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 June 30, 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 July 31, 2004:
119,470,878.
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets -
December 31, 2003 and June 30, 2004 3
Consolidated Statements of Income -
Three months and six months ended
June 30, 2003 and 2004 5
Consolidated Statements of Comprehensive Income -
Six months ended June 30, 2003 and 2004 6
Consolidated Statements of Cash Flows -
Six months ended June 30, 2003 and 2004 7
Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2004 9
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 28
Item 4. Controls and Procedures 49
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 51
Item 4. Submission of Matters to Vote of Security Holders 52
Item 6. Exhibits and Reports on Form 8-K. 52
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, June 30,
2003 2004
---------- -----------
Current assets:
Cash and cash equivalents $ 103,394 $ 141,640
Restricted cash and cash equivalents 19,348 11,281
Marketable securities 6,147 9,121
Accounts and other receivables 189,091 237,074
Refundable income taxes 37,712 1,350
Receivable from affiliates 317 796
Inventories 293,113 235,340
Prepaid expenses 10,635 5,964
Deferred income taxes 14,435 12,975
---------- ----------
Total current assets 674,192 655,541
---------- ----------
Other assets:
Marketable securities 176,941 179,492
Investment in affiliates 161,818 159,164
Receivable from affiliate 14,000 12,000
Loans and other receivables 116,566 116,751
Unrecognized net pension obligations 13,747 13,426
Goodwill 377,591 386,061
Other intangible assets 3,805 3,495
Deferred income taxes 351 180,053
Other 27,177 28,166
---------- ----------
Total other assets 891,996 1,078,608
---------- ----------
Property and equipment:
Land 35,557 34,744
Buildings 217,744 210,626
Equipment 805,081 794,814
Mining properties 34,330 33,552
Construction in progress 11,297 17,385
---------- ----------
1,104,009 1,091,121
Less accumulated depreciation 465,851 490,500
---------- ----------
Net property and equipment 638,158 600,621
---------- ----------
$2,204,346 $2,334,770
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30,
2003 2004
------------ -------------
Current liabilities:
Current maturities of long-term debt $ 5,392 $ 50,232
Accounts payable 118,781 82,954
Accrued liabilities 130,091 121,809
Payable to affiliates 21,454 13,464
Income taxes 13,105 8,533
Deferred income taxes 3,941 22,713
---------- ----------
Total current liabilities 292,764 299,705
---------- ----------
Noncurrent liabilities:
Long-term debt 632,533 598,822
Accrued pension costs 90,517 88,481
Accrued OPEB costs 37,410 35,567
Accrued environmental costs 61,725 61,027
Deferred income taxes 294,966 163,649
Other 34,908 35,532
---------- ----------
Total noncurrent liabilities 1,152,059 983,078
---------- ----------
Minority interest 99,789 145,929
---------- ----------
Stockholders' equity:
Common stock 1,340 1,340
Additional paid-in capital 99,048 98,625
Retained earnings 639,463 891,624
Accumulated other comprehensive income:
Marketable securities 85,124 86,837
Currency translation (3,573) (11,009)
Pension liabilities (59,154) (58,845)
Treasury stock (102,514) (102,514)
---------- ----------
Total stockholders' equity 659,734 906,058
---------- ----------
$2,204,346 $2,334,770
========== ==========
Commitments and contingencies (Notes 11 and 13)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
2003 2004 2003 2004
---- ---- ---- ----
Revenues and other income:
Net sales $317,393 $ 353,857 $622,779 $ 671,088
Other, net 8,221 16,719 16,823 26,036
-------- --------- -------- ---------
325,614 370,576 639,602 697,124
-------- --------- -------- ---------
Costs and expenses:
Cost of sales 245,505 278,162 481,604 529,660
Selling, general and administrative 67,042 51,286 123,387 105,350
Interest 14,710 15,055 29,129 30,660
-------- --------- -------- ---------
327,257 344,503 634,120 665,670
-------- --------- -------- ---------
(1,643) 26,073 5,482 31,454
Equity in earnings of:
Titanium Metals Corporation ("TIMET") (1,106) 2,146 (3,880) 2,512
Other (184) (21) 500 115
-------- --------- -------- ---------
Income (loss) before income taxes (2,933) 28,198 2,102 34,081
Income tax benefit (25,381) (283,204) (23,372) (282,534)
Minority interest in after-tax earnings 4,669 47,738 6,099 49,553
-------- --------- -------- ---------
Income before cumulative effect of
change in accounting principle 17,779 263,664 19,375 267,062
Cumulative effect of change in
accounting principle - - 586 -
-------- --------- -------- ------
Net income $ 17,779 $ 263,664 $ 19,961 $ 267,062
======== ========= ======== =========
Basic and diluted earnings per share:
Income before cumulative effect of
change in accounting principle $ .15 $ 2.19 $ .16 $ 2.22
Cumulative effect of change in
accounting principle - - .01 -
-------- -------- -------- -----
Net income $ .15 $ 2.19 $ .17 $ 2.22
======== ======== ======== ========
Cash dividends per share $ .06 $ .06 $ .12 $ .12
======== ======== ======== ========
Shares used in the calculation of per share amounts:
Basic earnings per common share 120,165 120,193 119,225 120,192
Dilutive impact of outstanding stock
options 167 146 153 222
-------- -------- -------- --------
Diluted earnings per share 120,332 120,339 119,378 120,414
======== ======== ======== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Six months ended June 30, 2003 and 2004
(In thousands)
2003 2004
---- ----
Net income $19,961 $267,062
------- --------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment 987 1,713
Currency translation adjustment 19,874 (7,436)
Pension liabilities adjustment (259) 309
------- --------
Total other comprehensive income (loss), net 20,602 (5,414)
------- --------
Comprehensive income $40,563 $261,648
======= ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2003 and 2004
(In thousands)
2003 2004
---- ----
Cash flows from operating activities:
Net income $ 19,961 $ 267,062
Depreciation and amortization 35,531 38,981
Securities transactions, net (537) 25
Proceeds from disposal of marketable securities (trading) 50 -
Noncash:
Interest expense 1,176 1,306
Defined benefit pension expense (1,249) 227
Other postretirement benefit expense (1,950) (1,867)
Deferred income taxes (22,163) (289,402)
Minority interest 6,099 49,553
Other, net (1,297) 895
Equity in:
TIMET 3,880 (2,512)
Other (500) (115)
Cumulative effect of change in accounting principle (586) -
Distributions from:
Manufacturing joint venture, net 800 8,300
Other - 53
Change in assets and liabilities:
Accounts and other receivables (32,773) (54,492)
Inventories 25,292 52,614
Accounts payable and accrued liabilities (10,556) (41,236)
Accounts with affiliates 16,659 (1,989)
Income taxes (23,928) 27,492
Other, net 5,354 2,001
-------- --------
Net cash provided by operating activities 19,263 56,896
-------- --------
Cash flows from investing activities:
Capital expenditures (18,372) (16,527)
Purchases of:
Kronos common stock - (16,158)
TIMET common stock (977) -
TIMET debt securities (158) -
Collection of loans to affiliate 2,000 2,000
Change in restricted cash equivalents, net 695 2,468
Other, net 1,272 2,938
-------- --------
Net cash used by investing activities (15,540) (25,279)
-------- --------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six months ended June 30, 2003 and 2004
(In thousands)
2003 2004
---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings $ 22,106 $ 147,220
Principal payments (16,293) (126,165)
Deferred financing costs paid (416) (28)
Loans from affiliate:
Loans 4,594 18,394
Repayments (15,043) (24,430)
Valhi dividends paid (14,898) (14,901)
Distributions to minority interest (3,531) (1,744)
Issuance of NL common stock 175 8,354
Other, net 78 410
-------- ---------
Net cash provided (used) by financing activities (23,228) 7,110
-------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities (19,505) 38,727
Currency translation 1,934 (481)
Cash and equivalents at beginning of period 94,679 103,394
-------- ---------
Cash and equivalents at end of period $ 77,108 $ 141,640
======== =========
Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized $ 29,370 $ 29,560
Income taxes, net 8,886 (20,489)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2004
(In thousands)
Accumulated other comprehensive income
Additional -------------------------------- Total
Common paid-in Retained Marketable Currency Pension Treasury stockholders'
stock capital earnings securities translation liabilities stock equity
Balance at December 31, 2003 $1,340 $ 99,048 $ 639,463 $85,124 $ (3,573) $(59,154) $(102,514) $ 659,734
Net income ................. -- -- 267,062 -- -- -- -- 267,062
Dividends .................. -- -- (14,901) -- -- -- -- (14,901)
Other comprehensive income
(loss), net ............... -- -- -- 1,713 (7,436) 309 -- (5,414)
Income tax related to
shares of Kronos Worldwide
distributed by NL ......... -- (503) -- -- -- -- -- (503)
