VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS December 31, September 30,
2004 2005
--------- -----------
(Restated) (Unaudited)
Current assets:
Cash and cash equivalents $ 267,829 $ 170,379
Restricted cash equivalents 9,609 3,715
Marketable securities 9,446 9,920
Accounts and other receivables 217,931 226,898
Refundable income taxes 3,330 1,339
Receivable from affiliates 5,484 815
Inventories 263,414 274,931
Prepaid expenses and other 12,342 15,352
Deferred income taxes 9,705 12,855
---------- ----------
Total current assets 799,090 716,204
---------- ----------
Other assets:
Marketable securities 256,770 260,882
Investment in affiliates 189,726 247,422
Receivable from affiliate 10,000 8,000
Loans and other receivables 119,452 120,528
Unrecognized net pension obligations 13,518 12,994
Goodwill 354,051 359,607
Other intangible assets 3,189 3,646
Deferred income taxes 239,521 178,553
Other 52,326 54,709
---------- ----------
Total other assets 1,238,553 1,246,341
---------- ----------
Property and equipment:
Land 38,493 38,199
Buildings 234,152 219,699
Equipment 894,023 822,527
Mining properties 20,277 17,289
Construction in progress 21,557 25,252
---------- ----------
1,208,502 1,122,966
Less accumulated depreciation 555,707 544,479
---------- ----------
Net property and equipment 652,795 578,487
---------- ----------
$2,690,438 $2,541,032
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30,
2004 2005
------------ -------------
(Restated) (Unaudited)
Current liabilities:
Current maturities of long-term debt $ 14,412 $ 839
Accounts payable 109,158 85,747
Accrued liabilities 131,119 159,168
Payable to affiliates 11,607 11,415
Income taxes 21,196 14,395
Deferred income taxes 24,170 1,008
---------- ----------
Total current liabilities 311,662 272,572
---------- ----------
Noncurrent liabilities:
Long-term debt 769,525 714,125
Accrued pension costs 77,360 70,311
Accrued OPEB costs 34,988 32,511
Accrued environmental costs 55,450 46,651
Deferred income taxes 198,577 211,116
Other 41,061 37,406
---------- ----------
Total noncurrent liabilities 1,176,961 1,112,120
---------- ----------
Minority interest 157,936 154,231
---------- ----------
Stockholders' equity:
Common stock 1,242 1,209
Additional paid-in capital 111,048 109,809
Retained earnings 976,300 966,527
Accumulated other comprehensive income:
Marketable securities 5,449 4,863
Currency translation 45,561 15,975
Pension liabilities (57,779) (57,779)
Treasury stock (37,942) (37,942)
---------- ----------
Total stockholders' equity 1,043,879 1,002,109
---------- ----------
$2,690,438 $2,541,032
========== ==========
Commitments and contingencies (Notes 11 and 13)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------- ---------------
2004 2005 2004 2005
---- ---- ---- ----
(Restated) (Restated)
Revenues and other income:
Net sales $ 336,714 $342,204 $ 987,753 $1,042,895
Other, net 7,667 11,789 34,456 57,834
Equity in earnings of:
Titanium Metals Corporation
("TIMET") 11,529 15,037 14,910 47,628
Other 2,426 2,540 2,541 2,361
--------- -------- ---------- ----------
358,336 371,570 1,039,660 1,150,718
--------- -------- ---------- ----------
Costs and expenses:
Cost of sales 262,160 259,955 775,795 771,840
Selling, general and administrative 49,638 52,974 152,174 161,597
Interest 15,224 16,757 45,884 52,413
--------- -------- ---------- ----------
327,022 329,686 973,853 985,850
--------- -------- ---------- ----------
Income before income taxes 31,314 41,884 65,807 164,868
Provision for income taxes (benefit) 12,288 22,767 (286,823) 71,366
Minority interest in after-tax earnings 2,699 601 54,574 10,647
--------- -------- ---------- ----------
Income from continuing operations 16,327 18,516 298,056 82,855
Discontinued operations 219 - 409 (272)
--------- -------- ---------- ----------
Net income $ 16,546 $ 18,516 $ 298,465 $ 82,583
========= ======== ========== ==========
Basic earnings per share:
Income from continuing operations $ .14 $ .16 $ 2.48 $ .70
Discontinued operations - - - -
--------- ------- ---------- -------
Net income $ .14 $ .16 $ 2.48 $ .70
========= ======= ========== ==========
Diluted earnings per share
Income from continuing operations $ .14 $ .16 $ 2.48 $ .69
Discontinued operations - - - -
--------- ------- ---------- -------
$ .14 $ .16 $ 2.48 $ .69
========= ======= ========== ==========
Cash dividends per share $ .06 $ .10 $ .18 $ .30
========= ======= ========== ==========
Shares used in the calculation of per share amounts:
Basic earnings per common share 120,196 117,541 120,193 118,597
Dilutive impact of outstanding stock
Options 212 361 219 364
--------- -------- ---------- ----------
Diluted earnings per share 120,408 117,902 120,412 118,961
========= ======== ========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Nine months ended September 30, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
---- ----
(Restated)
Net income $298,465 $ 82,583
Other comprehensive income (loss), net of tax:
Marketable securities adjustment 30 (586)
Currency translation adjustment 3,755 (29,586)
Pension liabilities adjustment 309 -
-------- -----
Total other comprehensive income (loss), net 4,094 (30,172)
-------- --------
Comprehensive income $302,559 $ 52,411
======== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
---- ----
(Restated)
Cash flows from operating activities:
Net income $ 298,465 $ 82,583
Depreciation and amortization 58,040 55,981
Goodwill impairment - 864
Securities transactions, net 58 (20,213)
Noncash interest expense 1,978 2,367
Benefit plan expense greater than (less than)
cash funding requirements:
Defined benefit pension plans 486 (3,916)
Other postretirement benefit plans (2,554) (2,652)
Deferred income taxes:
Continuing operations (302,993) 25,872
Discontinued operations 374 (577)
Minority interest:
Continuing operations 54,574 10,647
Discontinued operations 203 (205)
Other, net 2,835 (1,050)
Equity in:
TIMET (14,910) (47,628)
Other (2,541) (2,361)
Net distributions from:
Manufacturing joint venture 9,100 5,100
Other 53 109
Change in assets and liabilities:
Accounts and other receivables (59,472) (26,953)
Inventories 60,873 (36,870)
Accounts payable and accrued liabilities (26,547) 6,773
Accounts with affiliates 2,169 3,061
Income taxes 38,929 (171)
Other, net (6,801) (11,407)
--------- --------
Net cash provided by operating activities 112,319 39,354
--------- --------
Cash flows from investing activities:
Capital expenditures (26,484) (37,527)
Purchases of:
TIMET common stock - (17,972)
Kronos common stock (17,057) (5,482)
CompX common stock - (707)
Marketable securities - (19,654)
Business unit - (7,342)
Capitalized permit costs (4,894) (2,260)
Proceeds from disposal of:
Business unit - 18,094
Other property and equipment 3,033 545
Kronos common stock - 19,176
Marketable securities - 11,005
Interest in Norwegian smelting operations - 3,542
Loans to affiliate:
Loans - (11,000)
Collections 2,000 17,929
Cash of disposed business unit - (4,006)
Change in restricted cash equivalents, net 6,177 5,789
Other, net 1 2,474
--------- --------
Net cash used by investing activities (37,224) (27,396)
--------- --------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
---- ----
(Restated)
Cash flows from financing activities:
Indebtedness:
Borrowings $ 155,361 $ 13,678
Principal payments (128,219) (21,840)
Deferred financing costs paid (28) (28)
Loans from affiliate:
Loans 24,409 -
Repayments (29,230) -
Valhi dividends paid (22,352) (36,744)
Distributions to minority interest (2,232) (8,522)
Treasury stock acquired - (58,509)
Issuance of NL common stock 8,793 2,488
Issuance of Valhi common stock and other, net 581 1,861
--------- ---------
Net cash provided (used) by financing activities 7,083 (107,616)
--------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities 82,178 (95,658)
Currency translation 6 (1,792)
Cash and equivalents at beginning of period 103,394 267,829
--------- ---------
Cash and equivalents at end of period $ 185,578 $ 170,379
========= =========
Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized $ 36,198 $ 39,857
Income taxes, net (19,838) 48,068
Noncash investing activities:
Note receivable received upon disposal of
business unit $ - $ 4,179
Inventories received as partial consideration
for disposal of interest in Norwegian
smelting operation - 1,897
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 2005
(In thousands)
(Unaudited)
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, 2004:
As originally reported $1,242 $85,213 $864,821 $ 88,367 $45,561 $(57,779) $(37,942) $ 989,483
Adjustments:
Effect of TIMET's change
in accounting - - 7,092 - - - - 7,092
Prior period adjustment -
Income tax on Kronos
distribution - 25,835 (25,835) - - - - -
Prior period adjustment -
Amalgamated Sugar Company LLC
and other - - 130,222 (83,918) - - - 47,304
------ ------- -------- -------- ------- --------- -------- ----------
Balance, as restated 1,242 111,048 976,300 5,449 45,561 (57,779) (37,942) 1,043,879
Net income - - 82,583 - - - - 82,583
Dividends - - (36,744) - - - - (36,744)
Other comprehensive income
(loss), net - - - (586) (29,586) - - (30,172)
Treasury stock:
Acquired - - - - - - (58,509) (58,509)
Retired (33) (2,311) (56,165) - - - 58,509 -
Other, net - 1,072 - - - - - 1,072
------ ------- -------- ------- ------- -------- -------- ----------
Balance at September 30, 2005 $1,209 $109,809 $965,974 $ 4,863 $15,975 $(57,779) $(37,942) $1,002,109
====== ======== ======== ======= ======= ======== ======== ==========
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Restatements, Organization and basis of presentation and Other:
Restatements.
As previously reported, effective January 1, 2005 TIMET changed its method
of accounting for approximately 40% of its inventories from the last-in,
first-out ("LIFO") method to the specific identification cost method,
representing all of its inventories previously accounted for under the LIFO
method. In accordance with accounting principles generally accepted in the
United States of America ("GAAP"), the Company has retroactively restated its
consolidated financial statements to reflect its financial position, results of
operations and cash flows as if TIMET had accounted for such inventories under
the new method for all periods presented. As a result of this change in
accounting principles by TIMET, the Company's income from continuing operations
in the third quarter and first nine months of 2004 is approximately $239,000 and
$804,000, respectively, higher than previously reported, and the Company's
consolidated stockholders' equity as of December 31, 2004 is approximately $7.1
million higher than previously reported.
As disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2004 (the "2004 Annual Report"), in January 1997 the Company
transferred control of the refined sugar operations previously conducted by the
Company's wholly-owned subsidiary, The Amalgamated Sugar Company, to Snake River
Sugar Company, an Oregon agricultural cooperative formed by certain sugarbeet
growers in Amalgamated's areas of operations. Pursuant to the transaction,
Amalgamated contributed substantially all of its net assets to the Amalgamated
Sugar Company LLC, a limited liability company controlled by Snake River, on a
tax-deferred basis in exchange for a non-voting ownership interest in the LLC.
The cost basis of the net assets transferred by Amalgamated to the LLC was
approximately $34 million. As part of such transaction, Snake River made certain
loans to Valhi aggregating $250 million. Such loans from Snake River are
collateralized by the Company's interest in the LLC. Snake River's sources of
funds for its loans to Valhi, as well as for the $14 million it contributed to
the LLC for its voting interest in the LLC, included cash capital contributions
by the grower members of Snake River and $180 million in debt financing provided
by Valhi, of which $100 million was subsequently repaid in 1997 when Snake River
obtained an equal amount of third-party term loan financing. After such
repayments, $80 million principal amount of Valhi's loans to Snake River have
remained outstanding since June 30, 1997 through September 30, 2005. See Notes 7
and 9.
The Company and Snake River share in distributions from the LLC up to an
aggregate of $26.7 million per year (the "base" level), with a preferential 95%
share going to the Company. To the extent the LLC's distributions are below this
base level in any given year, the Company is entitled to an additional 95%
preferential share of any future annual LLC distributions in excess of the base
level until such shortfall is recovered. Under certain conditions, the Company
is entitled to receive additional cash distributions from the LLC. The Company
may, at its option, require the LLC to redeem the Company's interest in the LLC
beginning in 2012, and the LLC has the right to redeem the Company's interest in
the LLC beginning in 2027. The redemption price is generally $250 million plus
the amount of certain undistributed income allocable to the Company. In the
event the Company requires the LLC to redeem the Company's interest in the LLC,
Snake River has the right to accelerate the maturity of and call Valhi's $250
million loans from Snake River.
The Company reports the cash distributions received from the LLC as
dividend income. See Note 8. The amount of such future distributions is
dependent upon, among other things, the future performance of the LLC's
operations. Because the Company receives preferential distributions from the LLC
and has the right to require the LLC to redeem its interest in the LLC for a
fixed and determinable amount beginning at a fixed and determinable date, the
Company accounts for its investment in the LLC as a debt security at its
estimated fair value.
In 1997 when the Company obtained its interest in the LLC, the Company
concluded that the earnings process with respect to the refined sugar operations
contributed by the Company to the LLC was not complete. Accordingly, the Company
did not recognize any gain in earnings. The Company did treat its investment in
the LLC as equivalent to a SFAS No. 115 debt security. Thus, the excess of the
fair value of the Company's investment in the LLC over the $34 million cost
basis of such investment was recognized as a component of other comprehensive
income, net of applicable deferred income taxes. In estimating the fair value of
the Company's interest in the LLC, the Company considered, among other things,
the outstanding balance of the Company's loans to Snake River and the
outstanding balance of the Company's loans from Snake River, with the result
that the estimated fair value of the Company's LLC investment was deemed to be
$170 million ever since June 30, 1997. Under this accounting, the Company would
have reported a gain in earnings for financial reporting purposes at the time
its LLC interest was redeemed, with a corresponding reduction in accumulated
other income.
In connection with finalizing the preparation of the Company's consolidated
financial statements for the quarter ended September 30, 2005, the Company
re-evaluated its original conclusions regarding how it accounts for its
investment in the LLC. As a result, the Company has now concluded that a proper
application of GAAP would have been to recognize a gain in earnings in 1997
equal to the difference between $250 million (the fair value of the Company's
interest in the LLC) and the $34 million cost basis of the net assets
contributed to the LLC, net of applicable deferred income taxes. This correction
constitutes a prior period adjustment under GAAP. Accordingly, the Company has
retroactively restated its consolidated balance sheet at December 31, 2004, as
contained in this Quarterly Report, to reflect this correction. The effect of
this correction on the Company's December 31, 2004 consolidated balance sheet,
as contained herein, as compared to such consolidated balance sheet contained in
the 2004 Annual Report, is to (i) increase the carrying value of the Company's
investment in the LLC (included as part of noncurrent marketable securities) by
$80 million, (ii) increase noncurrent deferred income tax liabilities by $31.2
million and (iii) increase total stockholders' equity by $48.8 million (with
retained earnings increasing by $131.7 million and accumulated other
comprehensive income related to marketable securities decreasing by $82.9
million). A similar balance sheet adjustment would be applicable to Valhi's
previously-reported consolidated balance sheet at December 31, 2003 contained in
the 2004 Annual Report, and each consolidated balance sheet prior thereto until
June 30, 1997. This correction would have no effect on Valhi's consolidated
statements of income (including per share earnings amounts), comprehensive
income or cash flows contained in the 2004 Annual Report. Under this revised
accounting, the Company would not be expected to report a gain in earnings for
financial reporting purposes at the time its LLC interest is redeemed, as the
redemption price of $250 million is expected to equal the carrying value of its
investment in the LLC at the time of redemption. As disclosed in the Company's
Current Report on Form 8-K dated November 14, 2005, the Company will file a Form
10-K/A for the year ended December 31, 2004 to also reflect this correction.
