SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2004 Commission file number 1-5467
------------------ ------
VALHI, INC.
(Exact name of Registrant as specified in its charter)
Delaware 87-0110150
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No
--- ---
Number of shares of the Registrant's common stock outstanding on April 30, 2004:
119,468,678.
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets -
December 31, 2003 and March 31, 2004 3
Consolidated Statements of Income -
Three months ended March 31, 2003 and 2004 5
Consolidated Statements of Comprehensive Income -
Three months ended March 31, 2003 and 2004 6
Consolidated Statements of Cash Flows -
Three months ended March 31, 2003 and 2004 7
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 2004 9
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 26
Item 4. Controls and Procedures 45
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 46
Item 6. Exhibits and Reports on Form 8-K. 47
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, March 31,
2003 2004
---------- ----------
Current assets:
Cash and cash equivalents $ 103,394 $ 139,083
Restricted cash equivalents 19,348 15,921
Marketable securities 6,147 4,267
Accounts and other receivables 189,091 218,493
Refundable income taxes 37,712 15,817
Receivable from affiliates 317 20
Inventories 293,113 252,575
Prepaid expenses 10,635 8,677
Deferred income taxes 14,435 13,671
---------- ----------
Total current assets 674,192 668,524
---------- ----------
Other assets:
Marketable securities 176,941 178,803
Investment in affiliates 161,818 163,513
Receivable from affiliate 14,000 14,000
Loans and other receivables 116,566 118,498
Unrecognized net pension obligations 13,747 13,747
Goodwill 377,591 383,078
Other intangible assets 3,805 3,648
Deferred income taxes 351 65
Other 27,177 24,048
---------- ----------
Total other assets 891,996 899,400
---------- ----------
Property and equipment:
Land 35,557 34,923
Buildings 217,744 212,801
Equipment 805,081 790,810
Mining properties 34,330 33,058
Construction in progress 11,297 11,761
---------- ----------
1,104,009 1,083,353
Less accumulated depreciation 465,851 472,413
---------- ----------
Net property and equipment 638,158 610,940
---------- ----------
$2,204,346 $2,178,864
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, March 31,
2003 2004
------------ ----------
Current liabilities:
Current maturities of long-term debt $ 5,392 $ 40,376
Accounts payable 118,781 77,107
Accrued liabilities 130,091 126,997
Payable to affiliates 21,454 11,480
Income taxes 13,105 13,445
Deferred income taxes 3,941 1,896
---------- ----------
Total current liabilities 292,764 271,301
---------- ----------
Noncurrent liabilities:
Long-term debt 632,533 641,690
Accrued pension costs 90,517 90,206
Accrued OPEB costs 37,410 36,337
Accrued environmental costs 61,725 60,877
Deferred income taxes 294,966 288,347
Other 34,908 34,845
---------- ----------
Total noncurrent liabilities 1,152,059 1,152,302
---------- ----------
Minority interest 99,789 100,804
---------- ----------
Stockholders' equity:
Common stock 1,340 1,340
Additional paid-in capital 99,048 98,579
Retained earnings 639,463 635,410
Accumulated other comprehensive income:
Marketable securities 85,124 86,392
Currency translation (3,573) (5,905)
Pension liabilities (59,154) (58,845)
Treasury stock (102,514) (102,514)
---------- ----------
Total stockholders' equity 659,734 654,457
---------- ----------
$2,204,346 $2,178,864
========== ==========
Commitments and contingencies (Notes 11 and 13)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2003 and 2004
(In thousands, except per share data)
2003 2004
---- ----
Revenues and other income:
Net sales $305,386 $317,231
Other, net 8,602 9,317
-------- --------
313,988 326,548
-------- --------
Costs and expenses:
Cost of sales 236,099 251,498
Selling, general and administrative 56,345 54,064
Interest 14,419 15,605
-------- --------
306,863 321,167
-------- --------
7,125 5,381
Equity in earnings of:
Titanium Metals Corporation ("TIMET") (2,774) 366
Other 684 136
-------- --------
Income before income taxes 5,035 5,883
Provision for income taxes 2,009 670
Minority interest in after-tax earnings 1,430 1,815
-------- --------
Income before cumulative effect of
change in accounting principle 1,596 3,398
Cumulative effect of change in accounting principle 586 -
-------- --------
Net income $ 2,182 $ 3,398
======== ========
Basic and diluted earnings per share:
Income before cumulative effect of
change in accounting principle $ .01 $ .03
Cumulative effect of change in accounting principle .01 -
-------- --------
Net income $ .02 $ .03
======== ========
Cash dividends per share $ .06 $ .06
======== ========
Shares used in the calculation of per share amounts:
Basic earnings per common share 118,284 120,190
Dilutive impact of outstanding stock options 140 299
-------- --------
Diluted earnings per share 118,424 120,489
======== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, 2003 and 2004
(In thousands)
2003 2004
---- ----
Net income $2,182 $ 3,398
------ -------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment 1,186 1,268
Currency translation adjustment 5,703 (2,332)
Pension liabilities adjustment (259) 309
------ -------
Total other comprehensive income (loss), net 6,630 (755)
------ -------
Comprehensive income $8,812 $ 2,643
====== =======
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2003 and 2004
(In thousands)
2003 2004
---- ----
Cash flows from operating activities:
Net income $ 2,182 $ 3,398
Depreciation and amortization 17,411 19,606
Securities transactions, net (319) 25
Proceeds from disposal of marketable securities (trading) 50 -
Noncash:
Interest expense 584 654
Defined benefit pension expense (970) 1,048
Other postretirement benefit expense (961) (1,146)
Deferred income taxes (1,030) (1,626)
Minority interest 1,430 1,815
Other, net (205) 1,139
Equity in:
TIMET 2,774 (366)
Other (684) (136)
Cumulative effect of change in accounting principle (586) -
Distributions from:
Manufacturing joint venture - 1,800
Other - 52
Change in assets and liabilities:
Accounts and other receivables (30,282) (34,703)
Inventories 20,111 35,276
Accounts payable and accrued liabilities (29,850) (43,283)
Accounts with affiliates 2,557 (1,977)
Income taxes 17 22,339
Other, net 2,876 1,801
-------- --------
Net cash provided (used) by operating activities (14,895) 5,716
-------- --------
Cash flows from investing activities:
Capital expenditures (8,741) (6,358)
Purchases of:
TIMET common stock (172) -
Kronos common stock - (11,833)
Investment in manufacturing joint venture (1,250) -
Change in restricted cash equivalents, net 2,087 1,687
Other, net (204) 21
-------- --------
Net cash used by investing activities (8,280) (16,483)
-------- --------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 2003 and 2004
(In thousands)
2003 2004
---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings $ 17,106 $135,220
Principal payments (2,971) (79,607)
Deferred financing costs paid (417) (35)
Loans from affiliate:
Loans 1,571 11,348
Repayments (11,000) (18,680)
Valhi dividends paid (7,449) (7,451)
Distributions to minority interest (2,061) (772)
Issuance of NL common stock 77 7,664
Other, net 21 34
-------- --------
Net cash provided (used) by financing activities (5,123) 47,721
-------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing activities (28,298) 36,954
Currency translation 918 (1,265)
Cash and equivalents at beginning of period 94,679 103,394
-------- --------
Cash and equivalents at end of period $ 67,299 $139,083
======== ========
Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized $ 7,359 $ 7,493
Income taxes, net 3,296 (16,414)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2004
(In thousands)
Accumulated other
Additional comprehensive income Total
Common paid-in Retained Marketable Currency Pension Treasury stockholders'
stock capital earnings securities translation liabilities stock equity
Balance at December 31, 2003 $1,340 $ 99,048 $ 639,463 $85,124 $(3,573) $(59,154) $(102,514) $ 659,734
Net income ................. -- -- 3,398 -- -- -- -- 3,398
Dividends .................. -- -- (7,451) -- -- -- -- (7,451)
Other comprehensive income
(loss), net ............... -- -- -- 1,268 (2,332) 309 -- (755)
Income tax related to
shares of Kronos Worldwide
distributed by NL ......... -- (503) -- -- -- -- -- (503)
Other, net ................. -- 34 -- -- -- -- -- 34
------ -------- --------- ------- ------- -------- --------- ---------
Balance at March 31, 2004 .. $1,340 $ 98,579 $ 635,410 $86,392 $(5,905) $(58,845) $(102,514) $ 654,457
====== ======== ========= ======= ======= ======== ========= =========
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
The consolidated balance sheet of Valhi, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2003 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 2004, and the consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended March 31, 2003 and 2004, have been prepared by the
Company, without audit, in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the consolidated financial position, results of operations and
cash flows have been made.
The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted, and certain prior year
amounts have been reclassified to conform to the current year presentation. The
accompanying consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
2003 (the "2003 Annual Report").
Contran Corporation holds, directly or through subsidiaries, approximately
90% of Valhi's outstanding common stock. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of
certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is
sole trustee, or is held by Mr. Simmons or persons or other entities related to
Mr. Simmons. Mr. Simmons, the Chairman of the Board of Valhi and Contran, may be
deemed to control such companies.
The Company has complied with the consolidation requirements of FASB
Interpretation ("FIN") No. 46R, Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51, as amended, as of March 31, 2004. See Note 15.
As disclosed in the 2003 Annual Report, the Company accounts for
stock-based employee compensation in accordance with Accounting Principles Board
Opinion ("APBO") No. 25, Accounting for Stock Issued to Employees, and its
various interpretations. Under APBO No. 25, no compensation cost is generally
recognized for fixed stock options in which the exercise price is greater than
or equal to the market price on the grant date. Prior to 2003, and following the
cash settlement of certain stock options held by employees of NL Industries,
Inc., NL commenced accounting for its remaining stock options using the variable
accounting method because NL could not overcome the presumption that it would
not similarly cash settle its remaining stock options. Under the variable
accounting method, the intrinsic value of all unexercised stock options
(including those with an exercise price at least equal to the market price on
the date of grant) are accrued as an expense over their vesting period, with
subsequent increases (decreases) in the market price of the underlying common
stock resulting in additional compensation expense (income). Net compensation
income recognized by the Company in accordance with APBO No. 25 was $500,000 in
the first quarter of 2003, and net compensation expense was $1.1 million in the
first quarter of 2004, in each case all of which relates to stock options
granted by NL.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in the 2003 and 2004 periods
presented if Valhi and its subsidiaries and affiliates had each elected to
account for their respective stock-based employee compensation related to stock
options in accordance with the fair value-based recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, for all awards granted
subsequent to January 1, 1995.
Three months
ended March 31,
2003 2004
---- ----
(In millions, except
per share amounts)
Net income as reported $2.2 $3.4
Adjustments, net of applicable income tax effects and minority interest:
Stock-based employee compensation expense
(income) determined under APBO No. 25 (.3) .6
Stock-based employee compensation expense
determined under SFAS No. 123 (.4) (.2)
---- ----
Pro forma net income $1.5 $3.8
==== ====
Basic and diluted net income per share:
As reported $.02 $.03
Pro forma .01 .03
Note 2 - Business segment information:
% owned by Valhi at
Business segment Entity March 31, 2004
Chemicals Kronos Worldwide, Inc. 94%
Component products CompX International Inc. 69%
Waste management Waste Control Specialists LLC 90%
Titanium metals TIMET 41%
The Company's ownership of Kronos includes 33% held directly by Valhi, 50%
held directly by NL and 11% owned by Tremont LLC, a wholly-owned subsidiary of
Valhi. Valhi owns 62% of NL directly, and Tremont LLC owns an additional 21%.
