SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 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 October 31, 2002: 115,118,917
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets -
December 31, 2001 and September 30, 2002 3
Consolidated Statements of Operations -
Three months and nine months ended
September 30, 2001 and 2002 5
Consolidated Statements of Comprehensive Income -
Nine months ended September 30, 2001 and 2002 6
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2001 and 2002 7
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 2002 9
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 23
Item 4. Controls and Procedures 46
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 48
Item 6. Exhibits and Reports on Form 8-K. 49
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, September 30,
2001 2002
Current assets:
Cash and cash equivalents .................... $ 154,413 $ 189,690
Restricted cash equivalents .................. 63,257 52,832
Marketable securities ........................ 18,465 17,795
Accounts and other receivables ............... 162,310 193,057
Refundable income taxes ...................... 3,564 2,404
Receivable from affiliates ................... 844 7,760
Inventories .................................. 262,733 202,596
Prepaid expenses ............................. 11,252 19,232
Deferred income taxes ........................ 12,999 14,039
---------- ----------
Total current assets ..................... 689,837 699,405
---------- ----------
Other assets:
Marketable securities ........................ 186,549 177,562
Investment in affiliates ..................... 211,115 172,060
Receivable from affiliate .................... 20,000 20,000
Loans and other receivables .................. 105,940 109,927
Mining properties ............................ 12,410 13,562
Prepaid pension costs ........................ 18,411 21,991
Unrecognized net pension obligations ......... 5,901 5,901
Goodwill ..................................... 349,058 359,961
Other intangible assets ...................... 2,440 4,653
Deferred income taxes ........................ 3,818 5,237
Other ........................................ 30,109 35,048
--------- ----------
Total other assets ....................... 945,751 925,902
--------- ----------
Property and equipment:
Land ......................................... 28,721 30,206
Buildings .................................... 163,995 174,081
Equipment .................................... 569,001 634,810
Construction in progress ..................... 9,992 15,655
771,709 854,752
Less accumulated depreciation ................ 253,450 313,079
---------- ----------
Net property and equipment ............... 518,259 541,673
---------- ----------
$2,153,847 $2,166,980
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30,
2001 2002
Current liabilities:
Notes payable .............................. $ 46,201 $ --
Current maturities of long-term debt ....... 64,972 35,541
Accounts payable ........................... 114,474 73,271
Accrued liabilities ........................ 166,488 166,823
Payable to affiliates ...................... 38,148 32,034
Income taxes ............................... 9,578 9,789
Deferred income taxes ...................... 1,821 2,223
----------- -----------
Total current liabilities .............. 441,682 319,681
----------- -----------
Noncurrent liabilities:
Long-term debt ............................. 497,215 621,361
Accrued OPEB costs ......................... 50,146 46,996
Accrued pension costs ...................... 33,823 32,321
Accrued environmental costs ................ 54,392 53,453
Deferred income taxes ...................... 268,468 280,729
Other ...................................... 32,642 31,002
----------- -----------
Total noncurrent liabilities ........... 936,686 1,065,862
----------- -----------
Minority interest ............................ 153,151 148,586
----------- -----------
Stockholders' equity:
Common stock ............................... 1,258 1,262
Additional paid-in capital ................. 44,982 47,657
Retained earnings .......................... 656,408 631,063
Accumulated other comprehensive income:
Marketable securities .................... 86,654 86,469
Currency translation ..................... (79,404) (43,817)
Pension liabilities ...................... (11,921) (14,134)
Treasury stock ............................. (75,649) (75,649)
----------- ------------
Total stockholders' equity ............. 622,328 632,851
----------- ------------
$ 2,153,847 $ 2,166,980
=========== ============
Commitments and contingencies (Note 1)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
2001 2002 2001 2002
Revenues and other income:
Net sales ........................... $ 262,488 $ 284,110 $827,593 $ 816,908
Other, net .......................... 16,011 12,340 123,742 44,073
--------- --------- -------- ---------
278,499 296,450 951,335 860,981
--------- --------- -------- ---------
Costs and expenses:
Cost of sales ....................... 193,252 224,151 595,953 648,197
Selling, general and administrative . 46,236 50,485 144,186 141,200
Interest ............................ 14,910 15,033 47,686 45,396
--------- --------- -------- ---------
254,398 289,669 787,825 834,793
--------- --------- -------- ---------
24,101 6,781 163,510 26,188
Equity in earnings of:
Titanium Metals Corporation ("TIMET") 3,170 (17,153) 16,172 (31,710)
Other ............................... (76) (14) 446 298
--------- --------- -------- ---------
Income (loss) before income taxes . 27,195 (10,386) 180,128 (5,224)
Provision for income taxes (benefit) .. 11,246 (2,101) 66,921 (1,707)
Minority interest in after-tax
earnings (losses) .................... 5,639 (1,172) 23,668 935
--------- --------- -------- ---------
Net income (loss) ................. $ 10,310 $ (7,113) $ 89,539 $ (4,452)
========= ========= ======== =========
Earnings per share:
Basic ............................... $ .09 $ (.06) $ .78 $ (.04)
========= ========= ======== =========
Diluted ............................. $ .09 $ (.06) $ .77 $ (.04)
========= ========= ======== =========
Cash dividends per share .............. $ .06 $ .06 $ .18 $ .18
========= ========= ======== =========
Shares used in the calculation of per
share amounts:
Basic earnings per common share ..... 115,201 115,583 115,177 115,361
Dilutive impact of outstanding
stock options ...................... 934 -- 903 --
------- ------- ------- -------
Diluted earnings per share .......... 116,135 115,583 116,080 115,361
======= ======= ======= =======
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Nine months ended September 30, 2001 and 2002
(In thousands)
2001 2002
Net income (loss) .................................... $ 89,539 $ (4,452)
-------- ---------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment:
Unrealized gains (losses) arising during
the period ...................................... (8,028) (185)
Less reclassification for gains included in
net income ...................................... (33,887) --
-------- ---------
(41,915) (185)
Currency translation adjustment .................... (7,617) 35,587
Pension liabilities adjustment ..................... (332) (2,213)
-------- ---------
Total other comprehensive income (loss), net ..... (49,864) 33,189
-------- ---------
Comprehensive income ........................... $ 39,675 $ 28,737
======== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2001 and 2002
(In thousands)
2001 2002
Cash flows from operating activities:
Net income (loss) ....................................... $ 89,539 $ (4,452)
Depreciation, depletion and amortization ................ 56,054 46,075
Legal settlement gains, net ............................. (10,307) --
Insurance gain .......................................... (4,551) --
Securities transaction gains, net ....................... (51,874) (1,915)
Proceeds from disposal of marketable securities (trading) -- 8,659
Noncash interest expense ................................ 4,893 3,057
Deferred income taxes ................................... 16,257 463
Minority interest ....................................... 23,668 935
Other, net .............................................. (1,380) (9,549)
Equity in:
TIMET ................................................. (16,172) 31,710
Other ................................................. (446) (298)
Distributions from:
Manufacturing joint venture ........................... 5,513 6,350
Other ................................................. 1,300 361
-------- --------
112,494 81,396
Change in assets and liabilities:
Accounts and other receivables ........................ (10,181) (24,414)
Inventories ........................................... 15,985 73,039
Accounts payable and accrued liabilities .............. (8,970) (44,490)
Accounts with affiliates .............................. 11,012 (9,056)
Income taxes .......................................... 12,241 1,227
Other, net ............................................ (13,768) (6,389)
-------- --------
Net cash provided by operating activities ......... 118,813 71,313
-------- --------
Cash flows from investing activities:
Capital expenditures .................................... (45,248) (28,384)
Purchases of:
Business unit ......................................... -- (9,149)
NL common stock ....................................... (9,853) (10,559)
CompX common stock .................................... (2,650) --
Tremont common stock .................................. (198) --
Proceeds from disposal of marketable securities
(available-for-sale) ................................... 16,802 --
Loans to affiliate ...................................... (20,000) --
Property damaged by fire:
Insurance proceeds .................................... 10,500 --
Other, net ............................................ (2,100) --
Change in restricted cash equivalents, net .............. 838 3,045
Other, net .............................................. (239) 2,472
-------- --------
Net cash used by investing activities ............. (52,148) (42,575)
-------- --------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 2001 and 2002
(In thousands)
2001 2002
Cash flows from financing activities:
Indebtedness:
Borrowings ....................................... $ 46,356 $ 331,800
Principal payments ............................... (101,671) (291,254)
Deferred financing costs paid .................... -- (10,590)
Loans from affiliate:
Loans ............................................ 76,666 10,914
Repayments ....................................... (73,731) (12,825)
Valhi dividends paid ............................... (20,863) (20,893)
Distributions to minority interest ................. (7,950) (7,275)
Other, net ......................................... 1,217 3,154
-------- --------
Net cash provided (used) by financing
activities .................................... (79,976) 3,031
-------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing activities ...... (13,311) 31,769
Currency translation ............................... 232 3,312
Business unit acquired ............................. -- 196
Cash and equivalents at beginning of period .......... 135,017 154,413
-------- --------
Cash and equivalents at end of period ................ $ 121,938 $ 189,690
========= =========
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized ............. $ 36,770 $ 40,754
Income taxes, net ................................ 26,880 10,156
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
========= =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 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 .................... -- -- (4,452) -- -- -- -- (4,452)
Dividends ................... -- -- (20,893) -- -- -- -- (20,893)
Other comprehensive income
(loss), net ................ -- -- -- (185) 35,587 (2,213) -- 33,189
Other, net .................. 4 2,675 -- -- -- -- -- 2,679
------ ------- --------- -------- -------- -------- -------- ---------
Balance at September 30, 2002 $1,262 $47,657 $ 631,063 $ 86,469 $(43,817) $(14,134) $(75,649) $ 632,851
====== ======= ========= ======== ======== ======== ========
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 September 30, 2002, and the consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flows for the interim periods ended September 30, 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").
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
93% of Valhi's outstanding common stock. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of
certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is
sole trustee. Mr. Simmons, the Chairman of the Board 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, and
adopted SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections, effective April 1, 2002.
See Note 14.
Note 2 - Business segment information:
% owned by Valhi at
Business segment Entity September 30, 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 September 30, 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 September 30, 2002.
Three months ended Nine months ended
September 30, September 30,
2001 2002 2001 2002
(In millions)
Net sales:
Chemicals ............................ $207.0 $234.0 $653.2 $663.3
Component products ................... 51.5 48.8 164.4 148.4
Waste management ..................... 4.0 1.3 10.0 5.2
------ ------ ------ ------
Total net sales .................... $262.5 $284.1 $827.6 $816.9
====== ====== ====== ======
Operating income:
Chemicals ............................ $ 29.9 $ 26.5 $114.1 $ 67.5
Component products ................... 4.7 1.3 17.0 5.6
Waste management ..................... (3.1) (2.5) (10.7) (6.6)
------ ------ ------ ------
Total operating income ............. 31.5 25.3 120.4 66.5
General corporate items:
Legal settlements gains, net ......... -- -- 30.7 2.4
Securities transaction
gains, net .......................... 1.1 -- 51.9 1.9
Interest and dividend income ......... 9.3 9.0 29.0 25.9
Foreign currency transaction gain
-- -- -- 6.3
Gain on disposal of fixed assets
-- -- -- 1.6
Insurance gain ....................... 3.8 -- 4.5 --
Expenses, net ........................ (6.7) (12.5) (25.3) (33.0)
Interest expense ....................... (14.9) (15.0) (47.7) (45.4)
------ ------ ------ ------
24.1 6.8 163.5 26.2
Equity in:
TIMET ................................ 3.2 (17.2) 16.2 (31.7)
Other ................................ (.1) -- .4 .3
------ ------ ------ ------
Income (loss) before
income taxes ...................... $ 27.2 $(10.4) $180.1 $ (5.2)
====== ====== ====== ======
During the first nine months of 2002, NL purchased shares of its common
stock in market transactions for an aggregate of $10.6 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.