Also in connection with finalizing the preparation of the Company's
consolidated financial statements for the quarter ended September 30, 2005, the
Company concluded its net income for the year ended December 31, 2003 was
misstated by $19.1 million, or $.16 per diluted share, and its net income for
the year ended December 31, 2004 was misstated by $6.8 million, or $.05 per
diluted share (including $1.1 million in the third quarter of 2004 and $1.6
million in the first nine months of 2004), in each case to correct the Company's
accounting for its pro-rata share of the income tax liability recognized by NL
Industries, Inc., the Company's majority-owned subsidiary, upon NL's
distribution of certain shares of common stock of Kronos Worldwide, Inc. to NL's
stockholders other than the Company. The Company previously accounted for its
pro-rata share of such income taxes as a direct reduction of equity (additional
paid-in capital). The Company has now concluded that such income taxes should
have been accounted for in the determination of net income, as required by the
guidance of SFAS No. 109, Accounting for Income Taxes. This correction also
constitutes a prior period adjustment under GAAP. Accordingly, the Company has
retroactively restated its consolidated balance sheet at December 31, 2004, and
its consolidated statements of income, comprehensive income and cash flows for
the interim periods ended September 30, 2004, in each case as contained in this
Quarterly Report, to reflect this correction. There is no net effect to the
Company's total stockholders' equity as a result of this correction.
The following tables show (i) selected consolidated statements of income,
comprehensive income and cash flow data for the three months and nine months
ended September 30, 2004, and selected consolidated balance sheet data as of
December 31, 2004, in each case as reported before the effect of the
restatements discussed above, (ii) adjustments to such consolidated financial
statement data to reflect the aggregate effect of the restatements discussed
above as well as certain other immaterial items and (iii) such consolidated
financial statement data, as restated to reflect the aggregate effect of the
restatements.
Valhi, Inc. and Subsidiaries
Selected Consolidated Statement of Income Data
Three months and nine months ended September 30, 2004
(In thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
------------------------------------------------------------------------------------------
Before Adjustment As restated Before Adjustment As restated
restatements restatements
------------------------------------------------------------------------------------------
Income from continuing operations
before income tax and minority
interest $ 31,314 $ - $ 31,314 $ 65,807 $ - $ 65,807
Provision for income taxes (benefit) 10,985 1,303 12,288 (288,724) 1,901 (286,823)
Minority interest in after tax earnings 2,915 (216) 2,699 54,883 (309) 54,574
----------- ----------- ---------- ------------ ----------- ----------
Income from continuing operations 17,414 (1,087) 16,327 299,648 (1,592) 298,056
Discontinued operations 219 - 219 409 - 409
--------- --------- --------- -------- --------- ---------
Net income $ 17,633 $ (1,087) $ 16,546 $ 300,057 $ (1,592) $ 298,465
========== =========== ======== ========== =========== ==========
Earnings per share:
Basic net income per share $ .15 $ (.01) $ .14 $ 2.49 $ (.01) $ 2.48
========= ========== ========= ========== =========== ==========
Diluted net income per share $ .15 $ (.01) $ .14 $ 2.49 $ (.01) $ 2.48
========= ========== ========= ========== =========== ==========
Valhi, Inc. and Subsidiaries
Selected Consolidated Statement of Cash Flow Data
Nine months ended September 30, 2004
(In thousands)
(Unaudited)
Before
restatements Adjustment As restated
--------- --------- -----------
Items comprising cash flow from operating activities:
Net income $ 300,057 $ (1,592) $ 298,465
========== =========== ==========
Minority interest - continuing
operations $ 54,883 $ (309) $ 54,574
========= ========= =========
Accounts with affiliates $ 268 $ 1,901 $2,169
===== ======== ======
Valhi, Inc. and Subsidiaries
Selected Consolidated Statements of Comprehensive Income
Nine months ended September 30, 2004
(In thousands)
(Unaudited)
------------------------------------------------------
Before
restatements Adjustment As restated
------------------------------------------------------
Net income $300,057 $ (1,592) $298,465
Other comprehensive income:
Marketable securities 30 - 30
Currency translationa 3,755 - 3,755
Pension liabilities 309 - 309
-------- --------- --------
Other comprehensive income 4,094 - 4,094
-------- --------- --------
Comprehensive income 304,151 $ (1,592) $302,559
======= =========== ========
Valhi, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
December 31, 2004
(In thousands)
(Unaudited)
Before
restatements Adjustment As restated
-------------------- -------------------- ---------------
Current assets $799,090 $ - $799,090
Marketable securities 176,770 80,000 256,770
Property and equipment, net 652,795 - 652,795
Other noncurrent assets 981,783 - 981,783
-------------------- -------------------- ---------------
$2,610,438 $80,000 $2,690,438
==================== ==================== ===============
Current liabilities $311,662 $ - $311,662
Deferred income taxes 165,577 33,000 198,577
Other noncurrent liabilities 978,384 - 978,384
Minority interest 158,240 (304) 157,936
Stockholders' equity 996,575 47,304 1,043,879
-------------------- -------------------- ---------------
$2,610,438 $80,000 $2,690,438
==================== ==================== ===============
Components of stockholders' equity:
Common stock at par $1,242 $ - $1,242
Paid in capital 85,213 25,835 111,048
Retained earnings 871,913 104,387 976,300
Accumulated other
comprehensive income :
Marketable securities 88,367 (82,918) 5,449
Foreign currency 45,561 - 45,561
Pension liabilities (57,779) - (57,779)
Treasury stock (37,942) - (37,942)
-------------------- -------------------- ---------------
$996,575 $47,304 $1,043,879
==================== ==================== ===============
In addition, and as previously reported, during the fourth quarter of 2004,
Kronos Worldwide, Inc. determined that it should have recognized an additional
$17.3 million net deferred income tax benefit during the second quarter of 2004.
The results of operations for the nine months ended September 30, 2004, as
presented herein, reflect this additional second quarter income tax benefit,
which aggregated $14.8 million, or $.13 per diluted share, net of minority
interest.
Organization and basis of presentation.
The consolidated balance sheet of Valhi, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2004 has been derived from the
Company's audited consolidated financial statements at that date (as more fully
described above). The consolidated balance sheet at September 30, 2005, and the
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows for the interim periods ended September 30, 2004 and 2005, have
been prepared by the Company, without audit, in accordance with GAAP. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to state 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 2004 Annual Report.
Contran Corporation holds, directly or through subsidiaries, approximately
92% of Valhi's outstanding common stock at September 30, 2005. 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, or is held by Mr. Simmons or persons or other entities
related to Mr. Simmons. Consequently, Mr. Simmons, may be deemed to control such
companies.
Other.
As disclosed in the 2004 Annual Report, the Company currently 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. See Note 16. 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. Prior to 2004, and
following the cash settlement of certain stock options held by employees of NL,
NL and the Company commenced accounting for NL's 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
expense recognized by the Company in accordance with APBO No. 25 was $1.1
million and $2.2 million in the third quarter and first nine months of 2004,
respectively, and net compensation expense (income) was $700,000 and ($600,000)
in the third quarter and first nine months of 2005, respectively.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in the 2004 and 2005 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
Statement of Financial Accounting Standards ("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,
2004 2005 2004 2005
---- ---- ---- ----
(Restated) (Restated)
(In millions, except per share amounts)
Net income as reported $16.5 $18.5 $298.5 $82.6
Adjustments, net of applicable income tax effects and minority interest:
Stock-based employee compensation
expense determined under APBO No. 25
Stock-based employee compensation .6 .3 1.2 (.3)
expense determined under APBO No. 123 (.2) (.1) (.6) (.2)
----- ----- ------ -----
Pro forma net income $16.9 $18.7 $299.1 $82.1
===== ===== ====== =====
Basic net income per share:
As reported $ .14 $ .16 $ 2.48 $ .70
Pro forma .14 .16 2.49 .69
Diluted net income per share:
As reported $ .14 $ .16 $ 2.48 $ .69
Pro forma .14 .16 2.48 .69
Note 2 - Business segment information:
% owned by Valhi at
Business segment Entity September 30, 2005
Chemicals Kronos Worldwide, Inc. 93%
Component products CompX International Inc. 68%
Waste management Waste Control Specialists LLC 100%
Titanium metals TIMET 41%
The Company's ownership of Kronos includes 57% held directly by Valhi and
36% held directly by NL Industries, Inc., an 83%-owned subsidiary of Valhi.
During the first nine months of 2005, NL sold approximately 470,000 shares of
Kronos common stock in market transactions for an aggregate of $19.2 million,
and Valhi purchased approximately 169,000 shares of Kronos common stock in
market transactions for an aggregate of $5.5 million. See Note 8.
The Company's ownership of CompX is held principally by CompX Group, Inc,
an 82.4%-owned subsidiary of NL. TIMET owns the remaining 17.6% of CompX Group.
CompX Group's sole asset consists of shares of CompX common stock representing
approximately 83% of the total number of CompX shares outstanding, and the
percentage ownership of CompX shown above includes NL's ownership interest in
CompX Group multiplied by CompX Group's ownership interest in CompX, or 68%.
During the first nine months of 2005, NL purchased 47,900 additional shares of
CompX common stock in market transactions, representing approximately .3% of
CompX's outstanding common share, for an aggregate of approximately $707,000.
The Company's ownership of TIMET includes 37% owned directly by Tremont
LLC, a wholly-owned subsidiary of Valhi, and 4% owned directly by Valhi. The
Combined Master Retirement Trust, a trust sponsored by Contran to permit the
collective investment by certain master trusts which fund certain employee
benefits plans sponsored by Contran and certain of its affiliates, owned an
additional 11% of TIMET's outstanding common stock at September 30, 2005. During
the first nine months of 2005, Valhi purchased approximately 1 million
additional shares of TIMET common stock (as adjusted for the 2:1 stock split
discussed in Note 7) in market transactions for approximately $18.0 million.
TIMET owns an additional 3% of CompX, .5% of NL and less than .1% of
Kronos, and TIMET accounts for such CompX, NL and Kronos shares, as well as its
shares of CompX Group, as available-for-sale marketable securities carried at
fair value (with the fair value of TIMET's shares of CompX Group determined
based on the fair value of the underlying CompX shares held by CompX Group).
Because the Company does not consolidate TIMET, the shares of CompX Group,
CompX, NL and Kronos owned by TIMET are not considered as part of the Company's
consolidated investment in such companies.
In August 2005, CompX completed the acquisition of a components products
business for aggregate cash consideration of $7.3 million, net of cash acquired.
The purchase price has been allocated among the tangible and intangible net
assets acquired based upon a preliminary estimate of the fair value of such net
assets. The pro forma effect on the Company's results of operations assuming
such acquisition had been completed as of January 1, 2005 is not material.
Chemicals operating income, as presented below, differs from amounts
separately reported by Kronos 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.
Kronos (NYSE: KRO), 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. A summary of sales
and operating income for the Company's business segments during the 2004 and
2005 interim periods, and other items included in the determination of income
before income taxes, are presented in the table below.
Three months ended Nine months ended
September 30, September 30,
2004 2005 2004 2005
---- ---- ---- ----
(Restated) (Restated)
(In millions)
Net sales:
Chemicals $286.1 $292.1 $845.1 $ 895.7
Component products 46.3 47.1 136.1 139.7
Waste management 4.4 3.0 6.6 7.5
------ ------ ------ --------
Total net sales $336.8 $342.2 $987.8 $1,042.9
====== ====== ====== ========
Operating income:
Chemicals $ 25.8 $ 35.5 $ 84.2 $ 134.2
Component products 4.9 4.9 12.5 13.8
Waste management (.5) (2.8) (7.3) (9.1)
------ ------ ------ --------
Total operating income 30.2 37.6 89.4 138.9
Equity in:
TIMET 11.5 15.0 14.9 47.6
Other 2.4 2.6 2.5 2.4
General corporate items:
Interest and dividend income 8.5 9.4 25.4 28.9
Securities transaction gains, net - - - 20.2
Insurance recoveries - 1.2 .5 2.4
Gain on disposal of fixed assets - - .6 -
General expenses, net (6.1) (7.2) (21.6) (23.1)
Interest expense (15.2) (16.7) (45.9) (52.4)
------ ------ ------ --------
Income before income taxes $ 31.3 $ 41.9 $ 65.8 $ 164.9
====== ====== ====== ========
Note 3 - Marketable securities:
December 31, September 30,
2004 2005
-------- ---------
(Restated)
(In thousands)
Current assets (available-for-sale):
Restricted debt securities $ 9,446 $ 9,428
Other debt securities - 492
-------- --------
$ 9,446 $ 9,920
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $250,000 $250,000
Restricted debt securities 6,725 2,682
Other debt securities and common stocks 45 8,200
-------- --------
$256,770 $260,882
======== ========
As discussed in Note 1, the carrying value of the Company's investment in
The Amalgamated Sugar Company LLC at December 31, 2004, as presented herein, has
been restated. See Note 1 for a discussion of this restatement and a description
of the LLC interest.
Note 4 - Accounts and other receivables:
December 31, September 30,
2004 2005
--------- ---------
(In thousands)
Accounts receivable $219,764 $227,177
Notes receivable 1,993 3,064
Allowance for doubtful accounts (3,826) (3,343)
-------- --------
$217,931 $226,898
======== ========
Note 5 - Inventories:
December 31, September 30,
2004 2005
--------- ----------
(In thousands)
Raw materials:
Chemicals $ 45,961 $ 43,933
Component products 8,193 7,534
-------- --------
54,154 51,467
-------- --------
In process products:
Chemicals 16,612 19,481
Component products 10,827 9,942
-------- --------
27,439 29,423
-------- --------
Finished products:
Chemicals 131,161 149,752
Component products 9,696 5,169
-------- --------
140,857 154,921
-------- --------
Supplies (primarily chemicals) 40,964 39,120
-------- --------
$263,414 $274,931
======== ========
Note 6 - Accrued liabilities:
December 31, September 30,
2004 2005
--------- ----------
(In thousands)
Current:
Employee benefits $ 53,295 $ 49,666
Environmental costs 21,316 21,210
Deferred income 5,276 5,809
Interest 243 10,377
Other 50,989 72,106
-------- --------
$131,119 $159,168
======== ========
Noncurrent:
Insurance claims and expenses $ 22,718 $ 24,115
Employee benefits 5,380 4,879
Deferred income 1,427 1,179
Asset retirement obligations 1,357 1,376
Other 10,179 5,857
-------- --------
$ 41,061 $ 37,406
======== ========
Note 7 - Other assets:
December 31, September 30,
2004 2005
--------- ----------
(In thousands)
Investment in affiliates:
TIMET:
Common stock $ 55,425 $115,970
Preferred stock 183 183
-------- --------
55,608 116,153
TiO2 manufacturing joint venture 120,251 115,151
Other 13,867 16,118
-------- --------
$189,726 $247,422
======== ========
Loans and other receivables:
Snake River Sugar Company:
Principal $ 80,000 $ 80,000
Interest 38,294 36,687
Other 3,151 6,905
-------- --------
121,445 123,592
Less current portion 1,993 3,064
-------- --------
Noncurrent portion $119,452 $120,528
======== ========
Other noncurrent assets:
IBNR receivables $ 11,646 $ 14,157
Waste disposal site operating permits 9,269 12,449
Deferred financing costs 10,933 8,886
Refundable insurance deposit 2,483 -
Restricted cash equivalents 494 576
Other 17,501 18,641
-------- --------
$ 52,326 $ 54,709
======== ========
At September 30, 2005, the Company held approximately 14 million shares of
TIMET with a quoted market price of $39.56 per share, or an aggregate market
value of $554 million. Such share ownership reflects the effect of a 2:1 stock
split TIMET effected in September 2005. At September 30, 2005, TIMET reported
total assets of $840.8 million and stockholders' equity of $508.3 million.