The Company's ownership of TIMET includes 40% owned directly by Tremont LLC and
1% owned directly by Valhi. TIMET owns an additional 8% of CompX, and TIMET
accounts for such CompX shares as available-for-sale marketable securities
carried at fair value. Because the Company does not consolidate TIMET, the
shares of CompX owned by TIMET are not considered as part of the Company's
consolidated investment in CompX. During the first quarter of 2004, the Company
acquired additional shares of Kronos common stock in market transactions for an
aggregate of $11.8 million, increasing the Company's aggregate ownership of
Kronos to 94% at March 31, 2004. Kronos (NYSE: KRO), NL (NYSE: NL), CompX (NYSE:
CIX), and TIMET (NYSE: TIE) each file periodic reports with the Securities and
Exchange Commission ("SEC") pursuant to the Securities Exchange Act of 1934, as
amended.
Three months ended
March 31,
2003 2004
---- ----
(In millions)
Net sales:
Chemicals $253.0 $263.3
Component products 51.0 53.1
Waste management 1.4 .8
------ ------
Total net sales $305.4 $317.2
====== ======
Operating income:
Chemicals $ 30.7 $ 22.2
Component products 1.3 2.9
Waste management (2.0) (3.2)
------ ------
Total operating income 30.0 21.9
General corporate items:
Interest and dividend income 8.3 8.1
Securities transaction gains, net .3 -
General expenses, net (17.1) (9.0)
Interest expense (14.4) (15.6)
------ ------
7.1 5.4
Equity in:
TIMET (2.8) .4
Other .7 .1
------ ------
Income before income taxes $ 5.0 $ 5.9
====== ======
Chemicals operating income, as presented above, differs from amounts
separately reported by Kronos due to amortization of purchase accounting basis
adjustments recorded by the Company. Similarly, the Company's equity in earnings
of TIMET differs from the Company's pro-rata share of TIMET's
separately-reported results. Component products operating income, as presented
below, may differ from amounts separately reported by CompX because the Company
defines operating income differently than CompX.
In March 2004, NL paid its $.20 per share regular quarterly dividend in the
form of shares of Kronos common stock in which approximately 345,100 shares, or
approximately .7% of Kronos' outstanding common stock, were distributed to NL
shareholders (including Valhi and Tremont LLC) in the form of a pro-rata
dividend. Valhi, Tremont and NL are members of the Contran Tax Group. NL's
distribution of such shares of Kronos common stock is taxable to NL, and NL is
required to recognize a taxable gain equal to the difference between the fair
market value of the shares of Kronos common stock distributed ($30.15 per share,
equal to the closing market price of Kronos' common stock on March 29, 2004, the
date the distribution was completed) and NL's adjusted tax basis in such stock
at the date of distribution. With respect to the shares of Kronos distributed to
Valhi and Tremont (288,200 shares in the aggregate), the terms of NL's tax
sharing agreement with Valhi, as amended in December 2003, do not require NL to
pay up to Valhi the tax liability generated from the distribution of such Kronos
shares to Valhi and Tremont, since the tax on that portion of the gain is
deferred at the Valhi level due to Valhi, Tremont and NL being members of the
same tax group. NL was required to recognize a tax liability with respect to the
Kronos shares distributed to NL shareholders other than Valhi and Tremont, and
such tax liability was approximately $600,000. The Company's pro-rata share of
such tax liability, based on the Company's ownership of NL, is $503,000 and in
accordance with GAAP has been recognized as a reduction of the Company's
additional paid-in capital. Completion of the distribution had no other impact
on the Company's consolidated financial position, results of operations or cash
flows.
Note 3 - Marketable securities:
December 31, March 31,
2003 2004
------------ ---------
(In thousands)
Current assets - restricted debt securities
(available-for-sale) $ 6,147 $ 4,267
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $170,000 $170,000
Restricted debt securities 6,870 8,782
Other common stocks 71 21
-------- --------
$176,941 $178,803
======== ========
Note 4 - Accounts and other receivables:
December 31, March 31,
2003 2004
--------- --------
(In thousands)
Accounts receivable $191,714 $220,853
Notes receivable 2,026 2,120
Allowance for doubtful accounts (4,649) (4,480)
-------- --------
$189,091 $218,493
======== ========
Note 5 - Inventories:
December 31, March 31,
2003 2004
----------- ---------
(In thousands)
Raw materials:
Chemicals $ 61,960 $ 31,590
Component products 6,170 6,144
-------- --------
68,130 37,734
-------- --------
In process products:
Chemicals 19,854 18,136
Component products 10,852 10,558
-------- --------
30,706 28,694
-------- --------
Finished products:
Chemicals 148,047 142,950
Component products 9,166 7,425
-------- --------
157,213 150,375
-------- --------
Supplies (primarily chemicals) 37,064 35,772
-------- --------
$293,113 $252,575
======== ========
Note 6 - Accrued liabilities:
December 31, March 31,
2003 2004
------------ ----------
(In thousands)
Current:
Employee benefits $ 48,827 $ 41,911
Environmental costs 24,956 22,149
Deferred income 4,699 3,287
Interest 383 8,185
Other 51,226 51,465
-------- --------
$130,091 $126,997
======== ========
Noncurrent:
Insurance claims and expenses $ 13,303 $ 13,919
Employee benefits 9,705 9,580
Deferred income 1,634 1,545
Asset retirement obligations 1,670 1,584
Other 8,596 8,217
-------- --------
$ 34,908 $ 34,845
======== ========
Note 7 - Other assets:
December 31, March 31,
2003 2004
--------- ---------
(In thousands)
Investment in affiliates:
TIMET:
Common stock $ 20,357 $ 23,778
Convertible preferred debt securities 265 277
-------- --------
20,622 24,055
TiO2 manufacturing joint venture 129,010 127,187
Other 12,186 12,271
-------- --------
$161,818 $163,513
======== ========
Loans and other receivables:
Snake River Sugar Company:
Principal $ 80,000 $ 80,000
Interest 33,102 34,400
Other 5,490 6,218
-------- --------
118,592 120,618
Less current portion 2,026 2,120
-------- --------
Noncurrent portion $116,566 $118,498
======== ========
Other noncurrent assets:
Deferred financing costs $ 10,569 $ 9,812
Refundable insurance deposit 1,972 1,972
Waste disposal site operating permits 982 809
Restricted cash equivalents 488 490
Other 13,166 10,965
-------- --------
$ 27,177 $ 24,048
======== ========
At March 31, 2004, the Company held 1.3 million shares of TIMET with a
quoted market price of $99.70 per share, or an aggregate market value of $129
million. In March 2004, TIMET announced that its board of directors had
approved, subject to shareholder approval of an amendment to its certificate of
incorporation, a split of its common stock at a ratio of five shares of
post-split common stock for each outstanding share of pre-split common stock.
When completed, such stock split will have no financial statement impact to the
Company, and the Company's ownership interest in TIMET will not change as a
result of the split.
At March 31, 2004, TIMET reported total assets of $603.3 million and
stockholders' equity of $163.4 million. TIMET's total assets at March 31, 2004
include current assets of $296.0 million, property and equipment of $236.5
million and intangible assets of $5.9 million. TIMET's total liabilities at
March 31, 2004 include current liabilities of $125.0 million, long-term capital
lease obligations of $10.1 million, accrued OPEB and pension costs aggregating
$80.5 million and debt payable to TIMET Capital Trust I (the subsidiary of TIMET
that issued its convertible preferred debt securities) of $207.5 million.
During the first quarter of 2004, TIMET reported net sales of $120.5
million, operating income of $2.8 million and a loss before cumulative effect of
a change in accounting principle of $1.7 million (2003 - net sales of $99.3
million, an operating loss of $8.1 million and a loss before cumulative effect
of change in accounting principle of $13.4 million).
In April 2004, TIMET announced that its board of directors had authorized
an offer to exchange any and all of the outstanding convertible preferred debt
securities issued by TIMET Capital Trust I for shares of a newly-created Series
A Convertible Preferred Stock of TIMET at the exchange rate of one share of
Series A Preferred Stock for each convertible preferred debt security.
Completion of the tender offer is subject to, among other things, approval by
TIMET's shareholders and effectiveness of a registration statement filed by
TIMET with the SEC with respect to the Series A Preferred Stock. Dividends on
the Series A shares would accumulate at the rate of 6 3/4% of their liquidation
value of $50 per share, and would be convertible into shares of TIMET common
stock at the rate of .2 shares of TIMET common stock per Series A share (a rate
of one share of TIMET common stock per Series A share, assuming completion of
the five-for-one stock split discussed above). The Series A shares would not be
mandatorily redeemable, but would be redeemable at the option of TIMET in
certain circumstances. Valhi has indicated it intends to tender its shares of
the convertible preferred debt securities (14,700 shares) in the exchange offer,
if it is commenced.
Note 8 - Other income:
Three months ended
March 31,
2003 2004
---- ----
(In thousands)
Securities earnings:
Dividends and interest $ 8,251 $8,073
Securities transactions, net 319 (25)
------- ------
8,570 8,048
Currency transactions, net (1,694) 397
Other, net 1,726 872
------- ------
$ 8,602 $9,317
======= ======
Note 9 - Long-term debt:
December 31, March 31,
2003 2004
------- ---------
(In thousands)
Valhi:
Snake River Sugar Company $250,000 $250,000
Bank credit facility 5,000 40,000
-------- --------
255,000 290,000
-------- --------
Subsidiaries:
Kronos Worldwide:
Senior Secured Notes 356,136 345,848
European bank credit facility - 31,551
CompX revolving bank credit facility 26,000 14,000
Other 789 667
-------- --------
382,925 392,066
-------- --------
637,925 682,066
Less current maturities 5,392 40,376
-------- --------
$632,533 $641,690
======== ========
Note 10 - Accounts with affiliates:
December 31, March 31,
2003 2004
---------- ----------
(In thousands)
Current receivables from affiliates:
TIMET $ 50 $ -
Other 267 20
-------- --------
$ 317 $ 20
======== ========
Noncurrent receivable from affiliate -
loan to Contran family trust $ 14,000 $ 14,000
======== ========
Payables to affiliates:
Contran:
Demand loan $ 7,332 $ -
Income taxes 3,759 1,092
Trade items 1,790 2,021
Louisiana Pigment Company 8,560 8,295
Other, net 13 72
-------- --------
$ 21,454 $ 11,480
======== ========
Note 11 - Provision for income taxes:
Three months ended
March 31,
2003 2004
---- ----
(In millions)
Expected tax expense $ 1.8 $ 2.1
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies 1.1 .6
Non-U.S. tax rates (.5) .1
Change in NL's deferred income tax valuation
allowance (.7) (3.0)
U.S. state income taxes, net .2 -
Other, net .1 .9
----- -----
$ 2.0 $ .7
===== =====
Comprehensive provision for income taxes allocated to:
Income (loss) before cumulative effect of change
in accounting principle 2.0 .7
Cumulative effect of change in accounting principle .3 -
Additional paid-in capital - .6
Other comprehensive income:
Marketable securities 1.3 .1
Currency translation .9 (.1)
Pension liabilities - .1
----- -----
$ 4.5 $ 1.4
===== =====
Certain of the Company's U.S. and non-U.S. tax returns are being examined
and tax authorities have or may propose tax deficiencies, including non-income
related items and interest. For example:
o NL's and NL's majority-owned subsidiary, NL Environmental Management
Services, Inc. ("EMS"),1998 U.S. federal income tax returns are being
examined by the U.S. tax authorities, and NL and EMS have granted
extensions of the statute of limitations for assessments of tax with
respect to their 1998 and 1999 income tax returns until September 30, 2004.
