash paid ........................................ $ 9,497 $ --
========= =========
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 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 .................... -- -- 89,539 -- -- -- -- 89,539
Dividends ..................... -- -- (20,863) -- -- -- -- (20,863)
Other comprehensive income, net -- -- -- (41,915) (7,617) (332) -- (49,864)
Other, net .................... 1 601 -- -- -- -- -- 602
------ ------- --------- --------- -------- ------- -------- ---------
Balance at September 30, 2001 . $1,258 $44,946 $ 659,706 $ 90,665 $(68,428) $(4,849) $(75,649) $ 647,649
====== ======= ========= ========= ======== ======= ======== =========
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 September 30, 2001, and the consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for the interim periods ended September 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 information normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") has been condensed or omitted. The accompanying consolidated
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 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
94% 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 nine 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.
Effective July 1, 2001, the Company adopted SFAS No. 141, Business
Combinations, for all business combinations initiated on or after July 1, 2001,
and all purchase business combinations (including step acquisitions). Under SFAS
No. 141, all business combinations will be accounted for by the purchase method,
and the pooling-of-interests method will be prohibited.
Note 2 - Business segment information:
% owned at
Business Entity September 30, 2001
Chemicals NL Industries, Inc. 61%
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 September 30, 2001. NL owns the other 20% of Tremont Group.
Tremont is also a holding company and owns an additional 21% of NL and 39% of
Titanium Metals Corporation ("TIMET") at September 30, 2001.
Three months ended Nine months ended
September 30, September 30,
------------------ ----------------
2000 2001 2000 2001
---- ---- ---- ----
(In millions)
Net sales:
Chemicals ........................ $242.3 $207.0 $724.4 $653.2
Component products ............... 63.0 51.5 194.2 164.4
Waste management ................. 2.8 4.0 11.2 10.0
------ ------ ------ ------
Total net sales ................ $308.1 $262.5 $929.8 $827.6
====== ====== ====== ======
Operating income:
Chemicals ........................ $ 51.2 $ 29.9 $147.5 $114.1
Component products ............... 9.2 4.7 31.6 17.0
Waste management ................. (3.0) (3.1) (6.0) (10.7)
------ ------ ------ ------
Total operating income ......... 57.4 31.5 173.1 120.4
General corporate items:
Legal settlement gains, net ...... -- -- 43.0 30.7
Securities transactions .......... .2 1.1 5.8 51.9
Interest and dividend income ..... 9.7 9.3 30.0 29.0
Insurance gain ................... -- 3.8 -- 4.5
Expenses, net .................... (8.1) (6.7) (27.5) (25.3)
Interest expense ................... (17.5) (14.9) (52.5) (47.7)
------ ------ ------ ------
41.7 24.1 171.9 163.5
Equity in:
TIMET ............................ (1.5) 3.2 (8.0) 16.2
Other ............................ .5 (.1) .8 .4
------ ------ ------ ------
Income before income taxes ..... $ 40.7 $ 27.2 $164.7 $180.1
====== ====== ====== ======
During the first nine months of 2001, NL and CompX each purchased shares of
their common stocks in market transactions for an aggregate of $9.9 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, September 30,
2000 2001
------ ------
(In thousands)
Current assets - Halliburton Company
common stock (trading) .......................... $ -- $ 11,609
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC .............. $170,000 $170,000
Halliburton Company common stock ............... 97,108 14,009
Other common stocks ............................ 898 682
-------- --------
$268,006 $184,691
======== ========
At September 30, 2001, Valhi held 1.1 million shares of Halliburton common
stock (aggregate cost of $9 million) with a quoted market price of $22.55 per
share, or an aggregate market value of $26 million. Of such Halliburton shares,
approximately 515,000 Halliburton shares are classified as current trading
securities and 621,000 are classified as noncurrent available-for-sale
securities. 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. 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 and July 2001 when
they became eligible to, and were, released from the escrow for the benefit of
the holders of the LYONs. During the first nine 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 September 30, 2001. See Note 10.
Note 4 - Inventories:
December 31, September 30,
2000 2001
------ ------
(In thousands)
Raw materials:
Chemicals .................................. $ 66,061 $ 40,160
Component products ......................... 11,866 12,003
-------- --------
77,927 52,163
-------- --------
In process products:
Chemicals .................................. 7,117 7,321
Component products ......................... 11,454 12,807
-------- --------
18,571 20,128
-------- --------
Finished products:
Chemicals .................................. 107,895 112,654
Component products ......................... 12,811 10,275
-------- --------
120,706 122,929
-------- --------
Supplies (primarily chemicals) ............... 25,790 27,572
-------- --------
$242,994 $222,792
======== ========
Note 5 - Investment in affiliates:
December 31, September 30,
2000 2001
------ ------
(In thousands)
TiO2 manufacturing joint venture ............... $150,002 $144,228
TIMET .......................................... 72,655 87,958
Other .......................................... 13,134 12,281
-------- --------
$235,791 $244,467
======== ========
At September 30, 2001, Tremont held 12.3 million shares of TIMET common
stock with a quoted market price of $3.20 per share, or an aggregate of $39
million.
