SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2003 Commission file number 1-5467
VALHI, INC.
(Exact name of Registrant as specified in its charter)
Delaware 87-0110150
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No
--- ---
Number of shares of the Registrant's common stock outstanding on October 31,
2003: 119,441,578.
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets -
December 31, 2002 and September 30, 2003 3
Consolidated Statements of Operations -
Three months and nine months ended
September 30, 2002 and 2003 5
Consolidated Statements of Comprehensive
Income - Nine months ended
September 30, 2002 and 2003 7
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 2003 8
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2002 and 2003 9
Notes to Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 29
Item 4. Controls and Procedures 49
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 50
Item 6. Exhibits and Reports on Form 8-K. 50
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, September 30,
2002 2003
------ ------
Current assets:
Cash and cash equivalents .................... $ 94,679 $ 89,051
Restricted cash equivalents .................. 52,489 22,358
Marketable securities ........................ 9,717 8,212
Accounts and other receivables ............... 170,623 209,638
Refundable income taxes ...................... 3,161 1,667
Receivable from affiliates ................... 3,947 6,013
Inventories .................................. 239,533 232,746
Prepaid expenses ............................. 15,867 9,723
Deferred income taxes ........................ 14,114 14,526
---------- ----------
Total current assets ..................... 604,130 593,934
---------- ----------
Other assets:
Marketable securities ........................ 179,582 173,699
Investment in affiliates ..................... 155,549 152,540
Receivable from affiliate .................... 18,000 16,000
Loans and other receivables .................. 111,255 115,413
Mining properties ............................ 16,545 14,951
Prepaid pension costs ........................ 17,572 17,249
Unrecognized net pension obligations ......... 5,561 6,439
Goodwill ..................................... 364,994 371,623
Other intangible assets ...................... 4,413 3,990
Deferred income taxes ........................ 1,934 236
Other ........................................ 31,120 24,376
---------- ----------
Total other assets ....................... 906,525 896,516
---------- ----------
Property and equipment:
Land ......................................... 31,725 33,660
Buildings .................................... 180,311 201,085
Equipment .................................... 677,268 741,006
Construction in progress ..................... 12,605 23,370
---------- ----------
901,909 999,121
Less accumulated depreciation ................ 337,783 408,114
---------- ----------
Net property and equipment ............... 564,126 591,007
---------- ----------
$2,074,781 $2,081,457
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30,
2002 2003
------ ------
Current liabilities:
Current maturities of long-term debt ....... $ 4,127 $ 627
Accounts payable ........................... 108,970 72,308
Accrued liabilities ........................ 149,466 135,237
Payable to affiliates ...................... 20,122 11,200
Income taxes ............................... 8,344 9,087
Deferred income taxes ...................... 3,627 2,144
----------- -----------
Total current liabilities .............. 294,656 230,603
----------- -----------
Noncurrent liabilities:
Long-term debt ............................. 605,740 612,358
Accrued pension costs ...................... 54,930 54,360
Accrued OPEB costs ......................... 45,474 38,555
Accrued environmental costs ................ 50,660 68,074
Deferred income taxes ...................... 255,735 254,029
Other ...................................... 31,984 29,830
----------- -----------
Total noncurrent liabilities ........... 1,044,523 1,057,206
----------- -----------
Minority interest ............................ 120,846 104,350
----------- -----------
Stockholders' equity:
Common stock ............................... 1,262 1,340
Additional paid-in capital ................. 47,657 117,858
Retained earnings .......................... 629,773 636,249
Accumulated other comprehensive income:
Marketable securities .................... 84,264 85,687
Currency translation ..................... (35,590) (12,102)
Pension liabilities ...................... (36,961) (37,220)
Treasury stock ............................. (75,649) (102,514)
----------- -----------
Total stockholders' equity ............. 614,756 689,298
----------- -----------
$ 2,074,781 $ 2,081,457
=========== ===========
Commitments and contingencies (Notes 11 and 14)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
2002 2003 2002 2003
---- ---- ---- ----
Revenues and other income:
Net sales $284,110 $295,986 $816,908 $918,765
Other, net 12,340 15,642 44,073 32,465
-------- -------- -------- --------
296,450 311,628 860,981 951,230
-------- -------- -------- --------
Costs and expenses:
Cost of sales 224,151 226,097 648,197 707,701
Selling, general and administrative 50,485 53,563 141,200 176,950
Interest 15,033 14,693 45,396 43,822
-------- -------- -------- --------
289,669 294,353 834,793 928,473
-------- -------- -------- --------
6,781 17,275 26,188 22,757
Equity in earnings of:
Titanium Metals Corporation ("TIMET") (17,153) 185 (31,710) (3,695)
Other (14) 177 298 677
-------- -------- -------- --------
Income (loss) before income taxes (10,386) 17,637 (5,224) 19,739
Provision for income taxes (benefit) (2,101) 6,328 (1,707) (17,044)
Minority interest in after-tax earnings (1,172) 2,447 935 8,546
-------- -------- -------- --------
Income (loss) before cumulative
effect of change in accounting
principle (7,113) 8,862 (4,452) 28,237
Cumulative effect of change in
accounting principle - - - 586
-------- -------- -------- --------
Net income (loss) $ (7,113) $ 8,862 $ (4,452) $ 28,823
======== ======== ======== ========
Pro forma income (loss) before
cumulative effect of change in
accounting principle* $ (7,119) $ 8,862 $ (4,479) $ 28,237
======== ======== ======== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
2002 2003 2002 2003
---- ---- ---- ----
Basic and diluted earnings per share:
Income (loss) before cumulative
effect of change in accounting
principle $ (.06) $ .07 $ (.04) $ .23
Cumulative effect of change in
accounting principle - - - .01
------- ------- ------- -------
Net income (loss) $ (.06) $ .07 $ (.04) $ .24
======= ======= ======= =======
Pro forma income (loss) before
cumulative effect of change in
accounting principle* $ (.06) $ .07 $ (.04) $ .23
======= ======= ======= =======
Cash dividends per share $ .06 $ .06 $ .18 $ .18
======= ======= ======= =======
Shares used in the calculation of per share amounts:
Basic earnings per common share 115,583 120,166 115,361 119,539
Dilutive impact of outstanding stock
options - 201 - 169
------- ------- ------- -------
Diluted earnings per share 115,583 120,367 115,361 119,708
======= ======= ======= =======
* Assumes Statement of Financial Accounting Standards No. 143 had been
adopted as of January 1, 2002. See Note 13.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Nine months ended September 30, 2002 and 2003
(In thousands)
2002 2003
---- ----
Net income (loss) .................................. $ (4,452) $ 28,823
-------- --------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment ................. (185) 1,423
Currency translation adjustment .................. 35,587 23,488
Pension liabilities adjustment ................... (2,213) (259)
-------- --------
Total other comprehensive income, net .......... 33,189 24,652
-------- --------
Comprehensive income ......................... $ 28,737 $ 53,475
======== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 2003
(In thousands)
Accumulated other comprehensive income
Additional -------------------------------------------- Total
Common paid-in Retained Marketable Currency Pension Treasury stockholders'
stock capital earnings securities translation liabilities stock equity
------ -------- -------- ---------- ----------- ----------- -------- -------------
Balance at December 31, 2002 .... $1,262 $ 47,657 $ 629,773 $84,264 $(35,590) $(36,961) $ (75,649) $ 614,756
Net income ...................... -- -- 28,823 -- -- -- -- 28,823
Dividends ....................... -- -- (22,347) -- -- -- -- (22,347)
Other comprehensive income
(loss), net .................... -- -- -- 1,423 23,488 (259) -- 24,652
Merger transactions - Valhi
shares issued to acquire Tremont
shares attributable to:
Tremont minority interest ..... 48 50,926 -- -- -- -- -- 50,974
NL's holdings of Tremont ...... 30 19,219 -- -- -- -- (19,249) --
Adjust treasury stock for
Valhi shares held by NL ........ -- -- -- -- -- -- (7,616) (7,616)
Other, net ...................... -- 56 -- -- -- -- -- 56
------ -------- --------- ------- -------- -------- --------- ---------
Balance at September 30, 2003 ... $1,340 $117,858 $ 636,249 $85,687 $(12,102) $(37,220) $(102,514) $ 689,298
====== ======== ========= ======= ======== ======== ========= =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2002 and 2003
(In thousands)
2002 2003
---- ----
Cash flows from operating activities:
Net income (loss) ....................................... $ (4,452) $ 28,823
Depreciation and amortization ........................... 46,075 53,563
Securities transaction gains, net ....................... (1,915) (537)
Proceeds from disposal of marketable securities (trading) 8,659 50
Gain on disposal of property and equipment .............. (1,942) (8,259)
Non-cash interest expense ............................... 3,057 1,744
Deferred income taxes ................................... 463 (3,830)
Minority interest ....................................... 935 8,546
Other, net .............................................. (7,607) (6,230)
Equity in:
TIMET ................................................. 31,710 3,695
Other ................................................. (298) (677)
Cumulative effect of change in accounting principle ..... -- (586)
Distributions from:
Manufacturing joint venture ........................... 6,350 2,175
Other ................................................. 361 1,205
Change in assets and liabilities:
Accounts and other receivables ........................ (24,414) (30,922)
Inventories ........................................... 73,039 25,045
Accounts payable and accrued liabilities .............. (44,490) (8,092)
Accounts with affiliates .............................. (9,056) (291)
Income taxes .......................................... 1,227 3,448
Other, net ............................................ (6,389) 4,882
-------- --------
Net cash provided by operating activities ......... 71,313 73,752
-------- --------
Cash flows from investing activities:
Capital expenditures .................................... (28,384) (32,272)
Purchases of:
TIMET common stock .................................... -- (976)
TIMET debt securities ................................. -- (238)
NL common stock ....................................... (10,559) --
Business unit ......................................... (9,149) --
Proceeds from disposal of property and equipment ........ 2,716 11,333
Collection of loans to affiliate ........................ -- 2,000
Change in restricted cash equivalents, net .............. 3,045 1,090
Other, net .............................................. (244) 1,949
-------- --------
Net cash used by investing activities ............. (42,575) (17,114)
-------- --------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 2002 and 2003
(In thousands)
2002 2003
---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings ........................................ $ 331,800 $ 22,106
Principal payments ................................ (291,254) (50,596)
Deferred financing costs paid ..................... (10,590) (416)
Loans from affiliate:
Loans ............................................. 10,914 10,086
Repayments ........................................ (12,825) (20,193)
Valhi dividends paid ................................ (20,893) (22,347)
Distributions to minority interest .................. (7,275) (5,007)
Other, net .......................................... 3,154 750
--------- --------
Net cash provided (used) by financing activities 3,031 (65,617)
--------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing activities ....... 31,769 (8,979)
Currency translation ................................ 3,312 3,351
Business unit acquired .............................. 196 --
Cash and equivalents at beginning of period ........... 154,413 94,679
--------- --------
Cash and equivalents at end of period ................. $ 189,690 $ 89,051
========= ========
Supplemental disclosures:
Cash paid (received) for:
Interest, net of amounts capitalized .............. $ 40,754 $ 35,699
Income taxes, net ................................. 10,156 (12,706)
Business unit acquired - net assets consolidated:
Cash and cash equivalents ......................... $ 196 $ --
Restricted cash equivalents ....................... 2,685 --
Goodwill and other intangible assets .............. 9,007 --
Other non-cash assets ............................. 1,259 --
Liabilities ....................................... (3,998) --
--------- --------
Cash paid ......................................... $ 9,149 $ --
========= ========
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
The consolidated balance sheet of Valhi, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2002 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at September 30, 2003, and the consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flows for the interim periods ended September 30, 2002 and 2003, have been
prepared by the Company, without audit, in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the consolidated financial position, results of
operations and cash flows have been made.
The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted, and certain prior year
amounts have been reclassified to conform to the current year presentation. The
accompanying consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
2002 (the "2002 Annual Report").
Basic earnings per share of common stock is based upon the weighted average
number of common shares actually outstanding during each period. Diluted
earnings per share of common stock includes the impact of outstanding dilutive
stock options.
Contran Corporation holds, directly or through subsidiaries, approximately
90% of Valhi's outstanding common stock. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of
certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is
sole trustee. Mr. Simmons, the Chairman of the Board of Valhi and Contran, may
be deemed to control such companies.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 143, Accounting for Asset Retirement Obligations, effective January 1, 2003.
See Note 13.
As disclosed in the 2002 Annual Report, the Company accounts for
stock-based employee compensation in accordance with Accounting Principles Board
Opinion ("APBO") 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. During the fourth quarter of
2002, following the cash settlement of certain stock options held by employees
of NL, NL commenced accounting for its remaining stock options using the
variable accounting method because NL could not overcome the presumption that it
would not similarly cash settle its remaining stock options. Under the variable
accounting method, the intrinsic value of all unexercised stock options
(including those with an exercise price at least equal to the market price on
the date of grant) are accrued as an expense over their vesting period, with
subsequent increases (decreases) in the market price of the underlying common
stock resulting in additional compensation expense (income). Net compensation
cost recognized by the Company in accordance with APBO No. 25 was nil in each of
the third quarter and first nine months of 2002, and net compensation income was
$400,000 in each of the third quarter and first nine months of 2003.
The following table presents what the Company's consolidated net income
(loss), and related per share amounts, would have been in the 2002 and 2003
periods presented if Valhi and its subsidiaries and affiliates had each elected
to account for their respective stock-based employee compensation related to
stock options in accordance with the fair value-based recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation, for all awards granted
subsequent to January 1, 1995.
