SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 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 October 31,
2004: 119,477,878.
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets -
December 31, 2003 and September 30, 2004 3
Consolidated Statements of Income -
Three months and nine months ended
September 30, 2003 and 2004 5
Consolidated Statements of Comprehensive Income -
Nine months ended September 30, 2003 and 2004 7
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 2004 8
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2003 and 2004 9
Notes to Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 31
Item 4. Controls and Procedures 53
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 55
Item 6. Exhibits and Reports on Form 8-K. 55
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, September 30,
2003 2004
------------ -------------
Current assets:
Cash and cash equivalents $ 103,394 $ 185,578
Restricted cash and cash equivalents 19,348 8,612
Marketable securities 6,147 9,231
Accounts and other receivables 189,091 242,754
Refundable income taxes 37,712 1,729
Receivable from affiliates 317 138
Inventories 293,113 230,541
Prepaid expenses 10,635 15,971
Deferred income taxes 14,435 12,860
---------- ----------
Total current assets 674,192 707,414
---------- ----------
Other assets:
Marketable securities 176,941 178,367
Investment in affiliates 161,818 174,126
Receivable from affiliate 14,000 12,000
Loans and other receivables 116,566 118,018
Unrecognized net pension obligations 13,747 13,810
Goodwill 377,591 386,280
Other intangible assets 3,805 3,342
Deferred income taxes 351 180,576
Other 27,177 30,042
---------- ----------
Total other assets 891,996 1,096,561
---------- ----------
Property and equipment:
Land 35,557 35,431
Buildings 217,744 213,792
Equipment 805,081 805,525
Mining properties 34,330 34,014
Construction in progress 11,297 28,899
---------- ----------
1,104,009 1,117,661
Less accumulated depreciation 465,851 512,860
---------- ----------
Net property and equipment 638,158 604,801
---------- ----------
$2,204,346 $2,408,776
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30,
2003 2004
------------ -------------
Current liabilities:
Current maturities of long-term debt $ 5,392 $ 368
Accounts payable 118,781 86,739
Accrued liabilities 130,091 146,330
Payable to affiliates 21,454 16,644
Income taxes 13,105 15,236
Deferred income taxes 3,941 23,032
---------- ----------
Total current liabilities 292,764 288,349
---------- ----------
Noncurrent liabilities:
Long-term debt 632,533 658,511
Accrued pension costs 90,517 87,809
Accrued OPEB costs 37,410 35,049
Accrued environmental costs 61,725 57,336
Deferred income taxes 294,966 169,193
Other 34,908 36,228
---------- ----------
Total noncurrent liabilities 1,152,059 1,044,126
---------- ----------
Minority interest 99,789 151,878
---------- ----------
Stockholders' equity:
Common stock 1,340 1,252
Additional paid-in capital 99,048 91,022
Retained earnings 639,463 847,475
Accumulated other comprehensive income:
Marketable securities 85,124 85,154
Currency translation (3,573) 182
Pension liabilities (59,154) (58,845)
Treasury stock (102,514) (41,817)
---------- ----------
Total stockholders' equity 659,734 924,423
---------- ----------
$2,204,346 $2,408,776
========== ==========
Commitments and contingencies (Notes 11 and 13)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
2003 2004 2003 2004
---- ---- ---- ----
Revenues and other income:
Net sales $295,986 $346,467 $918,765 $1,017,555
Other, net 15,642 7,277 32,465 33,313
-------- -------- -------- ----------
311,628 353,744 951,230 1,050,868
-------- -------- -------- ----------
Costs and expenses:
Cost of sales 226,097 269,720 707,701 799,380
Selling, general and administrative 53,563 50,912 176,950 156,262
Interest 14,693 15,224 43,822 45,884
-------- -------- -------- ----------
294,353 335,856 928,473 1,001,526
-------- -------- -------- ----------
17,275 17,888 22,757 49,342
Equity in earnings of:
Titanium Metals Corporation ("TIMET") 185 11,161 (3,695) 13,673
Other 177 2,426 677 2,541
-------- -------- -------- ----------
Income before income taxes 17,637 31,475 19,739 65,556
Provision for income taxes (benefit) 6,328 11,057 (17,044) (271,477)
Minority interest in after-tax earnings 2,447 3,024 8,546 52,577
-------- -------- -------- ----------
Income before cumulative effect of
change in accounting principle 8,862 17,394 28,237 284,456
Cumulative effect of change in
accounting principle - - 586 -
-------- -------- -------- -------
Net income $ 8,862 $ 17,394 $ 28,823 $ 284,456
======== ======== ======== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
2003 2004 2003 2004
---- ---- ---- ----
Basic earnings per share:
Income before cumulative effect of
change in accounting principle $ .07 $ .14 $ .23 $ 2.37
Cumulative effect of change in
accounting principle - - .01 -
-------- -------- -------- ----------
Net income $ .07 $ .14 $ .24 $ 2.37
======== ======== ======== ==========
Diluted earnings per share:
Income before cumulative effect of
change in accounting principle $ .07 $ .14 $ .23 $ 2.36
Cumulative effect of change in
accounting principle - - .01 -
-------- -------- -------- ----------
Net income $ .07 $ .14 $ .24 $ 2.36
======== ======== ======== ==========
Cash dividends per share $ .06 $ .06 $ .18 $ .18
======== ======== ======== ==========
Shares used in the calculation of per share amounts:
Basic earnings per common share 120,166 120,196 119,539 120,193
Dilutive impact of outstanding stock
Options 201 212 169 219
-------- -------- -------- ----------
Diluted earnings per share 120,367 120,408 119,708 120,412
======== ======== ======== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Nine months ended September 30, 2003 and 2004
(In thousands)
2003 2004
---- ----
Net income $28,823 $284,456
------- --------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment 1,423 30
Currency translation adjustment 23,488 3,755
Pension liabilities adjustment (259) 309
------- --------
Total other comprehensive income, net 24,652 4,094
------- --------
Comprehensive income $53,475 $288,550
======= ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 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 - - 284,456 - - - - 284,456
Dividends - - (22,352) - - - - (22,352)
Other comprehensive income - - - 30 3,755 309 - 4,094
Income tax related to
shares of Kronos Worldwide
distributed by NL - (1,590) - - - - - (1,590)
Retirement of treasury stock (89) (6,516) (54,092) - - - 60,697 -
Other, net 1 80 - - - - - 81
------ ------- -------- ------- ------- ------- -------- --------
Balance at September 30, 2004 $1,252 $91,022 $847,475 $85,154 $ 182 $(58,845) $ (41,817) $924,423
====== ======= ======== ======= ======= ======== ========= ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2003 and 2004
(In thousands)
2003 2004
---- ----
Cash flows from operating activities:
Net income $ 28,823 $ 284,456
Depreciation and amortization 53,563 58,040
Securities transactions, net (537) 58
Proceeds from disposal of marketable securities (trading) 50 -
Gain on disposal of fixed assets (8,259) (66)
Noncash:
Interest expense 1,744 1,978
Defined benefit pension expense (3,402) 486
Other postretirement benefit expense (2,850) (2,554)
Deferred income taxes (3,830) (285,746)
Minority interest 8,546 52,577
Other, net 22 2,901
Equity in:
TIMET 3,695 (13,673)
Other (677) (2,541)
Cumulative effect of change in accounting principle (586) -
Distributions from:
Manufacturing joint venture, net 2,175 9,100
Other 1,205 53
Change in assets and liabilities:
Accounts and other receivables (30,922) (59,472)
Inventories 25,045 60,873
Accounts payable and accrued liabilities (8,092) (26,547)
Accounts with affiliates (291) 268
Income taxes 3,448 38,929
Other, net 4,882 (6,801)
-------- --------
Net cash provided by operating activities 73,752 112,319
-------- --------
Cash flows from investing activities:
Capital expenditures (32,272) (31,378)
Purchases of:
Kronos common stock - (17,057)
TIMET common stock (976) -
TIMET debt securities (238) -
Proceeds from disposal of fixed assets 11,333 3,033
Collection of loans to affiliate 2,000 2,000
Change in restricted cash equivalents, net 1,090 6,177
Other, net 1,949 1
-------- --------
Net cash used by investing activities (17,114) (37,224)
-------- --------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 2003 and 2004
(In thousands)
2003 2004
---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings $ 22,106 $ 155,361
Principal payments (50,596) (128,219)
Deferred financing costs paid (416) (28)
Loans from affiliate:
Loans 10,086 24,409
Repayments (20,193) (29,230)
Valhi dividends paid (22,347) (22,352)
Distributions to minority interest (5,007) (2,232)
Issuance of NL common stock 701 8,793
Other, net 49 581
-------- ---------
Net cash provided (used) by financing activities (65,617) 7,083
-------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities (8,979) 82,178
Currency translation 3,351 6
Cash and equivalents at beginning of period 94,679 103,394
-------- ---------
Cash and equivalents at end of period $ 89,051 $ 185,578
======== =========
Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized $ 35,699 $ 36,198
Income taxes, net (12,706) (19,838)
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 September 30, 2004, and the consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for the interim periods ended September 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 16.