At September 30, 2001, TIMET reported total assets and stockholders' equity
of $756.5 million and $388.2 million, respectively. TIMET's total assets at such
date include current assets of $292.1 million, property and equipment of $274.0
million and goodwill and other intangible assets of $56.7 million. TIMET's total
liabilities at such date include current liabilities of $106.2 million,
long-term debt of $16.7 million, accrued OPEB costs of $17.2 million and
convertible preferred securities of $201.2 million.
During the first nine months of 2001, TIMET reported net sales of $370.5
million, operating income of $56.8 million and net income of $30.3 million (2000
first nine months - net sales of $320.3 million, an operating loss of $35.5
million and a net loss of $32.5 million).
Note 6 - Other assets:
December 31, September 30,
2000 2001
------ ------
(In thousands)
Loans and other receivables:
Snake River Sugar Company:
Principal ................................ $ 80,000 $ 80,000
Interest ................................. 17,526 21,420
Other ...................................... 4,754 6,702
-------- --------
102,280 108,122
Less current portion ....................... 1,740 3,610
-------- --------
Noncurrent portion ......................... $100,540 $104,512
======== ========
Other noncurrent assets:
Restricted cash investments ................ $ 22,897 $ 17,473
Intangible assets .......................... 5,945 5,222
Deferred financing costs ................... 2,527 1,590
Other ...................................... 18,235 19,530
-------- --------
$ 49,604 $ 43,815
======== ========
Note 7 - Accrued liabilities:
December 31, September 30,
2000 2001
------ -----
(In thousands)
Current:
Employee benefits .......................... $ 44,397 $ 37,554
Environmental costs ........................ 56,323 66,780
Interest ................................... 6,172 12,274
Deferred income ............................ 7,241 12,039
Other ...................................... 48,298 48,703
-------- --------
$162,431 $177,350
======== ========
Noncurrent:
Insurance claims and expenses .............. $ 22,424 $ 20,474
Employee benefits .......................... 11,893 10,185
Deferred income ............................ 5,453 2,363
Other ...................................... 1,285 2,830
-------- --------
$ 41,055 $ 35,852
======== ========
Note 8 - Notes payable and long-term debt:
December 31, September 30,
2000 2001
------ ------
(In thousands)
Notes payable -
Kronos - non-U.S. bank credit agreements ........... $ 70,039 $ 47,435
======== ========
Long-term debt:
Valhi:
Snake River Sugar Company ........................ $250,000 $250,000
LYONs ............................................ 100,333 24,900
Bank credit facility ............................. 31,000 30,000
Other ............................................ 2,880 2,880
-------- --------
384,213 307,780
-------- --------
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 3,795
-------- --------
245,425 249,226
-------- --------
629,638 557,006
Less current maturities ............................ 34,284 1,551
-------- --------
$595,354 $555,455
======== ========
During the first nine 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 nine months of 2001 was so settled. See Note 10. Also during
the first nine months of 2001, $50.4 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.
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 September 30, 2001. In November
2001, the maturity date of Valhi's bank credit facility was extended one year to
November 2002, and the size of the facility was increased $10 million to $55
million.
Note 9 - Accounts with affiliates:
December 31, September 30,
2000 2001
------ ------
(In thousands)
Receivables from affiliates:
Loan to Contran family trust ................. $ -- $20,000
TIMET ........................................ 599 504
Other ........................................ 286 385
------- -------
$ 885 $20,889
======= =======
Payables to affiliates:
Demand loan from Contran:
Valhi ...................................... $ 8,000 $24,335
Tremont .................................... 13,403 --
Income taxes payable to Contran .............. 1,666 13,222
Louisiana Pigment Company .................... 8,710 7,592
Other, net ................................... 263 289
------- -------
$32,042 $45,438
======= =======
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 September 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 and Class E cumulative preferred 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 September 30, 2001.
Note 10 - Other income:
Nine months ended
September 30,
2000 2001
---- ----
(In thousands)
Securities earnings:
Interest and dividends ..................... $ 29,978 $ 29,045
Securities transactions, net ............... 5,763 51,874
-------- --------
35,741 80,919
Legal settlement gains, net .................. 43,000 30,723
Noncompete agreement income .................. 3,000 3,000
Currency transactions, net ................... 4,227 543
Insurance gain ............................... -- 4,551
Other, net ................................... 4,562 4,006
-------- --------
$ 90,530 $123,742
======== ========
Net securities transactions gains in the first nine months of 2001 are
comprised of (i) a $33.1 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 $14.2 million gain related to the
reclassification of 515,000 Halliburton shares from available-for-sale to
trading securities, (iv) a $6.7 million net unrealized loss related to changes
in market value of the Halliburton shares classified as trading securities and
(v) 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:
Nine months ended
September 30,
2000 2001
---- ----
(In millions)
Expected tax expense ..................................... $57.6 $63.0
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies ........... 12.9 2.7
Non-U.S. tax rates ....................................... (4.3) (4.8)
Change in NL's and Tremont's deferred income tax
valuation allowance, net ................................ .9 (2.1)
No tax benefit for goodwill amortization ................. 4.0 4.4
U.S. state income taxes, net ............................. 1.5 2.7
Other, net ............................................... .1 1.0
----- -----
$72.7 $66.9
===== =====
Comprehensive provision for income taxes
(benefit) allocated to:
Net income ............................................. $72.7 $66.9
Other comprehensive income:
Marketable securities ................................ 2.0 (22.5)
Currency translation ................................. (19.4) (1.3)
Pension liabilities .................................. .6 (.3)
----- -----
$55.9 $42.8
===== =====
Note 12 - Minority interest:
December 31, September 30,
2000 2001
------ ------
(In thousands)
Minority interest in net assets:
NL Industries ............................ $ 66,761 $ 69,289
Tremont Corporation ...................... 34,235 38,274
CompX International ...................... 49,003 46,359
Subsidiaries of NL ....................... 6,279 7,211
-------- --------
$156,278 $161,133
======== ========
Nine months ended
September 30,
2000 2001
---- ----
(In thousands)
Minority interest in net earnings (losses):
NL Industries .............................. $ 23,500 $15,562
Tremont Corporation ........................ 1,223 4,500
CompX International ........................ 6,871 2,653
Subsidiaries of NL ......................... 1,655 953
Subsidiaries of Tremont .................... 235 --
Subsidiaries of CompX ...................... (3) --
-------- -------
$ 33,481 $23,668
======== =======
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
September 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. The
facility's sulfate-process plant became approximately 50% operational in
September 2001, and became fully operational in late 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 was 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 was limited by the available excess
capacity at its Nordenham plant.