Other, net ................. -- 80 -- -- -- -- -- 80
------ -------- --------- ------- -------- -------- --------- ---------
Balance at June 30, 2004 ... $1,340 $ 98,625 $ 891,624 $86,837 $(11,009) $(58,845) $(102,514) $ 906,058
====== ======== ========= ======= ======== ======== ========= =========
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 June 30, 2004, and the consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended June 30, 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
expense recognized by the Company in accordance with APBO No. 25 was $500,000
and nil in the second quarter and first six months of 2003, respectively, and
net compensation expense was nil and $1.1 million in the second quarter and
first six months of 2004, respectively, 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 Six months ended
June 30, June 30,
2003 2004 2003 2004
---- ---- ---- ----
(In millions, except per share amounts)
Net income as reported $17.8 $263.7 $20.0 $267.1
Adjustments, net of applicable income tax effects and minority interest, of
stock-based employee compensation expense determined under:
APBO No. 25 .3 .1 - .7
SFAS No. 123 (.4) (.3) (.8) (.5)
----- ------ ----- ------
Pro forma net income $17.7 $263.5 $19.2 $267.3
===== ====== ===== ======
Basic and diluted net income per share:
As reported $ .15 $ 2.19 $ .17 $ 2.22
Pro forma .15 2.19 .16 2.22
Note 2 - Business segment information:
% owned at
Business segment Entity June 30, 2004
Chemicals Kronos Worldwide, Inc. 94%
Component products CompX International Inc. 68%
Waste management Waste Control Specialists LLC 100%
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 owns an additional 21%. The
Company's ownership of TIMET includes 40% owned directly by Tremont and 1% owned
directly by Valhi. TIMET owns an additional 9% of CompX and .5% of NL, and TIMET
accounts for such CompX and NL shares as available-for-sale marketable
securities carried at fair value. Because the Company does not consolidate
TIMET, the shares of CompX and NL owned by TIMET are not considered as part of
the Company's consolidated investment in such companies. During the first six
months of 2004, the Company acquired additional shares of Kronos common stock in
market transactions for an aggregate of $16.2 million, increasing the Company's
aggregate ownership of Kronos to 94% at June 30, 2004. Also during the first six
months of 2004, the Company acquired the remaining 10% membership interest in
Waste Control Specialists, as discussed below, increasing the Company's
ownership interest in Waste Control Specialists to 100% as of June 30, 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 Six months ended
June 30, June 30,
2003 2004 2003 2004
---- ---- ---- ----
(In millions, except per share amounts)
Net sales:
Chemicals $266.6 $295.7 $519.6 $559.0
Component products 49.7 56.8 100.7 109.9
Waste management 1.1 1.4 2.5 2.2
------ ------ ------ ------
Total net sales $317.4 $353.9 $622.8 $671.1
====== ====== ====== ======
Operating income:
Chemicals $ 31.7 $ 36.2 $ 62.4 $ 58.4
Component products .9 5.9 2.2 8.8
Waste management (3.6) (3.6) (5.6) (6.8)
------ ------ ------ ------
Total operating income 29.0 38.5 59.0 60.4
General corporate items:
Interest and dividend income 8.0 8.0 16.3 16.1
Legal settlement gains, net .7 .5 .7 .5
Securities transaction gains, net .2 - .5 -
General expenses, net (24.8) (5.8) (41.9) (14.8)
Interest expense (14.7) (15.1) (29.1) (30.7)
------ ------ ------ ------
(1.6) 26.1 5.5 31.5
Equity in:
TIMET (1.1) 2.1 (3.9) 2.5
Other (.2) - .5 .1
------ ------ ------ ------
Income (loss) before income taxes $ (2.9) $ 28.2 $ 2.1 $ 34.1
====== ====== ====== ======
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) 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. NL paid
its next regular $.20 per share quarterly dividend in July 2004, also paid in
the form of shares of Kronos common stock, and the effect of such dividend will
be recognized by the Company in its consolidated financial statements during the
third quarter of 2004.
At the beginning of 2004, the Company owned 90% of the membership interest
in Waste Control Specialists. The Company's ownership of Waste Control
Specialists is owned by Andrews County Holding, Inc., a subsidiary of Valhi.
Andrews County had also previously loaned approximately $1.5 million to an
individual who controlled the remaining 10% membership interest in Waste Control
Specialists, and such loan was collateralized by such 10% membership interest in
Waste Control Specialists. During the second quarter of 2004, the other owner of
Waste Control Specialists entered into an agreement with Andrews County in
which, among other things, Andrews County acquired the remaining 10% ownership
interest in Waste Control Specialists and the outstanding balance of such loan
($2.5 million, including accrued and unpaid interest), was cancelled. As a
result, Waste Control Specialists became wholly owned by Andrews County. Valhi
owns 100% of the outstanding common stock of Andrews County.
Note 3 - Marketable securities:
December 31, June 30,
2003 2004
------------ ----------
(In thousands)
Current assets - restricted debt securities
(available-for-sale) $ 6,147 $ 9,121
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $170,000 $170,000
Restricted debt securities 6,870 9,423
Other common stocks 71 69
-------- --------
$176,941 $179,492
======== ========
Note 4 - Accounts and other receivables:
December 31, June 30,
2003 2004
------------ -----------
(In thousands)
Accounts receivable $191,714 $239,210
Notes receivable 2,026 2,131
Allowance for doubtful accounts (4,649) (4,267)
-------- --------
$189,091 $237,074
======== ========
Note 5 - Inventories:
December 31, June 30,
2003 2004
-------- --------
(In thousands)
Raw materials:
Chemicals $ 61,960 $ 35,409
Component products 6,170 5,939
-------- --------
68,130 41,348
-------- --------
In process products:
Chemicals 19,854 17,079
Component products 10,852 10,331
-------- --------
30,706 27,410
-------- ---------
Finished products:
Chemicals 148,047 122,433
Component products 9,166 8,308
-------- --------
157,213 130,741
-------- --------
Supplies (primarily chemicals) 37,064 35,841
-------- --------
$293,113 $235,340
======== ========
Note 6 - Accrued liabilities:
December 31, June 30,
2003 2004
------------ ----------
(In thousands)
Current:
Employee benefits $ 48,827 $ 43,438
Environmental costs 24,956 20,026
Deferred income 4,699 823
Interest 383 407
Other 51,226 57,115
-------- --------
$130,091 $121,809
======== ========
Noncurrent:
Insurance claims and expenses $ 13,303 $ 13,569
Employee benefits 9,705 9,606
Deferred income 1,634 1,491
Asset retirement obligations 1,670 1,623
Other 8,596 9,243
-------- --------
$ 34,908 $ 35,532
======== ========
Note 7 - Other assets:
December 31, June 30,
2003 2004
-------- ----------
(In thousands)
Investment in affiliates:
TIMET:
Common stock $ 20,357 $ 26,004
Convertible preferred debt securities 265 200
-------- --------
20,622 26,204
TiO2 manufacturing joint venture 129,010 120,711
Other 12,186 12,249
-------- --------
$161,818 $159,164
======== ========
Loans and other receivables:
Snake River Sugar Company:
Principal $ 80,000 $ 80,000
Interest 33,102 35,698
Other 5,490 3,184
-------- --------
118,592 118,882
Less current portion 2,026 2,131
-------- --------
Noncurrent portion $116,566 $116,751
======== ========
Other noncurrent assets:
Deferred financing costs $ 10,569 $ 9,182
Refundable insurance deposit 1,972 1,972
Waste disposal site operating permits 982 2,769
Restricted cash equivalents 488 490
Other 13,166 13,753
-------- --------
$ 27,177 $ 28,166
======== ========
At June 30, 2004, the Company held 1.3 million shares of TIMET with a
quoted market price of $92.55 per share, or an aggregate market value of $120
million. In March 2004, TIMET announced that its board of directors had
approved, subject to certain conditions, 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, which is expected to occur during the
third quarter of 2004, 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 June 30, 2004, TIMET reported total assets of $591.3 million and
stockholders' equity of $165.5 million. TIMET's total assets at June 30, 2004
include current assets of $287.4 million, property and equipment of $230.9
million and intangible assets of $5.5 million. TIMET's total liabilities at June
30, 2004 include current liabilities of $113.0 million, long-term capital lease
obligations of $9.8 million, accrued OPEB and pension costs aggregating $79.2
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 six months of 2004, TIMET reported net sales of $244.6
million, operating income of $9.8 million and income before cumulative effect of
a change in accounting principle of $200,000 (2003 - net sales of $201.1
million, an operating loss of $10.2 million and a loss before cumulative effect
of a change in accounting principle of $19.7 million).
