3SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2002 Commission file number 1-5467
----------------- ------
VALHI, INC.
- ------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 87-0110150
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- -
Number of shares of common stock outstanding on July 31, 2002: 115,118,917
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets -
December 31, 2001 and June 30, 2002 3
Consolidated Statements of Income -
Three months and six months ended
June 30, 2001 and 2002 5
Consolidated Statements of Comprehensive Income -
Six months ended June 30, 2001 and 2002 6
Consolidated Statements of Cash Flows -
Six months ended June 30, 2001 and 2002 7
Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2002 9
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 23
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 43
Item 6. Exhibits and Reports on Form 8-K. 44
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, June 30,
2001 2002
---- ----
Current assets:
Cash and cash equivalents .................... $ 154,413 $ 195,470
Restricted cash equivalents .................. 63,257 54,405
Marketable securities ........................ 18,465 17,022
Accounts and other receivables ............... 162,310 191,236
Refundable income taxes ...................... 3,564 7,194
Receivable from affiliates ................... 844 4,443
Inventories .................................. 262,733 209,698
Prepaid expenses ............................. 11,252 7,900
Deferred income taxes ........................ 12,999 12,431
---------- ----------
Total current assets ..................... 689,837 699,799
---------- ----------
Other assets:
Marketable securities ........................ 186,549 181,525
Investment in affiliates ..................... 211,115 192,829
Receivable from affiliate .................... 20,000 20,000
Loans and other receivables .................. 105,940 108,663
Mining properties ............................ 12,410 13,705
Prepaid pension costs ........................ 18,411 22,266
Unrecognized net pension obligations ......... 5,901 5,901
Goodwill ..................................... 349,058 358,079
Other intangible assets ...................... 2,440 4,813
Deferred income taxes ........................ 3,818 3,829
Other ........................................ 30,109 39,854
---------- ----------
Total other assets ....................... 945,751 951,464
---------- ----------
Property and equipment:
Land ......................................... 28,721 30,682
Buildings .................................... 163,995 177,373
Equipment .................................... 569,001 635,221
Construction in progress ..................... 9,992 18,787
---------- ----------
771,709 862,063
Less accumulated depreciation ................ 253,450 304,998
---------- ----------
Net property and equipment ............... 518,259 557,065
---------- ----------
$2,153,847 $2,208,328
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30,
2001 2002
---- ----
Current liabilities:
Notes payable .............................. $ 46,201 $ --
Current maturities of long-term debt ....... 64,972 96,251
Accounts payable ........................... 114,474 71,980
Accrued liabilities ........................ 166,488 153,972
Payable to affiliates ...................... 38,148 31,979
Income taxes ............................... 9,578 9,034
Deferred income taxes ...................... 1,821 1,976
----------- -----------
Total current liabilities .............. 441,682 365,192
----------- -----------
Noncurrent liabilities:
Long-term debt ............................. 497,215 576,408
Accrued OPEB costs ......................... 50,146 48,490
Accrued pension costs ...................... 33,823 33,132
Accrued environmental costs ................ 54,392 55,545
Deferred income taxes ...................... 268,468 288,339
Other ...................................... 32,642 31,544
----------- -----------
Total noncurrent liabilities ........... 936,686 1,033,458
----------- -----------
Minority interest ............................ 153,151 158,445
----------- -----------
Stockholders' equity:
Common stock ............................... 1,258 1,260
Additional paid-in capital ................. 44,982 46,822
Retained earnings .......................... 656,408 645,154
Accumulated other comprehensive income:
Marketable securities .................... 86,654 88,535
Currency translation ..................... (79,404) (40,755)
Pension liabilities ...................... (11,921) (14,134)
Treasury stock ............................. (75,649) (75,649)
----------- -----------
Total stockholders' equity ............. 622,328 651,233
----------- -----------
$ 2,153,847 $ 2,208,328
=========== ===========
Commitments and contingencies (Note 1)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
--------------------- -------------------
2001 2002 2001 2002
---- ---- ---- ----
Revenues and other income:
Net sales ........................................ $ 276,270 $ 279,051 $565,105 $ 532,798
Other, net ....................................... 63,640 16,793 107,731 31,733
--------- --------- -------- ---------
339,910 295,844 672,836 564,531
--------- --------- -------- ---------
Costs and expenses:
Cost of sales .................................... 200,010 222,651 402,701 424,046
Selling, general and administrative .............. 48,757 43,666 97,950 90,715
Interest ......................................... 15,666 15,930 32,776 30,363
--------- --------- -------- ---------
264,433 282,247 533,427 545,124
--------- --------- -------- ---------
75,477 13,597 139,409 19,407
Equity in earnings (losses) of:
Titanium Metals Corporation ("TIMET") ............ 12,877 (2,717) 13,002 (14,557)
Other ............................................ (136) (14) 522 312
--------- --------- -------- ---------
Income before income taxes ..................... 88,218 10,866 152,933 5,162
Provision for income taxes ......................... 31,953 1,591 55,675 394
Minority interest in after-tax earnings ............ 8,597 2,903 18,029 2,107
--------- --------- -------- ---------
Net income ..................................... $ 47,668 $ 6,372 $ 79,229 $ 2,661
========= ========= ======== =========
Earnings per share:
Basic ............................................ $ .41 $ .05 $ .69 $ .02
========= ========= ======== =========
Diluted .......................................... $ .41 $ .05 $ .68 $ .02
========= ========= ======== =========
Cash dividends per share ........................... $ .06 $ .06 $ .12 $ .12
========= ========= ======== =========
Shares used in the calculation of per share amounts:
Basic earnings per common share .................. 115,169 115,257 115,166 115,250
Dilutive impact of outstanding
stock options ................................... 931 357 886 517
--------- --------- -------- ---------
Diluted earnings per share ....................... 116,100 115,614 116,052 115,767
========= ========= ======== =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Six months ended June 30, 2001 and 2002
(In thousands)
2001 2002
---- ----
Net income ........................................... $ 79,229 $ 2,661
-------- --------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment:
Unrealized gains arising during the period ....... 2,053 1,881
Less reclassification for gains included in
net income ...................................... (33,190) --
-------- --------
(31,137) 1,881
Currency translation adjustment .................... (22,507) 38,649
Pension liabilities adjustment ..................... (332) (2,213)
-------- --------
Total other comprehensive income (loss), net ..... (53,976) 38,317
-------- --------
Comprehensive income ........................... $ 25,253 $ 40,978
======== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2001 and 2002
(In thousands)
2001 2002
---- ----
Cash flows from operating activities:
Net income ......................................... $ 79,229 $ 2,661
Depreciation, depletion and amortization ........... 37,132 29,936
Legal settlements, net ............................. (10,307) --
Securities transaction gains, net .................. (50,803) (1,915)
Proceeds from disposal of marketable
securities (trading) .............................. -- 8,659
Noncash interest expense ........................... 4,179 2,031
Deferred income taxes .............................. 10,147 4,753
Minority interest .................................. 18,029 2,107
Other, net ......................................... (3,634) (7,388)
Equity in:
TIMET ............................................ (13,002) 14,557
Other ............................................ (522) (312)
Distributions from:
Manufacturing joint venture ...................... 4,950 2,250
Other ............................................ 1,300 361
-------- --------
76,698 57,700
Change in assets and liabilities:
Accounts and other receivables ................... (23,797) (17,993)
Inventories ...................................... 20,994 69,096
Accounts payable and accrued liabilities ......... (22,453) (60,190)
Accounts with affiliates ......................... 15,662 (6,366)
Income taxes ..................................... 4,347 (3,270)
Other, net ....................................... (2,400) 4,749
-------- --------
Net cash provided by operating activities .... 69,051 43,726
-------- --------
Cash flows from investing activities:
Capital expenditures ............................... (27,150) (19,973)
Purchases of:
Business unit .................................... -- (9,149)
NL common stock .................................. (2,718) (3,272)
CompX common stock ............................... (2,650) --
Tremont common stock ............................. (198) --
Proceeds from disposal of marketable securities
(available for sale) .............................. 16,802 --
Loans to affiliate ................................. (20,000) --
Property damaged by fire:
Insurance proceeds ............................... 5,500 --
Other, net ....................................... (1,000) --
Change in restricted cash equivalents, net ......... 428 421
Other, net ......................................... (573) 2,505
-------- --------
Net cash used by investing activities ........ (31,559) (29,468)
-------- --------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six months ended June 30, 2001 and 2002
(In thousands)
2001 2002
---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings ....................................... $ 41,356 $ 319,275
Principal payments ............................... (75,303) (266,945)
Deferred financing costs paid .................... -- (9,342)
Loans from affiliate:
Loans ............................................ 60,753 7,135
Repayments ....................................... (68,631) (9,225)
Valhi dividends paid ............................... (13,906) (13,915)
Distributions to minority interest ................. (5,360) (4,907)
Other, net ......................................... 766 1,096
--------- ---------
Net cash provided (used) by financing
activities .................................... (60,325) 23,172
--------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities ...... (22,833) 37,430
Currency translation ............................... (3,256) 3,431
Business unit acquired ............................. -- 196
Cash and equivalents at beginning of period .......... 135,017 154,413
--------- ---------
Cash and equivalents at end of period ................ $ 108,928 $ 195,470
========= =========
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized ............. $ 28,868 $ 32,332
Income taxes, net ................................ 25,861 9,811
Business unit acquired - net assets consolidated:
Cash and cash equivalents ........................ $ -- $ 196
Restricted cash .................................. -- 2,685
Goodwill and other intangible assets ............. -- 9,007
Other noncash assets ............................. -- 1,259
Liabilities ...................................... -- (3,998)
--------- ---------
Cash paid ........................................ $ -- $ 9,149
========= =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2002
(In thousands)
Additiona Accumulated other comprehensive income Total
Common paid-in Retained Marketable Currency Pension Treasury stockholders'
stock capital earnings securities translation liabilities stock equity
Balance at December 31, 2001 $1,258 $44,982 $ 656,408 $86,654 $(79,404) $(11,921) $(75,649) $ 622,328
Net income ................. -- -- 2,661 -- -- -- -- 2,661
Dividends .................. -- -- (13,915) -- -- -- -- (13,915)
Other comprehensive income
(loss), net ............... -- -- -- 1,881 38,649 (2,213) -- 38,317
Other, net ................. 2 1,840 -- -- -- -- -- 1,842
------ ------- --------- ------- -------- -------- -------- ---------
Balance at June 30, 2002 ... $1,260 $46,822 $ 645,154 $88,535 $(40,755) $(14,134) $(75,649) $ 651,233
====== ======= ========= ======= ======== ======== ======== =========
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation:
The consolidated balance sheet of Valhi, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2001 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 2002, and the consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended June 30, 2001 and 2002, have been prepared by the Company,
without audit, in accordance with accounting principles generally accepted in
the United States of America ("GAAP"). In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the consolidated financial position, results of operations and
cash flows have been made.
The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted. The accompanying
consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2001 (the
"2001 Annual Report").
Commitments and contingencies are discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Legal Proceedings"
and the 2001 Annual Report.
Contran Corporation holds, directly or through subsidiaries, approximately
93% of Valhi's outstanding common stock. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of
certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is
sole trustee. Mr. Simmons, the Chairman of the Board of Valhi and Contran, may
be deemed to control such companies.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, Goodwill and Other Intangible Assets, and SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, effective January 1, 2002, and
adopted SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections, effective April 1, 2002.
See Note 14.
Note 2 - Business segment information:
% owned by Valhi at
Business segment Entity June 30, 2002
Chemicals NL Industries, Inc. 62%
Component products CompX International Inc. 69%
Waste management Waste Control Specialists 90%
Titanium metals Tremont Group, Inc. 80%
Tremont Group is a holding company which owns 80% of Tremont Corporation
("Tremont") at June 30, 2002. NL owns the other 20% of Tremont Group. Tremont is
also a holding company and owns an additional 21% of NL and 39% of Titanium
Metals Corporation at June 30, 2002.
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2001 2002 2001 2002
---- ---- ---- ----
(In millions)
Net sales:
Chemicals ............................ $220.1 $226.9 $446.2 $429.3
Component products ................... 53.3 51.1 112.9 99.6
Waste management ..................... 2.9 1.1 6.0 3.9
------ ------ ------ ------
Total net sales .................... $276.3 $279.1 $565.1 $532.8
====== ====== ====== ======
Operating income:
Chemicals ............................ $ 38.8 $ 21.7 $ 84.2 $ 41.0
Component products ................... 5.3 2.2 12.3 4.3
Waste management ..................... (4.4) (2.1) (7.6) (4.1)
------ ------ ------ ------
Total operating income ............. 39.7 21.8 88.9 41.2
General corporate items:
Legal settlements gains, net ......... -- .5 30.7 2.4
Securities transactions, net ......... 50.8 -- 50.8 1.9
Interest and dividend income ......... 9.4 8.4 19.7 16.9
Foreign currency transaction gain
-- 6.3 -- 6.3
Gain on disposal of fixed assets
-- 1.6 -- 1.6
Insurance gain ....................... .7 -- .7 --
Expenses, net ........................ (9.4) (9.0) (18.6) (20.5)
Interest expense ....................... (15.7) (16.0) (32.8) (30.4)
------ ------ ------ ------
75.5 13.6 139.4 19.4
Equity in:
TIMET ................................ 12.9 (2.7) 13.0 (14.5)
Other ................................ (.2) -- .5 .3
------ ------ ------ ------
Income before income taxes ......... $ 88.2 $ 10.9 $152.9 $ 5.2
====== ====== ====== ======
During the first six months of 2002, NL purchased shares of its common
stock in market transactions for an aggregate of $3.3 million, increasing
Valhi's ownership of NL to 62%. As previously reported in the 2001 Annual
Report, in January 2002 NL purchased the insurance brokerage operations
conducted by EWI Re, Inc. and EWI Re, Ltd. for an aggregate cash purchase price
of $9 million. The pro forma impact assuming the acquisition of EWI had occurred
as of January 1, 2001 is not material.
