SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2001 Commission file number 1-5467
------------------ ------
VALHI, INC.
- ------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 87-0110150
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ----
Number of shares of common stock outstanding on April 30, 2000: 114,692,317.
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 2000
and March 31, 2001 3
Consolidated Statements of Income -
Three months ended March 31, 2000 and 2001 5
Consolidated Statements of Comprehensive Income -
Three months ended March 31, 2000 and 2001 6
Consolidated Statements of Cash Flows -
Three months ended March 31, 2000 and 2001 7
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 2001 9
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 35
Item 6. Exhibits and Reports on Form 8-K. 36
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, March 31,
2000 2001
------ ------
Current assets:
Cash and cash equivalents .................. $ 135,017 $ 113,027
Restricted cash equivalents ................ 69,242 74,782
Accounts and other receivables ............. 182,991 206,563
Refundable income taxes .................... 14,470 15,675
Receivable from affiliates ................. 885 1,187
Inventories ................................ 242,994 223,746
Prepaid expenses ........................... 7,272 6,708
Deferred income taxes ...................... 14,236 15,177
---------- ----------
Total current assets ................... 667,107 656,865
---------- ----------
Other assets:
Marketable securities ...................... 268,006 269,426
Investment in affiliates ................... 235,791 232,509
Loans and other receivables ................ 100,540 101,957
Mining properties .......................... 13,971 12,957
Prepaid pension costs ...................... 22,789 22,392
Goodwill ................................... 359,420 354,365
Deferred income taxes ...................... 2,046 1,754
Other ...................................... 49,604 40,657
---------- ----------
Total other assets ..................... 1,052,167 1,036,017
---------- ----------
Property and equipment:
Land ....................................... 29,644 28,989
Buildings .................................. 167,653 164,727
Equipment .................................. 543,915 526,032
Construction in progress ................... 14,865 22,144
---------- ----------
756,077 741,892
Less accumulated depreciation .............. 218,530 226,485
---------- ----------
Net property and equipment ............. 537,547 515,407
---------- ----------
$2,256,821 $2,208,289
========== ==========
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, March 31,
2000 2001
------ -------
Current liabilities:
Notes payable .............................. $ 70,039 $ 67,096
Current maturities of long-term debt ....... 34,284 1,669
Accounts payable ........................... 81,572 63,133
Accrued liabilities ........................ 162,431 161,229
Payable to affiliates ...................... 32,042 39,241
Income taxes ............................... 15,693 15,021
Deferred income taxes ...................... 1,922 1,303
----------- -----------
Total current liabilities .............. 397,983 348,692
----------- -----------
Noncurrent liabilities:
Long-term debt ............................. 595,354 598,333
Accrued OPEB costs ......................... 50,624 49,986
Accrued pension costs ...................... 26,697 24,761
Accrued environmental costs ................ 66,224 60,913
Deferred income taxes ...................... 294,371 294,283
Other ...................................... 41,055 39,672
----------- -----------
Total noncurrent liabilities ........... 1,074,325 1,067,948
----------- -----------
Minority interest ............................ 156,278 155,273
----------- -----------
Stockholders' equity:
Common stock ............................... 1,257 1,257
Additional paid-in capital ................. 44,345 44,386
Retained earnings .......................... 591,030 615,638
Accumulated other comprehensive income:
Marketable securities .................... 132,580 133,314
Currency translation ..................... (60,811) (77,721)
Pension liabilities ...................... (4,517) (4,849)
Treasury stock ............................. (75,649) (75,649)
----------- -----------
Total stockholders' equity ............. 628,235 636,376
----------- -----------
$ 2,256,821 $ 2,208,289
=========== ===========
Commitments and contingencies (Note 1)
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2000 and 2001
(In thousands, except per share data)
2000 2001
---- ----
Revenues and other income:
Net sales ............................................ $ 301,728 $288,835
Other, net ........................................... 15,872 44,091
--------- --------
317,600 332,926
--------- --------
Costs and expenses:
Cost of sales ........................................ 214,603 202,691
Selling, general and administrative .................. 49,973 49,193
Interest ............................................. 17,348 17,110
--------- --------
281,924 268,994
--------- --------
35,676 63,932
Equity in earnings (losses) of:
Titanium Metals Corporation ("TIMET") ................ (4,321) 125
Other ................................................ 276 658
--------- --------
Income before income taxes ......................... 31,631 64,715
Provision for income taxes ............................. 14,772 23,722
Minority interest in after-tax earnings ................ 6,374 9,432
--------- --------
Net income ......................................... $ 10,485 $ 31,561
========= ========
Basic and diluted earnings per share ................... $ .09 $ .27
========= ========
Cash dividends per share ............................... $ .05 $ .06
========= ========
Shares used in the calculation of per share amounts:
Basic earnings per common share ...................... 115,090 115,162
Dilutive impact of outstanding stock options ......... 1,106 842
--------- --------
Diluted earnings per share ........................... 116,196 116,004
========= ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, 2000 and 2001
(In thousands)
2000 2001
---- ----
Net income ........................................... $ 10,485 $ 31,561
-------- --------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment ................... 997 734
Currency translation adjustment .................... (9,543) (16,910)
Pension liabilities adjustment ..................... 941 (332)
-------- --------
Total other comprehensive income (loss), net ..... (7,605) (16,508)
-------- --------
Comprehensive income ........................... $ 2,880 $ 15,053
======== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2000 and 2001
(In thousands)
2000 2001
---- ----
Cash flows from operating activities:
Net income ......................................... $ 10,485 $ 31,561
Depreciation, depletion and amortization ........... 18,620 18,673
Legal settlements, net ............................. -- (10,307)
Noncash interest expense ........................... 2,276 2,437
Deferred income taxes .............................. 5,939 5,273
Minority interest .................................. 6,374 9,432
Other, net ......................................... (1,434) (2,222)
Equity in:
TIMET ............................................ 4,321 (125)
Other ............................................ (276) (658)
Distributions from:
Manufacturing joint venture ...................... 3,500 1,500
Other ............................................ 81 --
-------- --------
49,886 55,564
Change in assets and liabilities:
Accounts and other receivables ................... (11,420) (20,201)
Inventories ...................................... 8,400 11,125
Accounts payable and accrued liabilities ......... (3,663) (19,983)
Accounts with affiliates ......................... (2,061) 8,690
Income taxes ..................................... 4,712 (1,383)
Other, net ....................................... (1,320) (563)
-------- --------
Net cash provided by operating activities .... 44,534 33,249
-------- --------
Cash flows from investing activities:
Capital expenditures ............................... (11,040) (11,011)
Purchases of:
Business unit .................................... (9,409) --
Tremont common stock ............................. (20,681) --
NL common stock .................................. (10,331) --
CompX common stock ............................... -- (2,442)
Change in restricted cash equivalents, net ......... 361 863
Other, net ......................................... 316 309
-------- --------
Net cash used by investing activities ........ (50,784) (12,281)
-------- --------
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 2000 and 2001
(In thousands)
2000 2001
---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings ....................................... $ 28,062 $ 7,000
Principal payments ............................... (643) (38,914)
Loans from affiliate:
Loans ............................................ 11,180 27,500
Repayments ....................................... (12,482) (27,900)
Valhi dividends paid ............................... (5,791) (6,953)
Distributions to minority interest ................. (2,482) (2,701)
Other, net ......................................... 802 634
--------- ---------
Net cash provided (used) by
financing activities .......................... 18,646 (41,334)
--------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities ...... 12,396 (20,366)
Currency translation ............................... (1,507) (1,624)
Business unit acquired ............................. 250 --
Cash and equivalents at beginning of period .......... 152,707 135,017
--------- ---------
Cash and equivalents at end of period ................ $ 163,846 $ 113,027
========= =========
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized ............. $ 7,520 $ 9,118
Income taxes, net ................................ 6,409 13,543
Business unit acquired - net assets consolidated:
Cash and cash equivalents ........................ $ 250 $ --
Goodwill and other intangible assets ............. 2,514 --
Other non-cash assets ............................ 8,429 --
Liabilities ...................................... (1,784) --
--------- ---------
Cash paid ........................................ $ 9,409 $ --
========= =========
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2001
(In thousands)
Additional Accumulated other comprehensive income Total
Common paid-in Retained Marketable Currency Pension Treasury stockholders'
stock capital earnings securities translation liabilities stock equity
----- --------- -------- ---------- ----------- ----------- ------- ----------
Balance at December 31, 2000 .. $1,257 $44,345 $ 591,030 $132,580 $(60,811) $(4,517) $(75,649) $ 628,235
Net income .................... -- -- 31,561 -- -- -- -- 31,561
Dividends ..................... -- -- (6,953) -- -- -- -- (6,953)
Other comprehensive income, net -- -- -- 734 (16,910) (332) -- (16,508)
Other, net .................... -- 41 -- -- -- -- -- 41
------ ------- --------- -------- -------- ------- -------- ---------
Balance at March 31, 2001 ..... $1,257 $44,386 $ 615,638 $133,314 $(77,721) $(4,849) $(75,649) $ 636,376
====== ======= ========= ======== ======== ======= ======== =========
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation:
The consolidated balance sheet of Valhi, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2000 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 2001, and the consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended March 31, 2000 and 2001, have been prepared by the
Company, without audit. 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 prior year amounts have been reclassified to conform to the current year
presentation, and certain information normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America has been condensed or omitted. The accompanying
consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2000 (the
"2000 Annual Report").