In July 2004, TIMET commenced 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 certain
conditions. 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 one-third of a share of TIMET common
stock per Series A share (a rate of one and two-thirds of a 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, which is currently expected to
be completed during the third quarter of 2004.
Note 8 - Other income:
Six months ended
June 30,
2003 2004
---- ----
(In thousands)
Securities earnings:
Dividends and interest $16,329 $16,122
Securities transactions, net 537 (25)
------- -------
16,866 16,097
Contract dispute settlement - 6,289
Legal settlement gains, net 650 495
Currency transactions, net (4,465) 871
Other, net 3,772 2,284
------- -------
$16,823 $26,036
======= =======
The contract dispute settlement relates to Kronos' settlement with a
customer. As part of the settlement, the customer agreed to make payments to
Kronos through 2007 aggregating $7.3 million. The $6.3 million gain recognized
represents the present value of the future payments to be paid by the customer
to Kronos.
Note 9 - Long-term debt:
December 31, June 30,
2003 2004
------------- ----------
(In thousands)
Valhi:
Snake River Sugar Company $250,000 $250,000
Bank credit facility 5,000 50,000
-------- --------
255,000 300,000
-------- --------
Subsidiaries:
Kronos Worldwide Senior Secured Notes 356,136 346,446
CompX revolving bank credit facility 26,000 2,000
Other 789 608
-------- --------
382,925 349,054
-------- --------
637,925 649,054
Less current maturities 5,392 50,232
-------- --------
$632,533 $598,822
======== ========
Note 10 - Accounts with affiliates:
December 31, June 30,
2003 2004
------------ ----------
(In thousands)
Current receivables from affiliates:
TIMET $ 50 $ 387
Other 267 409
-------- --------
$ 317 $ 796
======== ========
Noncurrent receivable from affiliate -
loan to Contran family trust $ 14,000 $ 12,000
======== ========
Payables to affiliates:
Contran:
Demand loan $ 7,332 $ 1,296
Income taxes 3,759 862
Trade items 1,790 2,266
Louisiana Pigment Company 8,560 9,030
Other 13 10
-------- --------
$ 21,454 $ 13,464
======== ========
Note 11 - Income tax benefit:
Six months ended
June 30,
2003 2004
---- ----
(In millions)
Expected tax expense $ .7 $ 11.9
Change in deferred income tax valuation allowance, net (.4) (285.4)
Tax contingency reserve adjustments, net - (12.5)
Refund of prior year income taxes (24.6) (3.1)
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies .4 .8
Non-U.S. tax rates (.5) (.1)
U.S. state income taxes, net .7 .3
Other, net .3 5.6
------ -------
$(23.4) $(282.5)
====== =======
Comprehensive provision for income taxes (benefit) allocated to:
Income before cumulative effect of change
in accounting principle $(23.4) (282.5)
Cumulative effect of change in accounting principle .3 -
Additional paid-in capital - .6
Other comprehensive income:
Marketable securities .8 -
Currency translation 2.7 (.5)
Pension liabilities - .1
------ -------
$(19.6) $(282.3)
====== =======
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, 1999 and 2000 income tax returns until September 30,
2005. During the course of the examination, the IRS proposed 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 has reached an
agreement with the IRS concerning the settlement of this matter pursuant to
which, among other things, the Company agreed to pay approximately $24
million, including interest, up front as a partial payment of the
settlement amount (which amount is expected to be paid in the next 12
months and is classified as a current liability at June 30, 2004), and NL
will be required to recognize the remaining settlement amount in its
taxable income over the next 15 years beginning in 2004. NL has signed the
settlement agreement that was drafted by the IRS. The IRS will sign the
settlement agreement after certain procedural matters are concluded, which
procedural matters both NL and its outside legal counsel believe are
perfunctory. NL had previously provided accruals to cover its estimated
additional tax liability (and related interest) concerning this matter. As
a result of the settlement, NL has decreased its previous estimate of the
amount of additional income taxes and interest it will be required to pay,
and NL recognized a $12.6 million tax benefit in the second quarter of 2004
related to the revised estimate. In addition, during the second quarter of
2004, the Company recognized a $30.5 million tax benefit related to the
reversal of a deferred income tax asset valuation allowance related to
certain tax attributes of EMS which NL believes now meet the
"more-likely-than-not" recognition criteria. A majority of the deferred
income tax asset valuation allowance relates to net operating loss
carryforwards of EMS. As a result of the settlement agreement, NL (which
previously was not allowed to utilize such net operating loss carryforwards
of EMS) will fully utilize such carryforwards in its 2003 taxable year,
eliminating the need for a valuation allowance related to such
carryforwards. The remainder of the deferred income tax asset valuation
allowance relates to deductible temporary differences associated with
accrued environmental obligations of EMS which NL now believes meet the
"more-likely-than-not" recognition criteria since, as a result of the
settlement agreement, such obligations and the related tax deductions will
be included in NL's taxable income.
o Kronos has received a preliminary tax assessment related to 1993 from the
Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately euro 6 million ($7 million at June 30, 2004).
Kronos 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
the proposed assessment is substantially 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.
At December 31, 2003, Kronos had a significant amount of net operating loss
carryforwards for German corporate and trade tax purposes, all of which have no
expiration date. These net operating loss carryforwards were generated by Kronos
International principally during the 1990's when Kronos International had a
significantly higher level of outstanding indebtedness than is currently
outstanding. For financial reporting purposes, however, the benefit of such net
operating loss carryforwards had not previously been recognized because Kronos
did not believe they met the "more-likely-than-not" recognition criteria, and
accordingly Kronos had a deferred income tax asset valuation allowance
offsetting the benefit of such net operating loss carryforwards and Kronos'
other tax attributes in Germany. Prior to the end of 2003, Kronos believed there
was significant uncertainty regarding its ability to utilize such net operating
loss carryforwards under German tax law and, principally because of this
uncertainty, Kronos had concluded the benefit of the net operating loss
carryforwards did not meet the "more-likely-than-not" criteria. By the end of
2003, and primarily as a result of a favorable German court ruling in 2003 and
the procedures Kronos had completed during 2003 with respect to the filing of
certain amended German tax returns (as discussed below), Kronos had concluded
that the significant uncertainty regarding its ability to utilize such net
operating loss carryforwards under German tax law had been eliminated. However,
at the end of 2003, Kronos believed that it would generate a taxable loss in
Germany during 2004. Such expectation was based primarily upon then current
levels of prices for TiO2, and the fact that Kronos was experiencing a downward
trend in its TiO2 selling prices and Kronos did not have any indication that the
downward trend would improve. Accordingly, Kronos continued to conclude at the
end of 2003 that the benefit of the German net operating loss carryforwards did
not meet the "more-likely-than-not" criteria. The expectation for a taxable loss
in Germany continued through the end of the first quarter of 2004. By the end of
the second quarter of 2004, however, Kronos' TiO2 selling prices had started to
increase, and Kronos believes its selling prices will continue to increase
during the second half of 2004 after Kronos and its major competitors announced
an additional round of price increases. Consequently, Kronos' revised
projections now reflect taxable income for Germany in 2004 as well as 2005.