In July 2002, Valhi proposed a merger of Valhi and Tremont pursuant to
which stockholders of Tremont (including NL, to the extent of NL's ownership
interest in the Tremont shares held by Tremont Group), other than Valhi, would
receive between 2 and 2.5 shares of Valhi common stock for each Tremont share
held. Tremont has formed a special committee of its board of directors
consisting of members unrelated to Valhi to review the proposal. There can be no
assurance that any such merger will be completed or completed on the proposed
terms.
NL (NYSE: NL), CompX (NYSE: CIX), Tremont (NYSE: TRE) and TIMET (NYSE: TIE)
each file periodic reports pursuant to the Securities Exchange Act of 1934, as
amended.
Note 3 - Marketable securities:
December 31, June 30,
2001 2002
---- ----
(In thousands)
Current assets:
Halliburton Company common stock
(available-for-sale) .............................. $ 8,138 $ 9,903
Halliburton Company common stock (trading) ......... 6,744 --
Restricted debt securities (available-for-sale) .... 3,583 7,119
-------- --------
$ 18,465 $ 17,022
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC .................. $170,000 $170,000
Restricted debt securities ......................... 16,121 10,860
Other common stocks ................................ 428 665
-------- --------
$186,549 $181,525
======== ========
At June 30, 2002, Valhi held approximately 621,000 shares of Halliburton
common stock (aggregate cost of $5 million) with a quoted market price of $15.94
per share, or an aggregate market value of $10 million. Valhi's LYONs debt
obligations are exchangeable at any time, at the option of the LYON holder, for
such shares of Halliburton common stock, and the carrying value of such
Halliburton shares is limited to the accreted LYONs obligations. Such
Halliburton shares are held in escrow for the benefit of the holders of the
LYONs. Valhi receives the regular quarterly dividend on all of the Halliburton
shares held, including shares held in escrow. Such Halliburton shares are
classified as a current asset at June 30, 2002 because the related LYONs
obligations, which are redeemable at the option of the holders in October 2002,
are classified as a current liability at such date. During the first six months
of 2002, the Company sold approximately 515,000 Halliburton shares classified as
trading securities in market transactions for aggregate proceeds of $8.7
million. See Notes 9 and 12.
See the 2001 Annual Report for a discussion of the Company's investment in
The Amalgamated Sugar Company LLC. The aggregate cost of the debt securities,
restricted pursuant to the terms of one of NL's environmental special purpose
trusts discussed in the 2001 Annual Report, approximates their net carrying
value at June 30, 2002. The aggregate cost of other noncurrent
available-for-sale securities is nominal at June 30, 2002.
Note 4 - Inventories:
December 31, June 30,
2001 2002
---- ----
(In thousands)
Raw materials:
Chemicals .................................. $ 79,162 $ 34,855
Component products ......................... 9,677 7,907
-------- --------
88,839 42,762
-------- --------
In process products:
Chemicals .................................. 9,675 10,431
Component products ......................... 12,619 13,726
-------- --------
22,294 24,157
-------- --------
Finished products:
Chemicals .................................. 117,976 104,242
Component products ......................... 8,494 9,329
-------- --------
126,470 113,571
-------- --------
Supplies (primarily chemicals) ............... 25,130 29,208
-------- --------
$262,733 $209,698
======== ========
Note 5 - Accrued liabilities:
December 31, June 30,
2001 2002
---- ----
(In thousands)
Current:
Employee benefits .......................... $ 39,974 $ 38,595
Environmental costs ........................ 64,165 56,503
Interest ................................... 5,162 1,149
Deferred income ............................ 9,479 2,946
Other ...................................... 47,708 54,779
-------- --------
$166,488 $153,972
======== ========
Noncurrent:
Insurance claims and expenses .............. $ 19,182 $ 18,379
Employee benefits .......................... 8,616 8,911
Deferred income ............................ 1,333 1,952
Other ...................................... 3,511 2,302
-------- --------
$ 32,642 $ 31,544
======== ========
Note 6 - Accounts and other receivables:
December 31, June 30,
2001 2002
---- ----
(In thousands)
Accounts receivable .......................... $ 166,126 $ 194,481
Notes receivable ............................. 2,484 3,324
Accrued interest ............................. 26 23
Allowance for doubtful accounts .............. (6,326) (6,592)
--------- ---------
$ 162,310 $ 191,236
========= =========
Note 7 - Other assets:
December 31, June 30,
2001 2002
---- ----
(In thousands)
Investment in affiliates:
TiO2 manufacturing joint venture ............... $138,428 $136,178
TIMET .......................................... 60,272 44,285
Other .......................................... 12,415 12,366
-------- --------
$211,115 $192,829
======== ========
Loans and other receivables:
Snake River Sugar Company:
Principal .................................. $ 80,000 $ 80,000
Interest ................................... 22,718 25,314
Other ........................................ 5,706 6,673
-------- --------
108,424 111,987
Less current portion ......................... 2,484 3,324
-------- --------
Noncurrent portion ........................... $105,940 $108,663
======== ========
Other noncurrent assets:
Restricted cash equivalents .................. $ 4,713 $ 7,619
Waste disposal operating permits ............. 2,527 2,141
Refundable insurance deposits ................ 1,609 1,864
Deferred financing costs ..................... 1,120 9,627
Other ........................................ 20,140 18,603
-------- --------
$ 30,109 $ 39,854
======== ========
At June 30, 2002, Tremont held 12.3 million shares of TIMET common stock
with a quoted market price of $3.50 per share, or an aggregate of $43 million.
At June 30, 2002, TIMET reported total assets of $642.7 million and
stockholders' equity of $257.4 million. TIMET's total assets at June 30, 2002
include current assets of $288.0 million, property and equipment of $265.4
million and goodwill and other intangible assets of $54.0 million. TIMET's total
liabilities at June 30, 2002 include current liabilities of $108.5 million,
long-term debt of $18.7 million, accrued OPEB and pension costs of $39.0 million
and convertible preferred securities of $201.2 million. During the first six
months of 2002, TIMET reported net sales of $198.7 million, an operating loss of
$11.7 million and a net loss of $48.4 million (first six months of 2001 - net
sales of $244.0 million, operating income of $46.8 million and net income of
$25.9 million).
Note 8 - Goodwill and other intangible assets:
Goodwill.
Operating segment
Component
Chemicals products Total
(In millions)
Balance at December 31, 2001 ................ $307.2 $ 41.9 $349.1
Goodwill acquired during the period ......... 7.6 -- 7.6
Changes in foreign exchange rates ........... -- 1.4 1.4
------ ------ ------
Balance at June 30, 2002 .................... $314.8 43.3 $358.1
====== ====== ======
Upon adoption of SFAS No. 142 effective January 1, 2002 (see Note 14), the
goodwill related to the chemicals operating segment was assigned to the
reporting unit (as that term is defined in SFAS No. 142) consisting of NL in
total, and the goodwill related to the component products operating segment was
assigned to two reporting units within that operating segment, one consisting of
CompX's security products operations and the other consisting of CompX's
ergonomic and slide products operations.
Other intangible assets.
December 31, June 30,
2001 2002
---- ----
(In millions)
Patents:
Cost ............................................. $3.4 $3.5
Less accumulated amortization .................... 1.0 1.1
---- ----
Net ............................................ 2.4 2.4
---- ----
Customer list:
Cost ............................................. -- 2.6
Less accumulated amortization .................... -- .2
---- ----
Net ............................................ -- 2.4
---- ----
$2.4 $4.8
==== ====
The patent intangible asset relates to the estimated fair value of certain
patents acquired in connection with the acquisition of certain business units by
CompX, and the customer list intangible asset relates to NL's acquisition of EWI
discussed in Note 2. The patent intangible asset was, and will continue to be
after adoption of SFAS No. 142 effective January 1, 2002, amortized by the
straight-line method over the lives of the patents (approximately 10.75 years
remaining at June 30, 2002), with no assumed residual value at the end of the
life of the patents. The customer list intangible asset will be amortized by the
straight-line method over the estimated seven-year life of such intangible asset
(approximately 6.5 years remaining at June 30, 2002), with no assumed residual
value at the end of the life of the intangible asset. Amortization expense of
intangible assets was approximately $120,000 in the first six months of 2001 and
approximately $305,000 in the first six months of 2002, and amortization expense
of intangible assets is expected to be approximately $620,000 in each of
calendar 2002 through 2006.
Note 9 - Notes payable and long-term debt:
December 31, June 30,
2001 2002
---- ----
(In thousands)
Notes payable -
Kronos - non-U.S. bank credit agreements ......... $ 46,201 $ --
======== ========
Long-term debt:
Valhi:
Snake River Sugar Company ...................... $250,000 $250,000
LYONs .......................................... 25,472 26,651
Bank credit facility ........................... 35,000 35,000
Other .......................................... 2,880 2,880
-------- --------
313,352 314,531
-------- --------
Subsidiaries:
NL Senior Secured Notes ........................ 194,000 --
Kronos International:
Senior Secured Notes ......................... -- 283,005
Bank credit facility ......................... -- 39,649
CompX bank credit facility ..................... 49,000 30,000
Valcor Senior Notes ............................ 2,431 2,431
Other .......................................... 3,404 3,043
-------- --------
248,835 358,128
-------- --------
562,187 672,659
Less current maturities .......................... 64,972 96,251
-------- --------
$497,215 $576,408
======== ========
In June 2002, Kronos International ("KII"), which conducts NL's TiO2
operations in Europe, issued euro 285 million principal amount ($280 million
when issued) of its 8.875% Senior Secured Notes due 2009. The KII Senior Secured
Notes are collateralized by a pledge of the stock or other ownership interests
of KII's first-tier operating subsidiaries. The KII Senior Secured Notes are
issued pursuant to an indenture which contains a number of covenants and
restrictions which, among other things, restricts the ability of KII and its
subsidiaries to incur debt, incur liens, pay dividends or merge or consolidate
with, or sell or transfer all or substantially all of their assets to, another
entity. The KII Senior Secured Notes are redeemable, at KII's option, on or
after December 30, 2005 at redemption prices ranging from 104.437% of the
principal amount, declining to 100% on or after December 30, 2008. In addition,
on or before June 30, 2005, KII may redeem up to 35% of its Senior Secured Notes
with the net proceeds of a qualified public equity offering at 108.875% of the
principal amount. In the event of a change of control of KII, as defined, KII
would be required to make an offer to purchase its Senior Secured Notes at 101%
of the principal amount. KII would also be required to make an offer to purchase
a specified portion of its Senior Secured Notes at par value in the event KII
generates a certain amount of net proceeds from the sale of assets outside the
ordinary course of business, and such net proceeds are not otherwise used for
specified purposes within a specified time period. The interest rate on the KII
Senior Secured Notes will increase by up to 75 basis points if KII fails to file
a registration statement with the U.S. Securities and Exchange Commission, have
such registration statement declared effective and complete a subsequent tender
offer to exchange the currently outstanding KII Senior Secured Notes for
substantially identical, registered publicly-traded Senior Secured Notes within
specified time periods.
Also in June 2002, KII's operating subsidiaries in Germany, Belgium and
Norway entered into a new, three-year euro 80 million revolving bank credit
facility, of which euro 13 million ($13 million) and NOK 200 million ($26
million) was borrowed at closing and used, along with available cash on hand, to
repay and terminate Kronos' short-term non-U.S. bank credit agreements.
Borrowings may be demoninated in euros, Norwegian kroner, U.S. dollars or other
currencies as mutually agreed upon, and bear interest at the applicable
interbank market rate plus 1.75% (weighted average interest rate of 7.6% on
outstanding borrowings at June 30, 2002). The facility also provides for the
issuance of letters of credit up to euro 5 million. The new KII bank credit
agreement is collateralized by the accounts receivable and inventories of the
borrowers, plus a limited pledge of all of the other assets of the Belgian
borrower. The new KII bank credit agreement contains certain restrictive
covenants which, among other things, restricts the ability of the borrowers to
incur debt, incur liens, pay dividends or merge or consolidate with, or sell or
transfer all or substantially all of their assets to, another entity.
In March 2002, NL redeemed $25 million principal amount of the NL Senior
Secured Notes at par value, using available cash on hand. In addition, NL used a
portion of the net proceeds from the issuance of the KII Senior Secured Notes to
redeem in full the remaining $169 million principal amount of the NL Senior
Secured Notes. In accordance with the terms of the indenture governing the NL
Senior Secured Notes, on June 28, 2002, NL irrevocably placed on deposit with
the NL Senior Secured Note trustee funds in an amount sufficient to pay in full
the redemption price plus all accrued and unpaid interest due on the July 28,
2002 redemption date. Immediately thereafter, NL was released from its
obligations under such indenture, the indenture was discharged and all
collateral was released to NL. Because NL had been released as being the primary
obligor under the indenture as of June 30, 2002, the NL Senior Secured Notes
were eliminated from the balance sheet as of that date along with the funds
placed on deposit with the trustee to effect the July 28, 2002 redemption. NL
recognized a loss on the early extinguishment of debt of approximately $2
million in the second quarter of 2002, consisting primarily of the interest on
the NL Senior Secured Notes for the period from July 1 to July 28, 2002. Such
loss is recognized as a component of interest expense. See Note 14.
