Annual Report on Form 10-K
Items 8, 14(a) and 14(d)
Index of Financial Statements and Schedules
Financial Statements Page
Report of Independent Accountants F-2
Consolidated Balance Sheets - December 31, 2000 and 2001 F-3
Consolidated Statements of Income -
Years ended December 31, 1999, 2000 and 2001 F-5
Consolidated Statements of Comprehensive Income -
Years ended December 31, 1999, 2000 and 2001 F-7
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1999, 2000 and 2001 F-8
Consolidated Statements of Cash Flows -
Years ended December 31, 1999, 2000 and 2001 F-9
Notes to Consolidated Financial Statements F-12
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Valhi, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Valhi, Inc. and Subsidiaries as of December 31, 2000 and 2001, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 22 to the consolidated financial statements, on April
1, 2002 the Company adopted Statement of Financial Accounting Standards No. 145.
PricewaterhouseCoopers LLP
Dallas, Texas
March 15, 2002, except for Note 22
as to which the date is November 12, 2002
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 2001
(In thousands, except per share data)
ASSETS
2000 2001
---- ----
Current assets:
Cash and cash equivalents .................... $ 135,017 $ 154,413
Restricted cash equivalents .................. 69,242 63,257
Marketable securities ........................ -- 18,465
Accounts and other receivables ............... 182,991 162,310
Refundable income taxes ...................... 14,470 3,564
Receivable from affiliates ................... 885 844
Inventories .................................. 242,994 262,733
Prepaid expenses ............................. 7,272 11,252
Deferred income taxes ........................ 14,236 12,999
---------- ----------
Total current assets ..................... 667,107 689,837
---------- ----------
Other assets:
Marketable securities ........................ 268,006 186,549
Investment in affiliates ..................... 235,791 211,115
Receivable from affiliate .................... -- 20,000
Loans and other receivables .................. 100,540 105,940
Mining properties ............................ 13,971 12,410
Prepaid pension costs ........................ 22,789 18,411
Unrecognized net pension obligations ......... -- 5,901
Goodwill ..................................... 359,420 349,058
Deferred income taxes ........................ 2,046 3,818
Other assets ................................. 49,604 32,549
---------- ----------
Total other assets ....................... 1,052,167 945,751
---------- ----------
Property and equipment:
Land ......................................... 29,644 28,721
Buildings .................................... 167,653 163,995
Equipment .................................... 543,915 569,001
Construction in progress ..................... 14,865 9,992
---------- ----------
756,077 771,709
Less accumulated depreciation ................ 218,530 253,450
---------- ----------
Net property and equipment ............... 537,547 518,259
---------- ----------
$2,256,821 $2,153,847
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2000 and 2001
(In thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2000 2001
---- ----
Current liabilities:
Notes payable .................................. $ 70,039 $ 46,201
Current maturities of long-term debt ........... 34,284 64,972
Accounts payable ............................... 81,572 114,474
Accrued liabilities ............................ 162,431 166,488
Payable to affiliates .......................... 32,042 38,148
Income taxes ................................... 15,693 9,578
Deferred income taxes .......................... 1,922 1,821
----------- -----------
Total current liabilities .................. 397,983 441,682
----------- -----------
Noncurrent liabilities:
Long-term debt ................................. 595,354 497,215
Accrued OPEB costs ............................. 50,624 50,146
Accrued pension costs .......................... 26,697 33,823
Accrued environmental costs .................... 66,224 54,392
Deferred income taxes .......................... 294,371 268,468
Other .......................................... 41,055 32,642
----------- -----------
Total noncurrent liabilities ............... 1,074,325 936,686
----------- -----------
Minority interest ................................ 156,278 153,151
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized; none issued ....................... -- --
Common stock, $.01 par value; 150,000 shares
authorized; 125,730 and 125,811 shares issued . 1,257 1,258
Additional paid-in capital ..................... 44,345 44,982
Retained earnings .............................. 591,030 656,408
Accumulated other comprehensive income:
Marketable securities ........................ 132,580 86,654
Currency translation ......................... (60,811) (79,404)
Pension liabilities .......................... (4,517) (11,921)
Treasury stock, at cost - 10,570 shares ........ (75,649) (75,649)
----------- -----------
Total stockholders' equity ................. 628,235 622,328
----------- -----------
$ 2,256,821 $ 2,153,847
=========== ===========
Commitments and contingencies (Notes 5, 8, 11, 16, 18 and 19)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 2000 and 2001
(In thousands, except per share data)
1999 2000 2001
---- ---- ----
Revenues and other income:
Net sales ........................... $ 1,145,222 $ 1,191,885 $ 1,059,470
Other, net .......................... 68,456 127,101 154,000
----------- ----------- -----------
1,213,678 1,318,986 1,213,470
----------- ----------- -----------
Cost and expenses:
Cost of sales ....................... 840,326 824,391 774,979
Selling, general and administrative . 189,036 201,732 195,166
Interest ............................ 72,039 71,480 62,285
----------- ----------- -----------
1,101,401 1,097,603 1,032,430
----------- ----------- -----------
112,277 221,383 181,040
Equity in earnings of:
Titanium Metals Corporation ("TIMET") -- (8,990) (9,161)
Tremont Corporation* ................ (48,652) -- --
Waste Control Specialists* .......... (8,496) -- --
Other ............................... -- 1,672 580
----------- ----------- -----------
Income before taxes ............... 55,129 214,065 172,459
Provision for income taxes (benefit) .. (71,285) 93,955 53,179
Minority interest in after-tax earnings 78,992 43,496 26,082
----------- ----------- -----------
Income from continuing operations . 47,422 76,614 93,198
Discontinued operations ............... 2,000 -- --
----------- ----------- -----------
Net income ........................ $ 49,422 $ 76,614 $ 93,198
=========== =========== ===========
*Prior to consolidation.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
Years ended December 31, 1999, 2000 and 2001
(In thousands, except per share data)
1999 2000 2001
---- ---- ----
Basic earnings per share:
Continuing operations ............................ $ .41 $ .67 $ .81
Discontinued operations .......................... .02 -- --
----------- ----------- -----------
Net income ....................................... $ .43 $ .67 $ .81
=========== =========== ===========
Diluted earnings per share:
Continuing operations ............................ $ .41 $ .66 $ .80
Discontinued operations .......................... .02 -- --
----------- ----------- -----------
Net income ....................................... $ .43 $ .66 $ .80
=========== =========== ===========
Cash dividends per share ........................... $ .20 $ .21 $ .24
=========== =========== ===========
Shares used in the calculation of per share amounts:
Basic earnings per share ......................... 115,030 115,132 115,193
Dilutive impact of stock options ................. 1,164 1,138 920
----------- ----------- -----------
Diluted earnings per share ....................... 116,194 116,270 116,113
=========== =========== ===========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1999, 2000 and 2001
(In thousands)
1999 2000 2001
---- ---- ----
Net income ..................................... $ 49,422 $ 76,614 $ 93,198
-------- -------- --------
Other comprehensive income (loss),
net of tax:
Marketable securities adjustment:
Unrealized net gains (losses) arising during
the period ................................ 5,503 1,863 (7,673)
Reclassification for realized net losses
(gains) included in net income ............ (492) 2,880 (38,253)
-------- -------- --------
5,011 4,743 (45,926)
Currency translation adjustment .............. (18,121) (19,978) (18,593)
Pension liabilities adjustment ............... (2,930) 1,258 (7,404)
-------- -------- --------
Total other comprehensive income
(loss), net ............................... (16,040) (13,977) (71,923)
-------- -------- --------
Comprehensive income ..................... $ 33,382 $ 62,637 $ 21,275
======== ======== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 2000 and 2001
(In thousands)
Additional Accumulated other comprehensive income Total
Common paid-in Retained Marketable Currency Pension Treasury stockholders'
stock capital earnings securities translation liabilities stock equity
Balance at December 31, 1998 ......... $1,255 $42,789 $ 512,468 $ 122,826 $(22,712) $ (2,845) $(75,259) $ 578,522
Net income ........................... -- -- 49,422 -- -- -- -- 49,422
Cash dividends ....................... -- -- (23,146) -- -- -- -- (23,146)
Other comprehensive income (loss), net -- -- -- 5,011 (18,121) (2,930) -- (16,040)
Other, net ........................... 1 655 -- -- -- -- -- 656
------ ------- --------- --------- -------- -------- -------- ---------
Balance at December 31, 1999 ......... 1,256 43,444 538,744 127,837 (40,833) (5,775) (75,259) 589,414
Net income ........................... -- -- 76,614 -- -- -- -- 76,614
Cash dividends ....................... -- -- (24,328) -- -- -- -- (24,328)
Other comprehensive income (loss), net -- -- -- 4,743 (19,978) 1,258 -- (13,977)
Common stock reacquired .............. -- -- -- -- -- -- (19) (19)
Other, net ........................... 1 901 -- -- -- -- (371) 531
------ ------- --------- ------- -------- -------- -------- ---------
Balance at December 31, 2000 ......... 1,257 44,345 591,030 132,580 (60,811) (4,517) (75,649) 628,235
Net income ........................... -- -- 93,198 -- -- -- -- 93,198
Cash dividends ....................... -- -- (27,820) -- -- -- -- (27,820)
Other comprehensive income (loss), net -- -- -- (45,926) (18,593) (7,404) -- (71,923)
Other, net ........................... 1 637 -- -- -- -- -- 638
------ ------- --------- --------- -------- -------- -------- ---------
Balance at December 31, 2001 ......... $1,258 $44,982 $ 656,408 $ 86,654 $(79,404) $(11,921) $(75,649) $ 622,328
====== ======= ========= ========= ======== ======== ======== =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 2000 and 2001
(In thousands)
1999 2000 2001
---- ---- ----
Cash flows from operating activities:
Net income .................................. $ 49,422 $ 76,614 $ 93,198
Depreciation, depletion and amortization .... 64,654 71,091 74,493
Legal settlements, net ...................... -- (69,465) (10,307)
Securities transaction gains, net ........... (757) (40) (47,009)
Insurance gain .............................. -- -- (16,190)
Non-cash:
Interest expense .......................... 9,788 10,572 5,601
Defined benefit pension expense ........... (4,543) (11,874) (3,651)
Other postretirement benefit expense ...... (5,091) (2,641) (385)
Deferred income taxes ....................... (92,840) 42,819 7,718
Minority interest ........................... 78,992 43,496 26,082
Equity in:
TIMET ..................................... -- 8,990 9,161
Tremont Corporation* ...................... 48,652 -- --
Waste Control Specialists* ................ 8,496 -- --
Other ..................................... -- (1,672) (580)
Discontinued operations ................... (2,000) -- --
Distributions from:
Manufacturing joint venture ............... 13,650 7,550 11,313
Tremont Corporation* ...................... 655 -- --
Other ..................................... -- 81 1,300
Other, net .................................. 1,809 2,187 (477)
--------- --------- ---------
170,887 177,708 150,267
Change in assets and liabilities:
Accounts and other receivables ............ (34,616) (10,709) 8,464
Inventories ............................... 18,671 (30,816) (28,623)
Accounts payable and accrued
liabilities .............................. 1,080 12,955 30,065
Income taxes .............................. 5,150 3,940 3,439
Accounts with affiliates .................. (7,055) 13,544 4,025
Other, net ................................ (15,812) (4,183) (8,988)
--------- --------- ---------
Net cash provided by operating activities 138,305 162,439 158,649
--------- --------- ---------
*Prior to consolidation
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1999, 2000 and 2001
(In thousands)
1999 2000 2001
---- ---- ----
Cash flows from investing activities:
Capital expenditures ................... $ (55,869) $ (57,772) $ (70,821)
Purchases of:
Business units ....................... (64,975) (9,346) --
NL common stock ...................... (7,210) (30,886) (15,502)
Tremont common stock ................. (1,945) (45,351) (198)
CompX common stock ................... (816) (8,665) (2,650)
Interest in other subsidiaries ....... -- (2,500) --
Investment in Waste Control Specialists* (10,000) -- --
Proceeds from disposal of:
Marketable securities ................ 6,588 158 16,802
Property and equipment ............... 2,449 577 11,032
Change in restricted cash
equivalents, net ...................... (5,176) 1,517 8,022
Loans to affiliates:
Loans ................................ (6,000) (21,969) (20,000)
Collections .......................... 6,000 21,969 --
Property damaged by fire:
Insurance proceeds ................... -- -- 23,361
Other, net ........................... -- -- (3,205)
Discontinued operations, net ........... 2,000 -- --
Other, net ............................. (595) 1,351 (635)
--------- --------- ---------
Net cash used by investing activities (135,549) (150,917) (53,794)
--------- --------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ........................... 123,203 123,857 51,356
Principal payments ................... (157,310) (126,252) (102,014)
Loans from affiliates:
Loans ................................ 45,000 18,160 81,905
Repayments ........................... (52,218) (12,782) (78,731)
Valhi dividends paid ................... (23,146) (24,328) (27,820)
Valhi common stock reacquired .......... -- (19) --
Distributions to minority interest ..... (3,744) (10,084) (10,496)
Other, net ............................. 860 4,411 1,347
--------- --------- ---------
Net cash used by financing activities (67,355) (27,037) (84,453)
--------- --------- ---------
Net decrease ............................. $ (64,599) $ (15,515) $ 20,402
========= ========= =========
*Prior to consolidation.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1999, 2000 and 2001
(In thousands)
1999 2000 2001
---- ---- ----
Cash and cash equivalents -
net change from:
Operating, investing and financing
activities ........................... $ (64,599) $ (15,515) $ 20,402
Currency translation .................. (3,398) (2,175) (1,006)
Business units acquired ............... 4,785 -- --
Consolidation of Waste Control
Specialists and Tremont Corporation .. 3,736 -- --
--------- --------- ---------
(59,476) (17,690) 19,396
Balance at beginning of year .......... 212,183 152,707 135,017
--------- --------- ---------
Balance at end of year ................ $ 152,707 $ 135,017 $ 154,413
========= ========= =========
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized .. $ 62,208 $ 61,930 $ 57,775
Income taxes .......................... 16,296 33,798 36,556
Business units acquired -
net assets consolidated:
Cash and cash equivalents ........... $ 4,785 $ -- $ --
Goodwill and other intangible assets 22,700 5,091 --
Other non-cash assets ............... 54,966 7,144 --
Liabilities ......................... (17,476) (2,889) --
--------- --------- ---------
Cash paid ........................... $ 64,975 $ 9,346 $ --
========= ========= =========
Waste Control Specialists and
Tremont Corporation - net assets
consolidated:
Cash and cash equivalents ........... $ 3,736 $ -- $ --
Noncurrent restricted cash .......... 4,710 -- --
Investment in
TIMET ............................. 85,772 -- --
NL Industries* .................... 159,799 -- --
Other joint ventures .............. 13,658 -- --
Property and equipment .............. 23,716 -- --
Other non-cash assets ............... 17,933 -- --
Liabilities ......................... (83,784) -- --
Minority interest ................... (85,610) -- --
--------- --------- ---------
Net investment at respective dates
of consolidation ................... $ 139,930 $ -- $ --
========= ========= =========
*Eliminated in consolidation.
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies:
Organization and basis of presentation. Valhi, Inc. (NYSE: VHI) is a
subsidiary of Contran Corporation. Contran holds, directly or through
subsidiaries, approximately 94% of Valhi's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons, the Chairman of the
Board and Chief Executive Officer of Valhi and Contran, may be deemed to control
such companies. Certain prior year amounts have been reclassified to conform to
the current year presentation. As more fully described in Note 22, on April 1,
2002 the Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 145. As a result of adopting SFAS No. 145, the Company's results of
operations for 2000, as presented herein, have been reclassified from amounts
previously reported with respect to a loss on the early extinguishment of debt.
Such reclassification had no effect on net income.
Management's estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America ("GAAP") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reporting period. Actual
results may differ from previously-estimated amounts under different assumptions
or conditions.
Principles of consolidation. The consolidated financial statements include
the accounts of Valhi and its majority-owned subsidiaries (collectively, the
"Company"), except as described below. All material intercompany accounts and
balances have been eliminated. Prior to June 30 1999, the Company did not
consolidate its majority-owned subsidiary Waste Control Specialists because the
Company was not deemed to control Waste Control Specialists. See Note 3.
Translation of foreign currencies. Assets and liabilities of subsidiaries
whose functional currency is other than the U.S. dollar are translated at
year-end rates of exchange and revenues and expenses are translated at average
exchange rates prevailing during the year. Resulting translation adjustments are
accumulated in stockholders' equity as part of accumulated other comprehensive
income, net of related deferred income taxes and minority interest. Currency
transaction gains and losses are recognized in income currently.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed. Shipping terms of products shipped in both the Company's chemicals
and components products segments are generally FOB shipping point, although in
some instances shipping terms are FOB destination point. Amounts charged to
customers for shipping and handling are included in net sales. The Company
adopted Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No.
101, as amended, in 2000. SAB No. 101 provides guidance on the recognition,
presentation and disclosure of revenue. The impact of adopting SAB No. 101 was
not material.
Inventories and cost of sales. Inventories are stated at the lower of cost
or market. Inventory costs are generally based on average cost or the first-in,
first-out method.
Shipping and handling costs. Shipping and handling costs of the Company's
chemicals segment are included in selling, general and administrative expenses
and were approximately $54 million in 1999, $50 million in 2000 and $49 million
in 2001. Shipping and handling costs of the Company's component products and
waste management segments are not material.
