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 March 31, 2002 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 April 30, 2002: 114,773,617.
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets -
December 31, 2001 and March 31, 2002 3
Consolidated Statements of Operations -
Three months ended March 31, 2001 and 2002 5
Consolidated Statements of Comprehensive Income (Loss) -
Three months ended March 31, 2001 and 2002 6
Consolidated Statements of Cash Flows -
Three months ended March 31, 2001 and 2002 7
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 2002 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. 38
Item 4. Submission of Matters to a Vote of Security Holders. 38
Item 6. Exhibits and Reports on Form 8-K. 39
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, March 31,
2001 2002
---- ----
Current assets:
Cash and cash equivalents .................... $ 154,413 $ 117,885
Restricted cash equivalents .................. 63,257 54,771
Marketable securities ........................ 18,465 19,268
Accounts and other receivables ............... 162,310 173,665
Refundable income taxes ...................... 3,564 3,346
Receivable from affiliates ................... 844 197
Inventories .................................. 262,733 217,092
Prepaid expenses ............................. 11,252 9,679
Deferred income taxes ........................ 12,999 12,486
---------- ----------
Total current assets ..................... 689,837 608,389
---------- ----------
Other assets:
Marketable securities ........................ 186,549 181,948
Investment in affiliates ..................... 211,115 193,506
Receivable from affiliate .................... 20,000 20,000
Loans and other receivables .................. 105,940 107,214
Mining properties ............................ 12,410 12,148
Prepaid pension costs ........................ 18,411 18,384
Unrecognized net pension obligations ......... 5,901 5,901
Goodwill ..................................... 349,058 356,475
Other intangible assets ...................... 2,440 4,966
Deferred income taxes ........................ 3,818 3,773
Other ........................................ 30,109 33,271
---------- ----------
Total other assets ....................... 945,751 937,586
---------- ----------
Property and equipment:
Land ......................................... 28,721 28,467
Buildings .................................... 163,995 160,196
Equipment .................................... 569,001 573,168
Construction in progress ..................... 9,992 13,309
---------- ----------
771,709 775,140
Less accumulated depreciation ................ 253,450 264,555
---------- ----------
Net property and equipment ............... 518,259 510,585
---------- ----------
$2,153,847 $2,056,560
========== ==========
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, March 31,
2001 2002
------ ------
Current liabilities:
Notes payable .............................. $ 46,201 $ 46,382
Current maturities of long-term debt ....... 64,972 114,525
Accounts payable ........................... 114,474 79,485
Accrued liabilities ........................ 166,488 156,234
Payable to affiliates ...................... 38,148 32,877
Income taxes ............................... 9,578 8,716
Deferred income taxes ...................... 1,821 2,247
----------- -----------
Total current liabilities .............. 441,682 440,466
----------- -----------
Noncurrent liabilities:
Long-term debt ............................. 497,215 422,845
Accrued OPEB costs ......................... 50,146 49,513
Accrued pension costs ...................... 33,823 32,382
Accrued environmental costs ................ 54,392 57,782
Deferred income taxes ...................... 268,468 266,491
Other ...................................... 32,642 32,087
----------- -----------
Total noncurrent liabilities ........... 936,686 861,100
----------- -----------
Minority interest ............................ 153,151 146,428
----------- -----------
Stockholders' equity:
Common stock ............................... 1,258 1,258
Additional paid-in capital ................. 44,982 45,037
Retained earnings .......................... 656,408 645,739
Accumulated other comprehensive income:
Marketable securities .................... 86,654 88,334
Currency translation ..................... (79,404) (82,019)
Pension liabilities ...................... (11,921) (14,134)
Treasury stock ............................. (75,649) (75,649)
----------- -----------
Total stockholders' equity ............. 622,328 608,566
----------- -----------
$ 2,153,847 $ 2,056,560
=========== ===========
Commitments and contingencies (Note 1)
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31, 2001 and 2002
(In thousands, except per share data)
2001 2002
---- ----
Revenues and other income:
Net sales ............................................ $288,835 $ 253,747
Other, net ........................................... 44,091 14,940
-------- ---------
332,926 268,687
-------- ---------
Costs and expenses:
Cost of sales ........................................ 202,691 201,395
Selling, general and administrative .................. 49,193 47,049
Interest ............................................. 17,110 14,433
-------- ---------
268,994 262,877
-------- ---------
63,932 5,810
Equity in earnings (losses) of:
Titanium Metals Corporation ("TIMET") ................ 125 (11,840)
Other ................................................ 658 326
-------- ---------
Income (loss) before income taxes .................. 64,715 (5,704)
Provision for income taxes (benefit) ................... 23,722 (1,197)
Minority interest in after-tax earnings (losses) ....... 9,432 (796)
-------- ---------
Net income (loss) .................................. $ 31,561 $ (3,711)
======== =========
Basic and diluted earnings (loss) per share ............ $ .27 $ (.03)
======== =========
Cash dividends per share ............................... $ .06 $ .06
======== =========
Shares used in the calculation of per share amounts:
Basic earnings per common share ...................... 115,162 115,243
Dilutive impact of outstanding stock options ......... 842 --
-------- ---------
Diluted earnings per share ........................... 116,004 115,243
======== =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three months ended March 31, 2001 and 2002
(In thousands)
2001 2002
---- ----
Net income (loss) ................................... $ 31,561 $(3,711)
-------- -------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment .................. 734 1,680
Currency translation adjustment ................... (16,910) (2,615)
Pension liabilities adjustment .................... (332) (2,213)
-------- -------
Total other comprehensive income (loss), net .... (16,508) (3,148)
-------- -------
Comprehensive income (loss) ................... $ 15,053 $(6,859)
======== =======
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2001 and 2002
(In thousands)
2001 2002
---- ----
Cash flows from operating activities:
Net income (loss) .................................. $ 31,561 $ (3,711)
Depreciation, depletion and amortization ........... 18,673 14,856
Legal settlements, net ............................. (10,307) --
Securities transaction gains, net .................. -- (1,915)
Proceeds from disposal of marketable
securities (trading) .............................. -- 8,659
Noncash interest expense ........................... 2,437 704
Deferred income taxes .............................. 5,273 (402)
Minority interest .................................. 9,432 (796)
Other, net ......................................... (2,222) (1,396)
Equity in:
TIMET ............................................ (125) 11,840
Other ............................................ (658) (326)
Distributions from:
Manufacturing joint venture ...................... 1,500 900
Other ............................................ -- 361
-------- --------
55,564 28,774
Change in assets and liabilities:
Accounts and other receivables ................... (20,201) (13,994)
Inventories ...................................... 11,125 44,843
Accounts payable and accrued liabilities ......... (19,983) (37,477)
Accounts with affiliates ......................... 8,690 (845)
Income taxes ..................................... (1,383) (829)
Other, net ....................................... (563) 2,826
-------- --------
Net cash provided by operating activities .... 33,249 23,298
-------- --------
Cash flows from investing activities:
Capital expenditures ............................... (11,011) (9,446)
Purchases of:
NL common stock .................................. -- (3,271)
CompX common stock ............................... (2,442) --
Business unit .................................... -- (9,149)
Change in restricted cash equivalents, net ......... 863 (185)
Other, net ......................................... 309 (63)
-------- --------
Net cash used by investing activities ........ (12,281) (22,114)
-------- --------
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 2001 and 2002
(In thousands)
2001 2002
---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings ....................................... $ 7,000 $ --
Principal payments ............................... (38,914) (25,445)
Loans from affiliate:
Loans ............................................ 27,500 3,924
Repayments ....................................... (27,900) (7,325)
Valhi dividends paid ............................... (6,953) (6,958)
Distributions to minority interest ................. (2,701) (2,446)
Other, net ......................................... 634 195
--------- ---------
Net cash used by financing activities .......... (41,334) (38,055)
--------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities ...... (20,366) (36,871)
Currency translation ............................... (1,624) 147
Business unit acquired ............................. -- 196
Cash and equivalents at beginning of period .......... 135,017 154,413
--------- ---------
Cash and equivalents at end of period ................ $ 113,027 $ 117,885
========= =========
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized ............. $ 9,118 $ 8,345
Income taxes, net ................................ 13,543 3,301
Business unit acquired - net assets consolidated:
Cash and cash equivalents ........................ $ -- $ 196
Restricted cash .................................. -- 2,685
Goodwill and other intangible assets ............. -- 9,007
Other noncash assets ............................. -- 1,259
Liabilities ...................................... -- (3,998)
--------- ---------
Cash paid ........................................ $ -- $ 9,149
========= =========
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2002
(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, 2001 $1,258 $44,982 $ 656,408 $86,654 $(79,404) $(11,921) $(75,649) $ 622,328
Net loss ................... -- -- (3,711) -- -- -- -- (3,711)
Dividends .................. -- -- (6,958) -- -- -- -- (6,958)
Other comprehensive income
(loss), net ............... -- -- -- 1,680 (2,615) (2,213) -- (3,148)
Other, net ................. -- 55 -- -- -- -- -- 55
------ ------- --------- ------- -------- -------- -------- ---------
Balance at March 31, 2002 .. $1,258 $45,037 $ 645,739 $88,334 $(82,019) $(14,134) $(75,649) $ 608,566
====== ======= ========= ======= ======== ======== ======== =========
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, 2001 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 2002, and the consolidated statements of
operations, comprehensive income, stockholders' equity and cash flows for the
interim periods ended March 31, 2001 and 2002, have been prepared by the
Company, without audit, in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
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 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, 2001 (the
"2001 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 2001 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. 142, Goodwill and Other Intangible Assets, and SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, effective January 1, 2002. See
Note 14.