Three months ended Nine months ended
September 30, September 30,
2002 2003 2002 2003
---- ---- ---- ----
(In millions, except per share amounts)
Net income (loss) as reported $(7.1) $ 8.8 $(4.4) $28.8
Adjustments, net of applicable income
tax effects and minority interest, of
stock-based employee compensation
expense determined:
Under APBO No. 25 - (.2) - (.2)
Under SFAS No. 123 (.6) (.3) (2.0) (1.1)
----- ----- ----- -----
Pro forma net income (loss) $(7.7) $ 8.3 $(6.4) $27.5
===== ===== ===== =====
Basic and diluted net income (loss) per share:
As reported $(.06) $ .07 $(.04) $ .24
Pro forma (.07) .07 (.06) .23
Note 2 - Business segment information:
% owned at
Business segment Entity September 30, 2003
Chemicals NL Industries, Inc. 84%
Component products CompX International Inc. 69%
Waste management Waste Control Specialists LLC 90%
Titanium metals TIMET 41%
The Company's ownership of NL includes 63% owned directly by Valhi and 21%
owned directly by Tremont LLC, a wholly-owned subsidiary of Valhi. The Company's
ownership of TIMET includes 40% owned directly by Tremont LLC and 1% owned
directly by Valhi. During the first nine months of 2003, the Company acquired
additional shares of TIMET common stock in market transactions for an aggregate
of $976,000, increasing the Company's ownership of TIMET to 41% at September 30,
2003. NL (NYSE: NL), CompX (NYSE: CIX), and TIMET (NYSE: TIE) each file periodic
reports with the Securities and Exchange Commission ("SEC") pursuant to the
Securities Exchange Act of 1934, as amended.
Chemicals operating income, as presented below, differs from amounts
separately reported by NL due to amortization of purchase accounting basis
adjustments recorded by the Company. Similarly, the Company's equity in earnings
of TIMET differs from the Company's pro-rata share of TIMET's
separately-reported results. Component products operating income, as presented
below, may differ from amounts separately reported by CompX because the Company
defines operating income differently than CompX.
Three months ended Nine months ended
September 30, September 30,
2002 2003 2002 2003
---- ---- ---- ----
(In millions)
Net sales:
Chemicals $234.0 $242.9 $663.3 $762.5
Component products 48.8 52.6 148.4 153.3
Waste management 1.3 .5 5.2 3.0
------ ------ ------ ------
Total net sales $284.1 $296.0 $816.9 $918.8
====== ====== ====== ======
Operating income:
Chemicals $ 26.5 $ 31.7 $ 67.5 $ 94.1
Component products 1.3 (.4) 5.6 1.8
Waste management (2.5) (3.1) (6.6) (8.7)
------ ------ ------ ------
Total operating income 25.3 28.2 66.5 87.2
General corporate items:
Interest and dividend income 9.0 8.0 25.9 24.3
Securities transaction gains, net - - 1.9 .5
Legal settlement gains, net - - 2.4 .7
Foreign currency transaction gain - - 6.3 -
Gain on disposal of fixed assets - 7.4 1.6 8.5
General expenses, net (12.5) (11.7) (33.0) (54.7)
Interest expense (15.0) (14.7) (45.4) (43.8)
------ ------ ------ ------
6.8 17.2 26.2 22.7
Equity in:
TIMET (17.2) .2 (31.7) (3.7)
Other - .2 .3 .7
------ ------ ------ ------
Income (loss) before income taxes $(10.4) $ 17.6 $ (5.2) $ 19.7
====== ====== ====== ======
At December 31, 2002, Valhi and NL owned 80% and 20%, respectively, of
Tremont Group, Inc., and Tremont Group owned approximately 80% of Tremont
Corporation. In addition, Valhi and NL each owned a nominal number of Tremont
shares directly. In February 2003, Valhi completed two consecutive merger
transactions pursuant to which Tremont Group and Tremont both became
wholly-owned subsidiaries of Valhi. Under these merger transactions, (i) Valhi
issued 3.5 million shares of its common stock to NL in exchange for NL's 20%
ownership interest in Tremont Group and (ii) Valhi issued 3.4 shares of its
common stock (plus cash in lieu of fractional shares) to Tremont stockholders
(other than Valhi and Tremont Group) in exchange for each share of Tremont
common stock held by such stockholders, or an aggregate of 4.3 million shares of
Valhi common stock, in each case in a tax-free exchange. A special committee of
Tremont's board of directors, consisting of members unrelated to Valhi who
retained their own independent financial and legal advisors, recommended
approval of the second merger. Subsequent to these two mergers, Tremont Group
and Tremont merged to form Tremont LLC, also wholly owned by Valhi. The number
of shares of Valhi common stock issued to NL in exchange for NL's 20% ownership
interest in Tremont Group was equal to NL's 20% pro-rata interest in the shares
of Tremont common stock held by Tremont Group, adjusted for the 3.4 exchange
ratio in the second merger.
For financial reporting purposes, the Tremont shares previously held by NL
(either directly or indirectly through NL's ownership interest in Tremont Group)
were already considered as part of the Valhi consolidated group's ownership of
Tremont to the extent of Valhi's ownership interest in NL. Therefore, that
portion of such Tremont shares was not considered as held by the Tremont
minority stockholders. As a result, the Valhi shares issued to NL in the merger
transactions described above were deemed to have been issued in exchange for the
Tremont shares held by the Tremont minority interest only to the extent that
Valhi did not have an ownership interest in NL. At September 30, 2003, NL and
its subsidiaries owned an aggregate of 4.7 million shares of Valhi common stock,
including 3.5 million shares received by NL in the merger transactions described
above and 1.2 million shares previously acquired by NL. As discussed in the 2002
Annual Report, the amount shown as treasury stock in the Company's consolidated
balance sheet for financial reporting purposes includes the Company's
proportional interest in the shares of Valhi common stock held by NL.
Accordingly, a portion of the 3.5 million shares of Valhi common stock issued to
NL in the merger transactions were reported as treasury stock, and were not
deemed to have been issued in exchange for Tremont shares held by the minority
interest, since they represent shares issued to "acquire" the portion of the
Tremont shares already held directly or indirectly by NL that were considered as
part of the Valhi consolidated group's ownership of Tremont.
The following table presents the number of Valhi common shares that were
issued pursuant to the merger transactions described above.
Equivalent
Tremont Valhi
shares shares(1)
Valhi shares issued to NL in exchange for NL's ownership interest in Tremont
Group:
Valhi shares issued to NL(2) 3,495,200
Less shares deemed Valhi has issued to itself based
on Valhi's ownership interest in NL (2,957,288)
----------
537,912
Valhi shares issued to the Tremont stockholders:
Total number of Tremont shares outstanding 6,424,858
Less Tremont shares held by Tremont Group and Valhi(3) (5,146,421)
----------
1,278,437 4,346,686
==========
Less fractional shares converted into cash (1,758)
Less shares deemed Valhi has issued to itself based on
Valhi's ownership interest in NL(4) (23,494)
---------
4,321,434
Net Valhi shares issued to acquire the Tremont
minority interest 4,859,346
=========
(1) Based on the 3.4 exchange ratio.
(2) Represents 5,141,421 shares of Tremont held by Tremont Group, multiplied by
NL's 20% ownership interest in Tremont Group, adjusted for the 3.4 exchange
ratio in the merger.
(3) The Tremont shares held by Tremont Group and Valhi were cancelled in the
merger transactions.
(4) Represents shares of Tremont held directly by NL, multiplied by Valhi's
ownership interest in NL and adjusted for the 3.4 exchange ratio.
For financial reporting purposes, the merger transactions described above
were accounted for by the purchase method (step acquisition of Tremont). The
shares of Valhi common stock issued to the Tremont minority interest were valued
at $10.49 per share, representing the average of Valhi's closing NYSE stock
price for the period beginning two trading days prior to the November 5, 2002
public announcement of the signing of the definitive merger agreement and ending
two trading days following such public announcement. The shares of Valhi common
stock issued to acquire the Tremont shares held by NL that were already
considered as part of the Valhi's consolidated groups ownership of Tremont,
which were reported as treasury stock, were valued at carryover cost basis of
approximately $19.2 million. The following presents the purchase price for the
step acquisition of Tremont. The value assigned to the shares of Valhi common
stock issued is $10.49 per share, as discussed above.
Valhi
shares Assigned
issued value
---------- -----
(In millions)
Net Valhi shares issued 4,859,346 $51.0
=========
Plus cash fees and expenses 0.9
-----
Total purchase price $51.9
=====
The purchase price has been allocated based upon a preliminary estimate of
the fair value of the net assets acquired as follows:
Amount
(In millions)
Book value of historical minority interest in Tremont's net
assets acquired $28.7
Remaining purchase price allocation:
Increase property and equipment to fair value 3.5
Increase mining properties to fair value .5
Reduce Tremont's accrued OPEB costs to accumulated benefit
obligations 4.4
Adjust deferred income taxes 8.9
Goodwill 5.9
-----
Purchase price $51.9
=====
The adjustments to increase the carrying value of property and equipment
and mining properties relate to such assets of NL, and gives recognition to the
effect that Valhi's acquisition of the minority interest in Tremont results in
an increase in Valhi's effective ownership of NL due to Tremont's ownership of
NL. The reduction in Tremont's accrued OPEB costs to an amount equal to the
accumulated benefit obligations eliminates the unrecognized prior service credit
and the unrecognized actuarial gains. The adjustment to deferred income taxes
includes (i) the deferred income tax effect of the estimated purchase price
allocated to property and equipment, mining properties and accrued OPEB costs
and (ii) the effect of adjusting the deferred income taxes separately-recognized
by Tremont (principally an elimination of a deferred income tax asset valuation
allowance separately-recognized by Tremont which Valhi does not believe is
required to be recognized at the Valhi level under the "more-likely-than-not"
recognition criteria).
Assuming the merger transactions had been completed as of January 1, 2002,
the Company would have reported a net loss of $8.9 million, or $.07 per diluted
share, in the first nine months of 2002. Such pro forma effect on the Company's
reported net income in the first nine months of 2003 was not material.
As noted above, the Company's proportional interest in shares of Valhi
common stock held by NL are reported as treasury stock in the Company's
consolidated balance sheet. As a result of the merger transactions discussed
above, the acquisition of minority interest in Tremont effectively resulted in
an increase in the Company's overall ownership of NL due to Tremont's 21%
ownership interest in NL. Accordingly, as a result of the merger transactions
noted above, the Company also recognized a $7.6 million increase in its treasury
stock attributable to the shares of Valhi common stock held by NL. At September
30, 2003, the amount reported as treasury stock, at cost, in the Company's
consolidated balance sheet includes an aggregate of $37.9 million attributable
to the 4.7 million shares of Valhi common stock held by NL (or 85% of NL's
aggregate original cost basis in such shares of $44.8 million).
Note 3 - Marketable securities:
December 31, September 30,
2002 2003
------ ------
(In thousands)
Current assets:
Restricted debt securities (available-for-sale) .... $ 9,670 $ 8,212
Halliburton Company common stock (trading) ......... 47 --
-------- --------
$ 9,717 $ 8,212
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC .................. $170,000 $170,000
Restricted debt securities ......................... 9,232 3,565
Other common stocks ................................ 350 134
-------- --------
$179,582 $173,699
======== ========
Note 4 - Accounts and other receivables:
December 31, September 30,
2002 2003
------ ------
(In thousands)
Accounts receivable .......................... $ 174,644 $ 214,584
Notes receivable ............................. 2,221 1,414
Accrued interest ............................. 114 13
Allowance for doubtful accounts .............. (6,356) (6,373)
--------- ---------
$ 170,623 $ 209,638
========= =========
Note 5 - Inventories:
December 31, September 30,
2002 2003
------ ------
(In thousands)
Raw materials:
Chemicals .................................. $ 54,077 $ 33,049
Component products ......................... 6,573 6,480
-------- --------
60,650 39,529
-------- --------
In process products:
Chemicals .................................. 15,936 17,028
Component products ......................... 12,602 11,948
-------- --------
28,538 28,976
-------- --------
Finished products:
Chemicals .................................. 109,978 120,189
Component products ......................... 12,296 10,080
-------- --------
122,274 130,269
-------- --------
Supplies (primarily chemicals) ............... 28,071 33,972
-------- --------
$239,533 $232,746
======== ========
Note 6 - Accrued liabilities:
December 31, September 30,
2002 2003
------ ------
(In thousands)
Current:
Employee benefits .......................... $ 43,534 $ 45,523
Environmental costs ........................ 57,496 28,460
Deferred income ............................ 6,018 1,639
Interest ................................... 317 7,639
Other ...................................... 42,101 51,976
-------- --------
$149,466 $135,237
======== ========
Noncurrent:
Insurance claims and expenses .............. $ 16,416 $ 16,066
Employee benefits .......................... 10,409 9,212
Deferred income ............................ 1,875 1,670
Asset retirement obligations ............... 1,665 1,473
Other ...................................... 1,619 1,409
-------- --------
$ 31,984 $ 29,830
======== ========
The asset retirement obligations are discussed in Note 13.