Basic earnings per share of common stock is based upon the weighted average
number of common shares actually outstanding during each period. Diluted
earnings per share of common stock includes the impact of outstanding dilutive
stock options.
Commitments and contingencies are discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Legal Proceedings"
and the 2000 Annual Report.
Contran Corporation holds, directly or through subsidiaries, approximately
93% of Valhi's outstanding common stock. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of
certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is
sole trustee. Mr. Simmons, the Chairman of the Board and Chief Executive Officer
of Valhi and Contran, may be deemed to control such companies.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended, effective January 1, 2001. Under SFAS No. 133, all derivatives are
recognized as either assets or liabilities and measured at fair value. The
accounting for changes in fair value of derivatives depends upon the intended
use of the derivative, and such changes are recognized either in net income or
other comprehensive income. As permitted by the transition requirements of SFAS
No. 133, as amended, the Company has exempted from the scope of SFAS No. 133 all
host contracts containing embedded derivatives which were issued or acquired
prior to January 1, 1999. Other than certain currency forward contracts, the
Company was not a party to any significant derivative or hedging instrument
covered by SFAS No. 133 during the first quarter of 2001. The accounting for
such currency forward contracts under SFAS No. 133 is not materially different
from the accounting for such contracts under prior accounting rules, and
therefore the impact to the Company of adopting SFAS No. 133 was not material.
Note 2 - Business segment information:
% owned at
Business Entity March 31, 2001
Chemicals NL Industries, Inc. 60%
Component products CompX International Inc. 69%
Waste management Waste Control Specialists 90%
Titanium metals Tremont Group, Inc. 80%
Tremont Group is a holding company which owns 80% of Tremont Corporation
("Tremont") at March 31, 2001. NL owns the other 20% of Tremont Group. Tremont
is also a holding company and owns an additional 20% of NL and 39% of Titanium
Metals Corporation ("TIMET") at March 31, 2001.
Three months ended
March 31,
2000 2001
---- ----
(In millions)
Net sales:
Chemicals .................................... $231.0 $226.1
Component products ........................... 66.1 59.6
Waste management ............................. 4.6 3.1
------ ------
Total net sales ............................ $301.7 $288.8
====== ======
Operating income:
Chemicals .................................... $ 39.8 $ 45.4
Component products ........................... 10.9 7.0
Waste management ............................. (1.6) (3.2)
------ ------
Total operating income ..................... 49.1 49.2
General corporate items:
Legal settlements, net ....................... -- 30.7
Interest and dividend income ................. 11.5 10.3
Expenses, net ................................ (7.6) (9.2)
Interest expense ............................... (17.3) (17.1)
------ ------
35.7 63.9
Equity in:
TIMET ........................................ (4.3) .1
Other ........................................ .3 .7
------ ------
Income before income taxes ................. $ 31.7 $ 64.7
====== ======
During the first quarter of 2001, CompX purchased shares of its common
stock in market transactions for an aggregate of $2.4 million, increasing the
Company's ownership of CompX to 69%. The Company accounted for such increase in
its ownership of CompX by the purchase method (step acquisition).
NL (NYSE: NL), CompX (NYSE: CIX), Tremont (NYSE: TRE) and TIMET (NYSE: TIE)
each file periodic reports pursuant to the Securities Exchange Act of 1934, as
amended.
Note 3 - Marketable securities:
December 31, March 31,
2000 2001
------ ------
(In thousands)
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC .............. $170,000 $170,000
Halliburton Company common stock ............... 97,108 98,447
Other common stocks ............................ 898 979
-------- --------
$268,006 $269,426
======== ========
At March 31, 2001, Valhi held 2.7 million shares of Halliburton common
stock (aggregate cost of $22 million) with a quoted market price of $36.75 per
share, or an aggregate market value of $98.4 million. Valhi's LYONs are
exchangeable at any time, at the option of the LYON holder, for such Halliburton
shares, and the carrying value of the Halliburton stock is limited to the
accreted LYONs obligation. See Note 7. See the 2000 Annual Report for a
discussion of the Company's investment in The Amalgamated Sugar Company LLC. The
aggregate cost of other available-for-sale common stocks is approximately $2.3
million at March 31, 2001.
Note 4 - Inventories:
December 31, March 31,
2000 2001
------ ------
(In thousands)
Raw materials:
Chemicals .................................. $ 66,061 $ 41,065
Component products ......................... 11,866 13,989
-------- --------
77,927 55,054
-------- --------
In process products:
Chemicals .................................. 7,117 8,123
Component products ......................... 11,454 11,617
-------- --------
18,571 19,740
-------- --------
Finished products:
Chemicals .................................. 107,895 113,451
Component products ......................... 12,811 10,425
-------- --------
120,706 123,876
-------- --------
Supplies (primarily chemicals) ............... 25,790 25,076
-------- --------
$242,994 $223,746
======== ========
Note 5 - Other assets:
December 31, March 31,
2000 2001
------- -------
(In thousands)
Investment in affiliates:
TiO2 manufacturing joint venture ............. $150,002 $148,241
TIMET ........................................ 72,655 70,476
Other ........................................ 13,134 13,792
-------- --------
$235,791 $232,509
======== ========
Loans and other receivables:
Snake River Sugar Company:
Principal .................................. $ 80,000 $ 80,000
Interest ................................... 17,526 18,824
Other ........................................ 4,754 4,859
-------- --------
102,280 103,683
Less current portion ......................... 1,740 1,726
-------- --------
Noncurrent portion ........................... $100,540 $101,957
======== ========
Other noncurrent assets:
Restricted cash investments .................. $ 22,897 $ 15,996
Intangible assets ............................ 5,945 5,729
Deferred financing costs ..................... 2,527 2,370
Other ........................................ 18,235 16,562
-------- --------
$ 49,604 $ 40,657
======== ========
At March 31, 2001, Tremont held 12.3 million shares of TIMET common stock
with a quoted market price of $9.05 per share, or an aggregate of $111 million.
At March 31, 2001, TIMET reported total assets and stockholders' equity of
$755.8 million and $349.8 million, respectively. TIMET's total assets at such
date include current assets of $251.7 million, property and equipment of $293.9
million and goodwill and other intangible assets of $60.0 million. TIMET's total
liabilities at such date include current liabilities of $133.5 million,
long-term debt of $25.6 million, accrued OPEB costs of $18.0 million and
convertible preferred securities of $201.3 million.
During the first quarter of 2001, TIMET reported net sales of $124.0
million, an operating loss of $1.8 million and a net loss of $3.6 million (2000
first quarter - $104.7 million, $18.4 million and $15.1 million, respectively).
Note 6 - Accrued liabilities:
December 31, March 31,
2000 2001
------ ------
(In thousands)
Current:
Employee benefits .......................... $ 44,397 $ 36,573
Environmental costs ........................ 56,323 61,805
Interest ................................... 6,172 11,809
Deferred income ............................ 7,241 6,954
Other ...................................... 48,298 44,088
-------- --------
$162,431 $161,229
======== ========
Noncurrent:
Insurance claims and expenses .............. $ 22,424 $ 21,670
Employee benefits .......................... 11,893 12,141
Deferred income ............................ 5,453 4,423
Other ...................................... 1,285 1,438
-------- --------
$ 41,055 $ 39,672
======== ========
Note 7 - Notes payable and long-term debt:
December 31, March 31,
2000 2001
------ ------
(In thousands)
Notes payable -
Kronos - non-U.S. bank credit agreements ........... $ 70,039 $ 67,096
======== ========
Long-term debt:
Valhi:
Snake River Sugar Company ........................ $250,000 $250,000
LYONs ............................................ 100,333 102,612
Bank credit facility ............................. 31,000 --
Other ............................................ 2,880 2,880
-------- --------
384,213 355,492
-------- --------
Subsidiaries:
NL Senior Secured Notes .......................... 194,000 194,000
CompX bank credit facility ....................... 39,000 45,000
Waste Control Specialists bank term loan ......... 5,311 --
Valcor Senior Notes .............................. 2,431 2,431
Other ............................................ 4,683 3,079
-------- --------
245,425 244,510
-------- --------
629,638 600,002
Less current maturities ............................ 34,284 1,669
-------- --------
$595,354 $598,333
======== ========
In February 2001, a wholly-owned subsidiary of Valhi purchased Waste
Control Specialists' bank term loan from the lender at par value, and such debt
became payable to such Valhi subsidiary. Accordingly, such debt is eliminated in
Valhi's consolidated financial statements at March 31, 2001. On May 3, 2001,
Valhi announced that it will redeem $20 million principal amount at maturity of
its LYONs on June 4, 2001. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Note 8 - Other income:
Three months ended
March 31,
2000 2001
---- ----
(In thousands)
Dividends and interest ....................... $11,482 $10,340
Legal settlement gains, net .................. -- 30,723
Noncompete agreement income .................. 1,000 1,000
Currency transactions, net ................... 1,325 1,176
Other, net ................................... 2,065 852
------- -------
$15,872 $44,091
======= =======
In the first quarter of 2001, Waste Control Specialists recognized a $20.1
million net gain from a legal settlement related to certain previously-reported
litigation. Pursuant to the settlement, Waste Control Specialists, among other
things, received a cash payment of approximately $20.1 million, net of attorney
fees.