As disclosed in the 2003 Annual Report, the Company accounts for
stock-based employee compensation in accordance with Accounting Principles Board
Opinion ("APBO") No. 25, Accounting for Stock Issued to Employees, and its
various interpretations. Under APBO No. 25, no compensation cost is generally
recognized for fixed stock options in which the exercise price is greater than
or equal to the market price on the grant date. Prior to 2003, and following the
cash settlement of certain stock options held by employees of NL Industries,
Inc., NL commenced accounting for its remaining stock options using the variable
accounting method because NL could not overcome the presumption that it would
not similarly cash settle its remaining stock options. Under the variable
accounting method, the intrinsic value of all unexercised stock options
(including those with an exercise price at least equal to the market price on
the date of grant) are accrued as an expense over their vesting period, with
subsequent increases (decreases) in the market price of the underlying common
stock resulting in additional compensation expense (income). Net compensation
income recognized by the Company in accordance with APBO No. 25 was $400,000 in
each of the third quarter and first nine months of 2003, and net compensation
cost was $1.1 million and $2.2 million in the third quarter and first nine
months of 2004, respectively, in each case all of which relates to outstanding
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 Nine months ended
September 30, September 30,
2003 2004 2003 2004
---- ---- ---- ----
(In millions, except per share amounts)
Net income as reported $ 8.8 $ 17.4 $28.8 $284.5
Adjustments, net of applicable income tax effects and minority interest, of
stock-based employee compensation expense determined under:
APBO No. 25 (.2) .6 (.2) 1.2
SFAS No. 123 (.3) (.2) (1.1) (.6)
----- ------ ----- ------
Pro forma net income $ 8.3 $ 17.8 $27.5 $285.1
===== ====== ===== ======
Basic and diluted net income per share:
As reported $ .07 $ .14 $ .24 $ 2.37
Pro forma .07 .15 .23 2.37
Diluted net income per share:
As reported $ .07 $ .14 $ .24 $ 2.36
Pro forma .07 .15 .23 2.37
Note 2 - Business segment information:
% owned at
Business segment Entity September 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 34% held directly by Valhi, 49%
held directly by NL Industries, Inc. 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 15% of CompX, .5% of NL and less than .1% of
Kronos, and TIMET accounts for such CompX, NL and Kronos shares as
available-for-sale marketable securities carried at fair value. Because the
Company does not consolidate TIMET, the shares of CompX, NL and Kronos owned by
TIMET are not considered as part of the Company's consolidated investment in
such companies. See Note 11.
During the first nine months of 2004, the Company acquired additional
shares of Kronos common stock in market transactions for an aggregate of $17.1
million, increasing the Company's aggregate ownership of Kronos to 94% at
September 30, 2004. Also during the first nine 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 September 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 Nine months ended
September 30, September 30,
2003 2004 2003 2004
---- ---- ---- ----
(In millions)
Net sales:
Chemicals $242.9 $286.1 $762.5 $ 845.1
Component products 52.6 56.0 153.3 165.9
Waste management .5 4.4 3.0 6.6
------ ------ ------ --------
Total net sales $296.0 $346.5 $918.8 $1,017.6
====== ====== ====== ========
Operating income:
Chemicals $ 31.7 $ 25.8 $ 94.1 $ 84.2
Component products (.4) 5.8 1.8 14.6
Waste management (3.1) (.5) (8.7) (7.3)
------ ------ ------ --------
Total operating income 28.2 31.1 87.2 91.5
General corporate items:
Interest and dividend income 8.0 8.2 24.3 24.3
Gain on disposal of fixed assets 7.4 - 8.5 .6
Legal settlement gains, net - - .7 .5
Securities transaction gains, net - - .5 -
General expenses, net (11.7) (6.2) (54.7) (21.6)
Interest expense (14.7) (15.2) (43.8) (45.9)
------ ------ ------ --------
17.2 17.9 22.7 49.4
Equity in:
TIMET .2 11.2 (3.7) 13.7
Other .2 2.4 .7 2.5
------ ------ ------ --------
Income before income taxes $ 17.6 $ 31.5 $ 19.7 $ 65.6
====== ====== ====== ========
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.
During the first nine months of 2004, NL paid each of its three $.20 per
share regular quarterly dividend in the form of shares of Kronos common stock in
which an aggregate of approximately 966,000 shares, or approximately 2% of
Kronos' outstanding common stock, were distributed to NL shareholders (including
Valhi and Tremont) in the form of pro-rata dividends. 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 and NL's adjusted tax basis in such stock at the
applicable date of distribution. With respect to the shares of Kronos
distributed to Valhi and Tremont (approximately 806,000 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 aggregated approximately $1.9
million. The Company's pro-rata share of such tax liability, based on the
Company's ownership of NL, is $1.6 million, and in accordance with GAAP has been
recognized as a reduction of the Company's additional paid-in capital.
Completion of these distributions had no other impact on the Company's
consolidated financial position, results of operations or cash flows.
Prior to September 24, 2004, the Company's ownership of CompX was owned by
Valhi and Valcor, Inc., a wholly-owned subsidiary of Valhi. On September 24,
2004, NL completed the acquisition the Compx shares previously held by Valhi and
Valcor at a purchase price of $16.25 per share, or an aggregate of approximately
$168.6 million. The purchase price was paid by NL's transfer to Valhi and Valcor
of an aggregate $168.6 million of NL's $200 million long-term note receivable
from Kronos (which long-term note is eliminated in the preparation of the
Company's consolidated financial statements). The acquisition was approved by a
special committee of NL's board of directors comprised of directors who were not
affiliated with Valhi, and such special committee retained their own financial
advisors who rendered an opinion to the special committee that the purchase
price was fair, from a financial point of view, to NL. NL's acquisition was
accounted for under GAAP as a transfer of net assets among entities under common
control, and such transaction had no effect on the Company's consolidated
financial statements. See Note 11.
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, September 30,
2003 2004
------- -------
(In thousands)
Current assets - restricted debt securities
(available-for-sale) $ 6,147 $ 9,231
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $170,000 $170,000
Restricted debt securities 6,870 8,181
Other common stocks 71 186
-------- --------
$176,941 $178,367
======== ========
Note 4 - Accounts and other receivables:
December 31, September 30,
2003 2004
----------- -------------
(In thousands)
Accounts receivable $191,714 $245,285
Notes receivable 2,026 1,748
Allowance for doubtful accounts (4,649) (4,279)
-------- --------
$189,091 $242,754
======== ========
Note 5 - Inventories:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Raw materials:
Chemicals $ 61,960 $ 36,363
Component products 6,170 7,180
-------- --------
68,130 43,543
-------- --------
In process products:
Chemicals 19,854 16,763
Component products 10,852 10,757
-------- --------
30,706 27,520
-------- --------
Finished products:
Chemicals 148,047 113,902
Component products 9,166 8,579
-------- --------
157,213 122,481
-------- --------
Supplies (primarily chemicals) 37,064 36,997
-------- --------
$293,113 $230,541
======== ========
Note 6 - Accrued liabilities:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Current:
Employee benefits $ 48,827 $ 49,717
Environmental costs 24,956 21,629
Deferred income 4,699 6,068
Interest 383 8,119
Other 51,226 60,797
-------- --------
$130,091 $146,330
======== ========
Noncurrent:
Insurance claims and expenses $ 13,303 $ 14,276
Employee benefits 9,705 9,671
Deferred income 1,634 670
Asset retirement obligations 1,670 1,663
Other 8,596 9,948
-------- --------
$ 34,908 $ 36,228
======== ========
Note 7 - Other assets:
December 31, September 30,
2003 2004
---------- ---------
(In thousands)
Investment in affiliates:
TIMET:
Common stock $ 20,357 $ 39,340
TIMET preferred stock - 200
Convertible preferred debt securities 265 -
-------- --------
20,622 39,540
TiO2 manufacturing joint venture 129,010 119,911
Other 12,186 14,675
-------- --------
$161,818 $174,126
======== ========
Loans and other receivables:
Snake River Sugar Company:
Principal $ 80,000 $ 80,000
Interest 33,102 36,996
Other 5,490 2,770
-------- --------
118,592 119,766
Less current portion 2,026 1,748
-------- --------
Noncurrent portion $116,566 $118,018
======== ========
Other noncurrent assets:
Deferred financing costs $ 10,569 $ 8,660
Refundable insurance deposit 1,972 1,972
Waste disposal site operating permits 982 2,524
Restricted cash equivalents 488 492
Other 13,166 16,394
-------- --------
$ 27,177 $ 30,042
======== ========
At September 30, 2004, the Company held 6.5 million shares of TIMET with a
quoted market price of $23.46 per share, or an aggregate market value of $152
million. In the third quarter of 2004, TIMET effected a 5:1 split of its common
stock. Such stock split had no financial statement impact to the Company, and
the Company's ownership interest in TIMET did not change as a result of the
split.
