SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the fiscal year ended December 31, 2002
Commission file number 1-5467
VALHI, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 87-0110150
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common stock New York Stock Exchange
($.01 par value per share) Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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). Yes X No
The aggregate market value of the 6.5 million shares of voting stock held by
nonaffiliates of Valhi, Inc. as of June 28, 2002 (the last business day of the
Registrant's most recently-completed second fiscal quarter) approximated $101.4
million.
As of February 28, 2003, 119,440,078 shares of the Registrant's common stock
were outstanding.
Documents incorporated by reference
Certain of the information required by Part III is incorporated by reference
from the Registrant's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this report.
A chart showing, as of December 31, 2002, (i) Valhi's 63% ownership of NL
Industries, Inc., (ii) Valhi's 69% ownership of CompX International Inc., (iii)
Valhi's 90% ownership of Waste Control Specialists LLC, (iv) Valhi's and NL's
80% and 20%, respectively, ownership in Tremont Group, Inc., (v) Tremont Group's
80% ownership of Tremont Corporation, (vi) Tremont's 39% ownership of Titanium
Metals Corporation and (vii) Tremont's 21% ownership of NL.
A chart showing, as of February 28, 2003, (i) Valhi's 63% ownership of NL
Industries, Inc., (ii) Valhi's 69% ownership of CompX International Inc., (iii)
Valhi's 90% ownership of Waste Control Specialists LLC, (iv) Valhi's 100%
ownership in Tremont LLC, (v) Tremont LLC's 40% ownership of Titanium Metals
Corporation and (vii) Tremont LLC's 21% ownership of NL.
PART I
ITEM 1. BUSINESS
As more fully described on the charts on the opposite pages, Valhi, Inc.
(NYSE: VHI), has operations through majority-owned subsidiaries or less than
majority-owned affiliates in the chemicals, component products, waste management
and titanium metals industries. Information regarding the Company's business
segments and the companies conducting such businesses is set forth below.
Business and geographic segment financial information is included in Note 2 to
the Company's Consolidated Financial Statements, which information is
incorporated herein by reference. The Company is based in Dallas, Texas.
Chemicals NL is the world's fifth-largest producer, and
NL Industries, Inc. Europe's second-largest producer, of titanium
dioxide pigments ("TiO2"), which are used for
imparting whiteness, brightness and opacity to a
wide range of products including paints,
plastics, paper, fibers, ceramics, and other
"quality-of-life" products. NL had an estimated
12% share of worldwide TiO2 sales volume in
2002. NL has production facilities throughout
Europe and North America.
Component Products CompX is a leading manufacturer of precision
CompX International Inc. ball bearing slides, security products and
ergonomic computer support systems for office
furniture, computer-related applications and a
variety of other products. CompX has production
facilities in North America, Europe and Asia.
Waste Management Waste Control Specialists owns and operates a
Waste Control Specialists LLC facility in West Texas for the processing,
treatment, storage and disposal of hazardous,
toxic and certain types of low-level radioactive
wastes. Waste Control Specialists is seeking
additional regulatory authorizations to expand
its treatment, storage and disposal capabilities
for low-level and mixed radioactive wastes.
Titanium Metals Titanium Metals Corporation ("TIMET") is one of
Titanium Metals Corporation the world's leading producers of titanium
sponge, melted products (ingot and slab) and
mill products. TIMET had an estimated 20% share
of worldwide industry shipments of titanium mill
products in 2002. TIMET has production
facilities in the U.S. and Europe. TIMET
continues its efforts to develop new
applications for titanium in the automotive and
other emerging markets to reduce the effect of
the highly-cyclical aerospace industry on its
business.