Note 7 - Other assets:
December 31, September 30,
2002 2003
------ ------
(In thousands)
Investment in affiliates:
TIMET:
Common stock ............................... $ 12,920 $ 12,360
Debt securities ............................ -- 253
-------- --------
12,920 12,613
TiO2 manufacturing joint venture ............. 130,009 127,834
Other ........................................ 12,620 12,093
-------- --------
$155,549 $152,540
======== ========
Loans and other receivables:
Snake River Sugar Company:
Principal .................................. $ 80,000 $ 80,000
Interest ................................... 27,910 31,804
Other ........................................ 5,566 5,023
-------- --------
113,476 116,827
Less current portion ......................... 2,221 1,414
-------- --------
Noncurrent portion ........................... $111,255 $115,413
======== ========
Other noncurrent assets:
Deferred financing costs ..................... $ 10,588 $ 10,196
Refundable insurance deposits ................ 1,864 1,972
Waste disposal operating permits ............. 1,754 1,174
Restricted cash equivalents .................. 2,158 782
Other ........................................ 14,756 10,252
-------- --------
$ 31,120 $ 24,376
======== ========
At September 30, 2003, the Company held 1.3 million shares of TIMET common
stock with a quoted market price of $33.75 per share, or an aggregate of $44
million.
At September 30, 2003, TIMET reported total assets of $548.3 million and
stockholders' equity of $141.9 million. TIMET's total assets at such date
include current assets of $267.0 million, property and equipment of $235.4
million and investment in joint ventures of $22.3 million. TIMET's total
liabilities at such date include current liabilities of $92.2 million, long-term
debt (including capital leases) of $9.2 million, accrued OPEB and pension costs
aggregating $73.0 million and convertible preferred securities (excluding
deferred distributions) of $201.2 million.
During the first nine months of 2003, TIMET reported net sales of $284.7
million, an operating loss of $8.9 million and a loss before cumulative effect
of a change in accounting principle of $22.7 million (2002 - net sales of $281.5
million, an operating loss of $16.1 million and a loss before cumulative effect
of change in accounting principle of $57.6 million). The Company's equity in
losses of TIMET in the third quarter of 2002 includes a $15.7 million impairment
provision for an other than temporary decline in value of the Company's
investment in TIMET.
During the first nine months of 2003, the Company purchased 14,700 shares
of TIMET's 6.625% convertible preferred securities (with an aggregate
liquidation amount of $735,000) for an aggregate cost of $238,000, including
expenses. Such shares represent less than 1% of the aggregate 4 million
convertible preferred securities that are outstanding. Each share of TIMET's
convertible preferred securities is convertible into .1339 shares of TIMET's
common stock. TIMET has the right to defer payments of distributions on the
convertible preferred securities for up to 20 consecutive quarters, although
distributions continue to accrue at the coupon rate during the deferral period
on the liquidation amount and any unpaid distributions. In October 2002, TIMET
exercised such deferral rights starting with the quarterly distribution payable
in December 2002. The convertible preferred securities mature in 2026, and do
not require any amortization prior to maturity. TIMET may currently redeem the
convertible preferred securities, at its option, for 102.65% of liquidation
amount, declining to 100% in December 2006 and thereafter. The convertible
preferred securities are accounted for as available-for-sale marketable
securities carried at estimated fair value. At September 30, 2003, the amortized
cost basis of the convertible preferred securities approximated their carrying
amount, and Contran held an additional 1.7 million shares of such convertible
preferred securities.
Note 8 - Other income:
Nine months ended
September 30,
2002 2003
---- ----
(In thousands)
Securities earnings:
Dividends and interest ....................... $25,866 $ 24,327
Securities transactions, net ................. 1,915 537
------- --------
27,781 24,864
Disposal of property and equipment ............. 1,942 8,259
Legal settlement gains, net .................... 2,360 691
Noncompete agreement income .................... 3,000 333
Currency transactions, net ..................... 4,583 (4,990)
Pension settlement gain ........................ 677 --
Other, net ..................................... 3,730 3,308
------- --------
$44,073 $ 32,465
======= ========
Note 9 - Long-term debt:
December 31, September 30,
2002 2003
------ ------
(In thousands)
Valhi:
Snake River Sugar Company .................... $250,000 $250,000
Revolving bank credit facility ............... -- 5,000
-------- --------
250,000 255,000
-------- --------
Subsidiaries:
Kronos International:
Senior Secured Notes ....................... 296,942 326,924
Bank credit facility ....................... 27,077 --
CompX bank credit facility ................... 31,000 30,000
Valcor Senior Notes .......................... 2,431 --
Other ........................................ 2,417 1,061
-------- --------
359,867 357,985
-------- --------
609,867 612,985
Less current maturities ........................ 4,127 627
-------- --------
$605,740 $612,358
======== ========
In February 2003, the Company redeemed the Valcor Senior Notes at par. In
March 2003, NL borrowed euro 15 million ($16.1 million when borrowed) under its
revolving bank credit facility, and in April 2003 NL repaid kroner 80 million
($11.0 million when repaid) under such facility. In October 2003, the maturity
date of Valhi's revolving bank credit facility was extended one year to October
2004, and the size of the facility was increased from $70 million to $85
million.
Note 10 - Accounts with affiliates:
December 31, September 30,
2002 2003
------ ------
(In thousands)
Current receivables from affiliates:
Income taxes receivable from Contran ............. $ 3,481 $ 5,677
Other ............................................ 466 336
------- -------
$ 3,947 $ 6,013
======= =======
Noncurrent receivable from affiliate -
loan to Contran family trust ...................... $18,000 $16,000
======= =======
Payables to affiliates:
Valhi demand loan from Contran ................... $11,171 $ 1,233
Louisiana Pigment Company ........................ 7,614 8,360
Contran - trade items ............................ 1,292 1,597
Other, net ....................................... 45 10
------- -------
$20,122 $11,200
======= =======
Note 11 - Provision for income taxes (benefit):
Nine months ended
September 30,
2002 2003
---- ----
(In millions)
Expected tax expense (benefit) ............................. $(1.8) $ 6.9
Refund of prior-year German taxes .......................... -- (24.6)
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies ............. (.2) .5
Non-U.S. tax rates ......................................... (1.3) (.4)
Change in deferred income tax valuation allowance, net ..... .9 (1.1)
U.S. state income taxes, net ............................... .3 1.0
Other, net ................................................. .4 .7
----- -----
$(1.7) $(17.0)
===== =====
Comprehensive provision for income taxes
(benefit) allocated to:
Income (loss) before cumulative effect of change
in accounting principle ................................. $(1.7) $(17.0)
Cumulative effect of change in accounting principle ...... -- .3
Other comprehensive income:
Marketable securities .................................. (.2) .6
Currency translation ................................... 2.7 2.9
Pension liabilities .................................... (1.5) --
----- -----
$ (.7) $(13.2)
===== =====
Certain of the Company's U.S. and non-U.S. tax returns are being examined
and tax authorities have or may propose tax deficiencies, including non-income
related items and interest. For example:
o NL's and NL's majority-owned subsidiary, NL Environmental Management
Services, Inc. ("EMS") 1998 U.S. federal income tax returns are being
examined by the U.S. tax authorities, and NL and EMS have granted
extensions of the statute of limitations for assessments of tax with
respect to their 1998 and 1999 income tax returns until September 30, 2004.
Based upon the course of the examination, NL anticipated that the IRS would
propose a substantial tax deficiency, including penalties and interest,
related to a restructuring transaction. In an effort to avoid protracted
litigation and minimize the hazards of such litigation, NL applied to take
part in an IRS settlement initiative applicable to transactions similar to
the restructuring transaction, and in April 2003 NL received notification
from the IRS that NL had been accepted into such settlement initiative.
Under the initiative, no penalties will be assessed and final settlement
with the IRS is to be reached through negotiation and, if necessary,
through a specified arbitration procedure. NL anticipates that settlement
of the matter will likely occur in 2004, resulting in payments of federal
and state tax and interest ranging from $33 million to $45 million.
Additional payments in later years may be required as part of the
settlement. NL believes it has provided adequate accruals to cover the
currently expected range of settlement outcomes.
o NL has received preliminary tax assessments for the years 1991 to 1997 from
the Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately euro 10 million ($12 million at September 30,
2003). 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. In April 2003, NL
received a notification from the Belgian tax authorities of their intent to
assess a tax deficiency related to 1999 that, including interest, is
expected to approximate euro 13 million ($15 million). NL believes the
proposed assessment related to 1999 is without merit, and in April 2003 NL
filed a written response in opposition to the notification of intent to
assess. The Belgian tax authorities have indicated they intend to file a
lien on the fixed assets of NL's Belgian TiO2 operations.
o NL has received a notification from the Norwegian tax authorities of their
intent to assess tax deficiencies of approximately kroner 12 million ($2
million) relating to 1998 through 2000. NL has objected to this proposed
assessment in a written response to the Norwegian tax authorities.
o In the first quarter of 2003, NL was notified by the German federal fiscal
court that they had ruled in NL's favor concerning a claim for refund suit
in which NL sought refunds of prior taxes paid during the periods 1990
through 1997. NL has filed certain amended German tax returns claiming such
refunds for all years affected by the court's decision, which is expected
to result in an estimated total net refund of taxes and interest equivalent
to approximately $40 million. Receipt of the German tax refunds is subject
to satisfaction of various procedural requirements, including a review and
acceptance of the amended German tax returns by the German authorities.
Certain of these procedural requirements were satisfied in the second
quarter of 2003 with respect to a portion of the refund claim, and in July
2003 the German tax authorities refunded to NL a portion of the total
anticipated refund. The portion received in July was euro 21.5 million
($24.6 million). NL has reflected this tax refund in its second quarter of
2003 results of operations. NL expects to receive the remaining refunds
over the next four to six months, a portion of which may result in an
additional income tax benefit.
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 settlement
initiatives, 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.
Note 12 - Minority interest:
December 31, September 30,
2002 2003
------ ------
(In thousands)
Minority interest in net assets:
NL Industries ............................ $ 40,880 $ 48,658
CompX International ...................... 44,539 46,973
Tremont Corporation ...................... 26,911 --
Subsidiaries of NL ....................... 8,516 8,719
-------- --------
$120,846 $104,350
======== ========
Nine months ended
September 30,
2002 2003
---- ----
(In thousands)
Minority interest in income (loss)
before cumulative effect of change in
accounting principle:
NL Industries ............................ $ 5,074 $ 8,438
CompX International ...................... 752 149
Tremont Corporation ...................... (5,975) (217)
Subsidiaries of NL ....................... 1,084 176
------- -------
$ 935 $ 8,546
======= =======
As previously reported, all of Waste Control Specialists aggregate,
inception-to-date net losses have accrued to the Company for financial reporting
purposes, and all of Waste Control Specialists future net income or net losses
will also accrue to the Company until Waste Control Specialists reports positive
equity attributable to its other owner. Accordingly, no minority interest in
Waste Control Specialists' net assets or net earnings (losses) is reported
through September 30, 2003.
Subsequent to February 2003, following completion of the merger of Valhi
and Tremont discussed in Note 2, the Company no longer reports minority interest
in Tremont's net assets or net earnings (losses).
Minority interest in NL's subsidiaries relates to NL's majority-owned
environmental management subsidiary, EMS. EMS was established in 1998, at which
time EMS contractually assumed certain of NL's environmental liabilities. EMS'
earnings are based, in part, upon its ability to favorably resolve these
liabilities on an aggregate basis. The shareholders of EMS, other than NL,
actively manage the environmental liabilities and share in 39% of EMS'
cumulative earnings. For financial reporting purposes, NL continues to
consolidate EMS and provides accruals for the reasonably estimable costs for the
settlement of EMS' environmental liabilities, as discussed in Note 14.
Note 13 - Accounting principle newly adopted in 2003:
Asset retirement obligations. The Company adopted SFAS No. 143, Accounting
for Asset Retirement Obligations, on 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 is 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 is accreted to its future value, and
the capitalized cost is depreciated over the useful life of the related asset.
Future revisions in the estimated fair value of the asset retirement obligation,
due to changes in the amount and/or timing of the expected future cash flows to
settle the retirement obligation, are accounted for prospectively as an
adjustment to the previously-recognized asset retirement cost. Upon settlement
of the liability, an entity would either settle the obligation for its recorded
amount or incur a gain or loss upon settlement.
Under the transition provisions of SFAS No. 143, at the date of adoption on
January 1, 2003 the Company recognized (i) an asset retirement cost capitalized
as an increase to the carrying value of its property and equipment, (ii)
accumulated depreciation on such capitalized cost and (iii) a liability for the
asset retirement obligation. Amounts resulting from the initial application of
SFAS No. 143 were measured using information, assumptions and interest rates all
as of January 1, 2003. The amount recognized as the asset retirement cost was
measured as of the date the asset retirement obligation was incurred. Cumulative
accretion on the asset retirement obligation, and accumulated depreciation on
the asset retirement cost, was recognized for the time period from the date the
asset retirement cost and liability would have been recognized had the
provisions of SFAS No. 143 been in effect at the date the liability was
incurred, through January 1, 2003. The difference, if any, between the amounts
to be recognized as described above and any associated amounts recognized in the
Company's balance sheet as of December 31, 2002 was recognized as a cumulative
effect of a change in accounting principles as of the date of adoption. The
effect of adopting SFAS No. 143 as of January 1, 2003 was a net gain of
approximately $600,000 as summarized in the table below. Such change in
accounting relates principally to accounting for closure and post-closure
obligations at the Company's waste management operations.