At September 30, 2004, TIMET reported total assets of $626.8 million and
preferred and common stockholders' equity of $173.7 million and $196.4 million,
respectively. TIMET's total assets at September 30, 2004 include current assets
of $314.5 million, property and equipment of $227.4 million and intangible
assets of $5.2 million. TIMET's total liabilities at September 30, 2004 include
current liabilities of $139.8 million, long-term capital lease obligations of
$9.7 million, accrued OPEB and pension costs aggregating $79.6 million and debt
payable to TIMET Capital Trust I (the subsidiary of TIMET that issued its
convertible preferred debt securities) of $12.0 million.
During the first nine months of 2004, TIMET reported net sales of $364.9
million, operating income of $22.2 million and income before cumulative effect
of a change in accounting principle attributable to common stock of $24.4
million (2003 - net sales of $284.7 million, an operating loss of $8.9 million
and a loss before cumulative effect of a change in accounting principle of $22.7
million).
In August 2004, TIMET completed an exchange offer in which approximately
3.9 million shares of the outstanding convertible preferred debt securities
issued by TIMET Capital Trust I (a wholly-owned subsidiary of TIMET) were
exchanged for an aggregate of 3.9 million shares of a newly-created Series A
Preferred Stock of TIMET at the exchange rate of one share of Series A Preferred
Stock for each convertible preferred debt security. Dividends on the Series A
shares accumulate at the rate of 6 3/4% of their liquidation value of $50 per
share, and are convertible into shares of TIMET common stock at the rate of one
and two-thirds of a share of TIMET common stock per Series A share. The Series A
shares are not mandatorily redeemable, but are redeemable at the option of TIMET
in certain circumstances. Valhi exchanged its 14,700 shares of the convertible
preferred debt securities in the exchange offer for 14,700 Series A shares, and
recognized a nominal gain related to such exchange.
Note 8 - Other income:
Nine months ended
September 30,
2003 2004
---- ----
(In thousands)
Securities earnings:
Dividends and interest $24,327 $24,265
Securities transactions, net 537 (58)
------- -------
24,864 24,207
Disposal of property and equipment 8,259 66
Contract dispute settlement - 6,289
Legal settlement gains, net 691 495
Currency transactions, net (4,990) (660)
Other, net 3,641 2,916
------- -------
$32,465 $33,313
======= =======
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. Of such $7.3 million, $1.5 million was paid to Kronos in the second
quarter of 2004, $1.75 million is due in each of the second quarter of 2005 and
2006 and $2.25 million is due in the second quarter of 2007. At September 30,
2004, the present value of the remaining amounts due to be paid to Kronos
aggregated approximately $5.0 million, of which $1.7 million in included in
accounts receivable and $3.3 million is included in other noncurrent assets.
Note 9 - Long-term debt:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Valhi:
Snake River Sugar Company $250,000 $250,000
Bank credit facility 5,000 58,000
-------- --------
255,000 308,000
-------- --------
Subsidiaries:
Kronos Worldwide Senior Secured Notes 356,136 350,180
CompX revolving bank credit facility 26,000 -
Other 789 699
-------- --------
382,925 350,879
-------- --------
637,925 658,879
Less current maturities 5,392 368
-------- --------
$632,533 $658,511
======== ========
In October 2004, the maturity of Valhi's revolving bank credit facility was
extended one year to October 2005. Accordingly, the outstanding balance under
such facility was classified as a noncurrent liability at September 30, 2004.
Note 10 - Accounts with affiliates:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Current receivables from affiliates:
TIMET $ 50 $ -
Other 267 138
-------- --------
$ 317 $ 138
======== ========
Noncurrent receivable from affiliate -
Loan to Contran family trust $ 14,000 $ 12,000
======== ========
Payables to affiliates:
Contran:
Demand loan $ 7,332 $ 2,511
Income taxes 3,759 2,282
Trade items 1,790 3,027
Louisiana Pigment Company 8,560 8,814
Other 13 10
-------- --------
$ 21,454 $ 16,644
======== ========
Note 11 - Income tax benefit:
Nine months ended
September 30,
2003 2004
---- ----
(In millions)
Expected tax expense $ 6.9 $ 22.9
Change in deferred income tax valuation allowance, net (1.1) (285.4)
Tax contingency reserve adjustments, net - (13.1)
Refund of prior years income taxes (24.6) (3.1)
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies .5 1.3
Non-U.S. tax rates (.4) (.4)
U.S. state income taxes, net 1.0 .3
Nondeductible expenses 2.5 2.5
Other, net (1.8) 3.5
------ -------
$(17.0) $(271.5)
====== =======
Comprehensive provision for income taxes (benefit) allocated to:
Income before cumulative effect of change
in accounting principle $(17.0) $(271.5)
Cumulative effect of change in accounting principle .3 -
Additional paid-in capital - 1.9
Other comprehensive income:
Marketable securities .6 1.7
Currency translation 2.9 (.1)
Pension liabilities - .2
------ -------
$(13.2) $(267.8)
====== =======
Certain of the Company's U.S. and non-U.S. tax returns are being examined
and tax authorities have or may propose tax deficiencies, including penalties
and interest. For example:
o 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 September 30, 2004), and
NL will be required to recognize the remaining settlement amount in its
taxable income over the 15-year time period 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) utilized 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 September 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 ("KII"), a wholly-owned subsidiary of Kronos, principally during
the 1990's when KII 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. KII had generated
positive taxable income in Germany for both German corporate and trade tax
purposes since 2000, and starting with the quarter ended December 31, 2002 and
for each quarter thereafter, KII had cumulative taxable income in Germany for
the most recent twelve quarters. However, offsetting this positive evidence was
the fact that 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 the uncertainty
caused by this negative evidence, 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 at that time 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 positive evidence to indicate that the downward trend would improve. If the
price trend continued downward throughout all of 2004 (which was a possibility
given Kronos' prior experience), Kronos would likely have a taxable loss in
Germany for 2004. If the downward trend in prices had abated, ceased, or
reversed at some point during 2004, then Kronos would likely have taxable income
in Germany during 2004. 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 and that it would not be appropriate to
reverse the deferred income tax asset valuation allowance, given the likelihood
that Kronos would generate a taxable loss in Germany during 2004. 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. The fact
that Kronos' selling prices started to increase during the second quarter of
2004, combined with the fact that Kronos and its competitors had announced
additional price increases (which based on past experience indicated to Kronos
that some portion of the additional price increases would be realized in the
marketplace), provided additional positive evidence that was not present at
December 31, 2003. Consequently, Kronos' revised projections now reflect taxable
income for Germany in 2004 as well as 2005. Accordingly, based on all available
evidence, including the fact that (i) Kronos had generated positive taxable
income in Germany since 2000, and starting with the quarter ended December 31,
2002 and for each quarter thereafter, KII had cumulative taxable income in
Germany for the most recent twelve quarters, (ii) Kronos was now projecting
positive taxable income in Germany for 2004 and 2005 and (iii) the German net
operating loss carryforwards have no expiration date, Kronos concluded that the
benefit of the net operating loss carryforwards and other German tax attributes
met the "more-likely-than-not" recognition criteria, and Kronos reversed the
deferred income tax asset valuation allowance related to Germany. Given the
magnitude of the German net operating loss carryforwards and the fact that
current provisions of German law limit the annualization of net operating loss
carryforwards to 60% of taxable income after the first euro 1 million of taxable
income, Kronos believes it will take several years to fully utilize the benefit
of such loss carryforwards. However, given the number of years for which Kronos
has now generated positive taxable income in Germany, combined with the fact
that the net operating loss carryforwards were generated during a time when KII
had a significantly higher level of outstanding indebtednesss than it currently
has outstanding, and the fact that the net operating loss carryforwards have no
expiration date, Kronos concluded it was appropriate to reverse all of the
valuation allowance related to the net operating loss carryforwards.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 September 30, 2004,
the net operating loss carryforwards for German corporate and trade tax purposes
aggregated the equivalent of $602 million and $244 million, respectively, all of
which have no expiration date.