Cash and cash equivalents and restricted cash. Cash equivalents include
bank time deposits and government and commercial notes and bills with original
maturities of three months or less.
Restricted cash equivalents and debt securities. Restricted cash
equivalents and debt securities, invested primarily in U.S. government
securities and money market funds that invest in U.S. government securities,
includes amounts restricted pursuant to outstanding letters of credit, and at
December 31, 2001 also includes $74 million held by special purpose trusts (2000
- - $70 million) formed by NL Industries, the assets of which can only be used to
pay for certain of NL's future environmental remediation and other environmental
expenditures. Such restricted amounts are generally classified as either a
current or noncurrent asset depending on the classification of the liability to
which the restricted amount relates. Additionally, the restricted debt
securities are generally classified as either a current or noncurrent asset
depending upon the maturity date of each debt security. See Notes 5, 8 and 12.
Marketable securities and securities transactions. Marketable debt and
equity securities are carried at fair value based upon quoted market prices or
as otherwise disclosed. Unrealized gains and losses on trading securities are
recognized in income currently. Unrealized gains and losses on
available-for-sale securities are accumulated in stockholders' equity as part of
accumulated other comprehensive income, net of related deferred income taxes and
minority interest. Realized gains and losses are based upon the specific
identification of the securities sold.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of these accounts.
Investment in joint ventures. Investments in more than 20%-owned but less
than majority-owned companies, and the Company's investment in Waste Control
Specialists prior to June 30 1999, are accounted for by the equity method. See
Note 7. Differences between the cost of each investment and the Company's pro
rata share of the entity's separately-reported net assets, if any, are allocated
among the assets and liabilities of the entity based upon estimated relative
fair values. Such differences approximate a $61 million credit at December 31,
2001, related principally to the Company's investment in TIMET and are charged
or credited to income as the entities depreciate, amortize or dispose of the
related net assets.
Goodwill and other intangible assets. Goodwill, representing the excess of
cost over fair value of individual net assets acquired in business combinations
accounted for by the purchase method, is stated net of accumulated amortization
of $77.8 million at December 31, 2001 (2000 - $60.9 million). Through December
31, 2001, goodwill was amortized by the straight-line method over not more than
40 years. Upon adoption of SFAS No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002, goodwill will no longer be subject to periodic
amortization. See Notes 9 and 20.
Intangible assets, consisting principally at December 31, 2000 and 2001 of
the estimated fair value of certain patents acquired in connection with the
acquisition of certain business units by CompX, are stated net of accumulated
amortization of $1.0 million at December 31, 2001 (2000 - $.8 million). Such
intangible assets have been, and will continue to be upon adoption of SFAS No.
142 effective January 1, 2002, amortized by the straight-line method over the
lives of the patents (approximately 11.25 years remaining at December 31, 2001)
with no assumed residual value at the end of the life of the patents.
Amortization expense of intangible assets was $2.1 million in 1999, $474,000 in
2000 and $229,000 in 2001, and is expected to be approximately $250,000 in each
of 2002 through 2006.
Through December 31, 2001, when events or changes in circumstances
indicated that goodwill or other intangible assets may be impaired, an
evaluation was performed to determine if an impairment existed. Such events or
circumstances included, among other things, (i) a prolonged period of time
during which the Company's net carrying value of its investment in subsidiaries
whose common stocks are publicly-traded was greater than quoted market prices
for such stocks and (ii) significant current and prior periods or current and
projected periods with operating losses related to the applicable business unit.
All relevant factors were considered in determining whether an impairment
existed. If an impairment was determined to exist, goodwill and, if appropriate,
the underlying long-lived assets associated with the goodwill, were written down
to reflect the estimated future discounted cash flows expected to be generated
by the underlying business. Effective January 1, 2002, the Company will assess
impairment of goodwill and other intangible assets in accordance with SFAS No.
142. See Note 20.
Property and equipment, mining properties, depreciation and depletion.
Property and equipment are stated at cost. Mining properties are stated at cost
less accumulated depletion. Depreciation for financial reporting purposes is
computed principally by the straight-line method over the estimated useful lives
of ten to 40 years for buildings and three to 20 years for equipment. Depletion
for financial reporting purposes is computed by the unit-of-production and
straight-line methods. Accelerated depreciation and depletion methods are used
for income tax purposes, as permitted. Upon sale or retirement of an asset, the
related cost and accumulated depreciation are removed from the accounts and any
gain or loss is recognized in income currently.
Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized. The Company will perform
certain planned major maintenance activities during the year, primarily with
respect to the chemicals segment. Repair and maintenance costs estimated to be
incurred in connection with such planned major maintenance activities are
accrued in advance and are included in cost of goods sold.
Interest costs related to major long-term capital projects and renewals are
capitalized as a component of construction costs. Interest costs capitalized
related to the Company's consolidated business segments were not significant in
1999, 2000 or 2001.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. Through December 31, 2001, if the asset being tested for impairment
was acquired in a business combination accounted for by the purchase method, any
goodwill which arose out of that business combination was also considered in the
impairment test if the goodwill related specifically to the acquired asset and
not to other aspects of the acquired business, such as the customer base or
product lines. Effective January 1, 2002, the Company will assess impairment of
goodwill in accordance with SFAS No. 142, and the Company will assess impairment
of other long-lived assets (such as property and equipment and mining
properties) in accordance with SFAS No. 144. See Note 20.
Long-term debt. Long-term debt is stated net of unamortized original issue
discount ("OID"). OID is amortized over the period during which interest is not
paid and deferred financing costs are amortized over the term of the applicable
issue, both by the interest method.
Derivatives and hedging activities. The Company adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended,
effective January 1, 2001. Under SFAS No. 133, all derivatives are recognized as
either assets or liabilities and measured at fair value. The accounting for
changes in fair value of derivatives depends upon the intended use of the
derivative, and such changes are recognized either in net income or other
comprehensive income. As permitted by the transition requirements of SFAS No.
133, as amended, the Company has exempted from the scope of SFAS No. 133 all
host contracts containing embedded derivatives which were issued or acquired
prior to January 1, 1999. Other than certain currency forward contracts
discussed below, the Company was not a party to any significant derivative or
hedging instrument covered by SFAS No. 133 at January 1, 2001. The accounting
for such currency forward contracts under SFAS No. 133 is not materially
different from the accounting for such contracts under prior GAAP, and therefore
the impact to the Company of adopting SFAS No. 133 was not material.
Certain of the Company's sales generated by its non-U.S. operations are
denominated in U.S. dollars. The Company periodically uses currency forward
contracts to manage a very nominal portion of foreign exchange rate risk
associated with receivables denominated in a currency other than the holder's
functional currency or similar exchange rate risk associated with future sales.
The Company has not entered into these contracts for trading or speculative
purposes in the past, nor does the Company currently anticipate entering into
such contracts for trading or speculative purposes in the future. At each
balance sheet date, any such outstanding currency forward contract is
marked-to-market with any resulting gain or loss recognized in income currently
as part of net currency transactions. To manage such exchange rate risk, at
December 31, 2000 the Company held contracts maturing through March 2001 to
exchange an aggregate of U.S. $9.1 million for an equivalent amount of Canadian
dollars at an exchange rate of Cdn. $1.48 per U.S. dollar. At December 31, 2000,
the actual exchange rate was Cdn. $1.50 per U.S. dollar. No such contracts were
held at December 31, 2001.
The Company periodically uses interest rate swaps and other types of
contracts to manage interest rate risk with respect to financial assets or
liabilities. The Company has not entered into these contracts for trading or
speculative purposes in the past, nor does the Company currently anticipate
entering into such contracts for trading or speculative purposes in the future.
The Company was not a party to any such contract during 1999, 2000 or 2001.
Income taxes. Valhi and its qualifying subsidiaries are members of
Contran's consolidated United States federal income tax group (the "Contran Tax
Group"). The policy for intercompany allocation of federal income taxes provides
that subsidiaries included in the Contran Tax Group compute the provision for
income taxes on a separate company basis. Subsidiaries make payments to or
receive payments from Contran in the amounts they would have paid to or received
from the Internal Revenue Service had they not been members of the Contran Tax
Group. The separate company provisions and payments are computed using the tax
elections made by Contran.
Through December 31, 2000, NL and Tremont Corporation were separate U.S.
taxpayers and were not members of the Contran Tax Group. Effective January 1,
2001, NL and Tremont became members of the Contran Tax Group. See Note 3. CompX
is a separate U.S. taxpayer and is not a member of the Contran Tax Group. Waste
Control Specialists LLC and The Amalgamated Sugar Company LLC are treated as
partnerships for income tax purposes.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
investments in the Company's subsidiaries and affiliates who are not members of
the Contran Tax Group. The Company periodically evaluates its deferred tax
assets in the various taxing jurisdictions in which it operates and adjusts any
related valuation allowance based on the estimate of the amount of such deferred
tax assets which the Company believes does not meet the "more-likely-than-not"
recognition criteria.
Earnings per share. Basic earnings per share of common stock is based upon
the weighted average number of common shares actually outstanding during each
period. Diluted earnings per share of common stock includes the impact of
outstanding dilutive stock options. The weighted average number of outstanding
stock options excluded from the calculation of diluted earnings per share
because their impact would have been antidilutive aggregated approximately
313,000 in 1999, 246,000 in 2000 and 297,000 in 2001.
Deferred income. Deferred income, related principally to a non-compete
agreement discussed in Note 12, is amortized over the periods earned, generally
by the straight-line method.
Stock options. The Company accounts for stock-based employee compensation
in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and its various interpretations. Under APBO No. 25,
no compensation cost is generally recognized for fixed stock options in which
the exercise price is greater than or equal to the market price on the grant
date. Compensation cost recognized by the Company in accordance with APBO No. 25
was not significant during 1999 and was approximately $2 million in each of 2000
and 2001.
Environmental costs. The Company records liabilities related to
environmental remediation obligations when estimated future expenditures are
probable and reasonably estimable. Such accruals are adjusted as further
information becomes available or circumstances change. Estimated future
expenditures are generally not discounted to their present value. Recoveries of
remediation costs from other parties, if any, are recognized as assets when
their receipt is deemed probable. At December 31, 2000 and 2001, no receivables
for recoveries have been recognized.
Closure and post closure costs. The Company provides for estimated closure
and post-closure monitoring costs for its waste disposal site over the operating
life of the facility as airspace is consumed ($802,000 and $1.2 million accrued
at December 31, 2000 and 2001, respectively). Such costs are estimated based on
the technical requirements of applicable state or federal regulations, whichever
are stricter, and include such items as final cap and cover on the site, methane
gas and leachate management and groundwater monitoring. Cost estimates are based
on management's judgment and experience and information available from
regulatory agencies as to costs of remediation. These estimates are sometimes a
range of possible outcomes, in which case the Company provides for the amount
within the range which constitutes its best estimate. If no amount within the
range appears to be a better estimate than any other amount, the Company
provides for at least the minimum amount within the range. See Note 20.
Estimates of the ultimate cost of remediation require a number of
assumptions, are inherently difficult and the ultimate outcome may differ from
current estimates. As additional information becomes available, estimates are
adjusted as necessary. Where the Company believes that both the amount of a
particular environmental liability and the timing of the payments are reliably
determinable, the cost in current dollars is inflated at 3% per annum until
expected time of payment.
The Company's waste disposal site has an estimated remaining life of over
100 years based upon current site plans and annual volumes of waste. During this
remaining site life, the Company estimates it will provide for an additional $23
million of closure and post-closure costs, including inflation. Anticipated
payments of environmental liabilities accrued at December 31, 2001 are not
expected to begin until 2004 at the earliest.
Other. Advertising costs related to the Company's consolidated business
segments, expensed as incurred, were $2.0 million in each of 1999, 2000 and
2001. Research and development costs related to the Company's consolidated
business segments, expensed as incurred, were $8 million in 1999 and $7 million
in each of 2000 and 2001.
Note 2 - Business and geographic segments:
% owned by Valhi at
Business segment Entity December 31, 2001
Chemicals NL Industries, Inc. 61%
Component products CompX International Inc. 69%
Waste management Waste Control Specialists 90%
Titanium metals Tremont Group, Inc. 80%
Tremont Group (80% owned by Valhi and 20% owned by NL) is a holding company
which owns 80% of Tremont Corporation ("Tremont") at December 31, 2001. Tremont
is also a holding company and owns an additional 21% of NL and 39% of TIMET at
December 31, 2001. See Note 3.
The Company is organized based upon its operating subsidiaries. The
Company's operating segments are defined as components of our consolidated
operations about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is Mr. Harold C. Simmons. Each operating segment is separately
managed, and each operating segment represents a strategic business unit
offering different products.
The Company's reportable operating segments are comprised of the chemicals
business conducted by NL, the component products business conducted by CompX
and, beginning in July 1999, the waste management business conducted by Waste
Control Specialists.
NL manufactures and sells titanium dioxide pigments ("TiO2") through its
subsidiary Kronos, Inc. TiO2 is used to impart whiteness, brightness and opacity
to a wide variety of products, including paints, plastics, paper, fibers and
ceramics. Kronos has production facilities located throughout North America and
Europe. Kronos also owns a one-half interest in a TiO2 production facility
located in Louisiana. See Note 7.
CompX produces and sells component products (ergonomic computer support
systems, precision ball bearing slides and security products) for office
furniture, computer related applications and a variety of other applications.
CompX has production facilities in North America, Europe and Asia.
Waste Control Specialists operates a facility in West Texas for the
processing, treatment and storage of hazardous, toxic and low-level and mixed
radioactive wastes, and for the disposal of hazardous and toxic and certain
types of low-level and mixed radioactive wastes. Waste Control Specialists is
seeking additional regulatory authorizations to expand its treatment and
disposal capabilities for low-level and mixed radioactive wastes.
TIMET is a vertically integrated producer of titanium sponge, melted
products (ingot and slab) and a variety of titanium mill products for aerospace,
industrial and other applications with production facilities located in the U.S.
and Europe.
The Company evaluates segment performance based on segment operating
income, which is defined as income before income taxes and interest expense,
exclusive of certain non-recurring items (such as gains or losses on disposition
of business units and other long-lived assets outside the ordinary course of
business and certain legal settlements) and certain general corporate income and
expense items (including securities transactions gains and losses and interest
and dividend income) which are not attributable to the operations of the
reportable operating segments. The accounting policies of the reportable
operating segments are the same as those described in Note 1. Segment operating
profit includes the effect of amortization of any goodwill and other intangible
assets attributable to the segment.
Interest income included in the calculation of segment operating income is
not material in 1999, 2000 or 2001. Capital expenditures include additions to
property and equipment and mining properties but exclude amounts paid for
business units acquired in business combinations accounted for by the purchase
method. See Note 3. Depreciation, depletion and amortization related to each
reportable operating segment includes amortization of any goodwill and other
intangible assets attributable to the segment. Amortization of deferred
financing costs is included in interest expense. There are no intersegment sales
or any other significant intersegment transactions.
Segment assets are comprised of all assets attributable to each reportable
operating segment, including goodwill and other intangible assets. The Company's
investment in the TiO2 manufacturing joint venture (see Note 7) is included in
the chemicals business segment assets. Corporate assets are not attributable to
any operating segment and consist principally of cash and cash equivalents,
restricted cash equivalents, marketable securities and loans to third parties.
At December 31, 2001, approximately 38% of corporate assets were held by NL
(2000 - 31%), with substantially all of the remainder held by Valhi.
For geographic information, net sales are attributed to the place of
manufacture (point-of-origin) and the location of the customer
(point-of-destination); property and equipment and mining properties are
attributed to their physical location. At December 31, 2001, the net assets of
non-U.S. subsidiaries included in consolidated net assets approximated $664
million (2000 - $650 million).