Note 10 - Accounts with affiliates:
December 31, June 30,
2001 2002
---- ----
(In thousands)
Current receivables from affiliates:
Income taxes receivable from Contran ............. $ -- $ 4,274
TIMET ............................................ 677 67
Other ............................................ 167 102
------- -------
$ 844 $ 4,443
======= =======
Noncurrent receivable from affiliate -
loan to Contran family trust ...................... $20,000 $20,000
======= =======
Payables to affiliates:
Valhi demand loan from Contran ................... $24,574 $22,484
Income taxes payable to Contran .................. 6,410 --
Louisiana Pigment Company ........................ 6,362 8,622
Contran - trade items ............................ 501 790
TIMET ............................................ 286 2
Other, net ....................................... 15 81
------- -------
$38,148 $31,979
======= =======
Note 11 - Provision for income taxes:
Six months ended
June 30,
2001 2002
---- ----
(In millions)
Expected tax expense .................................... $53.5 $ 1.8
Incremental U.S. tax and rate differences on
Equity in earnings of non-tax group companies .......... 1.9 .3
Non-U.S. tax rates ...................................... (3.6) (.7)
Change in NL's and Tremont's deferred income tax
valuation allowance, net ............................... (1.8) (1.5)
No tax benefit for goodwill amortization ................ 2.9 --
U.S. state income taxes, net ............................ 1.8 .1
Other, net .............................................. 1.0 .4
----- -----
$55.7 $ .4
===== =====
Comprehensive provision for income taxes
allocated to:
Net income ............................................ $55.7 $ .4
Other comprehensive income:
Marketable securities ............................... (16.2) 1.3
Currency translation ................................ (2.6) 3.2
Pension liabilities ................................. (.4) (1.5)
----- -----
$36.5 $ 3.4
===== =====
Note 12 - Other income:
Six months ended
June 30,
2001 2002
---- ----
(In thousands)
Securities earnings:
Dividends and interest ...................... $ 19,718 $16,930
Securities transactions, net ................ 50,803 1,915
-------- -------
70,521 18,845
Legal settlement gains, net ................... 30,723 2,355
Noncompete agreement income ................... 2,000 2,000
Currency transactions, net .................... 1,193 3,890
Pension settlement gain ....................... -- 677
Insurance gain ................................ 650 --
Other, net .................................... 2,644 3,966
-------- -------
$107,731 $31,733
======== =======
The securities transaction gain in 2002 is discussed in Note 3. The legal
settlement gain in 2002 relates to NL's settlement with certain additional
former insurance carriers from whom NL had been seeking reimbursement for legal
defense expenditures and indemnity coverage claims. The pension settlement gain
relates to a defined benefit plan previously sponsored by CompX in The
Netherlands. The net currency transaction gain in 2002 includes $6.3 million
related to the extinguishment of certain intercompany indebtedness of NL.
Note 13 - Minority interest:
December 31, June 30,
2001 2002
---- ----
(In thousands)
Minority interest in net assets:
NL Industries ............................ $ 68,566 $ 73,568
Tremont Corporation ...................... 32,610 31,118
CompX International ...................... 44,767 46,156
Subsidiaries of NL ....................... 7,208 7,603
-------- --------
$153,151 $158,445
======== ========
Six months ended
June 30,
2001 2002
---- ----
(In thousands)
Minority interest in net earnings (losses):
NL Industries ............................. $11,623 $ 3,550
Tremont Corporation ....................... 3,448 (2,489)
CompX International ....................... 2,005 676
Subsidiaries of NL ........................ 953 370
------- -------
$18,029 $ 2,107
======= =======
As previously reported, all of Waste Control Specialists aggregate,
inception-to-date net losses have accrued to the Company for financial reporting
purposes, and all of Waste Control Specialists future net income or net losses
will also accrue to the Company until Waste Control Specialists reports positive
equity attributable to its other owner. Accordingly, no minority interest in
Waste Control Specialists' net assets or net earnings (losses) is reported at
June 30, 2002.
Note 14 - Accounting principles newly adopted in 2002:
Goodwill. The Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets, effective January 1, 2002. Under SFAS No. 142, goodwill, including
goodwill arising from the difference between the cost of an investment accounted
for by the equity method and the amount of the underlying equity in net assets
of such equity method investee ("equity method goodwill"), is no longer
amortized on a periodic basis. Goodwill (other than equity method goodwill) is
subject to an impairment test to be performed at least on an annual basis, and
impairment reviews may result in future periodic write-downs charged to
earnings. Equity method goodwill is not tested for impairment in accordance with
SFAS No. 142; rather, the overall carrying amount of an equity method investee
will continue to be reviewed for impairment in accordance with existing GAAP.
There is currently no equity method goodwill associated with any of the
Company's equity method investees. Under the transition provisions of SFAS No.
142, all goodwill existing as of June 30, 2001 ceased to be periodically
amortized as of January 1, 2002, and all goodwill arising in a purchase business
combination (including step acquisitions) completed on or after July 1, 2001 was
not periodically amortized from the date of such combination.
As discussed in Note 8, the Company has assigned its goodwill to three
reporting units (as that term is defined in SFAS No. 142). Goodwill attributable
to the chemicals operating segment was assigned to the reporting unit consisting
of NL in total. Goodwill attributable to the component products operating
segment was assigned to two reporting units within that operating segment, one
consisting of CompX's security products operations and the other consisting of
CompX's ergonomic products and slide products operations. Under SFAS No. 142,
such goodwill will be deemed to not be impaired if the estimated fair value of
the applicable reporting unit exceeds the respective net carrying value of such
reporting units, including the allocated goodwill. If the fair value of the
reporting unit is less than carrying value, then a goodwill impairment loss
would be recognized equal to the excess, if any, of the net carrying value of
the reporting unit goodwill over its implied fair value (up to a maximum
impairment equal to the carrying value of the goodwill). The implied fair value
of reporting unit goodwill would be the amount equal to the excess of the
estimated fair value of the reporting unit over the amount that would be
allocated to the tangible and intangible net assets of the reporting unit
(including unrecognized intangible assets) as if such reporting unit had been
acquired in a purchase business combination accounted for in accordance with
GAAP as of the date of the impairment testing.
In determining the estimated fair value of the NL reporting unit, the
Company will consider quoted market prices for NL common stock. The Company will
also use other appropriate valuation techniques, such as discounted cash flows,
to estimate the fair value of the two CompX reporting units.
The Company has completed its initial, transitional goodwill impairment
analysis under SFAS No. 142 as of January 1, 2002, and no goodwill impairments
were deemed to exist. In accordance with the requirements of SFAS No. 142, the
Company will review the goodwill of its three reporting units for impairment
during the third quarter of each year starting in 2002. Goodwill will also be
reviewed for impairment at other times during each year when events or changes
in circumstances indicate that an impairment might be present.
As shown in the following table, the Company would have reported net income
of $87.1 million, or $.75 per diluted share, in the first six months of 2001
($51.6 million, or $.44 per diluted share, in the second quarter of 2001) if the
goodwill amortization included in the Company's reported net income had not been
recognized.
Three months ended Six months ended
June 30, June 30,
--------------- ---------------
2001 2002 2001 2002
---- ---- ---- ----
(In millions, except per share amounts)
Net income as reported ................. $ 47.6 $ 6.4 $ 79.2 $ 2.7
Adjustments:
Goodwill amortization ................ 4.3 -- 8.5 --
Incremental income taxes ............. (.1) -- (.1) --
Minority interest in goodwill
amortization ........................ (.2) -- (.5) --
------ ------ ------ ------
Adjusted net income ................ $ 51.6 $ 6.4 $ 87.1 $ 2.7
====== ====== ====== ======
Diluted net income per share as
reported .............................. $ .41 $ .05 $ .68 $ .02
Adjustments:
Goodwill amortization ................ .03 -- .07 --
Incremental income taxes ............. -- -- -- --
Minority interest in goodwill
amortization ........................ -- -- -- --
------ ------ ------ ------
Adjusted diluted net income
per share ......................... $ .44 $ .05 $ .75 $ .02
====== ====== ====== ======
Impairment of long-lived assets. The Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, effective
January 1, 2002. SFAS No. 144 retains the fundamental provisions of existing
GAAP with respect to the recognition and measurement of long-lived asset
impairment contained in SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Lived-Lived Assets to be Disposed Of. However, SFAS
No. 144 provides new guidance intended to address certain implementation issues
associated with SFAS No. 121, including expanded guidance with respect to
appropriate cash flows to be used to determine whether recognition of any
long-lived asset impairment is required, and if required how to measure the
amount of the impairment. SFAS No. 144 also requires that net assets to be
disposed of by sale are to be reported at the lower of carrying value or fair
value less cost to sell, and expands the reporting of discontinued operations to
include any component of an entity with operations and cash flows that can be
clearly distinguished from the rest of the entity. Adoption of SFAS No. 144 did
not have a significant effect on the Company.
Debt extinguishment gains and losses. The Company adopted SFAS No. 145
effective April 1, 2002. SFAS No. 145, among other things, eliminated the prior
requirement that all gains and losses from the early extinguishment of debt were
to be classified as an extraordinary item. Upon adoption of SFAS No. 145, gains
and losses from the early extinguishment of debt are now classified as an
extraordinary item only if they meet the "unusual and infrequent" criteria
contained in Accounting Principles Board Opinion ("APBO") No. 30. In addition,
upon adoption of SFAS No. 145, all gains and losses from the early
extinguishment of debt that had previously been classified as an extraordinary
item are to be reassessed to determine if they would have met the "unusual and
infrequent" criteria of APBO No. 30; any such gain or loss that would not have
met the APBO No. 30 criteria are retroactively reclassified and reported as a
component of income before extraordinary item. The Company has concluded that
all of its previously-recognized gains and losses from the early extinguishment
of debt that occurred on or after January 1, 1998 would not have met the APBO
No. 30 criteria for classification as an extraordinary item, and accordingly
such previously-reported gains and losses from the early extinguishment of debt
have been retroactively reclassified and are now reported as a component of
income before extraordinary item.
Note 15 - Accounting principles not yet adopted:
The Company will adopt SFAS No. 143, Accounting for Asset Retirement
Obligations, no later than January 1, 2003. Under SFAS No. 143, the fair value
of a liability for an asset retirement obligation covered under the scope of
SFAS No. 143 would be recognized in the period in which the liability is
incurred, with an offsetting increase in the carrying amount of the related
long-lived asset. Over time, the liability would be accreted to its present
value, and the capitalized cost would be depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity would either settle
the obligation for its recorded amount or incur a gain or loss upon settlement.
The Company is still studying this standard to determine, among other things,
whether it has any asset retirement obligations which are covered under the
scope of SFAS No. 143, and the effect, if any, on the Company of adopting SFAS
No. 143 has not yet been determined.
The Company will adopt SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, no later than January 1, 2003 for exit or disposal
activities initiated on or after the date of adoption. Under SFAS No. 146, costs
associated with exit activities, as defined, that are covered by the scope of
SFAS No. 146 will be recognized and measured initially at fair value, generally
in the period in which the liability is incurred. Costs covered by the scope of
SFAS No. 146 include termination benefits provided to employees, costs to
consolidate facilities or relocate employees, and costs to terminate contracts
(other than a capital lease). Under existing GAAP, a liability for such an exit
cost is recognized at the date an exit plan is adopted, which may or may not be
the date at which the liability has been incurred.
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
General
The Company reported net income of $6.4 million, or $.05 per diluted share,
in the second quarter of 2002 compared to net income of $47.6 million, or $.41
per diluted share, in the second quarter of 2001. Excluding the effects of the
items discussed below, the Company would have reported net income of $1.6
million in the second quarter of 2002 compared to net income of $10.8 million in
the second quarter of 2001. For the first six months of 2002, the Company
reported net income of $2.7 million, or $.02 per diluted share, compared to net
income of $79.2 million, or $.68 per diluted share, in the first six months of
2001. Excluding the effects of the items discussed below, the Company would have
reported net income of $1.0 million in the first six months of 2002 compared to
net income of $28.0 million in the first six months of 2001.
The Company's equity in losses of TIMET in the first six months of 2002
includes losses in the first quarter of $10.6 million ($5.4 million net of
income taxes and minority interest), related to the Company's pro-rata share of
TIMET's $27.5 million impairment charge for an other than temporary decline in
value of certain preferred securities held by TIMET. Legal settlement gains in
the second quarter and first six months of 2002 of $500,000 and $2.4 million
($224,000 and $1.2 million, net of income taxes and minority interest,
respectively) relate to legal settlements with certain of NL's former insurance
carriers, and securities transactions gains in the first six months of 2002 of
$1.9 million ($1.2 million net of income taxes) relate to the first quarter
disposal of certain shares of Halliburton Company common stock held by the
Company. Currency transaction gains in the second quarter of 2002 include gains
of $6.3 million ($4.7 million net of income taxes and minority interest) related
to the extinguishment of certain intercompany indebtedness of NL. The Company's
results in the second quarter of 2001 include aggregate net securities
transaction gains of $50.8 million ($33.2 million net of income taxes and
minority interest) related principally to the disposal of additional Halliburton
shares. The Company's equity in earnings of TIMET in the second quarter of 2001
includes $15.7 million ($7.5 million net of income taxes and minority interest)
related to TIMET's previously-reported settlement with Boeing. The Company's
results in the first six months of 2001 include the previously-reported first
quarter legal settlement gains aggregating $30.7 million ($18.4 million net of
income taxes and minority interest).