In the first quarter of 2003, 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 nine 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 through 1994 tax years. Through September 2004, KII's German
operating subsidiary had received net refunds of euro 27.2 million ($33.6
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.
Effective October 1, 2004, NL and TIMET each contributed their shares of
CompX common stock to newly-formed CompX Group, Inc. in return for an 82.4% and
17.6% ownership interest in CompX Group, respectively, and CompX Group became
the owner of the 83% of CompX that NL and TIMET had previously owned in the
aggregate. The CompX shares are the sole asset of CompX Group. CompX Group
recorded the shares of CompX received from NL at NL's carryover basis. The
shares of CompX contributed to CompX Group by TIMET will continue to be excluded
from the Company's consolidated investment in CompX. Effective with the
formation of CompX Group, CompX became a member of Contran's consolidated United
States federal income tax group (the "Contran Tax Group"). NL and Valhi were
already members of the Contran Tax Group.
Note 12 - Minority interest:
December 31, September 30,
2003 2004
------------ ---------
(In thousands)
Minority interest in net assets:
NL Industries $31,262 $ 65,014
Kronos Worldwide 11,076 25,693
CompX International 48,424 51,566
Subsidiary of NL 8,502 9,077
Subsidiary of Kronos Worldwide 525 528
------- --------
$99,789 $151,878
======= ========
Nine months ended
September 30,
2003 2004
---- ----
(In thousands)
Minority interest in income (loss) before cumulative effect of change in
accounting principle:
NL Industries $8,438 $17,900
Kronos Worldwide - 31,311
CompX International 149 2,754
Tremont Corporation (217) -
Subsidiary of NL 115 574
Subsidiary of Kronos Worldwide 61 38
------ -------
$8,546 $52,577
====== =======
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.
Subsidiary of NL. Minority interest in the subsidiary of NL relates 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 that might be
filed against NL in the future.
NL believes these actions are without merit, intends to continue to deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. NL has neither lost nor settled any of these cases. NL has not
accrued any amounts for 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.
Certain properties and facilities used in the Company's former businesses,
including divested primary and secondary lead smelters and former mining
locations of NL, are the subject of civil litigation, administrative proceedings
or investigations arising under federal and state environmental laws.
Additionally, in connection with past disposal practices, the Company has been
named as a defendant, 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 or more PRPs. No assurance can be given that
actual costs will not exceed accrued amounts or the upper end of the range for
sites for which estimates have been made, and no assurance can be given that
costs will not be incurred with respect to sites as to which no estimate
presently can be made. Further, there can be no assurance that additional
environmental matters will not arise in the future.
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.
The exact time frame over which the Company makes payments with respect to
its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process that in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs that
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
is classified as a noncurrent liability.
A summary of the activity in the Company's accrued environmental costs
during the first nine months of 2004 is presented in the table below. The amount
shown in the table below for payments against the Company's accrued
environmental costs is net of a $1.5 million recovery of remediation costs
previously expended by NL that was paid to NL by other PRPs in the third quarter
of 2004 pursuant to an agreement entered into by NL and the other PRPs.
Amount
(In thousands)
Balance at December 31, 2003 $86,681
Net increase charged to income 762
Payments, net (8,478)
-------
Balance at September 30, 2004 $78,965
=======
Amounts recognized in the balance sheet at September 30, 2004:
Current liability $21,629
Noncurrent liability 57,336
-------
$78,965
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 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 September 30,
2004, NL had accrued $71 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 September 30, 2004, there are approximately 20 sites for which NL is
unable to estimate a range of costs. For these sites, generally the
investigation is in the early stages, and it is either unknown as to whether or
not NL actually had any association with the site, or if NL had association with
the site, the nature of its responsibility, if any, for the contamination at the
site and the extent of contamination. The timing on when information would
become available to NL to allow NL to estimate a range of loss is unknown and
dependent on events outside the control of NL, such as when the party alleging
liability provides information to NL.
At September 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 net cash flows.
Tremont. In July 2000 Tremont, entered into a voluntary settlement
agreement with the Arkansas Department of Environmental Quality and certain
other PRPs pursuant to which Tremont and the other PRPs will undertake certain
investigatory and interim remedial activities at a former mining site located in
Hot Springs County, Arkansas. Tremont currently believes that it has accrued
adequate amounts ($1.8 million at September 30, 2004) to cover its share of
probable and reasonably estimable environmental obligations for these
activities. Tremont currently expects that the nature and extent of any final
remediation measures that might be imposed with respect to this site will be
known by 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 September 30, 2004 for any such cost. The amount accrued at September 30,
2004 represents Tremont's best estimate of the costs to be incurred through 2006
with respect to the interim remediation measures.
TIMET. TIMET and Basic Management, Inc. ("BMI") entered into an agreement
in 1999 providing that upon BMI's payment to TIMET of the cost to design,
purchase and install a new wastewater neutralization facility necessary to allow
TIMET to stop discharging liquid and solid effluents and co-products into
settling ponds located on certain lands owned by TIMET adjacent to its Nevada
facility (the "TIMET Pond Property"), TIMET would convey the TIMET Pond Property
to BMI, at no additional cost. Under this agreement, BMI would pay 100% of the
first $15.9 million of the cost for this project, and TIMET would pay 50% of the
cost in excess of $15.9 million, up to a maximum payment by TIMET of $2 million.
TIMET and BMI have agreed in principle to a new agreement that would supercede
the 1999 agreement pursuant to which TIMET would transfer to BMI the TIMET Pond
Property and BMI would pay TIMET cash and would assume substantially all of the
environmental obligations associated with such property. TIMET currently expects
to finalize this agreement during the fourth quarter 2004. TIMET expects to use
any funds received to pay all or substantially all of the expected cost to
complete the wastewater neutralization facility that is currently under
construction. In the event the new agreement is not completed, TIMET may be
required to restore some portion of the TIMET Pond Property to the condition it
was in prior to TIMET's use of the property, before returning title of the
affected property to BMI. TIMET believes liability it may have, if any, related
to this matter is remote. TIMET is also continuing investigation with respect to
other environmental issues associated with the TIMET Pond Property, including
possible groundwater issues, in the event the agreement is not finalized for any
reason.
At September 30, 2004, TIMET had accrued approximately $4.5 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 $9.4 million.
Other. The Company has also accrued approximately $6.4 million at September
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 quarters ended March 31, 2004 and June 30, 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
primarily to products manufactured by formerly owned operations of NL containing
asbestos, silica and/or mixed dust. Approximately 485 of these types of cases
involving a total of approximately 25,500 plaintiffs and their spouses remain
pending. Of these plaintiffs, approximately 9,200 are represented by six cases
pending in Mississippi state court and approximately 5,500 are represented by
four cases that have been removed to federal court in Mississippi, where they
have been, or are in the process of being, transferred to the multi-district
litigation pending in the United States District Court for the Eastern District
of Pennsylvania. NL has not accrued any amounts for this litigation because
liability that may result to NL, if any, cannot be reasonably estimated. In
addition, from time to time, NL has received notices regarding asbestos or
silica claims purporting to be brought against former subsidiaries of NL,
including notices provided to insurers with which NL has entered into
settlements extinguishing certain insurance policies. These insurers may seek
indemnification from NL.
In addition to the litigation described above, the Company and its
subsidiaries and affiliates may be involved from time to time in various other
environmental, contractual, product liability, patent (or intellectual
property), employment and other claims and disputes incidental to their present
and former businesses. In certain cases, the Company has insurance coverage for
such claims and disputes. 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 matter.