Based upon the course of the examination, NL anticipates that the IRS will
propose a substantial tax deficiency, including interest, related to a
restructuring transaction. In an effort to avoid protracted litigation and
minimize the hazards of such litigation, NL applied to take part in an IRS
settlement initiative applicable to transactions similar to the
restructuring transaction, and in April 2003 NL received notification from
the IRS that NL had been accepted into such settlement initiative. Under
the initiative, a final settlement with the IRS is to be reached through
expedited negotiations and, if necessary, through a specified arbitration
procedure. NL anticipates that settlement of this matter will likely occur
in 2004, resulting in payments of federal and state taxes and interest
ranging from $33 million to $45 million. Additional payments in later years
may be required as part of the settlement. NL has provided adequate
accruals to cover the currently expected range of settlement outcomes.
o Kronos has received a preliminary tax assessment related to 1993 from the
Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately euro 6 million ($8 million at March 31, 2004).
NL has filed a protest to this assessment, and believes that a significant
portion of the assessment is without merit. The Belgian tax authorities
have filed a lien on the fixed assets of Kronos' Belgian TiO2 operations in
connection with this assessment. In April 2003, Kronos received a
notification from the Belgian tax authorities of their intent to assess a
tax deficiency related to 1999 that, including interest, is expected to be
approximately euro 13 million ($16 million). Kronos believes a substantial
portion of the proposed assessment is without merit, and Kronos has filed a
written response.
o The Norwegian tax authorities have notified Kronos of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million)
relating to the years 1998 through 2000. Kronos has objected to this
proposed assessment.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in settlement
initiatives, court and tax proceedings. The Company believes that it has
provided adequate accruals for additional taxes and related interest expense
which may ultimately result from all such examinations and believes that the
ultimate disposition of such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
In the first quarter of 2003, Kronos International ("KII") was notified by
the German Federal Fiscal Court that the Court had ruled in KII's favor
concerning a claim for refund suit in which KII sought refunds of prior taxes
paid during the periods 1990 through 1997. KII and KII's German operating
subsidiary were required to file amended tax returns with the German tax
authorities to receive refunds for such years, and all of such amended returns
were filed during 2003. Such amended returns reflected an aggregate refund of
taxes and related interest to KII's German operating subsidiary of euro 103.2
million ($123.0 million), and an aggregate additional liability of taxes and
related interest to KII of euro 91.9 million ($109.6 million). Assessments and
refunds will be processed by year as the respective returns are reviewed by the
tax authorities. Certain interest components may also be refunded separately.
The German tax authorities have reviewed and accepted the amended return with
respect to the 1990 tax year. Through April 2004, KII's German operating
subsidiary had received net refunds of euro 16.3 million ($20.3 million when
received). KII believes it will receive the net refunds of taxes and related
interest for the remaining years during 2004. In addition to the refunds for the
1990 to 1997 periods, the court ruling also resulted in a refund of 1999 income
taxes and interest for which KII received euro 21.5 million ($24.6 million) in
2003. KII has recognized the aggregate euro 32.8 million ($38 million) benefit
of such net refunds in its 2003 results of operations.
Note 12 - Minority interest:
December 31, March 31,
2003 2004
------------ --------
(In thousands)
Minority interest in net assets:
NL Industries $31,262 $ 33,636
Kronos Worldwide 11,076 9,686
CompX International 48,424 48,461
Other subsidiaries of NL 9,027 9,021
------- --------
$99,789 $100,804
======= ========
Three months ended
March 31,
2003 2004
---- ----
(In thousands)
Minority interest in income (loss) before cumulative effect of change in
accounting principle:
NL Industries $1,448 $ 636
Kronos Worldwide - 681
CompX International 175 490
Tremont Corporation (217) -
Other subsidiaries of NL 24 8
------ ------
$1,430 $1,815
====== ======
Tremont Corporation. The Company no longer reports minority interest in
Tremont's net assets or net earnings (losses) subsequent to the February 2003
mergers of Valhi and Tremont.
Waste Control Specialists. All of Waste Control Specialists aggregate
inception-to-date net losses have accrued to the Company for financial reporting
purposes, and all of Waste Control Specialists future net income or net losses
will also accrue to the Company until Waste Control Specialists reports positive
equity attributable to the other owner. Accordingly, no minority interest in
Waste Control Specialists' net assets or net losses is reported at March 31,
2004.
Kronos Worldwide. The Company commenced recognizing minority interest in
Kronos' net assets and net earnings following NL's December 2003 distribution of
a portion of the shares of Kronos common stock to its shareholders discussed in
the 2003 Annual Report.
Other subsidiaries of NL. Minority interest in NL's subsidiaries relates
principally to EMS, NL's majority-owned environmental management subsidiary. 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 in Note 13.
Note 13 - Commitments and contingencies:
Lead pigment litigation - NL.
NL's former operations included the manufacture of lead pigments for use in
paint and lead-based paint. Since 1987, NL, other former manufacturers of lead
pigments for use in paint and lead-based paint, and the Lead Industries
Association ("LIA") have been named as defendants in various legal proceedings
seeking damages for personal injury, property damage and governmental
expenditures allegedly caused by the use of lead-based paints (the LIA
discontinued its business operations in 2002). Certain of these actions have
been filed by or on behalf of states, large U.S. cities or their public housing
authorities and school districts, and certain others have been asserted as class
actions. These lawsuits seek recovery under a variety of theories, including
public and private nuisance, negligent product design, negligent failure to
warn, strict liability, breach of warranty, conspiracy/concert of action, aiding
and abetting enterprise liability, market share liability, intentional tort,
fraud and misrepresentation, violations of state consumer protection statutes,
supplier negligence and similar claims.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and asserted health concerns associated
with the use of lead-based paints, including damages for personal injury,
contribution and/or indemnification for medical expenses, medical monitoring
expenses and costs for educational programs. Several former cases have been
dismissed or withdrawn. Most of the remaining cases are in various pre-trial
stages. Some are on appeal following dismissal or summary judgment rulings in
favor of the defendants. In addition, various other cases are pending (in which
NL is not a defendant) seeking recovery for injury allegedly caused by lead
pigment and lead-based paint. Although NL is not a defendant in these cases, the
outcome of these cases may have an impact on additional cases being filed
against NL.
NL believes these actions are without merit, intends to continue to deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. NL has neither lost nor settled any of these cases. NL has not
accrued any amounts for the pending lead pigment and lead-based paint
litigation. Liability that may result, if any, cannot reasonably be estimated.
There can be no assurance that NL will not incur future liability in respect of
this pending litigation in view of the inherent uncertainties involved in court
and jury rulings in pending and possible future cases.
Environmental matters and litigation.
General. The Company's operations are governed by various federal, state,
local and foreign environmental laws and regulations. Certain of the Company's
businesses are and have been engaged in the handling, manufacture or use of
substances or compounds that may be considered toxic or hazardous within the
meaning of applicable environmental laws. As with other companies engaged in
similar businesses, certain past and current operations and products of the
Company have the potential to cause environmental or other damage. The Company
has implemented and continues to implement various policies and programs in an
effort to minimize these risks. The Company's policy is to comply with
environmental laws and regulations at all of its plants and to continually
strive to improve environmental performance in association with applicable
industry initiatives. The Company believes that its operations are in
substantial compliance with applicable requirements of environmental laws. From
time to time, the Company may be subject to environmental regulatory enforcement
under various statutes, resolution of which typically involves the establishment
of compliance programs. It is possible that future developments, such as
stricter requirements of environmental laws and enforcement policies thereunder,
could adversely affect the Company's production, handling, use, storage,
transportation, sale or disposal of such substances.
The Company's production facilities operate within an environmental
regulatory framework in which governmental authorities typically are granted
broad discretionary powers which allow them to issue operating permits under
which the plants must operate. The Company believes all of its plants are in
substantial compliance with applicable environmental laws. With respect to the
Company's plants, neither the Company nor any of its subsidiaries have been
notified of any environmental claim in the United States or any foreign
jurisdiction by the U.S. EPA or any applicable foreign authority or any state,
provincial or local authority.
Some of the Company's current and former facilities, including divested
primary and secondary lead smelters and former mining locations, are the subject
of civil litigation, administrative proceedings or investigations arising under
federal and state environmental laws. Additionally, in connection with past
disposal practices, the Company has been named as a defendant, potential
responsible party ("PRP") or both, pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act, as amended by the Superfund Amendments
and Reauthorization Act ("CERCLA") and similar state laws in various
governmental and private actions associated with waste disposal sites, mining
locations, and facilities currently or previously owned, operated or used by the
Company or its subsidiaries, or their predecessors, certain of which are on the
U.S. EPA's Superfund National Priorities List or similar state lists. These
proceedings seek cleanup costs, damages for personal injury or property damage
and/or damages for injury to natural resources. Certain of these proceedings
involve claims for substantial amounts. Although the Company may be jointly and
severally liable for such costs, in most cases it is only one of a number of
PRPs who may also be jointly and severally liable.
Environmental obligations are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of governmental
regulations, the number of PRPs and the PRPs' ability or willingness to fund
such allocation of costs, their financial capabilities and the allocation of
costs among PRPs, the multiplicity of possible solutions, and the years of
investigatory, remedial and monitoring activity required. In addition, the
imposition of more stringent standards or requirements under environmental laws
or regulations, new developments or changes respecting site cleanup costs or
allocation of such costs among PRPs, solvency of other PRPs, the solvency of
other PRPs, the results of future testing and analysis undertaken with respect
to certain sites or a determination that the Company is potentially responsible
for the release of hazardous substances at other sites, could result in
expenditures in excess of amounts currently estimated by the Company to be
required for such matters. In addition, with respect to other PRPs and the fact
that the Company may be jointly and severally liable for the total remediation
cost at certain sites, the Company could ultimately be liable for amounts in
excess of its accruals due to, among other things, reallocation of costs among
PRPs or the insolvency of one of more PRPs. No assurance can be given that
actual costs will not exceed accrued amounts or the upper end of the range for
sites for which estimates have been made, and no assurance can be given that
costs will not be incurred with respect to sites as to which no estimate
presently can be made. Further, there can be no assurance that additional
environmental matters will not arise in the future.
The Company records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are generally not
discounted to their present value. Recoveries of remediation costs from other
parties, if any, are recognized as assets when their receipt is deemed probable.
At March 31, 2004, no receivables for recoveries have been recognized.
The exact time frame over which the Company makes payments with respect to
its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process that in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs that
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
is classified as a noncurrent liability.
A summary of the activity in the Company's accrued environmental costs
during the first quarter of 2004 is presented in the table below.
Amount
(In thousands)
Balance at the beginning of the period $86,681
Additions charged to expense 330
Payments (3,985)
-------
Balance at the end of the period $83,026
=======
Amounts recognized in the balance sheet at the end of the period:
Current liability $22,149
Noncurrent liability 60,877
-------
$83,026
NL. Some of NL's current and former facilities, including divested primary
secondary lead smelters and former mining locations, are the subject of civil
litigation, administrative proceedings or investigations arising under federal
and state environmental laws. Additionally, in connection with past disposal
practices, NL has been named as a defendant, PRP, or both, pursuant to the
CERCLA, or similar state laws in approximately 60 governmental and private
actions associated with waste disposal sites, mining locations and facilities
currently or previously owned, operated or used by NL, its subsidiaries and
their predecessors, certain of which are on the U.S. EPA's Superfund National
Priorities List or similar state lists. These proceedings seek cleanup costs,
damages for personal injury or property damage and/or damages for injury to
natural resources. Certain of these proceedings involve claims for substantial
amounts. Although NL may be jointly and severally liable for such costs, in most
cases, it is only one of a number of PRPs who may also be jointly and severally
liable.