Valhi, a Delaware corporation, is the successor of the 1987 merger of
LLC Corporation and another entity. As of February 28, 2003, Contran Corporation
holds, directly or through subsidiaries, approximately 90% of Valhi's
outstanding common stock (93% as of December 31, 2002). 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 the sole trustee. Mr. Simmons, the Chairman of the Board of Contran and
Valhi, may be deemed to control such companies. NL (NYSE: NL), CompX (NYSE: CIX)
and TIMET (NYSE: TIE) each currently file periodic reports with the Securities
and Exchange Commission ("SEC"). The information set forth below with respect to
such companies has been derived from such reports. Tremont Corporation
previously filed periodic reports with the SEC, however Tremont no longer files
such periodic reports subsequent to becoming a wholly-owned subsidiary of Valhi
in February 2003. See Note 3 to the Consolidated Financial Statements.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Annual Report on Form 10-K relating to matters that are not historical facts,
including, but not limited to, statements found in this Item 1 - "Business,"
Item 3 - "Legal Proceedings," Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 7A - "Quantitative and
Qualitative Disclosures About Market Risk," are forward-looking statements that
represent management's beliefs and assumptions based on currently available
information. Forward-looking statements can be identified by the use of words
such as "believes," "intends," "may," "should," "could," "anticipates,"
"expected" or comparable terminology, or by discussions of strategies or trends.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it cannot give any assurances that
these expectations will prove to be correct. Such statements by their nature
involve substantial risks and uncertainties that could significantly impact
expected results, and actual future results could differ materially from those
described in such forward-looking statements. While it is not possible to
identify all factors, the Company continues to face many risks and
uncertainties. Among the factors that could cause actual future results to
differ materially are the risks and uncertainties discussed in this Annual
Report and those described from time to time in the Company's other filings with
the SEC including, but not limited to, the following:
o Future supply and demand for the Company's products,
o The extent of the dependence of certain of the Company's businesses on
certain market sectors (such as the dependence of TIMET's titanium metals
business on the aerospace industry),
o The cyclicality of certain of the Company's businesses (such as NL's 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 NL's customers may,
from time to time, accelerate purchases of TiO2 in advance of anticipated
price increases or defer purchases of TiO2 in advance of anticipated price
decreases, or the relationship between inventory levels of TIMET's
customers and such customer's current inventory requirements and the impact
of such relationship on their purchases from TIMET),
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 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 Recoveries from insurance claims and the timing thereof,
o Potential difficulties in integrating completed acquisitions,
o The ability of the Company to renew or refinance credit facilities,
o The ultimate outcome of income tax audits,
o Uncertainties associated with new product development (such as TIMET's
ability to develop new end-uses for its titanium products),
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government laws and regulations and possible changes therein (such as a
change in Texas state law which would allow the applicable regulatory
agency to issue a permit for the disposal of low-level radioactive wastes
to a private entity such as Waste Control Specialists, or changes in
government regulations which might impose various obligations on present
and former manufacturers of lead pigment and lead-based paint, including
NL, with respect to asserted health concerns associated with the use of
such products),
o The ultimate outcome of income tax audits,
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 - NL INDUSTRIES, INC.
General. NL Industries is an international producer and marketer of TiO2 to
customers in over 100 countries from facilities located throughout Europe and
North America. NL's TiO2 operations are conducted through its wholly-owned
subsidiary, Kronos, Inc. Kronos is the world's fifth-largest TiO2 producer, with
an estimated 12% share of worldwide TiO2 sales volumes in 2002. Approximately
one-half of Kronos' 2002 sales volumes were attributable to markets in Europe,
where Kronos is the second-largest producer of TiO2 with an estimated 18% share
of European TiO2 sales volumes. Kronos has an estimated 14% share of North
American TiO2 sales volumes. Ti02 accounted for substantially all of NL's net
sales in 2002.
Pricing within the global TiO2 industry is cyclical, and changes in
industry economic conditions can significantly impact NL's earnings and
operating cash flows. NL's average TiO2 selling prices were generally increasing
during all of 2000, were generally decreasing during all of 2001 and the first
quarter of 2002, were generally flat during the second quarter of 2002 and were
generally increasing during the third and fourth quarters of 2002. Industry-wide
demand for TiO2 strengthened throughout 2002, with full- year demand estimated
to be 9% higher than 2001. NL believes the increase in demand resulted from
economic growth and customers restocking their inventory levels. NL expects
demand in 2003 will increase moderately over 2002 levels.
Products and operations. Titanium dioxide pigments are chemical products
used for imparting whiteness, brightness and opacity to a wide range of
products, including paints, paper, plastics, fibers and ceramics. TiO2 is
considered to be a "quality-of-life" product with demand affected by the gross
domestic product in various regions of the world.
TiO2 is produced in two crystalline forms: rutile and anatase. Rutile TiO2
is a more tightly bound crystal that has a higher refractive index than anatase
TiO2 and, therefore, provides better opacification and tinting strength in many
applications. Although many end-use applications can use either form of TiO2,
rutile TiO2 is the preferred form for use in coatings, plastics and ink. Anatase
TiO2 has a bluer undertone and is less abrasive than rutile TiO2, and it is
often preferred for use in paper, ceramics, rubber and man-made fibers.
