SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2005 Commission file number 1-5467
----------------- ------
VALHI, INC.
(Exact name of Registrant as specified in its charter)
Delaware 87-0110150
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No
--- ---
Number of shares of the Registrant's common stock outstanding on July 31, 2005:
117,182,478.
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets -
December 31, 2004; June 30, 2005 (Unaudited) 3
Consolidated Statements of Income -
Three months and six months ended
June 30, 2004 and 2005 (Unaudited) 5
Consolidated Statements of Comprehensive Income -
Six months ended June 30, 2004 and 2005 (Unaudited) 6
Consolidated Statements of Cash Flows -
Six months ended June 30, 2004 and 2005 (Unaudited) 7
Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2005 (Unaudited) 9
Notes to Consolidated Financial Statements (Unaudited) 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 27
Item 4. Controls and Procedures 49
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 51
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds; Share Repurchases 51
Item 4. Submission of Matters to a Vote of Security Holders 52
Item 6. Exhibits. 52
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, June 30,
2004 2005
------------ ----------
(Restated) (Unaudited)
Current assets:
Cash and cash equivalents $ 267,829 $ 148,189
Restricted cash equivalents 9,609 5,989
Marketable securities 9,446 12,965
Accounts and other receivables 217,931 247,446
Refundable income taxes 3,330 1,635
Receivable from affiliates 5,484 189
Inventories 263,414 255,650
Prepaid expenses and other 12,342 10,204
Deferred income taxes 9,705 10,261
---------- ----------
Total current assets 799,090 692,528
---------- ----------
Other assets:
Marketable securities 176,770 181,939
Investment in affiliates 189,726 235,798
Receivable from affiliate 10,000 8,000
Loans and other receivables 119,452 126,080
Unrecognized net pension obligations 13,518 12,703
Goodwill 354,051 352,937
Other intangible assets 3,189 2,892
Deferred income taxes 239,521 232,641
Other 52,326 54,065
---------- ----------
Total other assets 1,158,553 1,207,055
---------- ----------
Property and equipment:
Land 38,493 39,669
Buildings 234,152 215,738
Equipment 894,023 809,998
Mining properties 20,277 16,845
Construction in progress 21,557 27,234
---------- ----------
1,208,502 1,109,484
Less accumulated depreciation 555,707 526,998
---------- ----------
Net property and equipment 652,795 582,486
---------- ----------
$2,610,438 $2,482,069
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30,
2004 2005
------------ ----------
(Restated) (Unaudited)
Current liabilities:
Current maturities of long-term debt $ 14,412 $ 748
Accounts payable 109,158 74,972
Accrued liabilities 131,119 132,385
Payable to affiliates 11,607 11,674
Income taxes 21,196 20,054
Deferred income taxes 24,170 2,767
---------- ----------
Total current liabilities 311,662 242,600
---------- ----------
Noncurrent liabilities:
Long-term debt 769,525 711,260
Accrued pension costs 77,360 71,595
Accrued OPEB costs 34,988 33,320
Accrued environmental costs 55,450 52,765
Deferred income taxes 165,577 176,828
Other 41,061 37,203
---------- ----------
Total noncurrent liabilities 1,143,961 1,082,971
---------- ----------
Minority interest 158,240 160,521
---------- ----------
Stockholders' equity:
Common stock 1,242 1,219
Additional paid-in capital 85,213 88,599
Retained earnings 871,913 871,179
Accumulated other comprehensive income:
Marketable securities 88,367 88,201
Currency translation 45,561 42,500
Pension liabilities (57,779) (57,779)
Treasury stock (37,942) (37,942)
---------- ----------
Total stockholders' equity 996,575 995,977
---------- ----------
$2,610,438 $2,482,069
========== ==========
Commitments and contingencies (Notes 11 and 13)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2004 2005 2004 2005
--------- --------- --------- ---------
(Restated) (Restated)
Revenues and other income:
Net sales $ 343,362 $359,444 $ 651,039 $700,691
Other, net 17,088 19,408 26,789 46,045
Equity in earnings of:
Titanium Metals Corporation
("TIMET") 2,695 15,790 3,381 32,591
Other (21) (291) 115 (179)
--------- -------- --------- --------
363,124 394,351 681,324 779,148
--------- -------- --------- --------
Costs and expenses:
Cost of sales 269,949 259,903 513,635 511,885
Selling, general and administrative 49,819 54,192 102,536 108,623
Interest 15,055 17,777 30,660 35,656
--------- -------- --------- --------
334,823 331,872 646,831 656,164
--------- -------- --------- --------
Income before income taxes 28,301 62,479 34,493 122,984
Provision for income taxes (benefit) (300,487) 23,626 (299,709) 48,599
Minority interest in after-tax earnings 50,155 4,814 51,968 10,046
--------- -------- --------- --------
Income from continuing operations 278,633 34,039 282,234 64,339
Discontinued operations 185 - 190 (272)
--------- -------- --------- --------
Net income $ 278,818 $ 34,039 $ 282,424 $ 64,067
========= ======== ========= ========
Basic and diluted earnings per share:
Income from continuing operations $ 2.32 $ .28 $ 2.35 $ .53
Discontinued operations - - - -
--------- -------- --------- --------
Net income $ 2.32 $ .28 $ 2.35 $ .53
========= ======== ========= ========
Cash dividends per share $ .06 $ .10 $ .12 $ .20
========= ======== ========= ========
Shares used in the calculation of per
share amounts:
Basic earnings per common share 120,193 118,027 120,192 119,125
Dilutive impact of outstanding stock
Options 146 382 222 366
--------- -------- --------- --------
Diluted earnings per share 120,339 118,409 120,414 119,491
========= ======== ========= ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Six months ended June 30, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
-------- -------
(Restated)
Net income $282,424 $64,067
-------- -------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment 1,713 (166)
Currency translation adjustment (7,436) (3,061)
Pension liabilities adjustment 309 -
-------- -------
Total other comprehensive income (loss), net (5,414) (3,227)
-------- -------
Comprehensive income $277,010 $60,840
======== =======
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
--------- --------
(Restated)
Cash flows from operating activities:
Net income $ 282,424 $ 64,067
Depreciation and amortization 38,981 37,725
Goodwill impairment - 864
Securities transactions, net 25 (20,205)
Noncash:
Interest expense 1,306 1,630
Defined benefit pension expense 227 (3,079)
Other postretirement benefit expense (1,867) (1,651)
Deferred income taxes:
Continuing operations (306,577) 9,606
Discontinued operations 173 (334)
Minority interest:
Continuing operations 51,968 10,046
Discontinued operations 94 (205)
Other, net 895 (1,776)
Equity in:
TIMET (3,381) (32,591)
Other (115) 179
Net distributions from:
Manufacturing joint venture 8,300 650
Other 53 109
Change in assets and liabilities:
Accounts and other receivables (54,492) (54,223)
Inventories 52,614 (19,572)
Accounts payable and accrued liabilities (41,236) (15,622)
Accounts with affiliates (1,989) 5,168
Income taxes 27,492 (1,535)
Other, net 2,001 (5,968)
--------- ---------
Net cash provided (used) by operating activities 56,896 (26,717)
--------- ---------
Cash flows from investing activities:
Capital expenditures (13,819) (25,444)
Purchases of:
TIMET common stock - (17,972)
Kronos common stock (16,158) (3,264)
CompX common stock - (572)
Marketable securities - (16,638)
Capitalized permit costs (2,708) (1,508)
Proceeds from disposal of:
Business unit - 18,094
Kronos common stock - 19,176
Marketable securities - 6,012
Interest in Norwegian smelting operations - 3,542
Loans to affiliate:
Loans - (11,000)
Collections 2,000 17,929
Cash of disposed business unit - (4,006)
Change in restricted cash equivalents, net 2,468 3,623
Other, net 2,938 531
--------- ---------
Net cash used by investing activities (25,279) (11,497)
--------- ---------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six months ended June 30, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
---------- ---------
(Restated)
Cash flows from financing activities:
Indebtedness:
Borrowings $ 147,220 $ 78
Principal payments (126,165) (13,134)
Deferred financing costs paid (28) (28)
Loans from affiliate:
Loans 18,394 -
Repayments (24,430) -
Valhi dividends paid (14,901) (24,621)
Distributions to minority interest (1,744) (5,007)
Treasury stock acquired - (41,822)
Issuance of NL common stock 8,354 2,693
Issuance of Valhi common stock and other, net 410 1,435
--------- ---------
Net cash provided (used) by financing activities 7,110 (80,406)
--------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities 38,727 (118,620)
Currency translation (481) (1,020)
Cash and equivalents at beginning of period 103,394 267,829
--------- ---------
Cash and equivalents at end of period $ 141,640 $ 148,189
========= =========
Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized $ 29,560 $ 35,559
Income taxes, net (20,489) 36,885
Noncash investing activities:
Note receivable received upon disposal of
business unit $ - $ 4,179
Inventories received as partial consideration for disposal of interest in
Norwegian smelting operation - 1,897
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2005
(In thousands)
(Unaudited)
Accumulated other comprehensive income
Additional -------------------------------------- Total
Common paid-in Retained Marketable Currency Pension Treasury stockholders'
stock capital earnings securities translation liabilities stock equity
------ ---------- -------- ---------- ----------- ----------- -------- -------------
Balance at December 31, 2004
(Restated) $1,242 $85,213 $871,913 $88,367 $45,561 $(57,779) $(37,942) $ 996,575
Net income - - 64,067 - - - - 64,067
Dividends - - (24,621) - - - - (24,621)
Other comprehensive income
(loss), net - - - (166) (3,061) - - (3,227)
Income tax related to
shares of Kronos Worldwide
distributed by NL - (553) - - - - - (553)
Redemption of preferred
stock of subsidiary - 4,487 - - - - - 4,487
Treasury stock:
Acquired - - - - - - (41,822) (41,822)
Retired (24) (1,618) (40,180) - - - 41,822 -
Other, net 1 1,070 - - - - - 1,071
------ -------- -------- ------- ------- -------- -------- ----------
Balance at June 30, 2005 $1,219 $ 88,599 $871,179 $88,201 $42,500 $(57,779) $(37,942) $ 995,977
====== ======== ======== ======= ======= ======== ======== ==========
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Organization and basis of presentation:
As previously reported, effective January 1, 2005 TIMET changed its method
of accounting for approximately 40% of its inventories from the last-in,
first-out ("LIFO") method to the specific identification cost method,
representing all of its inventories previously accounted for under the LIFO
method. In accordance with accounting principles generally accepted in the
United States of America ("GAAP"), the Company has retroactively restated its
consolidated financial statements to reflect its financial position, results of
operations and cash flows as if TIMET had accounted for such inventories under
the new method for all periods presented. As a result of this change in
accounting principles by TIMET, the Company's income from continuing operations
in the second quarter and first six months of 2004 is approximately $357,000 and
$565,000, respectively, higher than previously reported, and the Company's
consolidated stockholders' equity as of December 31, 2004 is approximately $7.1
million higher than previously reported. In addition, and as previously
reported, during the fourth quarter of 2004, Kronos Worldwide, Inc. determined
that it should have recognized an additional $17.3 million net deferred income
tax benefit during the second quarter of 2004. While the additional tax benefit
is not material to the Company's second quarter 2004 results, the quarterly
results of operations for 2004, as presented herein, reflect this additional
income tax benefit, which aggregated $14.8 million, or $.13 per diluted share,
net of minority interest.
The consolidated balance sheet of Valhi, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2004 has been derived from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 2005, and the consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended June 30, 2004 and 2005, have been prepared by the Company,
without audit, in accordance with GAAP. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to state
fairly the consolidated financial position, results of operations and cash flows
have been made.
The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted, and certain prior year
amounts have been reclassified to conform to the current year presentation. The
accompanying consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
2004 (the "2004 Annual Report").
Contran Corporation holds, directly or through subsidiaries, approximately
91% of Valhi's outstanding common stock at June 30, 2005. Substantially all of
Contran's outstanding voting stock is held by trusts established for the benefit
of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons
is sole trustee, or is held by Mr. Simmons or persons or other entities related
to Mr. Simmons. Consequently, Mr. Simmons, may be deemed to control such
companies.
As disclosed in the 2004 Annual Report, the Company currently accounts for
stock-based employee compensation in accordance with Accounting Principles Board
Opinion ("APBO") No. 25, Accounting for Stock Issued to Employees, and its
various interpretations. See Note 16. Under APBO No. 25, no compensation cost is
generally recognized for fixed stock options in which the exercise price is
greater than or equal to the market price on the grant date. Prior to 2004, and
following the cash settlement of certain stock options held by employees of NL,
NL and the Company commenced accounting for NL's remaining stock options using
the variable accounting method because NL could not overcome the presumption
that it would not similarly cash settle its remaining stock options. Under the
variable accounting method, the intrinsic value of all unexercised stock options
(including those with an exercise price at least equal to the market price on
the date of grant) are accrued as an expense over their vesting period, with
subsequent increases (decreases) in the market price of the underlying common
stock resulting in additional compensation expense (income). Net compensation
expense recognized by the Company in accordance with APBO No. 25 was nil and
$1.1 million in the second quarter and first six months of 2004, respectively,
and net compensation income was $1.4 million and $1.3 million in the second
quarter and first six months of 2005, respectively.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in the 2004 and 2005 periods
presented if Valhi and its subsidiaries and affiliates had each elected to
account for their respective stock-based employee compensation related to stock
options in accordance with the fair value-based recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, for all awards granted subsequent to January 1, 1995.
Three months ended Six months ended
June 30, June 30,
------------------- --------------------
2004 2005 2004 2005
---- ---- ---- ----
(In millions, except per share amounts)
Net income as reported $278.8 $34.1 $282.4 $64.1
Adjustments, net of applicable income
tax effects and minority interest:
Stock-based employee compensation
expense determined under APBO No. 25
Stock-based employee compensation .1 (.6) .7 (.6)
Expense determined under APBO No. 123 (.3) (.1) (.5) (.1)
------ ----- ------ -----
Pro forma net income $278.6 $33.4 $282.6 $63.4
====== ===== ====== =====
Basic and diluted net income per share:
As reported $ 2.32 $ .28 $ 2.35 $ .53
Pro forma 2.32 .27 2.35 .53
Note 2 - Business segment information:
% owned by Valhi at
Business segment Entity June 30, 2005
- -------------------- ------------------------------ ---------------------
Chemicals Kronos Worldwide, Inc. 93%
Component products CompX International Inc. 68%
Waste management Waste Control Specialists LLC 100%
Titanium metals TIMET 44%
The Company's ownership of Kronos includes 57% held directly by Valhi and
36% held directly by NL Industries, Inc., an 83%-owned subsidiary of Valhi.
During the first six months of 2005, NL sold approximately 470,000 shares of
Kronos common stock in market transactions for an aggregate of $19.2 million,
and Valhi purchased approximately 91,000 shares of Kronos common stock in market
transactions for an aggregate of $3.3 million. See Note 8.