On a quarterly basis, NL evaluates the potential range of its liability at
sites where it has been named as a PRP or defendant, including sites for which
EMS has contractually assumed NL's obligation. See Note 12. At March 31, 2004,
NL had accrued $74 million for those environmental matters which NL believes are
reasonably estimable. NL believes it is not possible to estimate the range of
costs for certain sites. The upper end of the range of reasonably possible costs
to NL for sites for which NL believes it is possible to estimate costs is
approximately $108 million. NL's estimates of such liabilities have not been
discounted to present value, and NL has not recognized any insurance recoveries
in 2004.
At March 31, 2004, there are approximately 15 sites for which NL is unable
to estimate a range of costs. For these sites, generally the investigation is in
the early stages, and it is either unknown as to whether or not NL actually had
any association with the site, or if NL had association with the site, the
nature of its responsibility, if any, for the contamination at the site and the
extent of contamination. The timing on when information would become available
to NL to allow NL to estimate a range of loss is unknown and dependent on events
outside the control of NL, such as when the party alleging liability provides
information to NL.
At March 31, 2004, NL had $19 million in restricted cash, restricted cash
equivalents and restricted marketable debt securities held by special purpose
trusts, the assets of which can only be used to pay for certain of NL's future
environmental remediation and other environmental expenditures (December 31,
2003 - $24 million). Use of such restricted balances does not affect the
Company's consolidated statements of cash flows.
Tremont. In July 2000 Tremont, entered into a voluntary settlement
agreement with the Arkansas Department of Environmental Quality and certain
other PRPs pursuant to which Tremont and the other PRPs will undertake certain
investigatory and interim remedial activities at a former mining site located in
Hot Springs County, Arkansas. Tremont currently believes that it has accrued
adequate amounts ($2.2 million at March 31, 2004) to cover its share of probable
and reasonably estimable environmental obligations. Tremont currently expects
that the nature and extent of any final remediation measures that might be
imposed with respect to this site will be known by 2006. Currently, no
reasonable estimate can be made of the cost of any such final remediation
measure, and accordingly Tremont has accrued no amounts at March 31, 2004 for
any such cost. The amount accrued at March 31, 2004 represents Tremont's best
estimate of the costs to be incurred through 2006 with respect to the interim
remediation measures.
TIMET. At March 31, 2004, TIMET had accrued approximately $3.9 million for
environmental cleanup matters, principally related to TIMET's facility in
Nevada. The upper end of the range of reasonably possible costs related to these
matters is approximately $8.6 million.
Other. The Company has also accrued approximately $6.7 million at March 31,
2004 in respect of other environmental cleanup matters. Such accrual is near the
upper end of the range of the Company's estimate of reasonably estimable costs
for such matters.
Other litigation.
The court has scheduled a hearing in August 2004 on plaintiffs' application
for fees and expenses in the previously-reported In re Tremont Corporation
Shareholders Litigation.
In May 2004, the court ruled and, among other things, imposed a fine of
euro 200,000 against Kronos and fines ranging aggregating less than euro 40,000
against various employees of Kronos in the previously-reported matter concerning
fatalities at Kronos' Belgian facility. Kronos and the individuals will appeal
the ruling.
Reference is made to the 2003 Annual Report for a discussion of certain
other legal proceedings to which the Company is a party.
NL has been named as a defendant in various lawsuits in a variety of
jurisdictions, alleging personal injuries as a result of occupational exposure
to asbestos, silica and/or mixed dust in connection with formerly owned
operations. Approximately 465 of these cases involving a total of approximately
30,000 plaintiffs and their spouses remain pending. Of these plaintiffs,
approximately 18,400 are represented by eight cases pending in Mississippi state
courts. NL has not accrued any amounts for this litigation because liability
that may result to NL, if any, cannot be reasonably estimated. In addition, from
time to time, NL has received notices regarding asbestos or silica claims
purporting to be brought against former subsidiaries of NL, including notices
provided to insurers with which NL has entered into settlements extinguishing
certain insurance policies. These insurers may seek indemnification from NL.
In addition to the litigation described above, the Company and its
affiliates are also involved in various other environmental, contractual,
product liability, patent (or intellectual property), employment and other
claims and disputes incidental to its present and former businesses. In certain
cases, the Company has insurance coverage for such items. The Company currently
believes that the disposition of all claims and disputes, individually or in the
aggregate, should not have a material adverse effect on its consolidated
financial position, results of operations or liquidity.
Other matters
TIMET is the primary obligor on two workers' compensation bonds, each
having a maximum obligation of $1.5 million, issued on behalf of a former
subsidiary that TIMET sold in 1989. The bonds were provided as part of the
conditions imposed on the former subsidiary in order to self-insure its workers'
compensation obligations. The former subsidiary filed for Chapter 11 bankruptcy
protection in July 2001, and discontinued payment on the underlying workers'
compensation claims in November 2001. During 2002 and 2003, TIMET received
notices that the issuers of the bonds were required to make payments on the
bonds for applicable claims and were requesting reimbursement from TIMET.
Through March 31, 2004, TIMET has reimbursed the issuer approximately $900,000
under these bonds, and $1.1 million remains accrued for future payments. TIMET
may revise its estimated liability under these bonds in the future as additional
facts become known or claims develop.
Note 14 - Employee benefit plans:
Defined benefit plans. The Company maintains various U.S. and foreign
defined benefit pension plans. Variances from actuarially assumed rates will
result in increases or decreases in accumulated pension obligations, pension
expense and funding requirements in future periods. The components of net
periodic defined benefit pension cost are presented in the table below.
Three months ended
March 31,
2003 2004
---- ----
(In thousands)
Service cost benefits $ 1,298 $ 1,669
Interest cost on projected benefit obligations 4,864 5,497
Expected return on plan assets (5,332) (5,266)
Amortization of prior service cost 87 141
Amortization of net transition obligations 172 143
Recognized actuarial losses 602 1,078
------- -------
$ 1,691 $ 3,262
======= =======
Postretirement benefits other than pensions. Certain subsidiaries currently
provide certain health care and life insurance benefits for eligible retired
employees. Variances from actuarially-assumed rates will result in additional
increases or decreases in accumulated OPEB obligations, net periodic OPEB cost
and funding requirements in future periods. The components of net periodic OPEB
cost are presented in the table below.
Three months ended
March 31,
2003 2004
---- ----
(In thousands)
Service cost $ 35 $ 57
Interest cost 700 660
Amortization of prior service credit (519) (255)
Recognized actuarial losses 8 45
----- -----
$ 224 $ 507
===== =====
Note 15 - Accounting principle newly adopted in 2004:
The Company complied with the consolidation requirements of FASB
Interpretation ("FIN") No. 46R, Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51, as amended, as of March 31, 2004. The Company does
not have any involvement with any variable interest entity (as that term is
defined in FIN No. 46R) covered by the scope of FIN No. 46R that would require
the Company to consolidate such entity under FIN No. 46R which had not already
been consolidated under prior applicable GAAP, and therefore the impact to the
Company of adopting the consolidation requirements of FIN No. 46R was not
material.
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
General
The Company reported income before cumulative effect of change in
accounting principle of $3.4 million, or $.03 per diluted share, in the first
quarter of 2004 compared to income of $1.6 million, or $.01 per diluted share,
in the first quarter of 2003.
The increase in the Company's diluted earnings per share from the first
quarter of 2003 compared to the first quarter of 2004 is due primarily to the
net effects of (i) lower chemicals operating income, (ii) higher component
products operating income, (iii) a higher operating loss in the Company's waste
management segment and (iv) lower environmental remediation and legal expenses
of NL. The Company currently believes its net income in 2004 will be lower than
2003 due primarily to lower expected chemicals operating income.
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 Annual Report on Form 10-Q relating to matters that are not historical
facts, including, but not limited to, statements found in this Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements that represent management's beliefs
and assumptions based on currently available information. Forward-looking
statements can be identified by the use of words such as "believes," "intends,"
"may," "should," "could," "anticipates," "expected" or comparable terminology,
or by discussions of strategies or trends. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve substantial risks and uncertainties that
could significantly impact expected results, and actual future results could
differ materially from those described in such forward-looking statements. While
it is not possible to identify all factors, the Company continues to face many
risks and uncertainties. Among the factors that could cause future results to
differ materially from those described herein are the risks and uncertainties
discussed in this Annual Report and those described from time to time in the
Company's other filings with the SEC including, but not limited to, the
following:
o Future supply and demand for the Company's products,
o The extent of the dependence of certain of the Company's businesses on
certain market sectors (such as the dependence of TIMET's titanium metals
business on the aerospace industry),
o The cyclicality of certain of the Company's businesses (such as Kronos'
TiO2 operations and TIMET's titanium metals operations),
o The impact of certain long-term contracts on certain of the Company's
businesses (such as the impact of TIMET's long-term contracts with certain
of its customers and such customers' performance thereunder and the impact
of TIMET's long-term contracts with certain of its vendors on its ability
to reduce or increase supply or achieve lower costs),
o Customer inventory levels (such as the extent to which Kronos' customers
may, from time to time, accelerate purchases of TiO2 in advance of
anticipated price increases or defer purchases of TiO2 in advance of
anticipated price decreases, or the relationship between inventory levels
of TIMET's customers and such customers' current inventory requirements and
the impact of such relationship on their purchases from TIMET),
o Changes in raw material and other operating costs (such as energy costs),
o The possibility of labor disruptions,
o General global economic and political conditions (such as changes in the
level of gross domestic product in various regions of the world and the
impact of such changes on demand for, among other things, TiO2),
o Competitive products and substitute products,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o The introduction of trade barriers,
o Fluctuations in currency exchange rates (such as changes in the exchange
rate between the U.S. dollar and each of the euro, the Norwegian kroner and
the Canadian dollar),
o Operating interruptions (including, but not limited to, labor disputes,
leaks, fires, explosions, unscheduled or unplanned downtime and
transportation interruptions),
o The ability to implement headcount reductions in certain operations in a
cost effective manner within the constraints of non-U.S. governmental
regulations, and the timing and amount of any cost savings realized,
o The ability of the Company to renew or refinance credit facilities,
o The ultimate outcome of income tax audits, tax settlement initiatives or
other tax matters,
o Uncertainties associated with new product development (such as TIMET's
ability to develop new end-uses for its titanium products),
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government laws and regulations and possible changes therein (such as
changes in government regulations which might impose various obligations on
present and former manufacturers of lead pigment and lead-based paint,
including NL, with respect to asserted health concerns associated with the
use of such products),
o The ultimate resolution of pending litigation (such as NL's lead pigment
litigation and litigation surrounding environmental matters of NL, Tremont
and TIMET), and
o Possible future litigation.
Should one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of changes in information, future
events or otherwise.
Chemicals
Relative changes in Kronos' TiO2 sales and operating income during the 2003
and 2004 periods presented are primarily due to (i) relative changes in TiO2
average selling prices and (ii) relative changes in foreign currency exchange
rates. Selling prices (in billing currencies) for TiO2, Kronos' principal
product, were generally increasing during the first quarter of 2003, were
generally flat during the second quarter of 2003 and were generally decreasing
during the third and fourth quarters of 2003 and the first quarter of 2004.