Per capita Ti02 consumption in the United States and Western Europe far
exceeds that in other areas of the world and these regions are expected to
continue to be the largest consumers of TiO2. Significant regions for TiO2
consumption could emerge in Eastern Europe or the Far East (including China) if
the economies in these countries develop to the point that quality-of-life
products, including TiO2, are in greater demand. Kronos believes that, due to
its strong presence in Western Europe, it is well positioned to participate in
potential growth in consumption of Ti02 in Eastern Europe.
NL believes that there are no effective substitutes for TiO2. However,
extenders such as kaolin clays, calcium carbonate and polymeric opacifiers are
used in a number of Kronos' markets. Generally, extenders are used to reduce to
some extent the utilization of higher-cost TiO2. The use of extenders has not
significantly changed TiO2 consumption over the past decade because, to date,
extenders generally have failed to match the performance characteristics of
TiO2. As a result, NL believes that the use of extenders will not materially
alter the growth of the TiO2 business in the foreseeable future.
Kronos currently produces over 40 different TiO2 grades, sold under the
Kronos trademark, which provide a variety of performance properties to meet
customers' specific requirements. Kronos' major customers include domestic and
international paint, paper and plastics manufacturers. Kronos and its
distributors and agents sell and provide technical services for its products to
over 4,000 customers with the majority of sales in Europe and North America.
Kronos distributes its TiO2 by rail, truck and ocean carrier in either dry or
slurry form. Kronos and its predecessors have produced and marketed TiO2 in
North America and Europe for over 80 years. As a result, Kronos believes that it
has developed considerable expertise and efficiency in the manufacture, sale,
shipment and service of its products in domestic and international markets. By
volume, approximately one-half of Kronos' 2002 TiO2 sales were to Europe, with
about 39% to North America and the balance to export markets.
Kronos is also engaged in the mining and sale of ilmenite ore (a raw
material used as a feedstock in the sulfate pigment production process described
below), and Kronos has estimated ilmenite reserves that are expected to last at
least 20 years. Kronos is also engaged in the manufacture and sale of iron-based
water treatment chemicals (derived from co-products of the pigment production
processes). Kronos' water treatment chemicals are used as treatment and
conditioning agents for industrial effluents and municipal wastewater, and in
the manufacture of iron pigments.
Manufacturing process, properties and raw materials. TiO2 is manufactured
by Kronos using both the chloride process and the sulfate process. Approximately
72% of Kronos' current production capacity is based on its chloride process,
which generates less waste than the sulfate process. The chloride process is a
continuous process in which chlorine is used to extract rutile Ti02. In general,
the chloride process is also less intensive than the sulfate process in terms of
capital investment, labor and energy. Because much of the chlorine is recycled
and higher titanium-containing feedstock is used, the chloride process produces
less waste. The sulfate process is a batch chemical process that uses sulfuric
acid to extract TiO2. Sulfate technology normally produces either anatase or
rutile pigment. Once an intermediate TiO2 pigment has been produced by either
the chloride or sulfate process, it is finished into products with specific
performance characteristics for particular end-use applications through
proprietary processes involving various chemical surface treatments and
intensive milling and micronizing. Due to environmental factors and customer
considerations, the proportion of TiO2 industry sales represented by
chloride-process pigments has increased relative to sulfate-process pigments,
and chloride-process production facilities in 2002 represented approximately 62%
of industry capacity.
During 2002, Kronos operated five TiO2 facilities in Europe (two in
Leverkusen, Germany and one in each of Nordenham, Germany, Langerbrugge, Belgium
and Fredrikstad, Norway). In North America, Kronos has a Ti02 facility in
Varennes, Quebec and, through a manufacturing joint venture discussed below, a
one-half interest in a Ti02 plant in Lake Charles, Louisiana. Kronos also owns a
Ti02 slurry facility in Louisiana and leases various corporate and
administrative offices in the U.S. and various sales offices in the U.S. and
Europe. All of Kronos' principal production facilities are owned, except for the
land under the Leverkusen facility. Kronos also has a governmental concession
with an unlimited term to operate its ilmenite ore mine in Norway. During a
portion of 2001, production at Kronos' Leverkusen, Germany TiO2 facility was
halted due to the effects of a March 2001 fire. See Note 12 to the Consolidated
Financial Statements.