As discussed in Note 14 to the Consolidated Financial Statements, beginning
in 2002 the Company no longer recognizes periodic amortization of goodwill in
its results of operations. The Company would have reported net income of
approximately $51.6 million in the second quarter of 2001 and approximately
$87.1 million in the first six months of 2001, or about $4.0 million and $7.9
million higher, respectively, if the goodwill amortization included in the
Company's reported net income had not been recognized. Of such $7.9 million
difference in the first six months of 2001, approximately $7.2 million and $1.3
million relates to amortization of goodwill attributable to the Company's
chemicals and component products operating segments, respectively, approximately
$100,000 relates to incremental income taxes and approximately $500,000 relates
to minority interest associated with the goodwill amortization recognized by
certain of the Company's less-than-wholly-owned subsidiaries.
Total operating income in the second quarter and first six months of 2002
was lower as compared to the same periods in 2001 due to lower chemicals
earnings at NL and lower component products earnings at CompX, offset in part by
lower waste management operating losses at Waste Control Specialists.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "could," "anticipates," "expected" or comparable terminology, or by
discussions of strategies or trends. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve substantial risks and uncertainties that
could significantly impact expected results, and actual future results could
differ materially from those described in such forward-looking statements. While
it is not possible to identify all factors, the Company continues to face many
risks and uncertainties. Among the factors that could cause actual future
results to differ materially are the risks and uncertainties discussed in this
Quarterly Report and those described from time to time in the Company's other
filings with the Securities and Exchange Commission including, but not limited
to, future supply and demand for the Company's products, the extent of the
dependence of certain of the Company's businesses on certain market sectors
(such as the dependence of TIMET's titanium metals business on the aerospace
industry), the cyclicality of certain of the Company's businesses (such as NL's
TiO2 operations and TIMET's titanium metals operations), the impact of certain
long-term contracts on certain of the Company's businesses (such as the impact
of TIMET's long-term contracts with certain of its customers and such customers'
performance there under and the impact of TIMET's long-term contracts with
certain of its vendors on its ability to reduce or increase supply or achieve
lower costs), customer inventory levels (such as the extent to which NL's
customers may, from time to time, accelerate purchases of TiO2 in advance of
anticipated price increases or defer purchases of TiO2 in advance of anticipated
price decreases, or the relationship between inventory levels of TIMET's
customers and such customer's current inventory requirements and the impact of
such relationship on their purchases from TIMET), changes in raw material and
other operating costs (such as energy costs), the possibility of labor
disruptions, general global economic and political conditions (such as changes
in the level of gross domestic product in various regions of the world and the
impact of such changes on demand for, among other things, TiO2), competitive
products and substitute products, customer and competitor strategies, the impact
of pricing and production decisions, competitive technology positions, the
introduction of trade barriers, fluctuations in currency exchange rates (such as
changes in the exchange rate between the U.S. dollar and each of the euro and
the Canadian dollar), operating interruptions (including, but not limited to,
labor disputes, leaks, fires, explosions, unscheduled or unplanned downtime and
transportation interruptions), recoveries from insurance claims and the timing
thereof, potential difficulties in integrating completed acquisitions, the
ability of the Company to renew or refinance credit facilities, uncertainties
associated with new product development (such as TIMET's ability to develop new
end-uses for its titanium products), environmental matters (such as those
requiring emission and discharge standards for existing and new facilities),
government laws and regulations and possible changes therein (such as a change
in Texas state law which would allow the applicable regulatory agency to issue a
permit for the disposal of low-level radioactive wastes to a private entity such
as Waste Control Specialists, or changes in government regulations which might
impose various obligations on present and former manufacturers of lead pigment
and lead-based paint, including NL, with respect to asserted health concerns
associated with the use of such products), the ultimate resolution of pending
litigation (such as NL's lead pigment litigation and litigation surrounding
environmental matters of NL, Tremont and TIMET) and possible future litigation.
Should one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of new information, future events
or otherwise.
Chemicals
Selling prices for titanium dioxide pigments ("TiO2"), NL's principal
product, were generally decreasing during all of 2001 and the first quarter of
2002, and were generally flat during the second quarter of 2002. NL's TiO2
operations are conducted through its wholly-owned subsidiary Kronos, Inc.
Three months ended Six months ended
June 30, % June 30, %
2001 2002 Change 2001 2002 Change
---- ---- ------ ---- ---- ------
(In millions, except percentages)
Net sales .............. $220.1 $226.9 +3% $446.2 $429.3 -4%
Operating income ....... 38.8 21.7 -44% 84.2 41.0 -51%
Chemicals operating income declined in the second quarter and first six
months of 2002 compared to the same periods of 2001 due primarily to lower
average selling prices for titanium dioxide pigments ("TiO2"), offset in part by
higher TiO2 sales and production volumes. Excluding the effect of fluctuations
in the value of the U.S. dollar relative to other currencies, NL's average TiO2
selling prices in the second quarter of 2002 were 14% lower than the second
quarter of 2001, and were 15% lower in the first six months of 2002 compared to
the same period in 2001. While NL's average TiO2 selling prices had generally
been declining during all of 2001 and the first quarter of 2002, the rate of
decline abated during the second quarter of 2002, and NL's average TiO2 selling
prices in the second quarter of 2002 were flat compared to the first quarter of
the year, with increases in European and export markets offset by declines in
North American markets.
NL's TiO2 sales volumes in the second quarter of 2002, the highest
quarterly sales volumes in NL's history, were 17% higher than the second quarter
of 2001. NL's TiO2 sales volumes in the first six months of 2002 were 13% higher
than the first six months of 2001. NL's TiO2 production volumes in the second
quarter of 2002 were 14% higher than the second quarter of 2001, and were 6%
higher in the first six months of 2002 compared to the same period in 2001. The
increases in NL's TiO2 production volumes were due in part to the effect of the
previously-reported fire at NL's Leverkusen, Germany TiO2 facility in March
2001. As previously reported, NL settled its insurance claim related to the
Leverkusen fire during the fourth quarter of 2001. NL recognized $19.3 million
of business interruption insurance proceeds during the fourth quarter of 2001,
of which $16.6 million was attributable to recovery of unallocated period costs
and lost margin related to the first, second and third quarters of 2001.
NL believes that the strong demand for TiO2 in the first half of 2002
reflected improving economic conditions, some seasonality and customers
restocking their inventories ahead of previously-announced price increases. NL
expects that TiO2 industry demand in the second half of 2002 should be better
than industry demand in the second half of 2001 due to economic conditions. In
January 2002, NL announced price increases in all major markets of approximately
5% to 8% above existing December 2001 prices, a portion of which NL realized in
the second quarter of 2002, with additional increases expected to be realized in
the third quarter of this year. In May 2002, NL announced a second round of
price increases in all major markets of approximately 7% to 11% above June 2002
prices. NL is hopeful that it will realize a portion of the announced May 2002
price increases during the fourth quarter of 2002, but the extent to which
Kronos can realize any price increases during the remainder of 2002 will depend
on improving market conditions. Because TiO2 prices were generally declining
during all of 2001 and the first quarter of 2002, NL believes that its average
TiO2 selling prices in 2002 will be significantly below its average 2001 prices,
even if price increases continue to be realized. NL expects its TiO2 sales and
production volumes in 2002 should be higher as compared to 2001, in part due to
the effects in 2001 of the previously-reported fire at its Leverkusen, Germany
facility, with the level of its production volumes approximating the level of
its sales volumes. NL expects its TiO2 sales volumes in the second half of 2002
will be lower than the first half of the year. Overall, NL expects its TiO2
operating income in 2002 will be significantly lower than 2001, primarily due to
lower average TiO2 selling prices. NL's expectations as to the future prospects
of NL and the TiO2 industry are based upon a number of factors beyond NL's
control, including worldwide growth of gross domestic product, competition in
the marketplace, unexpected or earlier-than-expected capacity additions and
technological advances. If actual developments differ from NL's expectations,
NL's results of operations could be unfavorably affected.
NL has substantial operations and assets located outside the United States
(principally Germany, Belgium, Norway and Canada). A significant amount of NL's
sales generated from its non-U.S. operations are denominated in currencies other
than the U.S. dollar, primarily the euro, other major European currencies and
the Canadian dollar. In addition, a portion of NL's sales generated from its
non-U.S. operations are denominated in the U.S. dollar. Certain raw materials,
primarily titanium-containing feedstocks, are purchased in U.S. dollars, while
labor and other production costs are denominated primarily in local currencies.
Consequently, the translated U.S. dollar value of NL's foreign sales and
operating results are subject to currency exchange rate fluctuations which may
favorably or adversely impact reported earnings and may affect the comparability
of period-to-period operating results. Including the effect of fluctuations in
the value of the U.S. dollar relative to other currencies, Kronos' average TiO2
selling prices (in billing currencies) in the second quarter of 2002 decreased
13% compared to the second quarter of 2001, and decreased 15% during the first
six months of 2002. Overall, fluctuations in the value of the U.S. dollar
relative to other currencies, primarily the euro, increased TiO2 sales slightly
in the second quarter of 2002, and decreased Ti02 sales slightly in the first
six months of 2002, as compared to the same periods in 2001. Fluctuations in the
value of the U.S. dollar relative to other currencies similarly impacted NL's
foreign currency-denominated operating expenses. NL's operating costs that are
not denominated in the U.S. dollar, when translated into U.S. dollars, were
lower during 2002 as compared to 2001. Overall, the net impact of currency
exchange rate fluctuations decreased NL's TiO2 operating income by $3.6 million
and $2.5 million in the second quarter and first six months of 2002,
respectively, as compared to the same periods in 2001.
Chemicals operating income, as presented above, is stated net of
amortization of Valhi's purchase accounting adjustments made in conjunction with
its acquisitions of its interest in NL. Such adjustments result in additional
depreciation, depletion and amortization expense beyond amounts separately
reported by NL. Such additional non-cash expenses reduced chemicals operating
income, as reported by Valhi, by approximately $12.8 million in the first six
months of 2001 and approximately $5.8 million in the first six months of 2002 as
compared to amounts separately reported by NL. The decline from 2001 to 2002 in
such additional non-cash expenses relates primarily to ceasing to periodically
amortize goodwill beginning in 2002 (the 2001 amount included $7.2 million
related to goodwill amortization). See Note 14 to the Consolidated Financial
Statements.
Component Products
Three months ended Six months ended
June 30, % June 30, %
2001 2002 Change 2001 2002 Change
---- ---- ------ ---- ---- ------
(In millions, except percentages)
Net sales ................. $ 53.3 $ 51.1 -4% $112.9 $ 99.6 -12%
Operating income .......... 5.3 2.2 -59% 12.3 4.3 -65%
Component products sales and operating income decreased in the second
quarter and first six months of 2002 compared to the same periods in 2001 as the
manufacturing recession continued to negatively impact CompX's operating
results. Sales of slide and ergonomic products decreased 4% and 16%,
respectively, in the second quarter of 2002 compared to the second quarter of
2001, with year-to-date declines of 16% and 19%, respectively. While sales of
security products increased 3% in the second quarter of 2002 compared to the
same period in 2001, in part due to new business development and increased
orders in advance of implementation of certain price increases effective July 1,
2002, sales of security products were down 4% in the first six months of 2002
compared to the same period in 2001. Operating income comparisons were
negatively impacted by increases in certain raw material costs, primarily steel,
changes in product mix as well as the adverse impact of reduced selling prices
resulting from competitive pressures. Operating income comparisons were
favorably impacted by ceasing to periodically amortize goodwill, which amounted
to approximately $700,000 and $1.3 million in the second quarter and first six
months of 2001, respectively (none in 2002), as well as the impact of certain
cost reductions that were implemented. See Note 14 to the Consolidated Financial
Statements.
CompX has substantial operations and assets located outside the United
States (principally in Canada, The Netherlands and Taiwan). A portion of CompX's
sales generated from its non-U.S. operations are denominated in currencies other
than the U.S. dollar, principally the Canadian dollar, the euro and the New
Taiwan dollar. In addition, a portion of CompX's sales generated from its
non-U.S. operations (principally in Canada) are denominated in the U.S. dollar.
Most raw materials, labor and other production costs for such non-U.S.
operations are denominated primarily in local currencies. Consequently, the
translated U.S. dollar value of CompX's foreign sales and operating results are
subject to currency exchange rate fluctuations which may favorably or
unfavorably impact reported earnings and may affect comparability of
period-to-period operating results. Excluding the effect of currency, component
products sales decreased 5% in the second quarter of 2002 as compared to the
same period in 2001, and operating income decreased 49%. Excluding the effect of
currency, component products sales decreased 11% in the first six months of 2002
as compared to the same period in 2001, and operating income decreased 59%.
CompX currently expects that soft market conditions will continue for the
near term in the office furniture market, the primary end-use market for CompX's
products. As a result, sales volumes are expected to remain at depressed levels
for at least the remainder of the year. Competitive pricing pressures are also
expected to continue. In addition, the worldwide steel price increase that
followed the steel tariff imposed this year by the United States government is
expected to continue to negatively impact component products margins on CompX's
slide and ergonomic products, where steel is the primary raw material. CompX
intends to continue to focus on cost control measures to minimize the affect of
the anticipated lower sales volumes, pricing pressures and raw material cost
increases. In connection with these cost improvement initiatives, CompX may
consider strategies that could result in capacity reductions, consolidation of
existing facilities and production rebalancing which, depending on the outcome,
may result in future restructuring charges.