Note 2 - Business segment information:
% owned by Valhi at
Business segment Entity March 31, 2002
Chemicals NL Industries, Inc. 62%
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 March 31, 2002. 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 at March 31, 2002.
Three months ended
March 31,
2001 2002
---- ----
(In millions)
Net sales:
Chemicals ........................................ $226.1 $202.4
Component products ............................... 59.6 48.5
Waste management ................................. 3.1 2.8
------ ------
Total net sales ................................ $288.8 $253.7
====== ======
Operating income:
Chemicals ........................................ $ 45.4 $ 19.3
Component products ............................... 7.0 2.1
Waste management ................................. (3.2) (2.0)
------ ------
Total operating income ......................... 49.2 19.4
General corporate items:
Legal settlements, net ........................... 30.7 1.9
Interest and dividend income ..................... 10.3 8.5
Securities transactions, net ..................... -- 1.9
General expenses, net ............................ (9.2) (11.5)
Interest expense ................................... (17.1) (14.4)
------ ------
63.9 5.8
Equity in:
TIMET ............................................ .1 (11.8)
Other ............................................ .7 .3
------ ------
Income (loss) before income taxes .............. $ 64.7 $ (5.7)
====== ======
During the first quarter of 2002, NL purchased shares of its common stock
in market transactions for an aggregate of $3.3 million, increasing Valhi's
ownership of NL to 62%. As previously reported in the 2001 Annual Report, in
January 2002 NL purchased the insurance brokerage operations conducted by EWI
Re, Inc. and EWI Re, Ltd. for an aggregate cash purchase price of $9 million.
The pro forma impact assuming the acquisition of EWI had occurred as of January
1, 2001 is not material.
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, March 31,
2001 2002
(In thousands)
Current assets:
Halliburton Company common stock
(available-for-sale) .............................. $ 8,138 $ 10,605
Halliburton Company common stock (trading) ......... 6,744 --
Restricted debt securities (available-for-sale) .... 3,583 8,663
-------- --------
$ 18,465 $ 19,268
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC .................. $170,000 $170,000
Restricted debt securities ......................... 16,121 11,219
Other common stocks ................................ 428 729
-------- --------
$186,549 $181,948
======== ========
At March 31, 2002, Valhi held approximately 621,000 shares of Halliburton
common stock (aggregate cost of $5 million) with a quoted market price of $17.07
per share, or an aggregate market value of $10.6 million. Valhi's LYONs debt
obligations are exchangeable at any time, at the option of the LYON holder, for
such shares of Halliburton common stock, and the carrying value of such
Halliburton shares is limited to the accreted LYONs obligations. Such
Halliburton shares 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. Such Halliburton shares are
classified as a current asset at March 31, 2002 because the related LYONs
obligations, which are redeemable at the option of the holders in October 2002,
are classified as a current liability at such date. During the first quarter of
2002, the Company sold approximately 515,000 Halliburton shares classified as
trading securities in market transactions for aggregate proceeds of $8.7
million. See Notes 9 and 10. See the 2001 Annual Report for a discussion of the
Company's investment in The Amalgamated Sugar Company LLC. The aggregate cost of
the debt securities, restricted pursuant to the terms of one of NL's
environmental special purpose trusts discussed in the 2001 Annual Report,
approximates their net carrying value at March 31, 2002. The aggregate cost of
other noncurrent available-for-sale securities is nominal at March 31, 2002.
Note 4 - Accounts and other receivables:
December 31, March 31,
2001 2002
(In thousands)
Accounts receivable .......................... $ 166,126 $ 177,737
Notes receivable ............................. 2,484 2,664
Accrued interest ............................. 26 28
Allowance for doubtful accounts .............. (6,326) (6,764)
--------- ---------
$ 162,310 $ 173,665
========= =========
Note 5 - Inventories:
December 31, March 31,
2001 2002
(In thousands)
Raw materials:
Chemicals .................................. $ 79,162 $ 43,589
Component products ......................... 9,677 8,787
-------- --------
88,839 52,376
-------- --------
In process products:
Chemicals .................................. 9,675 9,408
Component products ......................... 12,619 12,416
-------- --------
22,294 21,824
-------- --------
Finished products:
Chemicals .................................. 117,976 109,486
Component products ......................... 8,494 7,849
-------- --------
126,470 117,335
-------- --------
Supplies (primarily chemicals) ............... 25,130 25,557
-------- --------
$262,733 $217,092
======== ========
Note 6 - Accrued liabilities:
December 31, March 31,
2001 2002
------ ----
(In thousands)
Current:
Employee benefits .......................... $ 39,974 $ 36,342
Environmental costs ........................ 64,165 57,184
Interest ................................... 5,162 10,357
Deferred income ............................ 9,479 6,797
Other ...................................... 47,708 45,554
-------- --------
$166,488 $156,234
======== ========
Noncurrent:
Insurance claims and expenses .............. $ 19,182 $ 19,112
Employee benefits .......................... 8,616 8,597
Deferred income ............................ 1,333 970
Other ...................................... 3,511 3,408
-------- --------
$ 32,642 $ 32,087
======== ========
Note 7 - Other assets:
December 31, March 31,
2001 2002
------ ------
(In thousands)
Investment in affiliates:
TiO2 manufacturing joint venture ............. $138,428 $137,528
TIMET ........................................ 60,272 43,598
Other ........................................ 12,415 12,380
-------- --------
$211,115 $193,506
======== ========
Loans and other receivables:
Snake River Sugar Company:
Principal .................................. $ 80,000 $ 80,000
Interest ................................... 22,718 24,016
Other ........................................ 5,706 5,862
-------- --------
108,424 109,878
Less current portion ......................... 2,484 2,664
-------- --------
Noncurrent portion ........................... $105,940 $107,214
======== ========
Other noncurrent assets:
Restricted cash equivalents .................. $ 4,713 $ 10,648
Waste disposal operating permits ............. 2,527 2,333
Refundable insurance deposits ................ 1,609 1,716
Deferred financing costs ..................... 1,120 884
Other ........................................ 20,140 17,690
-------- --------
$ 30,109 $ 33,271
======== ========
At March 31, 2002, Tremont held 12.3 million shares of TIMET common stock
with a quoted market price of $5.40 per share, or an aggregate of $66 million.