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 September
30, 2004, TIMET has reimbursed the issuer approximately $1.3 million under these
bonds, and $700,000 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 Nine months ended
September 30, September 30,
2003 2004 2003 2004
---- ---- ---- ----
(In thousands)
Service cost benefits $ 1,337 $ 1,772 $ 3,970 $ 4,900
Interest cost on projected benefit
Obligations 5,020 5,493 14,890 16,445
Expected return on plan assets (4,751) (5,210) (14,981) (15,698)
Amortization of prior service cost 88 140 263 421
Amortization of net transition
Obligations 187 142 542 432
Recognized actuarial losses 599 1,075 1,806 3,235
------- ------- -------- --------
$ 2,480 $ 3,412 $ 6,490 $ 9,735
======= ======= ======== ========
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 Nine months ended
September 30, September 30,
2003 2004 2003 2004
---- ---- ---- ----
(In thousands)
Service cost $ 39 $ 57 $ 112 $ 170
Interest cost 706 658 2,111 1,977
Amortization of prior service credit (518) (253) (1,556) (765)
Recognized actuarial losses (gains) (4) 44 15 134
------- ------- ------- -------
$ 223 $ 506 $ 682 $1,516
======= ======= ======= ======
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. During the third quarter of 2004, the Company
determined that benefits provided by its two U.S. plans (sponsored by NL and
Tremont) are actuarially equivalent to the Medicare Part D benefit and therefore
the Company is eligible for the federal subsidy provided for by the Medicare
2003 Act for those plans. The effect of such subsidy, which is accounted for
prospectively from the date actuarial equivalence was determined, as permitted
by and in accordance with FASB Staff Position No. 106-2, did not have a material
impact on the applicable accumulated postretirement benefit obligation, and will
not have a material impact on the net periodic OPEB cost going forward.
Note 15 - Stockholders' equity:
During the third quarter of 2004, the Company cancelled approximately 8.9
million shares of its common stock that previously had been held in treasury.
The aggregate $60.7 million cost of such treasury shares was allocated to common
stock at par value, additional paid in capital and retained earnings in
accordance with GAAP. Such cancellation had no impact on the net Valhi shares
outstanding for financial reporting purposes. At September 30, 2004,
approximately 5 million shares of Valhi common stock, held by subsidiaries of
Valhi, remain in treasury for financial reporting purposes and are classified as
treasury stock in the Company's consolidated financial statements in accordance
with GAAP.
Note 16 - 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 $17.4 million, or $.14 per diluted
share, in the third quarter of 2004 compared to net income of $8.8 million, or
$.07 per diluted share, in the third quarter of 2003. For the first nine months
of 2004, the Company reported income before cumulative effect of change in
accounting principle of $284.5 million, or $2.36 per diluted share, compared to
income of $28.2 million, or $.23 per diluted share, in the first nine months of
2003.
The increase in the Company's diluted earnings per share from the third
quarter and first nine months of 2003 compared to the same periods in 2004 is
due primarily to the net effects of (i) lower chemicals operating income, (ii)
higher component products operating income, (iii) lower environmental
remediation and legal expenses of NL, (iv) higher equity in earnings of TIMET,
(v) the reversal of Kronos' German deferred income tax asset valuation allowance
and (vi) the tax benefits related to EMS. Net income in 2003 includes (i) a
second quarter income tax benefit relating to the refund of prior year German
income taxes of $.17 per diluted share and (ii) gains from the disposal of
property and equipment (principally related to certain real property of NL)
aggregating $.03 per diluted share in the third quarter ($.04 per diluted share
in the 2003 year-to-date period). Net income in 2004 includes (i) a second
quarter income tax benefit related to the reversal of Kronos' deferred income
tax asset valuation allowance in Germany of $1.75 per diluted share, (ii) a
second quarter income tax benefit related to the reversal of the deferred income
tax asset valuation allowance related to EMS and the adjustment of estimated
income taxes due upon the IRS settlement related to EMS of $.30 per diluted
share, (iii) income related to Kronos' contract dispute settlement of $.03 per
diluted share and (iv) income related to the Company's pro-rata share of TIMET's
non-operating gain from TIMET's exchange of its convertible preferred debt
securities for a new issue of TIMET convertible preferred stock of $.03 per
diluted share. Overall, the Company currently believes its net income in
calendar 2004 will be higher than calendar 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 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, flat
during the second quarter of 2003, decreasing during the third and fourth
quarters of 2003 and the first quarter of 2004, flat during the second quarter
of 2004 and increasing in the third quarter of 2004.
Three months ended Nine months ended
September 30, September 30,
------------------- ---------------
2003 2004 % Change 2003 2004 % Change
---- ---- -------- ---- ---- --------
(In millions, except percentages and volumes)
Net sales $242.9 $286.1 +18% $762.5 $845.1 +11%
Operating income 31.7 25.8 -18% 94.1 84.2 -10%
Ti02 data:
Sales volumes* 111 128 +16% 350 383 +9%
Production volumes* 118 123 +5% 354 363 +3%
Percentage change in average Ti02 selling prices:
Using actual
foreign currency
exchange rates +3% +2%
Impact of changes in
foreign currency
exchange rates -4% -5%
---- ----
In billing currencies -1% -3%
==== ====
* Thousands of metric tons
Kronos' sales increased $43.2 million (18%) in the third quarter of 2004
compared to the third quarter of 2003, and increased $82.6 million (11%) in the
first nine months of 2004 as the favorable effect of fluctuations in foreign
currency exchange rates, which increased chemicals sales by approximately $11
million and $46 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 were
1% lower in the third quarter of 2004 than the third quarter of 2003, and were
3% lower in the first nine months of 2004 as compared to the same period in
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 third quarter of 2004 were 3% higher
than the third quarter of 2003, and increased 2% for the first nine 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 GAAP ("GAAP
measure"). Kronos discloses percentage changes in its average TiO2 prices in
billing currencies because Kronos believes such disclosure provides useful
information to investors to allow them to analyze such changes without the
impact of changes in foreign currency exchange rates, thereby facilitating
period-to-period comparisons of the relative changes in average selling prices
in the actual various billing currencies. Generally, when the U.S. dollar either
strengthens or weakens against other currencies, the percentage change in
average selling prices in billing currencies will be higher or lower,
respectively, than such percentage changes would be using actual exchange rates
prevailing during the respective periods. The difference between the 3% and 2%
increases in Kronos' average TiO2 selling prices during the third quarter and
first nine 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 1% and 3% 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 billing currencies in the
third quarter of 2004 were 3% higher than the second quarter of 2004, the first
quarter with an upward trend in selling prices since the third quarter of 2003.
In June 2004, Kronos announced additional price increases of 4 cents per pound
in the U.S., Canadian 6 cents per pound in Canada and euro 120 per metric ton in
Europe, all of which are targeted to be implemented in the fourth quarter of
2004. In September 2004, Kronos announced additional price increases of 3 cents
to 6 cents per pound in the U.S., Canadian 4 cents to Canadian 8 cents per pound
in Canada and euro 110 per metric ton in Europe, all of which are in addition to
the July/August announced increases and are targeted to be implemented in
January 2005. Kronos is also targeting to achieve price increases in export
markets in the fourth quarter of the year. 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. The dispute with the customer concerned the customer's alleged past
failure to purchase the required amount of TiO2 from Kronos under the terms of
Kronos' contract with the customer. Under the settlement, the customer agreed to
pay an aggregate of $7.3 million to Kronos through 2007 to resolve such dispute.
Kronos' TiO2 sales volumes in the third quarter of 2004 increased 16%
compared to the third quarter of 2003, and volumes were 9% 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 5% in the third
quarter of 2004 compared to the third quarter of 2003, and increased 3% in the
first nine months of 2004. Kronos' operating rates were near full capacity in
both periods, and Kronos' sales and production volumes in the first nine 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 third quarter and first nine
months of 2004 by a net amount of approximately $11 million and $46 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 first nine months of 2004 by $7 million as compared to the same
period in 2003, while the effect of currency exchange rate fluctuations was not
significant in the quarter.
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 continued to rise during the third quarter
of 2004. Kronos expects it average TiO2 selling prices will continue to increase
during the fourth quarter of the year. Nevertheless, Kronos expects its overall
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 approximately $11.1 million in the
first nine months of 2003 and $12.0 million in the first nine months of 2004.