Waste Management
Three months ended Six months ended
June 30, June 30,
---------------- -----------------
2001 2002 2001 2002
---- ---- ---- ----
(In millions)
Net sales ...................... $2.9 $1.1 $6.0 $3.9
Operating loss ................. (4.4) (2.1) (7.6) (4.1)
Waste Control Specialists' sales decreased in the second quarter and first
six months of 2002 compared to the same periods in 2001 due primarily to the
effect of weak demand for its waste management services. Waste management's
operating losses declined during 2002 as the effect of certain cost controls
implemented in 2002 more than offset the effects of the decline in sales.
Waste Control Specialists currently has permits which allow it to treat,
store and dispose of a broad range of hazardous and toxic wastes, and to treat
and store a broad range of low-level and mixed radioactive wastes. The waste
management industry currently is experiencing a relative decline in the number
of environmental remediation projects generating wastes. In addition, efforts on
the part of generators to reduce the volume of waste and/or manage wastes onsite
at their facilities also has resulted in weak demand for Waste Control
Specialists waste management services. These factors have led to reduced demand
and increased price pressure for waste management services. While Waste Control
Specialists' believes its broad range of permits for the treatment and storage
of low-level and mixed radioactive waste streams provides certain competitive
advantages, a key element of Waste Control Specialists' long-term strategy to
provide "one-stop shopping" for hazardous, low-level and mixed radioactive
wastes includes obtaining additional regulatory authorizations for the disposal
of a broad range of low-level and mixed radioactive wastes.
Waste Control Specialists is continuing its attempts to increase its sales
volumes from waste streams that conform to Waste Control Specialists' permits
currently in place. Waste Control Specialists is also continuing to identify and
attempt to obtain modifications to its current permits that would allow for
treatment, storage and disposal of additional types of wastes. The ability of
Waste Control Specialists to achieve increased sales volumes of these waste
streams, together with improved operating efficiencies through further cost
reductions and increased capacity utilization, are important factors in Waste
Control Specialists' ability to achieve improved cash flows. The Company
currently believes Waste Control Specialists can become a viable, profitable
operation. However, there can be no assurance that Waste Control Specialists'
efforts will prove successful in improving its cash flows. Valhi has in the
past, and may in the future, consider strategic alternatives with respect to
Waste Control Specialists. Depending on the form of the transaction that any
such strategic alternative might take, it is possible that the Company might
report a loss with respect to such a transaction.
TIMET
Tremont accounts for its interest in TIMET by the equity method. Tremont's
equity in earnings (losses) of TIMET differs from the amounts that would be
expected by applying Tremont's ownership percentage to TIMET's
separately-reported earnings because of the effect of amortization of purchase
accounting adjustments made by Tremont in conjunction with Tremont's
acquisitions of its interests in TIMET. Amortization of such basis differences
generally increases earnings (or reduces losses) attributable to TIMET as
reported by Tremont.
Three months ended Six months ended
June 30, June 30,
--------------- ----------------
2001 2002 2001 2002
---- ---- ---- ----
(In millions)
TIMET historical:
Net sales ......................... $120.0 $ 94.3 $244.0 $198.7
Operating income (loss):
Boeing settlement, net .......... $ 62.7 $ -- $ 62.7 $ --
Fixed asset impairment .......... (10.8) -- (10.8) --
Tungsten accrual ................ (2.8) -- (3.8) --
Other, net ...................... (.5) (7.0) (1.3) (11.7)
------ ------ ------ ------
48.6 (7.0) 46.8 (11.7)
Impairment of convertible
preferred securities ............. -- -- -- (27.5)
Other general corporate, net ...... 2.3 (.3) 4.0 (.8)
Interest expense .................. (1.1) (.7) (2.6) (1.5)
------ ------ ------ ------
49.8 (8.0) 48.2 (41.5)
Income tax benefit (expense) ...... (17.5) (.6) (16.9) .8
Minority interest ................. (2.7) (3.7) (5.3) (7.7)
------ ------ ------ ------
Net income (loss) ............... $ 29.6 $(12.3) $ 26.0 $(48.4)
====== ====== ====== ======
Equity in earnings (losses)
of TIMET ........................... $ 12.9 $ (2.7) $ 13.0 $(14.5)
====== ====== ====== ======
Excluding the effect of TIMET's previously-reported legal settlement with
Boeing, its impairment charge related to certain equipment and its accruals for
the tungsten matter discussed below, TIMET reported lower sales, and a higher
operating loss, in the second quarter and first six months of 2002 compared to
the same periods in 2001. During the second quarter of 2002, TIMET's mill
products sales volumes decreased 30% compared to the second quarter of 2001, and
its sales volumes of melted products decreased 40% during the same period.
During the first six months of 2002, TIMET's mill products sales volumes
decreased 23% compared to the same period in 2001, and its sales volumes of
melted products decreased 39%. Excluding the effect of fluctuations in the value
of the U.S. dollar relative to other currencies, TIMET's average selling prices
for mill products in the second quarter of 2002 were 4% higher compared to the
second quarter of 2001, while selling prices for its melted products increased
3%. TIMET's average selling prices for mill products in the first six months of
2002 were 4% higher compared to the same period in 2001, while selling prices
for its melted products increased 5%. TIMET's operating income comparisons were
favorably impacted by TIMET ceasing to periodically amortize goodwill recognized
on its separate-company books, which amounted to approximately $1.1 million and
$2.3 million in the second quarter and first six months of 2001 (none in 2002).
TIMET's operating income comparisons were negatively impacted by lower operating
rates in 2002, with estimated capacity utilization declining from 75% to 55% in
the second quarter of 2002 compared to the second quarter of 2001 (year-to-date
decline from 70% to 60%).
Under TIMET's previously-reported amended long-term agreement with Boeing,
Boeing has advanced TIMET $28.5 million for 2002, and Boeing will advance TIMET
$28.5 million annually from 2003 through 2007. The agreement is structured as a
take-or-pay agreement such that Boeing, beginning in calendar year 2002, will
forfeit a proportionate part of the $28.5 million annual advance, or effectively
$3.80 per pound, in the event that its orders for delivery for such calendar
year are less than 7.5 million pounds. TIMET can only be required, however, to
deliver up to 3 million pounds per quarter. Based on TIMET's actual deliveries
to Boeing of approximately 900,000 pounds during the first six months of 2002
and TIMET's contractual maximum obligation of delivering 6 million pounds during
the remainder of 2002, TIMET recognized $2.2 million of income in the second
quarter of 2002 related to the take-or-pay provisions for the 600,000 pounds of
material that TIMET is no longer obligated to provide to Boeing under the
agreement. TIMET currently expects that Boeing will purchase about 1.5 million
pounds of product under its agreement during all of 2002. At that level, TIMET
currently expects to recognize about $21 million of additional income during the
remainder of 2002 related to the take-or-pay provisions of the contract. These
earnings related to the take-or-pay provisions distort TIMET's operating income
percentages as there is no corresponding amount reported in TIMET's sales.
TIMET's results in the first six months of 2002 also includes a $27.5
million first quarter provision for an other than temporary impairment of
TIMET's investment in the convertible preferred securities of Special Metals
Corporation ("SMC"). In addition, TIMET's effective income tax rate in the 2002
periods varies from the 35% U.S. federal statutory income tax rate because TIMET
has concluded it is not currently appropriate to recognize an income tax benefit
related to its U.S. losses under the "more-likely-than-not" recognition
criteria.
As previously reported, in March 2001, TIMET was notified by one of its
customers that a product manufactured from standard grade titanium produced by
TIMET contained what has been confirmed to be a tungsten inclusion. TIMET
accrued $3.3 million during 2001, and an additional $200,000 during the second
quarter of 2002, for its best estimate of the most likely amount of loss it will
incur. However, it does not represent the maximum possible loss, which TIMET is
not presently able to estimate, and the amount accrued may be periodically
revised in the future as more facts become known. As of June 30, 2002, TIMET has
received claims aggregating approximately $5 million, and TIMET had settled
claims totaling $500,000. Pending claims are being investigated and negotiated,
and TIMET believes certain of the claims are without merit and can be settled
for less than the amount of the claim. There is no assurance that all potential
claims have yet been submitted to TIMET. TIMET has filed suit seeking full
recovery from its silicon supplier for any liability TIMET might incur, although
no assurances can be give that TIMET will ultimately be able to recover all or
any portion of such amounts. TIMET has not recorded any recoveries related to
this matter as of June 30, 2002.
The economic slowdown that began in 2001 in the economies of the U.S. and
other regions of the world combined with the events of September 11, 2001 have
resulted in the major commercial airframe and jet engine manufacturers
substantially reducing their forecast of engine and aircraft deliveries over the
next few years and their production levels in 2002. TIMET expects that aggregate
industry mill product shipments will decrease in 2002 by approximately 18% to
about 45,000 metric tons and that demand for mill products for the commercial
aerospace sector could decline by up to 40% in 2002, primarily due to a
combination of reduced aircraft production rates and excess inventory
accumulated throughout the aerospace supply chain. Excess inventory accumulation
typically leads to order demand for titanium products falling below actual
consumption. TIMET believes that demand for titanium is likely to recover more
gradually than it previously anticipated, based primarily on recent projections
of large commercial aircraft deliveries by The Airline Monitor. Based on The
Airline Monitor's current forecast and TIMET's projected changes in supply chain
inventory levels, TIMET anticipates a cyclical trough in titanium demand may
occur in 2003 with a gradual recovery beginning thereafter. Adverse world
events, including terrorist activities and conflicts in the Middle East, the
financial health of airlines and economic growth in the U.S. and other regions
of the world, could significantly and adversely affect the timing of the
commercial aerospace recovery.
Although the current business environment makes it particularly difficult
to predict TIMET's future performance, TIMET expects sales revenue for the third
quarter of 2002 to range between $75 million and $85 million. Mill product sales
volumes are expected to be about 2,000 metric tons with melted product shipments
of about 600 metric tons. Interest expense should be about $1 million while
minority interest on TIMET's Convertible Preferred Securities should approximate
$3.3 million. With these estimates, TIMET expects an operating loss in the third
quarter of 2002 before special items of between $4 million and $7 million, and a
net loss before special items of between $8 million and $12 million.
TIMET expects its sales for all of 2002 will decline to approximately $375
million, reflecting the combined effects of decreases in sales volume, softening
of market selling prices and changes in customer and product mix. Mill product
sales volumes are expected to decline approximately 25% relative to 2001 to
about 9,100 metric tons, and melted product sales volumes are expected to
decline by 40% to about 2,600 metric tons. The sales volumes decline in 2002 is
principally driven by an anticipated reduction in TIMET's commercial aerospace
sales volumes of about 35% compared to 2001, partly offset by sales volume
growth to other markets. Selling prices on new orders for titanium products are
expected to soften throughout 2002. However, about one-half of TIMET's
commercial aerospace volumes are under long-term agreements that provide TIMET
with price stability on that portion of its business. Overall, TIMET currently
expects to report an operating loss before special items for all of 2002 of
between $25 million and $35 million in 2002, and a net loss of between $40
million and $50 million.
In addition to its agreement with Boeing, TIMET has long-term supply
agreements with certain other major aerospace customers, including, but not
limited to, Rolls-Royce plc, United Technologies Corporation (Pratt & Whitney
and related companies) and Wyman-Gordon Company (a unit of Precision Castparts
Corporation). These agreements initially became effective in 1998 and 1999 and
expire in 2007 through 2008, subject to certain conditions. The agreements
generally provide for (i) minimum market shares of the customers' titanium
requirements or firm annual volume commitments and (ii) fixed or
formula-determined prices generally for at least the first five years.
Generally, the agreements require TIMET's service and product performance to
meet specified criteria, and they also contain a number of other terms and
conditions customary in transactions of these types. In certain events of
nonperformance by TIMET, the agreements may be terminated early. Additionally,
under a group of related agreements (which group represents approximately 15% of
TIMET's 2001 sales revenue), which currently have fixed prices that convert to
formula-derived prices in 2004, the customer may terminate the agreement as of
the end of 2003 if the effect of the initiation of formula-derived pricing would
cause such customer "material harm." If any of such agreements were to be
terminated by the customer on this basis, it is possible that some portion of
the business represented by that agreement would continue on a non-agreement
basis. However, the termination of one or more of such agreements by the
customer in such circumstances could result in a material and adverse effect on
TIMET's business, results of operations, consolidated financial condition or
liquidity.
As a consequence of uncertainties surrounding both the titanium and
commercial aerospace industries and broader economic conditions, TIMET expects
to take actions to reduce its cost and working capital over the remainder of
2002. TIMET plans to reduce the operating rate of its sponge production facility
to about 70% of capacity in the last half of the year, and it recently targeted
an additional reduction in its company-wide employment levels of 10% to 15% by
year-end. At June 30, 2002, TIMET employed approximately 2,250 individuals.
These actions could result in restructuring or other charges in 2002. TIMET also
believes assessments of the recoverability of its long-lived assets, that may
also result in charges for asset impairments, could occur in the balance of
2002. TIMET will consider all relevant factors in determining whether an
impairment exists. The timing and effect of these actions is somewhat uncertain,
and accordingly the effect of such items has not been included in TIMET's
forecasts outlined above. Such potential future charges, if any, could be
material to TIMET.