Amount
(In millions)
Increase in carrying value of net property and equipment:
Cost $ .8
Accumulated depreciation (.2)
Investment in TIMET (.1)
Decrease in carrying value of previously-accrued closure and
Post-closure activities 1.7
Asset retirement obligations recognized (1.3)
Deferred income taxes (.3)
-----
Net impact $ .6
=====
The increase in the asset retirement obligations from January 1, 2003 ($1.3
million) to September 30, 2003 ($1.5 million) is due to accretion expense, which
is reported as a component of cost of goods sold in the accompanying statement
of operations. If the Company had adopted SFAS No. 143 as of January 1, 2002,
the asset retirement obligations would have been $1.1 million and $1.3 million
at January 1, 2002 and September 30, 2002, respectively.
Note 14 - Commitments and contingencies:
Lead pigment litigation - NL.
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
and property damage allegedly caused by the use of lead-based paints. Certain of
these actions have been filed by or on behalf of states, large U.S. cities or
their public housing authorities and school districts, and certain others have
been asserted as class actions. These legal proceedings seek recovery under a
variety of theories, including public and private nuisance, negligent product
design, failure to warn, strict liability, 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. Several former cases have been
dismissed or withdrawn. Most of the remaining cases are in various pre-trial
stages. Some are on appeal following dismissal or summary judgment rulings in
favor of the defendants.
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 neither lost nor settled any of these cases. NL has not
accrued any amounts for the pending lead pigment and lead-based paint
litigation. Liability that may result, if any, cannot reasonably be estimated.
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, and there can be no assurance that NL will not incur
future liability in respect of this pending litigation in view of the inherent
uncertainties involved in court and jury rulings in pending and possible future
cases.
Environmental matters and litigation.
General. 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.
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 September 30, 2003, no receivables for recoveries have been recognized.
Environmental obligations are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of governmental
regulations, the number of potentially responsible parties ("PRPs") and the
PRPs' ability or willingness to fund such allocation of costs, their financial
capabilities and the allocation of costs among PRPs, the multiplicity of
possible solutions, and the years of investigatory, remedial and monitoring
activity required. In addition, 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, the results of future testing and analysis undertaken with respect to
certain sites 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. In addition, with respect to other PRPs and the fact that the Company
may be jointly and severally liable for the total remediation cost at certain
sites, the Company could ultimately be liable for amounts in excess of its
accruals due to, among other things, reallocation of costs among PRPs or the
insolvency of one of more PRPs. 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.
The exact time frame over which the Company makes payments with respect to
its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process which in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs that
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
is classified as a noncurrent liability.
NL. 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, PRP, or both, pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act, as amended
by the Superfund Amendments and Reauthorization Act ("CERCLA"), or similar state
laws in approximately 70 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.
On a quarterly basis, NL evaluates the potential range of its liability at
sites where it has been named as a PRP or defendant, including sites for which
EMS has contractually assumed NL's obligation. See Note 12. At September 30,
2003, NL had accrued $88 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 the range of reasonably
possible costs to NL for sites for which NL believes it is possible to estimate
costs is approximately $127 million. NL's estimates of such liabilities have not
been discounted to present value, and other than certain previously-reported
settlements with respect to certain of NL's former insurance carriers, NL has
not recognized any insurance recoveries.
At September 30, 2003, there are approximately 15 sites for which NL is
unable to estimate a range of costs. For these sites, generally the
investigation is in the early stages, and it is either unknown as to whether or
not NL actually had any association with the site, or if NL had association with
the site, the nature of its responsibility, if any, for the contamination at the
site and the extent of contamination. The timing on when information would
become available to NL to allow NL to estimate a range of loss is unknown and
dependent on events outside the control of NL, such as when the party alleging
liability provides information to NL.
At September 30, 2003, NL had $21 million in restricted cash, restricted
cash equivalents and restricted marketable debt securities held by special
purpose trusts, the assets of which can only be used to pay for certain of NL's
future environmental remediation and other environmental expenditures. Such
restricted balances declined by approximately $38 million in the nine months of
2003 due primarily to a $30.8 million payment made by NL related to the final
settlement of NL's previously-reported Granite City, Illinois lead smelter site.
NL may have to pay up to an additional $700,000 related to this site upon
completion of an EPA audit of certain response costs. No further material
expenditures related to this site are expected to be made.
Tremont. In July 2000 Tremont, entered into a voluntary settlement
agreement with the Arkansas Department of Environmental Quality and certain
other PRPs pursuant to which Tremont and the other PRPs will undertake certain
investigatory and interim remedial activities at a former mining site located in
Hot Springs County, Arkansas. Tremont currently believes that it has accrued
adequate amounts ($900,000 at September 30, 2003) to cover its share of probable
and reasonably estimable environmental obligations for these activities. Tremont
currently expects that the nature and extent of any final remediation measures
that might be imposed with respect to this site will be known by 2005.
Currently, no reasonable estimate can be made of the cost of any such final
remediation measure, and accordingly Tremont has accrued no amounts at September
30, 2003 for any such cost. The amount accrued at September 30, 2003 represents
Tremont's best estimate of the costs to be incurred through 2004 with respect to
the interim remediation measures.
TIMET. At September 30, 2003, TIMET had accrued approximately $3.8 million
for environmental cleanup matters, principally related to TIMET's facility in
Nevada and a former TIMET facility in California.
Other. The Company has also accrued approximately $8 million at September
30, 2003 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.
Other litigation.
Reference is made to the 2002 Annual Report and the Company's Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2003 and June 30, 2003 for
a discussion of certain other legal proceedings.
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. Approximately 390 of these cases involving a total of approximately
31,500 plaintiffs and their spouses remain pending. NL has not accrued any
amounts for this litigation because liability that may result to NL, if any, can
not be reasonably estimated. In addition, from time to time, NL has received
notices regarding asbestos or silica claims purporting to be brought against
former subsidiaries of NL, including notices provided to insurers with which NL
has entered into settlements extinguishing certain insurance policies. These
insurers may seek indemnification from NL.
NL's Belgian subsidiary and various of its Belgian employees are the
subject of civil and criminal proceedings relating to an accident that resulted
in two fatalities at NL's Belgian facility in October 2000. The investigation
stage of these proceedings was completed in 2002. In May 2003, the Belgian
authorities referred the proceedings against NL's Belgian subsidiary and certain
of its Belgian employees to the criminal court for trial. Trial briefs have been
submitted to the criminal court by the parties, and a final hearing and
determination by the court is scheduled for January 2004.
The Company currently believes the disposition of all claims and disputes,
including those discussed herein, individually and in the aggregate, should not
have a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
Other matters.
TIMET is the primary obligor on two $1.5 million workers' compensation
bonds issued on behalf of a former subsidiary that TIMET sold in 1989. The bonds
were provided as part of the conditions imposed on the former subsidiary in
order to self-insure its workers' compensation obligations. The former
subsidiary filed for Chapter 11 bankruptcy protection in July 2001, and
discontinued payment on the underlying workers' compensation claims in November
2001. During 2002, TIMET received notices that the issuers of the bonds were
required to make payments on one of the bonds with respect to certain of these
claims and were requesting reimbursement from TIMET. Based upon current loss
projections, TIMET accrued $1.6 million for this matter in 2002. Through
September 30, 2003, TIMET has reimbursed the issuer approximately $700,000 under
this bond, and $900,000 remains accrued for future payments. During 2003, TIMET
received notice that certain claimants had submitted claims under the second
bond. As of September 30, 2003, payments under the second bond have been
immaterial. However, TIMET expects to make additional payments in the future.
Accordingly, TIMET accrued $50,000 for this bond in the third quarter of 2003.
TIMET may revise its estimated liability under these bonds in the future as
additional facts become known or claims develop.
As of September 30, 2003, TIMET had $500,000 accrued for pending and
potential future claims associated with certain standard grade titanium produced
by TIMET, which was subsequently found to contain tungsten inclusions as a
result of tungsten contaminated silicon purchased from an outside vendor. This
amount represents TIMET's best estimate of the most likely amount of loss to be
incurred. Pending claims are being investigated and negotiated, and TIMET
believes that certain claims are without merit or can be settled for less than
the amount of the original claim. Based upon an analysis of information
pertaining to asserted and unasserted claims, during the third quarter of 2003
TIMET revised its estimate of probable loss and reduced its accrual for pending
and future customer claims downward to $500,000, resulting in a $1.7 million
reduction in TIMET's cost of sales during the quarter. There is no assurance
that all potential claims have been submitted to TIMET. TIMET has filed suit
seeking full recovery from its silicon supplier for any liability TIMET might
incur, although no assurances can be given that TIMET will ultimately be able to
recover all or any portion of such amounts. In April 2003, TIMET received notice
that the silicon supplier had filed a voluntary bankruptcy petition under
Chapter 11. TIMET is currently investigating what effect, if any, this
bankruptcy may have on TIMET's potential recovery. TIMET has not recorded any
recoveries related to this matter as of September 30, 2003.
Note 15 - Accounting principle not yet adopted:
The Company is required to comply with the consolidation requirements of
FASB Interpretation ("FIN") No. 46, Consolidation of Variable Interest Entities,
an interpretation of ARB No. 51, as amended, at December 31, 2003. The Company
is still studying this newly-issued interpretation. While the Company currently
does not believe it has any involvement with any variable interest entity (as
that term is defined in FIN No. 46), the interpretation is complex, and the
staff of the FASB continues to provide implementation guidance, and therefore
the impact of adopting the consolidation requirements of FIN No. 46 has not yet
been determined.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
General
The Company reported net income of $8.8 million, or $.07 per diluted share,
in the third quarter of 2003 compared to a net loss of $7.1 million, or $.06 per
diluted share, in the third quarter of 2002. For the first nine months of 2003,
the Company reported income before cumulative effect of change in accounting
principle of $28.2 million, or $.23 per diluted share, compared to a loss of
$4.4 million, or $.04 per diluted share, in the first nine months of 2002.
The Company believes the analysis presented in the following table is
useful in understanding the comparability of its results of operations for the
2002 and 2003 periods presented. Each of the items mentioned is more fully
discussed below in the applicable sections of this "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations" or in the 2002 Annual Report.
Income (loss) before cumulative effect
of change in accounting principle -
diluted earnings per share -
Three months ended Nine months ended
September 30, September 30,
2002 2003 2002 2003
---- ---- ---- ----
German income tax benefit (1) $ - $ - $ - $ .17
Gain on disposal of fixed assets (2) - .03 - .04
Equity in losses of TIMET:
Impairment provision - convertible
preferred securities (3) - - (.05) -
Impairment provision - TIMET (4) (.07) - (.07) -
Foreign currency transaction gain (5) - - .04 -
Legal settlement gains, net (6) - - .01 -
Securities transaction gains, net - - .01 -
Other, net .01 .04 .02 .02
----- ----- ----- -----
$(.06) $ .07 $(.04) $ .23
===== ===== ===== =====
(1) NL's German claim for refund suit.
(2) Primarily NL's gain on disposal of certain real property not associated
with NL's TiO2 operations.
(3) TIMET's provisions for other than temporary declines in value of the
convertible preferred securities of Special Metals Corporation.
(4) The Company's provision for an other than temporary decline in value of its
investment in TIMET.
(5) NL's foreign currency transaction gain related to the extinguishment of
certain NL intercompany indebtedness.
(6) Settlements NL reached with certain of its principal former insurance
carriers.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "could," "anticipates," "expected" or comparable terminology, or by
discussions of strategies or trends. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve substantial risks and uncertainties that
could significantly impact expected results, and actual future results could
differ materially from those described in such forward-looking statements. While
it is not possible to identify all factors, the Company continues to face many
risks and uncertainties. Among the factors that could cause future results to
differ materially from those described herein are the risks and uncertainties
discussed in this Quarterly Report and those described from time to time in the
Company's other filings with the SEC including, but not limited to, the
following:
o Future supply and demand for the Company's products,
o The extent of the dependence of certain of the Company's businesses on
certain market sectors (such as the dependence of TIMET's titanium metals
business on the aerospace industry),
o The cyclicality of certain of the Company's businesses (such as NL's TiO2
operations and TIMET's titanium metals operations),
o The impact of certain long-term contracts on certain of the Company's
businesses (such as the impact of TIMET's long-term contracts with certain
of its customers and such customers' performance thereunder and the impact
of TIMET's long-term contracts with certain of its vendors on its ability
to reduce or increase supply or achieve lower costs),
o Customer inventory levels (such as the extent to which NL's customers may,
from time to time, accelerate purchases of TiO2 in advance of anticipated
price increases or defer purchases of TiO2 in advance of anticipated price
decreases, or the relationship between inventory levels of TIMET's
customers and such customers' current inventory requirements and the impact
of such relationship on their purchases from TIMET),
o Changes in raw material and other operating costs (such as energy costs),
o The possibility of labor disruptions,
o General global economic and political conditions (such as changes in the
level of gross domestic product in various regions of the world and the
impact of such changes on demand for, among other things, TiO2),
o Competitive products and substitute products,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o The introduction of trade barriers,
o Fluctuations in currency exchange rates (such as changes in the exchange
rate between the U.S. dollar and each of the euro, the Norwegian kroner and
the Canadian dollar),
o Operating interruptions (including, but not limited to, labor disputes,
leaks, fires, explosions, unscheduled or unplanned downtime and
transportation interruptions),
o Recoveries from insurance claims and the timing thereof,
o Potential difficulties in integrating completed acquisitions,
o The ability of the Company to renew or refinance credit facilities,
o Uncertainties associated with new product development (such as TIMET's
ability to develop new end-uses for its titanium products),
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government laws and regulations and possible changes therein (such as
changes in government regulations which might impose various obligations on
present and former manufacturers of lead pigment and lead-based paint,
including NL, with respect to asserted health concerns associated with the
use of such products),
o The ultimate outcome of income tax audits, tax settlement initiatives or
other tax matters,
o The ultimate resolution of pending litigation (such as NL's lead pigment
litigation and litigation surrounding environmental matters of NL, Tremont
and TIMET), and
o Possible future litigation.