Accordingly, based on all available evidence, Kronos concluded that the benefit
of the net operating loss carryforwards and other German tax attributes now meet
the "more-likely-than-not" recognition criteria, and Kronos reversed the
deferred income tax asset valuation allowance related to Germany. Accordingly,
in the first six months of 2004, Kronos recognized a $254.3 million income tax
benefit related to the reversal of such deferred income tax asset valuation
allowance attributable to Kronos' income tax attributes in Germany (principally
the net operating loss carryforwards). Of such $254.3 million, $8.7 million
relates primarily to the utilization of the German net operating loss
carryforwards during the first six months of 2004, the benefit of which had
previously not met the "more-likely-than-not" recognition criteria, and $245.6
million relates to the German deferred income tax asset valuation allowance
attributable to the remaining German net operating loss carryforwards and other
tax attributes as of June 30, 2004, the benefit of which Kronos has concluded
now meet the "more-likely-than-not" recognition criteria. At June 30, 2004, the
net operating loss carryforwards for German corporate and trade tax purposes
aggregated the equivalent of $594 million and $255 million, respectively, all of
which have no expiration date.
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 net refund
of taxes and related interest to KII and its German operating subsidiary of euro
26.9 million ($32.1 million), and the Company recognized the benefit of these
net refunds in its 2003 results of operations. During the first six months of
2004, the Company recognized the benefit of euro 2.5 million ($3.1 million)
related to additional net interest which has accrued on the outstanding refund
amounts. 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 returns with respect to the 1990 and 1991 tax years.
Through June 2004, KII's German operating subsidiary had received net refunds of
euro 24.5 million ($28.4 million when received). KII believes it will receive
the remainder of the net refunds of taxes and related interest during the
remainder of 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, and the Company
recognized the benefit of this refund in the second quarter of 2003.
Note 12 - Minority interest:
December 31, June 30,
2003 2004
-------- ---------
(In thousands)
Minority interest in net assets:
NL Industries $31,262 $ 62,522
Kronos Worldwide 11,076 23,943
CompX International 48,424 49,829
Other subsidiaries of NL 9,027 9,635
------- --------
$99,789 $145,929
======= ========
Six months ended
June 30,
2003 2004
---- ----
(In thousands)
Minority interest in income (loss) before cumulative effect of change in
accounting principle:
NL Industries $5,886 $30,232
Kronos Worldwide - 17,239
CompX International 272 1,525
Tremont Corporation (217) -
Other subsidiaries of NL 158 557
------ -------
$6,099 $49,553
====== =======
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. As previously reported, all of Waste Control
Specialists aggregate inception-to-date net losses accrued to the Company for
financial reporting purposes prior to the time when Waste Control Specialists
became a wholly-owned subsidiary of the Company in the second quarter of 2004.
Accordingly, no minority interest in Waste Control Specialists has been
recognized in the Company's consolidated financial statements.
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 other 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 (which discontinued business operations in 2002) have been named as
defendants in various legal proceedings seeking damages for personal injury,
property damage and governmental expenditures allegedly caused by the use of
lead-based paints. Certain of these actions have been filed by or on behalf of
states, large U.S. cities or their public housing authorities and school
districts, and certain others have been asserted as class actions. These
lawsuits seek recovery under a variety of theories, including public and private
nuisance, negligent product design, negligent failure to warn, strict liability,
breach of warranty, conspiracy/concert of action, aiding and abetting enterprise
liability, market share 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. Environmental Protection Agency ("EPA") or any
applicable foreign authority or any state, provincial or local authority.
Certain properties and facilities used in the Company's former businesses,
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 solvency of other PRPs, the multiplicity of possible
solutions, and the years of investigatory, remedial and monitoring activity
required. In addition, the imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs or allocation of such costs among PRPs,
solvency of other PRPs, the results of future testing and analysis undertaken
with respect to certain sites or a determination that the Company is potentially
responsible for the release of hazardous substances at other sites, could result
in expenditures in excess of amounts currently estimated by the Company to be
required for such matters. In addition, with respect to other PRPs and the fact
that the Company may be jointly and severally liable for the total remediation
cost at certain sites, the Company could ultimately be liable for amounts in
excess of its accruals due to, among other things, reallocation of costs among
PRPs or the insolvency of one 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 June 30, 2004, NL had recognized a $1.5 million receivable from other PRPs at
one site for recovery of remediation costs previously expended by NL pursuant to
an agreement entered into by NL and such other PRPs. NL expects to receive the
$1.5 million recovery during the third quarter of 2004.
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 six months of 2004 is presented in the table below. The Company
recognized a net reduction in its accrued environmental costs credited to income
during the first six months of 2004 due primarily to the $1.5 million recovery
discussed above. The amount shown in the table below for payments against the
Company's accrued environmental costs is net of such $1.5 million recovery.
Amount
(In thousands)
Balance at December 31, 2003 $86,681
Net reductions credited to income (261)
Payments, net (5,367)
-------
Balance at June 30, 2004 $81,053
=======
Amounts recognized in the balance sheet at June 30, 2004:
Current liability $20,026
Noncurrent liability 61,027
-------
$81,053
NL. Certain properties and facilities used in NL's former operations,
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, NL has been named as a defendant,
PRP, or both, pursuant to the CERCLA, and 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,
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 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 June 30, 2004, NL
had accrued $73 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 $101 million. NL's estimates of such liabilities have not been
discounted to present value.
At June 30, 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 June 30, 2004, NL had $17 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 ($1.9 million at June 30, 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 June 30, 2004 for any
such cost. The amount accrued at June 30, 2004 represents Tremont's best
estimate of the costs to be incurred through 2006 with respect to the interim
remediation measures.
TIMET. At June 30, 2004, TIMET had accrued approximately $4.1 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 $6.6 million at June 30,
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.
Reference is made to the Company's 2003 Annual Report and Quarterly Report
on Form 10-Q for the quarter ended March 31, 2004 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 485 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 May 2004, the parties agreed to the dismissal with prejudice of the
previously-reported matter Ken Bigham, et al. v. Valhi, Inc., et al.
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 workers' compensation bonds having a
maximum aggregate obligation of $3.0 million that were issued on behalf of a
divested subsidiary that is currently under Chapter 11 bankruptcy protection.