General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend income decreased in the second quarter and first six months of 2002
compared to the same periods in 2001 due to a lower average level of invested
funds and lower average yields. Aggregate general corporate interest and
dividend income is currently expected to continue to be lower during the
remainder of 2002 compared to the same periods in 2001 due primarily to a lower
amount of funds available for investment and lower average interest rates.
Legal settlement gains. The legal settlement gains in the first six months
of 2002 relate to NL's first quarter settlement with certain former insurance
carriers. See Note 12 to the Consolidated Financial Statements. These
settlements, similar to certain previously-reported NL legal settlements
recognized during 2000 and 2001, resolved court proceedings in which NL had
sought reimbursement from the carriers for legal defense costs and indemnity
coverage for certain of its environmental remediation expenditures. No further
material settlements relating to litigation concerning environmental remediation
coverages are expected.
Securities transactions. Securities transactions gains in the first six
months of 2002 relate to the first quarter disposal of certain shares of
Halliburton Company common stock held by the Company that were classified as
trading securities. See Notes 3 and 12 to the Consolidated Financial Statements.
The remaining Halliburton shares held by the Company are held in escrow for the
benefit of the holders of the Company's LYONs debt obligation, which are
exchangeable at any time, at the option of the holder, for such Halliburton
shares. Any exchanges of the LYONs in 2002 or thereafter would result in a
securities transaction gain for financial reporting purposes.
Other general corporate income items. The $6.3 million foreign currency
transaction gain in the second quarter of 2002 relates to the extinguishment of
certain intercompany indebtedness of NL. The gain on disposal of fixed assets
relates to the sale of certain real estate held by Tremont. See Note 12 to the
Consolidated Financial Statements.
General corporate expenses. Net general corporate expenses in the second
quarter of 2002 were slightly lower than the second quarter of 2001, as higher
environmental and legal expenses of NL were more than offset by the effect of
lower compensation-related expenses of Tremont. Net general corporate expenses
in the first six months of 2002 were higher than the same period in 2001, as
higher environmental and legal expenses of NL more than offset the lower
compensation-related expenses of Tremont. NL's $20 million of proceeds from the
disposal of its specialty chemicals business unit related to its agreement not
to compete in the rheological products business is being recognized as a
component of general corporate income (expense) ratably over the five-year
non-compete period ending in the first quarter of 2003 ($2 million recognized in
the first six months of 2001 and 2002). See Note 12 to the Consolidated
Financial Statements. Net general corporate expenses in the remainder of 2002
are currently expected to continue to be somewhat higher compared to the same
periods in 2001.
Interest expense. Interest expense in the second quarter of 2002 includes
$2.0 million related to the loss on the early extinguishment of NL's Senior
Secured Notes. See Note 9 to the Consolidated Financial Statements. Excluding
this amount, interest expense declined in the second quarter and first six
months of 2002 compared to the same periods in 2001 due primarily to lower
average levels of outstanding indebtedness as well as lower average U.S.
variable interest rates. Assuming interest rates do not increase significantly
from year-end 2001 levels, interest expense in the remainder of 2002 is
currently expected to continue to be somewhat lower compared to the same periods
in 2001 due to lower anticipated interest rates on variable-rate borrowings in
the U.S. and a lower average level of outstanding debt.
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rates are explained in Note 11 to the Consolidated Financial
Statements. Income tax rates vary by jurisdiction (country and/or state), and
relative changes in the geographic mix of the Company's pre-tax earnings can
result in fluctuations in the effective income tax rate.
During the first six months of 2002, NL reduced its deferred income tax
asset valuation allowance by approximately $3.0 million, primarily as a result
of utilization of certain income tax attributes for which the benefit had not
previously been recognized. In this regard, no income tax was recognized on NL's
$6.3 million general corporate foreign currency transaction gain, as NL offset
such income tax by utilizing certain income tax attributes, the benefit of which
had not previously been recognized. During the first six months of 2002, Tremont
increased its deferred income tax asset valuation allowance (at the Valhi
consolidated level) by a net $1.5 million primarily because Tremont concluded
certain tax attributes do not currently meet the "more-likely-than-not"
recognition criteria.
As discussed in Note 14 to the Consolidated Financial Statements, effective
January 1, 2002, the Company no longer recognizes periodic amortization of
goodwill. Under GAAP, generally there is no income tax benefit recognized for
financial reporting purposes attributable to goodwill amortization. Accordingly,
ceasing to periodically amortize goodwill beginning in 2002 contributed to the
reduction in the Company's overall effective income tax rate in 2002 as compared
to 2001.
Minority interest. See Note 13 to the Consolidated Financial Statements.
Minority interest in NL's subsidiaries relates principally to NL's
majority-owned environmental management subsidiary, NL Environmental Management
Services, Inc. ("EMS"). EMS was established in 1998, at which time EMS
contractually assumed certain of NL's environmental liabilities. EMS' earnings
are based, in part, upon its ability to favorably resolve these liabilities on
an aggregate basis. The shareholders of EMS, other than NL, actively manage the
environmental liabilities and share in 39% of EMS' cumulative earnings. NL
continues to consolidate EMS and provides accruals for the reasonably estimable
costs for the settlement of EMS' environmental liabilities, as discussed below.
As previously reported, Waste Control Specialists was formed by Valhi and
another entity in 1995. Waste Control Specialists assumed certain liabilities of
the other owner and such liabilities exceeded the carrying value of the assets
contributed by the other owner. Since its inception in 1995, Waste Control
Specialists has reported aggregate net losses. Consequently, all of Waste
Control Specialists aggregate, inception-to-date net losses have accrued to the
Company for financial reporting purposes, and all of Waste Control Specialists
future net income or net losses will also accrue to the Company until Waste
Control Specialists reports positive equity attributable to the other owner.
Accordingly, no minority interest in Waste Control Specialists' net assets or
net earnings (losses) is reported during the first six months of 2001 and 2002.
In July 2002, Valhi proposed a merger of Valhi and Tremont pursuant to
which stockholders of Tremont (including NL, to the extent of NL's ownership
interest in the Tremont shares held by Tremont Group), other than Valhi, would
receive between 2 and 2.5 shares of Valhi common stock for each Tremont share
held. See Note 2 to the Consolidated Financial Statements. There can be no
assurance that any such merger will be completed or completed on the proposed
terms. If the merger is completed, the Company would no longer report minority
interest in Tremont's net assets or net earnings (losses).
Accounting principles not yet adopted. See Note 15 to the Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Consolidated cash flows
Operating activities. Trends in cash flows from operating annual activities
(excluding the impact of significant asset dispositions and relative changes in
assets and liabilities) are generally similar to trends in the Company's
earnings. Changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments.
Certain items included in the determination of net income are non-cash, and
therefore such items have no impact on cash flows from operating activities.
Non-cash items included in the determination of net income include depreciation,
depletion and amortization expense, non-cash interest expense, asset impairment
charges and unrealized securities transactions gains and losses. Non-cash
interest expense relates principally to Valhi and NL and consists of
amortization of original issue discount on certain indebtedness and amortization
of deferred financing costs. In addition, substantially all of the proceeds
resulting from NL's legal settlements in 2001 are shown as restricted cash, and
therefore such settlements had no impact on cash flows from operating
activities.
Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, equity in earnings of affiliates will generally differ from
the amount of distributions received from such affiliates, and equity in losses
of affiliates does not necessarily result in a current cash outlay paid to such
affiliates. The amount of periodic defined benefit pension plan expense and
periodic OPEB expense depends upon a number of factors, including certain
actuarial assumptions, and changes in such actuarial assumptions will result in
a change in the reported expense. In addition, the amount of such periodic
expense generally differs from the outflows of cash required to be currently
paid for such benefits.
Certain other items included in the determination of net income have no
impact on cash flows from operating activities, but such items do impact cash
flows from investing activities (although their impact on such cash flows
differs from their impact on net income). For example, realized gains and losses
from the disposal of available-for-sale marketable securities and long-lived
assets are included in the determination of net income, although the proceeds
from any such disposal are shown as part of cash flows from investing
activities.
Investing and financing activities. Approximately 60% of the Company's
consolidated capital expenditures in the first six months of 2002 relates to NL,
38% relate to CompX and substantially all of the remainder relates to Waste
Control Specialists. Approximately $2.2 million of NL's capital expenditures
relates to the ongoing reconstruction of NL's Leverkusen, Germany TiO2
production facility that was damaged by fire during 2001. NL expects such
reconstruction will be completed by the end of 2002. During the first six months
of 2002, NL purchased $3.3 million of its common stock in market transactions,
and NL purchased the EWI insurance brokerage services operations for $9 million.
See Note 2 to the Consolidated Financial Statements.
During the first six months of 2002, (i) Valhi repaid a net $2.1 million of
its short-term demand loans from Contran, (ii) CompX repaid a net $19 million of
its revolving bank credit facility, (iii) NL repaid all of its existing
short-term notes payable denominated in euros and Nowegian kroner ($53 million
when repaid) using primarily proceeds from borrowing ($39 million) under KII's
new revolving bank credit facility and (iv) NL redeemed $194 million principal
amount of its Senior Secured Notes, primarily using the proceeds from the new
euro 285 million ($280 million when issued) borrowing of KII. See Note 9 to the
Consolidated Financial Statements.
At June 30, 2002, unused credit available under existing credit facilities
approximated $148.5 million, which was comprised of $70 million available to
CompX under its revolving credit facility, $42 million available to NL
(primarily under KII's new revolving credit facility) and $36.5 million
available to Valhi under its revolving bank credit facility. Provisions
contained in certain of the Company's credit agreements could result in the
acceleration of the applicable indebtedness prior to its stated maturity for
reasons other than payment defaults or defaults from failing to comply with
typical financial covenants. For example, certain credit agreements allow the
lender to accelerate the maturity of the indebtedness upon a change of control
(as defined) of the borrower. The terms of Valhi's revolving bank credit
facility could require Valhi to either reduce outstanding borrowings or pledge
additional collateral in the event the fair value of the existing pledged
collateral falls below specified levels. In addition, certain credit agreements
could result in the acceleration of all or a portion of the indebtedness
following a sale of assets outside the ordinary course of business. Other than
operating leases, neither Valhi nor any of its subsidiaries or affiliates are
parties to any off-balance sheet financing arrangements.
Chemicals - NL Industries
At June 30, 2002, NL had cash, cash equivalents and marketable debt and
other securities of $251 million, including restricted balances of $75 million,
and NL had $42 million available for borrowing (primarily under KII's new
revolving credit facility).
NL's board of directors has authorized NL to purchase up to 4.5 million
shares of its common stock in open market or privately-negotiated transactions
over an unspecified period of time. Through June 30, 2002, NL had purchased 3.5
million of its shares pursuant to such authorizations for an aggregate of $57
million, including approximately 228,000 shares purchased during the first six
months of 2002 for an aggregate of $3.3 million.
In March 2002, NL redeemed $25 million principal amount of its Senior
Secured Notes, and in June 2002 NL redeemed the remaining $169 million principal
amount of such Senior Secured Notes. See Note 9 to the Consolidated Financial
Statements.
Certain of NL's U.S. and non-U.S. tax returns are being examined and tax
authorities have or may propose tax deficiencies, including non-income related
items and interest. NL's 1998 U.S. federal income tax return is currently being
examined by the U.S. tax authorities, and NL has granted an extension of the
statute of limitations for assessments until September 30, 2003. While EMS' 1998
U.S. federal income tax return is not currently being examined, EMS, at the
request of the U.S. tax authorities, has also granted an extension of the
statute of limitations for assessment until September 30, 2003 for such return.
Based on the course of the examination to date, NL anticipates that the U.S. tax
authorities may propose a substantial tax deficiency. NL has received
preliminary tax assessments for the years 1991 to 1997 from the Belgian tax
authorities proposing tax deficiencies, including related interest, of
approximately euro 10.4 million ($10 million at June 30, 2002). NL has filed
protests to the assessments for the years 1991 to 1997. NL is in discussions
with the Belgian tax authorities and believes that a significant portion of the
assessments are without merit. No assurance can be given that these tax matters
will be resolved in NL's favor in view of the inherent uncertainties involved in
court proceedings. NL believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on its consolidated
financial position, results of operations or liquidity.
NL has been named as a defendant, potentially responsible party, or both,
in a number of legal proceedings associated with environmental matters,
including waste disposal sites, mining locations and facilities currently or
previously owned, operated or used by NL, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. On a quarterly basis,
NL evaluates the potential range of its liability at sites where it has been
named as a PRP or defendant, including sites for which EMS has contractually
assumed NL's obligation. NL believes it has provided adequate accruals ($102
million at June 30, 2002) for reasonably estimable costs of such matters, but
NL's ultimate liability may be affected by a number of factors, including
changes in remedial alternatives and costs and the allocation of such costs
among PRPs. It is not possible to estimate the range of costs for certain sites.
The upper end of the range of reasonably possible costs to NL for sites for
which it is possible to estimate costs is approximately $150 million. NL's
estimates of such liabilities have not been discounted to present value, and
other than certain previously-reported settlements with respect to certain of
NL's former insurance carriers, NL has not recognized any insurance recoveries.