The Company's ownership of CompX is directly held principally by CompX
Group, Inc, an 82.4%-owned subsidiary of NL. TIMET owns the remaining 17.6% of
CompX Group. CompX Group's sole asset consists of shares of CompX common stock
representing approximately 83% of the total number of CompX shares outstanding,
and the percentage ownership of CompX shown above includes NL's ownership
interest in CompX Group multiplied by CompX Group's ownership interest in CompX,
or 68%. During the first six months of 2005, NL purchased approximately 39,000
additional shares of CompX common stock in market transactions, representing
approximately .3% of CompX's outstanding common share, for an aggregate of
approximately $572,000.
The Company's ownership of TIMET includes 40% owned directly by Tremont
LLC, a wholly-owned subsidiary of Valhi, and 4% owned directly by Valhi. The
Combined Master Retirement Trust, a trust established by Valhi to permit the
collective investment by certain master trusts which fund certain employee
benefits plans sponsored by Contran and certain of its affiliates, owned an
additional 12% of TIMET's outstanding common stock at June 30, 2005. During the
first six months of 2005, Valhi purchased 514,000 additional shares of TIMET
common stock in market transactions for approximately $18.0 million.
TIMET owns an additional 3% of CompX, .5% of NL and less than .1% of
Kronos, and TIMET accounts for such CompX, NL and Kronos shares, as well as its
shares of CompX Group, as available-for-sale marketable securities carried at
fair value (with the fair value of TIMET's shares of CompX Group determined
based on the fair value of the underlying CompX shares held by CompX Group).
Because the Company does not consolidate TIMET, the shares of CompX Group,
CompX, NL and Kronos owned by TIMET are not considered as part of the Company's
consolidated investment in such companies.
Chemicals operating income, as presented below, differs from amounts
separately reported by Kronos due to amortization of purchase accounting basis
adjustments recorded by the Company. Similarly, the Company's equity in earnings
of TIMET differs from the Company's pro-rata share of TIMET's
separately-reported results. Component products operating income, as presented
below, may differ from amounts separately reported by CompX because the Company
defines operating income differently than CompX.
In March 2005, NL paid its first quarter 2005 $.25 per share regular
quarterly dividend in the form of shares of Kronos common stock in which
approximately 266,000 shares, or approximately .5% of Kronos' outstanding common
stock, were distributed to NL shareholders, including Valhi, in the form of a
pro-rata dividend. NL's distribution of such shares of Kronos common stock is
taxable to NL, and NL is required to recognize a taxable gain equal to the
difference between the fair market value of the shares of Kronos common stock
distributed and NL's adjusted tax basis in such stock at the date of
distribution. Of the $3.9 million tax liability recognized by NL with respect to
the Kronos shares distributed, $664,000 relates to the Kronos shares distributed
to NL shareholders other than Valhi and $3.3 million relates to the Kronos
shares distributed to Valhi. The taxable gain with respect to the shares of
Kronos distributed to Valhi (approximately 221,000 shares) is deferred at the
Valhi level since Valhi and NL are members of the same consolidated tax group
for U.S. federal income tax purposes, and such tax liability is not recognized
in the Company's consolidated financial statements. The Company's pro-rata share
of the tax liability related to the shares distributed to NL shareholders other
than Valhi, based on the Company's ownership of NL, was $553,000 and in
accordance with GAAP has been recognized as a reduction of the Company's
additional paid-in capital. Completion of the distribution had no other impact
on the Company's consolidated financial position, results of operations or cash
flows. NL paid its second quarter 2005 regular quarterly dividend in the form of
cash.
Kronos (NYSE: KRO), NL (NYSE: NL), CompX (NYSE: CIX) and TIMET (NYSE: TIE)
each file periodic reports with the Securities and Exchange Commission ("SEC")
pursuant to the Securities Exchange Act of 1934, as amended.
Three months ended Six months ended
June 30, June 30,
--------------------- ----------------------
2004 2005 2004 2005
---- ---- ---- ----
(In millions)
Net sales:
Chemicals $295.7 $311.7 $559.0 $603.6
Component products 46.2 45.8 89.8 92.6
Waste management 1.4 2.0 2.2 4.5
------ ------ ------ ------
Total net sales $343.3 $359.5 $651.0 $700.7
====== ====== ====== ======
Operating income:
Chemicals $ 36.2 $ 55.1 $ 58.4 $ 98.7
Component products 5.1 4.8 7.6 8.9
Waste management (3.6) (3.5) (6.8) (6.3)
------ ------ ------ ------
Total operating income 37.7 56.4 59.2 101.3
Equity in:
TIMET 2.7 15.8 3.4 32.6
Other - (.3) .1 (.2)
General corporate items:
Interest and dividend income 8.4 9.3 16.9 19.5
Securities transaction gains, net - 5.6 - 20.2
Insurance recoveries .5 1.2 .5 1.2
Gain on disposal of fixed assets .6 - .6 -
General expenses, net (6.5) (7.7) (15.5) (15.9)
Interest expense (15.1) (17.8) (30.7) (35.7)
------ ------ ------ ------
Income before income taxes $ 28.3 $ 62.5 $ 34.5 $123.0
====== ====== ====== ======
Note 3 - Marketable securities:
December 31, June 30,
2004 2005
------------- ------------
(In thousands)
Current assets - available for sale:
Restricted debt securities $ 9,446 $ 11,538
Other debt securities - 1,427
-------- --------
$ 9,446 $ 12,965
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $170,000 $170,000
Restricted debt securities 6,725 2,649
Other debt securities and common stocks 45 9,290
-------- --------
$176,770 $181,939
======== ========
Note 4 - Accounts and other receivables:
December 31, June 30,
2004 2005
----------- ----------
(In thousands)
Accounts receivable $219,764 $248,570
Notes receivable 1,993 1,700
Allowance for doubtful accounts (3,826) (2,824)
-------- --------
$217,931 $247,446
======== ========
Note 5 - Inventories:
December 31, June 30,
2004 2005
------------- --------------
(In thousands)
Raw materials:
Chemicals $ 45,961 $ 36,955
Component products 8,193 4,286
-------- --------
54,154 41,241
-------- --------
In process products:
Chemicals 16,612 14,634
Component products 10,827 9,559
-------- --------
27,439 24,193
-------- --------
Finished products:
Chemicals 131,161 144,743
Component products 9,696 6,029
-------- --------
140,857 150,772
-------- --------
Supplies (primarily chemicals) 40,964 39,444
-------- --------
$263,414 $255,650
======== ========
Note 6 - Accrued liabilities:
December 31, June 30,
2004 2005
----------- -----------
(In thousands)
Current:
Employee benefits $ 53,295 $ 44,307
Environmental costs 21,316 20,905
Deferred income 5,276 1,771
Interest 243 227
Other 50,989 65,175
-------- --------
$131,119 $132,385
======== ========
Noncurrent:
Insurance claims and expenses $ 22,718 $ 23,347
Employee benefits 5,380 4,852
Deferred income 1,427 1,241
Asset retirement obligations 1,357 1,349
Other 10,179 6,414
-------- --------
$ 41,061 $ 37,203
======== ========
Note 7 - Other assets:
December 31, June 30,
2004 2005
------------- ----------------
(In thousands)
Investment in affiliates:
TIMET:
Common stock $ 55,425 $102,436
Preferred stock 183 183
-------- --------
55,608 102,619
TiO2 manufacturing joint venture 120,251 119,601
Other 13,867 13,578
-------- --------
$189,726 $235,798
======== ========
Loans and other receivables:
Snake River Sugar Company:
Principal $ 80,000 $ 80,000
Interest 38,294 40,890
Other 3,151 6,890
-------- --------
121,445 127,780
Less current portion 1,993 1,700
-------- --------
Noncurrent portion $119,452 $126,080
======== ========
Other noncurrent assets:
IBNR receivables $ 11,646 $ 13,441
Deferred financing costs 10,933 9,447
Waste disposal site operating permits 9,269 11,792
Refundable insurance deposit 2,483 2,483
Restricted cash equivalents 494 446
Other 17,501 16,456
-------- --------
$ 52,326 $ 54,065
======== ========
At June 30, 2005, the Company held approximately 7.0 million shares of
TIMET with a quoted market price of $56.79 per share, or an aggregate market
value of $397.5 million. At June 30, 2005, TIMET reported total assets of $805.3
million and stockholders' equity of $471.9 million. TIMET's total assets at June
30, 2005 include current assets of $445.7 million, property and equipment of
$242.0 million, marketable securities of $49.3 million and investment in joint
ventures of $24.1 million. TIMET's total liabilities at June 30, 2005 include
current liabilities of $215.4 million, accrued OPEB and pension costs
aggregating $88.1 million and debt payable to TIMET Capital Trust I of $12.0
million. During the first six months of 2005, TIMET reported net sales of $339.0
million, operating income of $56.3 million and income attributable to common
stockholders of $71.7 million (2004 - net sales of $244.6 million, operating
income of $11.7 million and income attributable to common stockholders of $2.2
million). See Note 1.
Note 8 - Other income:
Six months ended
June 30,
----------------------
2004 2005
---- ----
(In thousands)
Securities earnings:
Dividends and interest $16,880 $19,503
Securities transactions, net (25) 20,205
------- -------
16,855 39,708
Contract dispute settlement 6,289 -
Insurance recoveries 495 1,200
Currency transactions, net 869 3,307
Other, net 2,281 1,830
------- -------
$26,789 $46,045
======= =======
Securities transaction gains in the first six months of 2005 relate
primarily to (i) NL's $14.7 million pre-tax gain from the sale of approximately
470,000 shares of Kronos common stock in market transactions for aggregate
proceeds of $19.2 million and (ii) Kronos' $5.4 million pre-tax gain from the
sale of its passive interest in a Norwegian smelting operation, which had a
nominal carrying value for financial reporting purposes, for aggregate
consideration of approximately $5.4 million consisting of cash of $3.5 million
and inventory with a value of $1.9 million. Insurance recoveries in the first
six months of 2005 relate to NL's expected recovery from certain insolvent
former insurance carriers relating to settlement of excess insurance coverage
claims.
Note 9 - Long-term debt:
December 31, June 30,
2004 2005
----------- ----------
(In thousands)
Valhi - Snake River Sugar Company $250,000 $250,000
-------- --------
Subsidiaries:
Kronos International Senior Secured Notes 519,225 461,067
Kronos European bank credit facility 13,622 -
Other 1,090 941
-------- --------
533,937 462,008
-------- --------
783,937 712,008
Less current maturities 14,412 748
-------- --------
$769,525 $711,260
======== ========
As previously reported in the 2004 Annual Report, Kronos International has
pledged 65% of the common stock or other ownership interests of certain of its
first-tier operating subsidiaries as collateral for its Senior Secured Notes.
Such operating subsidiaries are Kronos Titan GmbH, Kronos Denmark ApS, Kronos
Limited and Societe Industrielle Du Titane, S.A.
During the first six months of 2005, Kronos repaid an aggregate of euro 10
million ($12.9 million when repaid) under its European bank credit facility.
During the second quarter of 2005, Kronos extended the respective maturity dates
of its European and U.S. credit facilities each by three years to June 2008 and
September 2008, respectively.
Note 10 - Accounts with affiliates:
December 31, June 30,
2004 2005
------------ ----------
(In thousands)
Current receivables from affiliates:
Contran:
Demand loan $ 4,929 $ -
Income taxes 531 189
TIMET 24 -
------- -------
$ 5,484 $ 189
======= =======
Noncurrent receivable from affiliate -
loan to Contran family trust $10,000 $ 8,000
======= =======
Payables to affiliates:
Louisiana Pigment Company $ 8,844 $ 8,255
Contran - trade items 2,753 3,359
Other 10 60
------- -------
$11,607 $11,674
======= =======
Note 11 - Provision for income taxes:
Six months ended
June 30,
------------------------
2004 2005
---- ----
(In millions)
Expected tax expense $ 12.1 $43.0
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies 1.2 1.5
Non-U.S. tax rates (.4) (.3)
Excess of book basis over tax basis of shares of
Kronos common stock sold - 1.5
Change in deferred income tax valuation allowance (308.4) -
Tax contingency reserve adjustment, net (12.5) .2
Refund of prior year income taxes (3.1) -
U.S. state income taxes, net .3 .9
Nondeductible expenses 2.0 2.1
Other, net 9.1 (.3)
------- -----
$(299.7) $48.6
======= =====
Comprehensive provision for income taxes (benefit)
allocated to:
Income from continuing operations $(299.7) $48.6
Discontinued operations .2 (.4)
Additional paid-in capital .6 .7
Other comprehensive income:
Marketable securities - .3
Currency translation (.5) (1.2)
Pension liabilities .1 -
------- -----
$(299.3) $ 48.0
======= =====
Certain of the Company's U.S. and non-U.S. tax returns are being examined
and tax authorities have or may propose tax deficiencies, including penalties
and interest. For example:
o Kronos has received a preliminary tax assessment related to 1993 from
the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately euro 6 million ($7 million at June
30 31, 2005). Kronos has filed a protest to this assessment, and
believes that a significant portion of the assessment is without
merit. The Belgian tax authorities have filed a lien on the fixed
assets of Kronos' Belgian TiO2 operations in connection with this
assessment. In April 2003, Kronos received a notification from the
Belgian tax authorities of their intent to assess a tax deficiency
related to 1999 that, including interest, is expected to be
approximately euro 9 million ($11 million). Kronos believes the
proposed assessment is substantially without merit, and Kronos has
filed a written response.
o The Norwegian tax authorities have notified Kronos of their intent to
assess tax deficiencies of approximately kroner 12 million ($2
million) relating to the years 1998 through 2000. Kronos has objected
to this proposed assessment.
o Kronos has received a preliminary tax assessment from the Canadian tax
authorities related to the years 1998 and 1999 proposing tax
deficiencies, including interest, of Cdn. $5 million ($4 million).
Kronos has filed a protest and believes a significant portion of the
assessment is without merit.
No assurance can be given that these unresolved tax matters will be
resolved in the Company's favor in view of the inherent uncertainties involved
in settlement initiatives and court and tax proceedings. The Company believes
that it has provided adequate accruals for additional taxes and related interest
expense which may ultimately result from all such examinations and believes that
the ultimate disposition of such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
Note 12 - Minority interest:
December 31, June 30,
2004 2005
---------------- -------------
(In thousands)
Minority interest in net assets:
NL Industries $ 70,192 $ 75,141
Kronos Worldwide 29,569 36,034
CompX International 49,153 49,274
Subsidiary of NL 9,250 -
Subsidiary of Kronos 76 72
-------- --------
$158,240 $160,521
======== ========
Six months ended
June 30,
---------------------------
2004 2005
---- ----
(In thousands)
Minority interest in income -
continuing operations:
NL Industries $31,676 $ 4,647
Kronos Worldwide 18,304 3,877
CompX International 1,431 1,454
Subsidiary of NL 537 61
Subsidiary of Kronos 20 7
------- -------
$51,968 $10,046
======= =======
In June 2005, NL's majority-owned subsidiary, NL Environmental Management
Services, Inc. ("EMS"), received notices from the three minority shareholders of
EMS indicating they were each exercising their right, which became exercisable
on June 1, 2005, to require EMS to purchase their shares in EMS as of June 30,
2005 for a formula-determined amount as provided in EMS' certificate of
incorporation. In accordance with the certificate of incorporation, EMS
determined the amount payable to the three former minority shareholders to
purchase their shares of EMS stock, which aggregated approximately $3.9 million.