In July 2002, Valhi proposed a merger of Valhi and Tremont pursuant to
which stockholders of Tremont (including NL, to the extent of NL's ownership
interest in the Tremont shares held by Tremont Group), other than Valhi, would
receive shares of Valhi common stock for each Tremont share held. Tremont formed
a special committee of its board of directors consisting of members unrelated to
Valhi to review the proposal. The special committee retained their own
independent financial and legal advisors. After performing due diligence and
evaluating the merits of Valhi's proposal, the special committee and their
advisors negotiated the financial and other terms of a definitive merger
agreement with Valhi. In November 2002, Tremont, based upon the recommendation
of their special committee, and Valhi reached an agreement on the terms of the
definitive merger agreement in which, among other things, the Tremont
stockholders referred to above would receive 3.4 shares of Valhi common stock
for each share of Tremont common stock held in a tax-free exchange. The
transaction has been approved by the board of directors of both Valhi and
Tremont. The financial advisors to the special committee have issued an opinion
to the special committee stating that the exchange ratio is fair, from a
financial point of view, to Tremont stockholders other than Valhi and its
affiliates. The transaction is subject to customary closing conditions and will
require approval by a majority of the outstanding shares of Tremont. Tremont
Group has indicated that it intends to vote its shares in favor of the merger.
Valhi will file a registration statement with the SEC in connection with the
transaction. The date of the Tremont stockholders meeting will be established as
soon as practical following completion of the filing with the SEC.
NL (NYSE: NL), CompX (NYSE: CIX), Tremont (NYSE: TRE) and TIMET (NYSE: TIE)
each file periodic reports pursuant to the Securities Exchange Act of 1934, as
amended.
Note 3 - Marketable securities:
December 31, September 30,
2001 2002
(In thousands)
Current assets:
Halliburton Company common stock
(available-for-sale) .............................. $ 8,138 $ 8,020
Halliburton Company common stock (trading) ......... 6,744 --
Restricted debt securities (available-for-sale) .... 3,583 9,775
-------- --------
$ 18,465 $ 17,795
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC .................. $170,000 $170,000
Restricted debt securities ......................... 16,121 7,204
Other common stocks ................................ 428 358
-------- --------
$186,549 $177,562
======== ========
At September 30, 2002, Valhi held approximately 621,000 shares of
Halliburton common stock (aggregate cost of $5 million) with a quoted market
price of $12.91 per share, or an aggregate market value of $8 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. At
September 30, 2002, 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. In October
2002, following the redemption of substantially all of the remaining LYONs,
substantially all of such Halliburton shares were released to the Company from
escrow and were sold in market transactions for aggregate proceeds of $9.5
million. During the first nine months of 2002, the Company sold an additional
515,000 Halliburton shares classified as trading securities in market
transactions for aggregate proceeds of $8.7 million. See Notes 9 and 12.
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 September 30, 2002. The aggregate cost of other noncurrent
available-for-sale securities is nominal at September 30, 2002.
Note 4 - Inventories:
December 31, September 30,
2001 2002
(In thousands)
Raw materials:
Chemicals .................................. $ 79,162 $ 33,835
Component products ......................... 9,677 7,206
-------- --------
88,839 41,041
-------- --------
In process products:
Chemicals .................................. 9,675 11,304
Component products ......................... 12,619 14,242
-------- --------
22,294 25,546
-------- --------
Finished products:
Chemicals .................................. 117,976 97,563
Component products ......................... 8,494 11,892
-------- --------
126,470 109,455
-------- --------
Supplies (primarily chemicals) ............... 25,130 26,554
-------- --------
$262,733 $202,596
======== ========
Note 5 - Accrued liabilities:
December 31, September 30,
2001 2002
(In thousands)
Current:
Employee benefits .......................... $ 39,974 $ 41,841
Environmental costs ........................ 64,165 56,066
Interest ................................... 5,162 6,720
Deferred income ............................ 9,479 9,792
Other ...................................... 47,708 52,404
-------- --------
$166,488 $166,823
======== ========
Noncurrent:
Insurance claims and expenses .............. $ 19,182 $ 18,263
Employee benefits .......................... 8,616 8,899
Deferred income ............................ 1,333 1,885
Other ...................................... 3,511 1,955
-------- --------
$ 32,642 $ 31,002
======== ========
Note 6 - Accounts and other receivables:
December 31, September 30,
2001 2002
(In thousands)
Accounts receivable .......................... $ 166,126 $ 197,095
Notes receivable ............................. 2,484 2,438
Accrued interest ............................. 26 106
Allowance for doubtful accounts .............. (6,326) (6,582)
--------- ---------
$ 162,310 $ 193,057
========= =========
Note 7 - Other assets:
December 31, September 30,
2001 2002
(In thousands)
Investment in affiliates:
TiO2 manufacturing joint venture ............. $138,428 $132,078
TIMET ........................................ 60,272 27,630
Other ........................................ 12,415 12,352
-------- --------
$211,115 $172,060
======== ========
Loans and other receivables:
Snake River Sugar Company:
Principal .................................. $ 80,000 $ 80,000
Interest ................................... 22,718 26,612
Other ........................................ 5,706 5,753
-------- --------
108,424 112,365
Less current portion ......................... 2,484 2,438
-------- --------
Noncurrent portion ........................... $105,940 $109,927
======== ========
Other noncurrent assets:
Deferred financing costs ..................... $ 1,120 $ 10,268
Restricted cash equivalents .................. 4,713 5,014
Waste disposal operating permits ............. 2,527 1,947
Refundable insurance deposits ................ 1,609 1,864
Other ........................................ 20,140 15,955
-------- --------
$ 30,109 $ 35,048
======== ========
The Company's equity in losses of TIMET in the third quarter of 2002
includes a $15.7 million impairment provision for an other than temporary
decline in the value of Tremont's investment in TIMET. In determining the amount
of the impairment charge, Tremont considered, among other things, recent ranges
of TIMET's NYSE market price and current estimates of TIMET's future operating
losses that would further reduce Tremont's carrying value of its investment in
TIMET as it records additional equity in losses of TIMET. At September 30, 2002,
Tremont held 12.3 million shares of TIMET common stock with a quoted market
price of $1.66 per share, or an aggregate of $20 million. At September 30, 2002,
TIMET reported total assets of $582.4 million and stockholders' equity of $205.6
million. TIMET's total assets at September 30, 2002 include current assets of
$278.8 million, property and equipment of $258.6 million and other intangible
assets of $8.4 million. TIMET's total liabilities at September 30, 2002 include
current liabilities of $111.3 million, long-term debt of $10.5 million, accrued
OPEB and pension costs of $35.9 million and convertible preferred securities of
$201.2 million. During the first nine months of 2002, TIMET reported net sales
of $281.5 million, an operating loss of $16.1 million and a loss before
cumulative effect of change in accounting principle of $57.6 million (first nine
months of 2001 - net sales of $370.5 million, operating income of $56.8 million
and net income of $30.3 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 ......... 9.9 -- 9.9
Changes in foreign exchange rates ........... -- 1.0 1.0
------ ------ ------
Balance at September 30, 2002 ............... $317.1 $ 42.9 $360.0
====== ====== ======
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, September 30,
2001 2002
(In millions)
Patents:
Cost ............................................. $3.4 $3.5
Less accumulated amortization .................... 1.0 1.2
---- ----
Net ............................................ 2.4 2.3
---- ----
Customer list:
Cost ............................................. -- 2.6
Less accumulated amortization .................... -- .3
---- ----
Net ............................................ -- 2.3
---- ----
$2.4 $4.6
==== ====
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 10.5 years
remaining at September 30, 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 6.3 years remaining at September 30, 2002), with no assumed
residual value at the end of the life of the intangible asset. Amortization
expense of intangible assets was approximately $180,000 and $460,000 in the
first nine months of 2001 and 2002, respectively, and amortization expense of
intangible assets is expected to be approximately $620,000 in each of calendar
2002 through 2006.
Note 9 - Notes payable and long-term debt:
December 31, September 30,
2001 2002
(In thousands)
Notes payable -
Kronos - non-U.S. bank credit agreements ......... $ 46,201 $ --
======== ========
Long-term debt:
Valhi:
Snake River Sugar Company ...................... $250,000 $250,000
LYONs .......................................... 25,472 27,256
Bank credit facility ........................... 35,000 35,000
Other .......................................... 2,880 2,880
-------- --------
313,352 315,136
-------- --------
Subsidiaries:
NL Senior Secured Notes ........................ 194,000 --
Kronos International:
Senior Secured Notes ......................... -- 278,673
Bank credit facility ......................... -- 26,993
CompX bank credit facility ..................... 49,000 31,000
Valcor Senior Notes ............................ 2,431 2,431
Other .......................................... 3,404 2,669
-------- --------
248,835 341,766
-------- --------
562,187 656,902
Less current maturities .......................... 64,972 35,541
-------- --------
$497,215 $621,361
======== ========
In June 2002, Kronos International ("KII"), which conducts NL's TiO2
operations in Europe, issued euro 285 million principal amount ($280 million
when issued) of its 8.875% Senior Secured Notes due 2009. The KII Senior Secured
Notes are collateralized by a pledge of the stock or other ownership interests
of KII's first-tier operating subsidiaries. The KII Senior Secured Notes are
issued pursuant to an indenture which contains a number of covenants and
restrictions which, among other things, restricts the ability of KII and its
subsidiaries to incur debt, incur liens, pay dividends or merge or consolidate
with, or sell or transfer all or substantially all of their assets to, another
entity. The KII Senior Secured Notes are redeemable, at KII's option, on or
after December 30, 2005 at redemption prices ranging from 104.437% of the
principal amount, declining to 100% on or after December 30, 2008. In addition,
on or before June 30, 2005, KII may redeem up to 35% of its Senior Secured Notes
with the net proceeds of a qualified public equity offering at 108.875% of the
principal amount. In the event of a change of control of KII, as defined, KII
would be required to make an offer to purchase its Senior Secured Notes at 101%
of the principal amount. KII would also be required to make an offer to purchase
a specified portion of its Senior Secured Notes at par value in the event KII
generates a certain amount of net proceeds from the sale of assets outside the
ordinary course of business, and such net proceeds are not otherwise used for
specified purposes within a specified time period.
Also in June 2002, KII's operating subsidiaries in Germany, Belgium and
Norway entered into a new three-year euro 80 million revolving bank credit
facility. Borrowings under this facility were used in part to repay and
terminate Kronos' short-term non-U.S. bank credit agreements. Borrowings may be
demoninated in euros, Norwegian kroner or U.S. dollars, and bear interest at the
applicable interbank market rate plus 1.75%. The facility also provides for the
issuance of letters of credit up to euro 5 million. The new KII bank credit
agreement is collateralized by the accounts receivable and inventories of the
borrowers, plus a limited pledge of all of the other assets of the Belgian
borrower. The new KII bank credit agreement contains certain restrictive
covenants which, among other things, restricts the ability of the borrowers to
incur debt, incur liens, pay dividends or merge or consolidate with, or sell or
transfer all or substantially all of their assets to, another entity.