The issuers of the bonds have been required to make payments on the bonds for
applicable claims and have requested reimbursement from TIMET. Through June 30,
2004, TIMET has reimbursed the issuer approximately $1.0 million under these
bonds, and $1.0 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 Six months ended
June 30, June 30,
2003 2004 2003 2004
---- ---- ---- ----
(In thousands)
Service cost benefits $ 1,335 $ 1,459 $ 2,633 $ 3,128
Interest cost on projected benefit
obligations 5,006 5,455 9,870 10,952
Expected return on plan assets (4,898) (5,222) (10,230) (10,488)
Amortization of prior service cost 88 140 175 281
Amortization of net transition
obligations 183 147 355 290
Recognized actuarial losses 605 1,082 1,207 2,160
------- ------- ------- -------
$ 2,319 $ 3,061 $ 4,010 $ 6,323
======= ======= ======= =======
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 Six months ended
June 30, June 30,
2003 2004 2003 2004
---- ---- ---- ----
(In thousands)
Service cost $ 38 $ 56 $ 73 $ 113
Interest cost 705 879 1,405 1,539
Amortization of prior service credit (519) (477) (1,038) (732)
Recognized actuarial losses 11 45 19 90
------- ------- ------- -------
$ 235 $ 503 $ 459 $ 1,010
======= ======= ======= =======
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the "Medicare 2003 Act") introduced a prescription drug benefit under Medicare
(Medicare Part D) as well as a federal subsidy to sponsors of retiree health
care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. Detailed regulations necessary to implement the
Medicare 2003 Act have not been issued, including those that would specify the
manner in which actuarial equivalency would be determined, the evidence required
to demonstrate actuarial equivalence and the documentation requirements
necessary to be receive the subsidy. Until such definitive regulations are
issued, the Company is unable to determine whether the prescription drug benefit
offered under its postretirement benefit plans is at least actuarially
equivalent to Medicare Part D. Accordingly, the Company's accumulated
postretirement benefit obligation and net periodic postretirement benefit cost,
as reflected in the accompanying consolidated financial statements, do not
reflect any effect of the federal subsidy. When such definitive regulations are
issued or at such other time that the Company can determine whether the
prescription drug benefit offered under its postretirement benefit plans is at
least actuarially equivalent to Medicare Part D, the Company would account for
the effect of the federal subsidy, if any, prospectively from that date, as
permitted by and in accordance with FASB Staff Position No. 106-2.
Note 15 - Accounting principle newly adopted in 2004:
The Company complied with the consolidation requirements of 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 net income of $263.7 million, or $2.19 per diluted
share, in the second quarter of 2004 compared to net income of $17.8 million, or
$.15 per diluted share, in the second quarter of 2003. For the first six months
of 2004, the Company reported income before cumulative effect of change in
accounting principle of $267.1 million, or $2.22 per diluted share, compared to
income of $19.4 million, or $.16 per diluted share, in the first six months of
2003.
The Company believes the analysis presented in the following table is
useful in understanding the comparability of its results of operations for the
2003 and 2004 periods presented. Each of these items are more fully discussed
below in the applicable sections of this "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Results of Operations" or in
the 2003 Annual Report.
Income before cumulative effect of change in
accounting principle -
diluted earnings per share -
Three months ended Six months ended
June 30, June 30,
2003 2004 2003 2004
---- ---- ---- ----
German valuation allowance adjustment (1) $ - $1.75 $ - $1.75
Tax benefits related to EMS (2) - .30 - .30
Kronos contract dispute settlement (3) - .03 - .03
Refund of prior year German income taxes(4) .17 - .17 -
Operations and other, net (.02) .11 (.01) .14
----- ----- ----- -----
$ .15 $2.19 $ .16 $2.22
===== ===== ===== =====
(1) Kronos' reversal of its German deferred income tax asset valuation
allowance as of June 30, 2004.
(2) Reversal of the deferred income tax asset valuation allowance related to
EMS and adjustment of estimated tax due upon IRS settlement.
(3) Kronos' income from settlement of a contract dispute.
(4) Refund of prior year German income taxes received.
The increase in the Company's diluted earnings per share from the first
quarter and first six months of 2003 compared to the same periods in 2004 is due
primarily to the net effects of (i) changes in chemicals operating income, (ii)
higher component products operating income, (iii) lower environmental
remediation and legal expenses of NL, (iv) the reversal of Kronos' German
deferred income tax asset valuation allowance and (v) the tax benefits related
to EMS. Overall, the Company currently believes its net income in 2004 will be
higher than 2003 due in part to the impact of the tax benefits recognized in
2004.
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 actual future
results to differ materially are the risks and uncertainties discussed in this
Quarterly Report and those described from time to time in the Company's other
filings with the 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 Uncertainties associated with new product development (such as TIMET's
ability to develop new end-uses for its titanium products),
o The ultimate outcome of income tax audits, tax settlement initiatives or
other tax matters,
o The ultimate ability to utilize income tax attributes, the benefit of which
has been recognized under the "more-likely-than-not" recognition criteria
(such as Kronos' ability to utilize its German net operating loss
carryforwards),
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government laws and regulations and possible changes therein (such as
changes in government regulations which might impose various obligations on
present and former manufacturers of lead pigment and lead-based paint,
including NL, with respect to asserted health concerns associated with the
use of such products),
o The ultimate resolution of pending litigation (such as NL's lead pigment
litigation and litigation surrounding environmental matters of NL, Tremont
and TIMET), and o Possible future litigation.
Should one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of changes in information, future
events or otherwise.
Chemicals
Relative changes in Kronos' TiO2 sales and operating income during the 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, were generally decreasing
during the third and fourth quarters of 2003 and the first quarter of 2004 and
were generally flat during the second quarter of 2004.
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2003 2004 % Change 2003 2004 % Change
---- ---- -------- ---- ---- --------
(In millions, except percentages)
Net sales $266.6 $295.7 +11% $519.6 $559.0 +8%
Operating income 31.7 36.2 +14% 62.4 58.4 -7%
Ti02 data:
Sales volumes* 121 137 +13% 240 255 +6%
Production volumes* 120 123 +3% 237 240 +1%
Percentage change in Ti02 average selling prices:
Using actual
foreign currency
exchange rates -% +2%
Impact of changes in
foreign currency
exchange rates -5% -7%
---- ----
In billing currencies -5% -5%
==== ====
* Thousands of metric tons
Kronos' sales increased $29.1 million (11%) in the second quarter of 2004
compared to the second quarter of 2003, and increased $39.4 million (8%) for the
first six months of 2004 as the favorable effect of fluctuations in foreign
currency exchange rates, which increased chemicals sales by approximately $13
million and $35 million, respectively, as further discussed below, and higher
sales volumes 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
each of the second quarter and first six months of 2004 were 5% lower than the
comparable periods of 2003. When translated from billing currencies into U.S.
dollars using actual foreign currency exchange rates prevailing during the
respective periods, Kronos' average TiO2 selling prices in the second quarter of
2004 were comparable to the second quarter of 2003, and increased 2% for the
first six months of the year.
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 nil and 2% increases in Kronos' average TiO2
selling prices during the second quarter and first six months of 2004,
respectively, as compared to the same periods of 2003 using actual foreign
currency exchange rates prevailing during the respective periods (the GAAP
measure) and the 5% decreases 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).
Reflecting the impact of partial implementation of prior price increase
announcements, Kronos' average TiO2 selling prices in the second quarter of 2004
were generally flat as compared to the first quarter of 2004, reversing the
downward trend that had existed since the third quarter of 2003. Kronos has also
recently announced additional price increases of 4 cents per pound in the U.S.,
a Canadian 6 cents per pound in Canada and a euro 120 per metric ton in Europe,
all of which are targeted to be implemented later in 2004. The extent to which
all of such price increases will be realized will depend on, among other things,
economic factors.
Chemicals operating income in the second quarter of 2004 includes $6.3
million of income related to the settlement of a certain contract dispute with a
customer. As part of the settlement, the customer agreed to make payments to
Kronos through 2007 aggregating $7.3 million. The $6.3 million gain recognized
represents the present value of the future payments to be paid by the customer
to Kronos.
Kronos' TiO2 sales volumes in the second quarter of 2004 increased 13%
compared to the second quarter of 2003, and volumes were 6% higher in the
year-to-date period, as higher volumes in European and export markets more than
offset lower volumes in Canada. Kronos' operating income comparisons were also
favorably impacted by higher production levels, which increased 3% in the second
quarter of 2004 compared to the second quarter of 2003, and increased 1% in the
first six months of 2004. Kronos' operating rates were near full capacity in
both periods, and Kronos' sales and production volumes in the first six months
of 2004 were both new records for Kronos. Operating income comparisons were
negatively impacted by the lower average selling prices for TiO2.