TIMET's total assets at September 30, 2005 include current assets of $490.7
million, property and equipment of $245.3 million, marketable securities of
$48.6 million and investment in joint ventures of $24.2 million. TIMET's total
liabilities at September 30, 2005 include current liabilities of $209.5 million,
accrued OPEB and pension costs aggregating $87.2 million and long-term debt of
$10.7 million. During the first nine months of 2005, TIMET reported net sales of
$529.0 million, operating income of $107.6 million and income attributable to
common stockholders of $104.8 million (2004 - net sales of $364.9 million,
operating income of $25.2 million and income attributable to common stockholders
of $27.4 million). See Note 1.
In October 2005, the Company and Snake River entered into an agreement
pursuant to which, among other things, Snake River agreed to make a $94.8
million prepayment on its loan payable to Valhi ($80 million of which would be
applied to principal and the remainder to accrued interest), in return for which
Valhi agreed to forgive and cancel all remaining amounts Snake River otherwise
owed Valhi under such loan. Snake River subsequently made such prepayment to
Valhi. Accordingly, in the fourth quarter of 2005 Valhi will recognize a $21.6
million charge to earnings related to the accrued interest on its loan to Snake
River that was forgiven and cancelled by Valhi in October. See Note 1 for a
further discussion of the Company's loan to Snake River and various other
relationships between the Company and Snake River.
Note 8 - Other income:
Nine months ended
September 30,
2004 2005
---- ----
(In thousands)
Securities earnings:
Dividends and interest $25,402 $28,854
Securities transactions, net (58) 20,213
------- -------
25,344 49,067
Contract dispute settlement 6,289 -
Insurance recoveries 495 2,431
Currency transactions, net (649) 3,493
Other, net 2,977 2,843
------- -------
$34,456 $57,834
======= =======
Securities transaction gains in the first nine months of 2005 relate
primarily to (i) NL's $14.7 million pre-tax gain from the sale of approximately
470,000 shares of Kronos common stock in market transactions for aggregate
proceeds of $19.2 million and (ii) Kronos' $5.4 million pre-tax gain from the
sale of its passive interest in a Norwegian smelting operation, which had a
nominal carrying value for financial reporting purposes, for aggregate
consideration of approximately $5.4 million consisting of cash of $3.5 million
and inventory with a value of $1.9 million. Insurance recoveries in the first
nine months of 2005 include $1.2 million received by NL in August 2005 in
recovery from certain insolvent former insurance carriers relating to settlement
of excess insurance coverage claims.
Note 9 - Long-term debt:
December 31, September 30,
2004 2005
-------- ---------
(In thousands)
Valhi:
Snake River Sugar Company $250,000 $250,000
Bank credit facility - 5,000
-------- --------
250,000 255,000
-------- --------
Subsidiaries:
Kronos International Senior Secured Notes 519,225 457,572
Kronos European bank credit facility 13,622 -
Other 1,090 2,392
-------- --------
533,937 459,964
-------- --------
783,937 714,964
Less current maturities 14,412 839
-------- --------
$769,525 $714,125
======== ========
As previously reported in the 2004 Annual Report, Kronos International has
pledged 65% of the common stock or other ownership interests of certain of its
first-tier operating subsidiaries as collateral for its Senior Secured Notes.
Such operating subsidiaries are Kronos Titan GmbH, Kronos Denmark ApS, Kronos
Limited and Societe Industrielle Du Titane, S.A.
During the first nine months of 2005, Kronos repaid an aggregate of euro 10
million ($12.9 million when repaid) under its European bank credit facility.
During the second quarter of 2005, Kronos extended the respective maturity dates
of its European and U.S. credit facilities each by three years to June 2008 and
September 2008, respectively, and in October 2005 Valhi extended the maturity
date of its revolving bank credit facility one year to October 2006.
See Note 1 for a discussion of the Company's loans from Snake River, and
various other relationships between the Company and Snake River.
Note 10 - Accounts with affiliates:
December 31, September 30,
2004 2005
-------- ---------
(In thousands)
Current receivables from affiliates:
Contran:
Demand loan $ 4,929 $ -
Income taxes 531 815
TIMET 24 -
------- -------
$ 5,484 $ 815
======= =======
Noncurrent receivable from affiliate -
loan to Contran family trust $10,000 $ 8,000
======= =======
Payables to affiliates:
Louisiana Pigment Company $ 8,844 $ 7,701
Contran - trade items 2,753 3,657
Other 10 57
------- -------
$11,607 $11,415
======= =======
Note 11 - Provision for income taxes:
Nine months ended
September 30,
2004 2005
---- ----
(Restated)
(In millions)
Expected tax expense $ 23.0 $ 57.7
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies 1.3 11.7
Loss of German tax attribute - 17.5
Non-U.S. tax rates (.7) .1
Excess of book basis over tax basis of shares of
Kronos common stock sold - 1.7
Change in deferred income tax valuation allowance (308.4) -
Tax contingency reserve adjustment, net (13.1) (23.5)
Refund of prior year income taxes (3.1) -
U.S. state income taxes, net .3 3.8
Nondeductible expenses 2.5 3.1
Income tax related to shares of Kronos common
stock disbtibuted by NL 1.9 .7
Other, net 9.5 (1.4)
------- ------
$(286.8) $ 71.4
======= ======
Comprehensive provision for income taxes (benefit) allocated to:
Income from continuing operations $(286.8) $ 71.4
Discontinued operations .3 (.4)
Additional paid-in capital 1.9 .7
Other comprehensive income:
Marketable securities 1.7 .3
Currency translation (.1) (1.6)
Pension liabilities .2 -
------- ----
$(282.8) $ 70.4
======= ======
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 penalties
and interest. For example:
o Kronos has received a preliminary tax assessment related to 1993 from the
Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately euro 6 million ($7 million at September 30,
2005). Kronos filed a protest to this assessment, and believed that a
significant portion of the assessment was without merit. The Belgian tax
authorities have filed a lien on the fixed assets of Kronos' Belgian TiO2
operations in connection with this assessment. In April 2003, Kronos
received a notification from the Belgian tax authorities of their intent to
assess a tax deficiency related to 1999 that, including interest, would
have aggregated approximately euro 9 million ($11 million). Kronos filed a
written response to the assessment, and in September 2005 the Belgian tax
authorities withdrew the assessment.
o The Norwegian tax authorities have notified Kronos of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million)
relating to the years 1998 through 2000. Kronos has objected to this
proposed assessment.
o Kronos has received a tax assessment from the Canadian tax authorities
related to the years 1998 and 1999 proposing tax deficiencies, including
interest, of approximately Cdn. $5 million ($4 million). Kronos filed a
protest, and in October 2005, the Canadian tax authorities agreed to reduce
the assessment and settle all issues, including interest, for approximately
Cdn. $2 million ($1.7 million).
During the third quarter of 2005, Kronos reached an agreement in principle
with the German tax authorities regarding such tax authorities' objection to the
value assigned to certain intellectual property rights held by Kronos' operating
subsidiary in Germany. Under the agreement in principle, the value assigned to
such intellectual property for German income tax purposes will be reduced
retroactively, resulting in a reduction in the amount of Kronos' net operating
loss carryforwards in Germany as well as a future reduction in the amount of
amortization expense attributable to such intellectual property. As a result,
Kronos recognized a $17.5 million non-cash deferred income tax expense in the
third quarter of 2005 related to such agreement. The $23.5 million non-cash tax
contingency adjustment income tax benefit in the first nine months of 2005
relates primarily to the withdrawal of the Belgium tax authorities' withdrawal
of its assessment related to 1999 and the Canadian tax authorities' reduction of
one of its assessments, both as discussed above, as well as favorable
developments with respect to certain income tax items of NL in the U.S.
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 and 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.
Under GAAP, a company is required to recognize a deferred income tax
liability with respect to the incremental U.S. taxes (federal and state) and
foreign withholding taxes that would be incurred when undistributed earnings of
a foreign subsidiary are subsequently repatriated, unless management has
determined that those undistributed earnings are permanently reinvested for the
foreseeable future. Prior to the third quarter of 2005, CompX had not recognized
a deferred tax liability related such incremental income taxes on the
undistributed earnings of its foreign operations, as those earnings were deemed
to be permanently reinvested. GAAP requires a company to reassess the permanent
reinvestment conclusion on an ongoing basis to determine if management's
intentions have changed. As of September 30, 2005, and based primarily upon
changes in CompX management's strategic plans for its non-U.S. operations, CompX
management has determined that the undistributed earnings of such subsidiaries
can no longer be considered to be permanently reinvested, except for the
pre-2005 earnings of its Taiwanese subsidiary. Accordingly, and in accordance
with GAAP, CompX recognized an aggregate $9.0 million provision for deferred
income taxes on the aggregate undistributed earnings of these foreign
subsidiaries.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law provided for a special 85% deduction for certain dividends
received from a controlled foreign corporation in 2005. In the third quarter of
2005, the Company completed its evaluation of this new provision and determined
that it would not benefit from such special dividends received deduction.
Note 12 - Minority interest:
December 31, September 30,
2004 2005
-------- --------
(In thousands)
Minority interest in net assets:
NL Industries $ 69,888 $ 74,031
Kronos Worldwide 29,569 32,982
CompX International 49,153 47,145
Subsidiary of NL 9,250 -
Subsidiary of Kronos 76 73
-------- --------
$157,936 $154,231
======== ========
Nine months ended
September 30,
2004 2005
---- ----
(Restated)
(In thousands)
Minority interest in income - continuing operations:
NL Industries $32,446 $ 6,606
Kronos Worldwide 18,965 4,444
CompX International 2,551 (473)
Subsidiary of NL 574 61
Subsidiary of Kronos 38 9
------- -------
$54,574 $10,647
======= =======
In June 2005, NL's majority-owned subsidiary, NL Environmental Management
Services, Inc. ("EMS"), received notices from the three minority shareholders of
EMS indicating they were each exercising their right, which became exercisable
on June 1, 2005, to require EMS to purchase their shares in EMS as of June 30,
2005 for a formula-determined amount as provided in EMS' certificate of
incorporation. EMS tendered an offer to the three former minority shareholders
to purchase their shares of EMS stock for an aggregate of approximately $3.9
million. In accordance with EMS' certificate of incorporation, EMS' offer may be
subject to review by a third party. In June 2005, EMS set aside $3.9 million in
funds as payment for the shares of EMS, but as of September 30, 2005, the former
minority shareholders have not tendered their shares, and accordingly the
liability owed to these former minority shareholders, which has not been
extinguished for financial reporting purposes as of September 30, 2005, has been
classified as a current liability at such date. Similarly, the $3.9 million in
funds which have been set aside are classified as a current asset at such date.
The carrying value of the minority interest in EMS as reflected in NL's
consolidated financial statements immediately prior to such June 30, 2005
purchase date was $9.3 million.
Note 13 - Commitments and contingencies:
Lead pigment litigation - NL.
NL's former operations included the manufacture of lead pigments for use in
paint and lead-based paint. NL, other former manufacturers of lead pigments for
use in paint and lead-based paint, and the Lead Industries Association (which
discontinued business operations in 2002) have been named as defendants in
various legal proceedings seeking damages for personal injury, property damage
and governmental expenditures 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 lawsuits seek recovery under a
variety of theories, including public and private nuisance, negligent product
design, negligent failure to warn, strict liability, breach of warranty,
conspiracy/concert of action, aiding and abetting, enterprise liability, market
share or risk contribution liability, intentional tort, fraud and
misrepresentation, violations of state consumer protection statutes, supplier
negligence and similar claims.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and 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. A number of cases are inactive or 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 either the defendants or the plaintiffs. In addition, various other
cases are pending (in which NL is not a defendant) seeking recovery for injury
allegedly caused by lead pigment and lead-based paint. Although NL is not a
defendant in these cases, the outcome of these cases may have an impact on
additional cases being filed against NL in the future.
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 pending lead pigment and lead-based paint litigation.
Liability that may result, if any, cannot reasonably be estimated. There can be
no assurance that NL will not incur liability in the future in respect of this
pending litigation in view of the inherent uncertainties involved in court and
jury rulings in pending and possible future cases. If any such future liability
were to be incurred, it could have a material adverse effect on the Company's
consolidated financial statements, results of operations and liquidity.
NL has reached an agreement with one of its former insurance carriers in
which such carrier would reimburse NL for a portion of its past and future lead
pigment litigation defense costs, although the amount which NL will ultimately
recover from such carrier with respect to such defense costs incurred by NL is
not yet determinable. NL is also continuing discussions with another former
insurance carrier with respect to recovery of past and future defense costs. In
addition, during the first nine months of 2005, NL recognized $1.2 million of
recoveries from certain insolvent former insurance carriers relating to
settlement of excess insurance coverage claims that was received in August 2005.
See Note 8. While NL continues to seek additional recoveries of past defense
costs as well as an agreement related to future defense costs, there can be no
assurance that NL will be successful in obtaining reimbursement for either
defense costs or indemnity. NL has not considered any potential insurance
recoveries in determining related accruals for lead pigment litigation matters.
Any such additional insurance recoveries would be recognized when their receipt
is deemed probable and the amount is determinable.
Environmental matters and litigation.
General. The Company's operations are governed by various environmental
laws and regulations. Certain of the Company's businesses are and have been
engaged in the handling, manufacture or use of substances or compounds that may
be considered toxic or hazardous within the meaning of applicable environmental
laws and regulations. As with other companies engaged in similar businesses,
certain past and current operations and products of the Company have the
potential to cause environmental or other damage. The Company has implemented
and continues to implement various policies and programs in an effort to
minimize these risks. The Company's policy is to maintain compliance with
applicable environmental laws and regulations at all of its plants and to strive
to improve its environmental performance. From time to time, the Company may be
subject to environmental regulatory enforcement under U.S. and foreign statutes,
resolution of which typically involves the establishment of compliance programs.