No assurance can be given that actual costs will not exceed accrued amounts or
the upper end of the range for sites for which estimates have been made, and no
assurance can be given that costs will not be incurred with respect to sites as
to which no estimate presently can be made. NL is also a defendant in a number
of legal proceedings seeking damages for personal injury and property damage
allegedly arising from the sale of lead pigments and lead-based paints,
including cases in which plaintiffs purport to represent a class and cases
brought on behalf of government entities. NL has not accrued any amounts for the
pending lead pigment and lead-based paint litigation. There is no assurance that
NL will not incur future liability in respect of this pending litigation in view
of the inherent uncertainties involved in court and jury rulings in pending and
possible future cases. However, based on, among other things, the results of
such litigation to date, NL believes that the pending lead pigment and
lead-based paint litigation is without merit. Liability that may result, if any,
cannot reasonably be estimated. In addition, various legislation and
administrative regulations have, from time to time, been enacted or proposed
that seek to impose various obligations on present and former manufacturers of
lead pigment and lead-based paint with respect to asserted health concerns
associated with the use of such products and to effectively overturn the
precedent set by court decisions in which NL and other pigment manufacturers
have been successful. Examples of such proposed legislation include bills which
would permit civil liability for damages on the basis of market share, rather
than requiring plaintiffs to prove that the defendant's product caused the
alleged damage, and bills which would revive actions currently barred by
statutes of limitations. NL currently believes the disposition of all claims and
disputes, individually or in the aggregate, should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity. There can be no assurance that additional matters of these types will
not arise in the future.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its debt service and capital expenditure requirements and estimated
future operating cash flows. As a result of this process, NL has in the past and
may in the future seek to reduce, refinance, repurchase or restructure
indebtedness, raise additional capital, repurchase shares of its common stock,
modify its dividend policy, restructure ownership interests, sell interests in
subsidiaries or other assets, or take a combination of such steps or other steps
to manage its liquidity and capital resources. In the normal course of its
business, NL may review opportunities for the acquisition, divestiture, joint
venture or other business combinations in the chemicals industry or other
industries, as well as the acquisition of interests in, and loans to, related
entities. In the event of any such transaction, NL may consider using its
available cash, issuing its equity securities or refinancing or increasing its
indebtedness to the extent permitted by the agreements governing NL's existing
debt.
Component products - CompX International
CompX expects to renew its existing revolving bank credit facility prior to
its expiration in February 2003. There can be no assurance however, that such
renewal will occur, or that CompX will be able to obtain comparable terms under
the new credit facility.
CompX periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, capital resources and estimated
future operating cash flows. As a result of this process, CompX has in the past
and may in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities, modify its dividend policy,
repurchase shares of its common stock or take a combination of such steps or
other steps to manage its liquidity and capital resources. In the normal course
of business, CompX may review opportunities for acquisitions, divestitures,
joint ventures or other business combinations in the component products
industry. In the event of any such transaction, CompX may consider using
available cash, issuing additional equity securities or increasing the
indebtedness of CompX or its subsidiaries.
Waste management - Waste Control Specialists
At June 30, 2002, Waste Control Specialists' indebtedness, as amended,
consists principally of (i) a $4.6 million term loan due in November 2004 and
(ii) $15.6 million of other borrowings under a $16.5 million revolving credit
facility that also matures in 2004. All of such indebtedness is owed to a
wholly-owned subsidiary of Valhi, and is therefore eliminated in the Company's
consolidated financial statements. Waste Control Specialists may borrow
additional amounts during the remainder of 2002 under its $16.5 million
revolving credit facility.
TIMET
At June 30, 2002, TIMET had net debt of approximately $13.0 million ($20.4
million of debt and $7.4 million of cash and equivalents). At June 30, 2002,
TIMET had approximately $139 million available for borrowing under its worldwide
credit facilities. TIMET's U.S. credit facility, a $125 million asset-based
revolving credit agreement, expires in February 2003. TIMET is currently
negotiating with its lender to extend the maturity date of this agreement on
substantially similar terms, although there can be no assurance that TIMET will
be able to renew the facility on such terms. The U.S. credit agreement allows
the lender to modify the borrowing base formulas at its discretion, subject to
certain conditions. In this regard, during the second quarter of 2002, the
lenders reassessed its borrowing-base formulas and reduced the rate at which
TIMET may borrow against its inventory and equipment. This change reduced
TIMET's U.S. borrowing availability by about $7 million. In the event the lender
exercises such discretion in the future, such event could have a material
adverse impact on TIMET's liquidity.
On March 27, 2002, SMC and its U.S. subsidiaries filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result,
TIMET, with the assistance of an external valuation specialist, undertook a
further assessment of its investment in SMC and recorded an additional $27.5
million impairment charge to general corporate expense for an other than
temporary decline in the fair vale of its investment in SMC, reducing TIMET's
carrying amount of its investment in SMC to zero.
TIMET periodically evaluates its liquidity requirements, capital needs and
availability of resources in view of, among other things, its alternative uses
of capital, its debt service requirements, the cost of debt and equity capital,
and estimated future operating cash flows. As a result of this process, TIMET
has in the past and may in the future seek to raise additional capital, modify
its common and preferred dividend policies, restructure ownership interests,
incur, refinance or restructure indebtedness, repurchase shares of capital
stock, sell assets, or take a combination of such steps or other steps to
increase or manage its liquidity and capital resources. In the normal course of
business, TIMET investigates, evaluates, discusses and engages in acquisition,
joint venture, strategic relationship and other business combination
opportunities in the titanium, specialty metal and other industries. In the
event of any future acquisition or joint venture opportunities, TIMET may
consider using then-available liquidity, issuing equity securities or incurring
additional indebtedness.
Tremont Corporation
Tremont is primarily a holding company which, at June 30, 2002, owned
approximately 39% of TIMET and 21% of NL. At June 30, 2002, the market value of
the 12.3 million shares of TIMET and the 10.2 million shares of NL held by
Tremont was approximately $43 million and $156 million, respectively.
As previously reported, in July 2000 Tremont entered into a voluntary
settlement agreement with the Arkansas Department of Environmental Quality and
certain other potentially responsible parties ("PRPs") pursuant to which Tremont
and the other PRPs will undertake certain investigatory and remediation
activities at a former mining site located in Hot Spring County, Arkansas.
Tremont currently believes that it has accrued adequate amounts ($4.6 million at
June 30, 2002) to cover its share of probable and reasonably estimable
environmental obligations. Tremont expects to spend $1.8 million in the second
half of 2002 for remediation efforts related to this site.
Tremont has received a demand from Halliburton to assume the defense of,
and indemnify Halliburton with respect to, the alleged liability of Atlas
Bradford Corporation as one of several PRPs in connection with a Texas State
Superfund Site known as the Force Road Oil and Vacuum Truck Company Site located
in Arcola, Texas. Atlas Bradford allegedly disposed of wastes from its Bryan,
Texas petroleum services operations at the Force Road Site. As part of a 1990
restructuring resulting in the separation of Tremont from Baroid Corporation, a
wholly-owned subsidiary of Tremont received title to the Bryan property.
Halliburton is the successor to Baroid. Tremont has declined to assume the
defense of the Force Road Site matter and has rejected Halliburton's indemnity
claim with respect thereto. Tremont believes that any liability in the Force
Road Site matter represents an obligation retained by Baroid in connection with
its historical petroleum services business. At present, Tremont has no
information that would enable it to determine whether or not it might eventually
have any liability for the Force Road Site, or what the potential magnitude, if
any, of such liability might be. Tremont intends to vigorously defend itself
against any and all allegations of such liability in this matter. Tremont sold
the Bryan property in 1994. Tremont's Chairman and Chief Executive Officer is
also a member of the board of directors of Halliburton and intends to recuse
himself from any involvement in this matter.
Tremont records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are not discounted to
their present value. It is not possible to estimate the range of costs for
certain sites. The imposition of more stringent standards or requirements under
environmental laws or regulations, the results of future testing and analysis
undertaken by Tremont at its non-operating facilities, or a determination that
Tremont is potentially responsible for the release of hazardous substances at
other sites, could result in expenditures in excess of amounts currently
estimated to be required for such matters. No assurance can be given that actual
costs will not exceed accrued amounts or that costs will not be incurred with
respect to sites as to which no problem is currently known or where no estimate
can presently be made. Further, there can be no assurance that additional
environmental matters will not arise in the future. Environmental exposures are
difficult to assess and estimate for numerous reasons including the complexity
and differing interpretations of governmental regulations; the number of PRPs,
their financial capabilities, and the allocation of costs among PRPs; the
multiplicity of possible solutions; and the years of investigatory, remedial and
monitoring activity required. It is possible that future developments could
adversely affect Tremont's business, results of operations, financial condition
or liquidity.
In February 2001, Tremont entered into a $13.4 million reducing revolving
credit facility with EMS, NL's majority-owned environmental management
subsidiary. Such intercompany loan between EMS and Tremont ($12.2 million
outstanding at June 30, 2002), collateralized by 10.2 million shares of NL
common stock owned by Tremont, is eliminated in Valhi's consolidated financial
statements.
Tremont's loan from EMS and its dividends from NL are currently Tremont's
primary sources of cash at the Tremont parent company level. Tremont's principal
cash uses at its parent company level are dividends, administrative expenses,
interest on the loan from EMS and payments related to its previously-reported
environmental remediation efforts. The loan from EMS matures March 31, 2003.
Tremont believes that its cash outflows at the Tremont parent company level
during the balance of 2002 will increase relative to the first half of 2002, and
that it will be required to increase its parent company cash resources prior to
December 31, 2002 in order to meet its near term obligations, even after Tremont
parent company receives a $1 million dividend from its wholly-owned insurance
subsidiary later in the year. To increase its liquidity, Tremont has requested
as amendment to the terms of its loan from EMS to, among other things, increase
the amount of borrowing availability and extend the maturity date. However,
Tremont understands that there may be certain regulatory issues that will be
required to be satisfactorily addressed in order for the amendment to be
successfully completed, and such amendment would require the approval of the
independent directors of both Tremont and NL. Tremont has also discussed the
possibility of a loan from Contran with officers of Contran. Based on such
discussions, Tremont believes such a loan from Contran could, if necessary, be
achieved on mutually agreeable terms. Tremont has other alternatives available
to either conserve or increase its liquidity including, among other things,
borrowings collateralized by Tremont's common stock of TIMET, the reduction or
suspension of Tremont's quarterly dividend payments and the sale, in whole or in
part, of assets, including Tremont's investments in TIMET and NL. There is no
assurance that any of these options or alternatives can be successfully
completed.
In April 2002, Tremont reached an agreement with the U.S. Internal Revenue
Service ("IRS") pursuant to which the IRS's previously-reported $8.3 million
assessment related to Tremont's 1998 federal income tax return was settled. The
settlement resulted in no additional cash income tax payment by Tremont but did
result in a reduction of the amount of Tremont's U.S. net operating loss
carryforwards that arose in periods prior to the time when Tremont became a
member of the same U.S. federal income tax group of which Valhi is a member.
Valhi has proposed a merger pursuant to which Tremont would become a
wholly-owned subsidiary of Valhi. See Note 2 to the Consolidated Financial
Statements.
Tremont periodically evaluates its liquidity requirements, capital needs
and availability of resources in view of, among other things, its alternative
uses of capital, its debt service requirements, the cost of debt and equity
capital and estimated future operating cash flows. As a result of this process,
Tremont has in the past and may in the future seek to obtain financing from
related parties or third parties, raise additional capital, modify its dividend
policy, restructure ownership interests of subsidiaries and affiliates, incur,
refinance or restructure indebtedness, purchase shares of its common stock,
consider the sale of interests in subsidiaries, affiliates, marketable
securities or other assets, or take a combination of such steps or other steps
to increase or manage liquidity and capital resources. In the normal course of
business, Tremont may investigate, evaluate, discuss and engage in acquisition,
joint venture and other business combination opportunities. In the event of any
future acquisition or joint venture opportunities, Tremont may consider using
then-available cash, issuing equity securities or incurring indebtedness.
General corporate - Valhi
Valhi's operations are conducted primarily through its subsidiaries (NL,
CompX, Tremont and Waste Control Specialists). Accordingly, Valhi's long-term
ability to meet its parent company level corporate obligations is dependent in
large measure on the receipt of dividends or other distributions from its
subsidiaries. NL increased its quarterly dividend from $.035 per share to $.15
per share in the first quarter of 2000, and NL further increased its quarterly
dividend to $.20 per share in the fourth quarter of 2000. At the current $.20
per share quarterly rate, and based on the 30.1 million NL shares held by Valhi
at June 30, 2002, Valhi would receive aggregate annual dividends from NL of
approximately $24.1 million. Tremont Group, Inc. owns 80% of Tremont
Corporation. Tremont Group is owned 80% by Valhi and 20% by NL. Tremont's
quarterly dividend is currently $.07 per share. At that rate, and based upon the
5.1 million Tremont shares owned by Tremont Group at June 30, 2002, Tremont
Group would receive aggregate annual dividends from Tremont of approximately
$1.4 million. Tremont Group intends to pass-through the dividends it receives
from Tremont to its shareholders (Valhi and NL). Based on Valhi's 80% ownership
of Tremont Group, Valhi would receive $1.2 million in annual dividends from
Tremont Group as a pass-through of Tremont Group's dividends from Tremont.