The damages to property and the business interruption losses caused by the
fire were covered by insurance, but the effect on the financial results of the
Company on a quarter-to-quarter basis was impacted by the timing and amount of
insurance recoveries. Chemicals operating income in the third quarter and first
nine months of 2001 includes $3 million and $8 million, respectively, of
business interruption insurance proceeds as partial payments 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 advance payments of $5 million and $10.5
million, respectively, in the third quarter and first nine months of 2001 for
property damage and related cleanup cost insurance recoveries, resulting in
insurance gains of $3.8 million and $4.5 million, respectively, as the advance
payments received exceeded the carrying value of the property destroyed and
cleanup costs incurred. See Note 10. In October 2001, NL reached an agreement in
principle with its insurance carriers to settle the coverage claims caused by
the fire under which NL expects to receive additional insurance proceeds of $25
million for business interruption losses and $13 million for property damage
costs. The Company expects to report a gain, net of certain expenses, related to
these amounts in the fourth quarter of 2001.
Note 14 - Accounting principles not yet adopted:
The Company will adopt SFAS No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002. Under SFAS No. 142, goodwill, including goodwill
arising from the difference between the cost of an investment accounted for by
the equity method and the amount of the underlying equity in net assets of such
equity method investee ("equity method goodwill") will not be amortized on a
periodic basis. Instead, goodwill (other than equity method goodwill) will be
subject to an impairment test to be performed at least on an annual basis, and
impairment reviews may result in future periodic write-downs charged to
earnings. Equity method goodwill will not be tested for impairment in accordance
with SFAS No. 142; rather, the overall carrying amount of an equity method
investee will continue to be reviewed for impairment in accordance with existing
GAAP. There is currently no equity method goodwill associated with any of the
Company's equity method investees. Under the transition provisions of SFAS No.
142, all goodwill existing as of June 30, 2001 will cease to be periodically
amortized as of January 1, 2002, but all 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 will complete its initial goodwill impairment analysis under the new
standard during 2002. If any goodwill impairment under the new standard is
determined to exist, such impairment would be recognized as a cumulative effect
of a change in accounting principle no later than December 31, 2002, as provided
by the transition requirement of SFAS No. 142. The Company would have reported
net income of approximately $101 million, or $.87 per diluted share, in the
first nine months of 2001 if the goodwill amortization included in the Company's
reported net income 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.
The Company will adopt SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, no later than January 1, 2002. SFAS No. 144
retains the fundamental provisions of existing generally accepted accounting
principles with respect to the recognition and measurement of long-lived asset
impairment contained in SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Lived-Lived Assets to be Disposed Of. However, SFAS
No. 144 provides new guidance intended to address certain significant
implementation issues associated with SFAS No. 121, including expanded guidance
with respect to appropriate cash flows to be used to determine whether
recognition of any long-lived asset impairment is required, and if required how
to measure the amount of the impairment. SFAS No. 144 also requires that any net
assets to be disposed of by sale to be reported at the lower of carrying value
or fair value less cost to sell, and expands the reporting of discontinued
operations to include any component of an entity with operations and cash flows
that can be clearly distinguished from the rest of the entity. The Company is
still studying this newly-issued standard, and the effect, if any, to the
Company of adopting SFAS No. 144 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 $10.3 million, or $.09 per diluted
share, in the third quarter of 2001 compared to net income of $13.0 million, or
$.11 per diluted share, in the third quarter of 2000. Excluding the effects of
the unusual item discussed in the next paragraph, the Company would have
reported net income of $8.5 million in the third quarter of 2001. For the first
nine months of 2001, the Company reported net income of $89.5 million, or $.77
per diluted share, compared to net income of $58.5 million, or $.50 per diluted
share, in the first nine months of 2000. Excluding the effects of the unusual
items discussed in the next paragraph, the Company would have reported net
income of $28.5 million in the first nine months of 2001 compared to net income
of $38.9 million in the first nine months of 2000.