Years ended December 31,
1999 2000 2001
---- ---- ----
(In millions)
Net sales:
Chemicals ................................ $ 908.4 $ 922.3 $ 835.1
Component products ....................... 225.9 253.3 211.4
Waste management (after consolidation) ... 10.9 16.3 13.0
-------- -------- --------
Total net sales ........................ $1,145.2 $1,191.9 $1,059.5
======== ======== ========
Operating income:
Chemicals ................................ $ 126.2 $ 187.4 $ 143.5
Component products ....................... 40.2 37.5 13.1
Waste management (after consolidation) ... (1.8) (7.2) (14.4)
-------- -------- --------
Total operating income ................. 164.6 217.7 142.2
General corporate items:
Legal settlement gains, net .............. -- 69.5 31.9
Securities transactions .................. .8 -- 47.0
Interest and dividend income ............. 43.0 40.3 38.0
Insurance gain ........................... -- -- 16.2
Gain on sale/leaseback ................... -- -- 2.2
General expenses, net .................... (24.1) (34.6) (34.1)
Interest expense ........................... (72.0) (71.5) (62.3)
-------- -------- --------
112.3 221.4 181.1
Equity in:
TIMET .................................... -- (9.0) (9.2)
Tremont Corporation ...................... (48.7) -- --
Waste Control Specialists ................ (8.5) -- --
Other .................................... -- 1.7 .6
-------- -------- --------
Income from continuing operations
before income taxes ................... $ 55.1 $ 214.1 $ 172.5
======== ======== ========
Net sales - point of origin:
United States ............................ $ 399.5 $ 436.0 $ 379.9
Germany .................................. 459.4 444.1 398.5
Belgium .................................. 138.7 137.8 126.8
Norway ................................... 88.3 98.3 102.8
Netherlands .............................. 36.8 35.8 32.2
Other Europe ............................. 92.8 92.7 82.3
Canada ................................... 259.7 253.7 230.7
Taiwan ................................... .7 12.1 9.6
Eliminations ............................. (330.7) (318.6) (303.3)
-------- -------- --------
$1,145.2 $1,191.9 $1,059.5
======== ======== ========
Net sales - point of destination:
United States ............................ $ 412.7 $ 459.3 $ 401.8
Europe ................................... 520.1 515.2 462.4
Canada ................................... 104.4 97.0 82.5
Asia ..................................... 45.0 53.6 51.3
Other .................................... 63.0 66.8 61.5
-------- -------- --------
$1,145.2 $1,191.9 $1,059.5
======== ======== ========
Years ended December 31,
1999 2000 2001
---- ---- ----
(In millions)
Depreciation, depletion and amortization:
Chemicals ................................... $52.5 $54.1 $54.6
Component products .......................... 9.6 12.6 14.9
Waste management (after consolidation) ...... 1.5 3.3 3.8
Corporate ................................... 1.1 1.1 1.2
----- ----- -----
$64.7 $71.1 $74.5
===== ===== =====
Capital expenditures:
Chemicals ................................... $32.7 $31.1 $53.7
Component products .......................... 19.7 23.1 13.2
Waste management (after consolidation) ...... .3 3.3 3.1
Corporate ................................... 3.2 .3 .8
----- ----- -----
$55.9 $57.8 $70.8
===== ===== =====
December 31,
1999 2000 2001
---- ---- ----
(In millions)
Total assets:
Operating segments:
Chemicals ........................ $1,413.8 $1,313.1 $1,296.5
Component products ............... 205.4 227.2 227.3
Waste management ................. 33.9 32.3 31.1
Investment in:
Titanium Metals Corporation ...... 85.8 72.7 60.3
Other joint ventures ............. 13.7 13.1 12.4
Corporate and eliminations ......... 482.6 598.4 526.2
-------- -------- --------
$2,235.2 $2,256.8 $2,153.8
======== ======== ========
Net property and equipment and
mining properties:
United States ...................... $ 67.3 $ 82.5 $ 84.0
Germany ............................ 278.5 246.5 243.1
Canada ............................. 94.3 88.2 83.0
Norway ............................. 64.1 57.7 55.2
Belgium ............................ 57.5 53.7 52.6
Netherlands ........................ 17.6 17.2 7.3
Other Europe ....................... 1.3 -- --
Taiwan ............................. 4.9 5.7 5.5
-------- -------- --------
$ 585.5 $ 551.5 $ 530.7
======== ======== ========
Note 3 - Business combinations and disposals:
NL Industries, Inc. At the beginning of 1999, Valhi held 58% of NL's
outstanding common stock, and Tremont held an additional 20% of NL. During 1999,
2000 and 2001, NL purchased shares of its own common stock in market and private
transactions for an aggregate of $53.6 million, thereby increasing Valhi's and
Tremont's ownership of NL to 61% and 21% at December 31, 2001, respectively. See
Note 18. The Company accounted for such increases in its interest in NL by the
purchase method (step acquisition).
CompX International Inc. At the beginning of 1999, the Company held 64% of
CompX's common stock. During 1999, 2000 and 2001, Valhi purchased shares of
CompX common stock, and CompX purchased shares of its own common stock, in
market transactions for an aggregate of $12.1 million, thereby increasing the
Company's ownership interest of CompX to 69% at December 31, 2001. The Company
accounted for such increases in its interest in CompX by the purchase method
(step acquisition).
In 1999, CompX acquired two slide producers for an aggregate of $65 million
cash consideration. In 2000, CompX acquired a lock producer for an aggregate of
$9 million cash consideration. Such acquisitions were accounted for by the
purchase method.
Waste Control Specialists LLC. In 1995, Valhi acquired a 50% interest in
newly-formed Waste Control Specialists LLC. Valhi contributed $25 million to
Waste Control Specialists at various dates through early 1997 for its 50%
interest. Valhi contributed an additional $10 million to Waste Control
Specialists' equity in each of 1997, 1998 and 1999, and contributed an
additional $20 million to Waste Control Specialists' equity in 2000, thereby
increasing its membership interest from 50% to 90% at December 31, 2001. A
substantial portion of such equity contributions were used by Waste Control
Specialists to reduce the then-outstanding balance of its revolving intercompany
borrowings from the Company.
In 1995, the other owner of Waste Control Specialists, KNB Holdings, Ltd.,
contributed certain assets, primarily land and certain operating permits for the
facility site, and Waste Control Specialists also assumed certain indebtedness
of the other owner. KNB Holdings is controlled by an individual who had been
granted the duties of chief executive officer of Waste Control Specialists under
an employment agreement previously-effective through at least 2001. Such
individual had the ability to establish management policies and procedures, and
had the authority to make routine operating decisions, for Waste Control
Specialists. Prior to June 1999, the rights granted to the owner of the
remaining membership interest under the employment agreement discussed above
overcame the Company's presumption of control at its majority ownership interest
level, and the Company accounted for its interest in Waste Control Specialists
by the equity method. As of June 1999, that individual resigned as chief
executive officer and a new chief executive officer unrelated to the other owner
was appointed. Accordingly, the Company was then deemed to control Waste Control
Specialists. The Company commenced consolidating Waste Control Specialists'
balance sheet at June 30, 1999, and commenced consolidating its results of
operations and cash flows in the third quarter of 1999. See Note 7.
Valhi is entitled to a 20% cumulative preferential return on its initial
$25 million investment, after which earnings are generally split in accordance
with ownership interests. The liabilities of the other owner assumed by Waste
Control Specialists in 1995 exceeded the carrying value of the assets
contributed. Accordingly, all of Waste Control Specialists' cumulative net
losses to date 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. See Note 13.
Tremont Corporation and Tremont Group, Inc. At the beginning of 1999, the
Company held 48% of Tremont Corporation's common stock, and the Company
accounted for its interest in Tremont by the equity method. During 1999, Valhi
purchased in market and private transactions additional shares of Tremont for an
aggregate of $1.9 million which, by late December 1999, increased the Company's
ownership of Tremont to 50.2% at December 31, 1999. Accordingly, the Company
commenced consolidating Tremont's balance sheet at December 31, 1999, and the
Company commenced consolidating Tremont's results of operations and cash flows
effective January 1, 2000. See Note 7.
During 2000, Valhi and NL each purchased shares of Tremont in market and
private transactions for an aggregate of $45.4 million, increasing Valhi's and
NL's ownership of Tremont to 64% and 16% at December 31, 2000, respectively. See
Note 18. Effective with the close of business on December 31, 2000, Valhi and NL
each contributed their Tremont shares to newly-formed Tremont Group in return
for an 80% and 20% ownership interest in Tremont Group, respectively, and
Tremont Group became the owner of the 80% of Tremont that Valhi and NL had
previously owned in the aggregate. Tremont Group recorded the shares of Tremont
received from Valhi and NL at predecessor carryover cost basis. During 2001,
Valhi purchased a nominal number of additional Tremont Corporation common shares
for $198,000. The Company accounted for such increases in its interest in
Tremont during 1999, 2000 and 2001 by the purchase method (step acquisition).
In December 2000, TRECO LLC, a 75%-owned subsidiary of Tremont, acquired
the 25% interest in TRECO previously held by the other owner for $2.5 million
cash consideration, and TRECO became a wholly-owned subsidiary of Tremont.
Other. 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. Discontinued operations represent additional consideration
received by the Company in 1999 related to the 1997 disposal of its fast food
operations.
Effective July 1, 2001, the Company adopted SFAS No. 141, Business
Combinations, for all business combinations initiated on or after July 1, 2001,
and all purchase business combinations (including step acquisitions). Under SFAS
No. 141, all business combinations are accounted for by the purchase method, and
the pooling-of-interests method became prohibited. The Company did not qualify
to use the pooling-of-interests method of accounting for business combinations
prior to July 1, 2001.
Note 4 - Accounts and other receivables:
December 31,
2000 2001
---- ----
(In thousands)
Accounts receivable .......................... $ 186,887 $ 166,126
Notes receivable ............................. 1,740 2,484
Accrued interest ............................. 272 26
Allowance for doubtful accounts .............. (5,908) (6,326)
--------- ---------
$ 182,991 $ 162,310
Note 5 - Marketable securities:
December 31,
2000 2001
---- ----
(In thousands)
Current assets:
Halliburton Company common stock (trading) ............. $ -- $ 6,744
Halliburton Company common stock (available-for-sale) .. -- 8,138
Restricted debt securities ............................. -- 3,583
-------- --------
$ -- $ 18,465
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC ...................... $170,000 $170,000
Restricted debt securities ............................. -- 16,121
Halliburton Company common stock ....................... 97,108 --
Other common stocks .................................... 898 428
-------- --------
$268,006 $186,549
Amalgamated. Prior to 1999, the Company transferred control of the refined
sugar operations previously conducted by the Company's wholly-owned subsidiary,
The Amalgamated Sugar Company, to Snake River Sugar Company, an Oregon
agricultural cooperative formed by certain sugarbeet growers in Amalgamated's
areas of operations. Pursuant to the transaction, Amalgamated contributed
substantially all of its net assets to the Amalgamated Sugar Company LLC, a
limited liability company controlled by Snake River, on a tax-deferred basis in
exchange for a non-voting ownership interest in the LLC. The cost basis of the
net assets transferred by Amalgamated to the LLC was approximately $34 million.
As part of such transaction, Snake River made certain loans to Valhi aggregating
$250 million. Such loans from Snake River are collateralized by the Company's
interest in the LLC. Snake River's sources of funds for its loans to Valhi, as
well as for the $14 million it contributed to the LLC for its voting interest in
the LLC, included cash capital contributions by the grower members of Snake
River and $180 million in debt financing provided by Valhi, of which $100
million was repaid prior to 1999 when Snake River obtained an equal amount of
third-party term loan financing. After such repayments, $80 million principal
amount of Valhi's loans to Snake River remain outstanding. See Notes 8 and 11.
The Company and Snake River share in distributions from the LLC up to an
aggregate of $26.7 million per year (the "base" level), with a preferential 95%
share going to the Company. To the extent the LLC's distributions are below this
base level in any given year, the Company is entitled to an additional 95%
preferential share of any future annual LLC distributions in excess of the base
level until such shortfall is recovered. Under certain conditions, the Company
is entitled to receive additional cash distributions from the LLC, including
amounts discussed in Note 8. 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.
The LLC Company Agreement contains certain restrictive covenants intended
to protect the Company's interest in the LLC, including limitations on capital
expenditures and additional indebtedness of the LLC. The Company also has the
ability to temporarily take control of the LLC in the event the Company's
cumulative distributions from the LLC fall below specified levels. As a
condition to exercising temporary control, the Company would be required to
escrow funds in amounts up to the next three years of debt service of Snake
River's third-party term loan (an aggregate of $25 million) unless the Company
and Snake River's third-party lender otherwise mutually agree. Through December
31, 2001, the Company's cumulative distributions from the LLC had not fallen
below the specified levels.
Beginning in 2000, Snake River agreed that the annual amount of (i) the
distributions paid by the LLC to the Company plus (ii) the debt service payments
paid by Snake River to the Company on the $80 million loan will at least equal
the annual amount of interest payments owed by Valhi to Snake River on the
Company's $250 million in loans from Snake River. In the event that such cash
flows to the Company are less than the required minimum amount, certain
agreements among the Company, Snake River and the LLC made in 2000, including a
reduction in the amount of cumulative distributions which must be paid by the
LLC to the Company in order to prevent the Company from having the ability to
temporarily take control of the LLC, would retroactively become null and void.
Through December 31, 2001, Snake River and the LLC maintained the minimum
required levels of cash flows to the Company.
The Company reports the cash distributions received from the LLC as
dividend income. See Note 12. The amount of such future distributions is
dependent upon, among other things, the future performance of the LLC's
operations. Because the Company receives preferential distributions from the LLC
and has the right to require the LLC to redeem its interest in the LLC for a
fixed and determinable amount beginning at a fixed and determinable date, the
Company accounts for its investment in the LLC as an available-for-sale
marketable security carried at estimated fair value. In estimating fair value of
the Company's interest in the LLC, the Company considers, among other things,
the outstanding balance of the Company's loans to Snake River and the
outstanding balance of the Company's loans from Snake River.
Halliburton. At December 31, 2001, Valhi held 1.1 million shares of
Halliburton common stock (aggregate cost of $9 million) with a quoted market
price of $13.10 per share, or an aggregate market value of $15 million. Of such
Halliburton shares, approximately 515,000 Halliburton shares are classified as
trading securities and 621,000 are classified as available-for-sale securities.
Valhi's LYONs debt obligations are exchangeable at any time, at the option of
the LYON holder, for the shares of Halliburton common stock classified as
available-for-sale, and the carrying value of such Halliburton shares is limited
to the accreted LYONs obligations. The Halliburton shares classified as
available-for-sale are held in escrow for the benefit of the holders of the
LYONs. Valhi receives the regular quarterly dividend on all of the Halliburton
shares held, including shares held in escrow. The available-for-sale Halliburton
shares are classified as a current asset at December 31, 2001 because the
related LYON obligations, which are redeemable at the option of the holders in
October 2002, are classified as a current liability at such date. During 1999,
2000 and 2001, certain LYON holders exchanged their LYONs for 7,000, 5,000 and
1.2 million Halliburton shares, respectively. The shares classified as trading
securities were reclassified from available-for-sale during 2001 when they
became eligible to, and were, released to Valhi from the LYONs escrow. Also
during 2001, an additional 390,000 Halliburton shares were released to Valhi
from the LYONs escrow and were sold in market transactions for aggregate
proceeds of $16.8 million. See Notes 11 and 12. Halliburton provides services
and products to customers in the oil and gas industry, and provides engineering
and construction services for commercial, industrial and governmental customers.
Halliburton (NYSE: HAL) files periodic reports with the SEC.
Other. The aggregate cost of the debt securities, restricted pursuant to
the terms of one of NL's environmental special purpose trusts discussed in Note
1, is approximately $19.7 million at December 31, 2001. The aggregate cost of
other noncurrent available-for-sale securities is nominal at December 31, 2001
(December 31, 2000 - $2.3 million). See Note 12.
Note 6 - Inventories:
December 31,
2000 2001
---- ----
(In thousands)
Raw materials:
Chemicals .................................. $ 66,061 $ 79,162
Component products ......................... 11,866 9,677
-------- --------
77,927 88,839
-------- --------
In process products:
Chemicals .................................. 7,117 9,675
Component products ......................... 11,454 12,619
-------- --------
18,571 22,294
-------- --------
Finished products:
Chemicals .................................. 107,895 117,976
Component products ......................... 12,811 8,494
-------- --------
120,706 126,470
-------- --------
Supplies (primarily chemicals) ............... 25,790 25,130
-------- --------
$242,994 $262,733
Note 7 - Investment in affiliates:
December 31,
2000 2001
---- ----
(In thousands)
Ti02 manufacturing joint venture ............... $150,002 $138,428
Titanium Metals Corporation .................... 72,655 60,272
Other joint ventures ........................... 13,134 12,415
-------- --------
$235,791 $211,115
TiO2 manufacturing joint venture. A Kronos TiO2 subsidiary (Kronos
Louisiana, Inc., or "KLA") and another Ti02 producer are equal owners of a
manufacturing joint venture (Louisiana Pigment Company, L.P., or "LPC") that
owns and operates a TiO2 plant in Louisiana. KLA and the other Ti02 producer are
each required to purchase one-half of the TiO2 produced by LPC. The
manufacturing joint venture operates on a break-even basis, and consequently the
Company reports no equity in earnings of LPC. Each owner's acquisition transfer
price for its share of the TiO2 produced is equal to its share of the joint
venture's production costs and interest expense, if any.
LPC's net sales aggregated $171.6 million, $185.9 million and $187.4
million in 1999, 2000 and 2001, respectively, of which $85.3 million, $92.5
million and $93.4 million, respectively, represented sales to Kronos and the
remainder represented sales to LPC's other owner. Substantially all of LPC's
operating costs during the past three years represented costs of sales.
At December 31, 2001, LPC reported total assets and partners' equity of
$296.4 million and $279.6 million, respectively (2000 - $321.0 million and
$302.2 million, respectively). Over 80% of LPC's assets at December 31, 2000 and
2001 are comprised of property and equipment; the remainder of LPC's assets are
comprised principally of inventories, receivables from its partners and cash and
cash equivalents. LPC's liabilities at December 31, 2000 and 2001 are comprised
primarily of trade payables and accruals. LPC has no indebtedness at December
31, 2000 and 2001.
Titanium Metals Corporation. At December 31, 2001, the Company held 12.3
million shares of TIMET with a quoted market price of $3.99 per share, or an
aggregate market value of $49 million (2000 - 12.3 million shares with a quoted
market price of $6.75 per share, or an aggregate market value of $83 million).