Component products
Three months ended Nine months ended
September 30, September 30,
------------------ ----------------
2003 2004 % Change 2003 2004 % Change
---- ---- -------- ---- ---- --------
(In millions, except percentages)
Net sales $52.6 $56.0 +7% $153.3 $165.9 +8%
Operating income (loss) (.4) 5.8 n.m. 1.8 14.6 +713%
n.m. = not meaningful
Component products sales were higher in the third quarter and first nine
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 $1.1 million in the third quarter of 2004
as compared to the third quarter of 2003, and increased sales by $4.5 million in
the first nine months of the year. Component products sales comparisons were
also impacted by higher sales volumes of security products and precision slide
products and the effect of price increases for certain products.
During the third quarter of 2004, sales of slide and security products
increased 11% and 2%, respectively, as compared to the third quarter of 2003,
and sales of ergonomic products increased 8% (year-to-date increases for slide
and security products of 15% and 3%, respectively, with no significant change in
sales of ergonomic products on a year-to-date basis). 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 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 $900,000 incurred
during the first nine months of 2003 (mostly in the first half of the year)
associated with the consolidation of the two Canadian facilities into one
facility. In addition, the components products operating loss in the third
quarter of 2003 includes a $3.5 million restructuring charge associated with the
implementation of certain headcount reduction at CompX's Netherlands operations.
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 third quarter and first nine 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 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 Asian 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. CompX believes its
combination of cost control initiatives together with its value-added approach
to development and marketing of products helps to mitigate the impact of
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 an additional focus on sales of CompX's
higher-margin ergonomic computer support systems to improve operating results.
Although CompX currently 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 Nine months ended
September 30, September 30,
2003 2004 2003 2004
---- ---- ---- ----
(In millions)
Net sales $ .5 $ 4.4 $ 3.0 $ 6.6
Operating loss (3.1) (.5) (8.7) (7.3)
Waste management sales increased, and its operating loss declined, in the
first nine months of 2004 compared to the same period of 2003 due to improved
demand for waste management services, offset in part by 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 help to further increase its sales, and decrease its operating loss, in
2004 and 2005.
Waste Control Specialists currently has permits which allow it to treat,
store and dispose of a broad range of hazardous and toxic wastes, and to treat
and store a broad range of low-level and mixed low-level radioactive wastes.
Although sales improved in the third quarter, the waste management industry is
still 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
have 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 low-level radioactive
wastes includes obtaining additional regulatory authorizations for the disposal
of low-level and mixed low-level radioactive wastes.
Prior to June 2003, the state law in Texas (where Waste Control
Specialists' disposal facility is located) prohibited the applicable Texas
regulatory agency from issuing a license for the disposal of a broad range of
low-level and mixed low-level radioactive waste to a private enterprise
operating a disposal facility in Texas. In June 2003, a new Texas state law was
enacted that allows the 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 Nine months ended
September 30, 2004 September 30,
2003 2004 2003 2004
---- ---- ---- ----
(In millions)
TIMET historical:
Net sales $ 83.6 $120.2 $284.7 $364.9
====== ====== ====== ======
Operating income (loss):
Boeing take-or-pay $ 10.1 $ 10.1 $ 12.9 $ 12.6
Tungsten accrual 1.7 - 1.7 -
LIFO income (expense) 3.9 (1.1) 4.5 (3.0)
Contract termination charge (6.8) - (6.8) -
Other, net (7.6) 3.4 (21.2) 12.6
------ ------ ------ ------
1.3 12.4 (8.9) 22.2
Gain on exchange of convertible
preferred debt securities - 15.5 - 15.5
Other general corporate, net - (.1) (.6) .8
Interest expense (4.0) (3.1) (12.2) (11.5)
------ ------ ------ ------
(2.7) 24.7 (21.7) 27.0
Income for tax benefit (expense) (.3) .6 (.8) (.7)
Minority interest - (.1) (.2) (.8)
Dividends on preferred stock - (1.1) - (1.1)
------ ------ ------ ------
Income (loss) before cumulative
effect of change in accounting
principle attributable to
common stock $ (3.0) $ 24.1 $(22.7) $ 24.4
====== ====== ====== ======
Equity in earnings (losses) of TIMET $ .2 $ 11.2 $ (3.7) $ 13.7
====== ====== ====== ======
TIMET's operating results improved in the third quarter of 2004 as compared
to the third quarter of 2003 in part due to the net effects of a 34% increase in
sales volumes of mill products, a 3% decrease in sales volumes of melted
products (ingot and slab) and an 39% increase in melted product average selling
prices. TIMET's sales volumes of mill products and melted products increased 31%
and 12%, respectively, in the first nine months of 2004 as compared to the same
period in 2003, while average selling prices for melted products increased 12%
and selling prices of mill products decreased 2%. TIMET's mill product average
selling prices were positively affected by the weakening of the U.S. dollar
compared to the British pound sterling and the euro, and were negatively
impacted by changes in product mix. 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 market demands and market share
gains. The increase in melted product average selling prices was due in part to
a change in product mix relative to a significant sale of slab in the third
quarter of 2003, for which selling prices are lower than ingot.
TIMET's operating results in the first nine 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 nine
months of 2003 to 72% in the first nine 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 third quarter and first nine months of 2004 by
$5.0 million and $7.5 million, respectively, as compared with the same periods
in 2003, as well as higher costs for raw materials (scrap and alloys) and
energy. TIMET's operating results in the third quarter of 2003 include (i) a
$6.8 million charge related to the termination of TIMET's purchase and sale
agreement with Wyman-Gordon and (ii) a $1.7 million reduction in its accrual for
a previously-reported product liability matter. TIMET's operating results in
2004 were also negatively affected by higher accruals for incentive compensation
payments expected to be paid in 2004, and higher environmental remediation
expenses (primarily associated with its Nevada production facility).
In August 2004, TIMET completed an exchange offer in which approximately
3.9 million shares of the outstanding convertible preferred debt securities
issued by TIMET Capital Trust I (a wholly-owned subsidiary of TIMET) were
exchanged for an aggregate of 3.9 million shares of a newly-created Series A
Preferred Stock of TIMET at the exchange rate of one share of Series A Preferred
Stock for each convertible preferred debt security. TIMET recognized a non-cash
pre-tax gain of $15.5 million related to such exchange. The exchange of the
convertible preferred debt securities for a new issue of TIMET preferred stock
will result in TIMET reporting lower interest expense going forward, although
the effect on TIMET's income attributable to common stock of lower interest
expense will be substantially offset by dividends accruing on the new preferred
stock.
TIMET currently expects sales revenues for the full year 2004 will range
from $495 million to $505 million. 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 nine months of 2004). TIMET's backlog was
approximately $400 million at September 30, 2004, up from $320 million at June
30, 2004 and $175 million at September 30, 2003. TIMET's June 2004 and September
2003 backlog numbers have been adjusted to include contractually obligated
consignment orders, which had previously been excluded from reported backlog
figures.
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 for
scrap precede the increase in scrap generation by downstream customers and the
supply chain, placing upward pressure on the market price of scrap. TIMET is
continuing its efforts to increase prices on its products in order to offset the
effects of increased raw material and energy costs.
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
1.6 million pounds of product during 2004. At this projected order level, TIMET
expects to recognize about $22 million of income in 2004 under the Boeing
long-term agreement take-or-pay provisions, including $2.5 million and $10.1
million recognized in the second and third quarters of 2004, respectively. 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 $33
million and $38 million, and TIMET currently expects its full year net income
attributable to common stock for 2004 will range between $34 million and $39
million.
The Company accounts for its interest in TIMET by the equity method. The
Company's equity in earnings of TIMET differs from the amounts that would be
expected by applying the Company's ownership percentage to TIMET's
separately-reported earnings because of the effect of amortization of purchase
accounting adjustments made by 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 $5.5 million in the first nine months of
2003 and $3.7 million in the first nine months of 2004.
General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend income in the first nine months of 2004 was comparable to the same
period of 2003. Aggregate general corporate interest and dividend income during
the fourth quarter of 2004 is currently expected to approximate the same period
in 2003.
Gain on disposal of fixed assets. The gain on disposal of fixed assets in
2003 relates primarily to the sale of certain real property of NL.
General corporate expenses. Net general corporate expenses in the third
quarter and first nine 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
third quarter and first nine 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 $500,000 during the third quarter of 2004 as
compared to the third quarter of 2003 (year-to-date increase of $2.2 million).