Should one or more of these risks materialize (or the consequences of such
a development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of new information, future events
or otherwise.
Chemicals
Selling prices for TiO2, NL's principal product, were generally decreasing
during the first quarter of 2002, were generally flat during the second quarter
of 2002, were generally increasing during the last half of 2002 and the first
quarter of 2003, were generally flat during the second quarter of 2003 and were
generally declining during the third quarter of 2003. NL's TiO2 operations are
conducted through its wholly-owned subsidiary Kronos Worldwide, Inc. (formerly
known as Kronos, Inc.).
Three months ended Nine months ended
September 30, % September 30, %
2002 2003 Change 2002 2003 Change
------ ------ -------- ------ ------ --------
(In millions, except percentages)
Net sales $234.0 $242.9 + 4% $663.3 $762.5 +15%
Operating income 26.5 31.7 +20% 67.5 94.1 +39%
Percent change in TiO2 average selling prices:
Using actual foreign currency exchange
rates +10% +15%
Impact of changes in foreign exchange
rates -8% -10%
---- ----
In billing currencies +2% +5%
==== ====
NL's sales and operating income increased $8.9 million (4%) and $5.2
million (20%), respectively, in the third quarter of 2003 compared to the third
quarter of 2002, and increased $99.2 million (15%) and $26.6 million (39%),
respectively, in the first nine months of 2003 compared to the same period in
2002, due primarily to higher average TiO2 selling prices and higher TiO2
production volumes, partially offset by lower TiO2 sales volumes and higher
operating costs (particularly energy costs, which increased by approximately $8
million in the year-to-date period). Excluding the effect of fluctuations in the
value of the U.S. dollar relative to other currencies, NL's average TiO2 selling
prices in billing currencies in the third quarter of 2003 were 2% higher than
the third quarter of 2002, with the greatest improvement in European and export
markets. NL's average TiO2 selling prices in billing currencies were 5% higher
in the first nine months of 2003 compared to the first nine months of 2002. When
translated from billing currencies to U.S. dollars using actual foreign currency
exchange rates prevailing during the respective periods, NL's average TiO2
selling prices in the third quarter of 2003 increased 10% compared to the third
quarter of 2002, and increased 15% in the year-to-date period. When translated
from billing currencies to U.S. dollars using actual foreign currency exchange
rates prevailing during the respective periods, NL's average TiO2 selling prices
were 1% lower in the third quarter of 2003 as compared to the second quarter of
the year.
NL's sales are denominated in various currencies, including the U.S.
dollar, the euro, other major European currencies and the Canadian dollar. The
disclosure of the percentage change in NL's average TiO2 selling prices in
billing currencies (which excludes the effects of fluctuations in the value of
the U.S. dollar relative to other currencies) is considered a "non-GAAP"
financial measure under regulations of the SEC. The disclosure of the percentage
change in NL's average TiO2 selling prices using actual foreign currency
exchange rates prevailing during the respective periods is considered the most
directly comparable financial measure presented in accordance with accounting
principles generally accepted in the United States ("GAAP measure"). NL
discloses percentage changes in its average TiO2 prices in billing currencies
because NL believes such disclosure provides useful information to investors to
allow them to analyze such changes without the impact of changes in foreign
currency exchange rates, thereby facilitating period-to-period comparisons of
the relative changes in average selling prices in the actual various billing
currencies. Generally, when the U.S. dollar either strengthens or weakens
against other currencies, the percentage change in average selling prices in
billing currencies will be higher or lower, respectively, than such percentage
changes would be using actual exchange rates prevailing during the respective
periods. The difference between the 10% and 15% changes in NL's average TiO2
selling prices during the third quarter and first nine months of 2003 as
compared to the same periods in 2002 using actual foreign currency exchange
rates prevailing during the respective periods (the GAAP measure) and the 2% and
5%, respectively, percentage changes in NL's average TiO2 selling price in
billing currencies (the non-GAAP measure) during such periods is due to the
effect of changes in foreign currency exchange rates. The above table presents
in a tabular format (i) the percentage change in NL's average TiO2 selling
prices using actual foreign currency exchange rates prevailing during the
respective periods (the GAAP measure), (ii) the percentage change in NL's
average TiO2 selling prices in billing currencies (the non-GAAP measure) and
(iii) the percentage change due to changes in foreign currency exchange rates
(or the reconciling item between the non-GAAP measure and the GAAP measure).
NL's TiO2 sales volumes in the third quarter of 2003 decreased 6% from the
third quarter of 2002, with substantially all of the decrease occurring in
export markets. Sales volumes in the first nine months of 2003 were 1% lower
than the same period in 2002. The Company's TiO2 production volumes in the third
quarter of 2003 were 1% higher than the third quarter of 2002, and were 6%
higher in the first nine months of 2003 as compared to the same period in 2002,
with operating rates at near full capacity in all periods presented.
The increases in average TiO2 selling prices during the third quarter and
first nine months of 2003 as compared to the same periods in 2002 increased NL's
operating income by $6 million and $29 million, respectively. The increase in
TiO2 production volumes during the first nine months of 2003 as compared to the
first nine months of 2002 increased NL's operating income by $9 million, while
the decrease in TiO2 sales volumes during the third quarter of 2003 as compared
to the same period in 2002 decreased NL's operating income by $5 million. The
effect of the increase in TiO2 production volumes during the third quarter of
2003 as compared to the third quarter of 2002, as well as the effect of the
decrease in TiO2 sales volumes during the first nine months of 2003 as compared
to the same period in 2002, was not material.
NL has substantial operations and assets located outside the United States
(primarily in Germany, Belgium, Norway and Canada). A significant amount of NL's
sales generated from its non-U.S. operations are denominated in currencies other
than the U.S. dollar, principally the euro, other major European currencies and
the Canadian dollar. A portion of NL's sales generated from its non-U.S.
operations are denominated in the U.S. dollar. Certain raw materials, primarily
titanium-containing feedstocks, are purchased in U.S. dollars, while labor and
other production costs are denominated primarily in local currencies.
Consequently, the translated U.S. dollar value of NL's foreign sales and
operating results are subject to currency exchange rate fluctuations which may
favorably or adversely impact reported earnings and may affect the comparability
of period-to-period operating results. Overall, fluctuations in the value of the
U.S. dollar relative to other currencies, primarily the euro, increased TiO2
sales in the third quarter and first nine months of 2003 by a net $17 million
and $71 million, respectively, compared to the same periods in 2002.
Fluctuations in the value of the U.S. dollar relative to other currencies
similarly impacted NL's foreign currency-denominated operating expenses. NL's
operating costs that are not denominated in the U.S. dollar, when translated
into U.S. dollars, were higher in 2003 compared to the same periods of 2002.
Overall, currency exchange rate fluctuations resulted in a net decrease in NL's
operating income in the first nine months of 2003 of $2 million as compared to
the first nine months of 2002 (with a nominal impact in the quarter-to-quarter
comparison.).
NL expects its average TiO2 selling prices, sales volumes, production
volumes and operating income will be higher in 2003 as compared to 2002. NL
anticipates its production volumes for full year 2003 will be higher than full
year 2002. NL's TiO2 production volumes in 2003 are expected to be higher than
NL's 2003 TiO2 sales volumes, with finished goods inventories rising modestly.
NL's expectations as to the future prospects of NL and the TiO2 industry are
based upon a number of factors beyond NL's control, including worldwide growth
of gross domestic product, competition in the marketplace, unexpected or
earlier-than-expected capacity additions and technological advances. If actual
developments differ from NL's expectations, NL's results of operations could be
unfavorably affected.
Chemicals operating income, as presented above, is stated net of
amortization of Valhi's purchase accounting adjustments made in conjunction with
its acquisitions of its interest in NL. Such adjustments result in additional
depreciation, depletion and amortization expense beyond amounts separately
reported by NL. Such additional non-cash expenses reduced chemicals operating
income, as reported by Valhi, by approximately $9.0 million in the first nine
months of 2002 and approximately $11.1 million in the first nine months of 2003
as compared to amounts separately reported by NL.
Component products
Three months ended Nine months ended
September 30, % September 30, %
2002 2003 Change 2002 2003 Change
(In millions, except percentages)
Net sales $48.8 $52.6 +8% $148.4 $153.3 +3%
Operating income (loss) 1.3 (.4) -130% 5.6 1.8 -68%
Component products sales were higher in the third quarter and first nine
months of 2003 as compared to the same periods in 2002 due primarily to the
favorable effect of fluctuations in foreign currency exchange rates.
Fluctuations in the value of the U.S. dollar relative to other currencies, as
discussed below, increased net sales by $2.0 million in the third quarter of
2003 as compared to the third quarter of 2002, and increased sales by $6.3
million in the year-to-date period. In addition to the favorable impact of
changes in currency exchange rates, sales increased in the third quarter of 2003
as compared to the third quarter of 2002 due principally to higher sales volumes
of precision ball-bearing slides. Offsetting the favorable effect of changes in
currency exchange rates during the first nine months of 2003 as compared to the
same period of 2002, sales were negatively impacted by lower sales volumes of
ergonomic computer support systems which are impacted by the continued soft
demand for office furniture as well as ongoing weakness in the overall economic
environment.
During the third quarter of 2003, sales of slide products increased 19% as
compared to the third quarter of 2002, while sales of ergonomic and security
products decreased 7% and 1%, respectively. During the first nine months of
2003, sales of slide products increased 9% as compared to the same period in
2002, while sales of ergonomic and security products decreased 8% and 1%,
respectively. The percentage changes in both slide and ergonomic products
include the impact resulting from changes in foreign currency exchange rates.
Sales of security products are generally denominated in U.S. dollars.
Despite the increase in sales in the first nine months of 2003, operating
income declined due primarily to unfavorable effects of changes in product mix
and expenses associated with the consolidation of CompX's two Canadian
facilities into one facility, as well as the unfavorable effect of fluctuations
in foreign currency exchange rates discussed below. Expenses of $900,000
associated with CompX's Canadian plant consolidation, which commenced in the
first quarter of 2003, were incurred substantially all in the first half of the
year. Benefits associated with this consolidation began to be realized in the
second half of 2003, and CompX expects such benefits to be fully realized
beginning in the first quarter of 2004. Fluctuations in the value of the U.S.
dollar relative to other currencies, as discussed below, decreased operating
income by $1.3 million in the third quarter of 2003 as compared to the third
quarter of 2002, and decreased operating income by $2.6 million in the
year-to-date period. In addition, the component products operating loss in the
third quarter of 2003 includes a $3.5 million restructuring charge associated
with the implementation of certain headcount reductions in CompX's Netherlands
operations.
CompX has substantial operations and assets located outside the United
States (principally in Canada, the Netherlands and Taiwan). A portion of CompX's
sales generated from its non-U.S. operations are denominated in currencies other
than the U.S. dollar, principally the Canadian dollar, the euro and the New
Taiwan dollar. In addition, a portion of CompX's sales generated from its
non-U.S. operations are denominated in the U.S. dollar. Most raw materials,
labor and other production costs for such non-U.S. operations are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
CompX's foreign sales and operating results are subject to currency exchange
rate fluctuations which may favorably or unfavorably impact reported earnings
and may affect comparability of period-to-period operating results. During the
third quarter and first nine months of 2003, currency exchange rate fluctuations
of the Canadian dollar and the euro positively impacted component products sales
comparisons with the same periods of 2002 (principally with respect to slide
products), but currency exchange rate fluctuations of the Canadian dollar, the
New Taiwan dollar and the euro negatively impacted component products operating
income comparisons for the same periods.
While signs of recovery are surfacing in the overall economy, CompX has not
experienced a sustained strengthening in customer orders as of the end of the
third quarter of 2003. For the remainder of the year, CompX does not expect this
situation to change significantly since a majority of CompX's customers are in
the office furniture industry, which tends to lag behind the overall economy in
a recovery. Additionally, the European office furniture industry experienced
continued economic decline in 2003 that put added pressure on operating results.
In response to the current economic conditions, CompX continues to focus on
improving lean manufacturing efficiency and cost improvement initiatives as well
as pursuing business opportunities for its products in new market segments.
CompX currently expects to realize annual cost savings of $3.5 million to $4
million as a result of its headcount reduction in its Netherlands' operations,
but CompX is continuing its ongoing strategic analysis of such operations, and
additional steps in the future that could negatively impact component products
operating results.
Waste management
Three months ended Nine months ended
September 30, September 30,
2002 2003 2002 2003
---- ---- ---- ----
(In millions)
Net sales $ 1.3 $ .5 $ 5.2 $ 3.0
Operating loss (2.5) (3.1) (6.6) (8.7)
Waste management sales decreased, and the operating loss increased, in the
third quarter and first nine months of 2003 compared to the same periods of 2002
due to continued weak demand for waste management services as well as costs
incurred in 2003 related to certain licensing and permitting activities. Waste
Control Specialists' continued emphasis on cost controls helped to mitigate the
effect of lower sales. Waste Control Specialists also continues to explore
opportunities to obtain certain types of new business that, if obtained, could
increase its sales, and decrease its operating loss, in the fourth quarter of
2003 as compared to the first three quarters of 2003.