At March 31, 2002, TIMET reported total assets of $647.0 million and
stockholders' equity of $260.8 million. TIMET's total assets at March 31, 2002
include current assets of $291.7 million, property and equipment of $267.6
million and goodwill and other intangible assets of $53.4 million. TIMET's total
liabilities at March 31, 2002 include current liabilities of $107.2 million,
long-term debt of $21.5 million, accrued OPEB and pension costs of $38.5 million
and convertible preferred securities of $201.2 million.
During the first quarter of 2002, TIMET reported net sales of $104.4
million, an operating loss of $4.7 million and a net loss of $36.1 million
(first quarter of 2001 - net sales of $124.0 million, an operating loss of $1.8
million and a net loss of $3.6 million).
Note 8 - Goodwill and other intangible assets:
Goodwill.
Operating segment
Component
Chemicals products Total
(In millions)
Balance at December 31, 2001 .............. $307.2 $ 41.9 $349.1
Goodwill acquired during the period ....... 7.6 -- 7.6
Changes in foreign exchange rates ......... -- (.2) (.2)
------ ------ ------
Balance at March 31, 2002 ................. $314.8 $ 41.7 $356.5
====== ====== ======
Upon adoption of SFAS No. 142 effective January 1, 2002 (see Note 14), the
goodwill related to the chemicals operating segment was assigned to the
reporting unit (as that term is defined in SFAS No. 142) consisting of NL in
total, and the goodwill related to the component products operating segment was
assigned to two reporting units within that operating segment, one consisting of
CompX's security products operations and the other consisting of CompX's
ergonomic and slide products operations.
Other intangible assets.
December 31, March 31,
2001 2002
------ ------
(In millions)
Patents:
Cost ............................................. $3.4 $3.5
Less accumulated amortization .................... 1.0 1.0
---- ----
Net ............................................ 2.4 2.5
---- ----
Customer list:
Cost ............................................. -- 2.6
Less accumulated amortization .................... -- .1
---- ----
Net ............................................ -- 2.5
---- ----
$2.4 $5.0
==== ====
The patent intangible asset relates to the estimated fair value of certain
patents acquired in connection with the acquisition of certain business units by
CompX, and the customer list intangible asset relates to NL's acquisition of EWI
discussed in Note 2. The patent intangible asset was, and will continue to be
after adoption of SFAS No. 142 effective January 1, 2002, amortized by the
straight-line method over the lives of the patents (approximately 11 years
remaining at March 31, 2002), with no assumed residual value at the end of the
life of the patents. The customer list intangible asset will be amortized by the
straight-line method over the estimated seven-year life of such intangible asset
(approximately 6.75 years remaining at March 31, 2002), with no assumed residual
value at the end of the life of the intangible asset. Amortization expense of
intangible assets was approximately $60,000 in the first three months of 2001
and approximately $153,000 in the first three months of 2002, and amortization
expense of intangible assets is expected to be approximately $620,000 in each of
calendar 2002 through 2006.
Note 9 - Other income:
Three months ended
March 31,
2001 2002
---- ----
(In thousands)
Securities earnings:
Dividends and interest ....................... $10,340 $ 8,486
Securities transactions, net ................. -- 1,915
------- -------
10,340 10,401
Legal settlement gains, net .................... 30,723 1,920
Noncompete agreement income .................... 1,000 1,000
Currency transactions, net ..................... 1,176 308
Pension settlement gain ........................ -- 677
Other, net ..................................... 852 634
------- -------
$44,091 $14,940
======= =======
The securities transaction gain in 2002 is discussed in Note 3. The
litigation settlement gain in 2002 relates to NL's settlement with certain
additional former insurance carriers from whom NL had been seeking reimbursement
for legal defense expenditures and indemnity coverage claims. The pension
settlement gain relates to a defined benefit plan previously sponsored by CompX
in The Netherlands.
Note 10 - Notes payable and long-term debt:
December 31, March 31,
2001 2002
------ ------
(In thousands)
Notes payable -
Kronos - non-U.S. bank credit agreements ......... $ 46,201 $ 46,382
======== ========
Long-term debt:
Valhi:
Snake River Sugar Company ...................... $250,000 $250,000
LYONs .......................................... 25,472 26,051
Bank credit facility ........................... 35,000 35,000
Other .......................................... 2,880 2,880
-------- --------
313,352 313,931
-------- --------
Subsidiaries:
NL Senior Secured Notes ........................ 194,000 169,000
CompX bank credit facility ..................... 49,000 49,000
Valcor Senior Notes ............................ 2,431 2,431
Other .......................................... 3,404 3,008
-------- --------
248,835 223,439
-------- --------
562,187 537,370
Less current maturities .......................... 64,972 114,525
-------- --------
$497,215 $422,845
======== ========
In March 2002, NL redeemed $25 million principal amount of its Senior
Secured Notes at par.
Note 11 - Accounts with affiliates:
December 31, March 31,
2001 2002
------ -----
(In thousands)
Current receivables from affiliates:
TIMET ............................................ $ 677 $ 46
Other ............................................ 167 151
------- -------
$ 844 $ 197
======= =======
Noncurrent receivable from affiliate -
loan to Contran family trust ...................... $20,000 $20,000
======= =======
Payables to affiliates:
Valhi demand loan from Contran ................... $24,574 $21,173
Income taxes payable to Contran .................. 6,410 3,253
Louisiana Pigment Company ........................ 6,362 7,669
Contran - trade items ............................ 501 628
TIMET ............................................ 286 1
Other, net ....................................... 15 153
------- -------
$38,148 $32,877
======= =======
Note 12 - Provision for income taxes:
Three months ended
March 31,
2001 2002
---- ----
(In millions)
Expected tax expense (benefit) .......................... $22.7 $(2.0)
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies .......... 1.0 (.6)
Non-U.S. tax rates ...................................... (1.8) (.2)
Change in NL's and Tremont's deferred income tax
valuation allowance, net ............................... (.7) 1.3
No tax benefit for goodwill amortization ................ 1.4 --
U.S. state income taxes, net ............................ .4 .1
Other, net .............................................. .7 .2
----- -----
$23.7 $(1.2)
===== =====
Comprehensive provision for income taxes
(benefit) allocated to:
Net income (loss) ..................................... $23.7 $(1.2)
Other comprehensive income:
Marketable securities ............................... -- .7
Currency translation ................................ (2.1) (.2)
Pension liabilities ................................. (.2) (1.5)
----- -----
$21.4 $(2.2)
===== =====
Note 13 - Minority interest:
December 31, March 31,
2001 2002
------ ------
(In thousands)
Minority interest in net assets:
NL Industries ............................ $ 68,566 $ 65,290
Tremont Corporation ...................... 32,610 29,220
CompX International ...................... 44,767 44,530
Subsidiaries of NL ....................... 7,208 7,388
-------- --------
$153,151 $146,428
======== ========
Three months ended
March 31,
2001 2002
---- ----
(In thousands)
Minority interest in net earnings (losses):
NL Industries ............................ $ 6,698 $ 1,113
Tremont Corporation ...................... 978 (2,510)
CompX International ...................... 1,170 417
Subsidiaries of NL ....................... 586 184
------- -------
$ 9,432 $ (796)
======= =======
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
March 31, 2002.