Kronos' principal German operating subsidiary leases the land under its
Leverkusen Ti02 production facility pursuant to a lease expiring in 2050. The
Leverkusen facility, representing about one-third of Kronos' current aggregate
TiO2 production capacity, is located within an extensive manufacturing complex
owned by Bayer AG, and Kronos is the only unrelated party so situated. Rent for
the Leverkusen facility is periodically established by agreement with Bayer AG
for periods of at least two years at a time. Under a separate supplies and
services agreement expiring in 2011, Bayer provides some raw materials,
auxiliary and operating materials and utilities services necessary to operate
the Leverkusen facility. Both the lease and supplies and services agreement
restrict Kronos' ability to transfer ownership or use of the Leverkusen
facility.
Kronos produced a Company-record 442,000 metric tons of TiO2 in 2002, up
from 412,000 metric tons in 2001 and up slightly from its previous record of
441,000 metric tons produced in 2000. The lower TiO2 production in 2001 as
compared to 2002 was due in part to the effects of the fire discussed above.
Kronos' average production capacity utilization rate in 2002 was 96%, compared
to 91% in 2001 and near full capacity utilization in 2000. Kronos believes its
current annual attainable production capacity is approximately 470,000 metric
tons, including the production capacity relating to its one-half interest in the
Louisiana plant. Kronos expects to be able to increase its production capacity
(primarily at its chloride-process facilities) to approximately 480,000 metric
tons during 2005 with only moderate capital expenditures.
The primary raw materials used in the TiO2 chloride production process are
chlorine, coke and titanium-containing feedstock derived from beach sand
ilmenite and natural rutile ore. Chlorine and coke are available from a number
of suppliers. Titanium-containing feedstock suitable for use in the chloride
process is available from a limited number of suppliers around the world,
principally in Australia, South Africa, Canada, India and the United States.
Kronos purchases slag refined from ilmenite sand from Richards Bay Iron and
Titanium (Proprietary) Limited (South Africa) under a long-term supply contract
that expires at the end of 2007. Natural rutile ore is purchased primarily from
Iluka Resources, Limited (Australia) under a long-term supply contract that
expires at the end of 2004. Kronos does not expect to encounter difficulties
obtaining long-term extensions to existing supply contracts prior to the
expiration of the contracts. Raw materials purchased under these contracts and
extensions thereof are expected to meet Kronos' chloride feedstock requirements
over the next several years.
The primary raw materials used in the TiO2 sulfate production process are
sulfuric acid and titanium-containing feedstock derived primarily from rock and
beach sand ilmenite. Sulfuric acid is available from a number of suppliers.
Titanium-containing feedstock suitable for use in the sulfate process is
available from a limited number of suppliers around the world. Currently, the
principal active sources are located in Norway, Canada, Australia, India and
South Africa. As one of the few vertically-integrated producers of
sulfate-process pigments, Kronos operates a Norwegian rock ilmenite mine which
provided all of Kronos' feedstock for its European sulfate-process pigment
plants in 2002. Kronos also purchases sulfate grade slag for its Canadian plant
primarily from Q.I.T. Fer et Titane Inc. (Canada) under a long-term supply
contract that expires at the end of 2006.
Kronos believes the availability of titanium-containing feedstock for both
the chloride and sulfate processes is adequate for the next several years.
Kronos does not expect to experience any interruptions of its raw material
supplies because of its long-term supply contracts. However, political and
economic instability in certain countries from which Kronos purchases its raw
material supplies could adversely affect the availability of such feedstock.
Should Kronos' vendors not be able to meet their contractual obligations or
should Kronos be otherwise unable to obtain necessary raw materials, Kronos may
incur higher costs for raw materials or may be required to reduce production
levels, which may have a material adverse effect on NL's consolidated financial
position, results of operations or liquidity.