In March 2002, NL redeemed $25 million principal amount of the NL Senior
Secured Notes at par value, using available cash on hand. In addition, NL used a
portion of the net proceeds from the issuance of the KII Senior Secured Notes to
redeem in full the remaining $169 million principal amount of the NL Senior
Secured Notes. In accordance with the terms of the indenture governing the NL
Senior Secured Notes, on June 28, 2002, NL irrevocably placed on deposit with
the NL Senior Secured Note trustee funds in an amount sufficient to pay in full
the redemption price plus all accrued and unpaid interest due on the July 28,
2002 redemption date. Immediately thereafter, NL was released from its
obligations under such indenture, the indenture was discharged and all
collateral was released to NL. Because NL had been released as the primary
obligor under the indenture as of June 30, 2002, the NL Senior Secured Notes
were eliminated from the balance sheet as of that date along with the funds
placed on deposit with the trustee to effect the July 28, 2002 redemption. NL
recognized a loss on the early extinguishment of debt of approximately $2
million in the second quarter of 2002, consisting primarily of the interest on
the NL Senior Secured Notes for the period from July 1 to July 28, 2002. Such
loss is recognized as a component of interest expense.
In September 2002, certain of NL's U.S. subsidiaries entered into a new
three-year $50 million revolving credit facility (nil outstanding at September
30, 2002) collateralized by the accounts receivable, inventories and certain
fixed assets of the borrowers. Borrowings under this facility are limited to the
lesser of $45 million or a formula-determined amount based upon the accounts
receivable and inventories of the borrowers. Borrowings bear interest at either
the prime rate or rates based upon the eurodollar rate. The facility contains
certain restrictive covenants which, among other things, restricts the abilities
of the borrowers to incur debt, incur liens, pay dividends in certain
circumstances, sell assets or enter into mergers.
In October 2002, holders representing substantially all of the Company's
LYONs exercised their right to require the Company to redeem their LYONs for a
cash redemption price of $27.3 million. Funds to pay the redemption price were
provided by borrowings under Valhi's bank credit agreement, the maturity date of
which was extended to October 31, 2003 in November 2002. Accordingly, both the
LYONs and Valhi's revolving bank credit facility are classified as noncurrent
debt at September 30, 2002. Also in November 2002, the size of Valhi's bank
credit facility was reduced from $72.5 million to $70 million. In November 2002,
the Company called the remaining normal amount of LYONs for redemption in
December 2002.
Note 10 - Accounts with affiliates:
December 31, September 30,
2001 2002
(In thousands)
Current receivables from affiliates:
Income taxes receivable from Contran ............. $ -- $ 7,185
TIMET ............................................ 677 43
Other ............................................ 167 532
------- -------
$ 844 $ 7,760
======= =======
Noncurrent receivable from affiliate -
loan to Contran family trust ...................... $20,000 $20,000
======= =======
Payables to affiliates:
Valhi demand loan from Contran ................... $24,574 $22,663
Income taxes payable to Contran .................. 6,410 --
Louisiana Pigment Company ........................ 6,362 8,377
Contran - trade items ............................ 501 932
TIMET ............................................ 286 --
Other, net ....................................... 15 62
------- -------
$38,148 $32,034
======= =======
Note 11 - Provision for income taxes (benefit):
Nine months ended
September 30,
2001 2002
(In millions)
Expected tax expense (benefit) .......................... $63.0 $(1.8)
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies .......... 2.7 (.2)
Non-U.S. tax rates ...................................... (4.8) (1.3)
Change in NL's and Tremont's deferred income tax
valuation allowance, net ............................... (2.1) .9
No tax benefit for goodwill amortization ................ 4.4 --
U.S. state income taxes, net ............................ 2.7 .3
Other, net .............................................. 1.0 .4
----- -----
$66.9 $(1.7)
===== =====
Comprehensive provision for income taxes
(benefit) allocated to:
Net income (loss) ..................................... $66.9 $(1.7)
Other comprehensive income:
Marketable securities ............................... (22.5) (.2)
Currency translation ................................ (1.3) 2.7
Pension liabilities ................................. (.3) (1.5)
----- -----
$42.8 $ (.7)
===== =====
Note 12 - Other income:
Nine months ended
September 30,
2001 2002
(In thousands)
Securities earnings:
Dividends and interest ........................ $ 29,045 $25,866
Securities transaction gains, net ............. 51,874 1,915
-------- -------
80,919 27,781
Legal settlement gains, net ..................... 30,723 2,360
Noncompete agreement income ..................... 3,000 3,000
Currency transactions, net ...................... 543 4,583
Pension settlement gain ......................... -- 677
Insurance gain .................................. 4,551 --
Other, net ...................................... 4,006 5,672
-------- -------
$123,742 $44,073
======== =======
The securities transaction gains in 2002 are discussed in Note 3. The legal
settlement gains 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. The net currency transaction gain in 2002 includes $6.3 million
related to the extinguishment of certain intercompany indebtedness of NL.
Note 13 - Minority interest:
December 31, September 30,
2001 2002
(In thousands)
Minority interest in net assets:
NL Industries ............................ $ 68,566 $ 67,946
Tremont Corporation ...................... 32,610 27,384
CompX International ...................... 44,767 44,944
Subsidiaries of NL ....................... 7,208 8,312
-------- --------
$153,151 $148,586
======== ========
Nine months ended
September 30,
2001 2002
(In thousands)
Minority interest in net earnings (losses):
NL Industries ............................. $15,562 $ 5,074
Tremont Corporation ....................... 4,500 (5,975)
CompX International ....................... 2,653 752
Subsidiaries of NL ........................ 953 1,084
------- -------
$23,668 $ 935
======= =======
As previously reported, all of Waste Control Specialists aggregate,
inception-to-date net losses have accrued to the Company for financial reporting
purposes, and all of Waste Control Specialists future net income or net losses
will also accrue to the Company until Waste Control Specialists reports positive
equity attributable to its other owner. Accordingly, no minority interest in
Waste Control Specialists' net assets or net earnings (losses) is reported at
September 30, 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 unit, including the allocated goodwill. If the fair value of the
reporting unit is less than carrying value, then a goodwill impairment loss
would be recognized equal to the excess, if any, of the net carrying value of
the reporting unit goodwill over its implied fair value (up to a maximum
impairment equal to the carrying value of the goodwill). The implied fair value
of reporting unit goodwill would be the amount equal to the excess of the
estimated fair value of the reporting unit over the amount that would be
allocated to the tangible and intangible net assets of the reporting unit
(including unrecognized intangible assets) as if such reporting unit had been
acquired in a purchase business combination accounted for in accordance with
GAAP as of the date of the impairment testing.
In determining the estimated fair value of the NL reporting unit, the
Company will consider quoted market prices for NL common stock, as adjusted for
an appropriate control premium. 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 completed its initial, transitional goodwill impairment
analysis under SFAS No. 142 as of January 1, 2002, and no goodwill impairments
were deemed to exist as of such date. In accordance with the requirements of
SFAS No. 142, the Company will review the goodwill of its 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. No
goodwill impairments were deemed to exist as a result of the Company's
impairment review completed during the third quarter of 2002.
As shown in the following table, the Company would have reported net income
of $101.3 million, or $.87 per diluted share, in the first nine months of 2001
($14.2 million, or $.12 per diluted share, in the third quarter of 2001) if the
goodwill amortization included in the Company's reported net income had not been
recognized.
Three months ended Nine months ended
September 30, September 30,
2001 2002 2001 2002
(In millions, except per share amounts)
Net income (loss) as reported ........... $ 10.3 $ (7.1) $ 89.5 $ (4.4)
Adjustments:
Goodwill amortization ................. 4.2 -- 12.7 --
Incremental income taxes .............. -- -- (.1) --
Minority interest in goodwill
amortization ......................... (.3) -- (.8) --
------- ------- ------- -------
Adjusted net income (loss) .......... $ 14.2 $ (7.1) $ 101.3 $ (4.4)
======= ======= ======= =======
Diluted net income (loss) per share
as reported ............................ $ .09 $ (.06) $ .77 $ (.04)
Adjustments:
Goodwill amortization ................. .04 -- .11 --
Incremental income taxes .............. -- -- -- --
Minority interest in goodwill
amortization ......................... (.01) -- (.01) --
------- ------- ------- -------
Adjusted diluted net income
(loss) per share ................... $ .12 $ (.06) $ .87 $ (.04)
======= ======= ======= =======
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 net assets to be
disposed of by sale are to be reported at the lower of carrying value or fair
value less cost to sell, and expands the reporting of discontinued operations to
include any component of an entity with operations and cash flows that can be
clearly distinguished from the rest of the entity. Adoption of SFAS No. 144 did
not have a significant effect on the Company.
Debt extinguishment gains and losses. The Company adopted SFAS No. 145
effective April 1, 2002. SFAS No. 145, among other things, eliminated the prior
requirement that all gains and losses from the early extinguishment of debt were
to be classified as an extraordinary item. Upon adoption of SFAS No. 145, gains
and losses from the early extinguishment of debt are now 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 are to be reassessed 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 is retroactively reclassified and reported as a
component of income before extraordinary item. The Company has concluded that
all of its previously-recognized gains and losses from the early extinguishment
of debt that occurred on or after January 1, 1998 would not have met the APBO
No. 30 criteria for classification as an extraordinary item, and accordingly
such previously-reported gains and losses from the early extinguishment of debt
have been retroactively reclassified and are now reported as a component of
income before extraordinary item.
Note 15 - Accounting principles 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. 146, Accounting for Costs Associated with
Exit or Disposal Activities, no later than January 1, 2003 for exit or disposal
activities initiated on or after the date of adoption. Under SFAS No. 146, costs
associated with exit activities, as defined, that are covered by the scope of
SFAS No. 146 will be recognized and measured initially at fair value, generally
in the period in which the liability is incurred. Costs covered by the scope of
SFAS No. 146 include termination benefits provided to employees, costs to
consolidate facilities or relocate employees, and costs to terminate contracts
(other than a capital lease). Under existing GAAP, a liability for such an exit
cost is recognized at the date an exit plan is adopted, which may or may not be
the date at which the liability has been incurred.
- -------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
General
The Company reported a net loss of $7.1 million, or $.06 per diluted share,
in the third quarter of 2002 compared to net income of $10.3 million, or $.09
per diluted share, in the third quarter of 2001. Excluding the effects of the
items discussed below, the Company would have reported net income of $900,000 in
the third quarter of 2002 compared to net income of $11.8 million in the third
quarter of 2001. For the first nine months of 2002, the Company reported a net
loss of $4.4 million, or $.04 per diluted share, compared to net income of $89.5
million, or $.77 per diluted share, in the first nine months of 2001. Excluding
the effects of the items discussed below, the Company would have reported net
income of $1.9 million in the first nine months of 2002 compared to net income
of $39.5 million in the first nine months of 2001.