Note 14 - Accounting principles newly adopted in 2002:
Goodwill. The Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets, effective January 1, 2002. Under SFAS No. 142, goodwill, including
goodwill arising from the difference between the cost of an investment accounted
for by the equity method and the amount of the underlying equity in net assets
of such equity method investee ("equity method goodwill"), is no longer
amortized on a periodic basis. Goodwill (other than equity method goodwill) is
subject to an impairment test to be performed at least on an annual basis, and
impairment reviews may result in future periodic write-downs charged to
earnings. Equity method goodwill is not tested for impairment in accordance with
SFAS No. 142; rather, the overall carrying amount of an equity method investee
will continue to be reviewed for impairment in accordance with existing GAAP.
There is currently no equity method goodwill associated with any of the
Company's equity method investees. Under the transition provisions of SFAS No.
142, all goodwill existing as of June 30, 2001 ceased to be periodically
amortized as of January 1, 2002, and all goodwill arising in a purchase business
combination (including step acquisitions) completed on or after July 1, 2001 was
not periodically amortized from the date of such combination.
As discussed in Note 8, the Company has assigned its goodwill to three
reporting units (as that term is defined in SFAS No. 142). Goodwill attributable
to the chemicals operating segment was assigned to the reporting unit consisting
of NL in total. Goodwill attributable to the component products operating
segment was assigned to two reporting units within that operating segment, one
consisting of CompX's security products operations and the other consisting of
CompX's ergonomic products and slide products operations. Under SFAS No. 142,
such goodwill will be deemed to not be impaired if the estimated fair value of
the applicable reporting unit exceeds the respective net carrying value of such
reporting units, including the allocated goodwill. If the fair value of the
reporting unit is less than carrying value, then a goodwill impairment loss
would be recognized equal to the excess, if any, of the net carrying value of
the reporting unit goodwill over its implied fair value (up to a maximum
impairment equal to the carrying value of the goodwill). The implied fair value
of reporting unit goodwill would be the amount equal to the excess of the
estimated fair value of the reporting unit over the amount that would be
allocated to the tangible and intangible net assets of the reporting unit
(including unrecognized intangible assets) as if such reporting unit had been
acquired in a purchase business combination accounted for in accordance with
GAAP as of the date of the impairment testing.
In determining the estimated fair value of the NL reporting unit, the
Company will consider quoted market prices for NL common stock. The Company will
also use other appropriate valuation techniques, such as discounted cash flows,
to estimate the fair value of the two CompX reporting units.
The Company has completed its initial, transitional goodwill impairment
analysis under SFAS No. 142 as of January 1, 2002, and no goodwill impairments
were deemed to exist. In accordance with the requirements of SFAS No. 142, the
Company will review the goodwill of its three reporting units for impairment
during the third quarter of each year starting in 2002. Goodwill will also be
reviewed for impairment at other times during each year when events or changes
in circumstances indicate that an impairment might be present.
As shown in the following table, the Company would have reported net income
of $35.5 million, or $.31 per diluted share, in the first quarter of 2001 if the
goodwill amortization included in the Company's reported net income had not been
recognized.
Three months ended
March 31,
2001 2002
---- ----
(In millions, except
per share amounts)
Net income (loss) as reported ........................... $ 31.6 $ (3.7)
Adjustments:
Goodwill amortization ................................. 4.2 --
Minority interest in goodwill amortization ............ (.3) --
------ ------
Adjusted net income (loss) .......................... $ 35.5 $ (3.7)
====== ======
Diluted net income (loss) per share as reported ......... $ .27 $ (.03)
Adjustments:
Goodwill amortization ................................. .04 --
Minority interest in goodwill amortization ............ -- --
------ ------
Adjusted diluted net income (loss) per share ........ $ .31 $ (.03)
====== ======
Impairment of long-lived assets. The Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, effective
January 1, 2002. SFAS No. 144 retains the fundamental provisions of existing
GAAP with respect to the recognition and measurement of long-lived asset
impairment contained in SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Lived-Lived Assets to be Disposed Of. However, SFAS
No. 144 provides new guidance intended to address certain implementation issues
associated with SFAS No. 121, including expanded guidance with respect to
appropriate cash flows to be used to determine whether recognition of any
long-lived asset impairment is required, and if required how to measure the
amount of the impairment. SFAS No. 144 also requires that 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. Adoption of SFAS No. 144 did
not have a significant effect on the Company.
Note 15 - Accounting principle not yet adopted:
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 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, on the Company of adopting SFAS
No. 143 has not yet been determined.
The Company will adopt SFAS No. 145 no later than January 1, 2003. SFAS No.
145, among other things, eliminates the requirement that all gains and losses
from the early extinguishment of debt are to be classified as an extraordinary
item. Upon adoption of SFAS No. 145, gains and losses from the early
extinguishment of debt will be classified as an extraordinary item only if they
meet the "unusual and infrequent" criteria contained in Accounting Principles
Board Opinion ("APBO") No. 30. In addition, upon adoption of SFAS No. 145, all
gains and losses from the early extinguishment of debt that had previously been
classified as an extraordinary item will have to be reassesed to determine if
they would have met the "unusual and infrequent" criteria of APBO No. 30. Any
such gain or loss that would not have met the APBO No. 30 criteria will be
retroactively reclassified and reported as a component of income from continuing
operations. The Company is still studying SFAS No. 145 to determine if the
Company's previously-recognized gains and losses from the early extinguishment
of debt would have met the APBO No. 30 criteria for classification as an
extraordinary item, and the effect, if any, of adopting SFAS No. 145 on the
Company's previously-reported results of operations has not yet been determined.
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
General
The Company reported a net loss of $3.7 million, or $.03 per diluted share,
in the first quarter of 2002 compared to net income of $31.6 million, or $.27
per diluted share, in the first quarter of 2001. Excluding the effects of the
items discussed below, the Company would have reported a net loss of $.5 million
in the first quarter of 2002 compared to net income of $17.1 million in the
first quarter of 2001.
The Company's equity in losses of TIMET in the first quarter of 2002
includes losses of $10.6 million ($5.4 million net of income taxes and minority
interest), related to the Company's pro-rata share of TIMET's $27.5 million
impairment charge for an other than temporary decline in value of certain
preferred securities held by TIMET. Litigation settlement gains in the first
quarter of 2002 of $1.9 million ($1.0 million, net of income taxes and minority
interest) relate to legal settlements with certain of NL's former insurance
carriers, and securities transactions gains in the first quarter of 2002 of $1.9
million ($1.2 million net of income taxes) relate to the disposal of certain
shares of Halliburton Company common stock held by the Company and classified as
trading securities. The Company's results in the first quarter of 2001 include
previously-reported pre-tax legal settlement gains aggregating $30.7 million
($18.4 million net of income taxes and minority interest).