In accordance with EMS' certificate of incorporation, EMS' determination of the
amount payable to the former minority shareholders may be subject to review by a
third party. EMS has set aside such funds as payment for the shares of EMS, but
the former minority shareholders have not tendered their shares, and accordingly
the liability owed to these former minority shareholders has not been
extinguished for financial reporting purposes as of June 30, 2005. In accordance
with GAAP, the $3.9 million amount payable to the former minority shareholders
has been classified as a current liability at June 30, 2005, and the funds which
have been set aside are classified as a current asset at such date. The
Company's pro-rata share of the difference between the $3.9 million amount
payable to the former minority shareholders of EMS and the $9.3 million carrying
value of the minority interest in EMS as reflected in NL's consolidated
financial statements immediately prior to such June 30, 2005 purchase date (or
$4.5 million) has been classified as a capital contribution in accordance with
GAAP, increasing additional paid-in capital. The earnings per share impact
related to this stock was not material.
Note 13 - Commitments and contingencies:
Lead pigment litigation - NL.
NL's former operations included the manufacture of lead pigments for use in
paint and lead-based paint. NL, other former manufacturers of lead pigments for
use in paint and lead-based paint, and the Lead Industries Association (which
discontinued business operations in 2002) have been named as defendants in
various legal proceedings seeking damages for personal injury, property damage
and governmental expenditures allegedly caused by the use of lead-based paints.
Certain of these actions have been filed by or on behalf of states, large U.S.
cities or their public housing authorities and school districts, and certain
others have been asserted as class actions. These lawsuits seek recovery under a
variety of theories, including public and private nuisance, negligent product
design, negligent failure to warn, strict liability, breach of warranty,
conspiracy/concert of action, aiding and abetting, enterprise liability, market
share or risk contribution liability, intentional tort, fraud and
misrepresentation, violations of state consumer protection statutes, supplier
negligence and similar claims.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and health concerns associated with the
use of lead-based paints, including damages for personal injury, contribution
and/or indemnification for medical expenses, medical monitoring expenses and
costs for educational programs. A number of cases are inactive or have been
dismissed or withdrawn. Most of the remaining cases are in various pre-trial
stages. Some are on appeal following dismissal or summary judgment rulings in
favor of the defendants. In addition, various other cases are pending (in which
NL is not a defendant) seeking recovery for injury allegedly caused by lead
pigment and lead-based paint. Although NL is not a defendant in these cases, the
outcome of these cases may have an impact on additional cases being filed
against NL in the future.
NL believes these actions are without merit, intends to continue to deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. NL has neither lost nor settled any of these cases. NL has not
accrued any amounts for pending lead pigment and lead-based paint litigation.
Liability that may result, if any, cannot reasonably be estimated. There can be
no assurance that NL will not incur liability in the future in respect of this
pending litigation in view of the inherent uncertainties involved in court and
jury rulings in pending and possible future cases. If any such future liability
were to be incurred, it could have a material adverse effect on the Company's
consolidated financial statements, results of operations and liquidity.
NL has reached an agreement with one of its former insurance carriers in
which such carrier would reimburse NL for a portion of its past and future lead
pigment litigation defense costs, although the amount which NL will ultimately
recover from such carrier with respect to such defense costs incurred by NL is
not yet determinable. NL is also continuing discussions with another former
insurance carrier with respect to recovery of past and future defense costs. In
addition, during the second quarter of 2005, NL recognized $1.2 million of
expected recoveries from certain insolvent former insurance carriers relating to
settlement of excess insurance coverae claims. See Note 8. While NL continues to
seek additional recoveries of past defense costs as well as an agreement related
to future defense costs, there can be no assurance that NL will be successful in
obtaining reimbursement for either defense costs or indemnity. NL has not
considered any potential insurance recoveries in determining related accruals
for lead pigment litigation matters. Any such additional insurance recoveries
would be recognized when their receipt is deemed probable and the amount is
determinable.
Environmental matters and litigation.
General. The Company's operations are governed by various environmental
laws and regulations. Certain of the Company's businesses are and have been
engaged in the handling, manufacture or use of substances or compounds that may
be considered toxic or hazardous within the meaning of applicable environmental
laws and regulations. As with other companies engaged in similar businesses,
certain past and current operations and products of the Company have the
potential to cause environmental or other damage. The Company has implemented
and continues to implement various policies and programs in an effort to
minimize these risks. The Company's policy is to maintain compliance with
applicable environmental laws and regulations at all of its plants and to strive
to improve its environmental performance. From time to time, the Company may be
subject to environmental regulatory enforcement under U.S. and foreign statutes,
resolution of which typically involves the establishment of compliance programs.
It is possible that future developments, such as stricter requirements of
environmental laws and enforcement policies thereunder, could adversely affect
the Company's production, handling, use, storage, transportation, sale or
disposal of such substances. The Company believes all of its plants are in
substantial compliance with applicable environmental laws.
Certain properties and facilities used in the Company's former businesses,
including divested primary and secondary lead smelters and former mining
locations of NL, are the subject of civil litigation, administrative proceedings
or investigations arising under federal and state environmental laws.
Additionally, in connection with past disposal practices, the Company has been
named as a defendant, potential responsible party ("PRP") or both, pursuant to
the Comprehensive Environmental Response, Compensation and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act ("CERCLA"), and
similar state laws in various governmental and private actions associated with
waste disposal sites, mining locations, and facilities currently or previously
owned, operated or used by the Company or its subsidiaries, or their
predecessors, certain of which are on the U.S. EPA's Superfund National
Priorities List or similar state lists. These proceedings seek cleanup costs,
damages for personal injury or property damage and/or damages for injury to
natural resources. Certain of these proceedings involve claims for substantial
amounts. Although the Company may be jointly and severally liable for such
costs, in most cases it is only one of a number of PRPs who may also be jointly
and severally liable.
Environmental obligations are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of governmental
regulations, the number of PRPs and the PRPs' ability or willingness to fund
such allocation of costs, their financial capabilities and the allocation of
costs among PRPs, the solvency of other PRPs, the multiplicity of possible
solutions, and the years of investigatory, remedial and monitoring activity
required. In addition, the imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs or allocation of such costs among PRPs,
solvency of other PRPs, the results of future testing and analysis undertaken
with respect to certain sites or a determination that the Company is potentially
responsible for the release of hazardous substances at other sites, could result
in expenditures in excess of amounts currently estimated by the Company to be
required for such matters. In addition, with respect to other PRPs and the fact
that the Company may be jointly and severally liable for the total remediation
cost at certain sites, the Company could ultimately be liable for amounts in
excess of its accruals due to, among other things, reallocation of costs among
PRPs or the insolvency of one or more PRPs. No assurance can be given that
actual costs will not exceed accrued amounts or the upper end of the range for
sites for which estimates have been made, and no assurance can be given that
costs will not be incurred with respect to sites as to which no estimate
presently can be made. Further, there can be no assurance that additional
environmental matters will not arise in the future. If any such future liability
were to be incurred, it could have a material adverse effect on the Company's
consolidated financial statements, results of operations and liquidity.
The Company records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are generally not
discounted to their present value. Recoveries of remediation costs from other
parties, if any, are recognized as assets when their receipt is deemed probable.
At June 30, 2005, no receivables for recoveries have been recognized.
The exact time frame over which the Company makes payments with respect to
its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process that in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs that
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
is classified as a noncurrent liability.
A summary of the activity in the Company's accrued environmental costs
during the first six months of 2005 is presented in the table below.
Amount
---------------
(In thousands)
Balance at the beginning of the period $76,766
Additions charged to expense 3,494
Payments (6,590)
-------
Balance at the end of the period $73,670
=======
Amounts recognized in the balance sheet at the end of
the period:
Current liability $20,905
Noncurrent liability 52,765
-------
$73,670
=======
NL. 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. At June 30, 2005, NL had
accrued $64.8 million for those environmental matters which NL believes are
reasonably estimable. NL believes it is not possible to estimate the range of
costs for certain sites. The upper end of the range of reasonably possible costs
to NL for sites for which NL believes it is possible to estimate costs is
approximately $99 million. NL's estimates of such liabilities have not been
discounted to present value.
At June 30, 2005, there are approximately 20 sites for which NL is unable
to estimate a range of costs. For these sites, generally the investigation is in
the early stages, and it is either unknown as to whether or not NL actually had
any association with the site, or if NL had association with the site, the
nature of its responsibility, if any, for the contamination at the site and the
extent of contamination. The timing on when information would become available
to NL to allow NL to estimate a range of loss is unknown and dependent on events
outside the control of NL, such as when the party alleging liability provides
information to NL.
At June 30, 2005, NL had $3 million in restricted cash, cash equivalents
and marketable debt securities held by special purpose trusts, the assets of
which can only be used to pay for certain of NL's future environmental
remediation and other environmental expenditures. (December 31, 2004 - $10
million). Use of such restricted balances does not affect the Company's
consolidated net cash flows.
Tremont. In July 2000 Tremont, entered into a voluntary settlement
agreement with the Arkansas Department of Environmental Quality and certain
other PRPs pursuant to which Tremont and the other PRPs will undertake certain
investigatory and interim remedial activities at a former mining site located in
Hot Springs County, Arkansas. Tremont currently believes that it has accrued
adequate amounts ($2.3 million at June 30, 2005) to cover its share of probable
and reasonably estimable environmental obligations for these activities. Tremont
has entered into an agreement with another PRP of this site that provides for,
among other thing, the interim sharing of remediation costs associated with the
site pending a final allocation of costs and an agreed-upon procedure through
arbitration to determine such final allocation of costs. Tremont has based its
accrual for this site based upon the agreed-upon interim cost sharing
allocation. Tremont currently expects that the nature and extent of any final
remediation measures that might be imposed with respect to this site will not be
known until 2007. Currently, no reasonable estimate can be made of the cost of
any such final remediation measures, and accordingly Tremont has accrued no
amounts at June 30, 2005 for any such cost. The amount accrued at June 30, 2005
represents Tremont's estimate of the costs to be incurred through 2007 with
respect to the interim remediation measures.
TIMET. At June 30, 2005, TIMET had accrued approximately $3.5 million for
environmental cleanup matters, principally related to TIMET's facility in
Nevada. The upper end of the range of reasonably possible costs related to these
matters is approximately $6.0 million.
Other. The Company has also accrued approximately $6.6 million at June 30,
2005 in respect of other environmental cleanup matters. Such accrual is near the
upper end of the range of the Company's estimate of reasonably possible costs
for such matters.
Other litigation.
Reference is made to the 2004 Annual Report for a discussion of certain
other legal proceedings to which the Company is a party.
NL has been named as a defendant in various lawsuits in a variety of
jurisdictions, alleging personal injuries as a result of occupational exposure
primarily to products manufactured by formerly-owned operations of NL containing
asbestos, silica and/or mixed dust. Approximately 490 of these types of cases
involving a total of approximately 14,500 plaintiffs and their spouses remain
pending. NL has not accrued any amounts for this litigation because liability
that might result to NL, if any, cannot be reasonably estimated. In addition,
from time to time, NL has received notices regarding asbestos or silica claims
purporting to be brought against former subsidiaries of NL, including notices
provided to insurers with which NL has entered into settlements extinguishing
certain insurance policies. These insurers may seek indemnification from NL.
In addition to the litigation described above, the Company and its
affiliates are also involved in various other environmental, contractual,
product liability, patent (or intellectual property), employment and other
claims and disputes incidental to its present and former businesses. In certain
cases, the Company has insurance coverage for such items, although the Company
does not currently expect any additional material insurance coverage for its
environmental claims. The Company currently believes that the disposition of all
claims and disputes, individually or in the aggregate, and including the lead
pigment litigation and environmental matters discussed above, should not have a
material adverse effect on its consolidated financial position, results of
operations or liquidity.
Operating leases.
As noted in the 2004 Annual Report, Kronos' principal German operating
subsidiary, Kronos Titan GmbH, leases the land under its Leverkusen TiO2
production facility pursuant to a lease with Bayer AG that expires in 2050. The
Leverkusen facility itself, which is owned by Kronos and which represents
approximately one-third of Kronos' current TiO2 production capacity, is located
within Bayer's extensive manufacturing complex. Rent for the land lease
associated with the Leverkusen facility is periodically established by agreement
with Bayer for periods of at least two years at a time. The lease agreement
provides for no formula, index or other mechanism to determine changes in the
rent for such land lease; rather, any change in the rent is subject solely to
periodic negotiation between Bayer and Kronos. Any change in the rent based on
such negotiations is recognized as part of lease expense starting from the time
such change is agreed upon by both parties, as any such change in the rent is
deemed "contingent rentals" under GAAP.
Note 14 - Employee benefit plans:
Defined benefit plans. The components of net periodic defined benefit
pension cost are presented in the table below.
Three months ended Six months ended
June 30, June 30,
---------------------- -------------------------
2004 2005 2004 2005
---- ---- ---- ----
(In thousands)
Service cost $ 1,459 $ 1,914 $ 3,128 $ 3,901
Interest cost 5,455 5,675 10,952 11,478
Expected return on plan assets (5,222) (5,632) (10,488) (11,376)
Amortization of prior service cost 140 150 281 304
Amortization of net transition
obligations 147 135 290 275
Recognized actuarial losses 1,082 1,126 2,160 2,276
------- ------- -------- -------
$ 3,061 $ 3,368 $ 6,323 $ 6,858
======= ======= ======== =======
Postretirement benefits other than pensions ("OPEB"). The components of net
periodic OPEB cost are presented in the table below.
Three months ended Six months ended
June 30, June 30,
------------------ -------------------
2004 2005 2004 2005
---- ---- ---- ----
(In thousands)
Service cost $ 56 $ 54 $ 113 $ 109
Interest cost 879 483 1,539 966
Amortization of prior service credit (477) (231) (732) (463)
Recognized actuarial losses (gains) 45 (34) 90 (176)
------- ------- -------- -------
$ 503 $ 272 $ 1,010 $ 436
======= ======= ======== =======
Note 15 - Discontinued operations:
As discussed in the 2004 Annual Report, in December 2004 CompX's board of
directors committed to a formal plan to dispose of its Thomas Regout operations
in The Netherlands. Such operations, which previously were included in the
Company's component products operating segment (see Note 2), met all of the
criteria under GAAP to be classified as an asset held for sale at December 31,
2004, and accordingly the results of operations of Thomas Regout have been
classified as discontinued operations for all periods presented. The Company has
not reclassified its consolidated balance sheet as of December 31, 2003 or its
2004 statement of cash flows. In classifying the net assets of the Thomas Regout
operations as an asset held for sale, the Company concluded that the carrying
amount of the net assets of such operations exceeded the estimated fair value
less costs to sell of such operations, and accordingly in the fourth quarter of
2004 the Company recognized a $6.5 million impairment charge to write-down its
investment in the Thomas Regout operations to its estimated net realizable
value. Such charge represented an impairment of goodwill.