It is possible that future developments, such as stricter requirements of
environmental laws and enforcement policies thereunder, could adversely affect
the Company's production, handling, use, storage, transportation, sale or
disposal of such substances. The Company believes all of its plants are in
substantial compliance with applicable environmental laws.
Certain properties and facilities used in the Company's former businesses,
including divested primary and secondary lead smelters and former mining
locations of NL, are the subject of civil litigation, administrative proceedings
or investigations arising under federal and state environmental laws.
Additionally, in connection with past disposal practices, the Company has been
named as a defendant, potentially responsible party ("PRP") or both, pursuant to
the Comprehensive Environmental Response, Compensation and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act ("CERCLA"), and
similar state laws in various governmental and private actions associated with
waste disposal sites, mining locations, and facilities currently or previously
owned, operated or used by the Company or its subsidiaries, or 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 the Company 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.
Environmental obligations are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of governmental
regulations, the number of PRPs and the PRPs' ability or willingness to fund
such allocation of costs, their financial capabilities and the allocation of
costs among PRPs, the solvency of other 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 respecting site cleanup costs or allocation of such costs among PRPs,
solvency of other 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 or 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. If any such future liability
were to be incurred, it could have a material adverse effect on the Company's
consolidated financial statements, results of operations and liquidity.
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, 2005, no receivables for such recoveries have been recognized.
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 that 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.
A summary of the activity in the Company's accrued environmental costs
during the first nine months of 2005 is presented in the table below.
Amount
(In thousands)
Balance at the beginning of the period $ 76,766
Net additions charged to expense 2,826
Payments (11,731)
--------
Balance at the end of the period $ 67,861
========
Amounts recognized in the balance sheet at the end of the period:
Current liability $ 21,210
Noncurrent liability 46,651
--------
$ 67,861
NL. 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. At September 30, 2005, NL
had accrued $58.7 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 $81 million. NL's estimates of such liabilities have not been
discounted to present value.
At September 30, 2005, there are approximately 20 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. On certain of these sites that had
previously been inactive, NL has received general and special notices of
liability from the EPA alleging that NL, along with other PRPs, is liable for
past and future costs of remediating environmental contamination allegedly
caused by former operations conducted at such sites. These notifications may
assert that NL, along with other PRP's, is liable for past clean-up costs that
could be material to NL if liability for such amounts ultimately were determined
against NL.
At December 31, 2004, NL had $8 million in restricted cash 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. During
the first nine months of 2005, all of such restricted balances had been so
utilized. Use of such restricted balances does not affect the Company's
consolidated net cash flows.
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 ($3.0 million at September 30, 2005) to cover its share of
probable and reasonably estimable environmental obligations for these
activities. Tremont has entered into an agreement with another PRP of this site
that provides for, among other thing, the interim sharing of remediation costs
associated with the site pending a final allocation of costs and an agreed-upon
procedure through arbitration to determine such final allocation of costs.
Tremont has based its accrual for this site based upon the agreed-upon interim
cost sharing allocation. Tremont currently expects that the nature and extent of
any final remediation measures that might be imposed with respect to this site
will not be known until 2007. Currently, no reasonable estimate can be made of
the cost of any such final remediation measures, and accordingly Tremont has
accrued no amounts at September 30, 2005 for any such cost. The amount accrued
at September 30, 2005 represents Tremont's estimate of the costs to be incurred
through 2007 with respect to the interim remediation measures.
TIMET. At September 30, 2005, TIMET had accrued approximately $3.6 million
for environmental cleanup matters, principally related to TIMET's facility in
Nevada. The upper end of the range of reasonably possible costs related to these
matters is approximately $6.0 million.
Other. The Company has also accrued approximately $6.2 million at September
30, 2005 in respect of other environmental cleanup matters. 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 2004 Annual Report for a discussion of certain
other legal proceedings to which the Company is a party.
NL has been named as a defendant in various lawsuits in a variety of
jurisdictions, alleging personal injuries as a result of occupational exposure
primarily to products manufactured by formerly-owned operations of NL containing
asbestos, silica and/or mixed dust. Approximately 500 of these types of cases
involving a total of approximately 12,500 plaintiffs and their spouses remain
pending. NL has not accrued any amounts for this litigation because liability
that might result to NL, if any, cannot be reasonably estimated. To date, NL has
not been adjudicated liable in any of these matters. Based on information
available to NL, including facts concerning its historical operations, the rate
of new claims, the number of claims from which NL has been dismissed and NL's
prior experience in the defense of these matters, NL believes that the range of
reasonably possible outcomes of these matters will be consistent with NL's
historical costs with respect to these matters (which are not material), and no
reasonably possible outcome is expected to involve amounts that are material to
NL. NL has and will continue to vigorously seek dismissal from each claim and/or
a finding of no liability by NL in each case. 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.
In addition to the litigation described above, the Company and its
affiliates are also involved in various other environmental, contractual,
product liability, patent (or intellectual property), employment and other
claims and disputes incidental to its present and former businesses. In certain
cases, the Company has insurance coverage for such items, although the Company
does not currently expect any additional material insurance coverage for its
environmental claims. The Company currently believes that the disposition of all
claims and disputes, individually or in the aggregate, and including the lead
pigment litigation and environmental matters discussed above, should not have a
material adverse effect on its consolidated financial position, results of
operations or liquidity.
Operating leases.
As noted in the 2004 Annual Report, Kronos' principal German operating
subsidiary, Kronos Titan GmbH, leases the land under its Leverkusen TiO2
production facility pursuant to a lease with Bayer AG that expires in 2050. The
Leverkusen facility itself, which is owned by Kronos and which represents
approximately one-third of Kronos' current TiO2 production capacity, is located
within Bayer's extensive manufacturing complex. Rent for the land lease
associated with the Leverkusen facility is periodically established by agreement
with Bayer for periods of at least two years at a time. The lease agreement
provides for no formula, index or other mechanism to determine changes in the
rent for such land lease; rather, any change in the rent is subject solely to
periodic negotiation between Bayer and Kronos. Any change in the rent based on
such negotiations is recognized as part of lease expense starting from the time
such change is agreed upon by both parties, as any such change in the rent is
deemed "contingent rentals" under GAAP.
Note 14 - Employee benefit plans:
Defined benefit plans. The components of net periodic defined benefit
pension cost are presented in the table below.
Three months ended Nine months ended
September 30, September 30,
2004 2005 2004 2005
---- ---- ---- ----
(In thousands)
Service cost $ 1,772 $ 1,974 $ 4,900 $ 5,875
Interest cost 5,493 5,527 16,445 17,005
Expected return on plan assets (5,210) (5,508) (15,698) (16,884)
Amortization of prior service cost 140 145 421 449
Amortization of net transition
Obligations and assets 142 (16) 432 259
Recognized actuarial losses 1,075 1,093 3,235 3,369
------- ------- -------- --------
$ 3,412 $ 3,215 $ 9,735 $ 10,073
======= ======= ======== ========
Postretirement benefits other than pensions ("OPEB"). The components of net
periodic OPEB cost are presented in the table below.
Three months ended Nine months ended
September 30, September 30,
2004 2005 2004 2005
---- ---- ---- ----
(In thousands)
Service cost $ 57 $ 56 $ 170 $ 165
Interest cost 658 483 1,977 1,449
Amortization of prior service credit (253) (231) (765) (694)
Recognized actuarial losses (gains) 44 (120) 134 (296)
------- ------- -------- -------
$ 506 $ 188 $ 1,516 $ 624
======= ======= ======== =======
Note 15 - Discontinued operations:
As discussed in the 2004 Annual Report, in December 2004 CompX's board of
directors committed to a formal plan to dispose of its Thomas Regout operations
in The Netherlands. Such operations, which previously were included in the
Company's component products operating segment (see Note 2), met all of the
criteria under GAAP to be classified as an asset held for sale at December 31,
2004, and accordingly the results of operations of Thomas Regout have been
classified as discontinued operations for all periods presented. The Company has
not reclassified its consolidated balance sheet as of December 31, 2004 or its
2004 statement of cash flows. In classifying the net assets of the Thomas Regout
operations as an asset held for sale, the Company concluded that the carrying
amount of the net assets of such operations exceeded the estimated fair value
less costs to sell such operations, and accordingly in the fourth quarter of
2004 the Company recognized a $6.5 million impairment charge to write-down its
investment in the Thomas Regout operations to its estimated net realizable
value. Such charge represented an impairment of goodwill.
In January 2005, CompX completed the sale of such operations for proceeds
(net of expenses) of approximately $22.3 million. The net proceeds consisted of
approximately $18.1 million in cash at the date of sale and a $4.2 million
principal amount note receivable from the purchaser bearing interest at a fixed
rate of 7% and payable over four years. The note receivable is collateralized by
a secondary lien on the assets sold and is subordinated to certain third-party
indebtedness of the purchaser. Accordingly, the Company no longer includes the
results of operations or cash flows of Thomas Regout subsequent to December 31,
2004 in its consolidated financial statements. The net proceeds from the January
2005 sale of Thomas Regout were approximately $860,000 (before income tax
benefit) less than the net realizable value estimated at the time of the
goodwill impairment charge (primarily due to higher expenses associated with the
disposal of the Thomas Regout operations), and discontinued operations in 2005
includes a first quarter charge related to such differential ($272,000, net of
income tax benefit and minority interest). During the first nine months of 2004,
the Thomas Regout operations reported net sales of $30.5 million, operating
income of $2.1 million, interest expense of $1.1 million and net income of
$645,000 ($409,000 to Valhi, net of minority interest).
Note 16 - Accounting principles not yet implemented:
Inventory costs. The Company will adopt SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4, for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs is charged to expense as incurred. Alternatively, in periods of production
above the high end of normal capacity, the amount of fixed overhead costs
allocated to each unit of production is decreased so that inventories are not
measured above cost. SFAS No. 151 also clarifies existing GAAP to require that
abnormal freight and wasted materials (spoilage) are to be expensed as incurred.
The Company believes its production cost accounting already complies with the
requirements of SFAS No. 151, and the Company does not expect adoption of SFAS
No. 151 will have a material effect on its consolidated financial statements.
Stock options. As permitted by regulations of the SEC, the Company will
adopt SFAS No. 123R, Share-Based Payment, as of January 1, 2006. SFAS No. 123R,
among other things, eliminates the alternative in existing GAAP to use the
intrinsic value method of accounting for stock-based employee compensation under
APBO No. 25. Upon adoption of SFAS No. 123R, the Company will generally be
required to recognize the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award,
with the cost recognized over the period during which an employee is required to
provide services in exchange for the award (generally, the vesting period of the
award). No compensation cost will be recognized in the aggregate for equity
instruments for which the employee does not render the requisite service
(generally, if the instrument is forfeited before it has vested). The grant-date
fair value will be estimated using option-pricing models (e.g. Black-Sholes or a
lattice model). Under the transition alternatives permitted under SFAS No. 123R,
the Company will apply the new standard to all new awards granted on or after
January 1, 2006, and to all awards existing as of December 31, 2005 which are
subsequently modified, repurchased or cancelled. Additionally, as of January 1,
2006, the Company will be required to recognize compensation cost previously
measured under SFAS No. 123 for the portion of any non-vested award existing as
of December 31, 2005 over the remaining vesting period. Because the number of
non-vested awards as of December 31, 2005 with respect to options granted by
Valhi and its subsidiaries and affiliates is not expected to be material, the
effect of adopting SFAS No. 123R is not expected to be significant in so far as
it relates to existing stock options. Should Valhi or its subsidiaries and
affiliates, however, either grant a significant number of options or modify,
repurchase or cancel existing options in the future, the effect on the Company's
consolidated financial statements could be material.
Note 17 - Stockholders' equity:
In March 2005, the Company's board of directors authorized the repurchase
of up to 5.0 million shares of Valhi's common stock in open market transactions,
including block purchases, or in privately negotiated transactions, which may
include transactions with affiliates of Valhi. The stock may be purchased from
time to time as market conditions permit. The stock repurchase program does not
include specific price targets or timetables and may be suspended at any time.
Depending on market conditions, the program could be terminated prior to
completion. The Company will use its cash on hand to acquire the shares.
Repurchased shares will be retired and cancelled or may be added to Valhi's
treasury and used for employee benefit plans, future acquisitions or other
corporate purposes.
On April 1, 2005, the Company purchased 2.0 million shares of its common
stock, at a discount to the then-current market price, from Contran for $17.50
per share or an aggregate purchase price of $35.0 million. Such shares were
purchased under the stock repurchase program. Valhi's independent directors
approved such purchase. During the second and third quarters of 2005, the
Company also purchased in the aggregate an additional 1.3 million shares of its
common stock under the repurchase program in market or private transactions for
an aggregate of $23.5 million, including 175,000 shares purchased for an
aggregate of $3.1 million from The Simmons Family Foundation, a charitable
organization of which Mr. Simmons is a trustee, based on the market price of
Valhi common stock on the date of purchase. Valhi cancelled these 3.3 million
shares purchased during the second and third quarters of 2005, and the aggregate
$58.5 million cost was allocated to common stock at par value, additional
paid-in capital and retained earnings in accordance with GAAP.
Prior to and within six months of Contran's sale of the 2.0 million shares
of Valhi common stock to Valhi, Contran had purchased shares of Valhi common
stock in market transactions. In settlement of any alleged short-swing profit
derived from these transactions as calculated pursuant to Section 16(b) of the
Securities Exchange Act of 1934, as amended, Contran remitted approximately
$645,000 to the Company, which amount, net of taxes, has been recorded by the
Company as a capital contribution, increasing additional paid-in capital.
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
General
The Company reported income from continuing operations of $18.5 million, or
$.16 per diluted share, in the third quarter of 2005 as compared to income of
$16.3 million, or $.14 per diluted share, in the third quarter of 2004. For the
first nine months of 2005, the Company reported income from continuing
operations of $82.9 million, or $.69 per diluted share, compared to income of
$298.1 million, or $2.48 per diluted share, in the first nine months of 2004.
See Note 1 for a discussion of the effect of certain restatements to the
Company's results of operation for the 2004 interim periods.
The Company's diluted earnings per share declined from the first nine
months of 2004 to the first nine months of 2005 as the favorable effect in 2005
of (i) higher chemicals operating income, (ii) higher component products
operating income, (iii) certain securities transaction gains and (iv) the
Company's equity in a non-operating gain from the sale of certain land and
certain income tax benefits recognized by TIMET were more than offset by the
favorable effect in 2004 of certain income tax benefits recognized by Kronos and
NL. The Company currently believes its net income in 2005 will be lower than
2004 due primarily to the effect of these 2004 income tax benefits.