As discussed in Note 14 to the Consolidated Financial Statements, beginning
in 2002 the Company no longer recognizes periodic amortization of goodwill in
its results of operations. The Company would have reported net income of
approximately $35.5 million in the first quarter of 2001, or about $3.9 million
higher, if the goodwill amortization included in the Company's reported net
income had not been recognized. Of such $3.9 million, approximately $3.6 million
and $600,000 relates to amortization of goodwill attributable to the Company's
chemicals and component products operating segments, respectively, and
approximately $300,000 relates to minority interest associated with the goodwill
amortization recognized by certain of the Company's less-than-wholly-owned
subsidiaries.
Total operating income in the first quarter of 2002 was lower as compared
to the first quarter of 2001 due primarily to lower chemicals earnings at NL and
lower component products earnings at CompX.
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
Annual 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
(such as descriptions that could erupt related to the June 2002 expiration of
TIMET's labor agreement at its Ohio facility), 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, the
ability of the Company to renew or refinance credit facilities, 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
Selling prices for titanium dioxide pigments ("TiO2"), NL's principal
product, were generally decreasing during all of 2001 and the first quarter of
2002. NL's TiO2 operations are conducted through its wholly-owned subsidiary
Kronos, Inc.
Three months ended
March 31,
----- ----- %
2001 2002 Change
---- ---- ------
(In millions)
Net sales ........................... $226.1 $202.4 -10%
Operating income .................... 45.4 19.3 -58%
Chemicals sales and operating income declined in the first quarter of 2002
compared to the first quarter of 2001 due primarily to lower average selling
prices for titanium dioxide pigments ("TiO2"), offset in part by higher TiO2
sales volumes. Excluding the effect of fluctuations in the value of the U.S.
dollar relative to other currencies, NL's average TiO2 selling prices in the
first quarter of 2002 were 15% lower than the first quarter of 2001. NL's TiO2
sales volumes in the first quarter of 2002 were a record and were 9% higher than
the first quarter of 2001, with higher volumes in North American and European
markets offset by lower volumes in export markets. NL's TiO2 production volumes
in the first quarter of 2002 were 2% lower than the first quarter of 2001, with
operating rates at 96% of capacity in 2002 compared to near full capacity in
2001.
NL expects TiO2 industry demand in 2002 will continue to improve over 2001
levels, because it expects worldwide economic conditions will improve and
customer inventory levels will increase. NL's TiO2 production volumes in 2002
are expected to approximate its 2002 TiO2 sales volumes. In January 2002, NL
announced certain price increases in all major markets, scheduled to be
implemented during the second quarter of 2002. NL is hopeful that it will
realize a portion of the announced price increases, but the extent to which NL
can realize these and possibly other price increases during 2002 will depend on
improving market conditions and global economic recovery. However, because TiO2
prices were generally declining during all of 2001, NL believes that its average
TiO2 selling prices in 2002 will be significantly below its average 2001 prices,
even if price increases are realized. NL expects its TiO2 sales and productions
volumes in 2002 will be higher as compared to 2001, in part due to the effects
in 2001 of the previously-reported fire at its Leverkusen, Germany facility.
Overall, NL expects its TiO2 operating income in 2002 will be significantly
lower than 2001, primarily due to lower average TiO2 selling prices. NL's
expectations as to the future prospects of NL and the TiO2 industry are based
upon a number of factors beyond NL's control, including worldwide growth of
gross domestic product, competition in the marketplace, unexpected or
earlier-than-expected capacity additions and technological advances. If actual
developments differ from NL's expectations, NL's results of operations could be
unfavorably affected.
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, Kronos' average TiO2
selling prices (in billing currencies) in the first quarter of 2002 decreased
18% compared to the first quarter of 2001. Overall, fluctuations in the value of
the U.S. dollar relative to other currencies, primarily the euro, decreased TiO2
sales in the first quarter of 2002 by a net $6.0 million compared to the same
period in 2001. 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 costs that are not denominated in the U.S. dollar, when
translated into U.S. dollars, were lower during 2002 as compared to 2001.
Overall, the net impact of currency exchange rate fluctuations on NL's operating
income comparisons was not significant in the first quarter of 2002 as compared
to the first quarter of 2001.
Chemicals operating income, as presented above, is stated net of
amortization of Valhi'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 $6.5 million in the first quarter
of 2001 and approximately $2.9 million in the first quarter of 2002 as compared
to amounts separately reported by NL. The decline from 2001 to 2002 in such
additional non-cash expenses relates primarily to ceasing to periodically
amortize goodwill beginning in 2002 (the 2001 amount included $3.6 million
related to goodwill amortization). See Note 14 to the Consolidated Financial
Statements.
Component Products
Three months ended
March 31,
----- ------ %
2001 2002 Change
---- ---- ------
(In millions)
Net sales .......................... $59.6 $48.5 -18%
Operating income ................... 7.0 2.1 -70%
Component products sales and operating income decreased in the first
quarter of 2002 compared to the first quarter of 2001 as the manufacturing
recession continued to negatively impact CompX's operating results. The decline
in sales was spread across all three of CompX's major product lines, as sales of
its ergonomic products, slide products and security products declined by 23%,
27% and 11%, respectively, in the first quarter of 2002 compared to the same
period in 2001. Operating income comparisons were favorably impacted by ceasing
to periodically amortize goodwill, which amounted to approximately $600,000 in
the first quarter of 2001 (none in 2002), as well as the impact of certain cost
reductions that were implemented. See Note 14 to the Consolidated Financial
Statements.
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. Excluding the effect of currency,
component products sales decreased 17% in the first quarter of 2002 as compared
to the same period in 2001, and operating income decreased 67%.
CompX expects the weak economic conditions experienced in 2001 will
continue to negatively impact its results of operations in 2002. A significant
portion of CompX's business is derived from the office furniture industry, which
has historically tended to lag behind the rest of the economy in periods of
economic recovery. Ceasing to periodically amortize goodwill, however, will
favorably impact component products operating income in 2002 compared to 2001 by
an aggregate of approximately $2.5 million.
Waste Management
Three months ended
March 31,
2001 2002
---- ----
(In millions)
Net sales .................................. $3.1 $2.8
Operating loss ............................. (3.2) (2.0)
Waste Control Specialists' sales decreased in the first quarter of 2002
compared to the first quarter of 2001 due primarily to the effect of weak demand
for its waste management services. Waste management's operating losses declined
somewhat in the first quarter of 2002 compared to the first quarter of 2001 as
the effect of implementing certain cost controls in 2002 more than offset the
effects of a 12% decline in sales.
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.
Waste Control Specialists is continuing its attempts 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
March 31,
2001 2002
---- ----
(In millions)
TIMET historical:
Net sales ............................................ $124.0 $104.4
Operating loss ....................................... $ (1.8) $ (4.7)
Impairment of convertible preferred securities ....... -- (27.5)
Other general corporate, net ......................... 1.7 (.6)
Interest expense ..................................... (1.5) (.8)
------ ------
(1.6) (33.6)
Income tax benefit ................................... .6 1.5
Minority interest .................................... (2.6) (4.0)
------ ------
Net loss ........................................... $ (3.6) $(36.1)
====== ======
Equity in earnings (losses) of TIMET ................... $ .1 $(11.8)
====== ======
Tremont accounts for its interest in TIMET by the equity method. Tremont's
equity in earnings (losses) 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.