Three months ended
March 31, %
2003 2004 Change
(In $ millions)
Net sales $253.0 $263.3 +4%
Operating income 30.7 22.2 -27%
Ti02 data:
Sales volumes* 118 118
Production volumes* 117 117
Percentage change in Ti02 average selling prices:
Using actual foreign currency exchange rates +4%
Impact of changes in foreign currency
exchange rates -8%
----
In billing currencies -4%
====
* Thousands of metric tons
Kronos' sales increased $10.3 million (4%) in the first quarter of 2004
compared to the first quarter of 2003 as the favorable effect of fluctuations in
foreign currency exchange rates, which increased chemicals sales by
approximately $21 million (as further discussed below), more than offset the
impact of lower average TiO2 selling prices. Excluding the effect of
fluctuations in the value of the U.S. dollar relative to other currencies,
Kronos' average TiO2 selling prices in billing currencies in the first quarter
of 2004 were 4% lower than the first quarter of 2003. When translated from
billing currencies to U.S. dollars using actual foreign currency exchange rates
prevailing during the respective periods, Kronos' average TiO2 selling prices in
the first quarter of 2004 increased 4% compared to the first quarter of 2003.
Kronos' sales are denominated in various currencies, including the U.S.
dollar, the euro, other major European currencies and the Canadian dollar. The
disclosure of the percentage change in Kronos' average TiO2 selling prices in
billing currencies (which excludes the effects of fluctuations in the value of
the U.S. dollar relative to other currencies) is considered a "non-GAAP"
financial measure under regulations of the SEC. The disclosure of the percentage
change in Kronos' average TiO2 selling prices using actual foreign currency
exchange rates prevailing during the respective periods is considered the most
directly comparable financial measure presented in accordance with accounting
principles generally accepted in the United States ("GAAP measure"). Kronos
discloses percentage changes in its average TiO2 prices in billing currencies
because Kronos believes such disclosure provides useful information to investors
to allow them to analyze such changes without the impact of changes in foreign
currency exchange rates, thereby facilitating period-to-period comparisons of
the relative changes in average selling prices in the actual various billing
currencies. Generally, when the U.S. dollar either strengthens or weakens
against other currencies, the percentage change in average selling prices in
billing currencies will be higher or lower, respectively, than such percentage
changes would be using actual exchange rates prevailing during the respective
periods. The difference between the 4% increase in Kronos' average TiO2 selling
prices during the first quarter of 2004 as compared to the first quarter of 2003
using actual foreign currency exchange rates prevailing during the respective
period (the GAAP measure) and the 4% decrease in Kronos' average TiO2 selling
prices in billing currencies (the non-GAAP measure) during such periods is due
to the effect of changes in foreign currency exchange rates. The above table
presents in a tabular format (i) the percentage change in Kronos' average TiO2
selling prices using actual foreign currency exchange rates prevailing during
the respective periods (the GAAP measure), (ii) the percentage change in Kronos'
average TiO2 selling prices in billing currencies (the non-GAAP measure) and
(iii) the percentage change due to changes in foreign currency exchange rates
(or the reconciling item between the non-GAAP measure and the GAAP measure).
Despite the increase in sales, chemicals operating income decreased in the
first quarter of 2004 as compared to the first quarter of 2003 due primarily to
the lower average TiO2 selling prices. Kronos' TiO2 sales volumes in the first
quarter of 2004 approximated Kronos' TiO2 sales volumes in the first quarter of
2003. Kronos' TiO2 production volumes in the first quarter of 2004 also
approximated Kronos' TiO2 production volumes in the first quarter of 2003, with
operating rates near full capacity in both periods.
Kronos has substantial operations and assets located outside the United
States (primarily in Germany, Belgium, Norway and Canada). A significant amount
of Kronos' sales generated from its non-U.S. operations are denominated in
currencies other than the U.S. dollar, primarily the euro, other major European
currencies and the Canadian dollar. In addition, a portion of Kronos' sales
generated from its non-U.S. operations are denominated in the U.S. dollar.
Certain raw materials, primarily titanium-containing feedstocks, are purchased
in U.S. dollars, while labor and other production costs are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
Kronos' foreign sales and operating results are subject to currency exchange
rate fluctuations which may favorably or adversely impact reported earnings and
may affect the comparability of period-to-period operating results. Overall,
fluctuations in the value of the U.S. dollar relative to other currencies,
primarily the euro, increased TiO2 sales in the first quarter of 2004 by a net
approximately $21 million compared to the first quarter of 2003. Fluctuations in
the value of the U.S. dollar relative to other currencies similarly impacted
Kronos' foreign currency-denominated operating expenses. Kronos' operating costs
that are not denominated in the U.S. dollar, when translated into U.S. dollars,
were higher in the first quarter of 2004 compared to the same period of 2003.
Overall, the net impact of currency exchange rate fluctuations did not
significantly impact Kronos' operating income in the first quarter of 2004 as
compared to the first quarter of 2003.
Kronos expects its TiO2 sales and production volumes in calendar 2004 will
be higher as compared to 2003. Kronos' average TiO2 selling prices, which
declined during the second half of 2003 and first quarter of 2004, are expected
to cease to decline sometime during the second quarter of 2004, and should rise
thereafter. Nevertheless, Kronos expects its average TiO2 selling prices, in
billing currencies, will be lower in calendar 2004 as compared to 2003. Overall,
Kronos expects it chemicals operating income in 2004 will be lower than 2003.
Kronos' expectations as to the future prospects of Kronos and the TiO2 industry
are based upon a number of factors beyond Kronos' control, including worldwide
growth of gross domestic product, competition in the marketplace, unexpected or
earlier-than-expected capacity additions and technological advances. If actual
developments differ from Kronos' expectations, Kronos' results of operations
could be unfavorably affected.
Chemicals operating income, as presented above, is stated net of
amortization of Valhi's purchase accounting adjustments made in conjunction with
its acquisitions of its interest in NL and Kronos. Such adjustments result in
additional depreciation and amortization expense beyond amounts separately
reported by Kronos. Such additional non-cash expenses reduced chemicals
operating income, as reported by Valhi, by $3.6 million in the first quarter of
2003 and $4.0 million in the first quarter of 2004.
Component products
Three months ended
March 31, %
2003 2004 Change
------ ------ ------
(In millions)
Net sales $51.0 $53.1 +4%
Operating income 1.3 2.9 +120%
Component products sales were higher in the first quarter of 2004 as
compared to the first quarter of 2003 due primarily to the favorable effect of
fluctuations in foreign currency exchange rates, which increased net sales by
$2.5 million in the first quarter of 2004 as compared to the same period in
2003. Component products sales comparisons were also impacted by higher sales
volumes of security products, lower sales volumes of slide products in the
European market and the effect of price increases for certain slide products.
During the first quarter of 2004, sales of slide and security products
increased 7% and 2%, respectively, as compared to the first quarter of 2003,
while sales of ergonomic products decreased 3%. The percentage changes in both
slide and ergonomic products include the impact resulting from changes in
foreign currency exchange rates. Sales of security products are generally
denominated in U.S. dollars.
Component products operating income comparisons were favorably impacted by
the effect of certain cost reduction efforts undertaken in 2002 and 2003,
including retooling of CompX's facility in Michigan, consolidating of CompX's
two Canadian facilities into one facility and restructuring CompX's operations
in the Netherlands. In addition, operating income comparisons were also
favorably impacted by relative changes in product mix of security products, the
price increases for certain slide products and expenses of approximately
$400,000 incurred during the first quarter of 2003 associated with the
consolidation of the two Canadian facilities into one facility.
CompX has substantial operations and assets located outside the United
States 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 values of CompX's foreign sales and operating results are subject to
currency exchange rate fluctuations which may favorably or unfavorably impact
reported earnings and may affect comparability of period-to-period operating
results. During the first quarter of 2004, currency exchange rate fluctuations
positively impacted component products sales comparisons with the same period in
2003. Currency exchange rate fluctuations did not significantly impact component
products operating income comparisons for the same periods.
CompX expects that weak market conditions will continue in the office
furniture market, the primary end-market for CompX's products, during 2004.
Competitive pricing pressures are expected to continue to be a challenge as
foreign manufacturing, particularly in China, gains market share. CompX has
responded to the competitive pricing pressure in part by reducing production
costs through product reengineering or improvements in manufacturing processes,
moving production to lower-cost facilities and providing value-added customer
support services that foreign manufacturers are generally unable to provide.
However, in some cases CompX has determined to forgo sales in response to the
competitive pricing pressures. CompX will continue to focus on cost improvement
initiatives, utilizing lean manufacturing techniques and prudent balance sheet
management in order to minimize the impact of lower sales to the office
furniture industry and to develop value-added customer relationships with
additional focus on sales of CompX's higher-margin ergonomic computer support
systems to improve operating results. CompX currently expects to realize annual
cost savings of $3.5 million to $4 million as the result of the headcount
reduction implemented during 2003 in its Netherlands operations. However, CompX
continues with its ongoing strategic analysis of the operations, and additional
actions could be taken in the future that could result in charges for asset
impairment, including goodwill, and other costs in future periods. These
actions, along with other activities to eliminate excess capacity, are designed
to position CompX to more effectively concentrate on both new product and new
customer opportunities to improve its profitability.
Waste management
Three months ended
March 31,
2003 2004
---- ----
(In millions)
Net sales $ 1.4 $ .8
Operating loss (2.0) (3.2)
Waste management sales decreased, and its operating loss increased, in the
first quarter of 2004 compared to the first quarter of 2003 due to continued
weak demand for waste management services and higher expenses associated with
recent permitting efforts to expand low-level and mixed low-level radioactive
waste disposal capabilities and the enhancement of the operating management
team. Waste Control Specialists also continues to explore opportunities to
obtain certain types of new business that, if obtained, could increase its
sales, and decrease its operating loss, in 2004 as compared to 2003.
Waste Control Specialists currently has permits which allow it to treat,
store and dispose of a broad range of hazardous and toxic wastes, and to treat
and store a broad range of low-level and mixed-level radioactive wastes. The
waste management industry currently is experiencing a relative decline in the
number of environmental remediation projects generating wastes. In addition,
efforts on the part of generators to reduce the volume of waste and/or manage
wastes onsite at their facilities also has resulted in weak demand for Waste
Control Specialists' waste management services. These factors have led to
reduced demand and increased downward price pressure for waste management
services. While Waste Control Specialists believes its broad range of
authorizations for the treatment and storage of low-level and mixed-level
radioactive waste streams provides certain competitive advantages, a key element
of Waste Control Specialists' long-term strategy to provide "one-stop shopping"
for hazardous, low-level and mixed-level radioactive wastes includes obtaining
additional regulatory authorizations for the disposal of low-level and mixed
low-level radioactive wastes.
Prior to June 2003, the state law in Texas (where Waste Control
Specialists' disposal facility is located) prohibited the applicable Texas
regulatory agency from issuing a license for the disposal of a broad range of
low-level and mixed low-level radioactive waste to a private enterprise
operating a disposal facility in Texas. In June 2003, a new Texas state law was
enacted that allows the regulatory agency to issue a low-level radioactive waste
disposal license to a private entity, such as Waste Control Specialists. Waste
Control Specialists currently expects to apply for such a disposal license with
the applicable regulatory agency by the application deadline of August 6, 2004.
The length of time that the regulatory agency will take to review and act upon
the license application is uncertain, although Waste Control Specialists does
not currently expect the agency would issue any final decision on the license
application before 2007. There can be no assurance that Waste Control
Specialists will be successful in obtaining any such license.
Waste Control Specialists is continuing its efforts to increase its sales
volumes from waste streams that conform to authorizations it currently has in
place. Waste Control Specialists is also continuing to identify certain waste
streams, and attempting to obtain modifications to its current permits, that
would allow for treatment, storage and disposal of additional types of wastes.
The ability of Waste Control Specialists to achieve increased sales volumes of
these waste streams, together with improved operating efficiencies through
further cost reductions and increased capacity utilization, are important
factors in Waste Control Specialists' ability to achieve improved cash flows.