The Company's equity in losses of TIMET in the third quarter of 2002
includes a $15.7 million impairment provision ($8 million net of income taxes
and minority interest) related to Tremont's impairment provision for an other
than temporary decline in the value of its investment in TIMET. The Company's
equity in losses of TIMET in the first nine months of 2002 includes losses in
the first quarter 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. Legal settlement gains in the first
nine months of 2002 of $2.4 million ($1.2 million, net of income taxes and
minority interest, respectively) related to prior-quarter legal settlements with
certain of NL's former insurance carriers, and securities transactions gains in
the first nine months of 2002 of $1.9 million ($1.2 million net of income taxes)
related to the first quarter disposal of certain shares of Halliburton Company
common stock held by the Company. Currency transaction gains in the first nine
months of 2002 included a gain that occurred during the second quarter of 2002
of $6.3 million ($4.7 million net of income taxes and minority interest) related
to the extinguishment of certain intercompany indebtedness of NL. Net securities
transaction gains in the third quarter and first nine months of 2001 of $1.1
million and $51.9 million, respectively ($700,000 and $33.9 million,
respectively, net of income taxes and minority interest) related principally to
the disposal of additional Halliburton shares. Insurance gains in the third
quarter and first nine months of 2001 of $3.8 million and $4.5 million,
respectively ($1.8 million and $2.0 million, respectively, net of income taxes
and minority interest) related to insurance recoveries received by NL resulting
from the March 2001 fire at one of NL's facilities, as insurance recoveries
exceeded the carrying value of the property destroyed and clean-up costs
incurred. The Company's equity in earnings of TIMET in the first nine months of
2001 included earnings in the second quarter of $15.7 million ($7.5 million net
of income taxes and minority interest) related to TIMET's previously-reported
settlement with Boeing. The Company's results in the first nine months of 2001
included the previously-reported first quarter 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 $14.2 million in the third quarter of 2001 and approximately
$101.3 million in the first nine months of 2001, or about $3.9 million and $11.8
million higher, respectively, if the goodwill amortization included in the
Company's reported net income had not been recognized. Of such $11.8 million
difference in the first nine months of 2001, approximately $10.8 million and
$1.9 million relates to amortization of goodwill attributable to the Company's
chemicals and component products operating segments, respectively, approximately
$100,000 relates to incremental income taxes and approximately $800,000 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 third quarter and first nine months of 2002
was lower as compared to the same periods in 2001 due to lower chemicals
earnings at NL and lower component products earnings at CompX, offset in part by
lower waste management operating losses at Waste Control Specialists.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "could," "anticipates," "expected" or comparable terminology, or by
discussions of strategies or trends. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve substantial risks and uncertainties that
could significantly impact expected results, and actual future results could
differ materially from those described in such forward-looking statements. While
it is not possible to identify all factors, the Company continues to face many
risks and uncertainties. Among the factors that could cause actual future
results to differ materially are the risks and uncertainties discussed in this
Quarterly Report and those described from time to time in the Company's other
filings with the Securities and Exchange Commission including, but not limited
to, future supply and demand for the Company's products, the extent of the
dependence of certain of the Company's businesses on certain market sectors
(such as the dependence of TIMET's titanium metals business on the aerospace
industry), the cyclicality of certain of the Company's businesses (such as NL's
TiO2 operations and TIMET's titanium metals operations), the impact of certain
long-term contracts on certain of the Company's businesses (such as the impact
of TIMET's long-term contracts with certain of its customers and such customers'
performance thereunder and the impact of TIMET's long-term contracts with
certain of its vendors on its ability to reduce or increase supply or achieve
lower costs), customer inventory levels (such as the extent to which NL's
customers may, from time to time, accelerate purchases of TiO2 in advance of
anticipated price increases or defer purchases of TiO2 in advance of anticipated
price decreases, or the relationship between inventory levels of TIMET's
customers and such customer's current inventory requirements and the impact of
such relationship on their purchases from TIMET), changes in raw material and
other operating costs (such as energy costs), the possibility of labor
disruptions, general global economic and political conditions (such as changes
in the level of gross domestic product in various regions of the world and the
impact of such changes on demand for, among other things, TiO2), competitive
products and substitute products, customer and competitor strategies, the impact
of pricing and production decisions, competitive technology positions, the
introduction of trade barriers, fluctuations in currency exchange rates (such as
changes in the exchange rate between the U.S. dollar and each of the euro and
the Canadian dollar), operating interruptions (including, but not limited to,
labor disputes, leaks, fires, explosions, unscheduled or unplanned downtime and
transportation interruptions), recoveries from insurance claims and the timing
thereof, 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 changes in 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, were generally flat during the second quarter of 2002 and were generally
increasing during the third quarter of 2002. NL's TiO2 operations are conducted
through its wholly-owned subsidiary Kronos, Inc.
Three months ended Nine months ended
September 30, % September 30, %
2001 2002 Change 2001 2002 Change
(In millions, except percentages)
Net sales $207.0 $234.0 +13% $653.2 $663.3 +2%
Operating income 29.9 26.5 -11% 114.1 67.5 -41%
Chemicals operating income declined in the third quarter and first nine
months of 2002 compared to the same periods of 2001 due primarily to lower
average selling prices for titanium dioxide pigments ("TiO2"), offset in part by
higher TiO2 sales and production 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 third quarter of 2002 were 7% lower than the third quarter
of 2001, and were 12% lower in the first nine months of 2002 compared to the
same period in 2001. While NL's average TiO2 selling prices had generally been
declining during all of 2001 and the first quarter of 2002, and were flat during
the second quarter of 2002, average TiO2 selling prices increased during the
third quarter of the year. NL's average TiO2 selling prices in the third quarter
of 2002 were 3% higher compared to the second quarter of the year, with
increases in all major markets.
NL's TiO2 sales volumes in the third quarter of 2002 were 14% higher than
the third quarter of 2001, with higher volumes in European and North American
markets and lower volumes in export markets. NL's TiO2 sales volumes in the
first nine months of 2002 were 13% higher than the first nine months of 2001.
NL's TiO2 production volumes in the third quarter of 2002 were 7% higher than
the third quarter of 2001, with operating rates near full capacity in 2002. NL's
TiO2 production volumes in the first nine months of 2002 were 6% higher compared
to the same period in 2001. The increases in NL's TiO2 sales and production
volumes in 2002 were due in part to the effect of the previously-reported fire
at NL's Leverkusen, Germany TiO2 facility in March 2001, as well as in part due
to customer restocking their inventory levels in 2002 in advance of
previously-announced TiO2 price increases. As previously reported, NL settled
its insurance claim related to the Leverkusen fire during the fourth quarter of
2001. NL recognized $19.3 million of business interruption insurance proceeds
during the fourth quarter of 2001, of which $16.6 million was attributable to
recovery of unallocated period costs and lost margin related to the first,
second and third quarters of 2001.
The damages to property and the business interruption losses caused by the
previously-reported Leverkusen fire were covered by insurance. Chemicals
operating income in the third quarter and first nine months of 2001 include $3
million and $8 million, respectively, of business interruption insurance
proceeds as partial payments for losses caused by the fire.
In January 2002, NL announced price increases in all major markets of
approximately 5% to 8% above existing December 2001 prices, a portion of which
NL realized in the second and third quarters of 2002. In May 2002, NL announced
a second round of price increases in all major markets of approximately 7% to
11% above June 2002 prices. Assuming demand for TiO2 remains at reasonable
levels, NL expects to achieve further price improvement in the fourth quarter of
this year, but the extent to which NL can realize any price increases during the
remainder of 2002 will depend on economic and competitive conditions. Because
TiO2 prices were generally declining during all of 2001 and the first quarter of
2002, NL believes that its average TiO2 selling prices in 2002 will be
significantly below its average 2001 prices, even if price increases continue to
be realized. NL expects its TiO2 sales and production volumes in 2002 should be
higher as compared to 2001, in part due to the effects in 2001 of the
previously-reported fire at its Leverkusen, Germany facility. NL expects its
sales volumes in 2002 will exceed its production volumes. While NL expects its
TiO2 sales volumes in the fourth quarter of 2002 will be seasonally lower than
the third quarter of this year, NL expects its sales volumes in the fourth
quarter of 2002 will exceed its sales volumes in the fourth quarter of 2001.
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, NL's average TiO2
selling prices (in billing currencies) in the third quarter of 2002 decreased 2%
compared to the third quarter of 2001, and decreased 11% during the first nine
months of 2002. Overall, fluctuations in the value of the U.S. dollar relative
to other currencies, primarily the euro, increased TiO2 sales in the third
quarter and first nine months of 2002 by approximately $14 million and $10
million, respectively, as compared to the same periods 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
higher during 2002 as compared to 2001. Overall, the net impact of currency
exchange rate fluctuations increased TiO2 operating income by $2.2 million in
the third quarter of 2002 compared to the third quarter of 2001, and slightly
decreased operating income in the first nine months of 2002 compared to the same
period in 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 $19.2 million in the first nine
months of 2001 and approximately $9.0 million in the first nine months 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 $10.8
million related to goodwill amortization). See Note 14 to the Consolidated
Financial Statements.
Component Products
Three months ended Nine months ended
September 30, % September 30, %
2001 2002 Change 2001 2002 Change
(In millions, except percentages)
Net sales $51.5 $48.8 -5% $164.4 $148.4 -10%
Operating income 4.7 1.3 -71% 17.0 5.6 -67%
Component products sales and operating income decreased in the third
quarter and first nine months of 2002 compared to the same periods in 2001 due
to continued weak demand for CompX's component products sold to the office
furniture market resulting from the continued weak economic conditions in the
manufacturing sectors in North America and Europe. Sales of slide and ergonomic
products decreased 6% and 18%, respectively, in the third quarter of 2002
compared to the third quarter of 2001, with year-to-date declines of 13% and
19%, respectively. While sales of security products increased 2% in the third
quarter of 2002 compared to the same period in 2001, in part due to price
increases implemented in July 2002, sales of security products were down 2% in
the first nine months of 2002 compared to the same period in 2001 due primarily
to lower volumes. Operating income comparisons were negatively impacted by
increases in certain raw material costs, primarily steel, as well as the adverse
impact of reduced selling prices primarily with respect to slide products
resulting from competitive pressures. Operating income comparisons were
favorably impacted by ceasing to periodically amortize goodwill, which amounted
to approximately $600,000 and $1.9 million in the third quarter and first nine
months of 2001, respectively (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 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 6% in the third quarter of 2002 as compared to the same
period in 2001, and operating income decreased 72%. Excluding the effect of
currency, component products sales decreased 9% in the first nine months of 2002
as compared to the same period in 2001, and operating income decreased 62%.
CompX currently expects to record a pre-tax charge in the fourth quarter of
2002 of between $1.7 million and $2.2 million, the majority of which will be
non-cash in nature, related to the retooling of one if its manufacturing
facilities. The cost savings resulting from this retooling are currently
expected to begin to be reflected in CompX's operating results in the first
quarter of 2003. CompX is also finalizing a plan to consolidate its two Canadian
facilities into one facility. A final decision on implementing this activity is
expected prior to the end of 2002, and if implemented such consolidation would
be expected to be substantially completed by the end of the first quarter of
2003. CompX is also reviewing other facility rationalizations. These activities
could result in charges for asset impairment and other related costs in addition
to the charge referred to above.
CompX currently expects that soft market conditions will continue in the
office furniture market, the primary end-use market for CompX's products. As a
result, sales volumes are expected to remain at depressed levels for at least
the remainder of the first half of 2003, and competitive pricing pressures are
also expected to continue. In addition, the worldwide steel price increase that
followed the steel tariff imposed this year by the United States government is
expected to continue to negatively impact component products margins on CompX's
slide and ergonomic products, where steel is the primary raw material. CompX has
initiated price increases on certain products and will continue to focus on cost
improvement initiatives in order to minimize the impact of lower sales to the
office furniture industry and to develop value-added customer relationships to
improve its operating results.