In the first quarter of 2001, NL recognized $10.6 million of net gains from
legal settlements, substantially all of which ($10.3 million) relates to
settlements with certain of its former insurance carriers. The insurance
settlement, similar to legal settlements NL reached with certain other of its
former insurance carriers during 2000, resolved court proceedings in which NL
sought reimbursement from the carriers for legal defense expenditures and
indemnity coverage for certain of its environmental remediation expenditures.
Proceeds from the first quarter 2001 insurance settlement were transferred by
the carriers in April 2001 to a special purpose trust formed to pay for certain
of NL's future remediation and other environmental expenditures.
Note 9 - Leverkusen fire and insurance claim:
On March 20, 2001, NL suffered a fire at its Leverkusen, Germany titanium
dioxide pigments ("TiO2") facility. Production at the facility's
chloride-process plant returned to full capacity on April 8, 2001, and NL
expects the facility's sulfate-process plant will become 50% to 70% operational
in August 2001 and fully operational in October 2001. In April the undamaged
section of the sulfate-process plant resumed limited production (5% to 20% of
capacity) of an intermediate form of TiO2, which is being transported to NL's
Nordenham, Germany sulfate-process TiO2 plant to be further processed and
finished into certain grades of TiO2. NL's ability to produce the intermediate
form of TiO2 at its Leverkusen facility is limited by the available excess
capacity at its Nordenham plant. NL believes that the damages to property and
the business interruption losses caused by the fire are covered by insurance,
but the effect on the financial results of the Company on a quarter-to-quarter
basis or a year-to-year basis will depend on the timing and amount of insurance
recoveries. No insurance proceeds have been recognized during the first quarter
of 2001 for the business interruption portion of the loss because the amount of
such proceeds is presently not determinable. No provision for impairment of the
damaged fixed assets has been recognized because the Company believes the
insurance proceeds will exceed their carrying value.
Note 10 - Accounts with affiliates:
December 31, March 31,
2000 2001
------ -----
(In thousands)
Receivables from affiliates:
TIMET ........................................ $ 599 $ 721
Other ........................................ 286 466
------- -------
$ 885 $ 1,187
======= =======
Payables to affiliates:
Demand loan from Contran:
Tremont .................................... $13,403 $ --
Valhi ...................................... 8,000 23,031
Income taxes payable to Contran .............. 1,666 8,396
Louisiana Pigment Company .................... 8,710 7,430
Other, net ................................... 263 384
------- -------
$32,042 $39,241
======= =======
In February 2001, Tremont entered into a $13.4 million reducing revolving
credit facility with NL's majority-owned environmental management subsidiary, NL
Environmental Management Services, Inc ("EMS"), and used the proceeds to repay
its loan from Contran. Such intercompany loan between EMS and Tremont,
collateralized by 10 million shares of NL common stock owned by Tremont, is
eliminated in Valhi's consolidated financial statements at March 31, 2001.
Note 11 - Provision for income taxes:
Three months ended
March 31,
2000 2001
---- ----
(In millions)
Expected tax expense ..................................... $11.1 $22.7
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies ........... 2.1 1.0
Non-U.S. tax rates ....................................... -- (1.8)
Change in NL's and Tremont's deferred income tax
valuation allowance, net ................................ .4 (.7)
No tax benefit for goodwill amortization ................. 1.3 1.4
U.S. state income taxes, net ............................. .4 .4
Other, net ............................................... (.5) .7
----- -----
$14.8 $23.7
===== =====
Comprehensive provision for income taxes
(benefit) allocated to:
Net income ............................................. $14.8 $23.7
Other comprehensive income:
Marketable securities ................................ .5 --
Currency translation ................................. (6.9) (2.1)
Pension liabilities .................................. .6 (.2)
----- -----
$ 9.0 $21.4
===== =====
Note 12 - Minority interest:
December 31, March 31,
2000 2001
------ ------
(In thousands)
Minority interest in net assets:
NL Industries ............................ $ 66,761 $ 68,002
Tremont Corporation ...................... 34,235 34,308
CompX International ...................... 49,003 46,112
Subsidiaries of NL ....................... 6,279 6,851
-------- --------
$156,278 $155,273
======== ========
Three months ended
March 31,
2000 2001
---- ----
(In thousands)
Minority interest in net earnings (losses):
NL Industries .............................. $ 4,796 $6,698
Tremont Corporation ........................ (939) 978
CompX International ........................ 2,351 1,170
Subsidiaries of NL ......................... 91 586
Subsidiaries of Tremont .................... 78 --
Subsidiaries of CompX ...................... (3) --
------- ------
$ 6,374 $9,432
======= ======
As previously reported, all of Waste Control Specialists aggregate,
inception-to-date net losses have accrued to the Company for financial reporting
purposes, and all of Waste Control Specialists future net income or net losses
will also accrue to the Company until Waste Control Specialists reports positive
equity attributable to its other owner. Accordingly, no minority interest in
Waste Control Specialists' net assets or net earnings (losses) is reported at
March 31, 2001.
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
The Company reported net income of $31.6 million, or $.27 per diluted
share, in the first quarter of 2001 compared to income of $10.5 million, or $.09
per diluted share, in the first quarter of 2000. Excluding the effects of the
unusual items discussed in the next paragraph, the Company would have reported
net income in the first quarter of 2001 of $13.2 million. Total operating income
in the first quarter of 2001 approximated the first quarter of 2000 as higher
chemicals earnings at NL was offset by lower component products operating income
at CompX and a higher waste management operating loss at Waste Control
Specialists.
The Company's results in the first quarter of 2001 include pre-tax gains
aggregating $30.7 million ($18.4 million, or $.16 per diluted share, net of
income taxes and minority interest) related principally to NL's legal
settlements with certain of its former insurance carriers and the settlement of
certain litigation to which Waste Control Specialists was a party. See Note 8 to
the Consolidated Financial Statements.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "could," "anticipates," "expected" or comparable terminology, or by
discussions of strategies or trends. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve substantial risks and uncertainties that
could significantly impact expected results, and actual future results could
differ materially from those described in such forward-looking statements. While
it is not possible to identify all factors, the Company continues to face many
risks and uncertainties. Among the factors that could cause actual future
results to differ materially are the risks and uncertainties discussed in this
Quarterly Report and those described from time to time in the Company's other
filings with the Securities and Exchange Commission including, but not limited
to, future supply and demand for the Company's products, the extent of the
dependence of certain of the Company's businesses on certain market sectors
(such as the dependence of TIMET's titanium metals business on the aerospace
industry), the cyclicality of certain of the Company's businesses (such as NL's
TiO2 operations and TIMET's titanium metals operations), the impact of certain
long-term contracts on certain of the Company's businesses (such as the impact
of TIMET's long-term contracts with certain of its customers and such customers'
performance hereunder and the impact of TIMET's long-term contracts with certain
of its vendors on its ability to reduce or increase supply or achieve lower
costs), customer inventory levels (such as the extent to which NL's customers
may, from time to time, accelerate purchases of TiO2 in advance of anticipated
price increases or defer purchases of TiO2 in advance of anticipated price
decreases, or the relationship between inventory levels of TIMET's customers and
such customer's current inventory requirements and the impact of such
relationship on their purchases from TIMET), changes in raw material and other
operating costs (such as energy costs), the possibility of labor disruptions,
general global economic conditions (such as changes in the level of gross
domestic product in various regions of the world and the impact of such changes
on demand for, among other things, TiO2), competitive products and substitute
products, customer and competitor strategies, the impact of pricing and
production decisions, competitive technology positions, fluctuations in currency
exchange rates (such as changes in the exchange rate between the U.S. dollar and
each of the Euro and the Canadian dollar), operating interruptions (including,
but not limited to, labor disputes, leaks, fires, explosions, unscheduled
downtime and transportation interruptions), recoveries from insurance claims and
the timing thereof (such as NL's pending insurance claims with respect to the
fire it suffered at one of its German TiO2 production facilities), potential
difficulties in integrating completed acquisitions, uncertainties associated
with new product development (such as TIMET's ability to develop new end-uses
for its titanium products), environmental matters (such as those requiring
emission and discharge standards for existing and new facilities), government
laws and regulations and possible changes therein (such as a change in Texas
state law which would allow the applicable regulatory agency to issue a permit
for the disposal of low-level radioactive wastes to a private entity such as
Waste Control Specialists, or changes in government regulations which might
impose various obligations on present and former manufacturers of lead pigment
and lead-based paint, including NL, with respect to asserted health concerns
associated with the use of such products), the ultimate resolution of pending
litigation (such as NL's lead pigment litigation and litigation surrounding
environmental matters of NL, Tremont and TIMET) and possible future litigation.
Should one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of new information, future events
or otherwise.