The Company's results in the third quarter and first nine months of 2001
include pre-tax insurance gains of $3.8 million and $4.5 million, respectively,
($1.8 million and $2.0 million, respectively, or each $.02 per diluted share,
net of income taxes and minority interest) related to insurance recoveries
received by NL resulting from the March 2001 fire at one of NL's facilities, as
insurance recoveries received exceeded the carrying value of the property
destroyed and cleanup costs incurred. The Company's year-to-date results in 2001
include previously-reported second quarter (i) 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 and (ii) equity in earnings of TIMET of $15.7 million ($7.5
million, or $.06 per diluted share, net of income taxes and minority interest)
related to TIMET's previously-reported settlement with Boeing. The Company's
year-to-date results in 2001 also include the 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. The Company's
year-to-date results in 2000 include previously-reported second quarter (i)
pre-tax gain of $43 million ($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. See Notes 10 and 13 to the Consolidated
Financial Statements.
Total operating income in the third quarter of 2001 decreased 45% compared
to the third quarter of 2000, and decreased 30% in the first nine 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 higher
waste management operating losses 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 and political conditions (such as changes in the level
of gross domestic product in various regions of the world and the impact of such
changes on demand for, 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 or unplanned downtime and transportation
interruptions), recoveries from insurance claims and the timing thereof (such as
NL's 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 Nine months ended
September 30, % September 30, %
---------------- - ------------- -
2000 2001 Change 2000 2001 Change
---- ---- ------ ---- ---- ------
(In millions) (In millions)
Net sales .............. $242.3 $207.0 -15% $724.4 $653.2 -10%
Operating income ....... 51.2 29.9 -42% 147.5 114.1 -23%
Chemicals sales and operating income decreased in the third quarter and
first nine months of 2001 compared to the same periods in 2000 due primarily to
lower TiO2 sales and production volumes and lower average TiO2 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 third quarter of 2001 were 6% lower compared to the third quarter of
2000, while they were comparable in the first nine months of 2001 compared to
the same period in 2000.
NL's TiO2 sales volumes in the third quarter of 2001 were 9% lower than the
near-record third quarter of 2000, with moderately higher volumes in export
markets more than offset by lower volumes in North America and Europe of 4% and
17%, respectively. NL's TiO2 sales volumes in the first nine months of 2001 were
10% lower than the first nine months of 2000. NL's TiO2 production volumes in
the third quarter of 2001 were 4% lower than the third quarter of 2000, with
operating rates at 95% 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 nine
months of 2001 compared to the same period in 2000, with operating rates at 94%
of capacity in 2001 compared to near full capacity in 2000. The Leverkusen
sulfate-process plant became approximately 50% operational in September 2001,
and returned to full operation in late October 2001.
The damages to property and the business interruption losses caused by the
Leverkusen fire were covered by insurance. Chemicals operating income in the
third quarter and first nine months of 2001 includes $3 million and $8 million,
respectively, of business interruption insurance proceeds as partial payments
for losses caused by the Leverkusen fire. NL also recognized payments of $5
million and $10.5 million, respectively, in the third quarter and first nine
months of 2001 for property damage and related cleanup cost insurance recoveries
related to the fire, resulting in an insurance gain of $3.8 million and $4.5
million, respectively, as insurance recoveries received exceeded the carrying
value of the property destroyed and cleanup costs incurred. Such insurance gains
are not reported as a component of chemicals operating income but are included
in general corporate items. In October 2001, NL reached an agreement in
principle with its insurance carriers to settle the coverage claims caused by
the fire under which NL expects to receive additional insurance proceeds of $25
million for business interruption losses and $13 million for property damage
costs. The Company expects to report a gain, net of certain expenses, related to
these amounts in the fourth quarter of 2001.
The sustained slowdown in the worldwide economy continues to cause a
reduction in demand for TiO2, thereby hampering NL's efforts to improve TiO2
prices. Due to the global economic slowdown, NL expects that TiO2 prices, which
have generally been trending downward during the first nine months of 2001, will
continue to trend downward through the end of the year and perhaps into the
first quarter of 2002. 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 nine months of 2001
decreased 4% compared to the first nine 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 nine months of 2001 by a net $24 million
compared to the first nine 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 nine months of 2001 compared to the first nine months of 2000.
Overall, the net impact of currency exchange rate fluctuations on NL's operating
income comparisons was not significant in the first nine months of 2001 compared
to the first nine 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 $18.9 million and $19.2
million in the first nine months of 2000 and 2001, respectively, as compared to
amounts separately reported by NL.
Component Products
Three months ended Nine months ended
September 30, % September 30, %
------------ - ------------- -
2000 2001 Change 2000 2001 Change
---- ---- ------ ---- ---- ------
(In millions) (In millions)
Net sales ................ $ 63.0 $ 51.5 -18% $194.2 $164.4 -15%
Operating income ......... 9.2 4.7 -49% 31.6 17.0 -46%
Component products sales and operating income decreased in the third
quarter and first nine months of 2001 compared to the same periods in 2000 due
primarily to continued weak economic conditions in the manufacturing sector in
North America, Europe and Asia. During the first nine months of 2001, sales of
slide products decreased 25% compared to the first nine months of 2000, and
sales of security products and ergonomic products decreased 11% and 13%,
respectively. CompX's efforts to reduce manufacturing and other costs partially
offset the effect of the decline in sales, although CompX was unable to
sufficiently reduce fixed costs 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 pricing pressures from foreign-based
manufacturers.
CompX remains concerned and uncertain regarding the duration and severity
of the current weak economic environment and its impact on CompX's business.