CompX's quarterly dividend is currently $.125 per share. At this current rate
and based on the 10.4 million CompX shares held by Valhi and its wholly-owned
subsidiary Valcor at June 30, 2002, Valhi/Valcor would receive annual dividends
from CompX of $5.2 million. Various credit agreements to which certain
subsidiaries or affiliates are parties contain customary limitations on the
payment of dividends, typically a percentage of net income or cash flow;
however, such restrictions in the past have not significantly impacted Valhi's
ability to service its parent company level obligations. Valhi has not
guaranteed any indebtedness of its subsidiaries or affiliates. To the extent
that one or more of Valhi's subsidiaries were to become unable to maintain its
current level of dividends, either due to restrictions contained in the
applicable subsidiary's credit agreements or otherwise, Valhi parent company's
liquidity could become adversely impacted. In such an event, Valhi might
consider reducing or eliminating its dividend or selling interests in
subsidiaries or other assets.
At June 30, 2002, Valhi had $6.5 million of parent level cash and cash
equivalents, had $35 million of outstanding borrowings under its revolving bank
credit agreement and had $22.5 million of short-term demand loans payable to
Contran. In addition, Valhi had $36.5 million of borrowing availability under
its bank credit facility. During the first quarter of 2002, Valhi sold in market
transactions 515,000 shares of Halliburton common stock that had been classified
as trading securities for an aggregate of $8.7 million, and used a majority of
the proceeds to reduce its outstanding borrowings from Contran. In January and
February 2002, the size of Valhi's bank credit facility was increased by an
aggregate of $17.5 million to $72.5 million.
Valhi's LYONs do not require current cash debt service. Exchanges of LYONs
for Halliburton stock result in the Company reporting income related to the
disposition of the Halliburton stock for both financial reporting and income tax
purposes, although no cash proceeds are generated by such exchanges. Valhi's
potential cash income tax liability that would have been triggered at June 30,
2002, assuming exchanges of all of the outstanding LYONs for Halliburton stock
at such date, was approximately $9 million.
At June 30, 2002, the LYONs had an accreted value equivalent to
approximately $42.90 per Halliburton share, and the market price of the
Halliburton common stock was $15.94 per share. The LYONs, which mature in
October 2007, are redeemable at the option of the LYON holder in October 2002
for an amount equal to $636.27 per $1,000 principal amount at maturity, or an
aggregate of $27.4 million. Such October 2002 redemption price is equivalent to
about $44 per Halliburton share. If the market value of Halliburton common stock
equals or exceeds $44 per share in October 2002, the Company does not expect a
significant amount of LYONs would be tendered to the Company for redemption at
that date. To the extent the Company was required to redeem the LYONs in October
2002 for cash and the market price of Halliburton was less than $44 per share,
the Company would likely sell the Halliburton shares underlying the LYONs
tendered in order to raise a portion of the cash redemption price due to the
LYON holder, and the Company would be required to use other resources to makeup
the shortfall due to the LYONs holder.
During calendar 2001, holders representing $92.2 million principal amount
at maturity exchanged their LYONs debt obligation for shares of Halliburton
common stock. Also during calendar 2001, $50.4 million principal amount at
maturity of LYONs were redeemed by the Company for cash at various redemption
prices equal to the accreted value of the LYONs on the respective redemption
dates. Valhi may consider additional partial redemptions or a full redemption of
the remaining notes based on future market conditions and other considerations.
There can be no assurance, however, that Valhi will pursue an additional partial
redemption or a full redemption of the notes.
The terms of The Amalgamated Sugar Company LLC provide for annual "base
level" of cash dividend distributions (sometimes referred to distributable cash)
by the LLC of $26.7 million, from which the Company is entitled to a 95%
preferential share. Distributions from the LLC are dependent, in part, upon the
operations of the LLC. The Company records dividend distributions from the LLC
as income upon receipt, which is the same month in which they are declared by
the LLC. To the extent the LLC's distributable cash is below this base level in
any given year, the Company is entitled to an additional 95% preferential share
of any future annual LLC distributable cash in excess of the base level until
such shortfall is recovered. Based on the LLC's current projections for 2002,
Valhi currently expects that distributions received from the LLC in 2002 will
approximate its debt service requirements under its $250 million loans from
Snake River Sugar Company.
Certain covenants contained in Snake River's third-party senior debt allow
Snake River to pay periodic installments of debt service payments (principal and
interest) under Valhi's $80 million loan to Snake River prior to its maturity in
2010, and such loan is subordinated to Snake River's third-party senior debt. At
June 30, 2002, the accrued and unpaid interest on the $80 million loan to Snake
River aggregated $25.3 million. Such accrued and unpaid interest is classified
as a noncurrent asset at June 30, 2002. The Company currently believes it will
ultimately realize both the $80 million principal amount and the accrued and
unpaid interest, whether through cash generated from the future operations of
Snake River and the LLC or otherwise (including any liquidation of Snake
River/LLC). Following the repayment of Snake River's third-party senior debt in
April 2009, Valhi believes it will receive significant debt service payments on
its loan to Snake River as the cash flows that Snake River previously would have
been using to fund debt service on its third-party senior debt ($14.5 million in
2002) would then become available, and would be required, to be used to fund
debt service payments on its loan from Valhi. Prior to the repayment of the
third-party senior debt, Snake River might also make debt service payments to
Valhi, if permitted by the terms of the senior debt.
The Company may, at its option, require the LLC to redeem the Company's
interest in the LLC beginning in 2010, and the LLC has the right to redeem the
Company's interest in the LLC beginning in 2027. The redemption price is
generally $250 million plus the amount of certain undistributed income allocable
to the Company. In the event the Company requires the LLC to redeem the
Company's interest in the LLC, Snake River has the right to accelerate the
maturity of and call Valhi's $250 million loans from Snake River. Redemption of
the Company's interest in the LLC would result in the Company reporting income
related to the disposition of its LLC interest for both financial reporting and
income tax purposes. However, because of Snake River's ability to call its $250
million loans to Valhi upon redemption of the Company's interest in the LLC, the
net cash proceeds (after repayment of the debt) generated by redemption of the
Company's interest in the LLC could be less than the income taxes that would
become payable as a result of the disposition.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policies, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company and related entities routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the 2001 Annual Report and prior 2002 periodic reports
for descriptions of certain legal proceedings.
In late July 2002, three separate complaints were filed in the Court of
Chancery of the State of Delaware, New Castle County, against Tremont, Valhi and
members of Tremont's board of directors (Crandon Capital Partners, et al. v. J.
Landis Martin, et al., CA No. 19785-NC, Andrew Neyman v. J. Landis Martin, et
al., CA No. 19787-NC, and Herman M. Weisman Revocable Trust v. J. Landis Martin,
et al., CA No. 19792-NC). The complaints, purported class actions, generally
allege, among other things, that the terms of the proposed merger of Valhi and
Tremont are unfair, and that defendants have violated their fiduciary duties.
The complaints seek, among other things, an order enjoining consummation of the
proposed merger and the award of unspecified damages, including attorney's fees
and other costs. The Company believes, and understands each of the other
defendants believe, that the complaints are without merit, and the Company
intends, and understands that each of the other defendants intend, to defend
against the actions vigorously.
In re: Lead Paint Litigation (Superior Court of New Jersey, Middlesex
County, Case Code 702). Two additional municipalities have filed suit in this
previously-reported case. NL has moved to dismiss all claims of all 25
municipalities.
Brownsville Independent School District v. Lead Industries Association, et
al. (District Court of Cameron County, Texas, No. 2002-052081 B). In May 2002,
NL was served with a complaint seeking compensatory and punitive damages jointly
and severally from the former lead pigment manufacturers and LIA for property
damage. NL has denied all allegations of liability.
Spring Branch Independent School District v. Lead Industries Association,
et al. (District Court of Harris County, Texas, No. 2000-31175). In June 2002,
the trial court granted NL's motion for summary judgment. The time for appeal
has not yet expired.
City of Milwaukee v. NL Industries, Inc., and Mautz Paint (Circuit Court,
Civil Division, Milwaukee County, Wisconsin, Case No. 01CV003066). A trial date
of October 27, 2003 has been set.
Smith, et al. v. Lead Industries Association, et al. (Circuit Court for
Baltimore City, Maryland, Case No. 24-C-99-004490). A trial date of July 7, 2003
for the first of the four plaintiff families has been set.
Quitman County School District v. Lead Industries Association, et al.,
(Circuit Court of Quitman County, Mississippi, Case No. 2001-0106). Defendants
removed this case to federal court. In July 2002, the United States District
Court for the Northern District of Mississippi denied plaintiff's motion to
remand the case to state court, and the case will remain pending in that federal
court as case number 2:02CV004-P-B.
El Paso Independent School District v. Lead Industries Association, et al.,
(District Court of El Paso County, Texas (No. 2002-2675)). In August 2002, NL
was served with a complaint seeking compensatory and exemplary damages from NL
and twelve other former lead pigment and/or paint manufacturers for alleged
property damages due to the presence of lead paint in the school district's
buildings. The complaint alleges product liability, strict liability,
negligence, fraudulent misrepresentation, breach of warranties, statutory
deceptive trade practices, conspiracy, fraud, concert of action, exemplary
damages, and indemnity causes of action. The time for NL to answer the complaint
has not yet expired.
The parties in the previously-reported Brownsville Independent School
District, Liberty Independent School District, Houston Independent School
District, and Harris County, Texas cases have reached an agreement in principle
to abate, or stay, those cases pending appellate review of the trial court's
dismissal of the Spring Branch Independent School District case or certain other
events. The agreement is subject to completion and to approval by the various
courts involved.
Pulliam v. NL (Superior Court, Marion County, Indiana, No.
49F12-0104-CT-001301). In May 2002, the court granted NL's motion to strike the
plaintiffs' allegations that the case should be certified as a class action.
Dew, et al. v. Bill Richardson, et al. (U.S. District Court for the Western
District of Kentucky, No. 5:00CV-221-M). NL and NLO, Inc. answered the complaint
in this previously-reported case in May 2002, denying all allegations of
wrongdoing and liability. Pre-trial proceedings and discovery continue.
United States of America v. NL Industries, Inc. et al., (U.S. District
Court for the Southern District of Illinois, No. 91-CV00578). In July 2002, NL
executed a consent decree with the United States in this previously-reported
matter, and NL is awaiting the execution of the consent decree by the United
States. The decree embodies the previously-reported agreement in principle with
the United States pursuant to which NL will pay approximately $31.5 million,
including $1 million in penalties, to settle its liabilities at this site.
NL has received a request from the U.S. EPA with respect to the on-site
portion of the previously-reported clean-up at NL's formerly-owned facility in
Chicago, Illinois, requesting that NL perform additional work. NL intends to
discuss the request with the U.S. EPA.
Since the filing of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002, NL has been named as a defendant in asbestos
and/or silica cases in various jurisdictions brought on behalf of approximately
3,575 additional personal injury claimants. Included in the foregoing total is
one case in Mississippi state court involving approximately 3,005 plaintiffs
(Lawrence Graves, et al. vs. Monstanto Company, et al., Circuit Court, Second
Judicial District, Jones County, Mississippi, Civil Action No. 2002-141-CV4).
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 - Amended and Restated Bylaws of the Registrant
dated as of August 9, 2002.
10.1 - Indenture dated June 28, 2002, between Kronos
International, Inc. and The Bank of New York, as
Trustee, governing Kronos International's 8.875%
Senior Secured Notes Due 2009, including form of
the notes, - incorporated by reference to Exhibit
4.1 to NL's Quarterly Report on Form 10-Q (File
No. 1-640) for the quarter ended June 30, 2002.
10.2 - Deposit Agreement dated June 28, 2002 among NL
Industries, Inc. and JP Morgan Chase Bank, as
trustee - incorporated by reference to Exhibit 4.9
to NL's Quarterly Report on Form 10-Q (File No.
1-640) for the quarter ended June 30, 2002.
10.3 - Satisfaction and Discharge of Indenture, Release,
Assignment and Transfer, dated June 28, 2002, made
by JP Morgan Chase Bank pursuant to the Indenture
for NL Industries, Inc.'s 11 3/4% Senior Secured
Notes due 2003 - incorporated by reference to
Exhibit 4.10 to NL's Quarterly Report on Form 10-Q
(File No. 1-640) for the quarter ended June 30,
2002.
10.4 - Purchase and Sale Agreement (for titanium
products) between The Boeing Company, acting
through its division, Boeing Commercial Airplanes,
and Titanium Metals Corporation (as amended and
restated effective April 19, 2001) - incorporated
by reference to Exhibit No. 10.2 to TIMET's
Quarterly Report on Form 10-Q (File No. 0-28538)
for the quarter ended June 30, 2002.
10.5 - Purchase and Sale Agreement between Rolls-Royce
plc and Titanium Metals Corporation dated December
22, 1998 - incorporated by reference to Exhibit
No. 10.3 to TIMET's Quarterly Report on Form 10-Q
(File No. 0-28538) for the quarter ended June 30,
2002.
10.6 - Administrative Settlement for Interim Remedial
Measures, Site Investigation and Feasibility Study
dated July 7, 2000 between the Arkansas Department
of Environmental Quality, Halliburton Energy
Services, Inc., M-I, LLC and TRE Management
Company - incorporated by reference to Exhibit
10.1 to Tremont's Quarterly Report on Form 10-Q
(File No. 1-10126) for the quarter ended June 30,
2002.
99.1 - Certification Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 - Certification Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended June 30, 2002.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALHI, INC.
---------------------------------
(Registrant)
Date August 13, 2002 By /s/ Bobby D. O'Brien
------------------- ------------------------------
Bobby D. O'Brien
Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
Date August 13, 2002 By /s/ Gregory M. Swalwell
------------------ ------------------------------
Gregory M. Swalwell
Vice President and Controller
(Principal Accounting Officer)