The Company currently believes Waste Control Specialists can become a viable,
profitable operation, even if Waste Control Specialists is unsuccessful in
obtaining a license for the disposal of a broad range of low-level and mixed
low-level radioactive wastes. However, there can be no assurance that Waste
Control Specialists' efforts will prove successful in improving its cash flows.
Valhi has in the past, and may in the future, consider strategic alternatives
with respect to Waste Control Specialists. There can be no assurance that the
Company would not report a loss with respect to any such strategic transaction.
Equity in earnings of TIMET
Three months ended
March 31,
2003 2004
---- ----
(In millions)
TIMET historical:
Net sales $ 99.3 $120.5
====== ======
Operating income (loss) $ (8.1) $ 2.8
Other general corporate, net (.4) .8
Interest expense (4.2) (4.3)
------ ------
(12.7) (.7)
Provision for income taxes (.5) (.6)
Minority interest (.2) (.4)
------ ------
Loss before cumulative effect of change in
accounting principle $(13.4) $ (1.7)
====== ======
Equity in earnings (losses) of TIMET $ (2.8) $ .4
====== ======
TIMET reported higher sales in the first quarter of 2004 as compared to the
first quarter of 2003, and TIMET improved from an $8.1 million operating loss in
the 2003 period to operating income of $2.8 million in the 2004 period. TIMET's
operating results improved due in part to a 44% increase in sales volumes of
melted products (ingot and slab) and a 26% increase in sales volumes of mill
products, offset in part by the unfavorable effect of a 6% decline in average
selling prices for melted products and a 3% decline in average selling prices
for mill products. The increase in sales volumes for melted products is
principally the result of new customer relationships and market share gains. The
decline in average selling prices for mill products was impacted in part by the
negative affect of changes in product mix and the favorable effect of the
weakening of the U.S. dollar compared to the British pound sterling and the
euro.
TIMET's operating results in 2004 include $1.9 million of income related to
a change in TIMET's vacation policy. TIMET's operating results comparisons were
also favorably impacted by improved plant operating rates, which increased from
52% in the first quarter of 2003 to 72% in the first quarter of 2004, and
TIMET's continued cost management efforts.
TIMET currently expects sales revenues for the full year 2004 will range
from $460 million to $480 million. Melted product sales volumes for the full
year 2004 are expected to approximate 4,950 metric tons, and mill product sales
volumes for the full year 2004 are expected to approximate 11,350 metric tons.
These increases reflect expected volume improvements in all key markets -
commercial and military aerospace, industrial and emerging.
TIMET currently expects its production volumes will remain relatively
stable throughout the remainder of 2004, resulting in overall capacity
utilization during 2004 of approximately 70% to 75% (as compared to 72% in the
first quarter of 2004). TIMET's backlog of unfilled orders was approximately
$220 million at March 31, 2004, up from $180 million at December 31, 2003 and
$165 million at March 31, 2003. Substantially all the March 31, 2004 backlog is
scheduled to ship within the next 12 months. TIMET's order backlog may not be a
reliable indicator of future business activity.
TIMET's operating costs are affected by a number of factors including
customer and product mix, material yields, plant operating rates, raw material
costs, labor costs and energy costs. Raw material costs represent the largest
portion of TIMET's manufacturing cost structure. TIMET expects to manufacture
about one-third of its titanium sponge requirements during 2004. The unit cost
of titanium sponge manufactured at TIMET's Nevada facility is expected to
decrease relative to 2003, due primarily to higher sponge plant operating rates
as the plant reaches full capacity. TIMET expects the aggregate cost of its
purchased sponge will increase through the remainder of 2004. TIMET is
experiencing higher prices for certain types of scrap and energy costs, and
TIMET expects those costs will continue to increase throughout 2004. TIMET
recently announced an increase in prices on all non-contract titanium mill and
melted products in an effort to offset the effects of such increased raw
material and energy costs.
Based on anticipated sales volumes, production levels and continued focus
on cost management opportunities, somewhat offset by the anticipated continued
increases in scrap and energy costs and adverse changes in product mix, TIMET
expects its full year 2004 gross margin will range from 8% to 10% of its net
sales. TIMET's selling, general, administrative and development expenses for
2004 are expected to be higher compared to 2003, in part due to potential
employee profit sharing payouts based upon TIMET's currently projected full year
return on equity.
TIMET currently anticipates that it will receive orders from Boeing for
about 1.5 million pounds of product during 2004. At this projected order level,
TIMET expects to recognize about $23 million of income in 2004 under the Boeing
LTA's take-or-pay provisions, substantially all of which would be recognized
during the second half of 2004.
TIMET currently expects its operating income in 2004 will be between $16
million and $26 million, and TIMET currently expects its full year net income
for 2004 will range between breakeven and $10 million. Such current expectations
do not reflect any potential effects that might result from the completion of
TIMET's offer to exchange its convertible preferred debt securities for shares
of TIMET's Series A Preferred Stock discussed in Note 7 to the Consolidated
Financial Statements.
The Company accounts for its interest in TIMET by the equity method. The
Company's equity in earnings of TIMET differs from the amounts that would be
expected by applying the Company's ownership percentage to TIMET's
separately-reported earnings because of the effect of amortization of purchase
accounting adjustments made by 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 the Company, and aggregated $2.5 million and $1.2 million in the
first quarter of 2003 and 2004, respectively.
In March 2004, TIMET announced that its board of directors had approved,
subject to shareholder approval of an amendment to its certificate of
incorporation, a split of its common stock at a ratio of five shares of
post-split common stock for each outstanding share of pre-split common stock.
When completed, such stock split will have no financial statement impact to the
Company, and the Company's ownership interest in TIMET will not change as a
result of the split.
General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend income decreased slightly in the first quarter of 2004 compared to
the first quarter of 2003 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 2004
compared to same periods in 2003 due primarily to a lower amount of funds
available for investment and lower average interest rates.
General corporate expenses. Net general corporate expenses in the first
quarter of 2004 were lower than the first quarter of 2003 due primarily to lower
environmental remediation and legal expenses of NL. Net general corporate
expenses in 2004 are currently expected to continue to be lower than 2003 due to
lower expected environmental remediation expenses of NL. However, obligations
for environmental remediation are difficult to assess and estimate, and no
assurance can be given that actual costs will not exceed accrued amounts or that
costs will not be incurred with respect to sites for which no estimate of
liability can presently be made. See Note 13 to the Consolidated Financial
Statements.
Interest expense. The Company has a significant amount of indebtedness
denominated in the euro, including KII's euro 285 million 8.875% Senior Secured
Notes. Accordingly, the reported amount of interest expense will vary depending
on relative changes in foreign currency exchange rates. Interest expense in the
first quarter of 2004 was higher than the same period in 2003 due primarily to
relative changes in foreign currency exchange rates, which increased the U.S.
dollar equivalent of interest expense on the KII Senior Secured Notes by
approximately $1.1 million during the first quarter of 2004 as compared to the
first quarter of 2003. Assuming no significant change in interest rates or
foreign currency exchange rates from current levels, interest expense in 2004 is
expected to be slightly higher than interest expense in 2003.
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.
During the first quarter of 2004, 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.
At March 31, 2004, Kronos had the equivalent of $606 million of income tax
loss carryforwards in Germany with no expiration date. However, Kronos has
provided a deferred income tax asset valuation allowance against substantially
all of these tax loss carryforwards because Kronos currently believes they do
not meet the "more-likely-than-not" recognition criteria. Kronos periodically
evaluates the "more-likely-than-not" recognition criteria with respect to such
tax loss carryforwards, and it is possible that in the future Kronos may
conclude such carryforwards do meet the recognition criteria, at which time
Kronos would reverse all or a portion of such deferred tax valuation allowance.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforwards
effective January 1, 2004. While the new law did not significantly affect
Kronos' income tax expense and cash tax payments in the first quarter of 2004,
it could have a significant affect in the future depending on the level of
income earned in Germany.
Minority interest. See Note 12 to the Consolidated Financial Statements.
Following completion of the merger transactions in which Tremont became wholly
owned by Valhi in February 2003, the Company no longer reports minority interest
in Tremont's net assets or earnings. The Company commenced recognizing minority
interest in Kronos' net assets and earnings in December 2003 following NL's
distribution of a portion of the shares of Kronos common stock to its
shareholders.
Minority interest in NL's other subsidiaries relates principally to 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 quarter of 2003 or 2004, or
as of December 31, 2003 and March 31, 2004.
Accounting principle newly adopted in 2004. See Note 15 to the Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Consolidated cash flows
Summary. The Company's primary source of liquidity on an ongoing basis is
its cash flows from operating activities, which is generally used to (i) fund
capital expenditures, (ii) repay short-term indebtedness incurred primarily for
working capital purposes and (iii) provide for the payment of dividends
(including dividends paid to Valhi by its subsidiaries). In addition, from
time-to-time the Company will incur indebtedness, generally to (i) fund
short-term working capital needs, (ii) refinance existing indebtedness, (iii)
make investments in marketable and other securities (including the acquisition
of securities issued by subsidiaries and affiliates of the Company) or (iii)
fund major capital expenditures or the acquisition of other assets outside the
ordinary course of business. Also, the Company will from time-to-time sell
assets outside the ordinary course of business, the proceeds of which are
generally used to (i) repay existing indebtedness (including indebtedness which
may have been collateralized by the assets sold), (ii) make investments in
marketable and other securities, (iii) fund major capital expenditures or the
acquisition of other assets outside the ordinary course of business or (iv) pay
dividends.
At March 31, 2004, the Company's third-party indebtedness aggregated $682
million, of which about 94% has a maturity date on or after January 1, 2005.
Accordingly, the Company does not currently expect that a significant amount of
its cash flows from operating activities generated in 2004 will be required to
be used to repay indebtedness during 2004.
Operating activities. Trends in cash flows from operating activities
(excluding the impact of significant asset dispositions and relative changes in
assets and liabilities) are generally similar to trends in the Company's
earnings. However, certain items included in the determination of net income are
non-cash, and therefore such items have no impact on cash flows from operating
activities. Non-cash items included in the determination of net income include
depreciation and amortization expense, non-cash interest expense and asset
impairment charges. Non-cash interest expense relates principally to NL and
consists of amortization of deferred financing costs.
Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, equity in earnings of affiliates will generally differ from
the amount of distributions received from such affiliates, and equity in losses
of affiliates does not necessarily result in current cash outlays paid to such
affiliates. The amount of periodic defined benefit pension plan expense and
periodic OPEB expense depends upon a number of factors, including certain
actuarial assumptions, and changes in such actuarial assumptions will result in
a change in the reported expense. In addition, the amount of such periodic
expense generally differs from the outflows of cash required to be currently
paid for such benefits.
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 long-lived assets are included in the determination of net
income, although the proceeds from any such disposal are shown as part of cash
flows from investing activities.
Changes in product pricing, production volumes and customer demand, among
other things, could significantly affect the liquidity of the Company. Relative
changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments. Such relative changes can
significantly impact the comparability of cash flow from operations from period
to period, as the income statement impact of such items may occur in a different
period from when the underlying cash transaction occurs. For example, raw
materials may be purchased in one period, but the payment for such raw materials
may occur in a subsequent period. Similarly, inventory may be sold in one
period, but the cash collection of the receivable may occur in a subsequent
period.
Cash flows from operating activities increased from a $14.9 million use of
cash in the first quarter of 2003 to $5.7 million of cash provided in the first
quarter of 2004. This $20.6 million increase was due primarily to the net effect
of (i) higher net income of $1.2 million, (ii) higher depreciation expense of
$2.2 million, (iii) higher distributions from NL's TiO2 manufacturing joint
venture of $1.8 million, (iv) lower equity in losses of TIMET of $3.1 million,
(v) a higher amount of net cash used to fund changes in the Company's
inventories, receivables, payables, accruals and accounts with affiliates of
$7.2 million and (vi) lower cash paid for income taxes of $19.7 million.