Waste Control Specialists currently has permits which allow it to treat,
store and dispose of a broad range of hazardous and toxic wastes, and to treat
and store a broad range of low-level and mixed radioactive wastes. The waste
management industry currently is experiencing a relative decline in the number
of environmental remediation projects generating wastes. In addition, efforts on
the part of generators to reduce the volume of waste and/or manage wastes onsite
at their facilities also has resulted in weak demand for Waste Control
Specialists' waste management services. These factors have led to reduced demand
and increased downward price pressure for waste management services. While Waste
Control Specialists believes its broad range of authorizations for the treatment
and storage of low-level and mixed radioactive waste streams provides certain
competitive advantages, a key element of Waste Control Specialists' long-term
strategy to provide "one-stop shopping" for hazardous, low-level and mixed
radioactive wastes includes obtaining additional regulatory authorizations for
the disposal of low-level and mixed radioactive wastes.
Prior to June 2003, the state law in Texas (where Waste Control
Specialists' disposal facility is located) prohibited the applicable Texas
regulatory agency from issuing a license for the disposal of a broad range of
low-level and mixed radioactive waste to a private enterprise operating a
disposal facility in Texas. In June 2003, a new Texas state law was enacted that
allows the regulatory agency to issue a low-level radioactive waste disposal
license to a private entity, such as Waste Control Specialists. Waste Control
Specialists currently expects to apply for such a disposal license with the
applicable regulatory agency in the first half of 2004. The length of time that
the regulatory agency will take to review and act upon the license application
is uncertain, although Waste Control Specialists does not currently expect the
agency would issue any final decision on the license application before the end
of 2007. There can be no assurance that Waste Control Specialists will be
successful in obtaining any such license.
Waste Control Specialists is continuing its attempts to increase its sales
volumes from waste streams that conform to authorizations it currently has in
place. Waste Control Specialists is also continuing to identify certain waste
streams, and attempting to obtain modifications to its current permits, that
would allow for treatment, storage and disposal of additional types of wastes.
The ability of Waste Control Specialists to achieve increased sales volumes of
these waste streams, together with improved operating efficiencies through
further cost reductions and increased capacity utilization, are important
factors in Waste Control Specialists' ability to achieve improved cash flows.
The Company currently believes Waste Control Specialists can become a viable,
profitable operation, even if Waste Control Specialists is unsuccessful in
obtaining a license for the disposal of a broad range of low-level and mixed
radioactive wastes. However, there can be no assurance that Waste Control
Specialists' efforts will prove successful in improving its cash flows. Valhi
has in the past, and may in the future, consider strategic alternatives with
respect to Waste Control Specialists. There can be no assurance that the Company
would not report a loss with respect to any such strategic transaction.
Equity in earnings of TIMET
Three months ended Nine months ended
September 30, September 30,
2002 2003 2002 2003
---- ---- ---- ----
(In millions)
TIMET historical:
Net sales $ 82.8 $ 83.6 $281.5 $284.7
====== ====== ====== ======
Operating income (loss):
Boeing take-or-pay income $ 10.5 $ 10.1 $ 12.7 $ 12.9
Tungsten accrual - 1.7 - 1.7
LIFO income (expense) (3.5) 3.9 (7.0) 4.5
Contract termination charge - (6.8) - (6.8)
Other, net (11.3) (7.6) (21.8) (21.2)
------ ------ ------ ------
(4.3) 1.3 (16.1) (8.9)
Impairment of convertible preferred
securities - - (27.5) -
Other general corporate, net (.9) (.2) (1.7) (.9)
Interest expense (.9) (.3) (2.4) (1.5)
------ ------ ------ ------
(6.1) .8 (47.7) (11.3)
Income tax benefit (expense) .5 (.3) 1.3 (.8)
Minority interest (3.5) (3.5) (11.2) (10.6)
------ ------ ------ ------
Loss before cumulative effect of
Equity in losses of TIMET $(17.2) $ .2 $(31.7) $ (3.7)
====== ====== ====== ======
TIMET reported higher sales in the third quarter and first nine months of
2003 as compared to the same periods in 2002, and TIMET improved from a $4.3
million operating loss in the third quarter of 2002 to operating income of $1.3
million in the third quarter of 2003 (year-to-date improvement from a $16.1
million operating loss to a $8.9 million operating loss). TIMET's net sales
increased in the third quarter of 2003 primarily due to a 95% increase in sales
volumes of melted products (ingot and slab), a 4% increase in average selling
prices for mill products and the effects of the weakening of the U.S. dollar as
compared to the British pound sterling and the euro. These factors were
partially offset by a 27% decrease in average selling prices for melted
products. The improvement in melted product sales volumes, and the decrease in
melted products selling prices, reflects a change in product mix relative to a
significant sale of slab in the third quarter of 2003, for which selling prices
are lower than ingot. TIMET's results in the third quarter of 2003 also include
a (i) $6.8 million charge related to the termination of TIMET's purchase and
sales agreement with Wyman-Gordon Company and (ii) a $1.7 million reduction in
its accrual for the tungsten matter discussed in Note 14 to the Consolidated
Financial Statements.
During the first nine months of 2003, TIMET's mill product sales volumes
decreased 5% compared to the first nine months of 2002, while sales volumes of
melted products increased 85%. TIMET's average selling prices for its mill
products in the first nine months of 2003 were 3% higher than the first nine
months of 2002, and such average selling prices for melted products declined
20%.
TIMET's operating results in the third quarter of 2003 were favorably
impacted by improved average plant operating rates, which were approximately 55%
of capacity during the third quarter of 2003 compared to 45% during the third
quarter of 2002. TIMET's operating rates remained constant at approximately 55%
of capacity during the first nine months of 2002 and 2003, although lower
product volumes and the related impact on manufacturing overhead costs are still
negatively impacting TIMET's gross margin. TIMET's operating results in 2003
were also favorably impacted by the effects of TIMET's cost reduction efforts
and raw material mix.
TIMET currently expects a reduction in its LIFO inventory reserve at the
end of 2003 as compared to the end of 2002. As a result, TIMET's operating
results were favorably impacted in the third quarter of 2003 by $3.9 million of
income related to the anticipated reduction in its LIFO reserve ($4.5 million of
income in the 2003 year-to-date period). This compared with an anticipated
increase in TIMET's LIFO reserve during 2002, in which TIMET recorded $3.5
million of expense in the third quarter of 2002 ($7.0 million of expense in the
2002 year-to-date period).
TIMET's results in the first nine months of 2002 include a first quarter
$27.5 million provision for an other than temporary impairment of TIMET's
investment in the convertible preferred securities of Special Metals
Corporation. In addition, TIMET's effective income tax rate in both the 2002 and
2003 periods varies from the 35% U.S. federal statutory income tax rate because
TIMET has concluded it is not currently appropriate to recognize an income tax
benefit related to its U.S. and U.K. losses under the "more-likely-than-not"
recognition criteria.
The Company's equity in losses of TIMET in the first nine months of 2002
includes (i) a third quarter impairment provision of $15.7 million ($8.0
million, or $.07 per diluted share, net of income tax benefit and minority
interest) related to an other than temporary decline in value of the Company's
investment in TIMET and (ii) a $10.6 million first quarter charge ($5.4 million,
or $.05 per diluted share, net of income tax benefit and minority interest)
related to TIMET's impairment for an other than temporary decline in value of
the Special Metals securities held by TIMET.
TIMET's U.K. hourly workforce, and a substantial portion of its U.K.
salaried workforce, are covered by collective bargaining agreements that are
re-negotiated annually on a calendar-year basis. Negotiations continue relative
to the 2003 agreements. While TIMET currently expects such negotiations to be
finalized during the fourth quarter of 2003, it is possible that there could be
work stoppages or other labor disruptions prior to finalization of these
agreements that could adversely affect TIMET's business, results of operations,
financial position and liquidity.
Although the commercial airline industry continues to face significant
challenges, recent economic data have shown signs of an improving business
environment in that sector. Airline passenger traffic in the U.S. and Europe has
benefited from, among other things, the limited duration of the war in Iraq and
the containment of the Severe Acute Respiratory Syndrome (SARS). However,
traffic continues to remain below pre-September 11, 2001 levels. In June 2003,
The Airline Monitor, a leading aerospace publication, forecasted that the major
U.S. airlines' losses will decrease to $6.3 billion in 2003 and $3.0 billion in
2004, after posting $11.2 billion in losses in 2002. Since that time, several
U.S.-based commercial airlines have reported positive third quarter operating
results or have similarly indicated expectations of improved results in the last
half of 2003.
TIMET expects sales for the full year 2003 to approximate $375 million to
$385 million. TIMET's mill product sales volumes for the full year 2003 is
expected to approximate 8,700 metric tons, reflecting a 2% decrease compared to
2002 levels. Melted product sales volumes for the full year 2003 is expected to
approximate 4,350 metric tons, reflecting an 81% increase over 2002 levels. The
increase in melted product sales volumes is due in part to new customer
relationships, share gains at certain customers, increased military aerospace
business and, to a lesser extent, a shift in purchasing preference by certain
customers in favor of ingot and away from wrought products.
TIMET's backlog of unfilled orders was approximately $160 million at
September 30, 2003, up from $140 million at June 30, 2003, but down slightly
from $165 million at September 30, 2002. Substantially all the September 30,
2003 backlog is scheduled to ship within the next 12 months. However, TIMET's
order backlog may not be a reliable indicator of its future business activity.
TIMET's operating margins are affected by a number of factors including,
among others, customer and product mix, material yields, plant operating rates,
raw material costs, labor and energy costs. Raw material costs represent the
largest portion of TIMET's manufacturing cost structure. TIMET expects to
manufacture a significant portion of its titanium sponge requirements during the
next several quarters and purchase the balance. TIMET expects the aggregate cost
of purchased sponge to remain relatively stable through the remainder of 2003.
TIMET is experiencing higher prices for certain types of scrap, but it has
somewhat mitigated those increased costs by utilizing other cheaper raw material
inputs. In addition, TIMET recently announced an increase in prices on all
non-contract titanium mill and melted products in an effort to offset increased
raw material and energy costs. Overall capacity utilization should average
approximately 54% in 2003. However, practical capacity utilization measures can
vary significantly based on product mix. TIMET has implemented a number of
actions to reduce manufacturing costs, including seeking supplier price
concessions and implementing stringent spending controls and programs to improve
manufacturing yields. The combination of these efforts have continue to improve
TIMET's gross margins.
TIMET currently anticipates Boeing will purchase about 1.4 million pounds
of product from TIMET in 2003 under the terms of its long-term supply agreement.
At this projected order level, TIMET expects to recognize about $23 million of
income under the agreement's take-or-pay provisions in 2003. Any such earnings
will be reported as operating income, but will not be included in sales revenue,
sales volume or gross margin.
TIMET expects its operating loss in 2003 will range from breakeven to a $5
million loss, and its net loss in 2003 will range from $20 million to $25
million.
The Company accounts for its interest in TIMET by the equity method. The
Company's equity in earnings of TIMET differs from the amounts that would be
expected by applying the Company's ownership percentage to TIMET's
separately-reported earnings because of the effect of amortization of purchase
accounting adjustments made by the Company in conjunction with the Company's
acquisitions of its interests in TIMET. Amortization of such basis differences
generally increases earnings (or reduces losses) attributable to TIMET as
reported by the Company, and aggregated $6.1 million and $5.5 million in the
first nine months 2002 and 2003, respectively.
The Company periodically evaluates the net carrying value of its long-term
assets, including its investment in TIMET, to determine if there has been any
decline in value below its amortized cost basis that is other than temporary and
would, therefore, require a write-down which would be accounted for as a
realized loss. The Company's equity in losses of TIMET in the third quarter of
2002 includes a $15.7 million impairment provision for an other than temporary
decline in value of the Company's investment in TIMET. At September 30, 2003,
the Company's net carrying value of its investment in TIMET was $9.53 per share
compared to a NYSE market price at that date of $33.75 per share. The Company
will continue to monitor and evaluate the value of its investment in TIMET. In
the event the Company determines any decline in value of its investment in TIMET
below its net carrying value has occurred which is other than temporary, the
Company would report a write-down at that time.
General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend income decreased $1.0 million and $1.6 million in the third quarter
and first nine months of 2003, respectively, compared to the same periods of
2002 due to a lower average level of invested funds and lower average yields.
General corporate interest and dividend income is currently expected to continue
to be lower during the fourth quarter of 2003 compared to the same period in
2002 due primarily to a lower amount of funds available for investment and lower
average yields.
Securities transactions. Securities transaction gains in the first nine
months of 2003 relate principally to a first quarter gain of $316,000 related to
NL's receipt of shares of Valhi common stock in exchange for shares of Tremont
common stock held directly or indirectly by NL (such gain being attributable to
NL stockholders other than the Company). See Note 2 to the Consolidated
Financial Statements.
Gain on disposal of property and equipment. The gain on disposal of
property and equipment in 2003 relates primarily to the sale of certain real
property of NL not associated with NL's TiO2 operations.
General corporate expenses. Net general corporate expenses in the first
nine months of 2003 were $21.7 million higher than the same period of 2002 due
primarily to higher environmental remediation expenses of NL (principally
related to one formerly-owned site of NL for which the remediation process is
expected to occur over the next several years) and higher legal expenses of NL.