At December 31, 2001, TIMET reported total assets of $699.4 million and
stockholders' equity of $298.1 million (2000 - $759.1 million and $357.5
million, respectively). TIMET's total assets at December 31, 2001 include
current assets of $308.7 million, property and equipment of $275.3 million and
goodwill and other intangible assets of $54.1 million (2000 - $248.2 million,
$302.1 million and $62.6 million, respectively). TIMET's total liabilities at
December 31, 2001 include current liabilities of $122.4 million, long-term debt
of $19.3 million, accrued OPEB costs of $16.0 million and convertible preferred
securities of $201.3 million (2000 - $115.8 million, $19.0 million, $18.2
million and $201.2 million, respectively). During 2001, TIMET reported net sales
of $486.9 million, operating income of $64.5 million and a net loss of $41.8
million (2000 - net sales of $426.8 million, an operating loss of $41.7 million
and a net loss of $38.9 million).
Tremont Corporation. Effective December 31, 1999, the Company commenced
consolidating Tremont's balance sheet, and the Company commenced consolidating
Tremont's results of operations and cash flows effective January 1, 2000. See
Note 3. During 1999, Tremont reported a net loss of $28.2 million, comprised
principally of equity in earnings of NL of $28.1 million, equity in losses of
TIMET of $72.0 million and an income tax benefit of $18.9 million. The Company's
equity in losses of Tremont in 1999 included a $50.0 million impairment
provision for an other than temporary decline in the value of TIMET.
Waste Control Specialists LLC. The Company commenced consolidating Waste
Control Specialists' results of operations and cash flows in the third quarter
of 1999. For periods prior to consolidation during the first six months of 1999,
Waste Control Specialists reported a net loss of $8.5 million, all of which
accrued to Valhi for financial reporting purposes, and net sales of $8.3
million. See Note 3.
Other. At December 31, 2000 and 2001, other joint ventures, held by TRECO
LLC, are comprised of (i) a 32% interest in Basic Management, Inc., which, among
other things, provides utility services in the industrial park where one of
TIMET's plants is located, and (ii) a 12% interest in The Landwell Company L.P.,
which is actively engaged in efforts to develop certain real estate. Basic
Management owns an additional 50% interest in Landwell.
At December 31, 2001, the combined balance sheets of Basic Management and
Landwell reflected total assets and partners' equity of $89.2 million and $49.7
million, respectively (2000 - $96.6 million and $55.4 million, respectively).
The combined total assets at December 31, 2001 include current assets of $32.1
million, property and equipment of $18.1 million, deferred charges of $13.7
million, land and development costs of $13.1 million, long-term notes and other
receivables of $9.4 million and investment in undeveloped land and water rights
of $2.3 million (2000 - $41.5 million, $18.3 million, $14.2 million, $11.9
million, $7.5 million and $2.5 million, respectively). Combined total
liabilities at December 31, 2001 include current liabilities of $16.5 million,
long-term debt of $18.5 million and deferred income taxes of $4.0 million (2000
- - $16.7 million, $19.2 million and $4.6 million, respectively).
During 2001, Basic Management and Landwell reported combined revenues of
$19.3 million, income before income taxes of $575,000 and net income of $761,000
(2000 - $28.8 million, $8.5 million and $7.6 million, respectively; 1999 - $11.0
million, $364,000 and $551,00, respectively). Landwell is treated for federal
income tax purposes as a partnership, and accordingly the combined results of
operations of Basic Management and Landwell includes a provision for income
taxes on Landwell's earnings only to the extent that such earnings accrue to
Basic Management.
Note 8 - Other noncurrent assets:
December 31,
2000 2001
---- ----
(In thousands)
Loans and other receivables:
Snake River Sugar Company:
Principal .................................... $ 80,000 $ 80,000
Interest ..................................... 17,526 22,718
Other .......................................... 4,754 5,706
-------- --------
102,280 108,424
Less current portion ........................... 1,740 2,484
-------- --------
Noncurrent portion ............................. $100,540 $105,940
======== ========
Other assets:
Restricted cash equivalents .................... $ 22,897 $ 4,713
Intangible assets .............................. 2,646 2,440
Waste disposal site operating permits .......... 3,299 2,527
Refundable insurance deposits .................. 1,011 1,609
Deferred financing costs ....................... 2,527 1,120
Other .......................................... 17,224 20,140
-------- --------
$ 49,604 $ 32,549
======== ========
Valhi's loan to Snake River, as amended, is subordinate to Snake River's
third-party senior term loan and bears interest at a fixed rate of 6.49% (12.99%
during 1999 and the first three months of 2000), with all amounts due no later
than 2010. Covenants contained in Snake River's third-party senior term loan
allow Snake River, under certain conditions, to pay periodic installments for
debt service on the $80 million loan prior to its maturity in 2010. Such
covenants allowed Snake River to pay interest debt services payments to Valhi of
$7.2 million in 1999 and $950,000 in 2000. The Company does not currently expect
to receive any significant debt service payments from Snake River during 2002,
and accordingly all accrued and unpaid interest has been classified as a
noncurrent asset as of December 31, 2001. Under certain conditions, Valhi will
be required to pledge $5 million in cash equivalents or marketable securities to
collateralize Snake River's third-party senior term loan as a condition to
permit continued repayment of the $80 million loan. No such cash equivalents or
marketable securities have yet been required to be pledged at December 31, 2001.
The reduction of interest income resulting from the reduction in the
interest rate on the $80 million loan from 12.99% to 6.49% effective April 1,
2000 will be recouped and paid to the Company via additional future LLC
distributions from The Amalgamated Sugar Company LLC upon achievement of
specified levels of future LLC profitability. If Snake River and the LLC do not
maintain minimum specified levels of cash flow to the Company, the interest rate
on the loan to Snake River would revert back to 12.99% retroactive to April 1,
2000. Through December 31, 2001, Snake River and the LLC maintained the minimum
required levels of cash flows to the Company. See Note 5. Snake River has
granted to Valhi a lien on substantially all of Snake River's assets to
collateralize the $80 million loan, such lien becoming effective generally upon
the repayment of Snake River's third-party senior term loan with a scheduled
maturity date of April 2009.
Note 9 - Goodwill:
Changes in the carrying amount of goodwill during the past three years is
presented in the table below. Goodwill related to the chemicals operating
segment was generated from the Company's various step acquisitions of its
interest in NL Industries. Goodwill related to the component products operating
segment was generated principally from CompX's acquisitions of certain business
units during 1998, 1999 and 2000, with a very small amount generated from the
Company's various step acquisitions of CompX.
Operating segment
Component
Chemicals products Total
(In millions)
Balance at December 31, 1998 ................ $234.0 $ 25.3 $259.3
Goodwill acquired during the year ........... 1.9 24.1 26.0
Periodic amortization ....................... (9.7) (2.1) (11.8)
Consolidation of Tremont Corporation ........ 85.2 -- 85.2
Changes in foreign exchange rates ........... -- (2.2) (2.2)
------ ------ ------
Balance at December 31, 1999 ................ 311.4 45.1 356.5
Goodwill acquired during the year ........... 16.0 4.1 20.1
Periodic amortization ....................... (13.4) (2.5) (15.9)
Changes in foreign exchange rates ........... -- (1.3) (1.3)
------ ------ ------
Balance at December 31, 2000 ................ 314.0 45.4 359.4
Goodwill acquired during the year ........... 7.7 -- 7.7
Periodic amortization ....................... (14.5) (2.4) (16.9)
Changes in foreign exchange rates ........... -- (1.1) (1.1)
------ ------ ------
Balance at December 31, 2001 ................ $307.2 $ 41.9 $349.1
====== ====== ======
Upon adoption of SFAS No. 142 effective January 1, 2002 (see Note 20), the
goodwill related to the chemicals operating segment will be 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 components product operating segment will
be 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.
Note 10 - Accrued liabilities:
December 31,
2000 2001
---- ----
Current:
Employee benefits .......................... $ 44,397 $ 39,974
Environmental costs ........................ 56,323 64,165
Deferred income ............................ 7,241 9,479
Interest ................................... 6,172 5,162
Other ...................................... 48,298 47,708
-------- --------
$162,431 $166,488
======== ========
Noncurrent:
Insurance claims and expenses .............. $ 22,424 $ 19,182
Employee benefits .......................... 11,893 8,616
Deferred income ............................ 5,453 1,333
Other ...................................... 1,285 3,511
-------- --------
$ 41,055 $ 32,642
======== ========
Note 11 - Notes payable and long-term debt:
December 31,
2000 2001
---- ----
(In thousands)
Notes payable - Kronos bank credit agreements ........ $ 70,039 $ 46,201
======== ========
Long-term debt:
Valhi:
Snake River Sugar Company ........................ $250,000 $250,000
Liquid Yield Option Notes (LYONs) ................ 100,333 25,472
Bank credit facility ............................. 31,000 35,000
Other ............................................ 2,880 2,880
-------- --------
384,213 313,352
-------- --------
Subsidiaries:
NL Senior Secured Notes .......................... 194,000 194,000
CompX bank credit facility ....................... 39,000 49,000
Waste Control Specialists bank term loan ......... 5,311 --
Valcor Senior Notes .............................. 2,431 2,431
Other ............................................ 4,683 3,404
-------- --------
245,425 248,835
-------- --------
629,638 562,187
Less current maturities ............................ 34,284 64,972
-------- --------
$595,354 $497,215
Valhi. Valhi's $250 million in loans from Snake River Sugar Company bear
interest at a weighted average fixed interest rate of 9.4%, are collateralized
by the Company's interest in The Amalgamated Sugar Company LLC and are due in
January 2027. Currently, these loans are nonrecourse to Valhi. Up to $37.5
million principal amount of such loans will become recourse to Valhi when the
balance of Valhi's loan to Snake River (including accrued interest) becomes less
than $37.5 million. Under certain conditions, Snake River has the ability to
accelerate the maturity of these loans. See Notes 5 and 8.
The zero coupon Senior Secured LYONs, $43.1 million principal amount at
maturity in October 2007 outstanding at December 31, 2001, were issued with
significant OID to represent a yield to maturity of 9.25%. No periodic interest
payments are required. Each $1,000 in principal amount at maturity of the LYONs
is exchangeable, at any time at the option of the holders of the LYONs, for
14.4308 shares of Halliburton common stock held by Valhi. Such shares of
Halliburton common stock, classified as available-for-sale, are collateral for
the LYONs debt obligations and are held in escrow for the benefit of holders of
the LYONs. Valhi receives the regular quarterly dividend on the escrowed
Halliburton shares. During 1999, 2000 and 2001, holders representing $483,000,
$336,000 and $92.2 million principal amount at maturity, respectively, of LYONs
exchanged such LYONs for Halliburton shares. Under the terms of the indenture
governing the LYONs, the Company has the option to deliver, in whole or in part,
cash equal to the market value of the Halliburton shares that are otherwise
required to be delivered to the LYONs holder in an exchange, and a portion of
such exchanges during 2001 was so settled. Also during 2001, $50.4 million
principal amount at maturity of LYONs were redeemed by the Company for cash at
various redemption prices equal to the accreted value of the LYONs on the
respective redemption dates. The LYONs are redeemable, at the option of the
holder, in October 2002, at $636.27 per $1,000 principal amount (the issue price
plus accrued OID through such purchase date), or an aggregate of $27.4 million
based on the number of LYONs outstanding at December 31, 2001, and accordingly
the LYONs are classified as a current liability at December 31, 2001. Such
redemptions may be paid, at Valhi's option, in cash, shares of Halliburton
common stock, or a combination thereof. The LYONs are redeemable, at any time,
at Valhi's option, for cash equal to the issue price plus accrued OID through
the redemption date. At December 31, 2000 and 2001, the net carrying value of
the LYONs per $1,000 principal amount at maturity was $541 and $592
respectively, and the quoted market price of the LYONs was $605 and $580,
respectively.
At December 31, 2001, Valhi has a $55 million revolving bank credit
facility which matures in November 2002, generally bears interest at LIBOR plus
1.5% (for LIBOR-based borrowings) or prime (for prime-based borrowings), and is
collateralized by 30 million shares of NL common stock held by Valhi. The size
of the facility was increased to $70 million in January 2002, and was further
increased to $72.5 million in February 2002. The agreement limits dividends and
additional indebtedness of Valhi and contains other provisions customary in
lending transactions of this type. In the event of a change of control of Valhi,
as defined, the lenders would have the right to accelerate the maturity of the
facility. The maximum amount which may be borrowed under the facility is limited
to one-third of the aggregate market value of the shares of NL common stock
pledged as collateral. Based on NL's December 31, 2001 quoted market price of
$15.27 per share, the 30 million shares of NL common stock pledged under the
facility provide more than sufficient collateral coverage to allow for
borrowings up to the full amount of the facility, even after considering the
January and February 2002 increases in the size of the facility to $72.5
million. Valhi would become limited to borrowing less than the full $72.5
million amount of the facility, or would be required to pledge additional
collateral if the full amount of the facility had been borrowed, only if NL's
stock price were to fall below approximately $7.25 per share. At December 31,
2001, $35 million was outstanding under this facility, consisting of $30 million
of LIBOR-based borrowings (at an interest rate of 3.625%) and $5 million of
prime-based borrowings (at an interest rate of 4.75%). At December 31, 2001,
$18.9 million was available for borrowing under this facility.
Other Valhi indebtedness consists of an unsecured $2.9 million note payable
bearing interest at 6.2% and due in November 2002. Such note was issued in
connection with Valhi's purchase of 90,000 shares of Tremont Corporation common
stock from an officer of Tremont in 2000. See Note 18.
NL Industries. NL's 11.75% Senior Secured Notes due 2003 are collateralized
by a series of intercompany notes from Kronos International, Inc. ("KII"), a
wholly-owned subsidiary of Kronos, to NL, the terms of which mirror those of the
Senior Secured Notes (the "NL Mirror Notes"). The Senior Secured Notes are also
collateralized by a first priority lien on the stock of Kronos. In the event of
foreclosure, the Senior Secured noteholders would have access to the
consolidated assets, earnings and equity of NL and NL believes the
collateralization of the Senior Secured Notes, as described above, is the
functional economic equivalent to a full and unconditional guarantee by Kronos.
The Senior Secured Notes are redeemable, at NL's option, at par value. The
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 NL 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. In the event of a change of control of NL, as defined, NL
would be required to make an offer to purchase the Senior Secured Notes at 101%
of the principal amount. NL would also be required to make an offer to purchase
a specified amount of the Senior Notes at par value in the event NL 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. The quoted market price of the Senior
Secured Notes per $1,000 principal amount was $1,010 and $1,005 at December 31,
2000 and 2001, respectively. During 2000, NL redeemed $50 million principal
amount of its Senior Secured Notes with a 1.5% premium. Interest expense in 2000
includes $1.1 million related to the write-off of unamortized deferred financing
costs and premiums paid in connection with the early retirement of such
indebtedness. In February 2002, NL announced the redemption of an additional $25
million principal amount of the Senior Secured Notes in March 2002 at par.
At December 31, 2001, notes payable consist of 27 million of
euro-denominated borrowings and 200 million of Norwegian Krona-denominated
borrowings (aggregating $46 million) which mature during 2002 and bear interest
at rates ranging from 3.8% to 7.3% (2000 - 51 million of euro-denominated
borrowings and 200 million of Norwegian Krona-denominated borrowings). At
December 31, 2001, NL had $8 million available for borrowing under non-U.S.
credit facilities.
CompX. CompX has a $100 million unsecured revolving bank credit facility
which matures in 2003 and bears interest at rates based upon the Eurodollar Rate
(4.2% at December 31, 2001). The facility contains certain covenants and
restrictions customary in lending transactions of this type which, among other
things, restricts the ability of CompX and its subsidiaries to incur debt, incur
liens and pay dividends. In the event of a change of control of CompX, as
defined, the lenders would have the right to accelerate the maturity of the
facility. CompX would also be required under certain conditions to use the net
proceeds from the sale of assets outside the ordinary course of business to
reduce outstanding borrowings under the facility, and such a transaction would
also result in a permanent reduction of the size of the facility. In December
2001, CompX amended the facility to permit the sale/leaseback of its
manufacturing facility in The Netherlands (see Note 12) without requiring the
use of the net proceeds from such transaction to reduce outstanding borrowings
under the facility and without requiring a permanent reduction in the size of
the facility. At December 31, 2001, $51 million was available for borrowing
under this facility.
Other indebtedness. In February 2001, a wholly-owned subsidiary of Valhi
purchased Waste Control Specialists' bank term loan from the lender at par
value, and such debt became payable to such Valhi subsidiary. Valcor's unsecured
9 5/8% Senior Notes due November 2003 are redeemable at the Company's option at
par value. At December 31, 2000 and 2001, the quoted market price of the Valcor
Notes was $982 and $1,006 per $1,000 principal amount, respectively.
Aggregate maturities of long-term debt at December 31, 2001
Years ending December 31, Amount
(In thousands)
2002 $ 66,891
2003 246,624
2004 270
2005 152
2006 144
2007 and thereafter 250,025
--------
564,106
Less unamortized OID on Valhi LYONs 1,919
--------
$562,187
The LYONs are reflected in the above table as due October 2002, the next
date they are redeemable at the option of the holder, at the aggregate
redemption price on such date of $27.4 million ($636.27 per $1,000 principal
amount at maturity in October 2007).