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 second quarter and first six
months of 2004 by a net amount of approximately $13 million and $35 million,
respectively, compared to the same periods 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 2004 periods as compared to the same periods of 2003. Overall, the net
impact of currency exchange rate fluctuations increased chemicals operating
income in the second quarter and first six months of 2004 by $6 million and $8
million, respectively, as compared to the same periods in 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, began to rise
during the second quarter of 2004, and should continue to rise during the
remainder of the year. 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 $7.4 million in the first six months
of 2003 and $8.0 million in the first six months of 2004.
Component products
Three months ended Six months ended
June 30, June 30,
------------------ --------------
2003 2004 % Change 2003 2004 % Change
---- ---- -------- ---- ---- --------
(In millions, except percentages)
Net sales $ 49.1 $ 56.8 +14% $100.7 $109.9 +9%
Operating income .9 5.9 +575% 2.2 8.8 +300%
Component products sales were higher in the second quarter and first six
months of 2004 as compared to the same periods in 2003 due in part to the
favorable effect of fluctuations in foreign currency exchange rates.
Fluctuations in the value of the U.S. dollar relative to other currencies
increased component products sales by $900,000 in the second quarter of 2004 as
compared to the second quarter of 2003, and increased sales by $3.4 million in
the first six months of the year. Component products sales comparisons were also
impacted by higher sales volumes of security products and precision slide
products, the effect of price increases for certain products and slightly lower
sales volumes of ergonomic products.
During the second quarter of 2004, sales of slide and security products
increased 28% and 5%, respectively, as compared to the second quarter of 2003,
while sales of ergonomic products decreased 5% (year-to-date increases for slide
and security products of 17% and 3%, respectively, and year-to-date decrease of
4% for ergonomic products). 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 initiatives undertaken in 2002 and 2003,
including retooling of CompX's facility in Michigan, consolidating CompX's two
Canadian facilities into one facility and restructuring the 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 products and expenses of approximately $800,000
incurred during the first six months of 2003 ($400,000 in the second quarter)
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 second quarter and first six months 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.
While demand has improved across most of CompX's product segments, certain
customers are seeking lower cost Asian sources as alternatives to CompX's
products. Although CompX believes the impact of this will be mitigated through
its ongoing initiatives to expand both new products and new market
opportunities, the recent increase in its order rates may be moderated to a
certain extent in the near term. Asian-sourced competitive pricing pressures are
expected to continue to be a challenge as those manufacturers, particularly
those located in China, gain market share. CompX has responded to the
competitive pricing pressure in part by reducing production cost through product
reengineering or improvement 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 unprofitable future sales in response to the
competitive pricing pressures.
Additionally, CompX's cost for steel continues to rise dramatically due to
the continued high demand and shortages worldwide. While CompX has thus far been
able to pass a majority of its higher raw material costs on to its customers
through price increases and surcharges, there is no assurance that it would be
able to continue to pass along any additional higher costs to its customers. The
price increases and surcharges may accelerate the efforts of some of CompX's
customers to find less expensive products from foreign manufacturers. CompX will
continue to focus on cost improvement initiatives, utilizing lean manufacturing
techniques and prudent balance sheet management in order to minimize the impact
of lower sales, particularly to the office furniture industry, and to develop
value-added customer relationships with 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 reductions implemented during 2003 at
it Netherlands operations. Although CompX expects the operating results of its
Netherlands operations will continue to improve, CompX is evaluating the overall
strategic role of such operations for CompX as a whole, and additional actions
could be taken in the future, including the possible sale of some or all of such
operations, and additional actions could be taken in the future that could
result in significant 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
expand on new product and new market opportunities to improve CompX's
profitability.
Waste management
Three months ended Six months ended
June 30, June 30,
2003 2004 2003 2004
---- ---- ---- ----
(In millions)
Net sales $ 1.1 $ 1.4 $ 2.5 $ 2.2
Operating loss (3.6) (3.6) (5.6) (6.8)
Waste management sales decreased, and its operating loss increased, in the
first six months of 2004 compared to the same period of 2003 due to continued
weak demand for waste management services and costs associated with the
enhancement of the operating management team. Waste Control Specialists also
continues to explore opportunities to obtain certain types of new business
(including treatment and storage of certain types of waste) 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 has applied for such a disposal license with the applicable
regulatory agency. 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 Six months ended
June 30, June 30,
2003 2004 2003 2004
---- ---- ---- ----
(In millions)
TIMET historical:
Net sales $101.8 $124.1 $201.1 $244.6
====== ====== ====== ======
Operating income (loss) $ (2.1) $ 7.0 $(10.2) $ 9.8
Other general corporate, net (.2) .1 (.5) .9
Interest expense (4.0) (4.1) (8.3) (8.4)
------ ------ ------ ------
(6.3) 3.0 (19.0) 2.3
Provision for income taxes (.1) (.8) (.5) (1.3)
Minority interest - (.3) (.2) (.8)
------ ------ ------ ------
Income (loss) before cumulative
effect of change in accounting
principle $ (6.4) $ 1.9 $(19.7) $ .2
====== ====== ====== ======
Equity in earnings (losses) of TIMET $ (1.1) $ 2.1 $ (3.9) $ 2.5
====== ====== ====== ======
TIMET reported higher sales in the second quarter and first six months of
2004 as compared to the same periods of 2003, and TIMET improved from reporting
operating losses in the 2003 periods to operating income in the 2004 periods.
TIMET's operating results improved in the second quarter of 2004 as compared to
the second quarter of 2003 in part due to a 33% increase in sales volumes of
mill products, a 3% increase in sales volumes of melted products (ingot and
slab) and an 8% increase in melted product average selling prices. These
increases were partially offset by a 3% decrease in mill product average selling
prices (which prices were, however, positively impacted by the continued
weakening of the U.S. dollar compared to the British pound sterling and the euro
and negatively impacted by changes in product mix). TIMET's sales volumes of
mill products and melted products increased 30% and 21%, respectively, in the
first six months of 2004 as compared to the same period in 2003, while average
selling prices for melted products increased 1% and selling prices of mill
products decreased 3%. The increase in sales volumes of mill products is due
primarily to higher volumes in the commercial and military aerospace sector and
industrial markets. The increase in sales volumes for melted products is
principally the result of new customer relationships and market share gains.
TIMET's operating results in the first six months of 2004 includes income
in the first quarter of $1.9 million 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 55% in the first six months
of 2003 to 72% in the first six months of 2004, and TIMET's continued cost
management efforts. TIMET's operating results comparisons were negatively
impacted by relative changes in TIMET's LIFO inventory reserves, which reduced
TIMET's operating income in the second quarter and first six months of 2004 by
$2.2 million and $2.5 million, respectively, as compared with the same periods
in 2003, as well as higher costs for raw materials (scrap and alloys), energy
and employee incentive compensation.
TIMET currently expects sales revenues for the full year 2004 will range
from $490 million to $510 million. Melted product sales volumes for the full
year 2004 are expected to approximate 5,300 metric tons (a 12% increase over
2003 levels), and mill product sales volumes for the full year 2004 are expected
to approximate 11,900 metric tons (a 34% increased over 2003 levels). 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 six months of 2004). TIMET's backlog of unfilled orders was approximately
$265 million at June 30, 2004, up from $180 million at December 31, 2003 and
$220 million at June 30, 2003. Substantially all the June 30, 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.
The Airline Monitor, a leading aerospace publication, recently issued its
July 2004 forecast for commercial aircraft deliveries, which indicated a
significant increase in large commercial aircraft deliveries in 2005 through
2008 as compared to its January 2004 forecast. Although the commercial airline
industry continues to struggle financially, this improved forecast is consistent
with the recent economic signs of an improving global operating environment in
the commercial airline industry, and TIMET expects strong sales volumes will
continue in the commercial aerospace sector for the remainder of 2004.