Assuming no significant change in interest rates or foreign currency exchange
rates, interest expense in the fourth quarter of 2004 is expected to continue to
be slightly higher than interest expense in the same period of 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 September 30, 2004, Kronos had the equivalent of $602 million and $244
million of income tax loss carryforwards for German corporate and trade tax
purposes, respectively, all of which have no expiration date. As more fully
described in 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 met 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 effective income tax rate in the
third quarter of 2004 was higher than what it would have otherwise been, and the
Company's future effective income tax rate is expected to continue to be higher
than it otherwise would have been, although its future cash income tax rate was
not 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.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law contains several provisions that could impact the Company.
These provisions provide for, among other things, a special deduction from U.S.
taxable income equal to a stipulated percentage of qualified income from
domestic activities (as defined) beginning in 2005, and a special 85% dividends
received deduction for certain dividends received from controlled foreign
corporations. Both of these provisions are complex and subject to numerous
limitations. The Company is still studying the new law, including the technical
provisions related to the two complex provisions noted above. The effect on the
Company of the new law, if any, has not yet been determined, in part because the
Company has not yet determined whether its operations qualify for the special
deduction or whether it would benefit from the special dividends received
deduction.
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 the subsidiary of NL relates 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 16 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 September 30, 2004, the Company's third-party indebtedness consisted
principally of (i) Valhi's $250 million of loans from Snake River Sugar Company
due in 2027, (ii) Valhi's $58 million of borrowings under its revolving bank
credit facility due (as amended in October 2004) in October 2005 and (iii)
Kronos International's euro-denominated Senior Secured Notes (equivalent of $350
million principal amount outstanding) due in 2009. Accordingly, the Company does
not currently expect that a significant amount of its cash flows from operating
activities generated during the fourth quarter of 2004 will be required to be
used to repay indebtedness during the remainder of the year.
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 $73.8 million
in the first nine months of 2003 to $112.3 million in the first nine months of
2004. This $38.5 million increase was due primarily to the net effect of (i)
higher net income of $255.7 million, (ii) a larger deferred income tax benefit
of $281.9 million, (iii) higher depreciation and amortization expense of $4.5
million, (iv) higher distributions from Kronos' TiO2 manufacturing joint venture
of $6.9 million, (v) a $17.4 million improvement in equity in earnings (losses)
of TIMET, (vi) higher minority interest of $44.0 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 $10.6 million and (viii)
higher cash received for income taxes of $7.1 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, NL Parent and
Tremont LLC).
Nine months ended
September 30,
2003 2004
---- ----
(In millions)
Cash provided (used) by operating activities:
Kronos $ 83.4 $119.8
CompX 14.1 20.8
Valhi Parent 21.7 24.2
NL (other than Kronos and CompX) (8.6) 7.1
Tremont LLC 3.1 1.1
Waste Control Specialists (4.5) (6.4)
Other (1.6) (.2)
Eliminations (33.8) (54.1)
------ ------
Valhi consolidated $ 73.8 $112.3
====== ======
Investing and financing activities. Approximately 68% of the Company's
consolidated capital expenditures in the first nine months of 2004 relate to
Kronos, 23% relates to Waste Control Specialists and substantially all of the
remainder relates to CompX. During the first nine months of 2004, Valhi
purchased shares of Kronos common stock in market transactions for $17.1
million, and NL collected $2 million on its loan to one of the Contran family
trusts.
During the first nine months of 2004, Valhi repaid a net $4.8 million of
its short-term demand loans from Contran and borrowed a net $53.0 million under
its revolving bank credit facility, (ii) CompX repaid a net $26.0 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 September 30, 2004, unused credit available under existing credit
facilities approximated $232.4 million, which was comprised of: CompX - $47.5
million under its new revolving credit facility; Kronos - $95 million under its
European credit facility, $8 million under its Canadian credit facility, $38
million under its U.S. credit facility and $3 million under other non-U.S.
facilities; and Valhi - $40.9 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 September 30, 2004, Kronos had cash, cash equivalents and marketable
debt securities of $122.0 million, including restricted balances of $3.5
million, and Kronos had approximately $144 million available for borrowing under
its U.S., Canadian and European credit facilities.
At September 30, 2004, Kronos' outstanding debt was comprised of (i) $350
million related to KII's Senior Secured Notes and (ii) approximately $300,000 of
other indebtedness. In addition, at September 30, 2004 Kronos had long-term
notes payable to NL, Valhi and Valcor aggregating $200 million and due in 2010
which are eliminated in the Company's consolidated financial statements. In
October 2004, Valcor distributed to Valhi its $162.5 million note receivable
from Kronos, and subsequently Kronos prepaid $100.0 million on the note payable
to Valhi (including accrued interest) principally using available cash on hand.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions significantly impact Kronos' earnings and operating cash
flows. Cash flows from operations is considered the primary source of liquidity
for Kronos. Changes in TiO2 pricing, production volumes and customer demand,
among other things, could significantly affect the liquidity of Kronos.
See Note 11 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of Kronos' income tax
returns in various U.S. and non-U.S. jurisdictions, and see Note 13 to the
Consolidated Financial Statements with respect to certain legal proceedings with
respect to Kronos.
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' net assets, will fluctuate based upon changes in currency
exchange rates.
In October 2004, Kronos filed a registration statement with the SEC for a
proposed offering of up to 8.25 million shares of its common stock. The
registration statement has not yet been declared effective by the SEC. There can
be no assurance that the registration statement will be declared effective, or
if declared effective, that the offering would be completed. The securities may
not be offered for sale or sold nor may offers to buy be accepted prior to the
time the registration statement becomes effective. If the offering is completed,
Kronos would use a portion of the net proceeds from such offering to repay the
remaining balance of its long-term note payable to affiliates, with the balance
of the net proceeds available for Kronos' general corporate purposes, including
possible acquisitions.
NL Industries
At September 30, 2004, NL (exclusive of Kronos and CompX) had cash, cash
equivalents and marketable debt securities of $57.7 million, including
restricted balances of $22.2 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 $31.4 million long-term note receivable from Kronos
due in 2010, which is eliminated in the Company's consolidated financial
statements. As discussed above, Kronos has filed a registration statement with
the SEC for a proposed offering of up to 8.25 million shares of its common
stock. Assuming the offering is completed, Kronos has stated that it intends to
use a portion of the net proceeds from such offering to prepay its remaining
notes payable to affilites, including the $31.4 million held by NL.
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
(of which NL transferred an aggregate of $168.6 million to Valhi and Valcor in
connection with NL's acquisition of the shares of CompX common stock previously
held by Valhi and Valcor, as discussed in Note 2 to the Consolidated Financial
Statements). During the first nine months of 2004, NL paid its three $.20 per
share regular quarterly dividends in the form of shares of Kronos common stock
in which an aggregate of approximately 966,000 shares, or approximately 2% of
Kronos' outstanding common stock, were distributed to NL shareholders (including
Valhi and Tremont) in the form of pro-rata dividends. 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 and NL's adjusted tax basis in such stock at the
applicable date of distribution. With respect to the shares of Kronos
distributed to Valhi and Tremont (806,000 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 aggregated approximately $1.9 million. The
Company's pro-rata share of such tax liability, based on the Company's ownership
of NL, is $1.6 million, and in accordance with GAAP has been recognized as a
reduction of the Company's additional paid-in capital. Completion of these
distributions had no other impact on the Company's consolidated financial
position, results of operations or cash flows.
Following the second of such quarterly dividends in 2004, NL no longer
owned a majority of Kronos' outstanding common stock, and accordingly NL ceased
to consolidate Kronos as of July 1, 2004. However, the Company continues to
consolidate Kronos since the Company continues to own a majority of Kronos,
either directly or indirectly through NL and Tremont.
Prior to September 24, 2004, the Company's ownership of Compx was owned by
Valhi and Valcor. On September 24, 2004, NL completed the acquisition the Compx
shares previously held by Valhi and Valcor at a purchase price of $16.25 per
share, or an aggregate of approximately $168.6 million. The purchase price was
paid by NL's transfer to Valhi and Valcor of $168.6 million of NL's $200 million
long-term note receivable from Kronos (which long-term note is eliminated in the
preparation of the Company's consolidated financial statements). See Note 2 to
the Consolidated Financial Statements. NL's acquisition was accounted for under
GAAP as a transfer of net assets among entities under common control, and such
transaction had no effect on the Company's consolidated financial statements.
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, debt service and dividends 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. In
the fourth quarter of 2004, CompX resumed its regular quarterly dividend at the
$.125 per share rate.