CompX continues to see downward pressure on its sales as its customers and the
overall industry respond to the continuing contracting economic environment,
indicating that CompX's results of operations in the fourth quarter of 2001 will
be lower than CompX's previous expectations. CompX continues to implement
various cost control initiatives, including ongoing headcount rationalization
efforts and operational cost improvements. These cost reduction measures are
designed to minimize the adverse affect of lower sales and more favorably
position CompX to meet demand when the economy recovers.
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 nine 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 nine months of 2000 (principally with respect to slide products),
decreasing component products sales by 2%. Currency exchange rate fluctuations
with respect to the Canadian dollar positively affected CompX's operating income
comparisons in the first nine months of 2001, while exchange rate fluctuations
with respect to the euro and other currencies did not materially impact these
operating income comparisons. Excluding the effect of currency, operating income
decreased 45% in the first nine months of 2001 as compared to the same period in
2000.
Waste Management
Three months ended Nine months ended
September 30, September 30,
---------------- ------------------
2000 2001 2000 2001
---- ---- ---- ----
(In millions)
Net sales .................... $ 2.8 $ 4.0 $11.2 $10.0
Operating loss ............... (3.0) (3.1) (6.0) (10.7)
Waste management operating losses increased in the third quarter and first
nine months of 2001 compared to the same periods in 2000 due primarily to the
effect of continued weak demand for Waste Control Specialists' waste management
services, higher expenses associated with its permitting efforts and expenses
associated with the start-up of certain new waste disposal process equipment.
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.
Valhi has in the past, and may in the future, consider strategic alternatives
with respect to Waste Control Specialists. Depending on the form of the
transaction that any such strategic alternative might take, it is possible that
the Company might report a loss with respect to such a transaction.
TIMET
Three months ended Nine months ended
September 30, September 30,
----------------- ----------------
2000 2001 2000 2001
---- ---- ---- ----
(In millions)
TIMET historical:
Net sales ...................... $106.8 $126.5 $320.3 $370.5
Operating income (loss) ........ (7.6) 10.0 (35.5) 56.8
Net income (loss) .............. (7.9) 4.4 (32.5) 30.3
Equity in earnings (losses) ...... $ (1.5) $ 3.2 $ (8.0) $ 16.2
Tremont accounts for its interest 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 first nine months of 2001
includes income in the second quarter of approximately $62.7 million related to
this settlement, net of associated legal, profit sharing and other costs.
During the third quarter of 2001, TIMET's mill products sales volumes
increased 6% compared to the third quarter of 2000, and sales volumes of its
melted products (ingot and slab) increased 42%. TIMET's average selling prices
(in billing currencies) for its mill products increased 5% in the third quarter
of 2001 compared to the third quarter of 2000, and melted product selling prices
increased 13%. During the first nine months of 2001, TIMET's mill products sales
volumes increased 10% compared to the first nine months of 2000, and sales
volumes of its melted products increased 40%. TIMET's average selling prices (in
billing currencies) for its mill products increased 1% in the first nine months
of 2001 compared to the same period in 2000, and melted product selling prices
increased 6%. Operating income comparisons were also favorably impacted by
higher operating rates at certain plants and lower energy costs. 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 ($1 million in
the first quarter and $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 nine months of 2000 include a net $8.3 million of
previously-reported special charges.
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 identification of the 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 six standard
grade ingots that have been demonstrated to contain tungsten inclusions;
however, further investigation may identify other material that has been
similarly affected. Until this investigation is completed, TIMET is unable to
determine the ultimate liability TIMET may 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. TIMET is
continuing to work with its affected customers to determine the appropriate
remedial steps required to satisfy their claims. The $3.8 million amount accrued
through September 30, 2001 represents TIMET's best estimate of the most likely
amount of loss it will incur. However, it may 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. TIMET has
filed suit seeking 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. TIMET has
not recorded any recoveries related to this matter at September 30, 2001.
The commercial aerospace industry has significant influence on titanium
companies, particularly mill product producers such as TIMET. Industry shipments
of mill products to the commercial aerospace industry in 2001 are expected to
account for approximately 40% of the estimated 54,000 metric tons of aggregate
titanium mill product demand, and this market has been the principal driver of
increased industry shipments over the last year. TIMET's business is more
dependent on commercial aerospace demand as shipments to this market are
presently estimated to represent approximately 80% of TIMET's sales revenues in
2001. TIMET's recently-improved financial performance has principally been
driven by heightened sales volumes and increased selling prices on both mill and
melted products destined for commercial aerospace.
The economic slowdown in the U.S. and other regions of the world recently
began to negatively affect the commercial aerospace industry as evidenced by,
among other things, a decline in airline passenger traffic, reported operating
losses by a number of airlines and a reduction in forecasted deliveries of large
commercial aircraft from both Boeing and Airbus. The September 11, 2001
terrorist attacks exacerbated these trends and had a significant adverse impact
on the global economy and the commercial aerospace industry. Since that time,
airline passenger traffic has declined substantially and airlines are reporting
significant losses. In response to the current business climate, airlines have
announced a number of actions to reduce both costs and capacity, including the
early retirement of airplanes, the deferral of scheduled deliveries of new
aircraft, and allowing aircraft purchase options to expire. Both Boeing and
Airbus have indicated that deliveries of large commercial aircraft over the next
two years are now expected to be lower than previously anticipated.