TIMET reported lower sales, and a higher operating loss, in the first
quarter of 2002 compared to the first quarter of 2001. During the first quarter
of 2002, TIMET's mill products sales volumes decreased 16% compared to the first
quarter of 2001, and its sales volumes of melted products decreased 37% during
the same period. Excluding the effect of fluctuations in the value of the U.S.
dollar relative to other currencies, TIMET's average selling prices for mill
products in the first quarter of 2002 were 7% higher compared to the first
quarter of 2001, while selling prices for its melted products increased 8%.
TIMET's operating income comparisons were favorably impacted by TIMET ceasing to
periodically amortize goodwill recognized on its separate-company books, which
amounted to approximately $1.2 million in the first quarter of 2001 (none in
2002).
TIMET's results in the first quarter of 2002 also includes a $27.5 million
provision for an other than temporary impairment of TIMET's investment in the
convertible preferred securities of Special Metals Corporation ("SMC"). In
addition, TIMET's effective income tax rate in the first quarter of 2002 varies
from the 35% U.S. federal statutory income tax rate because TIMET has concluded
it is not currently appropriate to recognize an income tax benefit related to
its U.S. losses under the "more-likely-than-not" recognition criteria.
As previously reported, 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
accrued $3.3 million (charged to expense during 2001) for its 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.
The economic slowdown that began in 2001 in the economies of the U.S. and
other regions of the world combined with the events of September 11, 2001 have
resulted in the major commercial airframe and jet engine manufacturers
substantially reducing their forecast of engine and aircraft deliveries over the
next few years and their production levels in 2002. TIMET continues to expect
that aggregate industry mill product shipments will decrease in 2002 by
approximately 16% to about 43,000 metric tons and that demand for mill products
for the commercial aerospace sector could decline by up to 40% in 2002,
primarily due to a combination of reduced aircraft production rates and excess
inventory accumulated throughout the aerospace supply chain. Excess inventory
accumulation typically leads to order demand for titanium products falling below
actual consumption.
Although the current business environment makes it particularly difficult
to predict TIMET's future performance, TIMET expects its sales in 2002 will
decline to approximately $375 million, reflecting the combined effects of
decreases in sales volume, softening of market selling prices and changes in
customer and product mix. Mill product sales volumes are expected to decline
approximately 20% relative to 2001 to just under 10,000 metric tons, and melted
product sales volumes are expected to decline by 35% to under 3,000 metric tons.
The sales volumes decline in 2002 is principally driven by an anticipated
reduction in TIMET's commercial aerospace sales volumes of about 30% compared to
2001, partly offset by sales volume growth to other markets. Market selling
prices on new orders for titanium products are expected to soften throughout
2002. However, about one-half of TIMET's commercial aerospace volumes are under
long-term agreements that provide TIMET with price stability on that portion of
its business.
TIMET expects its effective income tax rate in 2002 will vary significantly
from the U.S. statutory rate as TIMET does not currently expect that recognition
of an income tax benefit associated with its U.S. losses will be appropriate
under the "more-likely-than-not" recognition criteria.
Under TIMET's previously-reported amended long-term agreement with Boeing,
Boeing will advance TIMET $28.5 million annually from 2002 through 2007. The
agreement is structured as a take-or-pay agreement such that Boeing, beginning
in calendar year 2002, will forfeit a proportionate part of the $28.5 million
annual advance, or effectively $3.80 per pound, in the event that its orders for
delivery for such calendar year are less than 7.5 million pounds. TIMET
presently intends to recognize as income any forfeitable portion of the advance
when it becomes virtually assured that Boeing's annual orders for delivery will
be less than 7.5 million pounds. This will generally result in any take-or-pay
forfeiture being recognized in TIMET's operating income in the last half of each
year. TIMET currently anticipates that Boeing will purchase about 3 million
pounds of product in 2002. At this projected order level for 2002, TIMET expects
to recognize about $17 million of income in the last half of the year under the
Boeing contract's take-or-pay provisions. Those earnings, recognized as other
income and included in TIMET's operating income, will distort TIMET's operating
income percentages as there will be no corresponding amount reported in TIMET's
sales.
For the second quarter of 2002, TIMET expects sales revenue to range
between $85 million and $95 million. Mill product sales volumes are expected to
be about 2,300 metric tons with melted product shipments of about 600 metric
tons. Interest expense should be less than $1 million while minority interest on
TIMET's Convertible Preferred Securities should approximate $3.3 million. With
these estimates, TIMET expects an operating loss in the second quarter of 2002
of between $10 million and $12 million, and a net loss before special items of
between $15 million and $17 million.
In terms of quarterly trends during the year, TIMET continues to expect its
results in the last half of 2002 to be improved compared to the first half. That
improvement reflects the fact that the estimated $17 million expected to be
earned under the take or pay provision of the Boeing contract will be reflected
in the last half of the year. However, depending on Boeing's quarterly
purchases, it is possible that some amount of income under the take or pay
provisions of the Boeing contract could be earned and recognized in the second
quarter of 2002.
TIMET's agreement with its labor union at its Ohio plant expires at the end
of June 2002. TIMET does not presently anticipate any work stoppage or other
labor disruption at any facility, and its outlook for 2002 does not contemplate
any such event. However, should TIMET's efforts to negotiate a mutually
satisfactory agreement be unsuccessful, any work stoppage or other labor
disruption at any facility could materially and adversely affect TIMET's
business, results of operations, financial position and liquidity. TIMET expects
to undertake certain actions as part of its contingency planning for the
possibility of a labor disruption. These actions could include the production of
certain inventory earlier than normally scheduled and the incurrence of certain
costs, which could have an impact on operating results and working capital.
TIMET's anticipated results included herein do not incorporate the effects of
any such actions.
General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend income decreased in the first quarter of 2002 compared to the first
quarter of 2001 as a slightly higher level of distributions from The Amalgamated
Sugar Company LLC in 2002 was more than offset by a lower average interest rate
on funds available for investment. Aggregate general corporate interest and
dividend income is currently expected to continue to be lower during the
remainder of 2002 compared to the same periods in 2001 due primarily to a lower
amount of funds available for investment and lower average interest rates.
Legal settlement gains. The $1.9 million legal settlement gains in the
first quarter of 2002 relates to NL's settlement with certain former insurance
carriers. See Note 9 to the Consolidated Financial Statements. This settlement,
similar to certain previously-reported NL legal settlements recognized during
2000 and 2001, resolved court proceedings in which NL had sought reimbursement
from the carriers for legal defense costs and indemnity coverage for certain of
its environmental remediation expenditures. No further material settlements
relating to litigation concerning environmental remediation coverages are
expected.
Securities transactions. Securities transactions gains in the first quarter
of 2002 relate to the disposal of certain shares of Halliburton Company common
stock held by the Company that were classified as trading securities. See Notes
3 and 9 to the Consolidated Financial Statements. The remaining Halliburton
shares held by the Company are held in escrow for the benefit of the holders of
the Company's LYONs debt obligation, which are exchangeable at any time, at the
option of the holder, for such Halliburton shares. Any exchanges of the LYONs in
2002 or thereafter would result in a securities transaction gain for financial
reporting purposes.