Waste Management
Three months ended Nine months ended
September 30, September 30,
2001 2002 2001 2002
(In millions)
Net sales $ 4.0 $ 1.3 $ 10.0 $ 5.2
Operating loss (3.1) (2.5) (10.7) (6.6)
Waste Control Specialists' sales decreased in the third quarter and first
nine months of 2002 compared to the same periods in 2001 due primarily to the
effect of weak demand for its waste management services. Waste management's
operating losses declined during 2002 as the effect of certain cost controls
implemented in 2002 more than offset the effects of the 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 waste
management industry currently is experiencing a relative decline in the number
of environmental remediation projects generating wastes. In addition, efforts on
the part of generators to reduce the volume of waste and/or manage wastes onsite
at their facilities also has resulted in weak demand for Waste Control
Specialists waste management services. These factors have led to reduced demand
and increased downward price pressure for 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 a broad range 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 permits it currently has in place.
Waste Control Specialists is also continuing to identify certain waste streams,
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, there can be no assurance that the
Company would not report a loss with respect to such a transaction.
TIMET
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.
Three months ended Nine months ended
September 30, September 30,
2001 2002 2001 2002
(In millions)
TIMET historical:
Net sales ............................. $126.4 $ 82.8 $370.5 $281.5
====== ====== ====== ======
Operating income (loss):
Boeing settlement, net .............. $ -- $ -- $ 62.7 $ --
Fixed asset impairment .............. -- -- (10.8) --
Tungsten accrual .................... -- -- (3.8) --
Boeing take-or-pay income ........... -- 10.5 -- 12.7
Other, net .......................... 9.9 (14.8) 8.7 (28.8)
----- ----- ----- ------
9.9 (4.3) 56.8 (16.1)
Impairment of convertible
preferred securities ................. -- -- -- (27.5)
Other general corporate, net .......... 1.3 (.9) 5.3 (1.7)
Interest expense ...................... (.7) (.9) (3.3) (2.4)
----- ----- ----- ------
10.5 (6.1) 58.8 (47.7)
Income tax benefit (expense) .......... (3.7) .5 (20.7) 1.3
Minority interest ..................... (2.5) (3.5) (7.8) (11.2)
----- ----- ----- ------
Income (loss) before cumulative
effect of change in accounting
principle .......................... $ 4.3 $ (9.1) $ 30.3 $(57.6)
====== ====== ====== ======
Equity in earnings (losses)
of TIMET ............................... $ 3.2 $(17.2) $ 16.2 $(31.7)
====== ====== ====== ======
Tremont periodically evaluates the net carrying value of its long-term
assets, including its investment in TIMET, to determine if there has been any
decline in value below its amortized cost basis that is other than temporary and
would, therefore, require a write-down which would be accounted for as a
realized loss. At September 30, 2002, after considering what it believes to be
all relevant factors, including, among other things, TIMET's recent NYSE stock
prices, and TIMET's operating results, financial position, estimated asset
values and prospects, Tremont recorded a $15.7 million impairment provision for
an other than temporary decline in value of its investment in TIMET. Such
impairment provision is reported as part of the Company's equity in losses of
TIMET in the third quarter of 2002. After that writedown, at September 30, 2002,
Tremont's net carrying value of its investment in TIMET was $2.25 per share
compared to a NYSE market price at that date of $1.66 per share. In determining
the amount of the impairment charge, Tremont considered, among other things,
recent ranges of TIMET's NYSE market price and current estimates of TIMET's
future operating losses that would further reduce Tremont's carrying value of
its investment in TIMET as it records additional equity in losses of TIMET.
Tremont will continue to monitor and evaluate the value of its investment in
TIMET. In the event Tremont determines any further decline in value of its
investment in TIMET below its net carrying value has occurred which is other
than temporary, Tremont would report an additional write-down at that time.
Excluding the effect of TIMET's previously-reported legal settlement with
Boeing, its impairment charge related to certain equipment, its accruals for the
tungsten matter discussed below and the effect of the Boeing take-or-pay income,
TIMET reported lower sales and worse operating results in the third quarter and
first nine months of 2002 compared to the same periods in 2001. During the third
quarter of 2002, TIMET's mill and melted products sales volumes decreased 33%
and 54%, respectively, compared to the same period in 2001. During the first
nine months of 2002, TIMET's mill products sales volumes decreased 26% compared
to the same period in 2001, and its sales volumes of melted products decreased
45%. 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 third quarter of 2002 were 1% lower compared to the third quarter of
2001, while selling prices for its melted products decreased 5%. TIMET's average
selling prices for mill products in the first nine months of 2002 were 4% higher
compared to the same period in 2001, while selling prices for its melted
products increased 2%. 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 $1.1 million and $3.5
million in the third quarter and first nine months of 2001 (none in 2002).
TIMET's results in 2002 were negatively impacted by an increase in TIMET's
provision for excess inventories and severance costs related to TIMET's program
to reduce its global employment levels. TIMET's operating income comparisons
were also negatively impacted in 2002 by lower operating rates in 2002, with
estimated capacity utilization declining from 85% to 45% in the third quarter of
2002 compared to the third quarter of 2001 (year-to-date decline from 75% to
55%).
Under TIMET's previously-reported amended long-term agreement with Boeing,
Boeing has advanced TIMET $28.5 million for 2002, and Boeing is required to
advance TIMET $28.5 million annually from 2003 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 can only
be required, however, to deliver up to 3 million pounds per quarter. Based on
TIMET's actual deliveries to Boeing of approximately 1.2 million pounds during
the first nine months of 2002 (including 300,000 pounds during the third
quarter) and TIMET's contractual maximum obligation of delivering 3 million
pounds during the remainder of 2002, TIMET recognized income of $10.5 million
and $12.7 million in the third quarter and first nine months of 2002,
respectively, related to the take-or-pay provisions for the 3.3 million pounds
of material that TIMET is no longer obligated to provide to Boeing under the
agreement. TIMET currently expects to recognize about $10 million of additional
income during the fourth quarter of 2002 related to the take-or-pay provisions
of the contract. These earnings related to the take-or-pay provisions distort
TIMET's operating income percentages as there is no corresponding amount
reported in TIMET's sales.
TIMET's results in the first nine months of 2002 also includes a $27.5
million first quarter 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 2002
periods 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 during 2001, and an additional $200,000 during the second
quarter of 2002, for its best estimate of the most likely amount of loss it will
incur with respect to this matter. However, it does not represent the maximum
possible loss, which TIMET is not presently able to estimate, and the amount
accrued may be periodically revised in the future as more facts become known. As
of September 30, 2002, TIMET has received claims aggregating approximately $5
million, and TIMET had settled claims totaling $500,000. Pending claims are
being investigated and negotiated, and TIMET believes certain of the claims are
without merit and can be settled for less than the amount of the claim. There is
no assurance that all potential claims have yet been submitted to TIMET. TIMET
has filed suit seeking full recovery from its silicon supplier for any liability
TIMET might incur, although no assurances can be given that TIMET will
ultimately be able to recover all or any portion of such amounts. TIMET has not
recorded any recoveries related to this matter as of September 30, 2002.
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 expects that aggregate
industry mill product shipments will decrease in 2002 by approximately 18% to
about 45,000 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. Based on The Airline Monitor's July 2002 forecast and TIMET's
projected changes in supply chain inventory levels, TIMET anticipates a cyclical
trough in titanium demand may occur in 2003 with a gradual recovery beginning
thereafter. Adverse world events, including terrorist activities and conflicts
in the Middle East or elsewhere, could have a significant adverse impact on the
financial health of commercial airlines and economic growth in the U.S. and
other regions of the world. Any such events, which are not contemplated in
TIMET's outlook, could prolong and exacerbate the current commercial aerospace
slowdown.
Although the current business environment makes it particularly difficult
to predict TIMET's future financial performance, TIMET expects its sales revenue
for the fourth quarter of 2002 to range between $75 million and $85 million.
Mill product sales volumes are expected to be about 2,200 metric tons with
melted product shipments of about 700 metric tons. Interest expense should be
about $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 fourth quarter of 2002 before special items of between
$5 million and $10 million, and a net loss before special items of between $10
million and $15 million.
TIMET expects its sales for all of 2002 will range from $360 million to
$370 million, reflecting the combined effects of decreases in sales volumes,
softening of market selling prices and changes in customer and product mix. Mill
product sales volumes are expected to decline approximately 25% relative to 2001
to about 9,000 metric tons, and melted product sales volumes are expected to
decline by 40% to about 2,600 metric tons. The sales volumes decline in 2002 is
principally driven by an anticipated reduction in TIMET's commercial aerospace
sales volumes of about 40% compared to 2001, partly offset by sales volume
growth to other markets. TIMET expects its selling prices on new orders for
titanium products will continue to soften throughout the remainder of 2002.
Overall, TIMET currently expects to report an operating loss before special
items for all of 2002 of between $25 million and $30 million in 2002, and a net
loss before special items of between $45 million and $50 million.
As a consequence of uncertainties surrounding both the titanium and
commercial aerospace industries and broader economic conditions, TIMET believes
assessments of the recoverability of its long-lived assets, that may also result
in special charges for asset impairments, could occur in the balance of 2002.
Such potential future charges, if any, could be material to TIMET.
TIMET's outlook for 2003 is for a continuing difficult business environment
reflecting the severe downturn in the commercial aerospace industry and sluggish
economy. The commercial aerospace sector is the major source of demand for
TIMET's products. Although workforce reduction actions undertaken by TIMET in
2002 are expected to result in annual savings of between $12 million and $15
million, TIMET's early expectations are that its sales and financial results
during 2003 may be similar to 2002. However, TIMET is conscious of the
meaningful risks posed by the continuing war on terrorism, and potential
conflicts in the Middle East, Iraq and elsewhere. These and other adverse world
events could prolong and exacerbate the downturn in the commercial aerospace
industry and have broader economic consequences.
In addition to its agreement with Boeing, TIMET has long-term supply
agreements with certain other major aerospace customers, including, but not
limited to, Rolls-Royce plc, United Technologies Corporation (Pratt & Whitney
and related companies) and Wyman-Gordon Company (a unit of Precision Castparts
Corporation). These agreements initially became effective in 1998 and 1999 and
expire in 2007 through 2008, subject to certain conditions. The agreements
generally provide for (i) minimum market shares of the customers' titanium
requirements or firm annual volume commitments and (ii) fixed or
formula-determined prices generally for at least the first five years of the
contract term. Generally, the agreements require TIMET's service and product
performance to meet specified criteria, and also contain a number of other terms
and conditions customary in transactions of these types. In certain events of
nonperformance by TIMET, the agreements may be terminated early. Additionally,
under a group of related agreements (which group represents approximately 15% of
TIMET's 2001 sales revenue), which currently have fixed prices that convert to
formula-derived prices in 2004, the customer may terminate the agreement as of
the end of 2003 if the effect of the initiation of formula-derived pricing would
cause such customer "material harm." If any of such agreements were to be
terminated by the customer on this basis, it is possible that some portion of
the business represented by that agreement would continue on a non-agreement
basis. However, the termination of one or more of such agreements by the
customer in such circumstances could result in a material and adverse effect on
TIMET's business, results of operations, consolidated financial condition or
liquidity.
In September 2002, TIMET entered into a long-term agreement, effective from
January 1, 2002 through December 31, 2007, for the purchase of titanium sponge.
This agreement replaced and superceded a previous agreement entered into in by
TIMET in 1997. The new agreement requires annual minimum purchases by TIMET of
approximately $10 million.
General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend income decreased in the third quarter and first nine months of 2002
compared to the same periods in 2001 due to a lower average level of invested
funds and lower average yields. Aggregate general corporate interest and
dividend income is currently expected to continue to be lower during the
remainder of 2002 compared to the same period in 2001 due primarily to a lower
amount of funds available for investment and lower average interest rates.
Legal settlement gains. The legal settlement gains in the first nine months
of 2002 relate to NL's settlements with certain former insurance carriers. See
Note 12 to the Consolidated Financial Statements. These settlements, 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 insurance coverages are
expected.