Chemicals
NL's titanium dioxide pigments ("TiO2") operations are conducted through
its wholly-owned subsidiary Kronos, Inc.
Three months ended
March 31,
---------------- %
2000 2001 Change
---- ---- ------
(In millions)
Net sales ........................... $ 231.0 $ 226.1 -2%
Operating income .................... 39.8 45.4 +14%
Chemicals operating income increased in the first quarter of 2001 compared
to the first quarter of 2000 due primarily to higher average TiO2 selling prices
and higher TiO2 production volumes, partially offset by lower TiO2 sales
volumes. Excluding the effect of fluctuations in the value of the U.S. dollar
relative to other currencies, NL's average TiO2 selling prices (in billing
currencies) during the first quarter of 2001 were 5% higher compared to the
first quarter of 2000. NL's average TiO2 selling prices were increasing during
each quarter of 2000 as compared to the respective prior quarter, but the rate
of increase slowed in the fourth quarter of 2000. TiO2 selling prices were
generally declining during the first quarter of 2001, and NL's average selling
prices during such period were 1% lower compared to the fourth quarter of 2000.
NL's TiO2 sales volumes in the first quarter of 2001 were 7% lower than the
record first quarter of 2000, with higher sales volumes in export markets more
than offset by the effect of lower volumes in Europe and North America. NL's
TiO2 production volumes in the first quarter of 2001 were 2% higher than the
first quarter of 2000, with operating rates near full capacity in both periods.
On March 20, 2001, NL suffered a fire at its Leverkusen, Germany Ti02
facility. See Note 9 to the Consolidated Financial Statements. Production rates
at the facility's chloride-process plant returned to full capacity on April 8,
2001, and NL expects the facility's sulfate-process plant will be 50% to 70%
operational in August 2001 and fully operational in October 2001. NL believes
the damages to property and the business interruption losses caused by the fire
are covered by its insurance, but the effect on the financial results of NL on a
quarter-to-quarter basis or a year-to-year basis will depend on the timing and
amount of insurance recoveries. No insurance proceeds have been recognized
during the first quarter of 2001 for the business interruption portion of the
loss because the amount of such proceeds is presently not determinable. No
provision for impairment of the damaged fixed assets has been recognized because
NL believes the insurance proceeds will exceed their carrying value.
NL believes that market conditions in the TiO2 industry have generally
stalled its efforts to increase selling prices, and NL believes that worldwide
economic conditions will determine whether any price increases will be realized
during the remainder of the year. NL anticipates its TiO2 sales and production
volumes for full-year 2001 will be lower than that of 2000, in part due to the
effect of the fire. NL expects that its full-year 2001 operating income,
excluding fire-related insurance recoveries, will be lower than 2000 primarily
because of lower sales and production volumes and higher operating costs,
particularly for energy. Although NL believes its average selling price in
billing currencies could continue a downward trend throughout the rest of 2001,
it expects its average selling price for full-year 2001 to only be slightly
below the full-year average price in 2000.
NL has substantial operations and assets located outside the United States
(principally Germany, Belgium, Norway and Canada). A significant amount of NL's
sales generated from its non-U.S. operations are denominated in currencies other
than the U.S. dollar, primarily the euro, other major European currencies and
the Canadian dollar. In addition, a portion of NL's sales generated from its
non-U.S. operations are denominated in the U.S. dollar. Certain raw materials,
primarily titanium-containing feedstocks, are purchased in U.S. dollars, while
labor and other production costs are denominated primarily in local currencies.
Consequently, the translated U.S. dollar value of NL's foreign sales and
operating results are subject to currency exchange rate fluctuations which may
favorably or adversely impact reported earnings and may affect the comparability
of period-to-period operating results. Including the effect of fluctuations in
the value of the U.S. dollar relative to other currencies, NL's average TiO2
selling prices (in billing currencies) in the first quarter of 2001 increased 1%
compared to the first quarter of 2000. Overall, fluctuations in the value of the
U.S. dollar relative to other currencies, primarily the euro, decreased TiO2
sales in the first quarter of 2001 by a net $11 million compared to the first
quarter of 2000. Fluctuations in the value of the U.S. dollar relative to other
currencies similarly impacted NL's foreign currency-denominated operating
expenses. NL's operating expenses that are not denominated in the U.S. dollar,
when translated into U.S. dollars, were lower during the first quarter of 2001
compared to the first quarter of 2000. Overall, the net impact of currency
exchange rate fluctuations on NL's operating income comparisons was not
significant in the first quarter of 2001 compared to the first quarter of 2000.
Chemicals operating income, as presented above, is stated net of
amortization of the Company's purchase accounting adjustments made in
conjunction with its acquisitions of its interest in NL. Such adjustments result
in additional depreciation, depletion and amortization expense beyond amounts
separately reported by NL. Such additional non-cash expenses reduced chemicals
operating income, as reported by Valhi, by approximately $6.5 million in each of
the first quarter of 2000 and 2001 as compared to amounts separately-reported by
NL.
Component Products
Three months ended
March 31,
---------------- %
2000 2001 Change
---- ---- ------
(In millions)
Net sales .......................... $ 66.1 $ 59.6 -10%
Operating income ................... 10.9 7.0 -36%
Component products sales and operating income decreased in the first
quarter of 2001 compared to the first quarter of 2000 due primarily to continued
weak economic conditions in the manufacturing sector in North America and
Europe. During the first quarter of 2001, sales of slide products decreased 14%
compared to the first quarter of 2000, and sales of security products and
ergonomic products decreased 8% and 2%, respectively. CompX's efforts to reduce
manufacturing and other costs partially offset the effect of the decline in
sales, although CompX was unable to reduce certain fixed costs sufficiently to
fully compensate for the lower level of sales.
CompX expects the current weak economic cycle will continue to negatively
impact its operating results, and CompX continues to implement various cost
control initiatives, including certain headcount reductions. These cost
reduction measures are designed to minimize the adverse effect of lower sales
and more favorably position CompX when the economy recovers. Nevertheless, CompX
remains concerned regarding the duration and severity of the weak economic cycle
and its overall impact on CompX's business.
CompX has substantial operations and assets located outside the United
States (principally in Canada, The Netherlands and Taiwan). A portion of CompX's
sales generated from its non-U.S. operations are denominated in currencies other
than the U.S. dollar, principally the Canadian dollar, the Dutch guilder, the
euro and the New Taiwan dollar. In addition, a portion of CompX's sales
generated from its non-U.S. operations (principally in Canada) are denominated
in the U.S. dollar. Most raw materials, labor and other production costs for
such non-U.S. operations are denominated primarily in local currencies.
Consequently, the translated U.S. dollar value of CompX's foreign sales and
operating results are subject to currency exchange rate fluctuations which may
favorably or unfavorably impact reported earnings and may affect comparability
of period-to-period operating results. During the first quarter of 2001,
currency exchange rate fluctuations of the Canadian dollar and the euro
negatively impacted component products sales compared to the first quarter of
2000 (principally with respect to slide products). Excluding the effect of
currency, component products sales decreased 8% in the first quarter of 2001
compared to the first quarter of 2000. Currency exchange rate fluctuations with
respect to the Canadian dollar positively affected CompX's operating income
comparisons in the first quarter of 2001 compared to the first quarter of 2000,
while exchange rate fluctuations with respect to the euro and other currencies
did not materially impact these operating income comparisons. Excluding the
effect of currency, component products operating income decreased 42% in the
first quarter of 2001 compared to 2000.
Waste Management
Three months ended
March 31,
2000 2001
---- ----
(In millions)
Net sales .................................. $ 4.6 $ 3.1
Operating loss ............................. (1.6) (3.2)
Waste Control Specialists' sales decreased in the first quarter of 2001
compared to the first quarter of 2000 due primarily to the effect of weak demand
for its waste management services. In addition, mechanical problems with certain
new equipment hampered the treatment and disposal of certain types of hazardous
and toxic waste streams and also contributed to the lower level of sales.
Waste Control Specialists currently has permits which allow it to treat,
store and dispose of a broad range of hazardous and toxic wastes, and to treat
and store a broad range of low-level and mixed radioactive wastes. The hazardous
waste industry (other than low-level and mixed radioactive waste) currently has
excess industry capacity caused by a number of factors, including a relative
decline in the number of environmental remediation projects generating hazardous
wastes and efforts on the part of generators to reduce the volume of waste
and/or manage wastes onsite at their facilities. These factors have led to
reduced demand and increased price pressure for non-radioactive hazardous waste
management services. While Waste Control Specialists believes its broad range of
permits for the treatment and storage of low-level and mixed radioactive waste
streams provides certain competitive advantages, a key element of Waste Control
Specialists' long-term strategy to provide "one-stop shopping" for hazardous,
low-level and mixed radioactive wastes includes obtaining additional regulatory
authorizations for the disposal of low-level and mixed radioactive wastes.