The commercial aerospace supply chain is decentralized and fragmented.
Aircraft and jet engine manufacturers, as well as other companies in the supply
chain, are still assessing the impact these events will have on their
businesses. Although they will clearly have a negative effect on suppliers
throughout this sector, including TIMET, the magnitude and duration of that
impact is still very uncertain. While TIMET is regularly talking with its
customers, most of their views are only speculative at this time given the
limited information currently available.
The Airline Monitor, a leading aerospace publication, recently published
its revised forecast of large commercial aircraft deliveries which attempts to
take into consideration the events of September 11, 2001. The Airline Monitor's
current forecast of large commercial aircraft deliveries is for 820 deliveries
in 2001, 660 deliveries in 2002 and 505 deliveries in 2003. Compared to The
Airline Monitor's previous forecast (pre-September 11) for the same periods,
these delivery rates represent declines of 8%, 26% and 34%, respectively. As
compared to pre-September 11 estimated 2001 deliveries of 890 aircraft,
deliveries in 2002 and 2003 are expected to decline by 26% and 43%,
respectively.
TIMET presently believes commercial aerospace demand for titanium products
over the next year could decline by 30% to 40% from 2001 levels, resulting from
a combination of reduced aircraft production rates and excess inventory being
created throughout the supply chain. Although quantitative information is not
readily available, TIMET believes that no significant amount of excess titanium
inventory existed prior to September 11, 2001. However, a sharp decline in
demand could potentially cause a significant amount of inventory accumulation.
This would likely lead to order demand for titanium products falling below
actual consumption. The demand for titanium generally precedes aircraft
deliveries by about one year, although this varies considerably by titanium
product. Since TIMET will begin producing products in 2002 destined for aircraft
to be delivered in 2003, it expects to see a decline in its 2002 business that
is similar to aircraft delivery reductions relative to 2003.
TIMET's order backlog at the end of September 2001 was approximately $315
million compared to $245 million at December 31, 2000. However, TIMET's order
backlog may not be a reliable indicator of future business activity. TIMET has
recently experienced a number of customer requests to defer or cancel scheduled
orders. TIMET believes such requests will continue and may accelerate in the
near-term. As aircraft and jet engine manufacturers settle upon a production
schedule for next year, information should be communicated through the supply
chain providing TIMET a better understanding of its business outlook.
TIMET is preparing for the anticipated downturn by taking a number of
actions, including, but not limited to, (i) reducing plant operating rates and
employment levels as business declines, (ii) negotiating improved pricing at
lower volume commitments for certain raw materials, (iii) reducing discretionary
spending and (iv) negotiating various other concessions from both suppliers and
service providers. For the longer term, TIMET is evaluating product line and
facilities consolidations that may permit it to meaningfully reduce its cost
structure while maintaining and even increasing its market share.
In October 2001, TIMET announced that operating rates are being reduced at
both its Henderson, Nevada and Morgantown, Pennsylvania facilities. In Nevada,
TIMET is reducing its vacuum arc melting rates by about 40%. In Pennsylvania,
TIMET intends to stop production on one of its three electron beam cold hearth
melting operations this year and is reducing the operating rate on another
furnace. Production in Pennsylvania is expected to decline by about 20% after
these decisions are fully implemented. These actions will result in TIMET's
employment levels declining by approximately 50 people, however TIMET
anticipates further reductions in operating rates and employment levels in the
future as demand for titanium products declines.
Current business conditions make it particularly difficult to predict
TIMET's future financial results and, therefore, undue reliance should not be
placed on the following comments as actual results may differ materially from
expectations. For the fourth quarter of 2001, TIMET believes its sales may range
between $90 million and $120 million, reflecting the net effects of changes in
sales volumes, selling prices and mix. Excluding the effect of the Boeing
settlement and special charges, TIMET expects to be near break-even on operating
income and report a net loss for the full year of 2001.
For 2002, TIMET believes it may experience a 30% to 40% decline in its
commercial aerospace sales volumes as compared to expected 2001 levels, which
presently represents about 80% of TIMET's sales. A change in demand of this
magnitude will likely result in heightened competitive pricing pressures
resulting in decreased selling prices. TIMET believes the net effects of changes
in sales volumes, selling prices, and customer and product mix could result in
sales ranging from $350 million to $400 million in calendar 2002. TIMET's cost
of sales is affected by a number of factors including, among others, customer
and product mix, material yields, plant operating rates, raw material costs,
labor costs and energy costs. TIMET believes that costs for titanium sponge and
scrap will trend down over the next year while energy costs may remain volatile.
However, as TIMET reduces production volumes in response to reduced order
demand, certain manufacturing overhead costs are likely to decrease at a slower
rate and to a lesser extent than production volume changes, resulting in higher
costs relative to production levels. TIMET's gross margin expectation for 2002
is uncertain at this time, although TIMET anticipates that the adverse effects
of decreased selling prices and lower plant operating rates will only be
partially offset by lower raw material costs and other cost control actions
TIMET is presently taking. TIMET believes gross margins, excluding special
items, in 2002 may decline substantially as compared to 2001.