Relative changes in accounts receivable are affected by, among other things, the
timing of sales and the collection of the resulting receivable. Relative changes
in inventories, accounts payable and accrued liabilities are affected by, among
other things, the timing of raw material purchases and the payment for such
purchases and the relative difference between production volumes and sales
volumes. Relative changes in accrued environmental costs are affected by, among
other things, the period in which recognition of the environmental accrual is
recognized and the period in which the remediation expenditure is actually made.
Valhi does not have complete access to the cash flows of its subsidiaries
and affiliates, in part due to limitations contained in certain credit
agreements as well as the fact that such subsidiaries and affiliates are not
100% owned by Valhi. A detail of Valhi's consolidated cash flows from operating
activities is presented in the table below. Eliminations consist of intercompany
dividends (most of which are paid to Valhi Parent).
Three months ended
March 31,
2003 2004
---- ----
(In millions)
Cash provided (used) by operating activities:
NL/Kronos $(12.4) $ 13.4
CompX 1.5 3.4
Waste Control Specialists (1.1) (2.2)
Valhi Parent 7.6 9.7
Other .1 (.5)
Eliminations (10.6) (18.1)
------ ------
$(14.9) $ 5.7
====== ======
Investing and financing activities. Approximately 71% of the Company's
consolidated capital expenditures in the first quarter of 2004 relate to NL, 10%
relate to CompX and substantially all of the remainder relate to Waste Control
Specialists. During the first quarter of 2004, Valhi purchased shares of Kronos
common stock in market transactions for $11.8 million.
During the first quarter of 2004, Valhi repaid a net $7.3 million of its
short-term demand loans from Contran and borrowed a net $35.0 million under its
revolving bank credit facility, (ii) CompX repaid a net $12 million under its
revolving bank credit facility and (iii) Kronos borrowed a net aggregate of euro
26 million ($32 million when borrowed) of borrowings under its European
revolving bank credit facility.
At March 31, 2004, unused credit available under existing credit facilities
approximated $198.4 million, which was comprised of: CompX - $33.5 million under
its new revolving credit facility; Kronos - $66.6 million under its European
credit facilities, $9.7 million under its Canadian credit facility and $45.0
million under its U.S. credit facility; and Valhi - $43.9 million under its
revolving bank credit facility.
Provisions contained in certain of the Company's credit agreements could
result in the acceleration of the applicable indebtedness prior to its stated
maturity for reasons other than defaults from failing to comply with typical
financial covenants. For example, certain credit agreements allow the lender to
accelerate the maturity of the indebtedness upon a change of control (as
defined) of the borrower. The terms of Valhi's revolving bank credit facility
could require Valhi to either reduce outstanding borrowings or pledge additional
collateral in the event the fair value of the existing pledged collateral falls
below specified levels. In addition, certain credit agreements could result in
the acceleration of all or a portion of the indebtedness following a sale of
assets outside the ordinary course of business. Other than operating leases
discussed in the 2003 Annual Report, neither Valhi nor any of its subsidiaries
or affiliates are parties to any off-balance sheet financing arrangements.
Chemicals - Kronos
At March 31, 2004, Kronos had cash, cash equivalents and marketable debt
securities of $93.7 million, including restricted balances of $3.3 million, and
Kronos had approximately $121 million available for borrowing under its U.S.,
Canadian and European credit facilities.
At March 31, 2004, Kronos' outstanding debt was comprised of (i) $345.8
million related to KII's Senior Secured Notes, (ii) $31.6 million outstanding
under KII's European bank revolver and (iii) approximately $400,000 of other
indebtedness. In addition, Kronos had a $200 million long-term note payable to
NL due in 2010 which is eliminated in the Company's consolidated financial
statements.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions significantly impact Kronos' earnings and operating cash
flows. Cash flows from operations is considered the primary source of liquidity
for Kronos. Changes in TiO2 pricing, production volume and customer demand,
among other things, could significantly affect the liquidity of Kronos.
See Note 11 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of Kronos' income tax
returns in various U.S. and non-U.S. jurisdictions, and see Note 13 to the
Consolidated Financial Statements with respect to certain legal proceedings with
respect to Kronos.
Kronos periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and availability of resources in view of, among other
things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, Kronos has in the past and may in the future seek to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, repurchase
shares of its common stock, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, Kronos may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals or other industries, as well as the acquisition of interests in, and
loans to, related entities. In the event of any such transaction, Kronos may
consider using its available cash, issuing its equity securities or increasing
its indebtedness to the extent permitted by the agreements governing Kronos'
existing debt.
Kronos has substantial operations located outside the United States for
which the functional currency is not the U.S. dollar. As a result, the reported
amounts of Kronos' assets and liabilities related to its non-U.S. operations,
and therefore Kronos' and the Company's consolidated net assets, will fluctuate
based upon changes in currency exchange rates.
NL Industries
At March 31, 2004, NL (exclusive of Kronos) had cash, cash equivalents and
marketable debt securities of $46.6 million, including restricted balances of
$25.4 million. Of such restricted balances, $19 million was held by special
purpose trusts, the assets of which can only be used to pay for certain of NL's
future environmental remediation and other environmental expenditures. NL also
has a $200 million long-term note receivable from Kronos due in 2010, which is
eliminated in the Company's consolidated financial statements.
See Note 11 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of NL's income tax
returns, and see Note 13 to the Consolidated Financial Statements and Part II,
Item 1, "Legal Proceedings" with respect to certain legal proceedings and
environmental matters with respect to NL.
In December 2003, NL completed the distribution of approximately 48.8% of
Kronos' outstanding common stock to its shareholders under which NL shareholders
received one share of Kronos' common stock for every two shares of NL common
stock held. Approximately 23.9 million shares of Kronos common stock were
distributed. Immediately prior to the distribution of shares of Kronos common
stock, Kronos distributed a $200 million promissory note payable by Kronos to
NL. In March 2004, NL paid its $.20 per share regular quarterly dividend in the
form of shares of Kronos common stock. Approximately 345,100 shares, or
approximately .7% of Kronos' outstanding common stock, were distributed.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its dividend policy, 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 or other industries, as well as the acquisition of interests in, and
loans to, related entities. In the event of any such transaction, NL may
consider using its available cash, issuing its equity securities or increasing
its indebtedness to the extent permitted by the agreements governing NL's
existing debt.
Component products - CompX International
CompX believes that its cash on hand, together with cash generated from
operations and borrowing availability under its new bank credit facility, will
be sufficient to meet CompX's liquidity needs for working capital, capital
expenditures and debt service requirements for the foreseeable future. To the
extent that CompX's actual operating results or developments differ from CompX's
expectations, CompX's liquidity could be adversely affected. CompX suspended its
regular quarterly dividend of $.125 per share in the second quarter of 2003.
Certain of the CompX's sales generated by its non-U.S. operations are
denominated in U.S. dollars. CompX periodically uses currency forward contracts
to manage a portion of foreign exchange rate risk associated with receivables
denominated in a currency other than the holder's functional currency or similar
exchange rate risk associated with future sales. CompX has not entered into
these contracts for trading or speculative purposes in the past, nor does CompX
currently anticipate entering into such contracts for trading or speculative
purposes in the future. At each balance sheet date, any such outstanding
currency forward contract is marked-to-market with any resulting gain or loss
recognized in income currently as part of net currency transactions. To manage
such exchange rate risk, at March 31, 2004, CompX held contracts maturing
through May 2004 to exchange an aggregate of U.S. $3.0 million for an equivalent
amount of Canadian dollars at an exchange rates ranging from Cdn. $1.33 to Cdn.
$1.34 per U.S. dollar. At March 31, 2004 the actual exchange rate was Cdn. $1.33
per U.S. dollar.
CompX periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, dividend policy and estimated
future operating cash flows. As a result of this process, CompX has in the past
and may in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities, modify its dividend policy,
repurchase shares of its common stock or take a combination of such steps or
other steps to manage its liquidity and capital resources. In the normal course
of business, CompX may review opportunities for acquisitions, divestitures,
joint ventures or other business combinations in the component products
industry. In the event of any such transaction, CompX may consider using its
then-available cash, issuing additional equity securities or increasing the
indebtedness of CompX or its subsidiaries.
Waste management - Waste Control Specialists
At March 31, 2004, Waste Control Specialists' indebtedness consisted
principally of $34.5 million of borrowings owed to a wholly-owned subsidiary of
Valhi, all of which matures in March 2005 (December 31, 2003 intercompany
indebtedness - $30.9 million). The additional borrowings during the first
quarter of 2004 were used by Waste Control Specialists primarily to fund its
operating loss and its capital expenditures. Such indebtedness is eliminated in
the Company's consolidated financial statements. Waste Control Specialists will
likely borrow additional amounts during the remainder of 2004 under its
revolving credit facility with such Valhi subsidiary.
TIMET
At March 31, 2004, TIMET had $134 million of borrowing availability under
its various U.S. and European credit agreements. During the first quarter of
2004, TIMET amended its U.S. credit facility to remove the equipment component
from the determination of TIMET's borrowing availability. This amendment
effectively reduced TIMET's current borrowing availability in the U.S. by $12
million. However, TIMET can regain this availability, upon request, by
completing an updated equipment appraisal. TIMET presently expects to use $4
million to $14 million in cash flows from operations during 2004, reflecting in
part the resumption of paying distributions on the convertible preferred debt
securities, as discussed below. TIMET received the 2004 advance of $27.9 million
from Boeing in January 2004.
See Note 13 to the Consolidated Financial Statements for certain legal
proceedings, environmental matters and other contingencies associated with
TIMET. While TIMET currently believes that the outcome of these matters,
individually and in the aggregate, will not have a material adverse effect on
TIMET's consolidated financial position, liquidity or overall trends in results
of operations, all such matters are subject to inherent uncertainties. Were an
unfavorable outcome to occur in any given period, it is possible that it could
have a material adverse impact on TIMET's consolidated results of operations or
cash flows in a particular period.
At March 31, 2004, a wholly-owned subsidiary of TIMET had issued 4,024,820
shares outstanding of its 6.625% convertible preferred debt securities,
representing an aggregate $201.2 million liquidation amount, that mature in
2026. Each security is convertible into shares of TIMET common stock at a
conversion rate of .1339 shares of TIMET common stock per convertible preferred
security. Such convertible preferred debt securities do not require principal
amortization, and TIMET has the right to defer distributions on the convertible
preferred securities for one or more quarters of up to 20 consecutive quarters,
provided that such deferral period may not extend past the 2026 maturity date.
TIMET is prohibited from, among other things, paying dividends or reacquiring
its capital stock while distributions are being deferred on the convertible
preferred securities. In October 2002, TIMET elected to exercise its right to
defer future distributions on its convertible preferred securities for a period
of up to 20 consecutive quarters. Distributions continued to accrue at the
coupon rate on the liquidation amount and unpaid distributions. This deferral
was effective starting with TIMET's December 1, 2002 scheduled payment. In April
2004, TIMET paid all previously-deferred distributions with respect to the
convertible preferred debt securities and announced it would pay the next
scheduled distribution in June 2004.
In April 2004, TIMET announced that its board of directors had approved,
subject to shareholder approval of an amendment to its certificate of
incorporation, a split of its common stock at a ratio of five shares of
post-split common stock for each outstanding share of pre-split common stock.
When completed, such stock split will have no financial statement impact to the
Company, and the Company's ownership interest in TIMET will not change as a
result of the split.