Such environmental and legal expenses are included in selling, general and
administrative expenses. In addition, NL's $20 million of proceeds from the
disposal of its specialty chemicals business unit in January 1998 related to its
agreement not to compete in the rheological products business was recognized as
a component of general corporate income (expense) ratably over the five-year
non-compete period ended in January 2003 ($3 million recognized in the first
nine months of 2002 and $333,000 recognized in the first nine months of 2003).
See Note 8 to the Consolidated Financial Statements. Net general corporate
expenses in calendar 2003 are currently expected to be higher than calendar
2002, in part due to the effect of recognizing no more income related to NL's
non-compete agreement as well as higher expected legal and environmental
expenses of NL.
Interest expense. Interest expense declined $300,000 and $1.6 million in
the third quarter and first nine months of 2003, respectively, as compared to
the same periods in 2002 due primarily to the net effects of lower average
levels of indebtedness of Valhi parent, higher average levels of indebtedness of
NL and lower average interest rates on NL indebtedness. Assuming interest rates
do not increase significantly from current levels, interest expense in the
fourth quarter of 2003 is expected to approximate the amount for the same period
in 2002.
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rates are explained in Note 11 to the Consolidated Financial
Statements. Income tax rates vary by jurisdiction (country and/or state), and
relative changes in the geographic mix of the Company's pre-tax earnings can
result in fluctuations in the effective income tax rate.
During the first nine months of 2003, NL reduced its deferred income tax
asset valuation allowance by approximately $1.1 million, primarily as a result
of utilization of certain income tax attributes for which the benefit had not
previously been recognized.
Minority interest. See Note 12 to the Consolidated Financial Statements.
Minority interest in NL's subsidiaries relates principally to NL's
majority-owned environmental management subsidiary, NL Environmental Management
Services, Inc. ("EMS"). EMS was established in 1998, at which time EMS
contractually assumed certain of NL's environmental liabilities. EMS' earnings
are based, in part, upon its ability to favorably resolve these liabilities on
an aggregate basis. The shareholders of EMS, other than NL, actively manage the
environmental liabilities and share in 39% of EMS' cumulative earnings. For
financial reporting purposes, NL continues to consolidate EMS and provides
accruals for the reasonably estimable costs for the settlement of EMS'
environmental liabilities, as discussed below.
As previously reported, Waste Control Specialists was formed by Valhi and
another entity in 1995. Waste Control Specialists assumed certain liabilities of
the other owner and such liabilities exceeded the carrying value of the assets
contributed by the other owner. Since its inception in 1995, Waste Control
Specialists has reported aggregate net losses. Consequently, all of Waste
Control Specialists aggregate, inception-to-date net losses have accrued to the
Company for financial reporting purposes, and all of Waste Control Specialists
future net income or net losses will also accrue to the Company until Waste
Control Specialists reports positive equity attributable to the other owner.
Accordingly, no minority interest in Waste Control Specialists' net assets or
net earnings (losses) is reported at September 30, 2003.
Following completion of the merger transactions in which Tremont became
wholly owned by Valhi in February 2003, the Company no longer reports minority
interest in Tremont's net assets or earnings. See Note 2 to the Consolidated
Financial Statements.
Accounting principle newly adopted in 2003. See Note 13 to the Consolidated
Financial Statements.
Accounting principle not yet adopted. See Note 15 to the Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Consolidated cash flows
Operating activities. Certain items included in the determination of net
income are non-cash, and therefore such items have no impact on cash flows from
operating activities. Non-cash items included in the determination of net income
include depreciation, depletion and amortization expense, non-cash interest
expense, asset impairment charges and unrealized securities transactions gains
and losses. Non-cash interest expense relates principally to Valhi and NL and
consists of amortization of original issue discount on certain indebtedness and
amortization of deferred financing costs.
Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, equity in earnings of affiliates will generally differ from
the amount of distributions received from such affiliates, and equity in losses
of affiliates does not necessarily result in current cash outlays paid to such
affiliates. The amount of periodic defined benefit pension plan expense and
periodic OPEB expense depends upon a number of factors, including certain
actuarial assumptions, and changes in such actuarial assumptions will result in
a change in the reported expense. In addition, the amount of such periodic
expense generally differs from the outflows of cash required to be currently
paid for such benefits. Also, proceeds from the disposal of marketable
securities classified as trading securities are reported as a component of cash
flows from operating activities, and such proceeds will generally differ from
the amount of the related gain or loss on disposal.
Certain other items included in the determination of net income have no
impact on cash flows from operating activities, but such items do impact cash
flows from investing activities (although their impact on such cash flows
differs from their impact on net income). For example, realized gains and losses
from the disposal of available-for-sale marketable securities and long-lived
assets are included in the determination of net income, although the proceeds
from any such disposal are shown as part of cash flows from investing
activities.
Cash flows from operations is the primary source of liquidity for the
Company. Changes in product pricing, production volumes and customer demand,
among other things, could significantly affect the liquidity of the Company.
Relative changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments. Such relative changes can
significantly impact the comparability of cash flow from operations from period
to period, as the income statement impact of such items may occur in a different
period from when the underlying cash transaction occurs. For example, raw
materials may be purchased in one period, but the payment for such raw materials
may occur in a subsequent period. Similarly, inventory may be sold in one
period, but the cash collection of the receivable may occur in a subsequent
period.
Cash flows from operating activities increased from $71.3 million in the
first nine months of 2002 to $73.8 million in the first nine months of 2003.
This $2.5 million increase was due primarily to the net effect of (i) higher net
income of $33.3 million, (ii) higher depreciation expense of $7.5 million, (iii)
lower proceeds from the disposal of marketable securities (trading) of $8.6
million, (iv) higher gains on disposal of property and equipment of $6.3
million, (v) higher minority interest in earnings of $7.6 million, (vi) lower
distributions from NL's TiO2 manufacturing joint venture of $4.2 million, (vii)
lower equity in losses of TIMET of $28.0 million, (viii) a higher amount of net
cash used to fund changes in the Company's inventories, receivables, payables,
accruals and accounts with affiliates of $9.3 million and (ix) a higher amount
of net cash provided to fund relative changes in other assets and liabilities
(primarily noncurrent accruals) of $11.3 million. Relative changes in accounts
receivable are affected by, among other things, the timing of sales and the
collection of the resulting receivable. Relative changes in inventories,
accounts payable and accrued liabilities are affected by, among other things,
the timing of raw material purchases and the payment for such purchases and the
relative difference between production volume and sales volume. Relative changes
in accrued environmental costs are affected by, among other things, the period
in which recognition of the environmental accrual is recognized and the period
in which the remediation expenditure is actually made.
Investing and financing activities. Approximately 74% of the Company's
consolidated capital expenditures in the first nine months of 2003 relate to NL,
25% relate to CompX and substantially all of the remainder relate to Waste
Control Specialists.
During the first nine months of 2003, (i) the Company purchased additional
shares of TIMET common stock for $976,000, and the Company purchased a nominal
number of shares of TIMET's convertible preferred securities for $238,000 and
(ii) NL collected $2 million of its loan to one of the Contran family trusts
described in Note 1 to the Consolidated Financial Statements. In addition,
during the first nine months of 2003, the Company generated approximately $11.3
million from the sale of property and equipment, including the real property of
NL discussed above.
During the first nine months of 2003, (i) Valhi repaid a net $9.9 million
of its short-term demand loans from Contran and borrowed a net $5 million under
its revolving bank credit facility, (ii) CompX repaid a net $1 million under its
revolving bank credit facility and (iii) NL borrowed an aggregate of euro 15
million ($16 million when borrowed) of borrowings under its European revolving
bank credit facility and NL repaid kroner 80 million ($11 million) and euro 30
million ($34 million) under such facility.
At September 30, 2003, unused credit available under existing credit
facilities approximated $217.4 million, which was comprised of $17.5 million
available to CompX under its new revolving credit facility, $92 million
available to NL under non-U.S. credit facilities, $44 million available to NL
under its U.S. credit facility and $63.9 million available to Valhi under its
revolving bank credit facility.
Chemicals - NL Industries
At September 30, 2003, NL had cash, cash equivalents and marketable debt
securities of $94 million, including restricted balances of $34 million, and NL
had $136 million available for borrowing under its U.S. and non-U.S. credit
facilities.
See Note 11 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of NL's income tax
returns in various U.S. and non-U.S. jurisdictions, and see Note 14 to the
Consolidated Financial Statements with respect to certain legal proceedings and
environmental matters with respect to NL.
In addition to those legal proceedings described in Note 14 to the
Consolidated Financial Statements, various legislation and administrative
regulations have, from time to time, been enacted or proposed that seek to (i)
impose various obligations on present and former manufacturers of lead pigment
and lead-based paint with respect to asserted health concerns associated with
the use of such products and (ii) effectively overturn the precedent set by
court decisions in which NL and other pigment manufacturers have been
successful. Examples of such proposed legislation include bills which would
permit civil liability for damages on the basis of market share, rather than
requiring plaintiffs to prove that the defendant's product caused the alleged
damage, and bills which would revive actions barred by the statute of
limitations. While no legislation or regulations have been enacted to date that
are expected to have a material adverse effect on NL's consolidated financial
position, results of operations or liquidity, imposition of market share
liability or other legislation could have such an effect.
At September 30, 2003, NL had the equivalent of approximately $452 million
of income tax loss carryforwards in Germany with no expiration date. However, NL
has provided a deferred income tax asset valuation allowance against
substantially all of these tax loss carryforwards because NL currently believes
they do not meet the "more-likely-than-not" recognition criteria. In August
2003, the German federal government proposed new tax law amendments that would
limit the annual utilization of income tax loss carryforwards, to become
effective in 2004. This proposal is similar to a proposal the German federal
government introduced in 2002 that was never enacted. There can be no assurance
that these proposed law amendments will be enacted and, if enacted, when they
would become effective. Such proposal, if enacted as proposed, would
significantly affect NL's future income tax expense and cash tax payments.
In November 2003, NL announced that its board of directors had formally
approved a plan to distribute to its shareholders one share of common stock of
its wholly-owned subsidiary, Kronos Worldwide, Inc., for every two shares of NL
common stock held. The shares of Kronos common stock will be distributed on
December 8, 2003 to NL shareholders of record as of November 17, 2003.
Approximately 23.85 million shares of Kronos common stock would be distributed,
representing approximately 48.7% of Kronos' outstanding shares. The plan also
involves a recapitalization of Kronos, immediately prior to the distribution of
the shares of Kronos common stock, through Kronos' distribution of a $200
million promissory note payable by Kronos to NL. Kronos has applied to list its
shares of common stock on the New York Stock Exchange. Completion of the
distribution, which is subject to the satisfaction or waiver of certain
conditions, will have no impact on the Company's consolidated financial
position, results of operations or cash flows.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, its dividend policy, capital needs and availability of resources in
view of, among other things, its dividend policy, debt service and capital
expenditure requirements and estimated future operating cash flows. As a result
of this process, NL has in the past and may in the future seek to reduce,
refinance, repurchase or restructure indebtedness, raise additional capital,
repurchase shares of its common stock, modify its dividend policy, restructure
ownership interests, sell interests in subsidiaries or other assets, or take a
combination of such steps or other steps to manage its liquidity and capital
resources. In the normal course of its business, NL may review opportunities for
the acquisition, divestiture, joint venture or other business combinations in
the chemicals or other industries, as well as the acquisition of interests in,
and loans to, related entities. In the event of any such transaction, NL may
consider using its available cash, issuing its equity securities or increasing
its indebtedness to the extent permitted by the agreements governing NL's
existing debt.
Component products - CompX International
CompX believes that its cash on hand, together with cash generated from
operations and borrowing availability under its new bank credit facility, will
be sufficient to meet CompX's liquidity needs for working capital, capital
expenditures and debt service requirements for the foreseeable future. CompX
suspended its regular quarterly dividend of $.125 per share in the second
quarter of 2003.
CompX periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, dividend policy and estimated
future operating cash flows. As a result of this process, CompX has in the past
and may in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities, modify its dividend policy,
repurchase shares of its common stock or take a combination of such steps or
other steps to manage its liquidity and capital resources. In the normal course
of business, CompX may review opportunities for acquisitions, divestitures,
joint ventures or other business combinations in the component products
industry. In the event of any such transaction, CompX may consider using its
then-available cash, issuing additional equity securities or increasing the
indebtedness of CompX or its subsidiaries.
Waste management - Waste Control Specialists
At September 30, 2003, Waste Control Specialists' indebtedness consisted
principally of $28.2 million of borrowings owed to a wholly-owned subsidiary of
Valhi, all of which matures in November 2004. Such indebtedness is eliminated in
the Company's consolidated financial statements. Waste Control Specialists will
likely borrow additional amounts during 2003 under its revolving credit facility
with such Valhi subsidiary.
TIMET
At September 30, 2003, TIMET had $133 million of borrowing availability
under its various U.S. and European credit agreements. TIMET presently expects
to generate $40 million to $50 million in cash flow from operations during 2003,
principally driven by reductions in working capital, especially inventory, and
the deferral of distributions on the convertible preferred securities, as
discussed below. TIMET received the 2003 advance of $27.7 million ($28.5 million
less $800,000 for 2002 subcontractor purchases) from Boeing in January 2003.
See Note 14 to the Consolidated Financial Statements for certain legal
proceedings, environmental matters and other contingencies associated with
TIMET. While TIMET's management, including internal counsel, currently believes
that the outcome of these matters, individually and in the aggregate, will not
have a material adverse effect on TIMET's consolidated financial position,
liquidity or overall trends in results of operations, all such matters are
subject to inherent uncertainties. Were an unfavorable outcome to occur in any
given period, it is possible that it could have a material adverse impact on
TIMET's consolidated results of operations or cash flows in a particular period.