TIMET is currently assessing the longer-term impact of these changes to its
business environment noted above, and is developing plans to respond to such
changes. In this regard, TIMET is evaluating workforce reductions, product line
and facility consolidations and other cost control measures. In addition, TIMET
is evaluating whether recognition of any impairment of its tangible and
intangible assets is required, and if so the amount thereof. Such potential
charges, if any, are not yet reasonably estimable due to the period of time
necessary for external information to become available to, and be analyzed and
assessed by, TIMET. Accordingly, restructuring, asset impairment and other
special charges may impact TIMET's results in the fourth quarter of 2001 and
next year as well.
General corporate and other items
General corporate. General corporate interest and dividend income decreased
slightly in the third quarter and first nine months of 2001 compared to the same
periods of 2000 as a slightly higher level of distributions from The Amalgamated
Sugar Company LLC in 2001 was more than 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) and a lower level of funds
available for investment. General corporate interest and dividend income for all
of 2001 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.
The insurance gain is discussed in Note 13 to the Consolidated Financial
Statements. In October 2001, NL reached an agreement in principle with its
insurance carriers to settle the coverage claims caused by the Leverkusen fire
under which NL expects to receive additional insurance proceeds of $25 million
for business interruption losses and $13 million for property damage costs. The
Company expects to report a gain, net of certain expenses, related to these
amounts in the fourth quarter of 2001.
Securities transactions gains in the first nine months of 2001 relate
principally to exchanges of LYONs. Securities transactions in the first nine
months of 2001 also include (i) a $14.2 million gain related to the
reclassification of certain shares of Halliburton common stock from
available-for-sale to trading securities, (ii) a $6.7 million net unrealized
loss related to changes in market value of the Halliburton shares classified as
trading securities and (iii) Valhi's sale of 390,000 Halliburton shares in
market transactions for aggregate proceeds of $16.8 million. See Notes 3 and 10
to the Consolidated Financial Statements.
Net general corporate expenses decreased in the third quarter and first
nine 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 lower compared to calendar
2000.
Interest expense. Interest expense declined in the third quarter and first
nine months of 2001 compared to the same periods in 2000 due primarily to lower
interest rates on variable-rate borrowings and a lower level of outstanding
indebtedness of NL and Valhi, offset in part by higher levels of indebtedness at
CompX. Interest expense during the fourth quarter of 2001 is expected to be
lower than the same period in 2000.
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 nine months of 2001, NL and Tremont reduced their deferred
income tax valuation allowances by $1.3 million and $800,000, 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 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 nine 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 72% of the Company's
consolidated capital expenditures during the first nine months of 2001 relate to
NL, 21% relate to CompX and substantially all of the remainder relate to Waste
Control Specialists. Capital expenditures in the first nine months of 2001
include an aggregate of $11.7 million related to the rebuilding of NL's
Leverkusen plant. During the first nine months of 2001, NL and CompX each
purchased shares of their respective common stocks in market transactions for an
aggregate of $9.9 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, (i) EMS loaned a net $20 million to one of the family
trusts discussed in Note 1 to the Consolidated Financial Statements, (ii) NL
received $10.5 million of insurance recoveries for property damage and clean-up
costs associated with the Leverkusen fire and (iii) Valhi sold 390,000 shares of
Halliburton common stock in market transactions for aggregate proceeds of $16.8
million.
During the first nine months of 2001, (i) Valhi repaid a net $1 million
under its revolving bank credit facility and borrowed a net $16 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 24 million
($21.4 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) $142.6 million
principal amount at maturity ($79.9 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 September 30, 2001, unused credit available under existing credit
facilities approximated $90.5 million, which was comprised of $51 million
available to CompX under its revolving senior credit facility, $25 million
available to NL under non-U.S. credit facilities and $14.5 million available to
Valhi under its revolving bank credit facility.
Chemicals - NL Industries
At September 30, 2001, NL had cash and cash equivalents of $190 million,
including restricted cash balances of $93 million, and NL had $25 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 assessments,
and in June 2001 NL paid $4.3 million to the Norwegian tax authorities to settle
this matter. NL had previously adequately reserved for the payment. The
previously-reported lien filed on its Norwegian TiO2 plant in favor of the
Norwegian tax authorities has been released. NL has also received preliminary
tax assessments for the years 1991 to 1998 from the Belgian tax authorities
proposing tax deficiencies, including related interest, of approximately BEF 14
million ($12.5 million at September 30, 2001). NL has filed protests to the
assessments for the years 1991 to 1997 and expects to file a protest for 1998.
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 ($106
million at September 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 its 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 September 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 September 30, 2001, Waste Control Specialists' indebtedness consists
principally of (i) a $4.9 million term loan due in installments through November
2004 and (ii) $8.2 million of other borrowings under an $11 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 September 30,
2001, owned approximately 39% of TIMET and 21% of NL. At September 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 $39 million and $153 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 ($12.9 million outstanding at September 30, 2001),
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. Tremont periodically
evaluates the net carrying value of its long-term assets, including its
investment in TIMET, to determine if there has been ay decline in value below
their net carrying amounts that is other than temporary and would, therefore,
require a write-down which would be accounted for as a realized loss. At
September 30, 2001, Tremont's net carrying value of its investment in TIMET was
$7.16 per share compared to TIMET's NYSE stock price of $3.20 per share at that
date. However, TIMET's stock price has been less than Tremont's per share
carrying value of its investment in TIMET for only a relatively short period of
time. In this regard, TIMET's stock price was trading over $10 per share prior
to September 11, 2001. Tremont believes NYSE stock prices, particularly in the
case of companies such as TIMET which have a major shareholder, are not
necessarily indicative of a company's enterprise value or the value that could
be realized if the company were sold. Tremont will continue to monitor and
evaluate the value of its investment in TIMET based on, among other things,
TIMET's results of operations, financial condition, liquidity and business
outlook. In the event Tremont determines any decline in value of its investment
in TIMET below its net carrying value has occurred which is other than
temporary, Tremont would report an appropriate write-down at that time.