In April 2004, TIMET announced that its board had authorized a tender offer
in which TIMET would offer to exchange any and all of the outstanding
convertible preferred debt securities issued by TIMET Capital Trust I for shares
of a new Series A Preferred Stock of TIMET at the rate of 1 share of Series A
Preferred Stock for each convertible preferred debt security. Completion of the
tender offer is subject to, among other things, approval by TIMET's shareholders
and effectiveness of a registration statement filed by TIMET with the SEC with
respect to the Series A Preferred Stock. Dividends on the Series A shares would
accumulate at the rate of 6 3/4% of their liquidation value of $50 per share,
and would be convertible into shares of TIMET common stock at the rate of .2
shares of TIMET common stock per Series A share (a rate of 1 share of TIMET
common stock per Series A share, assuming completion of the five-for-one stock
split discussed above). The Series A shares would not be mandatorily redeemable,
but would be redeemable at the option of TIMET in certain circumstances. Valhi
has indicated it intends to tender its shares of the convertible preferred debt
securities (14,700 shares) in the tender offer, if it is commenced.
TIMET periodically evaluates its liquidity requirements, capital needs and
availability of resources in view of, among other things, its alternative uses
of capital, debt service requirements, the cost of debt and equity capital, and
estimated future operating cash flows. As a result of this process, TIMET has in
the past, or in light of its current outlook, may in the future seek to raise
additional capital, modify its common and preferred dividend policies,
restructure ownership interests, incur, refinance or restructure indebtedness,
repurchase shares of capital stock or debt securities, sell assets, or take a
combination of such steps or other steps to increase or manage its liquidity and
capital resources. In the normal course of business, TIMET investigates,
evaluates, discusses and engages in acquisition, joint venture, strategic
relationship and other business combination opportunities in the titanium,
specialty metal and other industries. In the event of any future acquisition or
joint venture opportunities, TIMET may consider using then-available liquidity,
issuing equity securities or incurring additional indebtedness.
Tremont LLC
See Note 13 to the Consolidated Financial Statements for certain legal
proceedings and environmental matters with respect to Tremont.
In October 2002, Tremont entered into a $15 million revolving credit
facility with NL, collateralized by 10.2 million shares of NL common stock and
5.1 million shares of Kronos common stock owned by Tremont. The new facility,
which matures in December 2004, is eliminated in Valhi's consolidated financial
statements. At March 31, 2004, no amounts were outstanding under Tremont's loan
facility with NL and $15 million was available to Tremont for additional
borrowings.
General corporate - Valhi
Because Valhi's operations are conducted primarily through its subsidiaries
and affiliates, Valhi's long-term ability to meet its parent company level
corporate obligations is dependent in large measure on the receipt of dividends
or other distributions from its subsidiaries and affiliates. In February 2004,
Kronos announced it would pay its first regular quarterly cash dividend of $.25
per share. At that rate, and based on the 21.2 million shares of Kronos held
directly or indirectly by Valhi at March 31, 2004 (including 5.2 million held by
Tremont LLC, a wholly-owned subsidiary of Valhi), Valhi would directly or
indirectly receive aggregate annual dividends from Kronos of $21.2 million. NL,
which paid regular quarterly cash dividends of $.20 per share in 2003, paid its
first quarter 2004 regular quarterly dividend of $.20 per share in the form of
shares of Kronos common stock. CompX suspended its regular quarterly dividend in
the second quarter of 2003. The Company does not currently expect to receive any
distributions from Waste Control Specialists during 2004.
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 March 31, 2004, Valhi had $8.5 million of parent level cash and cash
equivalents and had $40 million outstanding under its revolving bank credit
agreement. In addition, Valhi had $43.9 million of borrowing availability under
its $85 million revolving bank credit facility.
The terms of The Amalgamated Sugar Company LLC Company Agreement provide
for annual "base level" of cash dividend distributions (sometimes referred to as
distributable cash) by the LLC of $26.7 million, from which the Company is
entitled to a 95% preferential share. Distributions from the LLC are dependent,
in part, upon the operations of the LLC. The Company records dividend
distributions from the LLC as income upon receipt, which occurs in the same
month in which they are declared by the LLC. To the extent the LLC's
distributable cash is below this base level in any given year, the Company is
entitled to an additional 95% preferential share of any future annual LLC
distributable cash in excess of the base level until such shortfall is
recovered. Based on the LLC's current projections for 2004, Valhi currently
expects that distributions received from the LLC in 2004 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 current
scheduled maturity in 2007, and such loan is subordinated to Snake River's
third-party senior debt. At March 31, 2004, the accrued and unpaid interest on
the $80 million loan to Snake River aggregated $34.4 million and is classified
as a noncurrent asset. The Company currently believes it will ultimately realize
both the $80 million principal amount and the accrued and unpaid interest,
whether through cash generated from the future operations of Snake River and the
LLC or otherwise (including any liquidation of Snake River or the LLC).
Following the currently scheduled complete repayment of Snake River's
third-party senior debt in April 2007, 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 ($10.9 million in 2004) would then become available, and
would be required, to be used to fund debt service payments on its loan from
Valhi. Prior to the repayment of the third-party senior debt, Snake River might
also make debt service payments to Valhi, if permitted by the terms of the
senior debt.
The Company may, at its option, require the LLC to redeem the Company's
interest in the LLC beginning in 2010, and the LLC has the right to redeem the
Company's interest in the LLC beginning in 2027. The redemption price is
generally $250 million plus the amount of certain undistributed income allocable
to the Company. In the event the Company requires the LLC to redeem the
Company's interest in the LLC, Snake River has the right to accelerate the
maturity of and call Valhi's $250 million loans from Snake River. Redemption of
the Company's interest in the LLC would result in the Company reporting income
related to the disposition of its LLC interest for both financial reporting and
income tax purposes. However, because of Snake River's ability to call its $250
million loans to Valhi upon redemption of the Company's interest in the LLC, the
net cash proceeds (after repayment of the debt) generated by redemption of the
Company's interest in the LLC could be less than the income taxes that would
become payable as a result of the disposition.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policies, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company and related entities routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies.
Non-GAAP financial measure
In an effort to provide investors with additional information regarding the
Company's results of operations as determined by GAAP, the Company has disclosed
certain non-GAAP information which the Company believes provides useful
information to investors:
o The Company discloses percentage changes in Kronos' average TiO2 selling
prices in billing currencies, which excludes the effects of foreign
currency translation. The Company believes disclosure of such percentage
changes allows investors to analyze such changes without the impact of
changes in foreign currency exchange rates, thereby facilitating
period-to-period comparisons of the relative changes in average selling
prices in the actual various billing currencies. Generally, when the U.S.
dollar either strengthens or weakens against other currencies, the
percentage change in average selling prices in billing currencies will be
higher or lower, respectively, than such percentage changes would be using
actual exchange rates prevailing during the respective periods.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that the Company files or submits to the
SEC under the Securities Exchange Act of 1934, as amended (the "Act"), is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
to the SEC under the Act is accumulated and communicated to the Company's
management, including its principal executive officer and its principal
financial officer, or persons performing similar functions, as appropriate to
allow timely decisions to be made regarding required disclosure. Each of Steven
L. Watson, the Company's Chief Executive Officer, and Bobby D. O'Brien, the
Company's Vice President, Chief Financial Officer and Treasurer, have evaluated
the Company's disclosure controls and procedures as of March 31, 2004. Based
upon their evaluation, these executive officers have concluded that the
Company's disclosure controls and procedures are effective as of the date of
such evaluation.
The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP, and includes
those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
Company,
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company,
and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's consolidated financial
statements.
There has been no change to the Company's system of internal controls over
financial reporting during the quarter ended March 31, 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's system of
internal controls over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Note 13 to the Consolidated Financial Statements and
to the 2003 Annual Report for descriptions of certain legal proceedings.
City of St. Louis v. Lead Industries Association, et al. (Missouri Circuit
Court 22nd Judicial Circuit, St. Louis City, Cause No. 002-245, Division 1). In
March 2004, the court denied defendants' renewed motion to dismiss and motion
for summary judgment.
Barker, et al. v. The Sherwin-Williams Company, et al. (Circuit Court of
Jefferson County, Mississippi, Civil Action No. 2000-587). With respect to the
ten plaintiffs transferred by the trial court to Holmes County, in April 2004
the parties jointly petitioned the Mississippi Supreme Court to transfer the
plaintiffs to their appropriate venues. The October 2004 trial date in Jefferson
County has been stayed pending plaintiffs' appeal to the Mississippi Supreme
Court of the denial of their motion to add additional defendants.
Jackson, et al., v. Phillips Building Supply of Laurel, et al. (Circuit
Court of Jones County, Mississippi, Dkt. Co. 2002-10-CV1). In March 2004,
defendants filed a motion to sever one of the plaintiffs. In March 2004, the
court stayed the case, thus delaying the June 2004 trial date, pending a
decision on the motion to sever, which is on appeal to the Mississippi Supreme
Court.
Walters v. NL Industries, et al. (Kings County Supreme Court, New York, No.
28087/2002). In March 2004, NL filed a motion to dismiss based on plaintiffs'
failure to provide discovery.
Jones v. NL Industries, Inc., et al. (Circuit Court of LeFlore County,
Mississippi, Civil Action No. 2002-0241-CICI). In March 2004, plaintiffs dropped
their motion to remand.
Cole, et al. v. ASARCO Incorporated et al. (U.S. District Court for the
Northern District of Oklahoma, Case No. 03C V327 EA (J)). In April 2004, the
plaintiffs voluntarily dismissed NL with prejudice from this case.
Crawford, et al. v. ASARCO Incorporated, et al. (Case No. CJ-03-304); Barr,
et al. v. ASARCO Incorporated, et al. (Case No. CJ-03-305); Brewer, et al. v.
ASARCO Incorporated, et al. (Case No. CJ-03-306); Kloer, et al. v. ASARCO
Incorporated, et al. (Case No. CJ-03-307); Rhoten, et al. v. ASARCO
Incorporated, et al. (Case No. CJ-03-308; and Nowlin, et al. v. ASARCO
Incorporated, et al. (Case No. CJ-2003-342)(all in the District Court in and for
Ottawa County, State of Oklahoma). In April 2004, the plaintiffs voluntarily
dismissed NL with prejudice from these cases.
The Quapaw Tribe of Oklahoma et al. v. ASARCO Incorporated et al. (United
States District Court, Northern District of Oklahoma, Case No. 03C-V846 H). NL
has answered the complaint and denied all of the plaintiffs' allegations.
Evans v. Asarco (United States District Court, Northern District of
Oklahoma, Case No. 04-CV-94EA(M)). NL has answered the complaint and denied all
of the plaintiffs' allegations.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 - Intercorporate Services Agreement between Contran
Corporation and Valhi, Inc. effective as of
January 1, 2004.
31.1 - Certification
31.2 - Certification
32.1 - Certification.
The Company has retained a signed original of any of the above exhibits
that contains signatures, and the Company will provide such exhibit to the
Commission or its staff upon request. Valhi will also furnish, without charge, a
copy of its Code of Business Conduct and Ethics and its Audit Committee Charter,
each as adopted by the board of directors on February 26, 2004, upon request.
Such requests should be directed to the attention of Valhi's Corporate Secretary
at Valhi's corporate offices located at 5430 LBJ Freeway, Suite 1700, Dallas,
Texas 75240.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended March 31, 2004.
February 27, 2004 - Reported Item 9. February 27, 2004 - Reported
Items 9 and 12.
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 May 10, 2004 By /s/ Bobby D. O'Brien
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Bobby D. O'Brien
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
Date May 10, 2004 By /s/ Gregory M. Swalwell
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Gregory M. Swalwell
Vice President and Controller
(Principal Accounting Officer)