General corporate expenses. Net general corporate expenses in the first
quarter of 2002 were higher compared to the first quarter of 2001 due primarily
to higher legal and environmental remediation expenses of NL. NL's $20 million
of proceeds from the disposal of its specialty chemicals business unit related
to its agreement not to compete in the rheological products business is being
recognized as a component of general corporate income (expense) ratably over the
five-year non-compete period ending in the first quarter of 2003 ($4 million
recognized in each of 1999, 2000 and 2001). See Note 9 to the Consolidated
Financial Statements. Net general corporate expenses in the remainder of 2002
are currently expected to continue to be somewhat higher compared to the same
periods in 2001.
Interest expense. Interest expense declined in the first quarter of 2002
compared to the first quarter of 2001 due primarily to lower average levels of
indebtedness as well as lower average U.S. variable interest rates. Assuming
interest rates do not increase significantly from year-end 2001 levels, interest
expense in the remainder of 2002 is currently expected to continue to be
somewhat lower compared to the same periods in 2001 due to lower anticipated
interest rates on variable-rate borrowings in the U.S. and a lower average level
of outstanding debt (including Valhi's LYONs).
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 12 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 quarter of 2002, NL reduced its deferred income tax asset
valuation allowance by approximately $100,000, primarily as a result of
utilization of certain income tax attributes for which the benefit had also not
previously been recognized. During the first quarter of 2002, Tremont increased
its deferred income tax asset valuation allowance (at the Valhi consolidated
level) by a net $1.3 million due primarily because Tremont concluded certain tax
attributes do not currently meet the "more-likely-than-not" recognition
criteria.
As discussed in Note 14 to the Consolidated Financial Statements, effective
January 1, 2002, the Company no longer recognizes periodic amortization of
goodwill. Under GAAP, generally there is no income tax benefit recognized for
financial reporting purposes attributable to goodwill amortization. Accordingly,
ceasing to periodically amortize goodwill beginning in 2002 resulted in a
reduction in the Company's overall effective income tax rate as compared to
2001.
Minority interest. See Note 13 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.
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 quarter of 2001 and 2002.
Accounting principle not yet adopted. See Note 15 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.
Non-cash items included in the determination of net income include depreciation,
depletion and amortization expense, non-cash interest expense, asset impairment
charges and unrealized securities transactions gains and losses. Non-cash
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 2001 are shown as restricted cash, and
therefore such settlements had no impact on cash flows from operating
activities.
Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, equity in earnings of affiliates will generally differ from
the amount of distributions received from such affiliates, and equity in losses
of affiliates does not necessarily result in a current cash outlay paid to such
affiliates. The amount of periodic defined benefit pension plan expense and
periodic OPEB expense depends upon a number of factors, including certain
actuarial assumptions, and changes in such actuarial assumptions will result in
a change in the reported expense. In addition, the amount of such periodic
expense generally differs from the outflows of cash required to be currently
paid for such benefits.
Certain other items included in the determination of net income have no
impact on cash flows from operating activities, but such items do impact cash
flows from investing activities (although their impact on such cash flows
differs from their impact on net income). For example, realized gains and losses
from the disposal of available-for-sale marketable securities and long-lived
assets are included in the determination of net income, although the proceeds
from any such disposal are shown as part of cash flows from investing
activities.
Investing and financing activities. Approximately 58% of the Company's
consolidated capital expenditures in the first quarter of 2002 relate to NL, 39%
relate to CompX and substantially all of the remainder relates to Waste Control
Specialists. Approximately $1.2 million of NL's capital expenditures relates to
completing the reconstruction of NL's Leverkusen, Germany TiO2 production
facility that was damaged by fire during 2001. During the first quarter of 2002,
NL purchased $3.3 million shares of its common stock in market transactions, and
NL purchased the EWI insurance brokerage services operations for $9 million. See
Note 2 to the Consolidated Financial Statements.
During the first quarter of 2002, (i) Valhi repaid a net $3.4 million of
its short-term demand loans from Contran and (ii) NL redeemed $25 million
principal amount of its Senior Secured Notes at par value.
At March 31, 2002, unused credit available under existing credit facilities
approximated $95.4 million, which was comprised of $51 million available to
CompX under its revolving credit facility, $8 million available to NL under
non-U.S. credit facilities and $36.4 million available to Valhi under its
revolving bank credit facility. Provisions contained in certain of the Company's
credit agreements could result in the acceleration of the applicable
indebtedness prior to its stated maturity for reasons other than defaults from
failing to comply with typical financial covenants. For example, certain credit
agreements allow the lender to accelerate the maturity of the indebtedness upon
a change of control (as defined) of the borrower. The terms of Valhi's revolving
bank credit facility could require Valhi to either reduce outstanding borrowings
or pledge additional collateral in the event the fair value of the existing
pledged collateral falls below specified levels. In addition, certain credit
agreements could result in the acceleration of all or a portion of the
indebtedness following a sale of assets outside the ordinary course of business.
Other than operating leases, neither Valhi nor any of its subsidiaries or
affiliates are parties to any off-balance sheet financing arrangements.
Chemicals - NL Industries
At March 31, 2002, NL had cash, cash equivalents and marketable debt and
other securities of $157 million, including restricted balances of $81 million,
and NL had $8 million available for borrowing under its non-U.S. credit
facilities.
NL's board of directors has authorized NL to purchase up to 4.5 million
shares of its common stock in open market or privately-negotiated transactions
over an unspecified period of time. Through March 31, 2002, NL had purchased 3.5
million of its shares pursuant to such authorizations for an aggregate of $56.9
million, including 228,000 shares purchased during the first quarter of 2002 for
an aggregate of $3.3 million.
In March 2002, NL redeemed $25 million principal amount of its Senior
Secured Notes at par value. NL may redeem more of its Senior Secured Notes in
2002, although there can be no assurance that any such additional redemption
will be called.
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's 1998 U.S. federal income tax return is currently being
examined by the U.S. tax authorities. NL has granted an extension of the statute
of limitations for assessments until September 30, 2003. NL has received
preliminary tax assessments for the years 1991 to 1997 from the Belgian tax
authorities proposing tax deficiencies, including related interest, of
approximately 10.4 million euro ($9 million at March 31, 2002). NL has filed
protests to the assessments for the years 1991 to 1997. NL is in discussions
with the Belgian tax authorities and believes that a significant portion of the
assessments are 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 ($104
million at March 31, 2002) 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 $155 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, 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
CompX expects to renew its existing revolving bank credit facility prior to
its expiration in February 2003. There can be no assurance however, that such
renewal will occur, or that CompX will be able to obtain comparable terms under
the new credit facility.
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 March 31, 2002, Waste Control Specialists' indebtedness consists
principally of (i) a $4.6 million term loan due in installments through November
2004 and (ii) $14.8 million of other borrowings under a $15 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. Waste Control Specialists may borrow
additional amounts during the remainder of 2002 under its $15 million revolving
credit facility.
TIMET
At March 31, 2002, TIMET had net debt of approximately $8.6 million ($14.5
million of debt and $5.9 million of cash and equivalents). At March 31, 2002,
TIMET had over $150 million available for borrowing under its worldwide credit
facilities. TIMET's U.S. credit facility, a $125 million asset-based revolving
credit agreement, expires in February 2003. TIMET is currently negotiating with
its lender to extend the maturity date of this agreement on substantially
similar terms. The U.S. credit agreement allows the lender to modify the
borrowing base formulas at its discretion, subject to certain conditions.
On March 27, 2002, SMC and its U.S. subsidiaries filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result,
TIMET, with the assistance of an external valuation specialist, undertook a
further assessment of its investment in SMC and recorded an additional $27.5
million impairment charge to general corporate expense for an other than
temporary decline in the fair vale of its investment in SMC, reducing TIMET's
carrying amount of its investment in SMC to zero.