In January 2005, CompX completed the sale of such operations for proceeds
(net of expenses) of approximately $22.3 million. The net proceeds consisted of
approximately $18.1 million in cash at the date of sale and a $4.2 million
principal amount note receivable from the purchaser bearing interest at a fixed
rate of 7% and payable over four years. The note receivable is collateralized by
a secondary lien on the assets sold and is subordinated to certain third-party
indebtedness of the purchaser. Accordingly, the Company no longer includes the
results of operations or cash flows of Thomas Regout subsequent to December 31,
2004 in its consolidated financial statements. The net proceeds from the January
2005 sale of Thomas Regout were approximately $860,000 less than the net
realizable value estimated at the time of the goodwill impairment charge
(primarily due to higher expenses associated with the disposal of the Thomas
Regout operations), and discontinued operations in 2005 includes a first quarter
charge related to such differential ($272,000, net of income tax benefit and
minority interest). During the first six months of 2004, the Thomas Regout
operations reported net sales of $20.6 million, operating income of $1.2
million, interest expense of $762,000 and net income of approximately $300,000
(approximately $200,000 to Valhi, net of minority interest).
Note 16 - Accounting principles not yet implemented:
Inventory costs. The Company will adopt SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4, for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs is charged to expense as incurred. Alternatively, in periods of production
above the high end of normal capacity, the amount of fixed overhead costs
allocated to each unit of production is decreased so that inventories are not
measured above cost. SFAS No. 151 also clarifies existing GAAP to require that
abnormal freight and wasted materials (spoilage) are to be expensed as incurred.
The Company believes its production cost accounting already complies with the
requirements of SFAS No. 151, and the Company does not expect adoption of SFAS
No. 151 will have a material effect on its consolidated financial statements.
Stock options. As permitted by regulations of the SEC, the Company will
adopt SFAS No. 123R, Share-Based Payment, as of January 1, 2006. SFAS No. 123R,
among other things, eliminates the alternative in existing GAAP to use the
intrinsic value method of accounting for stock-based employee compensation under
APBO No. 25. Upon adoption of SFAS No. 123R, the Company will generally be
required to recognize the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award,
with the cost recognized over the period during which an employee is required to
provide services in exchange for the award (generally, the vesting period of the
award). No compensation cost will be recognized in the aggregate for equity
instruments for which the employee does not render the requisite service
(generally, if the instrument is forfeited before it has vested). The grant-date
fair value will be estimated using option-pricing models (e.g. Black-Sholes or a
lattice model). Under the transition alternatives permitted under SFAS No. 123R,
the Company will apply the new standard to all new awards granted on or after
January 1, 2006, and to all awards existing as of December 31, 2005 which are
subsequently modified, repurchased or cancelled. Additionally, as of January 1,
2006, the Company will be required to recognize compensation cost for the
portion of any non-vested award existing as of December 31, 2005 over the
remaining vesting period. Because the number of non-vested awards as of December
31, 2005 with respect to options granted by Valhi and its subsidiaries and
affiliates is not expected to be material, the effect of adopting SFAS No. 123R
is not expected to be significant in so far as it relates to existing stock
options. Should Valhi or its subsidiaries and affiliates, however, either grant
a significant number of options or modify, repurchase or cancel existing options
in the future, the effect on the Company's consolidated financial statements
could be material.
Note 17 - Stockholders' equity:
In March 2005, the Company's board of directors authorized the repurchase
of up to 5.0 million shares of Valhi's common stock in open market transactions,
including block purchases, or in privately negotiated transactions, which may
include transactions with affiliates of Valhi. The stock may be purchased from
time to time as market conditions permit. The stock repurchase program does not
include specific price targets or timetables and may be suspended at any time.
Depending on market conditions, the program could be terminated prior to
completion. The Company will use its cash on hand to acquire the shares.
Repurchased shares will be retired and cancelled or may be added to Valhi's
treasury and used for employee benefit plans, future acquisitions or other
corporate purposes.
On April 1, 2005, the Company purchased 2.0 million shares of its common
stock, at a discount to the then-current market price, from Contran for $17.50
per share or an aggregate purchase price of $35.0 million. Such shares were
purchased under the stock repurchase program. Valhi's independent directors
approved such purchase. During the second quarter of 2005, the Company also
purchased an additional 360,300 shares of its common stock under the repurchase
program in market transactions for an aggregate of $6.8 million. Valhi cancelled
these 2.4 million shares during the second quarter of 2005, and the aggregate
$41.8 million cost was allocated to common stock at par value, additional
paid-in capital and retained earnings in accordance with GAAP.
Prior to and within six months of Contran's sale of the 2.0 million shares
of Valhi common stock to Valhi, Contran had purchased shares of Valhi common
stock in market transactions. In settlement of any alleged short-swing profit
derived from these transactions as calculated pursuant to Section 16(b) of the
Securities Exchange Act of 1934, Contran remitted approximately $645,000 to the
Company, which amount, net of taxes, has been recorded by the Company as a
capital contribution, increasing additional paid-in capital.
- ------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS
General
The Company reported income from continuing operations of $34.1 million, or
$.28 per diluted share, in the second quarter of 2005 as compared to income of
$278.6 million, or $2.32 per diluted share, in the second quarter of 2004. For
the first six months of 2005, the Company reported income from continuing
operations of $64.4 million, or $.53 per diluted share, compared to income of
$282.2 million, or $2.35 per diluted share, in the first six months of 2004.
The Company's diluted earnings per share declined from the first six months
of 2004 to the first six months of 2005 as the favorable effect in 2005 of (i)
higher chemicals operating income, (ii) higher component products operating
income, (iii) certain securities transaction gains and (iv) the Company's equity
in a non-operating gain from the sale of certain land and certain income tax
benefits recognized by TIMET were more than offset by the favorable effect in
2004 of certain income tax benefits recognized by Kronos and NL. The Company
currently believes its net income in 2005 will be lower than 2004 due primarily
to the effect of these 2004 income tax benefits.
Income from continuing operations in the first six months of 2005 includes
(i) gains from NL's sales of shares of Kronos common stock of $.05 per diluted
share, most of which occurred in the first quarter, (ii) gains from Kronos'
second quarter sale of its passive interest in a Norwegian smelting operation of
$.03 per diluted share, (iii) income related to TIMET's second quarter sale of
certain real property adjacent to its Nevada facility of $.02 per diluted share
and (iv) income related to certain income tax benefits recognized by TIMET of
$.08 per diluted share. Income from continuing operations in the first six
months of 2004 includes (i) a second quarter income tax benefit related to the
reversal of Kronos' deferred income tax asset valuation allowance in Germany of
$1.91 per diluted share, (ii) a second quarter income tax benefit related to the
reversal of the deferred income tax asset valuation allowance related to a
subsidiary of NL and the adjustment of estimated income taxes due upon the
settlement of an IRS audit aggregating $.30 per diluted share and (iii) income
related to Kronos' second quarter contract dispute settlement of $.03 per
diluted share.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts,
including, but not limited to, statements found in this Item 2 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations," are
forward-looking statements that represent management's beliefs and assumptions
based on currently available information. Forward-looking statements can be
identified by the use of words such as "believes," "intends," "may," "should,"
"could," "anticipates," "expected" or comparable terminology, or by discussions
of strategies or trends. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurances that these expectations will prove to be correct. Such statements by
their nature involve substantial risks and uncertainties that could
significantly impact expected results, and actual future results could differ
materially from those described in such forward-looking statements. While it is
not possible to identify all factors, the Company continues to face many risks
and uncertainties. The factors that could cause actual future results to differ
materially from those described herein are the risks and uncertainties discussed
in this Quarterly Report and those described from time to time in the Company's
other filings with the SEC include, but are not limited to, the following:
o Future supply and demand for the Company's products,
o The extent of the dependence of certain of the Company's businesses on
certain market sectors (such as the dependence of TIMET's titanium
metals business on the aerospace industry),
o The cyclicality of certain of the Company's businesses (such as
Kronos' TiO2 operations and TIMET's titanium metals operations),
o The impact of certain long-term contracts on certain of the Company's
businesses (such as the impact of TIMET's long-term contracts with
certain of its customers and such customers' performance thereunder
and the impact of TIMET's long-term contracts with certain of its
vendors on its ability to reduce or increase supply or achieve lower
costs),
o Customer inventory levels (such as the extent to which Kronos'
customers may, from time to time, accelerate purchases of TiO2 in
advance of anticipated price increases or defer purchases of TiO2 in
advance of anticipated price decreases, or the relationship between
inventory levels of TIMET's customers and such customers' current
inventory requirements and the impact of such relationship on their
purchases from TIMET),
o Changes in raw material and other operating costs (such as energy
costs),
o The possibility of labor disruptions,
o General global economic and political conditions (such as changes in
the level of gross domestic product in various regions of the world
and the impact of such changes on demand for, among other things,
TiO2),
o Competitive products and substitute products,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o The introduction of trade barriers,
o Fluctuations in currency exchange rates (such as changes in the
exchange rate between the U.S. dollar and each of the euro, the
Norwegian kroner and the Canadian dollar),
o Operating interruptions (including, but not limited to, labor
disputes, leaks, fires, explosions, unscheduled or unplanned downtime
and transportation interruptions),
o The ability of the Company to renew or refinance credit facilities,
o Uncertainties associated with new product development (such as TIMET's
ability to develop new end-uses for its titanium products),
o The ultimate outcome of income tax audits, tax settlement initiatives
or other tax matters,
o The ultimate ability to utilize income tax attributes, the benefit of
which has been recognized under the "more-likely-than-not" recognition
criteria (such as Kronos' ability to utilize its German net operating
loss carryforwards),
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government laws and regulations and possible changes therein (such as
changes in government regulations which might impose various
obligations on present and former manufacturers of lead pigment and
lead-based paint, including NL, with respect to asserted health
concerns associated with the use of such products),
o The ultimate resolution of pending litigation (such as NL's lead
pigment litigation and litigation surrounding environmental matters of
NL, Tremont and TIMET), and
o Possible future litigation.
Should one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of changes in information, future
events or otherwise.
Chemicals
Relative changes in Kronos' TiO2 sales and operating income during the 2004
and 2005 periods presented are primarily due to (i) relative changes in TiO2
average selling prices and (ii) relative changes in foreign currency exchange
rates. Selling prices (in billing currencies) for TiO2, Kronos' principal
product, were generally: decreasing during the first half of 2004 and increasing
in the last half of 2004 and the first six months of 2005.
Three months ended June 30, Six months ended June 30,
------------------------------------ -------------------------------------
2004 2005 % Change 2004 2005 % Change
---- ---- -------- ---- ---- --------
(In millions, except percentages)
Net sales $295.7 $311.7 +5% $559.0 $603.6 +8%
Operating income 36.2 55.1 +52% 58.4 98.7 +69%
Ti02 operating
statistics:
Percentage change in
Ti02 average selling prices:
Using actual
foreign currency
exchange rates +15% +14%
Impact of changes in
foreign currency
exchange rates -4% -4%
----- -----
In billing currencies +11% +10%
===== =====
Sales volumes* 136 122 -10% 255 237 -7%
Production volumes* 122 127 +4% 240 249 +4%
* Thousands of metric tons
Kronos' sales increased $16.0 million (5%) in the second quarter of 2005
compared to the second quarter of 2004, and increased $44.6 million (8%) for the
first six months of 2005 due to the net effects of higher average TiO2 selling
prices, lower TiO2 selling volumes and the favorable effect of fluctuations in
foreign currency exchange rates, which increased chemicals sales by
approximately $10 million in the quarter and $21 million in the year-to-date
period, as further discussed below. Excluding the effect of fluctuations in the
value of the U.S. dollar relative to other currencies, Kronos' average TiO2
selling prices in billing currencies in the second quarter and first six months
of 2005 were 11% and 10% higher, respectively, as compared to the same periods
of 2004. When translated from billing currencies to U.S. dollars using actual
foreign currency exchange rates prevailing during the respective periods,
Kronos' average TiO2 selling prices in the second quarter and first six months
of 2005 increased 15% and 14%, respectively, compared to the second quarter and
first six months of 2004. Reflecting the continued implementation of prior price
increase announcements, Kronos' average TiO2 selling prices in billing
currencies in the second quarter of 2005 were 2% higher than the first quarter
of 2005.
Kronos' sales are denominated in various currencies, including the U.S.
dollar, the euro, other major European currencies and the Canadian dollar. The
disclosure of the percentage change in Kronos' average TiO2 selling prices in
billing currencies (which excludes the effects of fluctuations in the value of
the U.S. dollar relative to other currencies) is considered a "non-GAAP"
financial measure under regulations of the SEC. The disclosure of the percentage
change in Kronos' average TiO2 selling prices using actual foreign currency
exchange rates prevailing during the respective periods is considered the most
directly comparable financial measure presented in accordance with GAAP ("GAAP
measure"). Kronos discloses percentage changes in its average TiO2 prices in
billing currencies because Kronos believes such disclosure provides useful
information to investors to allow them to analyze such changes without the
impact of changes in foreign currency exchange rates, thereby facilitating
period-to-period comparisons of the relative changes in average selling prices
in the actual various billing currencies. Generally, when the U.S. dollar either
strengthens or weakens against other currencies, the percentage change in
average selling prices in billing currencies will be higher or lower,
respectively, than such percentage changes would be using actual exchange rates
prevailing during the respective periods. The difference between the 15% and 14%
increases in Kronos' average TiO2 selling prices during the second quarter and
first six months of 2005 as compared to the same periods of 2004 using actual
foreign currency exchange rates prevailing during the respective periods (the
GAAP measure), and the 11% and 10% increases, respectively, in Kronos' average
TiO2 selling prices in billing currencies (the non-GAAP measure) during such
periods is due to the effect of changes in foreign currency exchange rates. The
above table presents in a tabular format (i) the percentage change in Kronos'
average TiO2 selling prices using actual foreign currency exchange rates
prevailing during the respective periods (the GAAP measure), (ii) the percentage
change in Kronos' average TiO2 selling prices in billing currencies (the
non-GAAP measure) and (iii) the percentage change due to changes in foreign
currency exchange rates (or the reconciling item between the non-GAAP measure
and the GAAP measure).
Kronos' TiO2 sales volumes in the second quarter and first six months of
2005 decreased 10% and 7%, respectively, compared to the same periods of 2004,
with volumes lower in all regions of the world and with the largest decline in
Europe. Chemicals operating income in 2004 includes $6.3 million of income ($3.5
million or $.03 per diluted share, net of income taxes and minority interest) in
the second quarter related to Kronos' settlement of a contract dispute with a
customer. Kronos' operating income comparisons were favorably impacted by higher
production levels, which increased 4% in each of the second quarter and first
six months of 2005 as compared to the same periods of 2004. Kronos' operating
rates were near full capacity in all periods, and Kronos' production volumes in
the first six months of 2005 were a new record for Kronos for a first six-month
period.