The current state law in Texas (where Waste Control Specialists' disposal
facility is located) prohibits the applicable Texas regulatory agency from
issuing a permit for the disposal of low-level radioactive waste to a private
enterprise operating a disposal facility in Texas. During the previous Texas
legislative session, which ended in May 1999, Waste Control Specialists was
supporting a proposed change in state law that would allow the regulatory agency
to issue a low-level radioactive waste disposal permit to a private entity. The
legislative session ended without any such change in state law. The current
session of the Texas legislature convened in January 2001, and Waste Control
Specialists is again supporting a similar proposed change in state law. There
can be no assurance that the state law will be changed or, assuming the state
law is changed, that Waste Control Specialists would be successful in obtaining
any future permit modifications.
Waste Control Specialists is continuing its attempts to emphasize its sales
and marketing efforts to increase its sales volumes from waste streams that
conform to Waste Control Specialists' permits currently in place. 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 with its current operating permits. However, there can be no assurance
that Waste Control Specialists' efforts will prove successful in improving its
cash flows. In the event such efforts are not successful or Waste Control
Specialists is not successful in expanding its disposal capabilities for
low-level radioactive wastes, it is possible that Valhi will consider other
strategic alternatives with respect to Waste Control Specialists.
TIMET
Three months ended
March 31,
2000 2001
---- ----
(In millions)
TIMET historical:
Net sales .............................. $104.7 $124.0
Operating loss ......................... (18.4) (1.8)
Net loss ............................... (15.1) (3.6)
Equity in earnings ....................... $ (4.3) $ .1
====== ======
Tremont accounts for its interests in TIMET by the equity method. Tremont's
equity in earnings of TIMET differs from the amounts that would be expected by
applying Tremont's ownership percentage to TIMET's separately-reported earnings
because of the effect of amortization of purchase accounting adjustments made by
Tremont in conjunction with Tremont's acquisitions of its interests in TIMET.
Amortization of such basis differences generally increases earnings (or reduces
losses) attributable to TIMET as reported by Tremont.
TIMET reported higher sales, and a lower operating loss, in the first
quarter of 2001 compared to the first quarter of 2000. TIMET's operating results
improved in the first quarter of 2001 in part because the first quarter of 2000
included a net $9.2 million of previously-reported special charges. The
improvement in TIMET's operating results was also due in part to higher sales
volumes for TIMET's titanium mill and melted products. During the first quarter
of 2001, TIMET's mill products sales volumes increased 18% compared to the first
quarter of 2000, and sales volumes of its melted products (ingot and slab)
increased 75%. TIMET's average selling prices (in billing currencies) for its
mill products decreased 1% in the first quarter of 2001 compared to the first
quarter of 2000, and melted product selling prices decreased 3%.
TIMET's firm order backlog at the end of March 2001 was approximately $290
million. Comparable backlogs at the end of March 2000 and December 2000 were
approximately $185 million and $245 million, respectively.
In March 2001, TIMET was notified by one of its customers that a product
manufactured from standard grade titanium produced by TIMET contained what has
been confirmed to be a tungsten inclusion. TIMET believes that the source of
this tungsten was contaminated silicon purchased from an outside vendor in 1998.
The silicon was used as an alloying addition to the titanium at the melting
stage. TIMET is currently investigating the possible scope of this problem,
including an evaluation of the identities of customers who received material
manufactured using this silicon and the applications to which such material has
been placed by such customers. At the present time, TIMET is aware of only three
ingots that have been demonstrated to contain tungsten inclusions; however,
further investigation may identify other material that has been similarly
affected. During the first quarter of 2001, TIMET accrued an estimated loss of
$1 million related to this matter for costs that are reasonably estimable. Until
this investigation is completed, TIMET is unable to determine the possible
remedial steps that may be required and whether TIMET might incur any material
liability with respect to this matter. TIMET currently believes that it is
unlikely that its insurance policies will provide coverage for any costs that
may be associated with this matter. However, TIMET currently intends to seek
full recovery from the silicon supplier for any liability TIMET might incur in
this matter, although no assurances can be given that TIMET will ultimately be
able to recover all or any portion of such amounts.
In April 2001, TIMET announced that it had reached a settlement of the
litigation between TIMET and Boeing related to their 1997 long-term purchase and
supply agreement. Pursuant to the settlement, TIMET received a cash payment of
$82 million. The parties also entered into an amended long-term agreement that,
among other things, allows Boeing to purchase up to 7.5 million pounds of
titanium product annually from TIMET from 2002 through 2007, subject to certain
maximum quarterly volume levels. In consideration, Boeing will annually advance
TIMET $28.5 million for the upcoming year. The initial advance for calendar year
2002 will be made in December 2001, with each subsequent advance made in early
January of the applicable calendar year beginning in 2003. The amended long-term
agreement is structured as a take-or-pay agreement such that Boeing will forfeit
a proportionate part of the $28.5 million annual advance in the event that its
orders for delivery for such calendar year are less than 7.5 million pounds.
Under a separate agreement TIMET will establish and hold buffer stock for Boeing
at TIMET's facilities. TIMET expects to report pretax income of approximately
$60 million to $65 million in the second quarter of 2001 in connection with this
settlement, net of associated legal, profit sharing and other costs.
For the second quarter of 2001, TIMET currently expects its sales will be
approximately $120 million, with mill product sales volumes likely comparable to
first quarter 2001 levels and melted product sales volumes declining by about
10%. Most of the melted products that TIMET produces are consumed internally in
the manufacture of its mill products. Accordingly, TIMET's melted product sales
volumes can vary significantly from period to period and is influenced by
customer order mix and capacity availability.
TIMET currently expects its sales in 2001 will be between $500 million to
$510 million, reflecting the net effects of expected increased sales volumes,
price increases in certain products and changes in mix. TIMET currently expects
both its mill and melted products sales volumes will increase between 15% and
20% in 2001 over prior year levels. TIMET expects that selling prices (expressed
in U.S. dollars using actual currency exchange rates during the respective
periods) on aerospace product shipments, while difficult to forecast, are
expected to rise during 2001. However, certain price increases recently
announced by TIMET are expected to principally affect the second half of 2001
due to associated product lead times.
TIMET expects its gross margins as a percent of its sales will increase
during the rest of 2001, however, energy, raw material and other cost increases
could substantially offset expected realized selling price increases in 2001.
TIMET is experiencing increases in energy cost as a result of higher natural gas
and electricity prices in the U.S. TIMET is also experiencing increases in the
cost for purchased titanium scrap.
Excluding the effect of the settlement with Boeing, TIMET presently expects
to report both an operating loss and a net loss in 2001, although TIMET believes
the losses in 2001 will be substantially reduced from the operating loss and net
loss TIMET reported in 2000.
General corporate and other items
General corporate. General corporate interest and dividend income decreased
in the first quarter of 2001 compared to the first quarter of 2000 due primarily
to a lower interest rate on the Company's $80 million loan to Snake River Sugar
Company (which rate was reduced from 12.99% to 6.49% effective April 1, 2000).
Aggregate general corporate interest and dividend income is currently expected
to continue to be lower during the remainder of 2001 compared to the same
periods in 2000 due primarily to such lower interest rate on the $80 million
loan to Snake River.
The $30.7 million net legal settlement gains in the first quarter of 2001
relate principally to (i) settlement of certain litigation to which Waste
Control Specialists was a party ($20.1 million) and (ii) NL's settlements with
certain former insurance carriers ($10.3 million). See Note 8 to the
Consolidated Financial Statements. No further material settlements relating to
litigation concerning environmental remediation coverages are expected.
Net general corporate expenses increased in the first quarter of 2001
compared to the first quarter of 2000 due primarily to higher environmental and
legal expenses of NL. Net general corporate expenses in calendar 2001 are
currently expected to be somewhat lower compared to calendar 2000 due to lower
legal and environmental expenses of NL.
Interest expense. Interest expense declined slightly in the first quarter
of 2001 compared to the first quarter of 2000 due primarily to lower interest
rates on variable-rate borrowings of NL, offset in part by higher levels of
indebtedness at CompX. Assuming interest rates do not increase significantly
from year-end 2000 levels and that there is not a significant reduction in the
amount of outstanding LYONs indebtedness from exchanges or redemptions (other
than the redemption of $20 million principal amount at maturity discussed
below), interest expense during the remainder of 2001 is expected to continue to
be somewhat lower than the same periods in 2000 due to lower anticipated
interest rates on variable-rate borrowings in the U.S., NL's December 2000
redemption of $50 million principal amount of its 11.75% Senior Secured Notes
using funds on hand and proceeds from lower variable-rate non-U.S. borrowings
and Valhi's June 2001 redemption of $20 million principal amount at maturity of
its LYONs, partially offset by higher expected borrowing levels at CompX.
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rates are explained in Note 11 to the Consolidated Financial
Statements. Income tax rates vary by jurisdiction (country and/or state), and
relative changes in the geographic mix of the Company's pre-tax earnings can
result in fluctuations in the effective income tax rate.
During the first quarter of 2001, NL reduced its deferred income tax
valuation allowance by $.7 million primarily as a result of utilization of
certain tax attributes for which the benefit had not been previously recognized
under the "more-likely-than-not" recognition criteria.