Income from continuing operations in the first nine months of 2005 includes
(i) gains from NL's sales of shares of Kronos common stock of $.05 per diluted
share, most of which occurred in the first quarter, (ii) gains from Kronos'
second quarter sale of its passive interest in a Norwegian smelting operation of
$.03 per diluted share, (iii) income related to TIMET's second quarter sale of
certain real property adjacent to its Nevada facility of $.02 per diluted share,
(iv) a third quarter non-cash net income tax expense of less than $.01 per
diluted share related to the aggregate effects of recent developments with
respect to certain non-U.S. income tax audits of Kronos, (principally in
Germany, Belgium and Canada) and NL in the U.S. a change in CompX's permanent
reinvestment conclusion regarding certain of its non-U.S. subsidiaries and (v)
income related to certain non-cash income tax benefits recognized by TIMET of
$.09 per diluted share. Income from continuing operations in the first nine
months of 2004 includes (i) a second quarter non-cash income tax benefit related
to the reversal of Kronos' deferred income tax asset valuation allowance in
Germany of $1.91 per diluted share, (ii) a second quarter non-cash income tax
benefit related to the reversal of the deferred income tax asset valuation
allowance related to a subsidiary of NL and the adjustment of estimated income
taxes due upon the settlement of an IRS audit aggregating $.30 per diluted
share, (iii) income related to Kronos' second quarter contract dispute
settlement of $.03 per diluted share and (iv) income related to the Company's
pro-rata share of TIMET's non-cash, non-operating gain from TIMET's exchange of
its convertible preferred debt securities for a new issue of TIMET convertible
preferred stock of $.03 per diluted share.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
filing relating to matters that are not historical facts, including, but not
limited to, statements found in this Item 2 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations," 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. The factors that could cause actual 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 include, but are 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
Kronos' 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 Kronos'
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 The timing and amount of insurance recoveries,
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 The ultimate outcome of income tax audits, tax settlement initiatives
or other tax matters,
o The ultimate ability to utilize income tax attributes, the benefit of
which has been recognized under the "more-likely-than-not" recognition
criteria (such as Kronos' ability to utilize its German net operating
loss carryforwards),
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 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 changes in information, future
events or otherwise.
Chemicals
Relative changes in Kronos' TiO2 sales and operating income during the 2004
and 2005 periods presented are primarily due to (i) relative changes in TiO2
average selling prices and (ii) relative changes in foreign currency exchange
rates. Selling prices (in billing currencies) for TiO2, Kronos' principal
product, were generally: decreasing during the first half of 2004, increasing
during the last half of 2004 and the first six months of 2005 and decreasing
during the third quarter of 2005.
Three months ended Nine months ended September
September 30, 30,
--------------------- ---
2004 2005 % Change 2004 2005 % Change
---- ---- -------- ---- ---- --------
(In millions, except percentages)
Net sales $286.1 $292.1 +2% $845.1 $895.7 +6%
Operating income 25.8 35.5 +37% 84.2 134.2 +59%
Ti02 operating statistics:
Percentage change in Ti02 average selling prices:
Using actual
foreign currency
exchange rates +8% +12%
Impact of changes in
foreign currency
exchange rates -1% -3%
--- ---
In billing currencies +7% +9%
=== ===
Sales volumes* 128 119 -7% 383 356 -7%
Production volumes* 123 122 -1% 363 371 +2%
* Thousands of metric tons
Kronos' sales increased $6.0 million (2%) in the third quarter of 2005
compared to the third quarter of 2004, and increased $50.6 million (6%) for the
first nine months of 2005 due primarily to the net effects of higher average
TiO2 selling prices, lower TiO2 selling volumes and the favorable effect of
fluctuations in foreign currency exchange rates, which increased chemicals sales
by approximately $2 million in the quarter and $24 million in the year-to-date
period, as further discussed below. Excluding the effect of fluctuations in the
value of the U.S. dollar relative to other currencies, Kronos' average TiO2
selling prices in billing currencies in the third quarter and first nine months
of 2005 were 7% and 9% higher, respectively, as compared to the same periods of
2004. When translated from billing currencies to U.S. dollars using actual
foreign currency exchange rates prevailing during the respective periods,
Kronos' average TiO2 selling prices in the third quarter and first nine months
of 2005 increased 8% and 12%, respectively, compared to the third quarter and
first nine months of 2004. Kronos' average TiO2 selling prices in billing
currencies in the third quarter of 2005 were 1% lower than the second quarter of
2005.
Kronos' 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 Kronos' 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 Kronos' 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 GAAP ("GAAP
measure"). Kronos discloses percentage changes in its average TiO2 prices in
billing currencies because Kronos 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 8% and 12%
increases in Kronos' average TiO2 selling prices during the third quarter and
first nine months of 2005 as compared to the same periods of 2004 using actual
foreign currency exchange rates prevailing during the respective periods (the
GAAP measure), and the 7% and 9% increases, respectively, in Kronos' average
TiO2 selling prices in billing currencies (the non-GAAP measure) during each of
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
Kronos' average TiO2 selling prices using actual foreign currency exchange rates
prevailing during the respective periods (the GAAP measure), (ii) the percentage
change in Kronos' 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).
Kronos' TiO2 sales volumes in each of the third quarter and first nine
months of 2005 decreased 7% as compared to the same periods of 2004, with
volumes lower in all regions of the world. Chemicals operating income in 2004
includes $6.3 million of income ($3.5 million or $.03 per diluted share, net of
income taxes and minority interest) in the second quarter related to Kronos'
settlement of a contract dispute with a customer. Kronos' operating income
comparisons in the first nine months of 2005 were favorably impacted by higher
production levels, which increased 2% in the year-to-date period. Kronos'
operating rates were near full capacity in all periods, and Kronos' production
volumes in the first nine months of 2005 were a new record for Kronos for a
first nine-month period.
Kronos has substantial operations and assets located outside the United
States (particularly in Germany, Belgium, Norway and Canada). A significant
amount of Kronos' 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 Kronos' 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
Kronos' 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 by a net $2 million and $24 million in
the third quarter and first nine months of 2005, respectively, as compared to
the same periods of 2004. Fluctuations in the value of the U.S. dollar relative
to other currencies similarly impacted Kronos' foreign currency-denominated
operating expenses. Kronos' operating costs that are not denominated in the U.S.
dollar, when translated into U.S. dollars, were higher in the third quarter and
first nine months of 2005 as compared to the same periods in 2004. Overall,
currency exchange rate fluctuations resulted in a net $2 million increase in
Kronos' operating income in the first nine months of 2005 as compared to the
first nine months of 2004 (currency exchange rate fluctuations did not have a
significant effect on on the quarter-to-quarter comparison).
Kronos expects its operating income in 2005 will be significantly higher
than 2004, due primarily to higher overall average selling prices on a
year-to-year comparison basis. Kronos' expectations as to the future prospects
of Kronos and the TiO2 industry are based upon a number of factors beyond
Kronos' 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 Kronos'
expectations, Kronos' results of operations could be unfavorably affected.
On September 22, 2005, the chloride-process TiO2 facility operated by
Kronos' 50%-owned joint venture, Louisiana Pigment Company ("LPC"), temporarily
halted production due to Hurricane Rita. Although storm damage to core
processing facilities was not extensive, a variety of factors, including loss of
utilities, limited access and availability of employees and raw materials,
prevented the resumption of partial operations until October 9, 2005. Operations
are expected to be restored in early November 2005. The joint venture expects
the majority of its property damage and unabsorbed fixed costs for periods in
which normal production levels were not achieved are covered by insurance, and
Kronos believes insurance will cover its business interruption losses (subject
to applicable deductibles) resulting from its share of the lost production from
LPC. Kronos' results of operations in the third quarter of 2005 include
approximately $1 million of costs related to Hurricane Rita (primarily Kronos'
share of LPC's unabsorbed fixed costs) for which no insurance recovery has yet
been recognized as the amounts are not presently determinable. The effect on
Kronos' financial results will depend on the timing and amount of insurance
recoveries. Kronos' owned warehouse and slurry facilities located near LPC's
facility were also temporarily closed due to the storm, but property damage to
these facilities was not significant.
Kronos' efforts to debottleneck its production facilities to meet long-term
demand continue to prove successful. Such debottlenecking efforts included,
among other things, the addition of finishing capacity in the German facility
and equipment upgrades and enhancements in several locations to allow for
reduced downtime for maintenance activities. Kronos' production capacity has
increased by approximately 30% over the past ten years due to debottlenecking
programs, with only moderate capital expenditures. Kronos believes its annual
attainable production capacity for 2005 (absent the effect of Hurricane Rita
discussed above), is approximately 500,000 metric tons, with approximately
10,000 metric tons additional capacity expected to be available in 2006 through
its continued debottlenecking efforts.
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 and Kronos. Such adjustments result in
additional depreciation and amortization expense beyond amounts separately
reported by Kronos. Such additional non-cash expenses reduced chemicals
operating income, as reported by Valhi, by $12.0 million in the first nine
months of 2004 and $12.6 million in the first nine months of 2005.
Component products
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------
2004 2005 % Change 2004 2005 % Change
---- ---- -------- ---- ---- --------
(In millions, except percentages)
Net sales $46.3 $47.1 +2% $136.1 $139.7 +3%
Operating income 4.9 4.9 -% 12.5 13.8 +11%
Component products sales increased in the third quarter of 2005 as compared
to the third quarter of 2004 due primarily to sales volumes associated with a
components products business acquired in August 2005 and the net effect of
fluctuations in currency exchange rates (as discussed below), partially offset
by lower precision slide and ergonomic products sales volumes. Component
products sales increased in the first nine months of 2005 as compared to the
same period in 2004 due primarily to increases in selling prices for certain
products across all segments, sales volumes associated with the acquired
business and the net effect of fluctuations in currency exchange rates (as
discussed below), partially offset by lower sales volumes for certain products.
During the third quarter of 2005, sales of precision slide and ergonomic
products were 6% and 5% lower, respectively, as compared to the third quarter of
2004, while sales of security products increased 13%. During the first nine
months of 2005, sales of precision slide and ergonomic products were 3% and 2%
higher, respectively, as compared to the first nine months of 2004, and sales of
security products were 2% higher. The percentage changes in both precision 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. The results of the business acquired in August 2005, included as
part of security products results, were not material. Component products
operating income increased in the first nine months of 2005 as compared to the
same period in 2004 as the favorable impact of a continuing focus on reducing
costs were partially offset by the negative impact of foreign currency exchange
rate fluctuations (as discussed below).
CompX has substantial operations and assets located outside the United
States in Canada 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 and the New Taiwan dollar. In addition, a
portion of CompX's sales generated from its non-U.S. operations (principally in
Canada) are denominated in the U.S. dollar. Most raw materials, labor and other
production costs for such non-U.S. operations are denominated primarily in local
currencies. Consequently, the translated U.S. dollar values 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 of
2005, relative change in foreign currency exchange rates increased component
products sales by approximately $400,000 as compared to the third quarter of
2005, but decreased component products operating income by approximately
$600,000 ($1.3 million increase and $2.0 million decrease, respectively, during
the year-to-date period).
While demand has stabilized across most of CompX's product segments,
certain customers continue to seek lower-priced Asian sources as alternatives to
CompX's products. CompX believes the impact of this will be mitigated through
its ongoing initiatives to expand both new products and new market
opportunities. Asian-sourced competitive pricing pressures are expected to
continue to be a challenge. CompX's strategy in responding to the competitive
pricing pressure has included reducing production cost through product
reengineering, improvement in manufacturing processes or moving production to
lower-cost facilities, including CompX's Asian-based manufacturing facilities.
CompX has also emphasized and focused on opportunities where it can provide
value-added customer support services that Asian-based manufacturers are
generally unable to provide. CompX believes its combination of cost control
initiatives together with its value-added approach to development and marketing
of products helps to mitigate the impact of pricing pressures from Asian
competitors.
CompX will continue to focus on cost improvement initiatives, utilizing
lean manufacturing techniques and prudent balance sheet management in order to
minimize the impact of lower sales, particularly to the office furniture
industry, and to develop value-added customer relationships with an additional
focus on sales of CompX's higher-margin ergonomic computer support systems and
security products to improve operating results. In addition, CompX continues to
develop sources for lower cost components for certain product lines to
strengthen its ability to meet competitive pricing when practical. These
actions, along with other activities to eliminate excess capacity, have been
designed to position CompX to expand more effectively on both new product and
new market opportunities to improve CompX's profitability.
Waste management
Three months ended Nine months ended
September 30, September 30,
2004 2005 2004 2005
---- ---- ---- ----
(In millions)
Net sales $ 4.4 $ 3.0 $ 6.6 $ 7.5
Operating loss (.5) (2.8) (7.3) (9.1)
Waste management sales increased in the first nine months of 2005 as
compared to the same period of 2004, but its operating losses also increased in
the 2005 periods as higher operating costs more than offset the effect of higher
utilization of certain waste management services. Waste Control Specialists also
continues to explore opportunities to obtain certain types of new business
(including disposal and storage of certain types of waste) that, if obtained,
could help to further increase its sales, and decrease its operating loss, in
the remainder of 2005.
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 low-level radioactive wastes.
Certain sectors of the waste management industry are experiencing a relative
improvement in the number of environmental remediation projects generating
wastes. However, efforts on the part of generators to reduce the volume of waste
and/or manage waste onsite at their facilities may result in weaker demand for
Waste Control Specialists' waste management services. Although Waste Control
Specialists believes demand appears to be improving, there is continuing 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 low-level 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 low-level
radioactive wastes includes obtaining additional regulatory authorizations for
the disposal of low-level and mixed low-level 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 low-level 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 Texas Commission on Environmental Quality ("TCEQ") to
issue a low-level radioactive waste disposal license to a private entity, such
as Waste Control Specialists. Waste Control Specialists has applied for such a
disposal license with the TCEQ, and Waste Control Specialists was the only
entity to submit an application for such a disposal license. The application was
declared administratively complete by the TCEQ in February 2005. The
regulatorially required merit review has been completed, and the TCEQ began its
technical review of the application in May 2005. The length of time that it will
take to complete the review and act upon the license application is uncertain,
although Waste Control Specialists does not currently expect the agency will
issue any final decision on the license application before late 2007. There can
be no assurance that Waste Control Specialists will be successful in obtaining
any such license.
Waste Control Specialists applied to the Texas Department of State Health
Services ("TDSHS") for a license to dispose of byproduct 11.e(2) waste material
in June 2004. Waste Control Specialists can currently treat and store byproduct
material, but may not dispose of it. The length of time that TDSHS will take to
review and act upon the license application is uncertain, but Waste Control
Specialists currently expects the TDSHS will issue a final decision on the
license application sometime during 2006. There can be no assurance that Waste
Control Specialists will be successful in obtaining any such license.
Waste Control Specialists is continuing its efforts 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
low-level 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,
2004 2005 2004 2005
---- ---- ---- ----
(In millions)
TIMET historical:
Net sales $120.2 $190.0 $364.9 $529.0
====== ====== ====== ======
Operating income:
Boeing take-or-pay $ 10.1 $ 8.3 $ 12.6 $ 8.7
Other 3.3 43.0 12.6 98.9
------ ------ ------ ------
13.4 51.3 25.2 107.6
Gain on sale of land - - - 13.9
Gain on exchange of convertible
preferred securities 15.5 - 15.5 -
Other general corporate, net (.1) 1.3 .8 3.6
Interest expense (3.1) (1.1) (11.5) (2.7)
------ ------ ------ ------
25.7 51.5 30.0 122.4
Income tax benefit (expense) .6 (14.3) (.7) (4.8)
Minority interest - (1.3) (.8) (3.4)
Dividends on preferred stock (1.1) (2.8) (1.1) (9.4)
------ ------ ------ ------
Net income $ 25.2 $ 33.1 $ 27.4 $104.8
====== ====== ====== ======
Equity in earnings of TIMET $ 11.5 $ 15.0 $ 14.9 $ 47.6
====== ====== ====== ======
TIMET reported higher sales and operating income in the third quarter and
first nine months of 2005 as compared to the same periods of 2004 due in part to
higher sales volumes and average selling prices. TIMET's average selling prices
for melted products (ingot and slab) increased 66% in the third quarter of 2005
as compared to the third quarter of 2004, while average selling prices for mill
products increased 35%. For the first nine months of 2005, TIMET's average
selling prices for melted and mill products increased 42% and 27%, respectively.