Kronos has substantial operations and assets located outside the United
States (particularly in Germany, Belgium, Norway and Canada). A significant
amount of Kronos' sales generated from its non-U.S. operations are denominated
in currencies other than the U.S. dollar, principally the euro, other major
European currencies and the Canadian dollar. A portion of Kronos' sales
generated from its non-U.S. operations are denominated in the U.S. dollar.
Certain raw materials, primarily titanium-containing feedstocks, are purchased
in U.S. dollars, while labor and other production costs are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
Kronos' foreign sales and operating results are subject to currency exchange
rate fluctuations which may favorably or adversely impact reported earnings and
may affect the comparability of period-to-period operating results. Overall,
fluctuations in the value of the U.S. dollar relative to other currencies,
primarily the euro, increased TiO2 sales by a net $10 million and $21 million in
the second quarter and first six months of 2005, respectively, as compared to
the same periods of 2004. Fluctuations in the value of the U.S. dollar relative
to other currencies similarly impacted Kronos' foreign currency-denominated
operating expenses. Kronos' operating costs that are not denominated in the U.S.
dollar, when translated into U.S. dollars, were higher in the second quarter and
first six months of 2005 as compared to the same periods in 2004. Overall,
currency exchange rate fluctuations resulted in a net $2 million and $3 million
increase in Kronos' operating income in the second quarter and first six months
of 2005, respectively, as compared to the second quarter and first six months of
2004.
Kronos expects its operating income in 2005 will be higher than 2004, due
primarily to higher TiO2 average selling prices. The quarterly price
improvements in Kronos' average selling prices since the third quarter of 2004
are the key to its anticipation that its operating income in the second half of
2005 will be significantly higher than the second half of 2004. Kronos' average
selling prices in the second half of 2005 will likely rise moderately in North
America as compared to the second quarter of 2005, reflecting the expected
partial implementation of prior selling price increase announcements. In Europe
and export markets, Kronos' average selling prices in the second half of 2005
will likely decline from the second quarter of 2005. Kronos' TiO2 production
volumes in the second half of 2005 will likely be similar to those achieved in
the second half of 2004, and are expected to be below the production volumes in
the first half of 2005 due primarily to certain finishing capacity being taken
temporarily offline in order to complete debottlenecking projects at the
Company's Leverkusen, Germany facility. Kronos' TiO2 sales volumes in the second
half of 2005 are expected to be lower than the second half of 2004, and are
likely to be similar to the sales volumes in the first half of 2005. While
Kronos expects its operating income in calendar 2005 will be higher than
calendar 2004, Kronos expects its operating income in the second half of 2005
will be below the first half of 2005. Kronos' expectations as to the future
prospects of Kronos and the TiO2 industry are based upon a number of factors
beyond Kronos' control, including worldwide growth of gross domestic product,
competition in the marketplace, unexpected or earlier-than-expected capacity
additions and technological advances. If actual developments differ from Kronos'
expectations, Kronos' results of operations could be unfavorably affected.
Kronos' efforts to debottleneck its production facilities to meet long-term
demand continue to prove successful. Such debottlenecking efforts included,
among other things, the addition of back-end finishing capacity to be able to
process a larger quantity of the base TiO2 produced and equipment upgrades and
enhancements to allow for reduced downtime for maintenance activities. Kronos'
production capacity has increased by approximately 30% over the past ten years
due to debottlenecking programs, with only moderate capital expenditures. Kronos
believes its annual attainable production capacity for 2005 is approximately
500,000 metric tons, with approximately 10,000 metric tons additional capacity
available in 2006 through its continued debottlenecking efforts.
Chemicals operating income, as presented above, is stated net of
amortization of Valhi's purchase accounting adjustments made in conjunction with
its acquisitions of its interest in NL and Kronos. Such adjustments result in
additional depreciation and amortization expense beyond amounts separately
reported by Kronos. Such additional non-cash expenses reduced chemicals
operating income, as reported by Valhi, by $8.0 million in the first six months
of 2004 and $8.6 million in the first six months of 2005.
Component products
Three months ended June 30, Six months ended June 30,
------------------------------------ ----------------------------------
2004 2005 % Change 2004 2005 % Change
---- ---- -------- ---- ---- --------
(In millions, except percentages)
Net sales $46.2 $45.8 -1% $89.8 $92.6 +3%
Operating income 5.1 4.8 -6% 7.6 8.9 +17%
Component product sales and operating income were lower in the second
quarter of 2005 as compared to the second quarter of 2004 due primarily to the
net effect of lower sales volumes partially offset by higher selling prices for
certain products. Component product sales and operating income were higher in
the first six months of 2005 as compared to the same period in 2004 as the
effect of higher selling prices for certain products more than offset the impact
of lower sales volumes for certain products. During the second quarter of 2005,
sales of precision slide products were 2% higher than the second quarter of
2004, while sales of security products declined 5%. Sales of ergonomic products
in the second quarter of 2005 approximated ergonomic product sales in the second
quarter of 2004. For the first six months of 2005, sales of precision slide and
ergonomic products increased 9% and 5%, respectively, compared to the first six
months of 2004, while sales of security products declined 3%. The percentage
changes in both precision slide and ergonomic products include the impact
resulting from changes in foreign currency exchange rates. Sales of security
products are generally denominated in U.S. dollars.
CompX has substantial operations and assets located outside the United
States in Canada 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 and the New Taiwan dollar. In addition, a
portion of CompX's sales generated from its non-U.S. operations (principally in
Canada) are denominated in the U.S. dollar. Most raw materials, labor and other
production costs for such non-U.S. operations are denominated primarily in local
currencies. Consequently, the translated U.S. dollar values of CompX's foreign
sales and operating results are subject to currency exchange rate fluctuations
which may favorably or unfavorably impact reported earnings and may affect
comparability of period-to-period operating results. During the first six months
of 2005, currency exchange rate fluctuations did not significantly affect
comparisons with 2004.
While demand has stabilized across most of CompX's product segments,
certain customers continue to seek lower-priced Asian sources as alternatives to
CompX's products. CompX believes the impact of this will be mitigated through
its ongoing initiatives to expand both new products and new market
opportunities. Asian-sourced competitive pricing pressures are expected to
continue to be a challenge. CompX's strategy in responding to the competitive
pricing pressure has included reducing production cost through product
reengineering, improvement in manufacturing processes or moving production to
lower-cost facilities, including CompX's Asian-based manufacturing facilities.
CompX has also emphasized and focused on opportunities where it can provide
value-added customer support services that Asian-based manufacturers are
generally unable to provide. CompX believes its combination of cost control
initiatives together with its value-added approach to development and marketing
of products helps to mitigate the impact of pricing pressures from Asian
competitors.
CompX will continue to focus on cost improvement initiatives, utilizing
lean manufacturing techniques and prudent balance sheet management in order to
minimize the impact of lower sales, particularly to the office furniture
industry, and to develop value-added customer relationships with an additional
focus on sales of CompX's higher-margin ergonomic computer support systems and
security products to improve operating results. These actions, along with other
activities to eliminate excess capacity, have been designed to position CompX to
expand more effectively on both new product and new market opportunities to
improve CompX's profitability.
Waste management
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2004 2005 2004 2005
---- ---- ---- ----
(In millions)
Net sales $ 1.4 $ 2.0 $ 2.2 $ 4.5
Operating loss (3.6) (3.5) (6.8) (6.3)
Waste management sales increased, and its operating loss declined, in the
second quarter and first six months of 2005 as compared to the second quarter
and first six months of 2004 due to higher utilization of waste management
services, offset in part by higher operating costs. Waste Control Specialists
also continues to explore opportunities to obtain certain types of new business
(including treatment and storage of certain types of waste) that, if obtained,
could help to further increase its sales, and decrease its operating loss, in
the remainder of 2005.
Waste Control Specialists currently has permits which allow it to treat,
store and dispose of a broad range of hazardous and toxic wastes, and to treat
and store a broad range of low-level and mixed low-level radioactive wastes.
Certain sectors of the waste management industry are experiencing a relative
improvement in the number of environmental remediation projects generating
wastes. However, efforts on the part of generators to reduce the volume of waste
and/or manage waste onsite at their facilities may result in weaker demand for
Waste Control Specialists' waste management services. Although Waste Control
Specialists believes demand appears to be improving, there is continuing price
pressure for waste management services. While Waste Control Specialists believes
its broad range of authorizations for the treatment and storage of low-level and
mixed low-level radioactive waste streams provides certain competitive
advantages, a key element of Waste Control Specialists' long-term strategy to
provide "one-stop shopping" for hazardous, low-level and mixed low-level
radioactive wastes includes obtaining additional regulatory authorizations for
the disposal of low-level and mixed low-level radioactive wastes.
Prior to June 2003, the state law in Texas (where Waste Control
Specialists' disposal facility is located) prohibited the applicable Texas
regulatory agency from issuing a license for the disposal of a broad range of
low-level and mixed low-level radioactive waste to a private enterprise
operating a disposal facility in Texas. In June 2003, a new Texas state law was
enacted that allows the Texas Commission on Environmental Quality ("TCEQ") to
issue a low-level radioactive waste disposal license to a private entity, such
as Waste Control Specialists. Waste Control Specialists has applied for such a
disposal license with the TCEQ, and Waste Control Specialists was the only
entity to submit an application for such a disposal license. The application was
declared administratively complete by the TCEQ in February 2005. The
regulatorially required merit review has been completed, and the TCEQ began its
technical review of the application in May 2005. The length of time that it will
take to complete the review and act upon the license application is uncertain,
although Waste Control Specialists does not currently expect the agency will
issue any final decision on the license application before late 2007. There can
be no assurance that Waste Control Specialists will be successful in obtaining
any such license.
Waste Control Specialists applied to the Texas Department of State Health
Services ("TDSHS") for a license to dispose of byproduct 11.e(2) waste material
in June 2004. Waste Control Specialists can currently treat and store byproduct
material, but may not dispose of it. The length of time that TDSHS will take to
review and act upon the license application is uncertain, but Waste Control
Specialists expects the TDSHS will issue a final decision on the license
application by the end of 2006. There can be no assurance that Waste Control
Specialists will be successful in obtaining any such license.
Waste Control Specialists is continuing its efforts to increase its sales
volumes from waste streams that conform to authorizations it currently has in
place. Waste Control Specialists is also continuing to identify certain waste
streams, and attempting to obtain modifications to its current permits, that
would allow for treatment, storage and disposal of additional types of wastes.
The ability of Waste Control Specialists to achieve increased sales volumes of
these waste streams, together with improved operating efficiencies through
further cost reductions and increased capacity utilization, are important
factors in Waste Control Specialists' ability to achieve improved cash flows.
The Company currently believes Waste Control Specialists can become a viable,
profitable operation, even if Waste Control Specialists is unsuccessful in
obtaining a license for the disposal of a broad range of low-level and mixed
low-level radioactive wastes. However, there can be no assurance that Waste
Control Specialists' efforts will prove successful in improving its cash flows.
Valhi has in the past, and may in the future, consider strategic alternatives
with respect to Waste Control Specialists. There can be no assurance that the
Company would not report a loss with respect to any such strategic transaction.
Equity in earnings of TIMET
Three months ended Six months ended
June 30, June 30,
-------------------- ---------------------
2004 2005 2004 2005
---- ---- ---- ----
(In millions)
TIMET historical:
Net sales $124.1 $183.7 $244.6 $339.0
====== ====== ====== ======
Operating income $ 8.5 $ 36.9 $ 11.7 $ 56.3
Gain on sale of land - 13.9 - 13.9
Other general corporate, net .1 1.5 .9 2.3
Interest expense (4.1) (.9) (8.4) (1.6)
------ ------ ------ ------
4.5 51.4 4.2 70.9
Income tax benefit (expense) (.8) (13.3) (1.3) 9.5
Minority interest (.3) (1.2) (.7) (2.1)
Dividends on preferred stock - (3.3) - (6.6)
------ ------ ------ ------
Net income $ 3.4 $ 33.6 $ 2.2 $ 71.7
====== ====== ====== ======
Equity in earnings of TIMET $ 2.7 $ 15.8 $ 3.4 $ 32.6
====== ====== ====== ======
TIMET reported higher sales and operating income in the second quarter and
first six months of 2005 as compared to the same periods of 2004 due in part to
higher sales volumes and average selling prices. TIMET's average selling prices
for melted products (ingot and slab) increased 30% in the second quarter of 2005
as compared to the second quarter of 2004, while average selling prices for mill
products increased 27%. For the first six months of 2005, TIMET's average
selling prices for melted and mill products increased 29% and 23%, respectively.
For the second quarter and first six months of 2005, TIMET's sales volumes of
mill products increased 15% and 10%, respectively, while volumes of melted
products were 1% higher for both periods.
TIMET's operating results in the first quarter of 2004 include $1.9 million
of income related to a change in TIMET's vacation policy. TIMET's operating
results comparisons were favorably impacted by improved plant operating rates,
which increased from 72% in the first six months of 2004 to 79% in the first six
months of 2005. In addition, TIMET's operating results comparisons were
negatively impacted by higher costs for raw materials and accruals for certain
performance-based employee incentive compensation and a $1.2 million noncash
impairment charge in the first quarter of 2005 related to certain abandoned
manufacturing equipment of TIMET.
During the second quarter of 2005, TIMET recognized a $13.9 million pre-tax
gain ($2.6 million, or $.02 per diluted share, net of income taxes and minority
interest to Valhi) related to the sale of certain real property adjacent to
TIMET's facility in Nevada. In addition, TIMET periodically reviews its deferred
income tax assets to determine if future realization is more likely than not.
During the first quarter of 2005, due to a change in estimate of TIMET's ability
to utilize the benefits of its net operating loss carryforwards, other tax
attributes and deductible temporary differences in the U.S. and the U.K., TIMET
determined that its net deferred income tax assets in such jurisdictions now
meet the "more-likely-than-not" recognition criteria. Accordingly, TIMET's
income tax benefit in the first six months of 2005 includes a $35.6 million
benefit ($9.5 million, or $.08 per diluted share, net of minority interest to
Valhi) related to reversal of the valuation allowances attributable to such
deferred income tax assets. TIMET expects the remaining U.S. and U.K. valuation
allowances (other than with respect to a substantial portion of TIMET's U.S.
capital loss carryforward) aggregating approximately $14.6 million will be
reversed ratably during the second half of 2005 in accordance with the GAAP
requirements of accounting for income taxes at interim dates.
Over the past several quarters, TIMET has seen the availability of raw
materials tighten, and, consequently, the prices for such raw material have
generally increased. TIMET currently expects that a shortage in raw materials is
likely to continue throughout 2005 and into 2006, which could limit TIMET's
ability to produce enough titanium products to fully meet customer demand. In
addition, TIMET has certain long-term agreements that limit TIMET's ability to
pass on all of its increased raw material costs to its customers.
In July 2005, The Airline Monitor, a leading aerospace publication, issued
its semi-annual forecast for commercial aircraft deliveries. Beginning in 2006,
this new forecast increases its estimate of large commercial aircraft deliveries
over the next five years by 460 planes, including 55 wide bodies (wide body
planes currently require a higher percentage of titanium in their airframes,
engines and other parts than other commercial aircraft). Deliveries of titanium
generally precede aircraft deliveries by about one year, and the Company has
already begun to see the effects of the increased build rates from Boeing and
Airbus.