Securities transactions. Securities transactions gains in the first nine
months of 2002 relate to the first quarter disposal of certain shares of
Halliburton Company common stock held by the Company that were classified as
trading securities. See Notes 3 and 12 to the Consolidated Financial Statements.
The remaining Halliburton shares held by the Company at September 30, 2002 were
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. In October 2002, following the redemption of
substantially all of the remaining LYONs, substantially all of such Halliburton
shares were released to the Company from escrow and were sold in market
transactions aggregate proceeds of $9.5 million. The Company expects to report a
securities transaction gain in the fourth quarter of 2002 of $4.5 million
related to the sale of these Halliburton shares.
Other general corporate income items. The $6.3 million foreign currency
transaction gain in the second quarter of 2002 relates to the extinguishment of
certain intercompany indebtedness of NL. The gain on disposal of fixed assets
relates to the sale of certain real estate held by Tremont.
General corporate expenses. Net general corporate expenses in the third
quarter and first nine months of 2002 were higher than the same periods in 2001,
as higher environmental and legal expenses of NL were only partially offset by
the effect of lower compensation-related expenses of Tremont. 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 ($3 million
recognized in the first nine months of 2001 and 2002). See Note 12 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 in the first nine months of 2002
includes $2.0 million related to the second quarter loss on the early
extinguishment of NL's Senior Secured Notes. See Note 9 to the Consolidated
Financial Statements. Interest expense declined in the first nine months of 2002
compared to the same periods in 2001 due primarily to lower average levels of
outstanding 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.
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rates are explained in Note 11 to the Consolidated Financial
Statements. Income tax rates vary by jurisdiction (country and/or state), and
relative changes in the geographic mix of the Company's pre-tax earnings can
result in fluctuations in the effective income tax rate. In addition, the
absolute level of pre-tax earnings can impact the Company's effective income tax
rate due to income items included in pre-tax earnings which are not subject to
tax or expense items for which there is no tax benefit.
During the first nine months of 2002, NL reduced its deferred income tax
asset valuation allowance by approximately $2.7 million, primarily as a result
of utilization of certain income tax attributes for which the benefit had not
previously been recognized. In this regard, no income tax was recognized on NL's
$6.3 million general corporate foreign currency transaction gain, as NL offset
such income tax by utilizing certain income tax attributes, the benefit of which
had not previously been recognized. During the first nine months of 2002,
Tremont increased its deferred income tax asset valuation allowance (at the
Valhi consolidated level) by a net $3.6 million 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 impacted the
Company's overall effective income tax rate in 2002 as compared to 2001.
At September 30, 2002, NL had the equivalent of approximately $371 million
of income tax loss carryforwards in Germany with no expiration date. However, NL
has provided a deferred tax valuation allowance against substantially all of
these income tax loss carryforwards because NL currently believes they do not
meet the "more-likely-than-not" recognition criteria. The German federal
government has proposed certain changes to its income tax law, including certain
changes that would impose limitations on utilization of income tax loss
carryforwards, that as proposed would become effective January 1, 2003. Since NL
has provided a deferred income tax asset valuation allowance against
substantially all of these German tax loss carryforwards, any limitation on NL's
ability to utilize such carryforwards resulting from enactment of any of these
proposals would not have a material impact on NL's net deferred income tax
liability. However, if enacted, the proposed changes could have a material
impact on NL's ability to fully utilize its German income tax loss
carryforwards, which would significantly affect the Company's future income tax
expense and future German income tax payments. NL does not currently expect any
enactment of these proposals would occur prior to January 1, 2003.
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 nine months of 2001 and 2002.
In July 2002, Valhi proposed a merger of Valhi and Tremont pursuant to
which stockholders of Tremont (including NL, to the extent of NL's ownership
interest in the Tremont shares held by Tremont Group), other than Valhi, would
receive shares of Valhi common stock for each Tremont share held. See Note 2 to
the Consolidated Financial Statements. Tremont formed a special committee of its
board of directors consisting of directors unrelated to Valhi to review the
proposal. The special committee retained their own independent financial and
legal advisors. After performing due diligence and evaluating the merits of
Valhi's proposal, the special committee and their advisors negotiated the
financial and other terms of a definitive merger agreement with Valhi. In
November 2002, Tremont, based upon the recommendation of their special
committee, and Valhi reached an agreement on the terms of the definitive merger
agreement in which, among other things, the Tremont stockholders referred to
above would receive 3.4 shares of Valhi common stock for each share of Tremont
common stock held in a tax-free exchange. The transaction has been approved by
the board of directors of both Valhi and Tremont. The financial advisors to the
special committee have issued an opinion to the special committee stating that
the exchange ratio is fair, from a financial point of view, to Tremont
stockholders other than Valhi and its affiliates. The transaction is subject to
customary closing conditions and will require approval by a majority of the
outstanding shares of Tremont. Tremont Group has indicated that it intends to
vote its shares in favor of the merger. Valhi will file a registration statement
with the SEC in connection with the transaction. The date of the Tremont
stockholders meeting will be established as soon as practical following
completion of the filing with the SEC. Once the merger is completed, the Company
will no longer report minority interest in Tremont's net assets or net earnings
(losses).
Accounting principles 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 64% of the Company's
consolidated capital expenditures in the first nine months of 2002 relate to NL,
35% relate to CompX and substantially all of the remainder relate to Waste
Control Specialists. Approximately $2.6 million of NL's capital expenditures
relates to the ongoing reconstruction of NL's Leverkusen, Germany TiO2
production facility that was damaged by fire during 2001. NL expects such
reconstruction will be completed by the end of 2002. During the first nine
months of 2002, NL purchased $10.6 million 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 nine months of 2002, (i) Valhi repaid a net $1.9 million
of its short-term demand loans from Contran, (ii) CompX repaid a net $18 million
of its revolving bank credit facility, (iii) NL repaid all of its existing
short-term notes payable denominated in euros and Nowegian kroner ($53 million
when repaid) using primarily proceeds from borrowings ($39 million) under KII's
new revolving bank credit facility, (iv) NL redeemed $194 million principal
amount of its Senior Secured Notes, primarily using the proceeds from the new
euro 285 million ($280 million when issued) borrowing of KII and (v) NL repaid
an aggregate of euro 13 million ($12 million when repaid) of borrowings under
KII's revolving bank credit facility. See Note 9 to the Consolidated Financial
Statements.
At September 30, 2002, unused credit available under existing credit
facilities approximated $195.4 million, which was comprised of $69 million
available to CompX under its revolving credit facility, $90 million available to
NL (primarily under KII's new revolving credit facility and a new $50 million
facility collateralized by certain of NL's U.S. assets) 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 payment defaults or 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 September 30, 2002, NL had cash, cash equivalents and marketable debt
and other securities of $243 million, including restricted balances of $72
million, and NL had $90 million available for borrowing under its existing
credit facilities.
NL's board of directors has authorized NL to purchase up to an aggregate of
6.0 million shares of its common stock in open market or privately-negotiated
transactions over an unspecified period of time, including 1.5 million shares
authorized by NL's board in October 2002. Through September 30, 2002, NL had
purchased 4 million of its shares pursuant to such authorizations for an
aggregate of $64.2 million, including approximately 719,000 shares purchased
during the first nine months of 2002 for an aggregate of $10.6 million.
In addition to its regular quarterly dividend of $.20 per share, in
November 2002, NL's board of directors declared an additional dividend of $2.50
per share, payable in December 2002. Based on the approximately 47.7 million NL
shares outstanding as of November 12, 2002, NL's special dividend would
aggregate approximately $119 million, including $75.3 million that will be paid
to Valhi and $25.5 million that will be paid to Tremont.
In March 2002, NL redeemed $25 million principal amount of its Senior
Secured Notes, and in June 2002 NL redeemed the remaining $169 million principal
amount of such Senior Secured Notes. See Note 9 to the Consolidated Financial
Statements.
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 and EMS' 1998 U.S. federal income tax returns are
currently being examined by the U.S. tax authorities, and NL and EMS have
granted extensions of the statute of limitations for assessments until September
30, 2003. Based on the course of the examination to date, NL anticipates that
the U.S. tax authorities may propose a substantial tax deficiency. 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 euro 10.4 million ($10 million at September 30, 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 and tax 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 ("PRP"), 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 ($100
million at September 30, 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 $140 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 the
precedent set by 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.
Component products - CompX International
CompX expects to replace its existing revolving bank credit facility prior
to its expiration in February 2003 with a new credit facility. CompX anticipates
voluntarily reducing the new facility from $100 million to $50 million in line
with CompX's current credit needs. A $50 million facility is currently expected
to be adequate to meet CompX's liquidity and working capital requirements. CompX
expects the new facility will be secured and bear interest at a higher rate than
its existing facility, which in part reflects current market conditions. There
can be no assurance that CompX will be able to successfully negotiate a
replacement credit facility, or that the terms of any replacement facility
obtained will be on the terms as described above.
Certain of CompX's sales generated by its Canadian operations are
denominated in U. S. dollars. To manage a portion of the foreign exchange rate
risk associated with such receivables or similar exchange rate risk associated
with future sales, CompX periodically enters into short-term forward currency
exchange contracts. At each balance sheet date, any such outstanding currency
forward contracts are marked-to-market with any resulting gain or loss
recognized in income currently. These contracts are not accounted for as hedging
instruments under GAAP. At September 30, 2002, CompX held contracts to exchange
$9 million for an equivalent amount of Canadian dollars at an average exchange
rate of Cdn. $1.57 per U.S. dollar. Such contracts mature through January 2003.
The actual exchange rate at September 30, 2002 was Cdn. $1.58 per U.S. dollar,
and the estimated fair value of such contracts was not material.
CompX periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements in light of its capital resources
and estimated future operating cash flows. As a result of this process, CompX
has in the past and may in the future seek to raise additional capital,
refinance or restructure indebtedness, issue additional securities, modify its
dividend policy, repurchase shares of its common stock or take a combination of
such steps or other steps to manage its liquidity and capital resources. In the
normal course of business, CompX may review opportunities for acquisitions,
divestitures, joint ventures or other business combinations in the component
products industry. In the event of any such transaction, CompX may consider
using available cash, issuing additional equity securities or increasing the
indebtedness of CompX or its subsidiaries.
Waste management - Waste Control Specialists
At September 30, 2002, Waste Control Specialists' indebtedness, as amended,
consists principally of (i) a $4.6 million term loan due in November 2004 and
(ii) $16.7 million of other borrowings under a $17.5 million revolving credit
facility that, as amended, also 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 $17.5 million
revolving credit facility.
TIMET
At September 30, 2002, TIMET had net debt of approximately $14.1 million
($18.7 million of debt and $4.6 million of cash and equivalents).
As previously-reported, in March 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 in
the first quarter of 2002 for an other than temporary decline in the fair value
of its investment in SMC, reducing TIMET's carrying amount of its investment in
SMC to zero.
TIMET is involved in various environmental, contractual, product liability
and other claims, disputes and litigation incidental to its business including
those discussed above. While TIMET's management, including internal counsel,
currently believes that the outcome of these matters, individually and in the
aggregate, will not have a material adverse effect on TIMET's financial
position, liquidity or overall trends in results of operations, all such matters
are subject to inherent uncertainties. Were an unfavorable outcome to occur in
any given period, it is possible that it could have a material adverse impact on
TIMET's results of operations or cash flows in a particular period.