Through December 31, 2000, certain subsidiaries, including NL, Tremont and,
beginning in March 1998, CompX, were not members of the consolidated U.S. tax
group of which Valhi is a member (the Contran Tax Group), and the Company
provided incremental income taxes on such earnings. In addition, through
December 31, 2000, Tremont and NL were each in separate U.S. tax groups, and
Tremont provided incremental income taxes on its earnings with respect to NL. As
previously reported, effective January 1, 2001 NL and Tremont each became
members of the Contran Tax Group. Consequently, beginning in 2001 Valhi no
longer provides incremental income taxes on its earnings with respect to NL and
Tremont nor on Tremont's earnings with respect to NL. In addition, beginning in
2001 the Company believes that recognition of an income tax benefit for certain
of Tremont's deductible income tax attributes arising during 2001, while not
appropriate under the "more-likely-than-not" recognition criteria at the Tremont
separate-company level, is appropriate at the Valhi consolidated level as a
result of Tremont becoming a member of the Contran Tax Group. Both of these
factors resulted in a reduction in the Company's consolidated effective income
tax rate in the first quarter of 2001 compared to the first quarter of 2000.
Such overall reduction in the Company's consolidated effective income tax rate
in 2001 compared to 2000 is expected to continue during the remainder of the
year.
Minority interest. See Note 12 to the Consolidated Financial Statements.
Minority interest in NL's subsidiaries relates principally to NL's
majority-owned environmental management subsidiary, NL Environmental Management
Services, Inc. ("EMS"). EMS was established in 1998, at which time EMS
contractually assumed certain of NL's environmental liabilities. EMS' earnings
are based, in part, upon its ability to favorably resolve these liabilities on
an aggregate basis. The shareholders of EMS, other than NL, actively manage the
environmental liabilities and share in 39% of EMS' cumulative earnings. NL
continues to consolidate EMS and provides accruals for the reasonably estimable
costs for the settlement of EMS' environmental liabilities, as discussed below.
In December 2000, TRECO LLC, a 75%-owned subsidiary of Tremont, acquired
the 25% interest in TRECO previously held by the other owner of TRECO, and TRECO
became a wholly-owned subsidiary of Tremont. Accordingly, no minority interest
in the earnings of Tremont subsidiaries is reported beginning in the first
quarter of 2001.
As previously reported, Waste Control Specialists was formed by Valhi and
another entity in 1995. Waste Control Specialists assumed certain liabilities of
the other owner and such liabilities exceeded the carrying value of the assets
contributed by the other owner. Since its inception in 1995, Waste Control
Specialists has reported aggregate net losses. Consequently, all of Waste
Control Specialists aggregate, inception-to-date net losses have accrued to the
Company for financial reporting purposes, and all of Waste Control Specialists
future net income or net losses will also accrue to the Company until Waste
Control Specialists reports positive equity attributable to the other owner.
Accordingly, no minority interest in Waste Control Specialists' net assets or
net earnings (losses) is reported during the first quarter of 2000 and 2001.
LIQUIDITY AND CAPITAL RESOURCES:
Consolidated cash flows
Operating activities. Trends in cash flows from operating annual activities
(excluding the impact of significant asset dispositions and relative changes in
assets and liabilities) are generally similar to trends in the Company's
earnings. Changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments.
Certain items included in the determination of net income are non-cash, and
therefore such items have no impact on cash flows from operating activities.
Noncash items included in the determination of net income include depreciation,
depletion and amortization expense, as well as noncash interest expense. Noncash
interest expense relates principally to Valhi and NL and consists of
amortization of original issue discount on certain indebtedness and amortization
of deferred financing costs. In addition, substantially all of the proceeds
resulting from NL's legal settlement in the first quarter of 2001 are shown as
restricted cash, and therefore such settlement had no impact on cash flows from
operating activities. See Note 8 to the Consolidated Financial Statements.
Investing and financing activities. Approximately 54% of the Company's
consolidated capital expenditures during the first quarter of 2001 relate to NL,
34% relate to CompX and substantially all of the remainder relate to Waste
Control Specialists. During the first quarter of 2001, CompX purchased $2.4
million of shares of its common stock in market transactions.
During the first quarter of 2001, (i) Valhi repaid a net $31 million under
its revolving bank credit facility and borrowed a net $15 million under
short-term demand loans from Contran and (ii) CompX borrowed a net $6 million
under its revolving bank credit facility. In addition, (i) a wholly-owned
subsidiary of Valhi purchased Waste Control Specialists' bank term loan from the
lender at par value and (ii) EMS entered into a $13.4 million reducing revolving
intercompany credit facility with Tremont, the proceeds of which were used to
repay Tremont's loan from Contran. See Notes 7 and 10 to the Consolidated
Financial Statements.
At March 31, 2001, unused credit available under existing credit facilities
approximated $114 million, which was comprised of $55 million available to CompX
under its revolving senior credit facility, $15 million available to NL under
non-U.S. credit facilities and $44 million available to Valhi under its
revolving bank credit facility.
Chemicals - NL Industries
At March 31, 2001, NL had cash and cash equivalents of $186 million,
including restricted cash balances of $86 million, and NL had $15 million
available for borrowing under its non-U.S. credit facilities.
NL's board of directors has authorized NL to purchase up to 3 million
shares of its common stock in open market or privately-negotiated transactions
over an unspecified period of time. Through March 31, 2001, NL had purchased 2.2
million of its shares pursuant to such authorizations for an aggregate of $38.1
million. No such purchases were made during the first quarter of 2001.
Certain of NL's U.S. and non-U.S. tax returns are being examined and tax
authorities have or may propose tax deficiencies, including non-income related
items and interest. NL has received tax assessments from the Norwegian tax
authorities proposing tax deficiencies, including interest, of NOK 40 million
($4 million at March 31, 2001) pertaining to 1994 and 1996. NL is currently
litigating the primary issue related to the 1994 assessment. In February 2001,
the Norwegian Appeals Court ruled in favor of the Norwegian tax authorities, and
NL has appealed the case to the Norwegian Supreme Court. NL believes the outcome
of the 1996 assessment is dependent upon the eventual outcome of the 1994 case.
NL has granted a lien on its Norwegian Ti02 plant in favor of the Norwegian tax
authorities. NL has also received preliminary tax assessments for the years 1991
to 1997 from the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately BEF 13 million ($11 million). NL has filed
protests to the assessments for the years 1991 to 1996 and expects to file a
protest for 1997. NL is in discussions with the Belgian tax authorities and
believes that a significant portion of the assessments are without merit. No
assurance can be given that these tax matters will be resolved in NL's favor in
view of the inherent uncertainties involved in court proceedings. NL believes
that it has provided adequate accruals for additional taxes and related interest
expense which may ultimately result from all such examinations and believes that
the ultimate disposition of such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
NL has been named as a defendant, potentially responsible party, or both,
in a number of legal proceedings associated with environmental matters,
including waste disposal sites, mining locations and facilities currently or
previously owned, operated or used by NL, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. On a quarterly basis,
NL evaluates the potential range of its liability at sites where it has been
named as a PRP or defendant, including sites for which EMS has contractually
assumed NL's obligation. NL believes it has provided adequate accruals ($111
million at March 31, 2001) for reasonably estimable costs of such matters, but
NL's ultimate liability may be affected by a number of factors, including
changes in remedial alternatives and costs and the allocation of such costs
among PRPs. It is not possible to estimate the range of costs for certain sites.
The upper end of the range of reasonably possible costs to NL for sites for
which it is possible to estimate costs is approximately $170 million. NL's
estimates of such liabilities have not been discounted to present value, and
other than certain previously-reported settlements with respect to certain of
NL's former insurance carriers, NL has not recognized any insurance recoveries.
No assurance can be given that actual costs will not exceed accrued amounts or
the upper end of the range for sites for which estimates have been made, and no
assurance can be given that costs will not be incurred with respect to sites as
to which no estimate presently can be made. NL is also a defendant in a number
of legal proceedings seeking damages for personal injury and property damage
allegedly arising from the sale of lead pigments and lead-based paints,
including cases in which plaintiffs purport to represent a class and cases
brought on behalf of government entities. NL has not accrued any amounts for the
pending lead pigment and lead-based paint litigation. There is no assurance that
NL will not incur future liability in respect of this pending litigation in view
of the inherent uncertainties involved in court and jury rulings in pending and
possible future cases. However, based on, among other things, the results of
such litigation to date, NL believes that the pending lead pigment and
lead-based paint litigation is without merit. Liability that may result, if any,
cannot reasonably be estimated. In addition, various legislation and
administrative regulations have, from time to time, been enacted or proposed
that seek to impose various obligations on present and former manufacturers of
lead pigment and lead-based paint with respect to asserted health concerns
associated with the use of such products and to effectively overturn court
decisions in which NL and other pigment manufacturers have been successful.
Examples of such proposed legislation include bills which would permit civil
liability for damages on the basis of market share, rather than requiring
plaintiffs to prove that the defendant's product caused the alleged damage, and
bills which would revive actions currently barred by statutes of limitations. NL
currently believes the disposition of all claims and disputes, individually or
in the aggregate, should not have a material adverse effect on its consolidated
financial position, results of operations or liquidity. There can be no
assurance that additional matters of these types will not arise in the future.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its debt service and capital expenditure requirements and estimated
future operating cash flows. As a result of this process, NL has in the past and
may in the future seek to reduce, refinance, repurchase or restructure
indebtedness, raise additional capital, issue additional securities, repurchase
shares of its common stock, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, NL may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals industry or other industries, as well as the acquisition of interests
in, and loans to, related entities. In the event of any such transaction, NL may
consider using its available cash, issuing its equity securities or refinancing
or increasing its indebtedness to the extent permitted by the agreements
governing NL's existing debt. In this regard, the indentures governing NL's
publicly-traded debt contain provisions which limit the ability of NL and its
subsidiaries to incur additional indebtedness or hold noncontrolling interests
in business units.