In May 2005, TIMET announced plans to expand its existing titanium sponge
facility in Nevada. This expansion, which TIMET currently expects to complete by
the first quarter of 2007, will provide the capacity to produce an additional
4,000 metric tons of sponge annually, an increase of approximately 42% over
current Nevada sponge production capacity levels.
TIMET currently expects its full year 2005 sales revenue will range from
$730 million to $760 million. As compared to full year average selling prices
for 2004, TIMET currently expects 2005 average selling prices will increase 40%
to 45% for melted products and 25% to 30% for mill products.
TIMET's cost of sales is affected by a number of factors including customer
and product mix, material yields, plant operating rates, raw material costs,
labor and energy costs. Raw material costs, which include sponge, scrap and
alloys, represent the largest portion of TIMET's manufacturing cost structure.
As previously reported, scrap and certain alloy prices have increased
significantly from year-ago prices, and increased energy costs also continue to
have a negative impact on gross margin. However, TIMET has begun to see a mild
softening of such costs.
TIMET currently expects production volumes will continue to increase in
2005, with overall capacity utilization expected to approximate 80% in 2005 (as
compared to 75% in 2004). However, practical capacity utilization measures can
vary significantly based on product mix.
TIMET currently anticipates that it will receive orders from Boeing for
about 3.0 million pounds of product during 2005. At this projected order level,
TIMET expects to recognize about $17 million of take-or-pay income in 2005.
Overall, TIMET currently expects its operating income for 2005 will be between
$123 million and $138 million, with net income attributable to common
stockholders estimated to between $117 million and $132 million.
In August 2005, TIMET entered into a new agreement for the purchase and
sale of titanium products with Boeing. The new agreement is to be effective as
of July 1, 2005 and, unless extended by the parties, will expire December 31,
2010. The new agreement, which supercedes TIMET's prior agreement with Boeing,
provides for, among other things, mutual annual purchase and supply commitments
by both parties, for continuation of the existing buffer inventory program
currently in place for Boeing and for certain improved product pricing over the
levels applicable in the prior agreement. In addition, the new agreement
provides for the termination of the prior agreement's take-or-pay arrangement,
which would otherwise have continued in effect through the end of 2007, pursuant
to which commencing in 2006 Boeing will be required to make an annual makeup
payment to TIMET early in the following year in the event Boeing purchases less
than its annual volume commitment in any year. The new agreement also provides
for support of TIMET's sponge production operations under certain circumstances.
The Company accounts for its interest in TIMET by the equity method. The
Company's equity in earnings of TIMET differs from the amounts that would be
expected by applying the Company's ownership percentage to TIMET's
separately-reported earnings because of the effect of amortization of purchase
accounting adjustments made by the Company in conjunction with the Company's
acquisitions of its interests in TIMET. Amortization of such basis differences
generally increases earnings (or reduces losses) attributable to TIMET as
reported by the Company, and aggregated $2.5 million in the first six months of
2004 and $2.3 million in the first six months of 2005.
General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend income in the second quarter and first six months of 2005 was
higher as compared to the same periods of 2004 due primarily to a higher level
of funds available for investment. A significant portion of the Company's
general corporate interest and dividend income relates to distributions received
from The Amalgamated Sugar Company LLC and interest income on the Company's $80
million loan to Snake River Sugar Company. See Notes 3 and 7 to the Consolidated
Financial Statements. Aggregate general corporate interest and dividend income
in the remainder of 2005 is currently expected to be comparable to slightly
higher as compared to the same periods in 2004, with distributions from The
Amalgamated Sugar Company LLC in 2005 expected to be comparable to the aggregate
amount received in 2004.
Securities transactions. Net securities transactions gains in the first six
months of 2005 relate principally to a $14.7 million pre-tax gain ($6.6 million,
or $.05 per diluted share, net of income taxes and minority interest) related to
NL's sale of shares of Kronos common stock in market transactions, substantially
all of which occurred in the first quarter. See Notes 2 and 8 to the
Consolidated Financial Statements.
Security transaction gains in 2005 also include a $5.4 million gain ($3.1
million, or $.03 per diluted share, net of income taxes and minority interest)
related to Kronos' second quarter sale of its passive interest in a Norwegian
smelting operation, which had a nominal carrying value for financial reporting
purposes. See Note 8 to the Consolidated Financial Statements.
Insurance recoveries. NL has reached an agreement with one of its former
insurance carriers in which such carrier would reimburse NL for a portion of its
past and future lead pigment litigation defense costs, although the amount which
NL will ultimately recover from such carrier with respect to such defense costs
incurred by NL is not yet determinable. NL is also continuing discussions with
another former insurance carrier with respect to recovery of past and future
defense costs. Litigation settlement gains during the first six months of 2005
relates to $1.2 million of expected recoveries NL recognized from certain
insolvent former insurance carriers relating to settlement of excess insurance
coverage claims. See Note 8 to the Consolidated Financial Statements. While NL
continues to seek additional recoveries of past defense costs as well as an
agreement related to future defense costs, there can be no assurance that NL
will be successful in obtaining reimbursement for either defense costs or
indemnity. NL has not accrued any additional insurance recoveries and any such
additional insurance recoveries would be recognized when their receipt is deemed
probable and the amount is determinable.
General corporate expenses. Net general corporate expenses in the second
quarter and first six months of 2005 were $1.2 million and $400,000,
respectively, higher than the same periods of 2004. Net general corporate
expenses in calendar 2005 are currently expected to be higher as compared to
calendar 2004, primarily due to higher expected litigation and related expenses
of NL for the remainder of 2005. However, obligations for environmental
remediation are difficult to assess and estimate, and no assurance can be given
that actual costs will not exceed accrued amounts or that costs will not be
incurred in the future with respect to sites for which no estimate of liability
can presently be made. See Note 13 to the Consolidated Financial Statements.
Interest expense. The Company has a significant amount of indebtedness
denominated in the euro, including Kronos International's ("KII")
euro-denominated Senior Secured Notes (euro 375 million outstanding at June 30,
2005). Accordingly, the reported amount of interest expense will vary depending
on relative changes in foreign currency exchange rates. Interest expense in the
first six months of 2005 was higher than the same period of 2004 due primarily
to the interest expense associated with the additional euro 90 million principal
amount of Senior Secured Notes issued in November 2004. In addition, the
increase in interest expense was due to relative changes in foreign currency
exchange rates, which increased the U.S. dollar equivalent of interest expense
on the euro 285 million principal amount of KII Senior Secured Notes outstanding
during both periods by approximately $1.0 million in the six-month period.
Assuming interest rates and foreign currency exchange rates do not increase
significantly from current levels, interest expense in the remainder of 2005 is
currently expected to be higher than the same periods of 2004 due primarily to
the effect of the issuance of the additional euro 90 million principal amount of
KII Senior Secured Notes in November 2004.
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.
As previously reported, the Company's income tax benefit in the second
quarter of 2004 includes (i) a $268.6 million income tax benefit ($230.2
million, or $1.91 per diluted share, net of minority interest) related to the
reversal of a deferred income tax asset valuation allowance attributable to
Kronos' income tax attributes in Germany (principally net operating loss
carryforwards) and (ii) a $43.7 million income tax benefit ($36.4 million, or
$.30 per diluted share, net of minority interest) related to income tax
attributes of a subsidiary of NL.
At June 30, 2005, Kronos has the equivalent of $590 million and $178
million of income tax loss carryforwards for German corporate and trade tax
purposes, respectively, all of which have no expiration date. As more fully
described in the 2004 Annual Report, during 2004 Kronos concluded the benefit of
such net carryforwards met the more-likely-than-not recognition criteria of
GAAP, and accordingly in 2004 Kronos reversed the deferred income tax asset
valuation allowance related to such German carryforwards and other net
deductible temporary differences related to Germany. Because the benefit of such
net operating loss carryforwards and other deductible temporary differences in
Germany has now been recognized, the Company's effective income tax rate in 2005
is higher than its effective income tax rate in 2004, although its current and
future cash income tax rate was not affected by the reversal of the valuation
allowance. Prior to the complete utilization of such carryforwards, it is
possible that the Company might conclude in the future that the benefit of such
carryforwards would no longer meet the more-likely-than-not recognition
criteria, at which point the Company would be required to recognize a valuation
allowance against the then-remaining tax benefit associated with the
carryforwards.
Minority interest. See Note 12 to the Consolidated Financial Statements.
Discontinued operations. See Note 15 to the Consolidated Financial
Statements.
Accounting principles not yet implemented. See Note 16 to the Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Summary
The Company's primary source of liquidity on an ongoing short-term and
long-term basis is its cash flows from operating activities, which is generally
used to (i) fund capital expenditures, (ii) repay short-term indebtedness
incurred primarily for working capital purposes and (iii) provide for the
payment of dividends (including dividends paid to Valhi by its subsidiaries). In
addition, from time-to-time the Company may incur indebtedness, generally to (i)
fund short-term working capital needs, (ii) refinance existing indebtedness,
(iii) make investments in marketable and other securities (including the
acquisition of securities issued by subsidiaries and affiliates of the Company)
or (iv) fund major capital expenditures or the acquisition of other assets
outside the ordinary course of business. Also, the Company may from time-to-time
sell assets outside the ordinary course of business, the proceeds of which are
generally used to (i) repay existing indebtedness (including indebtedness which
may have been collateralized by the assets sold), (ii) make investments in
marketable and other securities, (iii) fund major capital expenditures or the
acquisition of other assets outside the ordinary course of business, (iv) pay
dividends or (v) repurchase shares of its common stock.
At June 30, 2005, the Company's outstanding third-party indebtedness was
substantially comprised of (i) Valhi's $250 million of loans from Snake River
Sugar Company due in 2027 and (ii) Kronos International's euro-denominated
Senior Secured Notes (equivalent of $461.1 million outstanding) due in 2009.
Accordingly, the Company does not currently expect that a significant amount of
its cash flows from operating activities generated during 2005 will be required
to be used to repay indebtedness during 2005.
Based upon the Company's expectations for the industries in which its
subsidiaries and affiliates operate, and the anticipated demands on the
Company's cash resources as discussed herein, the Company expects to have
sufficient liquidity to meet its short-term obligations (defined as the
twelve-month period ending June 30, 2006) and its long-term obligations (defined
as the remainder of the five-year period ending December 31, 2009, the time
period for which the Company generally does long-term budgeting) including
operations, capital expenditures, debt service current dividend policy and
repurchases of its common stock. To the extent that actual developments differ
from the Company's expectations, the Company's liquidity could be adversely
affected.
Consolidated cash flows
Operating activities. Trends in cash flows from operating activities
(excluding the impact of significant asset dispositions and relative changes in
assets and liabilities) are generally similar to trends in the Company's
earnings. However, certain items included in the determination of net income are
non-cash, and therefore such items have no impact on cash flows from operating
activities. Non-cash items included in the determination of net income include
depreciation and amortization expense, non-cash interest expense, asset
impairment charges and unrealized securities transactions gains and losses.
Non-cash interest expense relates principally to Kronos and consists of
amortization of original issue discount or premium on certain indebtedness and
amortization of deferred financing costs.
Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, equity in earnings of affiliates will generally differ from
the amount of distributions received from such affiliates, and equity in losses
of affiliates does not necessarily result in current cash outlays paid to such
affiliates. The amount of periodic defined benefit pension plan expense and
periodic OPEB expense depends upon a number of factors, including certain
actuarial assumptions, and changes in such actuarial assumptions will result in
a change in the reported expense. In addition, the amount of such periodic
expense generally differs from the outflows of cash required to be currently
paid for such benefits. Also, proceeds from the disposal of marketable
securities classified as trading securities are reported as a component of cash
flows from operating activities, and such proceeds will generally differ from
the amount of the related gain or loss on disposal.
Certain other items included in the determination of net income have no
impact on cash flows from operating activities, but such items do impact cash
flows from investing activities (although their impact on such cash flows
differs from their impact on net income). For example, realized gains and losses
from the disposal of available-for-sale marketable securities and long-lived
assets are included in the determination of net income, although the proceeds
from any such disposal are shown as part of cash flows from investing
activities.
Changes in product pricing, production volumes and customer demand, among
other things, can significantly affect the liquidity of the Company. Relative
changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments. Such relative changes can
significantly impact the comparability of cash flow from operations from period
to period, as the income statement impact of such items may occur in a different
period from when the underlying cash transaction occurs. For example, raw
materials may be purchased in one period, but the payment for such raw materials
may occur in a subsequent period. Similarly, inventory may be sold in one
period, but the cash collection of the receivable may occur in a subsequent
period. Relative changes in accounts receivable are affected by, among other
things, the timing of sales and the collection of the resulting receivable.
Relative changes in inventories, accounts payable and accrued liabilities are
affected by, among other things, the timing of raw material purchases and the
payment for such purchases and the relative difference between production
volumes and sales volumes. Relative changes in accrued environmental costs are
affected by, among other things, the period in which recognition of the
environmental accrual is recognized and the period in which the remediation
expenditure is actually made.
Cash flows from operating activities decreased from $56.9 million generated
in the first six months of 2004 to a $26.7 million of cash used in the first six
months of 2005. This $83.6 million net decrease is due primarily to the net
effects of (i) lower net income of $218.3 million, (ii) higher net securities
transaction gains of $20.2 million, (iii) a higher provision for deferred income
taxes of $315.7 million, (iv) lower minority interest of $42.2 million, (v)
higher equity in earnings of TIMET of $29.2 million, (vi) lower net cash
distributions from the TiO2 manufacturing joint venture of $7.7 million, (vii)
higher net cash paid for income taxes of $57.4 million, due in large part to a
$20.1 million tax refund received by Kronos in 2004 and a $21 million payment by
NL in 2005 to settle a previously-reported income tax audit and (viii) $39.1
million higher use of cash related to relative changes in working capital items
(accounts receivable, inventories, payables and accruals and accounts with
affiliates).
Relative changes in working capital assets and liabilities can have a
significant effect on cash flows from operating activities. Kronos' average days
sales outstanding ("DSO") increased from 60 days at December 31, 2004 to 64 days
at June 30, 2005, due to the timing of collection on the slightly higher
accounts receivable balance at the end of June. At June 30, 2005, Kronos'
average number of days in inventory ("DII") was consistent with its December 31,
2004 average at 97 days. CompX's average DSO related to its continuing
operations increased from 38 days at December 31, 2004 to 42 days at June 30,
2005 due to timing of collection on the slightly higher accounts receivable
balance at the end of June. CompX's average DII related to its continuing
operations was 52 days at both December 31, 2004 and June 30, 2005.
Valhi does not have complete access to the cash flows of certain of its
subsidiaries and affiliates, in part due to limitations contained in certain
credit agreements as well as the fact that such subsidiaries and affiliates are
not 100% owned by Valhi. A detail of Valhi's consolidated cash flows from
operating activities is presented in the table below. Eliminations consist of
intercompany dividends (most of which are paid to Valhi Parent and NL Parent).