Restrictions. In addition to the NL Senior Secured Notes and the CompX bank
credit facility discussed above, other subsidiary credit agreements typically
require the respective subsidiary to maintain minimum levels of equity, require
the maintenance of certain financial ratios, limit dividends and additional
indebtedness and contain other provisions and restrictive covenants customary in
lending transactions of this type. At December 31, 2001, the restricted net
assets of consolidated subsidiaries approximated $586 million.
At December 31, 2001, amounts available for the payment of Valhi dividends
pursuant to the terms of Valhi's revolving bank credit facility aggregated $.05
per Valhi share outstanding per quarter, plus an additional $14.2 million.
Note 12 - Other income, net:
Years ended December 31,
1999 2000 2001
---- ---- ----
(In thousands)
Securities earnings:
Dividends and interest .................. $ 43,040 $ 40,250 $ 38,003
Securities transactions, net ............ 757 40 47,009
--------- --------- --------
43,797 40,290 85,012
Legal settlement gains, net ............... -- 69,465 31,871
Insurance gain ............................ -- -- 16,190
Business interruption insurance ........... -- -- 7,222
Currency transactions, net ................ 9,865 6,383 1,824
Noncompete agreement income ............... 4,000 4,000 4,000
Disposal of property and equipment, net ... (635) (1,178) 1,375
Pension curtailment gain .................. -- -- 116
Other, net ................................ 11,429 8,141 6,390
--------- --------- --------
$ 68,456 $ 127,101 $154,000
========= ========= ========
Interest and dividend income in 1999, 2000 and 2001 includes $23.5 million,
$22.7 million and $23.6 million, respectively, of dividend distributions
received from The Amalgamated Sugar Company LLC. See Note 5. Noncompete
agreement income relates to NL's agreement not to compete in the specialty
chemicals industry and is recognized in income ratably over the five-year
noncompete period ending in February 2003. The pension curtailment gain is
discussed in Note 17.
Net securities transactions gains in 2001 are comprised of (i) a $33.1
million realized gain related to LYONs exchanges and the resulting disposition
of a portion of the shares of Halliburton common stock, (ii) a $13.7 million
realized gain related to the sale of 390,000 shares of Halliburton common stock
in market transactions, (iii) a $14.2 million unrealized gain related to the
reclassification of 515,000 Halliburton shares from available-for-sale to
trading securities, (iv) an $11.6 million unrealized loss related to changes in
market value of the Halliburton shares classified as trading securities and (v)
a $2.3 million impairment charge for an other than temporary decline in value of
certain marketable securities held by the Company. See Notes 5 and 11.
Securities transactions in 2000 include a $5.6 million gain related to
certain shares of common stock NL received pursuant to the demutualization of an
insurance company from which NL had purchased certain policies. Such shares,
valued by NL based upon the insurance company's initial public offering price of
$14.25 per share, were placed by NL in a trust, the assets of which may only be
used to pay for certain of NL's retiree benefits. The Company accounted for the
$5.6 million contribution of the insurance company's common stock to the trust
as a reduction of its accrued OPEB costs. See Note 17. Securities transactions
in 2000 also include a $5.7 million impairment charge for an other than
temporary decline in value of certain marketable securities held by the Company.
Securities transactions during 1999 relate principally to LYON exchanges. See
Notes 5 and 11.
In 2000, NL recognized a $69.5 million net gain from legal settlements with
certain of its former insurance carriers. The settlements resolved court
proceedings in which NL sought reimbursement from the carriers for legal defense
expenditures and indemnity coverage for certain of its environmental remediation
expenditures. The gain is stated net of $3.1 million of commissions associated
with the settlements. In 2001, NL recognized $11.7 million of net gains from
legal settlements, of which $11.4 million relates to additional settlements with
certain of its former insurance carriers. Proceeds from substantially all of
these settlements were transferred by the carriers to special purpose trusts
formed by NL to pay for certain of its future remediation and other
environmental expenditures. At December 31, 2000 and 2001, restricted cash
equivalents and debt securities include an aggregate of $70 million and $74
million, respectively, held by such special purpose trusts.
In 2001, Waste Control Specialists recognized a $20.1 million net gain from
a legal settlement related to certain previously-reported litigation. Pursuant
to the settlement, Waste Control Specialists, among other things, received a
cash payment of approximately $20.1 million, net of attorney fees.
In March 2001, NL suffered a fire at its Leverkusen, Germany TiO2 facility.
Production at the facility's chloride-process plant returned to full capacity on
April 8, 2001. The facility's sulfate-process plant became approximately 50%
operational in September 2001, and became fully operational in late October
2001. The damages to property and the business interruption losses caused by the
fire were covered by insurance, but the effect on the financial results of the
Company on a quarter-to-quarter basis was impacted by the timing and amount of
insurance recoveries. Chemicals operating income in 2001 includes $27.3 million
of business interruption insurance recoveries losses caused by the Leverkusen
fire. Of such business interruption proceeds amount, $20.1 million was recorded
as a reduction of cost of sales to offset unallocated period costs that resulted
from lost production and the remaining $7.2 million, representing recovery of
lost margin, was recorded as other income. NL also recognized insurance
recoveries of $29.1 million in 2001 for property damage and related cleanup and
other extra costs, resulting in an insurance gain of $16.2 million as such
recoveries exceeded the carrying value of the property destroyed and the cleanup
and other extra expenses incurred. The Company does not expect to report any
additional insurance recoveries related to the Leverkusen fire.
Net gains from disposal of property and equipment in 2001 include a $2.2
million gain related to the sale/leaseback of CompX's manufacturing facility in
The Netherlands. Pursuant to the sale/leaseback, CompX sold the manufacturing
facility with a net carrying value of $8.2 million for $10.0 million cash
consideration in December 2001, and CompX simultaneously entered into a
leaseback of the facility with a nominal monthly rental for approximately 30
months. CompX has the option to extend the leaseback period for up to an
additional two years with monthly rentals of $40,000 to $100,000. CompX may
terminate the leaseback at any time without penalty. In addition to the cash
received up front, CompX included an estimate of the fair market value of the
monthly rental during the nominal-rental leaseback period as part of the sale
proceeds. A portion of the gain from the sale of the facility after transaction
costs, equal to the present value of the monthly rentals over the expected
leaseback period (including the fair market value of the monthly rental during
the nominal-rental leaseback period), has been deferred and will be amortized
into income over the expected leaseback period. CompX will recognize rental
expense over the leaseback period, including amortization of the prepaid rent
consisting of the estimated fair market value of the monthly rental during the
nominal-rental leaseback period.
Note 13 - Minority interest:
December 31,
2000 2001
---- ----
(In thousands)
Minority interest in net assets:
NL Industries ............................ $ 66,761 $ 68,566
Tremont Corporation ...................... 34,235 32,610
CompX International ...................... 49,003 44,767
Subsidiaries of NL ....................... 6,279 7,208
-------- --------
$156,278 $153,151
Years ended December 31,
1999 2000 2001
---- ---- ----
(In thousands)
Minority interest in net earnings
(losses) - continuing operations:
NL Industries ..................... $ 66,760 $ 30,727 $ 23,061
Tremont Corporation ............... -- 2,071 (175)
CompX International ............... 9,013 7,810 2,236
Subsidiaries of NL ................ 3,322 2,436 960
Subsidiaries of Tremont ........... -- 455 --
Subsidiaries of CompX ............. (103) (3) --
-------- -------- --------
$ 78,992 $ 43,496 $ 26,082
======== ======== ========
Tremont Corporation. The Company commenced consolidating Tremont's balance
sheet effective December 31, 1999, and commenced consolidating its results of
operations effective January 1, 2000. Accordingly, the Company commenced
reporting minority interest in Tremont's net earnings in 2000. See Note 3.
Waste Control Specialists. Waste Control Specialists was formed by Valhi
and another entity in 1995. See Note 3. 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. 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 losses is reported at December 31, 2001.
Note 14 - Stockholders' equity:
Shares of common stock
Issued Treasury Outstanding
(In thousands)
Balance at December 31, 1998 ......... 125,521 (10,545) 114,976
Issued ............................... 90 -- 90
------- ------- --------
Balance at December 31, 1999 ......... 125,611 (10,545) 115,066
Issued ............................... 119 -- 119
Reacquired ........................... -- (1) (1)
Other ................................ -- (24) (24)
------- ------- --------
Balance at December 31, 2000 ......... 125,730 (10,570) 115,160
Issued ............................... 81 -- 81
------- ------- --------
Balance at December 31, 2001 ......... 125,811 (10,570) 115,241
======= ======= ========
For financial reporting purposes, treasury stock includes the Company's
proportional interest in 1.2 million Valhi shares held by NL. However, under
Delaware Corporation Law, 100% of a parent company's shares held by a
majority-owned subsidiary of the parent is considered to be treasury stock. As a
result, shares outstanding for financial reporting purposes differ from those
outstanding for legal purposes.
In January 1998, the Company's board of directors authorized the Company to
purchase up to 2 million shares of its common stock in open market or
privately-negotiated transactions over an unspecified period of time. As of
December 31, 2001, the Company had purchased approximately 383,000 shares for an
aggregate of $3.7 million pursuant to such authorization.
Valhi options. Valhi has an incentive stock option plan that provides for
the discretionary grant of, among other things, qualified incentive stock
options, nonqualified stock options, restricted common stock, stock awards and
stock appreciation rights. Up to five million shares of Valhi common stock may
be issued pursuant to this plan. Options are generally granted at a price not
less than fair market value on the date of grant, generally vest ratably over a
five-year period beginning one year from the date of grant and expire 10 years
from the date of grant. Restricted stock, when granted, is generally forfeitable
unless certain periods of employment are completed and held in escrow in the
name of the grantee until the restriction period expires. No stock appreciation
rights have been granted.
Outstanding options at December 31, 2001 represent approximately 2% of
Valhi's outstanding shares at that date and expire at various dates through
2011, with a weighted-average remaining term of 3.5 years. At December 31, 2001,
options to purchase 1.9 million Valhi shares were exercisable at prices ranging
from $4.96 to $12.06 per share, or an aggregate amount payable upon exercise of
$13.2 million. All of such exercisable options are exercisable at various dates
through 2010 at prices lower than the Company's December 31, 2001 market price
of $12.70 per share. At December 31, 2001, options to purchase 170,000 shares
are scheduled to become exercisable in 2002, and an aggregate of 4.1 million
shares were available for future grants.
The following table sets forth changes in outstanding options during the
past three years under all option plans in effect during such periods.
Amount
Exercise payable
price per upon
Shares share exercise
(In thousands, except
per share amounts)
Outstanding at December 31, 1998 2,901 $ 4.76-$14.66 $20,059
Granted 323 12.00- 12.06 3,876
Exercised (87) 5.48- 9.50 (621)
Canceled (172) 6.56- 14.66 (2,500)
------ ------------ -------
Outstanding at December 31, 1999 2,965 4.76- 12.16 20,814
Granted 248 11.00- 11.06 2,728
Exercised (116) 4.76- 12.00 (848)
Canceled (415) 4.76- 12.16 (2,133)
------ ------------ -------
Outstanding at December 31, 2000 2,682 $ 4.96-$12.06 $20,561
Granted 8 10.50 84
Exercised (76) 4.96- 12.00 (591)
Canceled (230) 5.36- 12.00 (1,410)
------ ------------ -------
Outstanding at December 31, 2001 2,384 $ 4.96-$12.06 $18,644
====== ============= =======
Stock option plans of subsidiaries and affiliates. NL, CompX, Tremont and
TIMET each maintain plans which provide for the grant of options to purchase
their respective common stocks. Provisions of these plans vary by company.
Outstanding options to purchase common stock of NL, CompX, Tremont and TIMET at
December 31, 2001 are summarized below.
Amount
Exercise payable
price per upon
Shares share exercise
(In thousands, except
per share amounts)
NL Industries 2,014 $ 5.00-$21.97 $32,960
CompX 856 10.00- 20.00 14,161
Tremont 27 8.13- 56.50 628
TIMET 1,554 3.60- 35.31 29,957
Other. The following pro forma information, required by SFAS No. 123,
"Accounting for Stock-Based Compensation," is based on an estimation of the fair
value of options issued subsequent to January 1, 1995. The weighted average fair
values of Valhi options granted during 1999 and 2000 were $5.96 and $5.43 per
share, respectively. The aggregate fair value of the Valhi options granted
during 2001 was not material. The fair values of such options were calculated
using the Black-Scholes stock option valuation model with the following
weighted-average assumptions: stock price volatility of 39% to 40%, risk-free
rates of return of 6.0% to 6.8%, dividend yields of 1.7% to 1.8% and an expected
term of 10 years. The Black-Scholes model was not developed for use in valuing
employee stock options, but was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, it requires the use of subjective assumptions including
expectations of future dividends and stock price volatility. Such assumptions
are only used for making the required fair value estimate and should not be
considered as indicators of future dividend policy or stock price appreciation.
Because changes in the subjective assumptions can materially affect the fair
value estimate, and because employee stock options have characteristics
significantly different from those of traded options, the use of the
Black-Scholes option-pricing model may not provide a reliable estimate of the
fair value of employee stock options.
Had the Company, NL, CompX, Tremont and TIMET each elected to account for
their respective stock-based employee compensation for all awards granted
subsequent to January 1, 1995 in accordance with the fair value-based accounting
method of SFAS No. 123, the Company's reported net income would have decreased
by $3.6 million, $3.8 million and $3.7 million in 1999, 2000 and 2001,
respectively, or $.03, $.04 and $.03 per basic share, respectively. For purposes
of this pro forma disclosure, the estimated fair value of options is amortized
to expense over the options' vesting period. Such pro forma impact on net income
and basic earnings per share is not necessarily indicative of future effects on
net income or earnings per share.
Note 15 - Financial instruments:
December 31,
2000 2001
----------------- ----------------
Carrying Fair Carrying Fair
amount Value amount value
(In millions)
Cash, cash equivalents and restricted
cash equivalents ......................... $ 227.2 $ 227.2 $ 222.4 $ 222.4
Marketable securities:
Current ................................. $ -- $ -- $ 18.5 $ 18.5
Noncurrent .............................. 268.0 268.0 186.5 186.5
Loan to Snake River Sugar Company ......... $ 80.0 $ 86.4 $ 80.0 $ 96.4
Notes payable and long-term debt (excluding
capitalized leases): Publicly-traded
fixed rate debt:
Valhi LYONs ........................... $ 100.3 $ 112.3 $ 25.5 $ 25.0
NL Senior Secured Notes ............... 194.0 195.9 194.0 194.9
Valcor Senior Notes ................... 2.4 2.4 2.4 2.4
Snake River Sugar Company loans ......... 250.0 250.0 250.0 250.0
Other fixed-rate debt ................... 4.1 4.1 3.7 3.7
Variable rate debt ...................... 148.6 148.6 132.7 132.7
Minority interest in:
NL common stock ......................... $ 66.8 $ 235.3 $ 68.6 $ 132.6
CompX common stock ...................... 49.0 44.6 44.8 61.3
Tremont common stock .................... 34.2 33.9 32.6 36.7
Valhi common stockholders' equity ......... $ 628.2 $1,324.3 $ 622.3 $1,463.6
The fair value of the Company's publicly-traded marketable securities and
debt, minority interest in NL Industries, CompX and Tremont and Valhi's common
stockholders' equity are all based upon quoted market prices. The fair value of
the Company's investment in The Amalgamated Sugar Company LLC is based upon the
$250 million redemption price of such investment, less the $80 million
outstanding balance of the Company's loan to Snake River Sugar Company. The fair
value of the Company's fixed-rate loan to Snake River Sugar Company is based
upon relative changes in market interest rates since the interest rates were
fixed. The fair value of Valhi's fixed-rate nonrecourse loans from Snake River
Sugar Company is based upon the $250 million redemption price of Valhi's
investment in the Amalgamated Sugar Company LLC, which investment collateralizes
such nonrecourse loans. Fair values of variable interest rate debt and other
fixed-rate debt are deemed to approximate book value. See Notes 5 and 11.
The estimated fair value of CompX's currency forward contracts at December
31, 2000 is insignificant. See Note 1.