Additionally, TIMET expects sales volumes growth in emerging markets, primarily
in the military armor sectors, during the second half of 2004.
TIMET currently expects its full year 2004 gross margin to range from 9% to
11% of net sales. 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 in 2004 is
expected to decrease relative to 2003, due primarily to higher sponge plant
operating rates as the plant reached full capacity in the second quarter of
2004. TIMET expects the aggregate cost of its purchased sponge and alloys will
increase through the remainder of 2004 and into 2005. Additionally, the industry
is currently experiencing higher prices for scrap, and TIMET expects those costs
will continue to increase throughout 2004 and into 2005. When the demand for
titanium melted and mill products begins to increase, TIMET's requirements
precede the increase in scrap generation by downstream customers and the supply
chain, placing upward pressure on the market price of scrap. In February 2004,
TIMET 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. In the event TIMET is unable to realize certain of
these price increases, TIMET may not be able to meet all demand because of its
inability to obtain certain raw materials at acceptable prices.
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 various incentive compensation plans.
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
long-term agreement take-or-pay provisions, including $2.5 million recognized in
the second quarter of 2004. Such earnings are reported as part of TIMET's
operating income, but will not be included in its sales revenue, sales volume or
gross margin.
TIMET currently expects its operating income in 2004 will be between $28
million and $38 million, and TIMET currently expects its full year net income
for 2004 will range between $8 million and $18 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. Such expectations also do not include any
effect that might occur should TIMET decide it would be appropriate to reverse
all or a portion of its deferred income tax asset valuation allowance during the
second half of 2004, or a non-operating gain TIMET might recognize in the second
half of 2004 related to the potential sale of certain real property at its
Nevada production facility.
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 $4.0 million in the first six months of
2003 and $2.5 million in the first six months of 2004.
General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend income decreased slightly in the first six months of 2004 compared
to the same period 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 second
quarter and first six months of 2004 were lower than the same periods 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
second quarter and first six months of 2004 was higher than the same periods 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 $600,000 during the second quarter of 2004 as
compared to the second quarter of 2003 (year-to-date increase of $1.7 million).
Assuming no significant change in interest rates or foreign currency exchange
rates from current levels, interest expense in the remainder 2004 is expected to
continue 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.
At June 30, 2004, Kronos had the equivalent of $594 million and $255
million of income tax loss carryforwards in Germany for German corporate and
trade tax purposes, respectively, all of which have no expiration date. As more
fully described in Note 11 to the Consolidated Financial Statements, Kronos had
previously provided a deferred income tax asset valuation allowance against
substantially all of these tax loss carryforwards and other deductible temporary
differences in Germany because Kronos did not believe they met the
"more-likely-than-not" recognition criteria. During the first six months of
2004, Kronos reduced its deferred income tax asset valuation allowance by
approximately $8.7 million, primarily as a result of utilization of these German
net operating loss carryforwards, the benefit of which had not previously been
recognized. At June 30, 2004, after considering all available evidence, Kronos
concluded that these German tax loss carryforwards and other deductible
temporary differences now meet the "more-likely-than-not" recognition criteria.
Accordingly, as of June 30, 2004, Kronos reversed the remaining $245.6 million
valuation allowance related to such items. Because the benefit of such net
operating loss carryforwards and other deductible temporary differences in
Germany has now been recognized, the Company's future effective income tax rate
will be higher than what it would have otherwise been, although its future cash
income tax rate would not be effected.
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 to 60% of taxable income after the first euro 1
million of taxable income. The new law will have a significant effect on Kronos'
cash tax payments in Germany going forward, the extent of which will be
dependent upon the level of taxable 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. Accordingly, no minority interest in
Waste Control Specialists has been recognized in the Company's consolidated
financial statements. Waste Control Specialists LLC became wholly owned by Valhi
during the second quarter of 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 June 30, 2004, the Company's third-party indebtedness aggregated $649
million, of which about 92% 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 provided from operating activities increased from $19.3 million
in the first six months of 2003 to $56.9 million in the first six months of
2004. This $37.6 million increase was due primarily to the net effect of (i)
higher net income of $247.1 million, (ii) a larger deferred income tax benefit
of $267.2 million, (iii) higher depreciation expense of $3.5 million, (iv)
higher distributions from NL's TiO2 manufacturing joint venture of $7.5 million,
(v) lower equity in losses of TIMET of $6.4 million, (vi) higher minority
interest of $43.4 million, (vii) a higher amount of net cash used to fund
changes in the Company's inventories, receivables, payables, accruals and
accounts with affiliates of $43.7 million and (viii) lower cash paid for income
taxes of $29.4 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 certain of 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).
Six months ended
June 30,
2003 2004
---- ----
(In millions)
Cash provided (used) by operating activities:
NL/Kronos $ 18.6 $ 58.1
CompX 8.4 13.7
Waste Control Specialists (2.5) (4.3)
Valhi Parent 13.5 18.9
Eliminations (18.7) (29.5)
------ ------
$ 19.3 $ 56.9
====== ======
Investing and financing activities. Approximately 66% of the Company's
consolidated capital expenditures in the first six months of 2004 relate to NL,
11% relate to CompX and substantially all of the remainder relate to Waste
Control Specialists. During the first six months of 2004, Valhi purchased shares
of Kronos common stock in market transactions for $16.2 million, and NL
collected $2 million on its loan to one of the Contran family trusts.
During the first six months of 2004, Valhi repaid a net $6.0 million of its
short-term demand loans from Contran and borrowed a net $45.0 million under its
revolving bank credit facility, (ii) CompX repaid a net $24.0 million under its
revolving bank credit facility and (iii) Kronos borrowed an aggregate of euro 26
million ($32 million when borrowed) of borrowings under its European revolving
bank credit facility, all of which were subsequently repaid in the second
quarter.
At June 30, 2004, unused credit available under existing credit facilities
approximated $244.1 million, which was comprised of: CompX - $45.5 million under
its new revolving credit facility; Kronos - $94.8 million under its European
credit facility, $11.4 million under its Canadian credit facility, $40.0 million
under its U.S. credit facility and $3.5 million under other non-U.S. facilities;
and Valhi - $48.9 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 June 30, 2004, Kronos had cash, cash equivalents and marketable debt
securities of $92.0 million, including restricted balances of $3.5 million, and
Kronos had approximately $149.7 million available for borrowing under its U.S.,
Canadian and European credit facilities.
At June 30, 2004, Kronos' outstanding debt was comprised of (i) $346.4
million related to KII's Senior Secured Notes and (ii) 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 June 30, 2004, NL (exclusive of Kronos) had cash, cash equivalents and
marketable debt securities of $53.3 million, including restricted balances of
$25.9 million. Of such restricted balances, $17 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 paid
its next regular $.20 per share quarterly dividend in the form of shares of
Kronos common stock in July 2004. Approximately 322,500 shares of Kronos, or
approximately .7% of Kronos' outstanding common stock, were distributed in this
distribution. Following this distribution, NL will no longer own a majority of
Kronos' outstanding common stock, and accordingly NL will cease to consolidate
Kronos as of July 1, 2004. However, the Company will continue to consolidate
Kronos since the Company continues to own a majority of Kronos, either directly
or indirectly through NL and Tremont.
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 or
similar exchange rate risk associated with future sales denominated in a
currency other than the holder's functional currency. CompX has not entered into
these contracts for trading or speculative purposes in the past, nor does CompX
currently anticipate entering into such contracts for trading or speculative
purposes in the future. 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 June 30, 2004, CompX held contracts maturing through
August 2004 to exchange an aggregate of U.S. $2.9 million for an equivalent
amount of Canadian dollars at exchange rates ranging from Cdn. $1.35 to Cdn.