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 September 30, 2001, TIMET had net cash of approximately $5.4
million ($10.0 million of debt and $15.4 million of cash and equivalents). TIMET
expects to generate positive cash flow from operations in 2001 in the range of
$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 $47 million at September
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 about
$15 million, covering principally capacity enhancements, capital maintenance,
and safety and environmental projects. TIMET believes its cash, cash flow from
operations, and borrowing availability under its credit agreements ($152 million
available for borrowing at September 30, 2001) will satisfy its expected working
capital, capital expenditures and other requirements over the next year.
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. Prior to September 2001, TIMET was prohibited from paying
dividends on its common stock due to restrictions contained in its U.S. credit
agreement. In September 2001, such U.S. credit agreement was amended to permit
TIMET to pay dividends on its common stock in amounts up to an aggregate of $10
million per year, provided certain specified conditions were met.
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").
Dividends on the SMC Preferred Stock for the period October 1998 through
December 1999 were deferred by Special Metals. In April 2000, Special Metals
resumed current dividend payments of $1.3 million each quarter, however
dividends in arrears were not repaid. At September 30, 2001, the aggregate
accrued and unpaid dividends on the SMC Preferred Stock ($8.8 million) was
classified by TIMET as a noncurrent asset. TIMET understands that about 30% of
Special Metal's sales are to the commercial aerospace industry, and therefore
Special Metal's business may be adversely impacted by the events of September
11, 2001. In this regard, in October 2001 Special Metals again deferred the
payment of dividends effective with the dividend due in October 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 September 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 September 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 September 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 September 30,
2001, Valhi had $4.2 million of parent level cash and cash equivalents, had $30
million of outstanding borrowings under its revolving bank credit agreement and
had $24.3 million of short-term demand loans payable to Contran. In addition,
Valhi had $14.5 million of borrowing availability under its bank credit facility
and 515,000 shares of Halliburton common stock with an aggregate market value of
$11.6 million which have been released from the LYONs escrow and could therefore
be sold. In November 2001, the maturity date of Valhi's bank credit facility was
extended one year to November 2002, and the size of the facility was increased
$10 million to $55 million.
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 September 30, 2001, assuming
exchanges of all of the outstanding LYONs for Halliburton stock at such date,
was approximately $7 million.
At September 30, 2001, the LYONs had an accreted value equivalent to
approximately $40.10 per Halliburton share, and the market price of the
Halliburton common stock was $22.55 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 per Halliburton share.
Assuming the market value of Halliburton common stock equals or exceeds $44 per
share in October 2002, the Company does not expect a significant amount of LYONs
would be tendered to the Company for redemption at that date. To the extent the
Company was required to redeem the LYONs in October 2002 for cash and the market
price of Halliburton was less than $44 per share, the Company would likely sell
the Halliburton shares underlying the LYONs tendered in order to raise a portion
of the cash redemption price due to the LYON holder, and the Company would be
required to use other resources to makeup the shortfall due to the LYONs holder.
During the first nine 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 nine months of 2001 were so settled. Also during the first nine
months of 2001, $50.4 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 September 30, 2001, the accrued and unpaid interest on the
$80 million loan to Snake River aggregated $21.4 million. Such accrued and
unpaid interest is classified as a noncurrent asset at September 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.
Jefferson County School District v. Lead Industries Association, et al.
(No. 2001-69). In July 2001, plaintiff filed a motion to remand the case to
state court.
County of Santa Clara v. Atlantic Richfield Company, et al. (No. CV788657).
In September 2001, the trial judge dismissed without leave to amend plaintiffs'
nuisance claim and their product liabilities claims for properties not owned by
plaintiffs.
Sabater, et al. v. Lead Industries Association, et al. (No. 25533/98). In
September 2001, the Federal Court dismissed the Federal Home Loan Mortgage
Corporation and remanded the case to state court.
City of Milwaukee v. NL Industries, Inc. and Mautz Paint (No. 01CV003066).
In October 2001, the trial court denied NL's motion to dismiss plaintiff's
conspiracy claim for lack of particularity.
Brenner, et al. v. American Cyanamid, et al. (No. 12596-93). In November
2001, the Fourth Department intermediate appellate court unanimously affirmed
the dismissal of plaintiff's complaint by the trial court.
Since NL filed its Annual Report on Form 10-K for the year ended December
31, 2000, NL has been named as a defendant in asbestos cases in various
jurisdictions on behalf of approximately 2,000 additional personal injury
claimants.
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 September 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.
---------------------------------
(Registrant)
Date November 12, 2001 By /s/ Bobby D. O'Brien
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Bobby D. O'Brien
(Vice President and Treasurer,
Principal Financial Officer)
Date November 12, 2001 By /s/ Gregory M. Swalwell
-------------------- ------------------------------
Gregory M. Swalwell
(Vice President and Controller,
Principal Accounting Officer)