At September 30, 2003, TIMET had 4,024,820 shares outstanding of its 6.625%
convertible preferred securities, representing an aggregate $201.2 million
liquidation amount, that mature in 2026. Each security is convertible into
shares of TIMET common stock at a conversion rate of .1339 shares of TIMET
common stock per convertible preferred security. Such convertible preferred
securities do not require principal amortization, and TIMET has the right to
defer distributions on the convertible preferred securities for one or more
quarters of up to 20 consecutive quarters, provided that such deferral period
may not extend past the 2026 maturity date. TIMET is prohibited from, among
other things, paying dividends or reacquiring its capital stock while
distributions are being deferred on the convertible preferred securities. In
October 2002, TIMET elected to exercise its right to defer future distributions
on its convertible preferred securities for a period of up to 20 consecutive
quarters. Distributions will continue to accrue at the coupon rate on the
liquidation amount and unpaid distributions. This deferral was effective
starting with TIMET's December 1, 2002 scheduled payment. TIMET may consider
resuming payment of distributions on the convertible preferred securities once
the outlook for TIMET's results from operations improves substantially.
TIMET periodically evaluates its liquidity requirements, capital needs and
availability of resources in view of, among other things, its alternative uses
of capital, debt service requirements, the cost of debt and equity capital, and
estimated future operating cash flows. As a result of this process, TIMET has in
the past, or in light of its current outlook, may in the future seek to raise
additional capital, modify its common and preferred dividend policies,
restructure ownership interests, incur, refinance or restructure indebtedness,
repurchase shares of capital stock or debt securities, sell assets, or take a
combination of such steps or other steps to increase or manage its liquidity and
capital resources. In the normal course of business, TIMET investigates,
evaluates, discusses and engages in acquisition, joint venture, strategic
relationship and other business combination opportunities in the titanium,
specialty metal and other industries. In the event of any future acquisition or
joint venture opportunities, TIMET may consider using then-available liquidity,
issuing equity securities or incurring additional indebtedness.
Tremont LLC
See Note 14 to the Consolidated Financial Statements for certain legal
proceedings and environmental matters with respect to Tremont.
In October 2002, Tremont entered into a $15 million revolving credit
facility with NL, collateralized by 10.2 million shares of NL common stock owned
by Tremont. The new facility, which matures in December 2004, is eliminated in
Valhi's consolidated financial statements. At September 30, 2003, no amounts
were outstanding under Tremont's loan facility with NL and $15 million was
available to Tremont for additional borrowings.
General corporate - Valhi
Valhi's operations are conducted primarily through its subsidiaries and
affiliates (NL, CompX, Waste Control Specialists and TIMET). Accordingly,
Valhi's long-term ability to meet its parent company level corporate obligations
is dependent in large measure on the receipt of dividends or other distributions
from its subsidiaries and affiliates. At NL's current $.20 per share quarterly
rate, and based on the 40.4 million NL shares held directly or indirectly by
Valhi at September 30, 2003 (including the 10.2 million NL shares now held by
Tremont LLC, a wholly-owned subsidiary of Valhi), Valhi would directly or
indirectly receive aggregate annual regular dividends from NL of approximately
$32.3 million. In the second quarter of 2003, CompX suspended its regular
quarterly dividend of $.125 per share. TIMET is currently prohibited from paying
dividends on its common stock due to its election to defer payment of interest
on its convertible securities.
Various credit agreements to which certain subsidiaries or affiliates are
parties contain customary limitations on the payment of dividends, typically a
percentage of net income or cash flow; however, such restrictions in the past
have not significantly impacted Valhi's ability to service its parent company
level obligations. Valhi has not guaranteed any indebtedness of its subsidiaries
or affiliates. To the extent that one or more of Valhi's subsidiaries were to
become unable to maintain its current level of dividends, either due to
restrictions contained in the applicable subsidiary's credit agreements or
otherwise, Valhi parent company's liquidity could become adversely impacted. In
such an event, Valhi might consider reducing or eliminating its dividend or
selling interests in subsidiaries or other assets.
At September 30, 2003, Valhi had $6.2 million of parent level cash and cash
equivalents, had $5 million outstanding under its revolving bank credit
agreement and had $1.2 million of short-term demand loans payable to Contran. In
addition, Valhi had $63.9 million of borrowing availability under its bank
credit facility. In October 2003, the maturity date of Valhi's revolving bank
credit facility was extended one year to October 2004, and the size of the
facility was increased from $70 million to $85 million.
In May 2003, Valhi purchased 14,700 shares of TIMET's convertible preferred
securities at a cash price of $10 per share pursuant to a previously-reported
tender offer.
The terms of The Amalgamated Sugar Company LLC Company Agreement provide
for annual "base level" of cash dividend distributions (sometimes referred to as
distributable cash) by the LLC of $26.7 million, from which the Company is
entitled to a 95% preferential share. Distributions from the LLC are dependent,
in part, upon the operations of the LLC. The Company records dividend
distributions from the LLC as income upon receipt, which occurs in the same
month in which they are declared by the LLC. To the extent the LLC's
distributable cash is below this base level in any given year, the Company is
entitled to an additional 95% preferential share of any future annual LLC
distributable cash in excess of the base level until such shortfall is
recovered. Based on the LLC's current projections for 2003, Valhi currently
expects that distributions received from the LLC in 2003 will approximate its
debt service requirements under its $250 million loans from Snake River Sugar
Company.
Certain covenants contained in Snake River's third-party senior debt allow
Snake River to pay periodic installments of debt service payments (principal and
interest) under Valhi's $80 million loan to Snake River prior to its maturity in
2010, and such loan is subordinated to Snake River's third-party senior debt. At
September 30, 2003, the accrued and unpaid interest on the $80 million loan to
Snake River aggregated $31.8 million and is classified as a noncurrent asset.
The Company currently believes it will ultimately realize both the $80 million
principal amount and the accrued and unpaid interest, whether through cash
generated from the future operations of Snake River and the LLC or otherwise
(including any liquidation of Snake River or the LLC). Following the currently
scheduled complete repayment of Snake River's third-party senior debt in April
2008, Valhi believes it will receive significant debt service payments on its
loan to Snake River as the cash flows that Snake River previously would have
been using to fund debt service on its third-party senior debt ($13.6 million in
2003) would then become available, and would be required, to be used to fund
debt service payments on its loan from Valhi. Prior to the repayment of the
third-party senior debt, Snake River might also make debt service payments to
Valhi, if permitted by the terms of the senior debt.
The Company may, at its option, require the LLC to redeem the Company's
interest in the LLC beginning in 2010, and the LLC has the right to redeem the
Company's interest in the LLC beginning in 2027. The redemption price is
generally $250 million plus the amount of certain undistributed income allocable
to the Company. In the event the Company requires the LLC to redeem the
Company's interest in the LLC, Snake River has the right to accelerate the
maturity of and call Valhi's $250 million loans from Snake River. Redemption of
the Company's interest in the LLC would result in the Company reporting income
related to the disposition of its LLC interest for both financial reporting and
income tax purposes. However, because of Snake River's ability to call its $250
million loans to Valhi upon redemption of the Company's interest in the LLC, the
net cash proceeds (after repayment of the debt) generated by redemption of the
Company's interest in the LLC could be less than the income taxes that would
become payable as a result of the disposition.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policies, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company and related entities routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies.
Non-GAAP financial measures
In an effort to provide investors with additional information regarding the
Company's results of operations as determined by accounting principles generally
accepted in the United States of America ("GAAP"), the Company has disclosed
certain non-GAAP information which the Company believes provides useful
information to investors:
o The Company discloses percentage changes in NL's average TiO2 selling
prices in billing currencies, which excludes the effects of foreign
currency translation. The Company believes disclosure of such percentage
changes allows investors to analyze such changes without the impact of
changes in foreign currency exchange rates, thereby facilitating
period-to-period comparisons of the relative changes in average selling
prices in the actual various billing currencies. Generally, when the U.S.
dollar either strengthens or weakens against other currencies, the
percentage change in average selling prices in billing currencies will be
higher or lower, respectively, than such percentage changes would be using
actual exchange rates prevailing during the respective periods.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that the Company files or submits to the
SEC under the Securities Exchange Act of 1934, as amended (the "Act"), is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
to the SEC under the Act is accumulated and communicated to the Company's
management, including its principal executive officer and its principal
financial officer, or persons performing similar functions, as appropriate to
allow timely decisions to be made regarding required disclosure. Each of Steven
L. Watson, the Company's Chief Executive Officer, and Bobby D. O'Brien, the
Company's Vice President, Chief Financial Officer and Treasurer, have evaluated
the Company's disclosure controls and procedures as of September 30, 2003. Based
upon their evaluation, these executive officers have concluded that the
Company's disclosure controls and procedures are effective as of the date of
such evaluation.
The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP, and includes
those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
Company,
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company,
and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's consolidated financial
statements.
There has been no change to the Company's system of internal controls over
financial reporting during the quarter ended September 30, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
system of internal controls over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to (i) the 2002 Annual Report, (ii) the Company's
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2003 and June
30, 2003 and (iii) Note 14 to the Consolidated Financial Statements included in
Part I of this Quarterly Report on Form 10-Q for descriptions of certain legal
proceedings, which information is incorporated herein by reference.
Barker, et al. v. The Sherwin-Williams Company, et al. (Circuit Court of
Jefferson County, Mississippi, Civil Action No. 2000-587) (formerly known as
Borden et al. vs. The Sherwin-Williams Company, et al.) In October 2003, the
court set June 24, 2004 as the trial date.
Quitman County School District v. Lead Industries Association, et al.
(Circuit Court of Quitman County, Mississippi, Case No. 2001-0106). In August
2003, the trial court granted the plaintiff's motion to dismiss NL with
prejudice.
Jackson et al., v. Phillips Building Supply of Laurel, et al. (Circuit
Court of Jones County, Mississippi, Case No. 2002-10-CV1). In August 2003, the
court set a trial date of June 1, 2004.
City of Chicago v. American Cyanamid, et al. (Circuit Court of Cook County,
Illinois, No. 02CH16212). In October 2003, the trial court granted defendants'
motion to dismiss. The time for appeal has not yet run.
City of Milwaukee v. NL Industries, Inc. and Mautz Paint (Circuit Court,
Civil Division, Milwaukee County, Wisconsin, Case No. 01CV0030066). In July
2003, defendants' motion for summary judgment was granted by the trial court,
and the plaintiff has appealed.
Cole, et al. v. ASARCO Incorporated et al. (U.S. District Court for the
Northern District of Oklahoma, Case No. 03C V327 EA (J)). NL has answered the
complaint and denied all of the plaintiffs' allegations.
Crawford, et al. v. ASARCO, Incorporated, et al. (Case No. CJ-03-304);
Barr, et al. v. ASARCO Incorporated, et al. (Case No. CJ-03-305); Brewer, et al.
v. ASARCO Incorporated, et al. (Case No. CJ-03-306); Kloer, et al. v. ASARCO,
Incorporated, et al. (Case No. CJ-03-307); Rhoten, et al. v. Asarco
Incorporated, et al. (Case No. CJ-03-308) (all in the District Court in and for
Ottawa County, State of Oklahoma). NL has removed the cases to the United States
District Court for the Northern District of Oklahoma, and has answered the
complaints and denied all of the plaintiffs' allegations.
In November 2003, NL was served with a complaint in Lauren Brown v. NL
Industries, Inc., et al. (Circuit Court of Cook County, Illinois, County
Department, Law Division, Case No. 03L 012425). The complaint seeks damages
against NL and two local property owners on behalf of a minor for injuries
alleged to be due to exposure to lead paint contained in the minor's residence.
NL intends to deny all allegations of liability.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 - Termination Agreement by and between Wyman-Gordon Company and
Titanium Metals Corporation effective as of September 28, 2003 -
incorporated by reference to Exhibit No. 10.1 to TIMET's
Quarterly Report on Form 10-Q (File No. 0-28538) for the quarter
ended September 30, 2003.
10.2 - Form of Intercorporate Services Agreement between Contran
Corporation and Kronos Worldwide, Inc. - incorporated by
reference to Exhibit No. 10.2 to the Kronos Worldwide, Inc.
Registration Statement on Form 10 (File No. 001-31763).
10.3 - Amendment dated August 11, 2003 to the Contract on Supplies and
Services among Bayer AG, Kronos Titan-GmbH & Co. OHG and Kronos
International (English translation of German language document) -
incorporated by reference to Exhibit No. 10.32 to the Kronos
Worldwide, Inc. Registration Statement on Form 10 (File No.
001-31763).
31.1 - Certification
31.2 - Certification
32.1 - Certification.
The Company has retained a signed original of any of the above exhibits
that contains signatures, and the Company will provide such exhibit to the
Commission or its staff upon request.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended September 30, 2003.
August 5, 2003 - Reported Items 7 and 9. September 2, 2003 -
Reported Items 7 and 9.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALHI, INC.
(Registrant)
Date November 13, 2003 By /s/ Bobby D. O'Brien
--------------------- ------------------------------
Bobby D. O'Brien
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
Date November 13, 2003 By /s/ Gregory M. Swalwell
--------------------- ------------------------------
Gregory M. Swalwell
Vice President and Controller
(Principal Accounting Officer)