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 September 30, 2004, CompX held contracts maturing
through November 2004 to exchange an aggregate of U.S. $3.1 million for an
equivalent amount of Canadian dollars at exchange rates ranging from Cdn. $1.29
to Cdn. $1.31 per U.S. dollar. At September 30, 2004 the actual exchange rate
was Cdn. $1.28 per U.S. dollar. The fair value of such forward contracts was not
significant at September 30, 2004.
CompX periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, dividend policy and estimated
future operating cash flows. As a result of this process, CompX has in the past
and may in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities, modify its dividend policy,
repurchase shares of its common stock or take a combination of such steps or
other steps to manage its liquidity and capital resources. In the normal course
of business, CompX may review opportunities for acquisitions, divestitures,
joint ventures or other business combinations in the component products
industry. In the event of any such transaction, CompX may consider using its
then-available cash, issuing additional equity securities or increasing the
indebtedness of CompX or its subsidiaries.
Waste management - Waste Control Specialists
At September 30, 2004, Waste Control Specialists' indebtedness consisted
principally of $44.3 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 nine 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 from such Valhi subsidiary.
TIMET
At September 30, 2004, TIMET had $117 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 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.
In August 2004, TIMET effected a 5:1 split of its common stock. Such stock
split had no financial statement impact to the Company, and the Company's
ownership interest in TIMET did not change as a result of the split.
Prior to August 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 August 2004, TIMET completed an exchange offer in which approximately
3.9 million shares of the outstanding convertible preferred debt securities
issued by TIMET Capital Trust I were exchanged for an aggregate of 3.9 million
shares of a newly-created Series A Preferred Stock of TIMET at the exchange rate
of one share of Series A Preferred Stock for each convertible preferred debt
security. Dividends on the Series A shares accumulate at the rate of 6 3/4% of
their liquidation value of $50 per share, and are convertible into shares of
TIMET common stock at the rate of one and two-thirds of a share of TIMET common
stock per Series A share. The Series A shares are not mandatorily redeemable,
but are redeemable at the option of TIMET in certain circumstances.
During the third quarter of 2004, the President of the United States
approved a petition filed by TIMET to eliminate a special tariff exemption for
titanium wrought products imported into the United States from Russia under the
Generalized System of Preferences ("GSP"). Under the GSP program, the President
has the authority to suspend normal trade tariffs on imports of designated
products from certain developing countries. Normal customs duties on titanium
wrought products from Russia had been suspended since 1998. This action means
that duties on imports of titanium wrought product from Russia, where one
TIMET's main competitors in located, will return to the normal tariff of 15%
during the fourth 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. Any
outstanding borrowings under the facility, which matures in December 2004, are
eliminated in Valhi's consolidated financial statements. At September 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 21.9 million shares of Kronos held by
Valhi and Tremont at September 30, 2004 (16.6 million shares held by Valhi and
5.3 million share held by Tremont, a wholly-owned subsidiary of Valhi), Valhi
would directly or indirectly receive aggregate annual dividends from Kronos of
$21.9 million. NL, which paid regular quarterly cash dividends of $.20 per share
in 2003, has paid its 2004 regular quarterly dividends of $.20 per share in the
form of shares of Kronos common stock. 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 dividends or
selling interests in subsidiaries or other assets.
At September 30, 2004, Valhi had $8.7 million of parent level cash and cash
equivalents and had $58 million outstanding under its revolving bank credit
agreement. In addition, Valhi had $40.9 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, and the maturity date of the facility has been extended one year to
October 2005.
As noted above, in September 2004 NL completed the acquisition of the
shares of CompX common stock previously held by Valhi and Valcor. The purchse
price for these shares was paid by NL's transfer to Valhi and Valcor of an
aggregate $168.6 million of NL's note receivable from Kronos ($162.5 million to
Valcor and $6.1 million to Valhi). In October 2004, Valcor distributed to Valhi
its $162.5 million note receivable from Kronos, and subsequently Kronos prepaid
$100.0 million on the note payable to Valhi (including accrued interest)
principally using available cash on hand. Valhi used $58 million of such $100
million to repay the outstanding balance under its revolving bank credit
facility. The remainder is available for Valhi's general corporate purposes.
Also as discussed above, Kronos has filed a registration statement with the SEC
for a proposed offering of up to 8.25 million shares of its common stock.
Assuming the offering is completed, Kronos has stated that it intends to use a
portion of the net proceeds from such offering to prepay its remaining notes
payable to affilites, including the remaining balance of Valhi's note receivable
from Kronos.
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 September 30, 2004, the accrued and unpaid interest
on the $80 million loan to Snake River aggregated $37.0 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 September 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 September 30, 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
system of internal controls over financial reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 will require the Company to
annually include a management report on internal control over financial
reporting starting in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004. The Company's independent auditors will also be
required to annually attest to the Company's internal control over financial
reporting. In order to achieve compliance with Section 404, the Company has been
documenting, testing and evaluating its internal control over financial
reporting since 2003, using a combination of internal and external resources .
The process of documenting, testing and evaluating the Company's internal
control over financial reporting under the applicable guidelines is complex and
time consuming, and available internal and external resources necessary to
assist the Company in the documentation and testing required to comply with
Section 404 are limited. While the Company currently believes it has dedicated
the appropriate resources and that it will be able to fully comply with Section
404 in its Annual Report on Form 10-K for the year ended December 31, 2004 and
be in a position to conclude that the Company's internal control over financial
reporting is effective as of December 31, 2004, because the applicable
requirements are complex and time consuming, and because currently unforeseen
events or circumstances beyond the Company's control could arise, there can be
no assurance that the Company will ultimately be able to fully comply with
Section 404 in its Annual Report on Form 10-K for the year ended December 31,
2004 or whether it will be able to conclude that the Company's internal control
over financial reporting is effective as of December 31, 2004.
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 Reports on Form 10-Q for the
quarters ended March 31, 2004 and June 30, 2004 for descriptions of certain
legal proceedings.
Thomas v. Lead Industries Association, et al. (Circuit Court, Milwaukee,
Wisconsin, Case No. 99-CV-6411). In September 2004, the Wisconsin Supreme Court
granted plaintiff's petition for review of the appellate court's June 2004
decision affirming the trial court's dismissal of all of the plaintiff's claims.
Smith, et al. v. Lead Industries Association, et al. (Circuit Court for
Baltimore City, Maryland, Case No. 24-C-99-004490). In September 2004, the
Maryland Court of Appeals granted plaintiffs' petition for review of the
appellate court's dismissal of certain of the plaintiffs' claims.
City of St. Louis v. Lead Industries Association, et al. (Missouri Circuit
Court 22nd Judicial Circuit, St. Louis City, Cause No. 002-245, Division 1). In
September 2004, the court amended the scheduling order and reset the trial date
for January 2006.
Spring Branch Independent School District v. Lead Industries Association,
et al. (District Court of Harris County, Texas, No. 2000-31175). The time for
plaintiff's appeal of the appellate court's June 2004 decision granting
defendants' motion for summary judgment expired in August 2004.
Jackson, et al. v. Phillips Building Supply of Laurel, et al. (Circuit
Court of Jones County, Mississippi, Dkt. Co. 2002-10-CV1). In August 2004,
plaintiffs voluntarily agreed to sever one of the plaintiffs, and defendants
withdrew their motion to sever such plaintiff.
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
September 2004, the court stayed the case pending an appeal by the tribe related
to sovereign immunity issues.
In July 2004, the U.S. EPA and NL entered into an administrative order on
consent to perform a removal action with respect to the site of a formerly-owned
lead smelting facility located in Collinsville, Illinois.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31.1 - Certification
31.2 - Certification
32.1 - Certification.
The Company has retained a signed original of any of the above exhibits
that contains signatures, and the Company will provide such exhibit to the
Commission or its staff upon request. Valhi will also furnish, without charge, a
copy of its Code of Business Conduct and Ethics and its Audit Committee Charter
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 September 30, 2004.
August 6, 2004 - Reported Items 9 and 12. August 31, 2004 -
Reported Items 7.01 and 9.01. September 24, 2004 - Reported Items
1.01, 2.01, 7.01 and 9.01.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALHI, INC.
(Registrant)
Date November 8, 2004 By /s/ Bobby D. O'Brien
-------------------- ------------------------------
Bobby D. O'Brien
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
Date November 8, 2004 By /s/ Gregory M. Swalwell
-------------------- ------------------------------
Gregory M. Swalwell
Vice President and Controller
(Principal Accounting Officer)