For the third quarter and first nine months of 2005, TIMET's sales volumes of
mill products increased 9% and 10%, respectively, while volumes of melted
products were 14% and 5% higher, as a result of increased demand across all
market segments.
TIMET's operating results in the first quarter of 2004 include $1.9 million
of income related to a change in TIMET's vacation policy. TIMET's operating
results comparisons were favorably impacted by improved plant operating rates,
which increased from 72% in the first nine months of 2004 to 78% in the first
nine months of 2005, and higher gross margin from the sale of titanium scrap and
other non-mill products. In addition, TIMET's operating results comparisons were
negatively impacted by higher costs for raw materials and accruals for certain
performance-based employee incentive compensation and a $1.2 million noncash
impairment charge in the first quarter of 2005 related to certain abandoned
manufacturing equipment of TIMET.
During the second quarter of 2005, TIMET recognized a $13.9 million pre-tax
gain ($2.6 million, or $.02 per diluted share, net of income taxes and minority
interest to Valhi) related to the sale of certain real property adjacent to
TIMET's facility in Nevada. In addition, TIMET periodically reviews its deferred
income tax assets to determine if future realization is more likely than not.
During the first quarter of 2005, due to a change in estimate of TIMET's ability
to utilize the benefits of its net operating loss carryforwards, other tax
attributes and deductible temporary differences in the U.S. and the U.K., TIMET
determined that its net deferred income tax assets in such jurisdictions now
meet the "more-likely-than-not" recognition criteria. Accordingly, TIMET's
income tax benefit in the first nine months of 2005 includes a $41.1 million
benefit ($11.1 million, or $.09 per diluted share, net of minority interest to
Valhi) related to reversal of the valuation allowances attributable to such
deferred income tax assets. TIMET expects the remaining U.S. and U.K. valuation
allowances (other than with respect to a substantial portion of TIMET's U.S.
capital loss carryforward) aggregating approximately $9.0 million will be
reversed during the fourth quarter of 2005 in accordance with the GAAP
requirements of accounting for income taxes at interim dates. Equity in earnings
of TIMET in the third quarter of 2004 includes income of $6.3 million ($4.1
million, or $.03 per diluted share, net of income taxes) related to a
nonoperating gain recognized by TIMET upon the exchange of substantially all of
its convertible preferred debt securities for a new issue of TIMET preferred
stock.
Over the past several quarters, TIMET has seen the availability of raw
materials tighten, and, consequently, the prices for such raw material have
generally increased. TIMET currently expects that a shortage in raw materials is
likely to continue throughout 2005 and into 2006, which could limit TIMET's
ability to produce enough titanium products to fully meet customer demand. In
addition, TIMET has certain long-term agreements that limit TIMET's ability to
pass on all of its increased raw material costs to its customers.
In July 2005, The Airline Monitor, a leading aerospace publication, issued
its semi-annual forecast for commercial aircraft deliveries. Beginning in 2006,
this new forecast increases its estimate of large commercial aircraft deliveries
over the next five years by 460 planes, including 55 wide bodies (wide body
planes currently require a higher percentage of titanium in their airframes,
engines and other parts than other commercial aircraft). This updated forecast
supports TIMET's belief that the titanium industry is in the early stages of the
business cycle and that the current uptrend will likely continue through 2006
and beyond.
In May 2005, TIMET announced plans to expand its existing titanium sponge
facility in Nevada. This expansion, which TIMET currently expects to complete by
the first quarter of 2007, will provide the capacity to produce an additional
4,000 metric tons of sponge annually, an increase of approximately 42% over
current Nevada sponge production capacity levels.
TIMET currently expects its full year 2005 sales revenue will range from
$740 million to $760 million. As compared to full year average selling prices
for 2004, TIMET currently expects 2005 average selling prices will increase 45%
to 50% for melted products and 25% to 30% for mill products. TIMET currently
expects its full year 2005 product shipments will increase 5% to 10% for melted
products and 10% to 15% for mill products, as compared to full year 2004.
TIMET's cost of sales is affected by a number of factors including customer
and product mix, material yields, plant operating rates, raw material costs,
labor and energy costs. Raw material costs, which include sponge, scrap and
alloys, represent the largest portion of TIMET's manufacturing cost structure.
As previously reported, scrap and certain alloy prices have increased
significantly from year-ago prices, and increased energy costs also continue to
have a negative impact on gross margin. However, TIMET has begun to see a
softening of certain alloy costs.
TIMET currently expects production volumes will continue to increase in
2005, with overall capacity utilization expected to approximate 80% in 2005 (as
compared to 75% in 2004). However, practical capacity utilization measures can
vary significantly based on product mix.
TIMET currently anticipates that it will receive orders from Boeing for
about 3.0 million pounds of product during 2005. At this projected order level,
TIMET expects to recognize about $17 million of take-or-pay income in 2005.
Overall, TIMET currently expects its operating income for 2005 will be between
$155 million and $165 million, with net income attributable to common
stockholders estimated to be between $140 million and $150 million.
Effective July 1, 2005, TIMET amended its long-term agreement with Boeing
for the purchase and sale of titanium products. The new agreement expires on
December 31, 2010 and provides for, among other things, (i) mutual annual
purchase and supply commitments by both parties, (ii) continuation of the
existing buffer inventory program currently in place for Boeing and (iii)
certain improved product pricing. The new agreement also replaces, beginning in
2006, the take-or-pay provisions of the previous agreement with an annual makeup
payment early in the following year in the event Boeing purchases less than its
annual volume commitment in any year. In addition, as part of the new agreement,
Boeing will provide support for TIMET's sponge production operations under
certain circumstances.
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 $3.7 million in the first nine months of
2004 and $3.2 million in the first nine months of 2005.
General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend income in the third quarter and first nine months of 2005 was
higher as compared to the same periods of 2004 due primarily to a higher level
of funds available for investment. A significant portion of the Company's
general corporate interest and dividend income relates to distributions received
from The Amalgamated Sugar Company LLC and interest income on the Company's $80
million loan to Snake River Sugar Company. See Notes 3 and 7 to the Consolidated
Financial Statements.
Aggregate general corporate interest and dividend income in the fourth
quarter of 2005 is expected to be significantly higher than the fourth quarter
of 2004, as the lower level of interest income on the Company's loan to Snake
River, which was prepaid in October 2005, is expected to be more than offset by
significantly higher distributions from The Amalgamated Sugar Company LLC
("LLC"). Distributions from the LLC were $17.8 million in the first nine months
of 2004 and $18.7 million in the first nine months of 2005. In October 2005, the
Company and Snake River Sugar Company amended the Company Agreement of the LLC
pursuant to which, among other things, the LLC is required to make higher
minimum levels of distributions to its members (including the Company) as
compared to levels required under the prior Company Agreement, which would
result in the Company receiving annual distributions from the LLC in aggregate
amounts approximately $1.8 million higher than the level of distributions
received during calendar 2004. In addition, assuming certain specified
conditions are met (which conditions the Company currently believes will be
met), the LLC would be required to distribute, in addition to the distributions
noted in the preceding sentence, additional amounts that would result in the
Company receiving at least an additional $25 million during the 15-month period
ending December 31, 2006 (with over one-half of such amount expected to be paid
during the fourth quarter of 2005). Also in the fourth quarter of 2005, the
Company expects to recognize a $21.6 million charge to earnings related to the
accrued interest on the Company's loan to Snake River that was forgiven. See
Note 7 to the Consolidated Financial Statements.
Securities transactions. Net securities transactions gains in the first
nine months of 2005 relate principally to a $14.7 million pre-tax gain ($6.6
million, or $.05 per diluted share, net of income taxes and minority interest)
related to NL's sale of shares of Kronos common stock in market transactions,
substantially all of which occurred in the first quarter. See Notes 2 and 8 to
the Consolidated Financial Statements.
Security transaction gains in 2005 also include a $5.4 million gain ($3.1
million, or $.03 per diluted share, net of income taxes and minority interest)
related to Kronos' second quarter sale of its passive interest in a Norwegian
smelting operation, which had a nominal carrying value for financial reporting
purposes. See Note 8 to the Consolidated Financial Statements.
Insurance recoveries. NL has reached an agreement with one of its former
insurance carriers in which such carrier would reimburse NL for a portion of its
past and future lead pigment litigation defense costs, although the amount which
NL will ultimately recover from such carrier with respect to such defense costs
incurred by NL is not yet determinable. NL is also continuing discussions with
another former insurance carrier with respect to recovery of past and future
defense costs. Insurance recoveries in 2005 includes $1.2 million received by NL
in August 2005 in recovery from certain insolvent former insurance carriers
relating to settlement of excess insurance coverage claims. See Note 8 to the
Consolidated Financial Statements. While NL continues to seek additional
recoveries of past defense costs as well as an agreement related to future
defense costs, there can be no assurance that NL will be successful in obtaining
reimbursement for either defense costs or indemnity. NL has not accrued any
additional insurance recoveries and any such additional insurance recoveries
would be recognized when their receipt is deemed probable and the amount is
determinable.
General corporate expenses. Net general corporate expenses in the third
quarter and first nine months of 2005 were $1.1 million and $1.5 million,
respectively, higher than the same periods of 2004. Net general corporate
expenses in calendar 2005 are currently expected to be higher as compared to
calendar 2004, in part due to higher expected litigation and related expenses of
NL in the fourth quarter of 2005. However, obligations for environmental
remediation are difficult to assess and estimate, and no assurance can be given
that actual costs will not exceed accrued amounts or that costs will not be
incurred in the future with respect to sites for which no estimate of liability
can presently be made. See Note 13 to the Consolidated Financial Statements.
Interest expense. The Company has a significant amount of indebtedness
denominated in the euro, including Kronos International's ("KII")
euro-denominated Senior Secured Notes (euro 375 million outstanding at September
30, 2005). Accordingly, the reported amount of interest expense will vary
depending on relative changes in foreign currency exchange rates. Interest
expense in the first nine months of 2005 was higher than the same period of 2004
due primarily to the interest expense associated with the additional euro 90
million principal amount of Senior Secured Notes issued in November 2004. In
addition, the increase in interest expense was due to relative changes in
foreign currency exchange rates, which increased the U.S. dollar equivalent of
interest expense on the euro 285 million principal amount of KII Senior Secured
Notes outstanding during both periods by approximately $1.0 million in the
nine-month period.
Assuming interest rates and foreign currency exchange rates do not change
significantly from current levels, interest expense in the fourth quarter of
2005 is currently expected to be higher than the same period of 2004 due
primarily to the effect of the issuance of the additional euro 90 million
principal amount of KII Senior Secured Notes in November 2004.
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. The Company's income tax expense in the third quarter of 2005
includes the net non-cash effects of (i) the aggregate favorable effects of
recent developments with respect to certain non-U.S. income tax audits of
Kronos, principally in Belgium and Canada, of $12.5 million ($10.8 million, or
$.09 per diluted share, net of minority interest), (ii) the favorable effect of
recent developments with respect to certain income tax items of NL of $10.8
million ($9.0 million, or $.08 per diluted share, net of minority interest),
(iii) the unfavorable effect with respect to the loss of certain income tax
attributes of Kronos in Germany of $17.5 million ($15.2 million, or $.13 per
diluted share, net of minority interest) and (iv) the unfavorable effect with
respect to a change in CompX's permanent reinvestment conclusion regarding
certain of its non-U.S. subsidiaries of $9.0 million ($5.1 million, or $.04 per
diluted share, net of minority interest).
As previously reported, the Company's income tax benefit in the second
quarter of 2004 includes (i) a $268.6 million non-cash income tax benefit
($230.2 million, or $1.91 per diluted share, net of minority interest) related
to the reversal of a deferred income tax asset valuation allowance attributable
to Kronos' income tax attributes in Germany (principally net operating loss
carryforwards) and (ii) a $43.7 million non-cash income tax benefit ($36.4
million, or $.30 per diluted share, net of minority interest) related to income
tax attributes of a subsidiary of NL.
At September 30, 2005, Kronos has the equivalent of $564 million and $146
million of income tax loss carryforwards for German corporate and trade tax
purposes, respectively, all of which have no expiration date. As more fully
described in the 2004 Annual Report, during 2004 Kronos concluded the benefit of
such income tax loss carryforwards met the "more-likely-than-not" recognition
criteria of GAAP, and accordingly in 2004 Kronos reversed the deferred income
tax asset valuation allowance related to such German carryforwards and other net
deductible temporary differences related to Germany. Prior to the complete
utilization of such carryforwards, it is possible that the Company might
conclude in the future that the benefit of such carryforwards would no longer
meet the "more-likely-than-not" recognition criteria, at which point the Company
would be required to recognize a valuation allowance against the then-remaining
tax benefit associated with the carryforwards.
Minority interest. See Note 12 to the Consolidated Financial Statements.
Discontinued operations. See Note 15 to the Consolidated Financial
Statements.
Accounting principles not yet implemented. See Note 16 to the Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Summary
The Company's primary source of liquidity on an ongoing short-term and
long-term basis is its cash flows from operating activities, which is generally
used to (i) fund capital expenditures, (ii) repay short-term indebtedness
incurred primarily for working capital purposes and (iii) provide for the
payment of dividends (including dividends paid to Valhi by its subsidiaries). In
addition, from time-to-time the Company may incur indebtedness, generally to (i)
fund short-term working capital needs, (ii) refinance existing indebtedness,
(iii) make investments in marketable and other securities (including the
acquisition of securities issued by subsidiaries and affiliates of the Company)
or (iv) fund major capital expenditures or the acquisition of other assets
outside the ordinary course of business. Also, the Company may from time-to-time
sell assets outside the ordinary course of business, the proceeds of which are
generally used to (i) repay existing indebtedness (including indebtedness which
may have been collateralized by the assets sold), (ii) make investments in
marketable and other securities, (iii) fund major capital expenditures or the
acquisition of other assets outside the ordinary course of business, (iv) pay
dividends or (v) repurchase shares of its common stock.
At September 30, 2005, the Company's outstanding third-party indebtedness
was substantially comprised of (i) Valhi's $250 million of loans from Snake
River Sugar Company due in 2027, (ii) Kronos International's euro-denominated
Senior Secured Notes (equivalent of $457.6 million outstanding) due in 2009 and
(iii) $5 million outstanding under Valhi's revolving bank credit facility, the
maturity date of which was extended to October 2006 in October 2005.
Accordingly, the Company does not currently expect that a significant amount of
its cash flows from operating activities generated during 2005 will be required
to be used to repay indebtedness during 2005.