Note 16 - Income taxes:
Years ended December 31,
1999 2000 2001
---- ---- ----
(In millions)
Components of pre-tax income:
United States:
Contran Tax Group ............................ $(14.2) $(20.7) $ 31.5
NL tax group ................................. 22.9 71.4 --
CompX tax group .............................. 14.0 7.6 (1.0)
Tremont tax group/Equity in Tremont .......... (48.7) (10.5) --
------ ------ ------
(26.0) 47.8 30.5
Non-U.S. subsidiaries .......................... 81.1 166.3 142.0
------ ------ ------
$ 55.1 $214.1 $172.5
====== ====== ======
Expected tax expense, at U.S. federal
statutory income tax rate of 35% ................ $ 19.3 $ 74.9 $ 60.4
Non-U.S. tax rates ............................... (.6) (7.1) (4.8)
Incremental U.S. tax and rate differences
on equity in earnings of non-tax group
companies ....................................... 15.7 17.7 8.0
Change in NL's and Tremont's deferred income
tax valuation allowance, net .................... (93.4) .7 (20.9)
Resolution of German income tax audits ........... (36.5) (5.5) --
Change in German income tax law .................. 24.1 4.4 --
U.S. state income taxes, net ..................... (.9) 2.1 2.5
No tax benefit for goodwill amortization ......... 4.1 5.4 5.8
Other, net ....................................... (3.1) 1.3 2.2
------ ------ ------
$(71.3) $ 93.9 $ 53.2
====== ====== ======
Components of income tax expense (benefit):
Currently payable (refundable):
U.S. federal and state ....................... $(11.1) $ (3.4) $ 11.2
Non-U.S ...................................... 32.6 54.5 34.3
------ ------ ------
21.5 51.1 45.5
------ ------ ------
Deferred income taxes (benefit):
U.S. federal and state ....................... (48.7) 39.9 21.0
Non-U.S ...................................... (44.1) 2.9 (13.3)
------ ------ ------
(92.8) 42.8 7.7
------ ------ ------
$(71.3) $ 93.9 $ 53.2
====== ====== ======
Comprehensive provision for income
taxes (benefit) allocable to:
Continuing operations .......................... $(71.3) $ 93.9 $ 53.2
Discontinued operations ........................ -- -- --
Other comprehensive income:
Marketable securities ........................ 2.0 3.9 (24.7)
Currency translation ......................... (10.7) (14.9) (2.3)
Pension liabilities .......................... (1.9) .8 (3.9)
------ ------ ------
$(81.9) $ 83.7 $ 22.3
====== ====== ======
The components of the net deferred tax liability at December 31, 2000 and
2001, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables. At December 31, 2000 and
2001, 98% and 95%, respectively, of the deferred tax valuation allowance relates
to NL tax jurisdictions, principally Germany, and all of the remainder relates
to Tremont's U.S. federal income tax jurisdiction.
December 31,
2000 2001
---------------- -----------------
Assets Liabilities Assets Liabilities
(In millions)
Tax effect of temporary differences related to:
Inventories ...................................... $ 4.3 $ (3.2) $ 4.2 $ (3.5)
Marketable securities ............................ -- (84.8) -- (56.4)
Mining properties ................................ -- (1.4) -- (1.2)
Property and equipment ........................... 62.1 (99.4) 43.2 (94.1)
Accrued OPEB costs ............................... 21.1 -- 19.0 --
Accrued environmental liabilities and
other deductible differences .................... 76.5 -- 73.7 --
Other taxable differences ........................ -- (165.0) -- (167.8)
Investments in subsidiaries and affiliates not
members of the Contran Tax Group ................ 7.5 (29.0) 12.4 (38.9)
Tax loss and tax credit carryforwards ............ 126.2 -- 119.2 --
Valuation allowance ................................ (195.0) -- (163.3) --
------ ------ ------ ------
Adjusted gross deferred tax assets (liabilities) 102.7 (382.8) 108.4 (361.9)
Netting of items by tax jurisdiction ............... (86.5) 86.5 (91.6) 91.6
------ ------ ------ ------
16.2 (296.3) 16.8 (270.3)
Less net current deferred tax asset (liability) .... 14.2 (1.9) 13.0 (1.8)
------ ------ ------ ------
Net noncurrent deferred tax asset (liability) .. $ 2.0 $(294.4) $ 3.8 $(268.5)
====== ====== ====== ======
Years ended December 31,
1999 2000 2001
---- ---- ----
(In millions)
Increase (decrease) in valuation allowance:
Increase in certain deductible temporary
differences which the Company believes do
not meet the "more-likely-than-not"
recognition criteria ........................... $ 1.6 $ 3.3 $ 3.8
Recognition of certain deductible tax
attributes for which the benefit had not
previously been recognized under the
"more-likely-than-not" recognition criteria .... (95.0) (2.6) (24.7)
Change in German tax law ........................ 24.1 -- --
Foreign currency translation .................... (14.7) (15.7) (7.5)
Offset to the change in gross deferred
income tax assets due principally to
redeterminations of certain tax attributes
and implementation of certain tax
planning strategies ............................ 183.1 (25.0) (3.7)
Consolidation of Tremont Corporation:
For financial reporting purposes .............. 13.6 -- --
For income tax purposes ....................... -- (12.1) --
Other, net ...................................... .8 (.9) .4
------ ------ ------
$113.5 $(53.0) $(31.7)
====== ====== ======
In 1999, NL recognized a $90 million non-cash income tax benefit related to
(i) a favorable resolution of NL's previously-reported tax contingency in
Germany ($36 million) and (ii) a net reduction in NL's deferred income tax
valuation allowance due to a change in estimate of NL's ability to utilize
certain income tax attributes under the "more-likely-than-not" recognition
criteria ($54 million). The $54 million net reduction in NL's deferred income
tax valuation allowance was comprised of (i) a $78 million decrease in the
valuation allowance to recognize the benefit of certain deductible income tax
attributes which NL now believes meets the recognition criteria as a result of,
among other things, a corporate restructuring of NL's German subsidiaries and
(ii) a $24 million increase in the valuation allowance to reduce the
previously-recognized benefit of certain other deductible income tax attributes
which NL now believes do not meet the recognition criteria due to a change in
German tax law. The German tax law change was effective January 1, 1999 and
resulted in an increase in NL's current income tax expense.
A reduction in the German "base" income tax rate from 30% to 25% was
enacted in October 2000 and became effective in January 2001. This reduction in
the German income tax rate resulted in a $4.4 million increase in the Company's
income tax expense in 2000 because the Company had recognized a net deferred
income tax asset with respect to Germany.
In 2001, NL completed a restructuring of its German subsidiaries, and as a
result NL recognized a $17.6 million net income tax benefit. This benefit is
comprised of a $23.2 million decrease in NL's deferred income tax asset
valuation allowance due to a change in estimate of NL's ability to utilize
certain German income tax attributes that did not previously meet the
"more-likely-than-not" recognition criteria, offset by $5.6 million of
incremental U.S. taxes on undistributed earnings of certain foreign
subsidiaries.
Certain of the Company's U.S. and non-U.S. income tax returns are being
examined and tax authorities have or may propose tax deficiencies. For example,
NL has received preliminary tax assessments for the years 1991 to 1997 from the
Belgian tax authorities proposing tax deficiencies, including related interest,
of approximately 10.4 million euro ($9 million at December 31, 2001). 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 is without merit.
Tremont has received a tax assessment from the U.S. federal tax authorities
proposing tax deficiencies of $8.3 million. Tremont is appealing the proposed
deficiencies and believes they are substantially without merit.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in court and tax
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on its consolidated
financial position, results of operations or liquidity.
At December 31, 2001, (i) NL had the equivalent of $317 million of German
income tax loss carryforwards with no expiration date, (ii) NL had $3 million of
U.S. net operating loss carryforwards expiring in 2019 and $5.7 million of
alternative minimum tax ("AMT") credit carryforwards with no expiration date,
(iii) Tremont had $9.5 million of U.S. net operating loss carryforwards expiring
in 2018 through 2020 and $.7 million of AMT credit carryforwards with no
expiration date and (iv) CompX had the equivalent of $4.7 million of net
operating loss carryforwards in The Netherlands with no expiration date and $8.4
million of U.S. net operating loss carryforwards expiring in 2007 through 2018.
The U.S. tax attribute carryforwards of NL and Tremont may only be used to
offset future taxable income of the respective company and are not available to
offset future taxable income of other members of the Contran Tax Group, and the
U.S. net operating loss carryforward of CompX may only be used to offset future
taxable income of an acquired subsidiary of CompX and are limited in utilization
to approximately $400,000 per year. During 1999, CompX utilized $300,000 of its
U.S. net operating loss carryforwards to reduce its current U.S. taxable income
(nil in 2000 and 2001).
Note 17 - Employee benefit plans:
Defined benefit plans. The Company maintains various defined benefit
pension plans. Variances from actuarially assumed rates will result in increases
or decreases in accumulated pension obligations, pension expense and funding
requirements in future periods. The funded status of the Company's defined
benefit pension plans, the components of net periodic defined benefit pension
cost related to the Company's consolidated business segments and charged to
continuing operations and the rates used in determining the actuarial present
value of benefit obligations are presented in the tables below. Effective
January 1, 2001, approximately 50 individuals previously compensated by Valhi
commenced being compensated by Contran. Accrued defined benefit pension costs
related to such individuals at December 31, 2000 were approximately $225,000.
During 2001, Valhi made a cash payment to Contran of $225,000, and the plan
assets and liabilities related to such individuals were transferred to Contran.
Effective January 1, 2001, CompX ceased providing future defined pension
benefits under its plan in The Netherlands, resulting in a curtailment gain of
$116,000. See Note 12. As of December 31, 2001, certain obligations related to
the terminated plan had not been fully settled and are reflected in accrued
defined benefit pension costs.
Years ended December 31,
2000 2001
---- ----
(In thousands)
Change in projected benefit obligations ("PBO"):
Benefit obligations at beginning of the year ....... $ 291,686 $ 281,540
Service cost ....................................... 4,368 3,974
Interest cost ...................................... 17,297 17,428
Participant contributions .......................... 1,027 1,004
Actuarial losses ................................... 1,890 10,359
Plan amendments .................................... -- 1,819
Curtailment gain ................................... -- (116)
Change in foreign exchange rates ................... (16,209) (3,385)
Benefits paid ...................................... (18,519) (17,432)
Transfer of obligations to Contran ................. -- (4,862)
--------- ---------
Benefit obligations at end of the year ......... $ 281,540 $ 290,329
========= =========
Change in plan assets:
Fair value of plan assets at beginning of the year . $ 244,555 $ 243,213
Actual return on plan assets ....................... 13,866 5,470
Employer contributions ............................. 16,620 7,577
Participant contributions .......................... 1,078 1,004
Change in foreign exchange rates ................... (14,387) (6,244)
Benefits paid ...................................... (18,519) (17,432)
Transfer of plan assets to Contran ................. -- (3,243)
--------- ---------
Fair value of plan assets at end of year ....... $ 243,213 $ 230,345
========= =========
Funded status at end of the year:
Plan assets less than PBO .......................... $ (38,327) $ (59,984)
Unrecognized actuarial loss ........................ 32,374 53,383
Unrecognized prior service cost .................... 1,948 4,371
Unrecognized net transition obligations ............ 788 4,269
--------- ---------
$ (3,217) $ 2,039
========= =========
Amounts recognized in the balance sheet:
Prepaid pension costs .............................. $ 22,789 $ 18,411
Unrecognized net pension obligations ............... -- 5,901
Accrued pension costs:
Current .......................................... (6,356) (6,241)
Noncurrent ....................................... (26,697) (33,823)
Accumulated other comprehensive income ............. 7,047 17,791
--------- ---------
$ (3,217) $ 2,039
========= =========
December 31,
Rate 1999 2000 2001
---- ---- ----
Discount 4% - 7.5% 4% - 7.8% 5.8% - 7.3%
Increase in future compensation levels 2.5% - 4.5% 3% - 4.5% 2.8% - 4.5%
Long-term return on assets 4% -10.0% 4% -10.0% 6.8% -10.0%
Years ended December 31,
1999 2000 2001
---- ---- ----
(In thousands)
Net periodic pension cost:
Service cost benefits ...................... $ 4,316 $ 4,368 $ 3,974
Interest cost on PBO ....................... 18,329 17,297 17,428
Expected return on plan assets ............. (18,120) (17,832) (18,386)
Amortization of prior service cost ......... 287 258 201
Amortization of net transition obligations . 580 532 509
Recognized actuarial losses ................ 1,328 369 703
-------- -------- --------
$ 6,720 $ 4,992 $ 4,429
======== ======== ========
The projected benefit obligations, accumulated benefit obligations and fair
value of plan assets for all defined benefit pension plans with accumulated
benefit obligations in excess of fair value of plan assets were $257 million,
$235 million and $197 million, respectively, at December 31, 2001 (2000 - $218.4
million, $196.6 million and $172.8 million, respectively). At December 31, 2000
and 2001, approximately 65% and 69%, respectively, of such unfunded amount
relates to NL's non-U.S. plans, and most of the remainder relates to certain of
NL's U.S. plans.
Defined contribution plans. The Company maintains various defined
contribution pension plans with Company contributions based on matching or other
formulas. Defined contribution plan expense related to the Company's
consolidated business segments approximated $2.8 million in 1999, $3.4 million
in 2000 and $2.5 million in 2001.
Postretirement benefits other than pensions. Certain subsidiaries currently
provide certain health care and life insurance benefits for eligible retired
employees. At December 31, 2000 and 2001, 60% and 61%, respectively, of the
Company's aggregate accrued OPEB costs relates to NL, and substantially all of
the remainder relates to Tremont.
The components of the periodic OPEB cost and accumulated OPEB obligations
and the rates used in determining the actuarial present value of benefit
obligations are presented in the tables below. Variances from
actuarially-assumed rates will result in additional increases or decreases in
accumulated OPEB obligations, net periodic OPEB cost and funding requirements in
future periods. At December 31, 2001, the expected rate of increase in future
health care costs ranges from 8% to 11.2% in 2002, declining to rates of about
5.0% in 2010 and thereafter. If the health care cost trend rate was increased
(decreased) by one percentage point for each year, OPEB expense would have
increased by $.3 million (decreased by $.2 million) in 2001, and the actuarial
present value of accumulated OPEB obligations at December 31, 2001 would have
increased by $2.4 million (decreased by $2.2 million).
Years ended December 31,
2000 2001
---- ----
(In thousands)
Change in accumulated OPEB obligations:
Obligations at beginning of the year ............. $ 54,410 $ 53,942
Service cost ..................................... 84 94
Interest cost .................................... 3,828 3,572
Actuarial losses (gains) ......................... 1,423 (230)
Plan asset reimbursements ........................ -- 1,197
Change in foreign exchange rates ................. (67) (145)
Benefits paid .................................... (5,736) (7,742)
-------- --------
Obligations at end of the year ................... $ 53,942 $ 50,688
======== ========
Change in plan assets:
Fair value of plan assets at
beginning of the year ........................... $ 5,968 $ 11,842
Actual return on plan assets ..................... 2,705 460
Employer contributions ........................... 8,905 1,840
Benefits paid .................................... (5,736) (7,742)
-------- --------
Fair value of plan assets at end of the year ..... $ 11,842 $ 6,400
======== ========
Funded status at end of the year:
Plan assets less than benefit obligations ........ $(42,100) $(44,288)
Unrecognized net actuarial gain .................. (2,676) (2,522)
Unrecognized prior service credit ................ (12,067) (9,551)
-------- --------
$(56,843) $(56,361)
======== ========
Accrued OPEB costs recognized in the
balance sheet:
Current .......................................... $ (6,219) $ (6,215)
Noncurrent ....................................... (50,624) (50,146)
-------- --------
$(56,843) $(56,361)
======== ========
Years ended December 31,
1999 2000 2001
---- ---- ----
(In thousands)
Net periodic OPEB cost (credit):
Service cost ............................... $ 40 $ 84 $ 94
Interest cost .............................. 2,069 3,828 3,572
Expected return on plan assets ............. (526) (521) (773)
Amortization of prior service credit ....... (2,075) (2,516) (2,516)
Recognized actuarial losses (gains) ........ (573) 24 (123)
------- ------- -------
$(1,065) $ 899 $ 254
======= ======= =======
December 31,
Rate 1999 2000 2001
---- ---- ---- ----
Discount 7.5% 7.25%-7.3% 7%
Increase in future compensation levels nil - 6% nil - 6% nil - 6%
Long-term return on assets nil - 9% nil -7.7% nil - 7.7%
Note 18 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties, and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. The Company
continuously considers, reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business, tax and other objectives then relevant, it is possible that the
Company might be a party to one or more such transactions in the future.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
Receivables from and payables to affiliates are summarized in the table
below.
December 31,
2000 2001
---- ----
(In thousands)
Current receivables from affiliates:
TIMET ............................................ $ 599 $ 677
Other ............................................ 286 167
------- -------
$ 885 $ 844
======= =======
Noncurrent receivable from affiliate -
loan to Contran family trust ..................... $ -- $20,000
======= =======
Current payables to affiliates:
Demand loan from Contran:
Tremont Corporation ............................ $13,403 $ --
Valhi .......................................... 8,000 24,574
Income taxes payable to Contran .................. 1,666 6,410
Louisiana Pigment Company ........................ 8,710 6,362
Contran - trade items ............................ -- 501
TIMET ............................................ 252 286
Other ............................................ 11 15
------- -------
$32,042 $38,148
From time to time, loans and advances are made between the Company and
various related parties, including Contran, pursuant to term and demand notes.
These loans and advances are entered into principally for cash management
purposes. When the Company loans funds to related parties, the lender is
generally able to earn a higher rate of return on the loan than the lender would
earn if the funds were invested in other instruments. While certain of such
loans may be of a lesser credit quality than cash equivalent instruments
otherwise available to the Company, the Company believes that it has evaluated
the credit risks involved, and that those risks are reasonable and reflected in
the terms of the applicable loans. When the Company borrows from related
parties, the borrower is generally able to pay a lower rate of interest than the
borrower would pay if it borrowed from other parties.
In 2001, NL Environmental Management Services, Inc ("EMS"), NL's
majority-owned environmental management subsidiary, entered into a $25 million
revolving credit facility with one of the family trusts discussed in Note 1 ($20
million outstanding at December 31, 2001). The loan bears interest at prime, is
due on demand with 60 days notice and is collateralized by certain shares of
Contran's Class A common stock and Class E cumulative preferred stock held by
the trust. The value of the collateral is dependent, in part, on the value of
the Company as Contran's beneficial ownership interest in the Company is one of
Contran's more substantial assets. The terms of this loan were approved by
special committees of both NL's and EMS' respective board of directors composed
of independent directors. At December 31, 2001, $5 million is available for
borrowing by the family trust, and the loan has been classified as a noncurrent
asset because EMS does not presently intend to demand repayment within the next
12 months.