$1.39 per U.S. dollar. At June 30, 2004 the actual exchange rate was Cdn. $1.35
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 June 30, 2004, Waste Control Specialists' indebtedness consisted
principally of $39.1 million of borrowings owed to a wholly-owned subsidiary of
Valhi (December 31, 2003 intercompany indebtedness - $30.9 million). The
additional borrowings during the first six months 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 June 30, 2004, TIMET had $147 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 in order to avoid the
cost of an appraisal. 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 its in cash flows from operating activities will be
slightly positive during 2004, reflecting in part the resumption of paying
quarterly 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 June 30, 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 paid the next scheduled distribution
in June 2004.
In April 2004, TIMET announced that its board of directors had approved,
subject to certain conditions, 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, which is expected to occur during the third quarter of
2004, 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 July 2004, TIMET commenced an 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 certain conditions. 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 one-third of a share of TIMET common stock per Series A
share (a rate of one and two third of a 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, which is currently expected to be completed during the
third quarter of 2004.
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
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, currently collateralized by 10.2 million shares of NL common
stock and 5.1 million shares of Kronos common stock owned by Tremont. The
facility, which matures in December 2004, is eliminated in Valhi's consolidated
financial statements. At June 30, 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 21.3 million shares of Kronos held by
Valhi and Tremont at June 30, 2004 (16.1 million shares held by Valhi and 5.2
million share held by Tremont, a wholly-owned subsidiary of Valhi), Valhi would
directly or indirectly receive aggregate annual dividends from Kronos of $21.3
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 June 30, 2004, Valhi had $7.4 million of parent level cash and cash
equivalents and had $50 million outstanding under its revolving bank credit
agreement. In addition, Valhi had $48.9 million of borrowing availability under
its revolving bank credit facility. During the second quarter of 2004, the size
of Valhi's revolving bank credit facility was increased from $85 million to $100
million.
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 June 30, 2004, the accrued and unpaid interest on
the $80 million loan to Snake River aggregated $35.7 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 June 30, 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 June 30, 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, the
2003 Annual Report and the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004 for descriptions of certain legal proceedings.
In July 2004, the court awarded $150,000 to plaintiffs' counsel for fees
and reimbursement of expenses in the previously-reported matter In re Tremont
Corporation Shareholders Litigation.
Sabater, et al. v. Lead Industries Association, et al. (Supreme Court of
the State of New York, County of Bronx, Index No. 25533/98). In June 2004, at
plaintiffs' request, the trial court dismissed the case with prejudice as to the
adult plaintiffs and without prejudice as to the minor plaintiffs.
Thomas v. Lead Industries Association, et al. (Circuit Court, Milwaukee,
Wisconsin, Case No. 99-CV-6411). In June 2004, the appellate court affirmed the
trial court's dismissal of all of plaintiff's claims. In July 2004, plaintiff
filed a petition for review with the Wisconsin Supreme Court.
State of Rhode Island v. Lead Industries Association, et al. (Superior
Court of Rhode Island, No. 99-5226). In July 2004, the Rhode Island Supreme
Court dismissed plaintiff's appeal of, and denied plaintiff's petition to
review, the trial court's decision that the case must be tried to a jury.
Smith, et al. v. Lead Industries Association, et al. (Circuit Court for
Baltimore City, Maryland, Case No. 24-C-99-004490). In May 2004, the appellate
court reversed and remanded the trial court's dismissal of plaintiffs' design
defect claim and other claims, but affirmed the trial court's dismissal of
plaintiffs' fraud claim and failure to warn claim. In July 2004, plaintiffs
filed a petition for review with the Maryland Court of Appeals.
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).
Defendants' renewed motion to dismiss and motion for summary judgment were
denied by the trial court in March 2004, but the trial court limited plaintiff's
complaint to monetary damages from 1990 to 2000, specifically excluding future
damages. In April 2004, the court set a trial date for July 2005.
Spring Branch Independent School District v. Lead Industries Association,
et al. (District Court of Harris County, Texas, No. 2000-31175). In June 2004,
the appellate court affirmed the trial court's order granting defendants' motion
for summary judgment. The time for plaintiff's appeal has not run.
Lewis et al. v. Lead Industries Association, et al. (Circuit Court of Cook
County, Illinois, County Department, Chancery Division, Case No. 00CH09800). In
May 2004, the trial court denied defendants' motion for summary judgment on
plaintiffs' conspiracy count. In May 2004, defendants filed another motion for
summary judgment on plaintiffs' conspiracy count, arguing that plaintiffs cannot
show that all manufacturers of lead pigment were members of a conspiracy.
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 May 2004, the
Mississippi Supreme Court remanded the case to the trial court in Holmes County
and instructed the court to transfer the plaintiffs to their appropriate venues.
With respect to the eight plaintiffs remaining in Jefferson County, in July 2004
the Mississippi Supreme Court denied plaintiffs' motion to add additional
defendants.
Russell v. NL Industries, Inc., et al. (Circuit Court of LeFlore County,
Mississippi, No.2002-0235-CICI). In May 2004, four of the six plaintiffs
voluntarily dismissed their claims.
Jones v. NL Industries, Inc., et al. (Circuit Court of LeFlore County,
Mississippi, Civil Action No. 2002-0241 - CICI). In June 2004, the court set
trial date of February 2006.
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). In
April 2004, the plaintiffs filed an amended complaint adding claims under the
Resource Conservation Recovery Act ("RCRA") and the Comprehensive Environmental
Response, Compensation and Liability Act, and NL moved to dismiss those claims.
In June 2004, the trial court dismissed the plaintiffs' claims for unjust
enrichment and fraud as well as one plaintiff's claims arising under RCRA.
Evans v. Asarco (United States District Court, Northern District of
Oklahoma, Case No. 04-CV-94EA(M)). The trial court has stayed the proceedings in
this case pending the outcome of a class certification decision in Cole, et al.
v. ASARCO Incorporated et al. (U.S. District Court for the Northern District of
Oklahoma, Case No. 03C V327 EA (J)) case, from which NL has been dismissed with
prejudice.
Item 4. Submission of Matters to a Vote of Security Holders.
Valhi's 2004 Annual Meeting of Stockholders was held on May 25, 2004.
Thomas E. Barry, Norman S. Edelcup, W. Hayden McIlroy, Glenn R. Simmons, Harold
C. Simmons, J. Walter Tucker, Jr. and Steven L. Watson were elected as
directors, each receiving votes "For" their election from at least 96.7% of the
119.5 million common shares eligible to vote at the Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1** - First Amendment to Purchase and Sale Agreement
between Rolls-Royce plc and Titanium Metals
Corporation - incorporated by reference to Exhibit
10.1 to TIMET's Quarterly Report on Form 10-Q
(File No. 0-28538) for the quarter ended June 30,
2004.
10.2** - Second Amendment to Purchase and Sale Agreement
between Rolls-Royce plc and Titanium Metals
Corporation- incorporated by reference to Exhibit
10.2 to TIMET's Quarterly Report on Form 10-Q
(File No. 0-28538) for the quarter ended June 30,
2004.
10.3** - Termination Agreement by and between Wyman-Gordon
Company and Titanium Metals Corporation, effective
as of September 28, 2003 - incorporated by
reference to Exhibit 10.3 to TIMET's Quarterly
Report on Form 10-Q (File No. 0-28538) for the
quarter ended June 30, 2004.
31.1 - Certification
31.2 - Certification
32.1 - Certification.
** Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
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
and its Corporate Governance Guidelines, each as adopted by the Company's board
of directors, 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 June 30, 2004.
May 10, 2004 - Reported Items 9 and 12. May 25, 2004 - Reported
Item 9.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALHI, INC.
(Registrant)
Date August 6, 2004 By /s/ Bobby D. O'Brien
------------------ ------------------------------
Bobby D. O'Brien
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
Date August 6, 2004 By /s/ Gregory M. Swalwell
------------------ ------------------------------
Gregory M. Swalwell
Vice President and Controller
(Principal Accounting Officer)