Based upon the Company's expectations for the industries in which its
subsidiaries and affiliates operate, and the anticipated demands on the
Company's cash resources as discussed herein, the Company expects to have
sufficient liquidity to meet its short-term obligations (defined as the
twelve-month period ending September 30, 2006) and its long-term obligations
(defined as the remainder of the five-year period ending December 31, 2009, the
time period for which the Company generally does long-term budgeting) including
operations, capital expenditures, debt service current dividend policy and
repurchases of its common stock. To the extent that actual developments differ
from the Company's expectations, the Company's liquidity could be adversely
affected.
Consolidated cash flows
Operating activities. Trends in cash flows from operating activities
(excluding the impact of significant asset dispositions and relative changes in
assets and liabilities) are generally similar to trends in the Company's
earnings. However, 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 and amortization expense, non-cash interest expense, asset
impairment charges and unrealized securities transactions gains and losses.
Non-cash interest expense relates principally to Kronos and consists of
amortization of original issue discount or premium 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.
Changes in product pricing, production volumes and customer demand, among
other things, can 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 flows 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. 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
volumes and sales volumes. Relative changes in accrued environmental costs are
affected by, among other things, the period in which the environmental accrual
is recognized and the period in which the remediation expenditure is actually
made.
Cash flows from operating activities decreased from $112.3 million
generated in the first nine months of 2004 to a $39.3 million in the first nine
months of 2005. This $73.4 million net decrease is due primarily to the net
effects of (i) lower net income of $215.9 million, (ii) higher net securities
transaction gains of $20.2 million, (iii) a higher provision for deferred income
taxes of $327.9 million, (iv) lower minority interest of $44.3 million, (v)
higher equity in earnings of TIMET of $32.7 million, (vi) lower net cash
distributions from the TiO2 manufacturing joint venture of $4.0 million, (vii)
higher net cash paid for income taxes of $67.9 million, due in large part to
$34.7 million of income tax refunds received by Kronos in 2004 and a $21 million
payment by NL in 2005 to settle a previously-reported income tax audit and
(viii) $31.0 million higher use of cash related to relative changes in working
capital items (accounts receivable, inventories, payables and accruals and
accounts with affiliates).
Relative changes in working capital assets and liabilities can have a
significant effect on cash flows from operating activities. Kronos' average days
sales outstanding ("DSO") increased from 60 days at December 31, 2004 to 61 days
at September 30, 2005, due to the timing of collection on the higher accounts
receivable balance at the end of September. At September 30, 2005, Kronos'
average number of days in inventory ("DII") increased to 105 days from 97 days
at December 31, 2004 due to the effects of higher production volumes and lower
sales volumes. CompX's average DSO related to its continuing operations
increased from 38 days at December 31, 2004 to 43 days at September 30, 2005 due
to timing of collection on the higher accounts receivable balance at the end of
September. CompX's average DII related to its continuing operations was 52 days
at December 31, 2004 and 57 days at September 30, 2005. The increase in CompX's
DII is primarily due to higher raw material prices, primarily steel.
Valhi does not have complete access to the cash flows of certain of its
subsidiaries and affiliates, in part due to limitations contained in certain
credit agreements as well as the fact that such subsidiaries and affiliates are
not 100% owned by Valhi. A detail of Valhi's consolidated cash flows from
operating activities is presented in the table below. Eliminations consist of
intercompany dividends (most of which are paid to Valhi Parent and NL Parent).
Nine months ended
September 30,
2004 2005
---- ----
(In millions)
Cash provided (used) by operating activities:
Kronos $119.8 $ 69.3
CompX 20.8 14.2
Waste Control Specialists (6.4) (5.6)
NL Parent 7.1 (27.0)
Tremont 1.1 (2.3)
Valhi Parent 24.2 50.3
Other, net (.2) (.7)
Eliminations (54.1) (58.9)
------ ------
$112.3 $ 39.3
====== ======
Investing and financing activities. Approximately 56% of the Company's
consolidated capital expenditures in the first nine months of 2005 relate to
Kronos, 23% relate to CompX and substantially all of the remainder relate to
Waste Control Specialists. During the first nine months of 2005, (i) Valhi
purchased shares of TIMET common stock in market transactions for $18.0 million,
(ii) NL sold shares of Kronos common stock in market transactions for $19.2
million, (iii) NL purchased shares of CompX common stock in market transactions
for $707,000, (iv) Valhi purchased shares of Kronos common stock in market
transactions for $5.5 million, (v) CompX received a net $18.1 million from the
sale of its Thomas Regout operations (which had approximately $4.0 million of
cash at the date of disposal), (vi) Valhi received a net $4.9 million on its
short-term loan to Contran, (vii) NL collected $2 million on its loan to one of
the Contran family trusts, (viii) the Company made net purchases of marketable
securities of $8.6 million, (ix) Kronos received $3.5 million from the sale of
its passive interest in a Norwegian smelting operations and (x) CompX acquired a
company for an aggregate of $7.3 million. See Notes 2, 8 and 15 to the
Consolidated Financial Statements.
During the first nine months of 2005, Kronos repaid an aggregate euro 10
million ($12.9 million when repaid) under its European revolving credit
facility, Kronos borrowed and repaid $8.6 million under its U.S. credit facility
and Valhi borrowed $5 million under its revolving bank credit facility. Valhi,
which increased its regular quarterly dividend from $.06 per share to $.10 per
share in the first quarter of 2005, paid cash dividends in the first nine months
of 2005 aggregating $36.7 million. Distributions to minority interest in the
first nine months of 2005 are primarily comprised of Kronos cash dividends paid
to shareholders other than Valhi and NL, NL cash dividends paid to shareholders
other than Valhi and CompX dividends paid to shareholders other than NL. Valhi
purchased approximately 3.3 million shares of its common stock in market and
other transactions for an aggregate of $58.5 million, and other cash flows from
financing activities in the first nine months of 2005 relate primarily to
proceeds from the issuance of NL, CompX and Valhi common stock upon exercises of
stock options.
At September 30, 2005, unused credit available under existing credit
facilities approximated $288.0 million, which was comprised of: CompX - $47.5
million under its revolving credit facility; Kronos - $96.0 million under its
European credit facility, $36.0 million under its U.S. credit facility, $11.0
million under its Canadian credit facility, and $4.0 million under other
non-U.S. facilities; and Valhi - $93.5 million under its revolving bank credit
facility.
Provisions contained in certain of the Company's credit agreements could
result in the acceleration of the applicable indebtedness prior to its stated
maturity for reasons other than defaults from failing to comply with typical
financial covenants. For example, certain credit agreements allow the lender to
accelerate the maturity of the indebtedness upon a change of control (as
defined) of the borrower. The terms of Valhi's revolving bank credit facility
could require Valhi to either reduce outstanding borrowings or pledge additional
collateral in the event the fair value of the existing pledged collateral falls
below specified levels. In addition, certain credit agreements could result in
the acceleration of all or a portion of the indebtedness following a sale of
assets outside the ordinary course of business. Other than operating leases,
neither Valhi nor any of its subsidiaries or affiliates are parties to any
off-balance sheet financing arrangements.
Chemicals - Kronos
At September 30, 2005, Kronos had cash, cash equivalents and marketable
debt securities of $66.6 million, including restricted balances of $3.7 million,
and Kronos had approximately $147 million available for borrowing under its
U.S., Canadian and European credit facilities. Based upon Kronos' expectations
for the TiO2 industry, Kronos expects to have sufficient liquidity to meet its
future obligations including operations, capital expenditures, debt service and
dividends. To the extent that actual developments differ from Kronos'
expectations, Kronos' liquidity could be adversely affected.
At September 30, 2005, Kronos' outstanding debt was comprised of (i) $457.6
million related to KII's Senior Secured Notes and (ii) approximately $200,000 of
other indebtedness. During the second quarter of 2005, Kronos extended the
respective maturity dates of its European and U.S. revolving credit facilities
each by three years to June 2008 and September 2008, respectively.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions significantly impact Kronos' earnings and operating cash
flows. Cash flows from operations is considered the primary source of liquidity
for Kronos. Changes in TiO2 pricing, production volumes and customer demand,
among other things, could significantly affect the liquidity of Kronos.
See Note 11 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of Kronos' income tax
returns in various U.S. and non-U.S. jurisdictions, and see Note 13 to the
Consolidated Financial Statements with respect to certain legal proceedings with
respect to Kronos.
Certain of the Kronos' sales generated by its non-U.S. operations are
denominated in U.S. dollars. Kronos periodically uses currency forward contracts
to manage a very nominal portion of foreign exchange rate risk associated with
receivables denominated in a currency other than the holder's functional
currency or similar exchange rate risk associated with future sales. Kronos has
not entered into these contracts for trading or speculative purposes in the
past, nor does Kronos currently anticipate entering into such contracts for
trading or speculative purposes in the future. Derivatives used to hedge
forecasted transactions and specific cash flows associated with foreign currency
denominated financial assets and liabilities which meet the criteria for hedge
accounting are designated as cash flow hedges. Consequently, the effective
portion of gains and losses is deferred as a component of accumulated other
comprehensive income and is recognized in earnings at the time the hedged item
affects earnings. Contracts that do not meet the criteria for hedge accounting
are marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. During 2004
and to date in 2005, Kronos has not used hedge accounting for any of its
contracts. To manage such exchange rate risk, at September 30, 2005, Kronos held
a series of contracts, which mature through December 2005, to exchange an
aggregate of U.S. $10.0 million for an equivalent amount of Canadian dollars at
exchange rates of Cdn. $1.25 to Cdn. $1.26 per U.S. dollar. At September 30,
2005, the actual exchange rate was Cdn. $1.18 per U.S. dollar. The estimated
fair value of such foreign currency forward contracts at September 30, 2005 was
not material.
Kronos International's assets consist primarily of investments in its
operating subsidiaries, and its ability to service its parent level obligations,
including the Senior Secured Notes, depends in large part upon the distribution
of earnings of its subsidiaries, whether in the form of dividends, advances or
payments on account of intercompany obligation, or otherwise. None of its
subsidiaries have guaranteed the Senior Secured Notes, although Kronos
International has pledged 65% of the common stock or other ownership interest of
certain of its first-tier operating subsidiaries as collateral of such Senior
Secured Notes.
Kronos periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and availability of resources in view of, among other
things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, Kronos 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, Kronos 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, Kronos may
consider using available cash, issuing equity securities or increasing its
indebtedness to the extent permitted by the agreements governing Kronos'
existing debt.
Kronos has substantial operations located outside the United States for
which the functional currency is not the U.S. dollar. As a result, the reported
amounts of Kronos' assets and liabilities related to its non-U.S. operations,
and therefore Kronos' consolidated net assets, will fluctuate based upon changes
in currency exchange rates.
NL Industries
At September 30, 2005, NL (exclusive of CompX) had cash, cash equivalents
and marketable debt securities of $66.9 million, including restricted balances
of $12.1 million.
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, and see Note 13 to the Consolidated Financial Statements and Part II,
Item 1, "Legal Proceedings" with respect to certain legal proceedings and
environmental matters with respect to NL.
In addition to those legal proceedings described in Note 13 to the
Consolidated Financial Statements, various legislation and administrative
regulations have, from time to time, been 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 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, enactment of such legislation could have such an effect.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its dividend policy 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.
Component products - CompX International
CompX received approximately $18.1 million cash (net of expenses) in
January 2005 upon the sale of its Thomas Regout operations in The Netherlands.
See Note 15 to the Consolidated Financial Statements. CompX believes that its
cash on hand, together with cash generated from operations and borrowing
availability under its bank credit facility, will be sufficient to meet CompX's
liquidity needs for working capital, capital expenditures and dividends (if
declared). To the extent that CompX's actual operating results or developments
differ from CompX's expectations, CompX's liquidity could be adversely affected.
CompX, which had suspended its regular quarterly dividend of $.125 per share in
the second quarter of 2003, reinstated its regular quarterly dividend at the
$.125 per share rate in the fourth quarter of 2004.
In August 2005, CompX completed the acquisition of a company for aggregate
cash consideration of $7.3 million, net of cash acquired. See Note 2 to the
Consolidated Financial Statements. During the fourth quarter of 2005, CompX
expects to obtain an extension of its $47.5 million revolving bank credit
facility, which currently expires in January 2006. CompX had no balance
outstanding under such facility at September 30, 2005.
Certain of the CompX's sales generated by its non-U.S. operations are
denominated in U.S. dollars. CompX periodically uses currency forward contracts
to manage a portion of foreign exchange rate risk associated with receivables
denominated in a currency other than the holder's functional currency. CompX has
not entered into these contracts for trading or speculative purposes in the
past, nor does CompX currently anticipate entering into such contracts for
trading or speculative purposes in the future. Derivatives used to hedge
forecasted transactions and specific cash flows associated with foreign currency
denominated financial assets and liabilities which meet the criteria for hedge
accounting are designated as cash flow hedges. Consequently, the effective
portion of gains and losses is deferred as a component of accumulated other
comprehensive income and is recognized in earnings at the time the hedged item
affects earnings. Contracts that do not meet the criteria for hedge accounting
are marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. CompX had
no such foreign currency contracts outstanding at September 30, 2005.
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 cash,
issuing additional equity securities or increasing the indebtedness of CompX or
its subsidiaries.
Waste management - Waste Control Specialists
At September 30, 2005, Waste Control Specialists' indebtedness consisted
principally of $21.9 million of borrowings owed to a wholly-owned subsidiary of
Valhi (December 31, 2004 intercompany indebtedness - $4.6 million). During the
first nine months of 2005, this subsidiary of Valhi loaned an additional net
$17.3 million to Waste Control Specialists, which were used by Waste Control
Specialists primarily to fund its operating loss and its capital expenditures.
Such indebtedness is eliminated in the Company's Consolidated Financial
Statements. Waste Control Specialists will likely borrow additional amounts
during the remainder of 2005 from such Valhi subsidiary under the terms of its
revolving credit facility that matures in March 2006.
TIMET
At September 30, 2005, TIMET had $102 million of borrowing availability
under its various U.S. and European credit agreements.
See Note 13 to the Consolidated Financial Statements for certain legal
proceedings, environmental matters and other contingencies associated with
TIMET. While TIMET 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.
In May 2005, TIMET announced it plans to expand its existing titanium
sponge facility in Nevada. This expansion, which TIMET currently expects to
complete by the first quarter of 2007 and cost an aggregate of $38 million, will
provide the capacity to produce an additional 4,000 metric tons of sponge
annually, an increase of approximately 42% over the current sponge production
capacity levels at its Nevada facility. Including an estimated $25 million
related to this sponge expansion, TIMET current expects its aggregate capital
expenditures during 2005 will be approximately $72 million.
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 13 to the Consolidated Financial Statements for certain legal
proceedings and environmental matters with respect to Tremont.