In 1998, Tremont entered into a revolving advance agreement with Contran.
Through February 2001, Tremont had net borrowings of $13.4 million from Contran
under such facility, primarily to fund Tremont's purchases of shares of NL and
TIMET common stock. Such borrowings from Contran bore interest at prime less .5%
and were payable upon demand. In February 2001, Tremont entered into a $13.4
million reducing revolving credit facility with EMS and used the proceeds to
repay its loan from Contran. Such intercompany loan between EMS and Tremont,
collateralized by 10 million shares of NL common stock owned by Tremont, is
eliminated in Valhi's consolidated financial statements at December 31, 2001.
The terms of Tremont's loans from both Contran and EMS were approved by the
independent directors of Tremont, and the terms of Tremont's loan from EMS was
approved by a special committee of EMS' board of directors composed of
independent directors.
During 1999, 2000 and 2001, Valhi borrowed varying amounts from Contran
pursuant to the terms of a demand note. Such unsecured borrowings bear interest
at a rate of prime less .5%.
Interest income on all loans to related parties was $.3 million in each of
1999 and 2000 and $.9 million in 2001. Interest expense on all loans from
related parties was $.5 million in 1999, $1.3 million in 2000 and $1.4 million
in 2001.
Payables to Louisiana Pigment Company are primarily for the purchase of
TiO2 (see Note 7). Purchases in the ordinary course of business from the
unconsolidated TiO2 manufacturing joint venture are disclosed in Note 7.
Under the terms of various intercorporate services agreements ("ISAs")
entered into between the Company and various related parties, including Contran,
employees of one company will provide certain management, tax planning,
financial and administrative services to the other company on a fee basis. Such
charges are based upon estimates of the time devoted by the employees of the
provider of the services to the affairs of the recipient, and the compensation
of such persons. Because of the large number of companies affiliated with
Contran, the Company believes it benefits from cost savings and economies of
scale gained by not having certain management, financial and administrative
staffs duplicated at each entity, thus allowing certain individuals to provide
services to multiple companies but only be compensated by one entity. These ISA
agreements are reviewed and approved by the applicable independent directors of
the companies that are parties to the agreements.
The net ISA fees charged by Contran to the Company aggregated approximately
$1.5 million in 1999, $2.6 million in 2000 and $8.5 million in 2001. Effective
July 1, 2000, three individuals who had previously been compensated by Valhi
commenced to be compensated by Contran, and effective January 1, 2001,
approximately 50 additional individuals who had previously been compensated by
Valhi also commenced to be compensated by Contran. The increases in the net ISA
fees charged by Contran from 1999 to 2000, and from 2000 to 2001, are due
principally to these changes.
NL has an ISA with TIMET whereby NL provides certain services to TIMET for
$300,000 in each of 1999, 2000 and 2001. TIMET has an ISA with Tremont whereby
TIMET provides certain services to Tremont for $200,000 in 1999, $300,000 in
2000 and $400,000 in 2001. Certain other subsidiaries of the Company are also
parties to similar ISAs among themselves, and expenses associated with these
agreements are eliminated in Valhi's consolidated financial statements.
Certain of the Company's insurance coverages that were reinsured in 1999,
2000 and 2001 were arranged for and brokered by EWI Re, Inc. Parties related to
Contran own all of the outstanding common stock of EWI. Through December 31,
2000, a son-in-law of Harold C. Simmons managed the operations of EWI.
Subsequent to December 31, 2000, such individual provides advisory services to
EWI as requested by EWI. The Company generally does not compensate EWI directly
for insurance, but understands that, consistent with insurance industry
practice, EWI receives a commission for its services from the insurance
underwriters.
Through January 2002, an entity controlled by one of Harold C. Simmons'
daughters owned a majority of EWI, and Contran owned all or substantially all of
the remainder of EWI. In January 2002, NL purchased EWI from its previous owners
for an aggregate cash purchase price of approximately $9 million, and EWI became
a wholly-owned subsidiary of NL. The purchase was approved by a special
committee of NL's board of directors consisting of two of its independent
directors, and the purchase price was negotiated by the special committee based
upon its consideration of relevant factors, including but not limited to due
diligence performed by independent consultants and an appraisal of EWI conducted
by an independent third party selected by the special committee.
Basic Management, Inc., among other things, provides utility services
(primarily water distribution, maintenance of a common electrical facility and
sewage disposal monitoring) to TIMET and other manufacturers within an
industrial complex located in Nevada. The other owners of BMI are generally the
other manufacturers located within the complex. Power and sewer services are
provided on a cost reimbursement basis, similar to a cooperative, while water is
provided at the same rates as are charged by BMI to an unrelated third party.
Amounts paid by TIMET to BMI for utility services were $1.0 million in 1999,
$1.6 million in 2000 and $1.5 million in 2001. TIMET also paid BMI a facilities
usage fee of $800,000 in 1999 and $1.3 million in each of 2000 and 2001. The
$1.3 million annual facilities usage fee will continue through 2005 and then
decline to $500,000 annually for 2006 through 2010, at which time the facilities
usage fee expires.
During 2001, Tremont paid BMI $600,000 pursuant to an agreement in which
Tremont and other owners of BMI agreed to cover the costs of certain land
improvements made by BMI to the land owned by Tremont and other BMI owners. The
cost of the land improvement was divided among the companies based on each
company's proportional share in the improved acreage.
During 2000, (i) Valhi purchased 90,000 shares of Tremont common stock from
an officer of Tremont for $2.9 million and 1,700 shares of its common stock from
an employee of Valhi for $19,000 and (ii) NL purchased 414,000 shares of its
common stock from officers and directors of NL for an aggregate of $9.4 million.
See Notes 3 and 11. Such purchases were at market prices on the respective dates
of purchase.
COAM Company is a partnership which has sponsored research agreements with
the University of Texas Southwestern Medical Center at Dallas to develop and
commercially market a safe and effective treatment for arthritis (the "Arthritis
Research Agreement") and to develop and commercially market patents and
technology resulting from a cancer research program (the "Cancer Research
Agreement"). At December 31, 2001, COAM partners are Contran, Valhi and another
Contran subsidiary. Harold C. Simmons is the manager of COAM. The Arthritis
Research Agreement, as amended, provides for payments by COAM of up to $2
million over the next three years and the Cancer Research Agreement, as amended,
provides for funds of up to $10.4 million over the next nine years. Funding
requirements pursuant to the Arthritis and Cancer Research Agreements are
without recourse to the COAM partners and the partnership agreement provides
that no partner shall be required to make capital contributions. Capital
contributions are expensed as paid. The Company's contributions to COAM were nil
in each of the past three years, and the Company does not currently expect it
will make any capital contributions to COAM in 2002.
Amalgamated Research, Inc., a wholly-owned subsidiary of the Company,
conducts certain research and development activities within and outside the
sweetener industry for The Amalgamated Sugar Company LLC and others. Amalgamated
Research has also granted to The Amalgamated Sugar Company LLC a non-exclusive,
perpetual royalty-free license to use all currently existing or hereafter
developed technology which is applicable to sugar operations and provides for
certain royalties to The Amalgamated Sugar Company from future sales or licenses
of the subsidiary's technology. Research and development services charged to The
Amalgamated Sugar Company LLC were $779,000 in 1999, $764,000 in 2000 and
$828,000 in 2001. The Amalgamated Sugar Company LLC also provides certain
administrative services to Amalgamated Research. The cost of such services
provided by the LLC, based upon estimates of the time devoted by employees of
the LLC to the affairs of Amalgamated Research, and the compensation of such
persons, is netted against the agreed-upon research and development services fee
paid by the LLC to Amalgamated Research.
Note 19 - Commitments and contingencies:
Legal proceedings
Lead pigment litigation. Since 1987, NL, other former manufacturers of lead
pigments for use in paint and lead-based paint and the Lead Industries
Association have been named as defendants in various legal proceedings seeking
damages for personal injury, property damage and government expenditures
allegedly caused by the use of lead-based paints. Certain of these actions have
been filed by or on behalf of states or large United States cities or their
public housing authorities, school districts and certain others have been
asserted as class actions. These legal proceedings seek recovery under a variety
of theories, including negligent product design, failure to warn, breach of
warranty, conspiracy/concert of action, enterprise liability, market share
liability, intentional tort, and fraud and misrepresentation.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and asserted health concerns associated
with the use of lead-based paints, including damages for personal injury,
contribution and/or indemnification for medical expenses, medical monitoring
expenses and costs for educational programs. Most of these legal proceedings are
in various pre-trial stages; some are on appeal.
NL believes these actions are without merit, intends to continue to deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. NL has not accrued any amounts for the pending lead pigment and
lead-based paint litigation. Considering NL's previous involvement in the lead
and lead pigment businesses, there can be no assurance that additional
litigation similar to that currently pending will not be filed.
Environmental matters and litigation. The Company's operations are governed
by various federal, state, local and foreign environmental laws and regulations.
The Company's policy is to comply with environmental laws and regulations at all
of its plants and to continually strive to improve environmental performance in
association with applicable industry initiatives. The Company believes that its
operations are in substantial compliance with applicable requirements of
environmental laws. From time to time, the Company may be subject to
environmental regulatory enforcement under various statutes, resolution of which
typically involves the establishment of compliance programs.
Some of NL's current and former facilities, including several divested
secondary lead smelters and former mining locations, are the subject of civil
litigation, administrative proceedings or investigations arising under federal
and state environmental laws. Additionally, in connection with past disposal
practices, NL has been named as a defendant, potentially responsible party
("PRP"), or both, pursuant to CERCLA or similar state loans in approximately 75
governmental and private actions associated with waste disposal sites, mining
locations and facilities currently or previously owned, operated or used by NL,
its subsidiaries and their predecessors, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. These proceedings
seek cleanup costs, damages for personal injury or property damage and/or
damages for injury to natural resources. Certain of these proceedings involve
claims for substantial amounts. Although NL may be jointly and severally liable
for such costs, in most cases, it is only one of a number of PRPs who may also
be jointly and severally liable. In addition, NL is a party to a number of
lawsuits filed in various jurisdictions alleging CERCLA or other environmental
claims. At December 31, 2001, NL had accrued $107 million for those
environmental matters which NL believes are reasonably estimable. NL believes it
is not possible to estimate the range of costs for certain sites. The upper end
of range of reasonably possible costs to NL for sites for which NL believes it
is possible to estimate costs is approximately $160 million.
At December 31, 2001, Tremont had accrued approximately $5 million for
environmental cleanup matters, principally related to one site in Arkansas.
Tremont believes it is only one of a number of apparently solvent PRPs that
would ultimately share in any cleanup costs for this site.
At December 31, 2001, TIMET had accrued approximately $4 million for
environmental cleanup matters, principally related to TIMET's facility in Nevada
and a former TIMET facility in California.
The Company has also accrued approximately $6 million at December 31, 2001
in respect of other environmental cleanup matters, including amounts related to
one Superfund site in Indiana where the Company, as a result of former
operations, has been named as a PRP and certain former sites of the disposed
building products segment. Such accrual is near the upper end of the range of
the Company's estimate of reasonably possible costs for such matters.
The imposition of more stringent standards or requirements under
environmental laws or regulations, new developments or changes with respect to
site cleanup costs or allocation of such costs among PRPs, or a determination
that the Company is potentially responsible for the release of hazardous
substances at other sites, could result in expenditures in excess of amounts
currently estimated by the Company to be required for such matters. No assurance
can be given that actual costs will not exceed accrued amounts or the upper end
of the range for sites for which estimates have been made, and no assurance can
be given that costs will not be incurred with respect to sites as to which no
estimate presently can be made. Further, there can be no assurance that
additional environmental matters will not arise in the future.
Other litigation. NL has been named as a defendant in various lawsuits in a
variety of jurisdictions alleging personal injuries as a result of occupational
exposure to asbestos, silica and/or mixed dust in connection with formerly-owned
operations. Various of these actions remain pending.
In March 1997, NL was served with a complaint filed in the Fifth Judicial
District Court of Cass County, Texas (Ernest Hughes, et al. v. Owens-Corning
Fiberglass Corporation, et al., No. 97-C-051) on behalf of approximately 4,000
plaintiffs and their spouses alleging injury due to exposure to asbestos, and
seeking compensatory and punitive damages. NL has filed an answer denying the
material allegations. The case has been inactive since 1998.
In February 1999, and October 2000, NL was served with complaints in Cosey,
et al. v. Bullard, et al., No. 95-0069, and Pierce, et al. v. GAF, et al., filed
in the Circuit Court of Jefferson County, Mississippi, on behalf of
approximately 1,600 and 275 plaintiffs, respectively, alleging injury due to
exposure to asbestos and/or silica and seeking compensatory and punitive
damages. NL has filed answers in both cases denying the material allegations of
the complaint. The Cosey Case was removed to federal court and has been
transferred to the U.S. District Court for the Eastern District of Pennsylvania
for consolidated proceedings.
NL is a defendant in various other asbestos, silica and/or mixed dust cases
pending in Ohio, Indiana and West Virginia on behalf of approximately 6,900
personal injury claimants.
In December 1997, a complaint was filed in the United States District Court
for the Northern District of Illinois against the Company (Finnsugar
Bioproducts, Inc. v. The Amalgamated Sugar Company LLC, et al., No. 97 C 8746).
The complaint, as amended, alleges certain technology used by The Amalgamated
Sugar Company LLC in its manufacturing processes infringes a certain patent of
Finnsugar and seeks, among other things, unspecified damages. The technology is
owned by Amalgamated Research and licensed to, among others, the LLC. Both
Amalgamated Research and the LLC are defendants in the action. Defendants have
answered the complaint denying infringement, and filed a counterclaim seeking to
have Finnsugar's patent declared invalid and unenforceable. Discovery on the
merits portion of both plaintiff's and defendants' claims has been completed.
Plaintiff and defendants each filed summary judgment motions. In April 2001, the
court granted certain of the defendants' summary judgment motions, and the court
also ruled that Finnsugar's patent was invalid. Finnsugar moved the court to
reconsider its decisions, and the remaining summary judgment motions filed by
both plaintiff and defendants remain pending. If such pending summary judgment
motions do not resolve the matter, a brief period of additional discovery will
occur. The Company believes, and understands the LLC believes, that the
complaint is without merit and that the Company's technology does not violate
Finnsugar's patent. The Company intends, and understands that the LLC intends,
to defend against this action vigorously.
In August and September 2000, NL and one of its subsidiaries, NLO, Inc.,
were named as defendants in each of the four lawsuits listed below that were
filed in federal court in the Western District of Kentucky against the
Department of Energy ("DOE") and a number of other defendants alleging that
nuclear material supplied by, among others, the Feed Material Production Center
("FMPC") in Fernald, Ohio, owned by the DOE and formerly managed under contract
by NLO, harmed employees and others at the DOE's Paducah, Kentucky Gaseous
Diffusion Plant ("PGDP"). With respect to each of the four cases listed below,
NL believes that the DOE is obligated to provide defense and indemnification
pursuant to its contract with NLO, and pursuant to its statutory obligation to
do so, as the DOE has done in several previous cases relating to management of
the FMPC. NL has so advised the DOE. Answers in the four cases have not been
filed and, as described below, three of the four cases have been settled. NL and
NLO have moved to dismiss the complaints in all four claims. If those motions
are not granted, NL and NLO intend to deny all allegations of wrongdoing and to
defend the cases vigorously.
o In Rainer, et al. v. E.I. du Pont de Nemours, et al., ("Rainer I") No.
5:00CV-223-J, plaintiffs purport to represent a class of former employees
at the PGDP and members of their households and seek actual and punitive
damages of $5 billion each for alleged negligence, infliction of emotional
distress, ultra-hazardous activity/strict liability and strict products
liability and battery. No answer or response to that complaint is yet due,
and pre-trial proceedings continue.
o In Rainer, et al. v. Bill Richardson, et al., ("Rainer II") No.
5:00CV-220-J, plaintiffs purport to represent the same classes regarding
the same matters alleged in Rainer I, and allege a violation of
constitutional rights and seek the same recovery sought in Rainer I, as
well as asserting claims for battery, fraud, deceit, and misrepresentation,
infliction of emotional distress, negligence, and conspiracy, concert of
action, joint venture and enterprise liability. No answer or response to
that complaint is yet due.
o In Dew, et al. v. Bill Richardson, et al., ("Dew") No. 5:00CV00221R,
plaintiffs purport to represent classes of all PGDP employees who sustained
pituitary tumors or cancer as a result of exposure to radiation and seek
actual and punitive damages of $2 billion each for alleged violation of
constitutional rights, assault and battery, fraud and misrepresentation,
infliction of emotional distress, negligence, ultra-hazardous
activity/strict liability, strict products liability, conspiracy, concert
of action, joint venture and enterprise liability, and equitable estoppel.
Pre-trial proceedings and discovery continue.
o In Shaffer, et al. v. Atomic Energy Commission, et al., ("Shaffer") No.