Component products - CompX International
Certain of CompX's sales generated by its Canadian operations are
denominated in U.S. dollars. CompX periodically uses currency forward contracts
to manage a portion of foreign exchange rate risk associated with such
receivables or similar exchange rate risk associated with future sales. CompX
has not entered into these contracts for trading or speculative purposes in the
past, nor does the Company currently anticipate entering into such contracts for
trading or speculative purposes in the future. To manage such exchange rate
risk, at December 31, 2000, CompX held contracts maturing through March 2001 to
exchange an aggregate of U.S. $9 million for an equivalent amount of Canadian
dollars at an exchange rate of Cdn. $1.48 per U.S. dollar. CompX held no such
contracts at March 31, 2001.
CompX periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, capital resources and estimated
future operating cash flows. As a result of this process, CompX has in the past
and may in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities, modify its dividend policy,
repurchase shares of its common stock or take a combination of such steps or
other steps to manage its liquidity and capital resources. In the normal course
of business, CompX may review opportunities for acquisitions, joint ventures or
other business combinations in the component products industry. In the event of
any such transaction, CompX may consider using available cash, issuing
additional equity securities or increasing the indebtedness of CompX or its
subsidiaries.
Waste management - Waste Control Specialists
At March 31, 2001, Waste Control Specialists' indebtedness consists
principally of (i) a $5.2 million term loan due in installments through November
2004 and (ii) $1.1 million of other borrowings under a $5 million revolving
credit facility that matures in 2004. All of such indebtedness is owed to a
wholly-owned subsidiary of Valhi, and is therefore eliminated in the Company's
consolidated financial statements.
Tremont Corporation and Titanium Metals Corporation
Tremont. Tremont is primarily a holding company which, at March 31, 2001,
owned approximately 39% of TIMET and 20% of NL. At March 31, 2001, the market
value of the 12.3 million shares of TIMET and the 10.2 million shares of NL held
by Tremont was approximately $111 million and $172 million, respectively.
In February 2001, Tremont entered into a $13.4 million reducing revolving
credit facility with EMS (NL's majority-owned environmental management
subsidiary), and Tremont repaid its loan from Contran. Such intercompany loan
between EMS and Tremont, collateralized by 10 million shares of NL common stock
owned by Tremont, is eliminated in Valhi's consolidated financial statements.
Tremont has received a tax assessment from the U.S. federal tax authorities
proposing tax deficiencies of $8.3 million. Tremont has appealed the proposed
deficiencies and believes they are substantially without merit. No assurances
can be given that these tax matters will be resolved in Tremont's favor in view
of the inherent uncertainties involved in tax proceedings. Tremont believes it
has provided adequate accruals for additional taxes 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.
Based upon certain technical provisions of the Investment Company Act of
1940 (the "1940 Act"), Tremont might arguably be deemed to be an "investment
company" under the 1940 Act, despite the fact that Tremont does not now engage,
nor has it engaged or intended to engage, in the business of investing,
reinvesting, owning, holding or trading of securities. Tremont has taken the
steps necessary to give itself the benefits of a temporary exemption under the
1940 Act and has sought an order from the Securities and Exchange Commission
that Tremont is primarily engaged, through TIMET and NL, in a non-investment
company business.
Tremont periodically evaluates its liquidity requirements, capital needs
and availability of resources in view of, among other things, its alternative
uses of capital, its debt service requirements, the cost of debt and equity
capital and estimated future operating cash flows. As a result of this process,
Tremont has in the past and may in the future seek to obtain financing from
related parties or third parties, raise additional capital, modify its dividend
policy, restructure ownership interests of subsidiaries and affiliates, incur,
refinance or restructure indebtedness, purchase shares of its common stock,
consider the sale of interests in subsidiaries, affiliates, marketable
securities or other assets, or take a combination of such steps or other steps
to increase or manage liquidity and capital resources. In the normal course of
business, Tremont may investigate, evaluate, discuss and engage in acquisition,
joint venture and other business combination opportunities. In the event of any
future acquisition or joint venture opportunities, Tremont may consider using
then-available cash, issuing equity securities or incurring indebtedness.
TIMET. At March 31, 2001, TIMET had net debt of approximately $50 million
($55 million of notes payable and long-term debt and $5 million of cash and
equivalents). TIMET's receivables and inventory levels are expected to increase
during 2001 to support the anticipated increase in sales. TIMET expects to
generate positive cash flow from operations in 2001 of between $70 million and
$90 million, principally due to the Boeing settlement and the related $28.5
million advance payment applicable to 2002 purchases that TIMET expects to
receive in December 2001. For U.S. federal income tax purposes, TIMET has net
operating loss carryforwards of approximately $100 million at March 31, 2001
and, accordingly, TIMET does not expect the Boeing settlement will require TIMET
to make any material cash income tax payments.
TIMET's capital expenditures during 2001 are currently expected to be
between $15 million to $20 million, covering principally capacity enhancements,
capital maintenance, and safety and environmental projects. TIMET expects its
current net debt position to change to a net cash position during 2001. TIMET
believes its cash, cash flow from operations, and borrowing availability under
its credit agreements ($107 million available for borrowing at March 31, 2001)
will satisfy its expected working capital, capital expenditures and other
requirements in 2001.
In April 2001, TIMET announced that it intends to resume payment of
dividends on its outstanding $201.3 million of 6.625% convertible preferred
securities, which had been suspended in April 2000, with the next scheduled
payment on June 1, 2001. TIMET also intends to pay the aggregate amount of
dividends that have been previously deferred on such convertible preferred
securities ($14.5 million at March 31, 2001) on such date. Dividends on TIMET's
common stock are currently prohibited under TIMET's U.S. credit agreement.
TIMET anticipates that the proceeds from its settlement with Boeing will be
used to (i) pay legal and other costs associated with the Boeing settlement,
(ii) pay the deferred dividends on its convertible preferred securities and
(iii) repay a substantial portion of TIMET's outstanding revolving bank debt.
In October 1998, TIMET purchased for cash $80 million of Special Metals
Corporation 6.625% convertible preferred stock (the "SMC Preferred Stock"), in
conjunction with, and concurrent with, SMC's acquisition of a business unit from
Inco Limited. Dividends on the SMC Preferred Stock are being accrued, but a
portion of the cumulative dividends through March 31, 2001, have not yet been
paid due to limitations imposed by SMC's bank credit agreement. As a result,
TIMET has classified its accrued and unpaid dividends on the SMC preferred
securities ($8.3 million at March 31, 2001) as a non-current asset. There can be
no assurance that TIMET will receive additional dividends during 2001.
TIMET periodically evaluates its liquidity requirements, capital needs and
availability of resources in view of, among other things, its alternative uses
of capital, its debt service requirements, the cost of debt and equity capital,
and estimated future operating cash flows. As a result of this process, TIMET
has in the past and may in the future seek to raise additional capital, modify
its common and preferred dividend policies, restructure ownership interests,
incur, refinance or restructure indebtedness, repurchase shares of capital
stock, sell assets, or take a combination of such steps or other steps to
increase or manage its liquidity and capital resources. In the normal course of
business, TIMET investigates, evaluates, discusses and engages in acquisition,
joint venture, strategic relationship and other business combination
opportunities in the titanium and related 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.
General corporate - Valhi
Valhi's operations are conducted primarily through its subsidiaries (NL,
CompX, Tremont and Waste Control Specialists). Accordingly, Valhi's long-term
ability to meet its parent company level corporate obligations is dependent in
large measure on the receipt of dividends or other distributions from its
subsidiaries. NL increased its quarterly dividend from $.035 per share to $.15
per share in the first quarter of 2000, and NL further increased its quarterly
dividend to $.20 per share in the fourth quarter of 2000. At the current $.20
per share quarterly rate, and based on the 30.1 million NL shares held by Valhi
at March 31, 2001, Valhi would receive aggregate annual dividends from NL of
approximately $24.1 million. Tremont Group, Inc. owns 80% of Tremont
Corporation. Tremont Group is owned 80% by Valhi and 20% by NL. Tremont's
quarterly dividend is currently $.07 per share. At that rate, and based upon the
5.1 million Tremont shares owned by Tremont Group at March 31, 2001, Tremont
Group would receive aggregate annual dividends from Tremont of approximately
$1.4 million. Tremont Group intends to pass-through the dividends it receives
from Tremont to its shareholders (Valhi and NL). Based on Valhi's 80% ownership
of Tremont Group, Valhi would receive $1.2 million in annual dividends from
Tremont Group as a pass-through of Tremont Group's dividends from Tremont. CompX
commenced quarterly dividends of $.125 per share in the fourth quarter of 1999.