Six months ended
June 30,
-----------------------
2004 2005
-------- ------
(In millions)
Cash provided (used) by operating activities:
Kronos $ 67.6 $ 2.4
CompX 13.7 8.6
Waste Control Specialists (4.3) (3.2)
NL Parent 2.9 (24.2)
Tremont .4 (1.5)
Valhi Parent 18.9 27.4
Other (.4) (.3)
Eliminations (41.9) (35.9)
------ ------
$ 56.9 $(26.7)
====== ======
Investing and financing activities. Approximately 45% of the Company's
consolidated capital expenditures in the first six months of 2005 relate to
Kronos, 28% relate to CompX and substantially all of the remainder relate to
Waste Control Specialists. During the first six months of 2005, (i) Valhi
purchased shares of TIMET common stock in market transactions for $18.0 million,
(ii) NL sold shares of Kronos common stock in market transactions for $19.2
million, (iii) NL purchased shares of CompX common stock in market transactions
for $572,000, (iv) Valhi purchased shares of Kronos common stock in market
transactions for $3.3 million, (v) CompX received a net $18.1 million from the
sale of its Thomas Regout operations (which had approximately $4.0 million of
cash at the date of disposal), (vi) Valhi received a net $4.9 million on its
short-term loan to Contran, (vii) NL collected $2 million on its loan to one of
the Contran family trusts, (viii) the Company made net purchases of marketable
securities of $10.6 million and (ix) Kronos received $3.5 million from the sale
of its passive interest in a Norwegian smelting operations. See Notes 2, 8 and
15 to the Consolidated Financial Statements.
During the first six months of 2005, Kronos repaid an aggregate euro 10
million ($12.9 million when repaid) under its European revolving credit
facility. Valhi, which increased its regular quarterly dividend from $.06 per
share to $.10 per share in the first quarter of 2005, paid cash dividends in the
first six months of 2005 aggregating $24.6 million. Distributions to minority
interest in the first six months of 2005 are primarily comprised of Kronos cash
dividends paid to shareholders other than Valhi and NL, NL cash dividends paid
to shareholders other than Valhi and CompX dividends paid to shareholders other
than NL. Valhi purchased approximately 2.4 million shares of its common stock in
market and other transactions for an aggregate of $41.8 million, and other cash
flows from financing activities in the first six months of 2005 relate primarily
to proceeds from the issuance of NL, CompX and Valhi common stock upon exercise
of stock options.
At June 30, 2005, unused credit available under existing credit facilities
approximated $299.4 million, which was comprised of: CompX - $47.5 million under
its revolving credit facility; Kronos - $95 million under its European credit
facility, $45 million under its U.S. credit facility, $11 million under its
Canadian credit facility, and $4 million under other non-U.S. facilities; and
Valhi - $96.9 million under its revolving bank credit facility.
Provisions contained in certain of the Company's credit agreements could
result in the acceleration of the applicable indebtedness prior to its stated
maturity for reasons other than defaults from failing to comply with typical
financial covenants. For example, certain credit agreements allow the lender to
accelerate the maturity of the indebtedness upon a change of control (as
defined) of the borrower. The terms of Valhi's revolving bank credit facility
could require Valhi to either reduce outstanding borrowings or pledge additional
collateral in the event the fair value of the existing pledged collateral falls
below specified levels. In addition, certain credit agreements could result in
the acceleration of all or a portion of the indebtedness following a sale of
assets outside the ordinary course of business. Other than operating leases,
neither Valhi nor any of its subsidiaries or affiliates are parties to any
off-balance sheet financing arrangements.
Chemicals - Kronos
At June 30, 2005, Kronos had cash, cash equivalents and marketable debt
securities of $21.2 million, including restricted balances of $3.6 million, and
Kronos had approximately $155 million available for borrowing under its U.S.,
Canadian and European credit facilities. Based upon Kronos' expectations for the
TiO2 industry, Kronos expects to have sufficient liquidity to meet its future
obligations including operations, capital expenditures, debt service and current
dividend policy. To the extent that actual developments differ from Kronos'
expectations, Kronos' liquidity could be adversely affected.
At June 30, 2005, Kronos' outstanding debt was comprised of (i) $461.1
million related to KII's Senior Secured Notes and (ii) approximately $200,000 of
other indebtedness. During the second quarter of 2005, Kronos extended the
respective maturity dates of its European and U.S. revolving credit facilities
each by three years to June 2008 and September 2008, respectively.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions significantly impact Kronos' earnings and operating cash
flows. Cash flows from operations is considered the primary source of liquidity
for Kronos. Changes in TiO2 pricing, production volumes and customer demand,
among other things, could significantly affect the liquidity of Kronos.
See Note 11 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of Kronos' income tax
returns in various U.S. and non-U.S. jurisdictions, and see Note 13 to the
Consolidated Financial Statements with respect to certain legal proceedings with
respect to Kronos.
Certain of the Kronos' sales generated by its non-U.S. operations are
denominated in U.S. dollars. Kronos periodically uses currency forward contracts
to manage a very nominal portion of foreign exchange rate risk associated with
receivables denominated in a currency other than the holder's functional
currency or similar exchange rate risk associated with future sales. Kronos has
not entered into these contracts for trading or speculative purposes in the
past, nor does Kronos currently anticipate entering into such contracts for
trading or speculative purposes in the future. Derivatives used to hedge
forecasted transactions and specific cash flows associated with foreign currency
denominated financial assets and liabilities which meet the criteria for hedge
accounting are designated as cash flow hedges. Consequently, the effective
portion of gains and losses is deferred as a component of accumulated other
comprehensive income and is recognized in earnings at the time the hedged item
affects earnings. Contracts that do not meet the criteria for hedge accounting
are marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. During 2004
and to date in 2005, Kronos has not used hedge accounting for any of its
contracts. To manage such exchange rate risk, at June 30, 2005, Kronos held a
series of contracts, which mature through December 2005, to exchange an
aggregate of U.S. $22.5 million for an equivalent amount of Canadian dollars at
exchange rates of Cdn. $1.23 to Cdn. $1.26 per U.S. dollar. At June 30, 2005,
the actual exchange rate was Cdn. $1.23 per U.S. dollar. The estimated fair
value of such foreign currency forward contracts at June 30, 2005 was not
material.
Kronos International's assets consist primarily of investments in its
operating subsidiaries, and its ability to service its parent level obligations,
including the Senior Secured Notes, depends in large part upon the distribution
of earnings of its subsidiaries, whether in the form of dividends, advances or
payments on account of intercompany obligation, or otherwise. None of its
subsidiaries have guaranteed the Senior Secured Notes, although Kronos
International has pledged 65% of the common stock or other ownership interest of
certain of its first-tier operating subsidiaries as collateral of such Senior
Secured Notes.
Based upon Kronos' expectations for the TiO2 industry and anticipated
demand for its cash resources as discussed herein, Kronos expects to have
sufficient short-term and long-term liquidity to meet its obligations including
operations, capital expenditures, debt service and dividends. To the extent that
actual developments differ from Kronos' expectations, Kronos' liquidity could be
adversely affected.
Kronos periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and availability of resources in view of, among other
things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, Kronos has in the past and may in the future seek to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, repurchase
shares of its common stock, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, Kronos may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals or other industries, as well as the acquisition of interests in, and
loans to, related entities. In the event of any such transaction, Kronos may
consider using available cash, issuing equity securities or increasing its
indebtedness to the extent permitted by the agreements governing Kronos'
existing debt.
Kronos has substantial operations located outside the United States for
which the functional currency is not the U.S. dollar. As a result, the reported
amounts of Kronos' assets and liabilities related to its non-U.S. operations,
and therefore Kronos' consolidated net assets, will fluctuate based upon changes
in currency exchange rates.
NL Industries
At June 30, 2005, NL (exclusive of CompX) had cash, cash equivalents and
marketable debt securities of $84.3 million, including restricted balances of
$16.2 million. Of such restricted balances, $3 million was held by special
purpose trusts, the assets of which can only be used to pay for certain of NL's
future environmental remediation and other environmental expenditures. See Note
13 to the Consolidated Financial Statements.
See Note 11 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of NL's income tax
returns, and see Note 13 to the Consolidated Financial Statements and Part II,
Item 1, "Legal Proceedings" with respect to certain legal proceedings and
environmental matters with respect to NL.
In addition to those legal proceedings described in Note 13 to the
Consolidated Financial Statements, various legislation and administrative
regulations have, from time to time, been proposed that seek to (i) 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 (ii) 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 barred by the statute of limitations. While no legislation or
regulations have been enacted to date that are expected to have a material
adverse effect on NL's consolidated financial position, results of operations or
liquidity, enactment of such legislation could have such an effect.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its dividend policy and capital expenditure requirements and estimated
future operating cash flows. As a result of this process, NL has in the past and
may in the future seek to reduce, refinance, repurchase or restructure
indebtedness, raise additional capital, repurchase shares of its common stock,
modify its dividend policy, restructure ownership interests, sell interests in
subsidiaries or other assets, or take a combination of such steps or other steps
to manage its liquidity and capital resources. In the normal course of its
business, NL may review opportunities for the acquisition, divestiture, joint
venture or other business combinations in the chemicals or other industries, as
well as the acquisition of interests in, and loans to, related entities.
Component products - CompX International
CompX received approximately $18.1 million cash (net of expenses) in
January 2005 upon the sale of its Thomas Regout operations in The Netherlands.
See Note 15 to the Consolidated Financial Statements. CompX believes that its
cash on hand, together with cash generated from operations and borrowing
availability under its bank credit facility, will be sufficient to meet CompX's
liquidity needs for working capital, capital expenditures and dividends. To the
extent that CompX's actual operating results or developments differ from CompX's
expectations, CompX's liquidity could be adversely affected. CompX, which had
suspended its regular quarterly dividend of $.125 per share in the second
quarter of 2003, reinstated its regular quarterly dividend at the $.125 per
share rate in the fourth quarter of 2004.
Certain of the CompX's sales generated by its non-U.S. operations are
denominated in U.S. dollars. CompX periodically uses currency forward contracts
to manage a portion of foreign exchange rate risk associated with receivables
denominated in a currency other than the holder's functional currency. CompX has
not entered into these contracts for trading or speculative purposes in the
past, nor does CompX currently anticipate entering into such contracts for
trading or speculative purposes in the future. Derivatives used to hedge
forecasted transactions and specific cash flows associated with foreign currency
denominated financial assets and liabilities which meet the criteria for hedge
accounting are designated as cash flow hedges. Consequently, the effective
portion of gains and losses is deferred as a component of accumulated other
comprehensive income and is recognized in earnings at the time the hedged item
affects earnings. Contracts that do not meet the criteria for hedge accounting
are marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. To manage
such exchange rate risk, at June 30, 2005, CompX held a series of contracts
maturing through September 2005 to exchange an aggregate of U.S. $6.5 million
for an equivalent amount of Canadian dollars at an exchange rates of Cdn. $1.25
to Cdn. $1.26 per U.S. dollar. At June 30, 2005, the actual exchange rate was
Cdn. $1.23 per U.S. dollar. The estimated fair value of such foreign currency
forward contracts at June 30, 2005 is not material.
CompX periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, dividend policy and estimated
future operating cash flows. As a result of this process, CompX has in the past
and may in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities, modify its dividend policy,
repurchase shares of its common stock or take a combination of such steps or
other steps to manage its liquidity and capital resources. In the normal course
of business, CompX may review opportunities for acquisitions, divestitures,
joint ventures or other business combinations in the component products
industry. In the event of any such transaction, CompX may consider using cash,
issuing additional equity securities or increasing the indebtedness of CompX or
its subsidiaries.
Waste management - Waste Control Specialists
At June 30, 2005, Waste Control Specialists' indebtedness consisted
principally of $20.4 million of borrowings owed to a wholly-owned subsidiary of
Valhi (December 31, 2004 intercompany indebtedness - $4.6 million). During the
first six months of 2005, this subsidiary of Valhi loaned an additional net of
$15.8 million to Waste Control Specialists, which were used by Waste Control
Specialists primarily to fund its operating loss and its capital expenditures.
Such indebtedness is eliminated in the Company's Consolidated Financial
Statements. Waste Control Specialists will likely borrow additional amounts
during the remainder of 2005 from such Valhi subsidiary under the terms of a its
revolving credit facility that matures in March 2006.
TIMET
At June 30, 2005, TIMET had $110 million of borrowing availability under
its various U.S. and European credit agreements.
See Note 13 to the Consolidated Financial Statements for certain legal
proceedings, environmental matters and other contingencies associated with
TIMET. While TIMET currently believes that the outcome of these matters,
individually and in the aggregate, will not have a material adverse effect on
TIMET's consolidated financial position, liquidity or overall trends in results
of operations, all such matters are subject to inherent uncertainties. Were an
unfavorable outcome to occur in any given period, it is possible that it could
have a material adverse impact on TIMET's consolidated results of operations or
cash flows in a particular period.
In May 2005, TIMET announced it plans to expand its existing titanium
sponge facility in Nevada. This expansion, which TIMET currently expects to
complete by the first quarter of 2007 and cost an aggregate of $38 million, will
provide the capacity to produce an additional 4,000 metric tons of sponge
annually, an increase of approximately 42% over the current sponge production
capacity levels at its Nevada facility. Including an estimated $25 million
related to this sponge expansion, TIMET current expects its aggregate capital
expenditures during 2005 will be approximately $78 million.
TIMET periodically evaluates its liquidity requirements, capital needs and
availability of resources in view of, among other things, its alternative uses
of capital, debt service requirements, the cost of debt and equity capital, and
estimated future operating cash flows. As a result of this process, TIMET has in
the past, or in light of its current outlook, may in the future seek to raise
additional capital, modify its common and preferred dividend policies,
restructure ownership interests, incur, refinance or restructure indebtedness,
repurchase shares of capital stock or debt securities, sell assets, or take a
combination of such steps or other steps to increase or manage its liquidity and
capital resources. In the normal course of business, TIMET investigates,
evaluates, discusses and engages in acquisition, joint venture, strategic
relationship and other business combination opportunities in the titanium,
specialty metal and other industries. In the event of any future acquisition or
joint venture opportunities, TIMET may consider using then-available liquidity,
issuing equity securities or incurring additional indebtedness.
Tremont LLC
See Note 13 to the Consolidated Financial Statements for certain legal
proceedings and environmental matters with respect to Tremont.
General corporate - Valhi
Because Valhi's operations are conducted primarily through its subsidiaries
and affiliates, Valhi's long-term ability to meet its parent company level
corporate obligations is dependent in large measure on the receipt of dividends
or other distributions from its subsidiaries and affiliates. In February 2004,
Kronos announced it would pay its first regular quarterly cash dividend of $.25
per share. At that rate, and based on the 27.9 million shares of Kronos held by
Valhi at June 30, 2005, Valhi would receive aggregate annual dividends from
Kronos of $27.9 million. NL, which paid its 2004 regular quarterly dividends of
$.20 per share in the form of shares of Kronos common stock, increased its
regular quarterly dividend in the first quarter of 2005 to $.25 per share, which
also was in the form of shares of Kronos common stock. In the second quarter of
2005, NL paid its regular quarterly dividend in the form of cash. Assuming NL
paid its regular quarterly dividends in the form of cash, and based on the 40.4
million shares of NL common stock held by Valhi at June 30, 2005, Valhi would
receive aggregate annual dividends from NL of $40.4 million. The Company does
not currently expect to receive any distributions from Waste Control Specialists
or TIMET during 2005. CompX dividends, which resumed in the fourth quarter of
2004, are paid to NL.