5:00CV00307M, plaintiffs purport to represent classes of PGDP employees and
household members, subcontractors at PGDP, and landowners near the PGDP and
seek actual and punitive damages of $1 billion each and medical monitoring
for the same counts alleged in Dew. In March 2001, the magistrate judge
ordered that the landowner plaintiffs be severed from the action and pursue
their claims in a separate action, Oreskovich v. Atomic Energy Commission,
No. 01CV-63-M. All of the Oreskovich plaintiffs subsequently dismissed
their claims against NL and NLO with prejudice. In addition, all but two of
the named plaintiffs in the Shaffer action have dismissed their claims
against the Settling Defendants without prejudice. In February 2002, the
court held that all causes of action asserted in the complaint that have a
one-year limitations period would be dismissed. In their motion to dismiss,
NL and NLO argued that all claims in the complaint, except the fraud claim,
were subject to dismissal because they have a one-year limitations period.
The court denied the motion to dismiss claims brought by certain decedents'
estates. The court reserved ruling on other arguments in the motion to
dismiss that, if granted, would dispose of all plaintiffs' claims,
indicating that it would address those arguments by separate opinion.
NL has reached an agreement pursuant to which the Rainer I, Rainer II, and
Shaffer cases against NL and NLO will be settled and dismissed with prejudice,
and in March 2002, the trial court approved the settlement. The time during
which the settlement may be appealed has not yet expired. The DOE has agreed to
reimburse NL for the settlement amount.
In September 2000, TIMET was named in an action filed by the U.S. Equal
Employment Opportunity Commission in federal district court in Las Vegas, Nevada
(U.S. Equal Employment Opportunity Commission v. Titanium Metals Corporation,
CV-S-00-1172DWH-RJJ). The complaint alleges that several female employees at
TIMET's Nevada plant were the subject of sexual harassment. TIMET intends to
vigorously defend this action, but in any event TIMET does not presently
anticipate that any adverse outcome in this case would be material to its
consolidated financial position, results of operations or liquidity.
In June 2001, Gutierrex-Palmenberg, Inc. ("GPI") filed a complaint in the
U.S. District Court, District of Arizona, against Waste Control Specialists LLC
(Guiterrez - Palmenberg, Inc. vs. Waste Control Specialists LLC, No. CIV '01
0981 PHX MS). The complaint alleges that Waste Control Specialists owes GPI in
excess of $380,000. Waste Control Specialists has counterclaimed for $55,000
that it believes it is owed from GPI. Waste Control Specialists intends to
defend against the action vigorously.
In addition to the litigation described above, the Company and its
affiliates are also involved in various other environmental, contractual,
product liability, patent (or intellectual property) and other claims and
disputes incidental to its present and former businesses. The Company currently
believes that 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.
Concentrations of credit risk. Sales of TiO2 accounted for substantially
all of NL's sales during the past three years. TiO2 is generally sold to the
paint, plastics and paper industries, which are generally considered
"quality-of-life" markets whose demand for TiO2 is influenced by the relative
economic well-being of the various geographic regions. TiO2 is sold to over
4,000 customers. In each of the past three years, approximately one-half of NL's
TiO2 sales volume were to Europe with about 38% attributable to North America,
and the ten largest customers accounted for about one-fourth of chemicals sales.
Component products are sold primarily to original equipment manufacturers
in North America and Europe. In 2001, the ten largest customers accounted for
approximately 36% of component products sales (2000 - 35%; 1999 - 33%).
The majority of TIMET's sales are to customers in the aerospace industry,
including airframe and engine manufacturers. TIMET's ten largest customers
accounted for about 30% of its sales in 1999 and about 48% in each of 2000 and
2001.
At December 31, 2001, consolidated cash, cash equivalents and restricted
cash includes $121 million invested in U.S. Treasury securities purchased under
short-term agreements to resell (2000 - $159 million), of which $62 million are
held in trust for the Company by a single U.S. bank (2000 - $67 million).
Capital expenditures. At December 31, 2001 the estimated cost to complete
capital projects in process approximated $13.5 million, of which $11 million
relates to NL's TiO2 facilities (including $4 million related to reconstruction
of the Leverkusen, Germany facility destroyed by fire in March 2001) and the
remainder relates to CompX. In addition, CompX is obligated to acquire
approximately 10 acres of land from the municipality of Maastricht, The
Netherlands, for approximately $2 million within the next two to three years as
part of an agreement made in conjunction with the sale/leaseback of its existing
Netherlands facility. See Note 12.
Royalties. Royalty expense, which relates principally to the volume of
certain products manufactured in Canada and sold in the United States under the
terms of a third-party patent license agreement, approximated $1.1 million in
each of 1999 and 2000 and $675,000 in 2001.
Long-term contracts. NL has long-term supply contracts that provide for
NL's chloride-process TiO2 feedstock requirements through 2006. The agreements
require NL to purchase certain minimum quantities of feedstock with average
minimum annual purchase commitments aggregating approximately $159 million.
TIMET has long-term agreements with certain major aerospace customers,
including The Boeing Company, Rolls-Royce plc, United Technologies Corporation
(and related companies) and Wyman-Gordon Company, pursuant to which TIMET is
intended to be the major supplier of titanium products to these customers. The
agreements are intended to provide for minimum market shares of the customer's
titanium requirements (generally at least 70%) for approximately 10-year
periods. The agreements generally provide for fixed or formula-determined
prices, at least for the first five years. With respect to TIMET's contract with
Boeing, although Boeing placed orders and accepted delivery of certain volumes
in 1999 and 2000, the level of orders was significantly below the contractual
volume requirements for those years. Boeing informed TIMET in 1999 that it was
unwilling to commit to the contract beyond the year 2000. In March 2000, TIMET
filed a lawsuit against The Boeing Company seeking damages for Boeing's breach
of the contract and a declaration from the court of TIMET's rights under the
contract. In June 2000, Boeing filed its answer to TIMET's complaint denying
substantially all of TIMET's allegations and making certain counterclaims
against TIMET. In April 2001, TIMET settled the litigation between TIMET and
Boeing related to their 1997 long-term purchase and supply agreement. Pursuant
to the settlement, TIMET received a cash payment of $82 million. The parties
also entered into an amended long-term agreement that, among other things,
allows Boeing to purchase up to 7.5 million pounds of titanium product annually
from TIMET from 2002 through 2007, subject to certain maximum quarterly volume
levels. In consideration, Boeing will annually advance TIMET $28.5 million for
purchases in the upcoming year. The initial advance for calendar year 2002 was
made in December 2001, with each subsequent advance made in early January of the
applicable calendar year beginning in 2003. The amended long-term agreement is
structured as a take-or-pay agreement such that Boeing will forfeit a
proportionate part of the $28.5 million annual advance in the event that its
orders for delivery for such calendar year are less than 7.5 million pounds.
Under a separate agreement TIMET will establish and hold buffer stock for Boeing
at TIMET's facilities.
TIMET also has a long-term arrangement for the purchase of titanium sponge.
The contract is effective through 2007, with firm pricing through 2002 (subject
to certain possible adjustments and possible early termination in 2004). The
agreement provides for annual purchases by TIMET of 6,000 metric tons, although
the supplier has agreed to reduced purchases by TIMET since 1999. TIMET is
currently operating under an agreement in principle that provides for minimum
purchases by TIMET of 1,500 metric tons in 2002 and certain other modified
terms. During 2001, TIMET accrued $3.0 million relating to its agreement with
the sponge supplier for settlement of purchases less than the required
contractual minimum for 2001 and prior years, of which $2.0 million remained
unpaid as of December 31, 2001. TIMET has no other long-term purchase
agreements.
Waste Control Specialists has agreed to pay two separate consultants fees
for performing certain services based on specified percentages of certain of
Waste Control Specialist's revenues. One such agreement currently provides for a
security interest in Waste Control Specialists' facility in West Texas to
collateralize Waste Control Specialists' obligation under that agreement, which
is limited to $18.4 million. A third similar agreement, under which Waste
Control Specialists was obligated to pay up to $10 million to another
independent consultant, was terminated during 2000. Expense related to all of
these agreements was not significant during the past three years.
Operating leases. Kronos' principal German operating subsidiary leases the
land under its Leverkusen TiO2 production facility pursuant to a lease expiring
in 2050. The Leverkusen facility, with approximately one-third of Kronos'
current TiO2 production capacity, is located within the lessor's extensive
manufacturing complex, and Kronos is the only unrelated party so situated. Under
a separate supplies and services agreement expiring in 2011, the lessor provides
some raw materials, auxiliary and operating materials and utilities services
necessary to operate the Leverkusen facility. Both the lease and the supplies
and services agreements restrict NL's ability to transfer ownership or use of
the Leverkusen facility. The Company also leases various other manufacturing
facilities and equipment. Most of the leases contain purchase and/or various
term renewal options at fair market and fair rental values, respectively. In
most cases the Company expects that, in the normal course of business, such
leases will be renewed or replaced by other leases. Rent expense related to the
Company's consolidated business segments approximated $10 million in 1999, $11
million in 2000 and $12 million in 2001. At December 31, 2001, future minimum
payments under noncancellable operating leases having an initial or remaining
term of more than one year were as follows:
Years ending December 31, Amount
(In thousands)
2002 $ 5,943
2003 4,509
2004 2,955
2005 1,818
2006 1,549
2007 and thereafter 20,269
-------
$37,043
Third-party indemnification. Amalgamated Research licenses certain of its
technology to third parties. With respect to such technology licensed to two
customers, Amalgamated Research has indemnified such customers for up to an
aggregate of $1.75 million against any damages they might incur resulting from
any claims for infringement of the Finnsugar patents discussed above. During
2000, Finnsugar filed a complaint against one of such customers in the U.S.
District Court for the Eastern District of Michigan alleging that the technology
licensed to such customer by the Company infringes certain of Finnsugar's
patents (Finnsugar Bioproducts, Inc. v. The Monitor Sugar Company, Civil No.
00-10381). Amalgamated Research is not a party to this litigation. The Company
denies such infringement, however the Company is providing defense costs to such
customer under the terms of their indemnification agreement up to the specified
limit of $750,000. Other than providing defense costs pursuant to the terms of
the indemnification agreements, Amalgamated Research does not believe it will
incur any losses as a result of providing such indemnification.
Note 20 - Accounting principles not yet adopted:
Goodwill. The Company will adopt SFAS No. 142, Goodwill and Other
Intangible Assets, effective January 1, 2002. Under SFAS No. 142, goodwill,
including goodwill arising from the difference between the cost of an investment
accounted for by the equity method and the amount of the underlying equity in
net assets of such equity method investee ("equity method goodwill"), will not
be amortized on a periodic basis. Instead, goodwill (other than equity method
goodwill) will be subject to an impairment test to be performed at least on an
annual basis, and impairment reviews may result in future periodic write-downs
charged to earnings. Equity method goodwill will not be tested for impairment in
accordance with SFAS No. 142; rather, the overall carrying amount of an equity
method investee will continue to be reviewed for impairment in accordance with
existing GAAP. There is currently no equity method goodwill associated with any
of the Company's equity method investees. Under the transition provisions of
SFAS No. 142, all goodwill existing as of June 30, 2001 will cease to be
periodically amortized as of January 1, 2002, but all goodwill arising in a
purchase business combination (including step acquisitions) completed on or
after July 1, 2001 would not be periodically amortized from the date of such
combination.
As discussed in Note 9, 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 will be assigned to the reporting unit
consisting of NL in total. Goodwill attributable to the component products
operating segment will be 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 deemed to not be impaired if the estimated fair
value of the applicable reporting unit exceeds the respective net carrying value
of such reporting units, including the allocated goodwill. If the fair value of
the reporting unit is less than carrying value, then a goodwill impairment loss
would be recognized equal to the excess, if any, of the net carrying value of
the reporting unit goodwill over its implied fair value (up to a maximum
impairment equal to the carrying value of the goodwill). The implied fair value
of reporting unit goodwill would be the amount equal to the excess of the
estimated fair value of the reporting unit over the amount that would be
allocated to the tangible and intangible net assets of the reporting unit
(including unrecognized intangible assets) as if such reporting unit had been
acquired in a purchase business combination accounted for in accordance with
SFAS No. 141.
In determining the estimated fair value of the NL reporting unit, the
Company will consider quoted market prices for NL common stock. The Company will
also use other appropriate valuation techniques, such as discounted cash flows,
to estimate the fair value of the two CompX reporting units.
The Company has completed its initial, transitional goodwill impairment
analysis under SFAS No. 142 as of January 1, 2002, and no goodwill impairments
were deemed to exist. In accordance with the requirements of SFAS No. 142, the
Company will review 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.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in 1999, 2000 and 2001 if the
goodwill amortization included in the Company's reported consolidated net income
had not been recognized.
Years ended December 31,
1999 2000 2001
---- ---- ----
(In millions,
except per share data)
Net income as reported .......................... $ 49.4 $ 76.6 $ 93.2
Adjustments:
Goodwill amortization ......................... 11.8 15.9 16.9
Equity method goodwill amortization ........... 4.3 -- --
Incremental income taxes ...................... (2.3) (1.6) (.1)
Minority interest in goodwill amortization .... (.7) (1.0) (1.1)
------- ------- -------
Adjusted net income .......................... $ 62.5 $ 89.9 $ 108.9
======= ======= =======
Basic net income per share
as reported .................................... $ .43 $ .67 $ .81
Adjustments:
Goodwill amortization ......................... .10 .13 .15
Equity method goodwill amortization ........... .04 -- --
Incremental income taxes ...................... (.02) (.01) --
Minority interest in goodwill amortization .... (.01) (.01) (.01)
------- ------- -------
Adjustment basic net income
per share ................................... $ .54 $ .78 $ .95
======= ======= =======
Diluted net income per share
as reported .................................... $ .43 $ .66 $ .80
Adjustments:
Goodwill amortization ......................... .10 .13 .15
Equity method goodwill amortization ........... .04 -- --
Incremental income taxes ...................... (.02) (.01) --
Minority interest in goodwill amortization .... (.01) (.01) (.01)
------- ------- -------
Adjusted diluted net income
per share ................................... $ .54 $ .77 $ .94
======= ======= =======
Impairment of long-lived assets. The Company will adopt SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, effective
January 1, 2002. SFAS No. 144 retains the fundamental provisions of existing
GAAP with respect to the recognition and measurement of long-lived asset
impairment contained in SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Lived-Lived Assets to be Disposed Of. However, SFAS
No. 144 provides new guidance intended to address certain implementation issues
associated with SFAS No. 121, including expanded guidance with respect to
appropriate cash flows to be used to determine whether recognition of any
long-lived asset impairment is required, and if required how to measure the
amount of the impairment. SFAS No. 144 also requires that any net assets to be
disposed of by sale to be reported at the lower of carrying value or fair value
less cost to sell, and expands the reporting of discontinued operations to
include any component of an entity with operations and cash flows that can be
clearly distinguished from the rest of the entity. Adoption of SFAS No. 144 will
not have a significant effect on the Company as of January 1, 2002.
Asset retirement obligations. 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.
Note 21 - Quarterly results of operations (unaudited):
Quarter ended
--------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In millions, except per share data)
Year ended December 31, 2000
Net sales ............................ $ 301.7 $ 320.0 $ 308.1 $ 262.1
Operating income ..................... 49.1 66.6 57.4 44.6
Net income ....................... $ 10.5 $ 35.0 $ 13.0 $ 18.1
Basic earnings per common share ...... $ .09 $ .30 $ .11 $ .16
Year ended December 31, 2001
Net sales ............................ $ 288.8 $ 276.3 $ 262.5 $ 231.9
Operating income ..................... 49.2 39.7 31.5 21.8
Net income ....................... $ 31.6 $ 47.6 $ 10.3 $ 3.7
Basic earnings per common share ...... $ .27 $ .41 $ .09 $ .03
The sum of the quarterly per share amounts may not equal the annual per
share amounts due to relative changes in the weighted average number of shares
used in the per share computations.
During the fourth quarter of 2000, the Company recognized a $26.5 million
pre-tax gain related to NL's legal settlement with certain of its former
insurance carriers and a $5.7 million pre-tax impairment charge for an other
than temporary decline in value of certain marketable securities held by the
Company. See Note 12. During the fourth quarter of 2000, the Company also
recognized an extraordinary loss related to the early extinguishment of certain
NL indebtedness. See Notes 1 and 11.
During the fourth quarter of 2001, the Company recognized (i) an $11.7
million insurance gain related to insurance recoveries received by NL resulting
from fire at its Leverkusen facility, (ii) $16.6 million of business
interruption insurance proceeds related to the Leverkusen fire as payment for
unallocated period costs and lost margin attributable to prior 2001 quarters,
and (iii) a $17.6 million net income tax benefit related principally to a change
in estimate of NL's ability to utilize certain German income tax attributes. See
Notes 12 and 16. In addition, the Company's equity in earnings of TIMET during
the fourth quarter of 2001 includes the effect of TIMET's $61.5 million
provision for an other than temporary decline in value of certain preferred
securities held by TIMET and a $12.3 million increase in TIMET's deferred income
tax asset valuation allowance.
Note 22 - Subsequent event:
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. With
respect to the Statements of Income for 1999, 2000 and 2001 included in these
consolidated financial statements, the effect of adopting SFAS No. 145 resulted
in a decrease in income before extraordinary item of $477,000 (nil per share) in
2000. There was no impact on 1999 or 2001 from adopting SFAS No. 145.