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.
Tremont Corporation
Tremont is primarily a holding company which, at March 31, 2002, owned
approximately 39% of TIMET and 21% of NL. At March 31, 2002, the market value of
the 12.3 million shares of TIMET and the 10.2 million shares of NL held by
Tremont was approximately $66 million and $170 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. Such intercompany loan between EMS and Tremont ($12.4 million
outstanding at March 31, 2002), collateralized by 10.2 million shares of NL
common stock owned by Tremont, is eliminated in Valhi's consolidated financial
statements. Tremont has indicated that it may seek to amend the terms of such
credit facility during 2002 to, among other things, increase the amount of
borrowings available to Tremont under the facility and extend the maturity date.
However, there is no assurance that Tremont and EMS will agree to any such
amendment.
Tremont has reached an agreement in principle with the U.S. Internal
Revenue Service ("IRS") pursuant to which the IRS's previously-reported $8.3
million assessment related to Tremont's 1998 federal income tax return would be
settled. The settlement, which is subject to formal approval by the IRS, would
result in no additional cash income tax payment by Tremont but would result in a
reduction of the amount of Tremont's U.S. net operating loss carryforwards that
arose in periods prior to the time when Tremont became a member of the same U.S.
federal income tax group of which Valhi is a member.
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.
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 March 31, 2002, 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 March 31, 2002, 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's quarterly dividend is currently $.125 per share. At this current rate
and based on the 10.4 million CompX shares held by Valhi and its wholly-owned
subsidiary Valcor at March 31, 2002, 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 in the past 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. To the extent
that one or more of Valhi's subsidiaries were to become unable to maintain its
current level of dividends, either due to restrictions contained in the
applicable subsidiary's credit agreements or otherwise, Valhi parent company's
liquidity could become adversely impacted. In such an event, Valhi might
consider reducing or eliminating its dividend or selling interests in
subsidiaries or other assets.
At March 31, 2002, Valhi had $7.3 million of parent level cash and cash
equivalents, had $35 million of outstanding borrowings under its revolving bank
credit agreement and had $21.2 million of short-term demand loans payable to
Contran. In addition, Valhi had $36.4 million of borrowing availability under
its bank credit facility. During the first quarter of 2002, Valhi sold in market
transactions 515,000 shares of Halliburton common stock that had been classified
as trading securities for an aggregate of $8.7 million, and used a majority of
the proceeds to reduce its outstanding borrowings from Contran. In January and
February 2002, the size of Valhi's bank credit facility was increased by an
aggregate of $17.5 million to $72.5 million.
Valhi's LYONs do not require current cash debt service. 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 March 31,
2002, assuming exchanges of all of the outstanding LYONs for Halliburton stock
at such date, was approximately $9 million.
At March 31, 2002, the LYONs had an accreted value equivalent to
approximately $41.95 per Halliburton share, and the market price of the
Halliburton common stock was $17.07 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, or an
aggregate of $27.4 million. Such October 2002 redemption price is equivalent to
about $44 per Halliburton share. If 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 calendar 2001, holders representing $92.2 million principal amount
at maturity exchanged their LYONs debt obligation for shares of Halliburton
common stock. Also during calendar 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.
The terms of The Amalgamated Sugar Company LLC provide for annual "base
level" of cash dividend distributions (sometimes referred to distributable cash)
by the LLC of $26.7 million, from which the Company is entitled to a 95%
preferential share. Distributions from the LLC are dependent, in part, upon the
operations of the LLC. The Company records dividend distributions from the LLC
as income upon receipt, which is the same month in which they are declared by
the LLC. To the extent the LLC's distributable cash is below this base level in
any given year, the Company is entitled to an additional 95% preferential share
of any future annual LLC distributable cash in excess of the base level until
such shortfall is recovered. Based on the LLC's current projections for 2002,
Valhi currently expects that distributions received from the LLC in 2002 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. At
March 31, 2002, the accrued and unpaid interest on the $80 million loan to Snake
River aggregated $24.0 million. Such accrued and unpaid interest is classified
as a noncurrent asset at March 31, 2002. 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). Following the repayment of Snake River's third-party senior debt in
April 2009, Valhi believes it will receive significant debt service payments on
its loan to Snake River as the cash flows that Snake River previously would have
been using to fund debt service on its third-party senior debt ($14.5 million in
2002) would then become available, and would be required, to be used to fund
debt service payments on its loan from Valhi. Prior to the repayment of the
third-party senior debt, Snake River might also make debt service payments to
Valhi, if permitted by the terms of the senior debt.
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 2001 Annual Report for descriptions of certain
legal proceedings.
Cofield, et. al. v. Lead Industries Association, et al. (Circuit Court for
Baltimore City, Maryland, Case No. 24-C-99-004491). The time for plaintiffs to
timely file an appeal of the previously-reported dismissal of this case has
expired, with no notice of appeal having been received by NL.
Lewis, et al. v. Lead Industries Association, et al. (Circuit Court of Cook
County, Illinois, County Department, Chancery Division, Case No. 00CH09800). In
March 2002, the trial court dismissed all claims in this previously-reported
case. Plaintiffs have appealed.
Gaines, et al. v. The Sherwin-Williams Company, et al. (Circuit Court of
Jefferson County, Mississippi, Civil Action No. 2000-0604). Upon motion to
reconsider, the case has been remanded to state court and local paint retailers
reinstated as defendants in this previously-reported case.
In re: Lead Paint Litigation, Superior Court of New Jersey, Middlesex
County, Case Code 702. One additional municipality has filed suit in this
previously-reported case.
Rainer, et al. v. E.I. du Pont de Nemours, et al., No. 5:00CV-223-M;
Rainer, et al. v. Bill Richardson, et al., No. 5:00CV-220-M; Shaffer, et al. v.
Atomic Energy Commission, et al., No. 5:00CV-307-M. In March 2002, the court
approved the previously-reported settlement in these cases and dismissed the
claims against NL and NLO, Inc. ("NLO"), and the Department of Energy has agreed
to pay the settlement amount. In the previously-reported case of Dew, et al. v.
Bill Richardson, et al. ("Dew"), No. 5:00CV-221-M, NL's and NLO's motions to
dismiss plaintiffs' claims were granted in part and denied in part. Pretrial
proceedings and discovery continue in the Dew case.
Liberty Independent School District, et al. v. Lead Industries Association,
et al. (District Court of Liberty County, Texas, No. 63,332). In May 2002, NL
was served with an amended complaint in this previously-reported case. The
amended complaint adds Liberty County, the City of Liberty, and the Dayton
Independent School District as plaintiffs and drops the Lead Industries
Association as a defendant.
Item 4. Submission of Matters to a Vote of Security Holders.
Valhi's 2002 Annual Meeting of Stockholders was held on May 13, 2002.
Thomas E. Barry, Norman S. Edelcup, Edward J. Hardin, Glenn R. Simmons, Harold
C. Simmons, J. Walter Tucker, Jr. and Steven L. Watson were elected as
directors, each receiving votes "For" their election from over 97% of the 114.7
million common shares eligible to vote at the Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended March 31, 2002.
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 May 14, 2002 By /s/ Bobby D. O'Brien
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Bobby D. O'Brien
(Vice President and Treasurer,
Principal Financial Officer)
Date May 14, 2002 By /s/ Gregory M. Swalwell
--------------- ------------------------------
Gregory M. Swalwell
(Vice President and Controller,
Principal Accounting Officer)