Various credit agreements to which certain subsidiaries or affiliates are
parties contain customary limitations on the payment of dividends, typically a
percentage of net income or cash flow; however, such restrictions in the past
have not significantly impacted Valhi's ability to service its parent company
level obligations. Valhi generally does not guarantee any indebtedness or other
obligations of its subsidiaries or affiliates. To the extent that one or more of
Valhi's subsidiaries were to become unable to maintain its current level of
dividends, either due to restrictions contained in the applicable subsidiary's
credit agreements or otherwise, Valhi parent company's liquidity could become
adversely impacted. In such an event, Valhi might consider reducing or
eliminating its dividends or selling interests in subsidiaries or other assets.
Waste Control Specialists is required to provide certain financial
assurance to a Texas government agency with respect to certain decommissioning
obligations related to its facility in West Texas. Such financial assurance may
be provided by various means, including a parent company guarantee assuming the
parent meets specified financial tests. In March 2005, Valhi agreed to guarantee
certain specified decommissioning obligations of Waste Control Specialists,
currently estimated by Waste Control Specialists at approximately $2 million.
Such obligations would arise only upon a closure of the facility and Waste
Control Specialists' failure to perform such activities. The Company does not
currently expect that it will have to perform under such guarantee for the
foreseeable future.
In March 2005, the Company's board of directors authorized the repurchase
of up to 5.0 million shares of Valhi's common stock in open market transactions,
including block purchases, or in privately negotiated transactions, which may
include transactions with affiliates of Valhi. The stock may be purchased from
time to time as market conditions permit. The stock repurchase program does not
include specific price targets or timetables and may be suspended at any time.
Depending on market conditions, the program could be terminated prior to
completion. The Company will use its cash on hand to acquire the shares.
Repurchased shares will be retired and cancelled or may be added to Valhi's
treasury and used for employee benefit plans, future acquisitions or other
corporate purposes. On April 1, 2005, the Company purchased 2.0 million shares
of its common stock, at a discount to the then-current market price, from
Contran for $17.50 per share or an aggregate purchase price of $35.0 million.
Such shares were purchased under the stock repurchase program. Valhi's
independent directors approved such purchase. The Company has also purchased
during the second quarter of 2005 an additional 360,300 shares of its common
stock under the repurchase program in market transactions for an aggregate of
$6.8 million.
At June 30, 2005, Valhi had $22.9 million of parent level cash and cash
equivalents and had no amounts outstanding under its revolving bank credit
agreement. In addition, Valhi had $96.9 million of borrowing availability under
its revolving bank credit facility.
The terms of The Amalgamated Sugar Company LLC Company Agreement provide
for annual "base level" of cash dividend distributions (sometimes referred to as
distributable cash) by the LLC of $26.7 million, from which the Company is
entitled to a 95% preferential share. Distributions from the LLC are dependent,
in part, upon the operations of the LLC. The Company records dividend
distributions from the LLC as income upon receipt, which occurs in the same
month in which they are declared by the LLC. To the extent the LLC's
distributable cash is below this base level in any given year, the Company is
entitled to an additional 95% preferential share of any future annual LLC
distributable cash in excess of the base level until such shortfall is
recovered. Based on the LLC's current projections for 2005, Valhi currently
expects that distributions received from the LLC in 2005 will approximate its
debt service requirements under its $250 million loans from Snake River Sugar
Company.
Certain covenants contained in Snake River's third-party senior debt allow
Snake River in certain circumstances to pay periodic installments of debt
service payments (principal and interest) under Valhi's $80 million loan to
Snake River prior to its current scheduled maturity in 2007, and such loan is
subordinated to Snake River's third-party senior debt. At June 30, 2005, the
accrued and unpaid interest on the $80 million loan to Snake River aggregated
$40.9 million and is classified as a noncurrent asset. The Company currently
believes it will ultimately realize both the $80 million principal amount and
the accrued and unpaid interest, whether through cash generated from the future
operations of Snake River and the LLC or otherwise (including any liquidation of
Snake River or the LLC). Following the currently scheduled complete repayment of
Snake River's third-party senior debt in April 2007, Valhi believes it will
receive significant debt service payments on its loan to Snake River as the cash
flows that Snake River previously would have been using to fund debt service on
its third-party senior debt ($10.0 million of scheduled payments in 2005), plus
other cash resources at Snake River would then become available, and would be
required, to be used to fund debt service payments on its loan from Valhi. Prior
to the repayment of the third-party senior debt, Snake River might also make
debt service payments to Valhi, if permitted by the terms of the senior debt, or
if Snake River would refinance with a third party all or a portion of the amount
it owes to Valhi under such $80 million loan.
The Company may, at its option, require the LLC to redeem the Company's
interest in the LLC beginning in 2010, and the LLC has the right to redeem the
Company's interest in the LLC beginning in 2027. The redemption price is
generally $250 million plus the amount of certain undistributed income allocable
to the Company. In the event the Company requires the LLC to redeem the
Company's interest in the LLC, Snake River has the right to accelerate the
maturity of and call Valhi's $250 million loans from Snake River. Redemption of
the Company's interest in the LLC would result in the Company reporting income
related to the disposition of its LLC interest for both financial reporting and
income tax purposes. However, because of Snake River's ability to call its $250
million loans to Valhi upon redemption of the Company's interest in the LLC, the
net cash proceeds (after repayment of the debt) generated by redemption of the
Company's interest in the LLC could be less than the income taxes that would
become payable as a result of the disposition.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policies, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company and related entities routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies.
Non-GAAP financial measures
In an effort to provide investors with additional information regarding the
Company's results of operations as determined by GAAP, the Company has disclosed
certain non-GAAP information which the Company believes provides useful
information to investors:
o The Company discloses percentage changes in Kronos' average TiO2
selling prices in billing currencies, which excludes the effects of
foreign currency translation. The Company believes disclosure of such
percentage changes allows investors to analyze such changes without
the impact of changes in foreign currency exchange rates, thereby
facilitating period-to-period comparisons of the relative changes in
average selling prices in the actual various billing currencies.
Generally, when the U.S. dollar either strengthens or weakens against
other currencies, the percentage change in average selling prices in
billing currencies will be higher or lower, respectively, than such
percentage changes would be using actual exchange rates prevailing
during the respective periods. See page 29.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Company maintains a
system of disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by regulations of the SEC, means controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of Steven L. Watson, the Company's
Chief Executive Officer, and Bobby D. O'Brien, the Company's Vice President and
Chief Financial Officer, have evaluated the Company's disclosure controls and
procedures as of June 30, 2005. Based upon their evaluation, these executive
officers have concluded that the Company's disclosure controls and procedures
are effective as of the date of such evaluation.
Internal Control Over Financial Reporting. The Company also maintains
internal control over financial reporting. The term "internal control over
financial reporting," as defined by regulations of the SEC, means a process
designed by, or under the supervision of, the Company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the Company's board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with GAAP, and includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company,
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and
directors of the Company, and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the Company's Consolidated
Financial Statements.
As permitted by the SEC, the Company's assessment of internal control over
financial reporting excludes (i) internal control over financial reporting of
its equity method investees and (ii) internal control over the preparation of
the Company's financial statement schedules required by Article 12 of Regulation
S-X. However, the Company's assessment of internal control over financial
reporting with respect to the Company's equity method investees did include our
controls over the recording of amounts related to our investment that are
recorded in our consolidated financial statements, including controls over the
selection of accounting methods for our investments, the recognition of equity
method earnings and losses and the determination, valuation and recording of our
investment account balances.
There has been no change to the Company's internal control over financial
reporting during the quarter ended June 30, 2005 that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Note 13 to the ConsolidIated Financial Statements, the
2004 Annual Report and the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2005 for descriptions of certain legal proceedings.
Thomas v. Lead Industries Association, et al. (Circuit Court, Milwaukee,
Wisconsin, Case No. 99-CV-6411). In July 2005, the Wisconsin Supreme Court
affirmed the appellate court's dismissal of plaintiff's civil conspiracy and
enterprise liability claims and reversed and remanded the appellate court's
dismissal of plaintiff's risk contribution claim.
State of Rhode Island v. Lead Industries Association, et al. (Superior
Court of Rhode Island, No. 99-5226). In June 2005, NL filed a motion for summary
judgment on the state's Unfair Trade Practices Act claim.
Barker, et al. v. The Sherwin-Williams Company, et al. (Circuit Court of
Jefferson County, Mississippi, Civil Action No. 2000-587, and formerly known as
Borden, et al. vs. The Sherwin-Williams Company, et al.). With respect to the
eight plaintiffs remaining in Holmes County Mississippi, three of these
plaintiffs voluntarily dismissed their claims without prejudice in May 2005.
With respect to the two plaintiffs remaining in Jefferson County, one of these
plaintiffs voluntarily dismissed his claim without prejudice in May 2005.
City of Milwaukee v. NL Industries, Inc. and Mautz Paint (Circuit Court,
Civil Division, Milwaukee County, Wisconsin, Case No. 01CV003066). In July 2005,
NL withdrew its petition to the Wisconsin Supreme Court seeking review of the
appellate court's ruling in December 2004 that reversed and remanded the trial
court's dismissal of the case.
Jackson, et al., v. Phillips Building Supply of Laurel, et al. (Circuit
Court of Jones County, Mississippi, Dkt. Co. 2002-10-CV1). In May 2005, the
court set a trial date of November 2006.
Harris County, Texas v. Lead Industries Association, et al. (District Court
of Harris County, Texas, No. 2001-21413). In May 2005, the plaintiff voluntarily
dismissed the case without prejudice.
City of Chicago vs. American Cyanamid, et al. (Circuit Court of Cook
County, Illinois, No. 02CH16212). In May 2005, the Illinois Supreme Court denied
plaintiff's petition seeking review of the appellate court's decision affirming
the dismissal of the case.
Russell v. NL Industries, Inc., et al. (Circuit Court of LeFlore County,
Mississippi, Civil Action No. No.2002-0235-CICI). In May 2005, the court
dismissed the case with prejudice.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds; Share
Repurchases.
In March 2005, the Company's board of directors authorized the repurchase
of up to 5.0 million shares of Valhi's common stock in open market transactions,
including block purchases, or in privately negotiated transactions, which may
include transactions with affiliates of Valhi. The stock may be purchased from
time to time as market conditions permit. The stock repurchase program does not
include specific price targets or timetables and may be suspended at any time.
Depending on market conditions, the program could be terminated prior to
completion. The Company will use its cash on hand to acquire the shares.
Repurchased shares will be retired and cancelled or may be added to Valhi's
treasury and used for employee benefit plans, future acquisitions or other
corporate purposes. See Note 17 to the Consolidated Financial Statements.
The following table discloses certain information regarding shares of Valhi
common stock purchased by Valhi during the period covered by this Quarterly
Report on Form 10-Q. All of such purchases were made under the repurchase
program discussed above, and other than 2.0 million shares of its common stock
Valhi purchased from Contran Corporation in April 2005 for $17.50 per share, or
an aggregate purchase price of $35.0 million, all of such purchases were made in
open market transactions.
Maximum number of shares
Average Total number of shares that may yet be purchased
Total number price paid purchased as part of a under the
of shares per share, publicly-announced publicly-announced plan at
purchased including plan end of period
Period commissions
- ------------------------ -------------- ------------------ ------------------------ ----------------------------
April 1, 2005 to
April 30, 2005 2,254,400 $17.73 2,254,400 2,745,600
May 1, 2005 to
May 31, 2005 18,700 $17.80 18,700 2,726,900
June 1, 2005 to
June 30, 2005 87,200 $17.51 87,200 2,639,700
Item 4. Submission of Matters to a Vote of Security Holders.
Valhi's 2005 Annual Meeting of Stockholders was held on May 26, 2005.
Thomas E. Barry, Norman S. Edelcup, W. Hayden McIlroy, Glenn R. Simmons, Harold
C. Simmons, J. Walter Tucker, Jr. and Steven L. Watson were elected as
directors, each receiving votes "For" their election from at least 96.6% of the
119.5 million common shares eligible to vote at the Annual Meeting.
Item 6. Exhibits.
31.1 - Certification
31.2 - Certification
32.1 - Certification.
The Company has retained a signed original of any of the above exhibits
that contains signatures, and the Company will provide such exhibit to the
Commission or its staff upon request. Valhi will also furnish, without charge, a
copy of its Code of Business Conduct and Ethics, its Audit Committee Charter and
its Corporate Governance Guidelines, each as adopted by the Company's board of
directors, upon request. Such requests should be directed to the attention of
Valhi's Corporate Secretary at Valhi's corporate offices located at 5430 LBJ
Freeway, Suite 1700, Dallas, Texas 75240.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALHI, INC.
--------------------------
(Registrant)
Date August 5, 2005 By /s/ Bobby D. O'Brien
------------------------------------------
Bobby D. O'Brien
Vice President and Chief Financial
Officer
(Principal Financial Officer)
Date August 5, 2005 By /s/ Gregory M. Swalwell
------------------------------------------
Gregory M. Swalwell
Vice President and Controller
(Principal Accounting Officer)
Exhibit 31.1
I, Steven L. Watson, the President and Chief Executive Officer of Valhi, Inc.,
certify that:
1) I have reviewed this quarterly report on Form 10-Q of Valhi, Inc.;
2) Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 5, 2005
/s/ Steven L. Watson
- -------------------------------------
Steven L. Watson
President and Chief Executive Officer
Exhibit 31.2
I, Bobby D. O'Brien, the Vice President, Chief Financial Officer and Treasurer
of Valhi, Inc., certify that:
1) I have reviewed this quarterly report on Form 10-Q of Valhi, Inc.;
2) Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 5, 2005
/s/Bobby D. O'Brien
- -----------------------------------------------------
Bobby D. O'Brien
Vice President, Chief Financial Officer and Treasurer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Valhi, Inc. (the "Company") on Form
10-Q for the quarter ended June 30, 2005 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), we, Steven L. Watson,
President and Chief Executive Officer of the Company, and Bobby D. O'Brien, Vice
President, Chief Financial Officer and Treasurer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Steven L. Watson /s/ Bobby D. O'Brien
- ------------------------------------- ---------------------
Steven L. Watson Bobby D. O'Brien
President and Chief Executive Officer Vice President, Chief Financial Officer
August 5, 2005 and Treasurer
August 5, 2005
Note: The certification the registrant furnishes in this exhibit is not deemed
"filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liabilities of that Section. Registration
Statements or other documents filed with the Securities and Exchange Commission
shall not incorporate this exhibit by reference, except as otherwise expressly
stated in such filing.