At this current rate and based on the 10.4 million CompX shares held by Valhi
and its wholly-owned subsidiary Valcor at March 31, 2001, Valhi/Valcor would
receive annual dividends from CompX of $5.2 million. Various credit agreements
to which certain subsidiaries or affiliates are parties contain customary
limitations on the payment of dividends, typically a percentage of net income or
cash flow; however, such restrictions 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. At March 31,
2001, Valhi had $3 million of parent level cash and cash equivalents, including
a portion held by Valcor which could be distributed to Valhi, had no outstanding
borrowings under its revolving bank credit agreement and had $23 million of
short-term demand loans payable to Contran. In addition, Valhi had $44 million
of borrowing availability under its bank credit facility.
Valhi's LYONs do not require current cash debt service. At March 31, 2001,
Valhi held 2.7 million shares of Halliburton common stock, which shares are held
in escrow for the benefit of holders of the LYONs. Valhi continues to receive
regular quarterly Halliburton dividends (currently $.125 per share) on the
escrowed shares. The LYONs are exchangeable at any time, at the option of the
holder, for the Halliburton shares owned by Valhi. Exchanges of LYONs for
Halliburton stock result in the Company reporting income related to the
disposition of the Halliburton stock for both financial reporting and income tax
purposes, although no cash proceeds are generated by such exchanges. Valhi's
potential cash income tax liability that would have been triggered at March 31,
2001, assuming exchanges of all of the outstanding LYONs for Halliburton stock
at such date, was approximately $31 million.
At March 31, 2001, the LYONs had an accreted value equivalent to
approximately $38.30 per Halliburton share, and the market price of the
Halliburton common stock was $36.75 per share (April 30, 2001 market price of
Halliburton - $43.21 per share). The LYONs, which mature in October 2007, are
redeemable at the option of the LYON holder in October 2002 for an amount equal
to $636.27 per $1,000 principal amount at maturity. Such October 2002 redemption
price is equivalent to about $44.10 per Halliburton share. Assuming the market
value of Halliburton common stock exceeds such equivalent redemption value of
the LYONS in October 2002, the Company does not expect a significant amount of
LYONs would be tendered to the Company for redemption at that date.
On May 3, 2001, Valhi announced that it was redeeming $20 million principal
amount at maturity of its LYONs on June 4, 2001 at the redemption price of
$562.26 per $1,000 principal amount at maturity (equivalent to about $39 per
Halliburton share). Such redemption price equals the original issue price per
$1,000 principal amount at maturity of $257.59 plus accrued original issue
discount on the notes through the redemption date of $304.67. The carrying value
of the LYONs to be redeemed on June 4, 2001 was approximately $11.1 million at
March 31, 2001. After the close of business on the redemption date, the redeemed
notes will no longer be outstanding. Original issue discount will cease to
accrue on the redeemed notes immediately after the redemption date. Holders of
notes have the right at any time to exchange their notes for shares of
Halliburton at the exchange rate of 14.4308 shares of Halliburton common stock
per $1,000 principal amount at maturity of the notes. The holder of a note
selected for redemption may exercise his or her right to exchange all or a part
of the note on or before the close of business on the redemption date. Assuming
the market price of Halliburton common stock stays above $39 per share through
the June 4, 2001 redemption date, the Company expects that holders of the LYONs
called for redemption would exercise their exchange rights on or prior to the
redemption date. Valhi, however, has the right to pay cash equal to the market
value of the shares of Halliburton common stock for which a note is exchangeable
in lieu, in whole or in part, of delivering shares of Halliburton common stock
in an exchange. Assuming all holders of the LYONs called for redemption exercise
their exchange rights on or prior to the redemption date, and assuming that
Valhi elects to deliver the underlying Halliburton shares in lieu of delivering
cash, Valhi would report a pre-tax securities transaction gain in the second
quarter of 2001 of approximately $8.8 million related to such exchanges. No gain
or loss on extinguishment of the LYONs debt obligation would be reported.
Valhi may consider additional partial redemptions or a full redemption of
the notes based on future market conditions and other considerations. There can
be no assurance, however, that Valhi will pursue an additional partial
redemption or a full redemption of the notes.
Based on The Amalgamated Sugar Company LLC's current projections for 2001,
Valhi currently expects that distributions received from the LLC in 2001 will
approximate its debt service requirements under its $250 million loans from
Snake River.
Certain covenants contained in Snake River's third-party senior debt allow
Snake River to pay periodic installments of debt service payments (principal and
interest) under Valhi's $80 million loan to Snake River prior to its maturity in
2010, and such loan is subordinated to Snake River's third-party senior debt.
Such covenants allowed Snake River to pay interest debt service payment to Valhi
on the $80 million loan of $2.9 million in 1998, $7.2 million in 1999 and
$950,000 in 2000. At March 31, 2001, the accrued and unpaid interest on the $80
million loan to Snake River aggregated $18.8 million. Such accrued and unpaid
interest is classified as a noncurrent asset at each of March 31, 2001. The
Company currently believes it will ultimately realize both the $80 million
principal amount and the accrued and unpaid interest, whether through cash
generated from the future operations of Snake River and the LLC or otherwise
(including any liquidation of Snake River/LLC).
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. The cash proceeds that would be
generated from such a disposition would likely be less than the specified
redemption price due to Snake River's ability to simultaneously call its $250
million loans to Valhi. As a result, the net cash proceeds 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. In this regard, the indentures
governing the publicly-traded debt of NL contain provisions which limit the
ability of NL and its subsidiaries to incur additional indebtedness or hold
noncontrolling interests in business units.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the 2000 Annual Report for descriptions of certain
legal proceedings.
In April 2001, the court granted certain of the defendant's summary
judgment motions in the previously-reported Finnsugar Bioproducts, Inc. v. The
Amalgamated Sugar Company LLC, et al. The court also ruled that Finnsugar's
patent was invalid. Other summary judgment motions filed by both the plaintiff
and defendants remain pending.
Jackson, et al. v. The Glidden Co., et al. (No. 236835). In March 2001, the
trial court denied plaintiffs' motion for class certification.
State of Rhode Island v. Lead Industries Association, et al. (No. 99-5226).
In April 2001, the trial court (i) dismissed all claims for special education
costs, (ii) granted defendants' motions to dismiss the
equitable-relief-to-children claim, the Unfair Trade Practices Act claim (except
insofar as it seeks to recover damages for post-1970 conduct) and the strict
liability, negligence and misrepresentation claims (except insofar as they
relate to state-owned buildings) and (iii) denied defendants' motions to dismiss
the public nuisance, civil conspiracy, unjust enrichment and indemnity claims.
City of St. Louis v. Lead Industries Association, et al. (No. 002-245). In
March 2001, the federal court remanded the case to state court.
County of Santa Clara v. Atlantic Richfield Company, et al. (No. CV788657).
In March 2001, defendants renewed their demurrers and motions to strike all
claims. The court has not ruled.
Lewis, et al. v. Lead Industries Association, et al. (No. CH09800). In
March 2001, defendants moved to dismiss all claims. The court has not ruled.
Borden, et al. v. The Sherwin Williams Company, et al. (No. 2000-587). In
March 2001, defendants removed to federal court and moved to dismiss the
fraudulent concealment and misrepresentation and negligence claims. In April
2001, plaintiffs moved to remand to State court.
In April 2001, a complaint was filed in City of Milwaukee v. NL Industries,
Inc. and Mautz Paint (Circuit Court, Civil Division, Milwaukee County,
Wisconsin, Case No. 01CV003066). Plaintiff seeks compensatory and equitable
relief for lead hazards in Milwaukee homes, restitution for amounts it has spent
to abate lead and punitive damages. The complaint asserts public nuisance,
restitution, and conspiracy claims against NL. NL has not been served. NL
intends to deny all allegations of wrongdoing and liability and to defend itself
vigorously.
In April 2001, a complaint was filed in Harris County, Texas v. Lead
Industries Association, et al. (No. 2001-21413). The complaint seeks actual and
punitive damages and asserts that NL, six other former manufacturers of lead
pigment and a trade association are jointly and severally liable for past and
future damages due to the presence of lead paint in county-owned buildings. The
complaint asserts claims for strict liability, negligence, fraudulent
misrepresentation, negligent misrepresentation, concert of action, public
nuisance, restitution and conspiracy. NL has not been served. NL intends to deny
all allegations of wrongdoing and liability and to defend itself vigorously.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 - Settlement Agreement and Release of Claims dated April 19,
2001 between Titanium Metals Corporation and the Boeing Company -
incorporated by reference to Exhibit 10.1 to TIMET's Quarterly
Report on Form 10-Q (File No. 0-28538) for the quarter ended
March 31, 2001.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended March 31, 2001.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALHI, INC.
---------------------------------
(Registrant)
Date May 10, 2001 By /s/ Bobby D. O'Brien
---------------- ------------------------------
Bobby D. O'Brien
(Vice President and Treasurer,
Principal Financial Officer)
Date May 10, 2001 By /s/ Gregory M. Swalwell
--------------- ------------------------------
Gregory M. Swalwell
(Vice President and Controller,
Principal Accounting Officer)