At September 30, 2002, TIMET had accrued an aggregate of $3.7 million for
environmental matters, including the previously-reported matter relating to the
site at its Nevada facility. TIMET records liabilities related to environmental
remediation obligations when estimated future expenditures are probable and
reasonably estimable. Such accruals are adjusted as further information becomes
available or circumstances change. Estimated future expenditures are not
discounted to their present value. It is not possible to estimate the range of
costs for certain sites. The imposition of more stringent standards or
requirements under environmental laws or regulations, the results of future
testing and analysis undertaken by TIMET at its operating facilities, or a
determination that TIMET is potentially responsible for the release of hazardous
substances at other sites, could result in expenditures in excess of amounts
currently estimated to be required for such matters. No assurance can be given
that actual costs will not exceed accrued amounts or that costs will not be
incurred with respect to sites as to which no problem is currently known or
where no estimate can presently be made. Further, there can be no assurance that
additional environmental matters will not arise in the future.
At September 30, 2002, TIMET had accrued an aggregate of $600,000 for
expected costs related to various legal proceedings. TIMET records liabilities
related to legal proceedings when estimated losses, including estimated legal
fees, are probable and reasonably estimable. Such accruals are adjusted as
further information becomes available or circumstances change. Estimated future
costs are not discounted to their present value. It is not possible to estimate
the range of costs for certain matters. No assurance can be given that actual
costs will not exceed accrued amounts or that costs will not be incurred with
respect to matters as to which no problem is currently known or where no
estimate can presently be made. Further, there can be no assurance that
additional legal proceedings will not arise in the future.
TIMET is the primary obligor on two worker compensation bonds issued on
behalf of a former subsidiary of TIMET. Each of the bonds has a maximum
obligation of $1.5 million. The bonds were provided as part of the conditions
imposed upon the former subsidiary in order to self-insure its workers
compensation obligations. In July 2001, the former subsidiary filed for Chapter
11 bankruptcy protection. During the third quarter of 2002, TIMET received
notices that the issuers of the bonds have been required to make payments on one
of the bonds in respect to certain of these claims and have requested
reimbursement from TIMET for claims paid through September 17, 2002 in the
amount of approximately $.3 million, which TIMET has accrued as of September 30,
2002. In addition, TIMET may be liable for up to an additional $1.2 million on
this bond if further claims on this bond are filed. Based upon current loss
projections, TIMET anticipates payouts of at least an additional $.6 million
under the bond and has accrued such amount at September 30, 2002. At this time
the insurance company has not paid any claims under the other bond, and no such
payments are currently anticipated. Accordingly, no accrual has been recorded
for potential claims that could be filed under the other bond. TIMET may revise
its estimated liability under these bonds in the future.
In October 2002, TIMET amended its existing U.S. asset-based revolving
credit agreement extending the maturity date to February 2006. Under the terms
of the amendment, borrowings are limited to the lesser of $90 million or a
formula-determined borrowing base derived from the value of TIMET's accounts
receivable, inventory and equipment. This facility requires TIMET's U.S. daily
cash receipts to be used to reduce outstanding borrowings, which may then be
reborrowed, subject to the terms of the agreement. Borrowings are collateralized
by substantially all of TIMET's U.S. assets. The credit agreement prohibits the
payment of dividends on TIMET's convertible preferred securities if excess
availability, as defined, is less than $25 million, limits additional
indebtedness, prohibits the payment of dividends on TIMET's common stock if
excess availability is less than $40 million, requires compliance with certain
financial covenants and contains other covenants customary in lending
transactions of this type. Excess availability is defined as unused borrowing
availability less certain contractual commitments such as letters of credit. As
of the October 2002 amendment date, unused borrowing availability was
approximately $69 million.
TIMET's U.S. credit agreement allows the lender to modify the borrowing
base formulas at its discretion, subject to certain conditions. During the
second quarter of 2002, TIMET's lender elected to exercise such discretion and
modified TIMET's borrowing base formulas, which reduced the amount that TIMET
could borrow against its inventory and equipment by approximately $7 million. In
the event the lender exercises such discretion in the future, such event could
have a material adverse impact on TIMET's liquidity.
TIMET's United Kingdom subsidiary also has a credit agreement that provides
for borrowings limited to the lesser of pound sterling 30 million or a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and equipment. As of September 30, 2002, the outstanding balance of
this facility was approximately $1.3 million with unused borrowing availability
was approximately $37 million.
TIMET also has overdraft and other credit facilities at certain of its
other European subsidiaries. These facilities accrue interest at various rates
and are payable on demand. Unused borrowing availability as of September 30,
2002 under these facilities was approximately $13 million.
In September 2002, Moody's Investor Service downgraded its rating on
TIMET's convertible preferred securities to Caa2 from B3, and Standard & Poor's
Ratings Services lowered its rating on such securities to CCC- from CCC. S&P has
further indicated that it will lower its credit rating on such securities to D
after the dividend payment due on December 1, 2002 is actually deferred. TIMET's
ability to obtain additional capital in the future, or its ability to obtain
capital on terms TIMET deemed appropriate, could be negatively affected by these
downgrades.
In October 2002, TIMET exercised its right to defer future dividend
payments on its convertible preferred securities for a period of up to 20
consecutive quarters. Dividends will continue to accrue and interest will
continue to accrue at the coupon rate on the principal and unpaid dividends.
This deferral is effective for TIMET's December 1, 2002 scheduled dividend
payment. TIMET may consider resuming payment of dividends on the convertible
preferred securities once the outlook for TIMET's results from operations
improves substantially`. Since TIMET exercised its right to defer dividend
payments, it is unable to, among other things, pay dividends on or reacquire its
capital stock during the deferral period.
In November 2002, TIMET announced that its board of directors had
unanimously approved a reverse split of TIMET's common stock at a ratio ranging
from one-for-eight up to and including one-for-ten. The reverse stock split
proposal will be submitted to TIMET's stockholders for approval at an upcoming
special meeting called for that purpose. TIMET will announce the date, time and
place of its special meeting once it has been determined. Assuming stockholder
approval, the TIMET board of directors will determine the applicable reverse
split ratio and implement the reverse stock split at that ratio, but will retain
the discretion not to proceed with this transaction if it determines that it is
not in the best interest of TIMET or its stockholders. Implementing such TIMET
reverse stock split would have no financial statement impact to the Company, and
Tremont's ownership interest in TIMET would not change as a result of the
reverse stock split. TIMET also announced that its board of directors also
approved a reduction in the number of shares of TIMET common stock that it is
authorized to issue from 100 million to 10 million. Such reduction, also subject
to TIMET stockholder approval, would become effective upon implementation of the
reverse split.
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 September 30, 2002, owned
approximately 39% of TIMET and 21% of NL. At September 30, 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 $20 million and $148 million, respectively.
As previously reported, in July 2000 Tremont entered into a voluntary
settlement agreement with the Arkansas Department of Environmental Quality and
certain other PRPs pursuant to which Tremont and the other PRPs will undertake
certain investigatory and interim remedial activities at a former mining site
located in Hot Springs County, Arkansas. Tremont currently believes that it has
accrued adequate amounts ($4.0 million at September 30, 2002) to cover its share
of probable and reasonably estimable environmental obligations for these
activities. No reasonable estimate can currently be made of any final
remediation measures which might be imposed.
Tremont has received a demand from Halliburton to assume the defense of,
and indemnify Halliburton with respect to, the alleged liability of Atlas
Bradford Corporation as one of several PRPs in connection with a Texas State
Superfund Site known as the Force Road Oil and Vacuum Truck Company Site located
in Arcola, Texas. Atlas Bradford allegedly disposed of wastes from its Bryan,
Texas petroleum services operations at the Force Road Site. As part of a 1990
restructuring resulting in the separation of Tremont from Baroid Corporation, a
wholly-owned subsidiary of Tremont received title to the Bryan property.
Halliburton is the successor to Baroid. Tremont has declined to assume the
defense of the Force Road Site matter and has rejected Halliburton's indemnity
claim with respect thereto. Tremont believes that any liability in the Force
Road Site matter represents an obligation retained by Baroid in connection with
its historical petroleum services business. A subsidiary of Halliburton, along
with 15 other respondents, executed an Agreed Administrative Order with the
Texas Natural Resource Conservation Commission dated August 29, 2002, pursuant
to which the Respondents agreed to perform a site investigation and feasibility
study of the site. Tremont has not been provided any information or basis to
believe that it might have any liability for the Force Road Site, but has been
informed that present cost estimates for the site investigation are currently
expected to be less than $1 million. Tremont intends to vigorously defend itself
against any and all allegations of such liability in this matter. Tremont
presently believes, based upon the relatively small volume of material disposed
of at the site from the Bryan, Texas operations, that, any associated liability
would not be material. Tremont sold the Bryan property in 1994. Tremont's
Chairman and Chief Executive Officer is also a member of the board of directors
of Halliburton and intends to recuse himself from any involvement in this
matter. NL is one of the named respondents at the site, as well.
Tremont records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are not discounted to
their present value. It is not possible to estimate the range of costs for
certain sites, including the Hot Springs County, Arkansas site discussed above.
The imposition of more stringent standards or requirements under environmental
laws or regulations, the results of future testing and analysis undertaken by
Tremont at its non-operating facilities, or a determination that Tremont is
potentially responsible for the release of hazardous substances at other sites,
could result in expenditures in excess of amounts currently estimated to be
required for such matters. No assurance can be given that actual costs will not
exceed accrued amounts or that costs will not be incurred with respect to sites
as to which no problem is currently known or where no estimate can presently be
made. Further, there can be no assurance that additional environmental matters
will not arise in the future. Environmental exposures are difficult to assess
and estimate for numerous reasons including the complexity and differing
interpretations of governmental regulations; the number of PRPs and the PRPs
ability or willingness to fund such allocation of costs, their financial
capabilities, the allocation of costs among PRPs; the multiplicity of possible
solutions; and the years of investigatory, remedial and monitoring activity
required. It is possible that future developments could adversely affect
Tremont's business, results of operations, financial condition or liquidity.
There can be no assurances that some, or all, of these risks would not result in
liabilities that would be material to Tremont's business, results of operations,
financial position or liquidity.
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 ($11.9 million
outstanding at September 30, 2002), collateralized by 10.2 million shares of NL
common stock owned by Tremont, is eliminated in Valhi's consolidated financial
statements. In October 2002, Tremont entered into a new $15 million revolving
credit facility with NL, also collateralized by the shares of NL common stock
owned by Tremont, which replaced its loan from EMS. The new facility, which
matures in December 2004, will also be eliminated in Valhi's consolidated
financial statements.
Tremont expects to receive approximately $25.5 million from NL's additional
dividend in the fourth quarter of 2002, as discussed above. Tremont expects to
use approximately $12 million of such dividend to repay the outstanding balance
of its revolving loan from NL, which revolving credit facility Tremont expects
to maintain. The remainder of such dividend will be available for Tremont's
general corporate purposes.
In April 2002, Tremont reached an agreement 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 was settled. The
settlement resulted in no additional cash income tax payment by Tremont but did
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 regular quarterly dividend from $.035 per share
to $.15 per share in the first quarter of 2000, and NL further increased its
regular quarterly dividend to $.20 per share in the fourth quarter of 2000. At
the current $.20 per share quarterly rate, and based on the 30.1 million NL
shares held by Valhi at September 30, 2002, Valhi would receive aggregate annual
regular dividends from NL of approximately $24.1 million. NL also expects to pay
a special dividend in the fourth quarter of 2002, as discussed below. Tremont
Group, Inc. owns 80% of Tremont Corporation. Tremont Group is owned 80% by Valhi
and 20% by NL. Tremont's regular quarterly dividend is currently $.07 per share.