General corporate - Valhi
Because Valhi's operations are conducted primarily through its subsidiaries
and affiliates, 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. In February 2004,
Kronos announced it would pay its first regular quarterly cash dividend of $.25
per share. At that rate, and based on the 28.0 million shares of Kronos held by
Valhi at September 30, 2005, Valhi would receive aggregate annual dividends from
Kronos of $28.0 million. NL, which paid its 2004 regular quarterly dividends of
$.20 per share in the form of shares of Kronos common stock, increased its
regular quarterly dividend in the first quarter of 2005 to $.25 per share, which
also was in the form of shares of Kronos common stock. In the second and third
quarters of 2005, NL paid its regular quarterly dividend in the form of cash.
Assuming NL paid its regular quarterly dividends in the form of cash, and based
on the 40.4 million shares of NL common stock held by Valhi at September 30,
2005, Valhi would receive aggregate annual dividends from NL of $40.4 million.
The Company does not currently expect to receive any distributions from Waste
Control Specialists or TIMET during 2005. CompX dividends, which resumed in the
fourth quarter of 2004, are paid to NL.
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 generally does not guarantee any indebtedness or other
obligations 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 dividends or selling interests in subsidiaries or other assets.
Waste Control Specialists is required to provide certain financial
assurances to Texas government agencies with respect to certain decommissioning
obligations related to its facility in West Texas. Such financial assurances may
be provided by various means, including a parent company guarantee assuming the
parent meets specified financial tests. In March 2005, Valhi agreed to guarantee
certain specified decommissioning obligations of Waste Control Specialists,
currently estimated by Waste Control Specialists at approximately $3.5 million.
Such obligations would arise only upon a closure of the facility and Waste
Control Specialists' failure to perform such activities. The Company does not
currently expect that it will have to perform under such guarantee for the
foreseeable future.
In March 2005, the Company's board of directors authorized the repurchase
of up to 5.0 million shares of Valhi's common stock in open market transactions,
including block purchases, or in privately negotiated transactions, which may
include transactions with affiliates of Valhi. The stock may be purchased from
time to time as market conditions permit. The stock repurchase program does not
include specific price targets or timetables and may be suspended at any time.
Depending on market conditions, the program could be terminated prior to
completion. The Company will use its cash on hand to acquire the shares.
Repurchased shares will be retired and cancelled or may be added to Valhi's
treasury and used for employee benefit plans, future acquisitions or other
corporate purposes. On April 1, 2005, the Company purchased 2.0 million shares
of its common stock, at a discount to the then-current market price, from
Contran for $17.50 per share or an aggregate purchase price of $35.0 million.
Such shares were purchased under the stock repurchase program. Valhi's
independent directors approved such purchase. The Company has also purchased
during the second and third quarters of 2005 an additional 1.3 shares of its
common stock under the repurchase program in market transactions for an
aggregate of $23.5 million. See Note 17 to the Consolidated Financial
Statements.
At September 30, 2005, Valhi had $15.9 million of parent level cash and
cash equivalents and had $5.0 million outstanding under its revolving bank
credit agreement. In addition, Valhi had $93.5 million of borrowing availability
under its revolving bank credit facility. In October 2005, Valhi extended the
maturity date of its revolving bank credit facility one year to October 2006,
and Valhi collected an aggregate $94.8 million under its loan to Snake River
Sugar Company. See Note 7 to the Consolidated Financial Statements.
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 2005, Valhi currently
expects that distributions received from the LLC in 2005 will exceed 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
allowed Snake River in certain circumstances to pay periodic installments of
debt service payments (principal and interest) under Valhi's $80 million loan to
Snake River prior to its scheduled maturity in 2007, and such loan was
subordinated to Snake River's third-party senior debt. During the third quarter
of 2005, Snake River prepaid such senior third-party senior debt, and Snake
River subsequently made an aggregate of $5.5 million of debt service payments to
Valhi during the quarter. At September 30, 2005, the accrued and unpaid interest
on the $80 million loan to Snake River aggregated $36.7 million and was
classified as a noncurrent asset. The Company believed it would 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 complete repayment of Snake River's third-party senior debt,
Snake River was required, under the terms of the Company's loan to Snake River,
to use all of its available cash resources to make debt service payments to
Valhi (estimated to be approximately $20 million annually), including the funds
that Snake River previously was using to fund debt service on its third-party
senior debt. In October 2005, when Valhi agreed to forgive approximately $21.6
million of accrued and unpaid interest in return for Snake River prepaying an
aggregate of $94.8 million under its loan from Valhi, Valhi considered, among
other things, the present value of the future repayment of its loan to Snake
River under the present terms, the income tax benefit relating to forgiveness of
the accrued interest and Valhi's various alternate reinvestment opportunities
with respect to such prepayment and the returns thereon. Consequently, while
Valhi continued to believe it would ultimately fully collect all amounts due
under the terms of its loan to Snake River, Valhi was willing to accept a
discount under certain conditions (principally, Snake River's $94.8 million
prepayment). In October 2005, Snake River completed a new senior loan facility
that generated funds sufficient to make the $94.8 million prepayment to Valhi,
and Valhi accordingly forgave the remaining accrued and unpaid interest. See
Note 7 to the Consolidated Financial Statements.
The Company may, at its option, require the LLC to redeem the Company's
interest in the LLC beginning in 2012, 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, if any. 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 income tax purposes, although
the Company would not be expected to report a gain in earnings for financial
reporting purposes at the time its LLC interest was redeemed (as discussed in
Note 1 to the Consolidated Financial Statements). 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 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 Kronos' 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.
CONTROLS AND PROCEDURES
Restatement. In connection with finalizing the preparation of the Company's
consolidated financial statements for the quarter ended September 30, 2005, the
Company concluded its net income for the year ended December 31, 2003 was
misstated by $19.1 million, or $.16 per diluted share, and its net income for
the year ended December 31, 2004 was misstated by $6.8 million, or $.05 per
diluted share (including $1.1 million in the third quarter of 2004 and $1.6
million in the first nine months of 2004), in each case to correct the Company's
accounting for its pro-rata share of the income tax liability recognized by NL
Industries, Inc., the Company's majority-owned subsidiary, upon NL's
distribution of certain shares of common stock of Kronos Worldwide, Inc. to NL's
stockholders other than the Company. The Company previously accounted for its
pro-rata share of such income taxes as a direct reduction of equity (additional
paid-in capital). The Company has now concluded that such income taxes should
have been accounted for in the determination of net income, as required by the
guidance of SFAS No. 109, Accounting for Income Taxes. There is no net effect to
the Company's previously-reported total stockholders' equity as a result of this
correction.
The guidance set forth in Auditing Standard No. 2 of the Public Company
Accounting Oversight Board states that a restatement of previously-issued
financial statements to reflect the correction of a misstatement should be
regarded as at least a significant control deficiency and as a strong indicator
that a material weakness in internal control over financial reporting exists. As
a result of this restatement, the Company has concluded that a material weakness
existed at December 31, 2004 that precludes the Company from concluding that its
internal control over financial reporting was effective as of December 31, 2004,
March 31, 2005, June 30, 2005 or September 30, 2005.
A material weakness is a control deficiency, or a combination of control
deficiencies, that results in a more than remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Management of the Company has now concluded it lacked effective
controls surrounding the proper application of GAAP as they relate to the
accounting for the income tax effect related to NL's distribution of shares of
common stock of Kronos to NL shareholders other than the Company in the
preparation of its consolidated financial statements. Specifically, the Company
did not maintain effective controls to accurately classify within its
consolidated financial statement, the Company's pro-rata share of the income tax
incurred by NL with respect to NL's distribution of shares of Kronos. This
control deficiency resulted in the restatement of the Company's consolidated
financial statements as of December 31, 2003 and December 31, 2004 and for the
years then ended. Additionally, if unmitigated, this control deficiency could
result in a misstatement of income tax provisions that would result in a
material misstatement to the Company's annual or interim consolidated financial
statements that would not be prevented or detected. Accordingly, management of
the Company determined that this control deficiency constitutes a material
weakness.
In order to remediate this material weakness, the Company will institute
enhanced procedures in the fourth quarter of 2005, designed to be performed each
quarter in connection with the Company's preparation and review of its quarterly
provision for income taxes. The procedure will help ensure that GAAP has been
appropriately applied with respect to the accurate classification within the
consolidated financial statements of income taxes arising from the distribution
of non-cash assets by the Company and its subsidiaries (which would include,
among other things, NL's distribution of shares of Kronos common stock). Such
enhanced procedures will include preparation of a written accounting and income
tax quarter-end close procedure related to the proper classification of such
income taxes, and the addition of an item on the applicable quarterly close
checklist to ensure that the appropriate level of personnel have reviewed such
quarter-end procedures and concluded that any applicable provision for income
taxes has been properly classified within the consolidated financial statements.
Evaluation of Disclosure 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 and
Chief Financial Officer, have evaluated the Company's disclosure controls and
procedures as of September 30, 2005. Based upon their evaluation, and as a
result of the material weakness discussed above, these executive officers have
concluded that the Company's disclosure controls and procedures are not
effective as of the date of such evaluation.
In coming to the conclusion that the Company's disclosure controls and
procedures were not effective as of September 30, 2005, management also
considered the restatement discussed in Note 1 to the Consolidated Financial
Statements related to the Company's accounting for its investment in The
Amalgamated Sugar Company LLC and the guidance contained in the SEC's Staff
Accounting Bulletin ("SAB") No. 99, Materiality, paragraphs 36 and 37 of
Accounting Principles Board Opinion ("APBO") No. 20 and paragraph 29 of APBO No.
28. The Company also considered, by analogy, the guidance contained in the SEC's
SAB Topic 5-F, Accounting Changes Not Retroactively Applied Due to
Immateriality. Because (i) the restatement adjustments did not have a material
impact to the financial statements of prior annual periods presented in the 2004
Annual Report or the financial statements of prior interim periods presented in
the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31,
2005 and June 30,2005 (the "Interim Form 10-Q's"), taken as a whole, (ii) the
impact of the restatement adjustments did not have a material impact on the
Company's consolidated stockholders' equity as of any prior annual period
presented in the 2004 Annual Report or any prior interim period presented in the
Interim Form 10-Q's and (iii) the Company decided to restate its
previously-issued consolidated financial statements in part because the impact
of the adjustment which the Company concluded should have been reported as part
of 1997's net income, if recorded in net income in the period in which the
adjustment became known, would have been material to such interim period's
reported net income, management of the Company concluded that this control
deficiency, individually or in the aggregate when considered with other control
deficiencies, does not constitute a material weakness in internal control over
financial reporting.
Internal Control Over Financial Reporting. The Company also maintains
internal control 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.
As permitted by the SEC, the Company's assessment of internal control over
financial reporting excludes (i) internal control over financial reporting of
its equity method investees and (ii) internal control over the preparation of
the Company's financial statement schedules required by Article 12 of Regulation
S-X. However, the Company's assessment of internal control over financial
reporting with respect to the Company's equity method investees did include our
controls over the recording of amounts related to our investment that are
recorded in the Company's Consolidated Financial Statements, including controls
over the selection of accounting methods for our investments, the recognition of
equity method earnings and losses and the determination, valuation and recording
of our investment account balances.
There has been no change to the Company's internal control over financial
reporting during the quarter ended September 30, 2005 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Legal Proceedings.
Reference is made to Note 13 to the Consolidated Financial Statements, the
2004 Annual Report and the Company's Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2005 and June 30, 2005 for descriptions of certain
legal proceedings.
State of Rhode Island v. Lead Industries Association, et al. (Superior
Court of Rhode Island, No. 99-5226). In September 2005, the state dismissed its
Unfair Trade Practices Act claim against NL without prejudice. Trial commenced
on November 1, 2005 on the State's remaining claims of public nuisance,
indemnity and unjust enrichment. In addition to compensatory and punitive
damages, the State is seeking abatement of lead pigment from residential housing
in the State.
City of St. Louis v. Lead Industries Association, et al. (Missouri Circuit
Court 22nd Judicial Circuit, St. Louis City, Cause No. 002-245, Division 1). In
March 2005, the defendants filed a motion for summary judgment. A new trial date
will not be determined until after the court rules on this motion.
In re: Lead Paint Litigation (Superior Court of New Jersey, Middlesex
County, Case Code 702). In August 2005, the appellate court affirmed the trial
court's dismissal of all counts except for the state's public nuisance count,
which has been reinstated. The defendants have filed a petition with the New
Jersey Supreme Court seeking review of the appellate court's decision on the
public nuisance count.
Liberty Independent School District v. Lead Industries Association, et al.
(District Court of Liberty County, Texas, No. 63,332). In September 2005, the
plaintiff voluntarily dismissed the case without prejudice.
Jones v. NL Industries, Inc., et al. (Circuit Court of LeFlore County,
Mississippi, Civil Action No. 2002-0241-CICI). In September 2005, the court
reset the trial date for July 2006.
In October 2005, NL was served with a complaint in Evans v. Atlantic
Richfield Company, et. al. (Circuit Court, Milwaukee, Wisconsin, Case No.
05-CV-9281). Plaintiff, a minor, alleges injuries purportedly caused by lead on
the surfaces of premises in homes in which she resided. Plaintiff seeks
compensatory and punitive damages. NL intends to deny all allegations of
liability.
Terry, et al. v. NL Industries, Inc., et al. (United States District Court,
Southern District of Mississippi, Case No. 4:04 CV 269 PB). In August 2005, the
court denied NL's motion to strike plaintiffs' fraud claim for lack of
particularity, allowing plaintiffs to re-plead this claim.
The previously-reported cases Thomas v. Lead Industries Association, et al.
(Circuit Court, Milwaukee, Wisconsin, Case No. 99-CV-6411) and City of Milwaukee
v. NL Industries, Inc. and Mautz Paint (Circuit Court, Civil Division, Milwaukee
County, Wisconsin, Case No. 01CV003066) are both proceeding in the trial court.
Unregistered Sales of Equity Securities and Use of Proceeds; Share Repurchases.
In March 2005, the Company's board of directors authorized the repurchase
of up to 5.0 million shares of Valhi's common stock in open market transactions,
including block purchases, or in privately negotiated transactions, which may
include transactions with affiliates of Valhi. The stock may be purchased from
time to time as market conditions permit. The stock repurchase program does not
include specific price targets or timetables and may be suspended at any time.
Depending on market conditions, the program could be terminated prior to
completion. The Company will use its cash on hand to acquire the shares.
Repurchased shares will be retired and cancelled or may be added to Valhi's
treasury and used for employee benefit plans, future acquisitions or other
corporate purposes. See Note 17 to the Consolidated Financial Statements.
The following table discloses certain information regarding shares of Valhi
common stock purchased by Valhi during the period covered by this Quarterly
Report on Form 10-Q. All of such purchases were made under the repurchase
program discussed above, and other than 175,000 shares of its common stock Valhi
purchased from The Simmons Family Foundation in September 2005 for $17.50 per
share, or an aggregate purchase price of $3.1 million, all of such purchases
were made in open market transactions.
Average Maximum number of shares
price paid Total number of shares that may yet be purchased
Total number per share, purchased as part of a under the
of shares including publicly-announced publicly-announced plan at
Period purchased commissions plan end of period
------ --------- ---------------- ------------------ ---------------
July 1, 2005 to
July 31, 2005 - $ - - 2,639,700
August 1, 2005 to
August 31, 2005 616,000 17.55 616,000 2,023,700
September 1, 2005
to September 30,
2005 335,300 17.52 335,300 1,688,400