At that rate, and based upon the 5.1 million Tremont shares owned by Tremont
Group at September 30, 2002, Tremont Group would receive aggregate annual
regular dividends from Tremont of approximately $1.4 million. Tremont Group
intends to pass-through the regular 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 regular dividends from Tremont Group
as a pass-through of Tremont Group's dividends from Tremont. CompX's regular
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 September 30, 2002, Valhi/Valcor would receive annual regular
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 September 30, 2002, Valhi had $5.2 million of parent level cash and cash
equivalents, had $35 million of outstanding borrowings under its revolving bank
credit agreement and had $23 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. In October 2002, holders
representing substantially all of the Company's LYONs exercised their right to
require the Company to redeem their LYONs for a cash redemption price of $27.3
million. Funds to pay the redemption price were provided by borrowings under
Valhi's revolving bank credit facility. Following the redemption of
substantially all of Valhi's remaining LYONs, approximately 619,000 shares of
Halliburton common stock were released to the Company from the LYONs escrow and
were sold in market transactions for aggregate proceeds of $9.5 million. The
Company has called the remaining nominal amount of LYONs for redemption in
December 2002.
In November 2002, the maturity date of Valhi's bank credit facility was
extended to October 31, 2003. At the same time, the size of the facility was
reduced to $70 million.
Valhi expects to receive approximately $75.3 million from NL's additional
dividend in the fourth quarter of 2002, as discussed above. Valhi expects to use
a portion of such dividend to repay the outstanding balance of its revolving
bank credit facility ($62 million), which revolving bank credit facility Valhi
expects to maintain. Valhi expects to use the remainder of such dividend to
reduce the outstanding balance of its short-term demand loan payable to Contran.
The terms of The Amalgamated Sugar Company LLC provide for annual "base
level" of cash dividend distributions (sometimes referred to as 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 occurs in 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 Sugar Company.
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
September 30, 2002, the accrued and unpaid interest on the $80 million loan to
Snake River aggregated $26.6 million. Such accrued and unpaid interest is
classified as a noncurrent asset at September 30, 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 or the 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.
The Company may, at its option, require the LLC to redeem the Company's
interest in the LLC beginning in 2010, and the LLC has the right to redeem the
Company's interest in the LLC beginning in 2027. The redemption price is
generally $250 million plus the amount of certain undistributed income allocable
to the Company. In the event the Company requires the LLC to redeem the
Company's interest in the LLC, Snake River has the right to accelerate the
maturity of and call Valhi's $250 million loans from Snake River. 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. However, because of Snake River's ability to call its $250
million loans to Valhi upon redemption of the Company's interest in the LLC, the
net cash proceeds (after repayment of the debt) 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.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the
Securities and Exchange Commission ("SEC"), means controls and other procedures
that are designed to ensure that information required to be disclosed in the
reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, as appropriate
to allow timely decisions to be made regarding required disclosure. Each of
Steven L. Watson, the Company's President and Chief Executive Officer, and Bobby
D. O'Brien, the Company's Vice President, Chief Financial Officer and Treasurer,
have evaluated the Company's disclosure controls and procedures as of a date
within 90 days of the filing date of this Form 10-Q. Based upon their
evaluation, these executive officers have concluded that the Company's
disclosure controls and procedures are effective as of the date of such
evaluation.
The Company also maintains a system of internal controls. The term
"internal controls," as defined by the American Institute of Certified Public
Accountants' Codification of Statement on Auditing Standards, AU Section 319,
means controls and other procedures designed to provide reasonable assurance
regarding the achievement of objectives in the reliability of the Company's
financial reporting, the effectiveness and efficiency of the Company's
operations and the Company's compliance with applicable laws and regulations.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date of their last evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the 2001 Annual Report and prior 2002 periodic reports
for descriptions of certain legal proceedings.
In late July 2002, following the announcement of the proposed merger of
Tremont and Valhi, four separate complaints were filed in the Court of Chancery
of the State of Delaware, New Castle County, against Tremont, Valhi and members
of Tremont's board of directors (Crandon Capital Partners, et al. v. J. Landis
Martin, et al., Andrew Neyman v. J. Landis Martin, et al., Herman M. Weisman
Revocable Trust v. J. Landis Martin, et al. and Alice Middleton v. J. Landis
Martin, et al.). In August 2002, at the request of the parties, the court
ordered that these actions be consolidated under the caption In Re Tremont
Corporation Shareholders Litigation (Consolidated C.A. No. 19785-NC) and that by
November 21, 2002, or such later date as the parties may agree, counsel for the
plaintiffs must file and serve a consolidated amended shareholder complaint. The
complaints, purported class actions, generally allege, among other things, that
the terms of the proposed merger of Valhi and Tremont are unfair, and that
defendants have violated their fiduciary duties. The complaints seek, among
other things, an order enjoining consummation of the proposed merger and the
award of unspecified damages, including attorney's fees and other costs. The
Company believes, and understands that each of the other defendants believe,
that the complaint is without merit, and intends, and understands that each of
the other defendants intend, to defend against the action vigorously.
State of Rhode Island v. Lead Industries Association, et al. (Superior
Court of Rhode Island, No. 99-5226). Trial began in phase I of this
previously-reported case before a Rhode Island state court jury in September
2002. On October 29, 2002, the trial judge declared a mistrial in the case when
the jury was unable to reach a verdict on the question of whether lead pigment
in paint on Rhode Island buildings is a public nuisance. No date has been set
for any further proceedings, including any possible retrial of the public
nuisance issue. Other claims made by the Attorney General, including violation
of the Rhode Island Unfair Trade Practices and Consumer Protection Act, strict
liability, negligence, negligent and fraudulent misrepresentation, civil
conspiracy, indemnity, and unjust enrichment remain pending and were not the
subject of this trial. Post trial motions by plaintiff and defendants for
judgment notwithstanding the mistrial are pending.
In September 2002, NL was served with a complaint in City of Chicago v.
American Cyanamid, et al. (Circuit Court of Cook County, Illinois, No.
02CH16212). The City of Chicago seeks damages to abate lead paint in a
single-count complaint alleging public nuisance against NL and seven other
former manufacturers of lead pigment. The time to respond to the complaint has
not yet occurred.
In October 2002, NL was served with a complaint in Walters v. NL
Industries, et al. (Kings County Supreme Court, New York, No. 28087/2002). A
single individual seeks compensatory and punitive damages from NL and five other
former manufacturers of lead pigment for childhood exposures to lead paint. The
complaint alleges causes of action in negligence and strict product liability
and seeks joint and several liability with claims of civil conspiracy, concert
of action, enterprise liability, and market share or alternative liability. The
time to respond to the complaint has not yet occurred.
Borden, et al. v. The Sherwin-Williams Company, et al. (Circuit Court of
Jefferson County, Mississippi, Civil Action No. 2000-587). In October 2002, the
court set a June 2003 trial date in this previously-reported matter.
Spring Branch Independent School District v. Lead Industries Association,
et al. (District Court of Harris County, Texas, No. 2000-31175). Plaintiff has
filed an appeal of the grant of summary judgment in favor of NL.
In the previously reported cases of Houston Independent School District,
Harris County, Brownsville Independent School District, and Liberty Independent
School District, pending in various Texas state courts, each court has entered
an order abating, or staying, the case pending the result of the appeal in the
Spring Branch Independent School District case.
Gaines, et al., v. The Sherwin-Williams Company, et al. (Circuit Court of
Jefferson County, Mississippi, Civil Action No. 2000-0604). Plaintiffs have
voluntarily dismissed NL with prejudice in this previously-reported case.
In re Lead Paint Litigation (Superior Court of New Jersey, Law Division,
Middlesex County Civil Action Docket No. Mid-L-2754-01, Case Code 247). In
November 2002, the court entered an order dismissing this previously-reported
action with prejudice. The time for the filing of an appeal has not run.
Jefferson County School District v. Lead Industries Association, et al.
(District Court of Jefferson County, Mississippi, Case No. 2001-69). In November
2002, plaintiffs agreed to voluntarily dismiss with prejudice this
previously-reported case.
El Paso Independent School District v. Lead Industries Association, et al.
(District Court of El Paso County, Texas, No. 2002-2675). In November 2002, the
plaintiff in this previously-reported case dismissed its case without prejudice.
Since the filing of NL's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002, NL has been named as a defendant in asbestos and/or silica
cases in various jurisdictions brought on behalf of approximately 2,700
additional personal injury claimants. Included in the foregoing total is one
case in Mississippi state court involving approximately 2,100 plaintiffs (Jones
v. A. O. Smith, et al., Circuit Court, Judicial District, Jasper County,
Mississippi). NL anticipates that various of these cases will be set for trial
from time-to-time for the foreseeable future. In addition, cases on behalf of
approximately 2,600 such personal injury plaintiffs have been dismissed or
settled for immaterial amounts.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 - Agreement and Plan of Merger dated November 4, 2002 by
and among Valhi, Inc., Valhi Acquisition Corp. and
Tremont Corporation.
10.2 - Amendment No. 1 to the Agreement and Plan of Merger by
and among Valhi, Inc., Valhi Acquisition Corp. and
Tremont Corporation dated November 12, 2002.
10.3 - Agreement and Plan of Merger dated November 4, 2002 by
and among Valhi, Inc., Tremont Group, Inc. and Valhi
Acquisition Corp. II.
10.4 - Intercorporate Services Agreement between Contran
Corporation and Valhi, Inc. effective as of January 1,
2002.
*10.5 - Agreement between Sachtleben Chemie GmbH and Kronos
Titan-GmbH effective as of December 30, 1988 -
incorporated by reference to Exhibit No. 10.1 to Kronos
International's Quarterly Report on Form 10-Q (File No.
333-100047) for the quarter ended September 30, 2002.
*10.6 - Supplementary Agreement dated as of May 3, 1996 to the
Agreement effective as of December 30, 1986 between
Sachtleben Chemie GmbH and Kronos Titan-GmbH. -
incorporated by reference to Exhibit No. 10.2 to Kronos
International's Quarterly Report on Form 10-Q (File No.
333-100047) for the quarter ended September 30, 2002.
*10.7 - Second Supplementary Agreement dated as of January 8,
2002 to the Agreement effective as of December 30, 1986
between Sachtleben Chemie GmbH and Kronos Titan-GmbH. -
incorporated by reference to Exhibit No. 10.3 to Kronos
International's Quarterly Report on Form 10-Q (File No.
333-100047) for the quarter ended September 30, 2002.
99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
* Portions of these exhibit have been omitted pursuant to a request for
confidential treatment made by NL.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended September 30, 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 November 14, 2002 By /s/ Bobby D. O'Brien
---------------------------------
Bobby D. O'Brien
Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
Date November 14, 2002 By /s/ Gregory M. Swalwell
------------------------------------
Gregory M. Swalwell
Vice President and Controller
(Principal Accounting Officer)
I, Steven L. Watson, the President and Chief Executive Officer of Valhi, Inc.,
certify that:
I have reviewed this quarterly report on Form 10-Q of Valhi, Inc.;
1) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
2) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
3) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
4) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
5) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Steven L. Watson
- ---------------------------------------
Steven L. Watson
President and Chief Executive Officer
I, Bobby D. O'Brien, the Vice President, Chief Financial Officer and Treasurer
of Valhi, Inc., certify that:
I have reviewed this quarterly report on Form 10-Q of Valhi, Inc.;
1) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
2) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
3) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
4) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
5) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Bobby D. O'Brien
- ---------------------------------------------
Bobby D. O'Brien
Vice President, Chief Financial Officer and Treasurer