TiO2 manufacturing joint venture. Subsidiaries of Kronos and Huntsman
International Holdings LLC ("HICI") each own a 50%-interest in a manufacturing
joint venture. The joint venture owns and operates a chloride-process TiO2 plant
in Lake Charles, Louisiana. Production from the plant is shared equally by
Kronos and HICI pursuant to separate offtake agreements. The manufacturing joint
venture operates on a break-even basis, and accordingly Kronos' transfer price
for its share of the TiO2 produced is equal to its share of the joint venture's
costs. A supervisory committee, composed of four members, two of whom are
appointed by each partner, directs the business and affairs of the joint
venture, including production and output decisions. Two general managers, one
appointed and compensated by each partner, manage the operations of the joint
venture acting under the direction of the supervisory committee.
Competition. The TiO2 industry is highly competitive. Kronos competes
primarily on the basis of price, product quality and technical service, and the
availability of high performance pigment grades. Although certain TiO2 grades
are considered specialty pigments, the majority of Kronos' grades and
substantially all of Kronos' production are considered commodity pigments with
price generally being the most significant competitive factor. During 2002,
Kronos had an estimated 12% share of worldwide TiO2 sales volumes, and Kronos
believes that it is the leading seller of TiO2 in several countries, including
Germany and Canada.
Kronos' principal competitors are E.I. du Pont de Nemours & Co. ("DuPont"),
Millennium Chemicals, Inc., HICI, Kerr-McGee Corporation and Ishihara Sangyo
Kaisha, Ltd. These five largest competitors have estimated individual worldwide
shares of TiO2 production capacity ranging from 5% to 24%, and an aggregate
estimated 70% share of worldwide TiO2 production volumes. DuPont has about
one-half of total U.S. TiO2 production capacity and is Kronos' principal North
American competitor.
Worldwide capacity additions in the TiO2 market resulting from construction
of greenfield plants require significant capital expenditures and substantial
lead time (typically three to five years in NL's experience). No greenfield
plants are currently under construction, and certain competitors have announced
that they have either idled or shut down facilities, but NL expects industry
capacity to increase as Kronos and its competitors debottleneck existing
facilities. Based on the factors described above, NL expects that the average
annual increase in industry capacity from announced debottlenecking projects
will be less than the average annual demand growth for TiO2 during the next
three to five years. However, no assurance can be given that future increases in
the TiO2 industry production capacity and future average annual demand growth
rates for TiO2 will conform to NL's expectations. If actual developments differ
from NL's expectations, NL and the TiO2 industry's performance could be
unfavorably affected.
Research and development. Kronos' annual expenditures for research and
development and certain technical support programs have averaged approximately
$6 million during the past three years. TiO2 research and development activities
are conducted principally at Kronos' Leverkusen, Germany facility. Such
activities are directed primarily towards improving both the chloride and
sulfate production processes, improving product quality and strengthening
Kronos' competitive position by developing new pigment applications.
Patents and trademarks. Patents held for products and production processes
are believed to be important to NL and to the continuing business activities of
Kronos. NL continually seeks patent protection for its technical developments,
principally in the United States, Canada and Europe, and from time to time
enters into licensing arrangements with third parties. NL's major trademarks,
including Kronos, are protected by registration in the United States and
elsewhere with respect to those products it manufactures and sells.
Customer base and seasonality. NL believes that neither its aggregate sales
nor those of any of its principal product groups are concentrated in or
materially dependent upon any single customer or small group of customers.
Kronos' ten largest customers accounted for about one-fourth of chemicals sales
during 2002. Neither NL's business as a whole nor that of any of its principal
product groups is seasonal to any significant extent. Due in part to the
increase in paint production in the spring to meet spring and summer painting
season demand, TiO2 sales are generally higher in the first half of the year
than in the second half of the year.
Employees. As of December 31, 2002, NL employed approximately 2,500 persons
(excluding employees of the Louisiana joint venture), with 100 employees in the
United States and 2,400 at non-U.S. sites. Hourly employees in production
facilities worldwide, including the TiO2 joint venture, are represented by a
variety of labor unions, with labor agreements having various expiration dates.
NL believes its labor relations are good.
Regulatory and environmental matters. Certain of NL's businesses are and
have been engaged in the handling, manufacture or use of substances or compounds
that may be considered toxic or hazardous within the meaning of applicable
environmental laws. As with other companies engaged in similar businesses,
certain past and current operations and products of NL have the potential to
cause environmental or other damage. NL has implemented and continues to
implement various policies and programs in an effort to minimize these risks.
NL's policy is to maintain compliance with applicable environmental laws and
regulations at all of its facilities and to strive to improve its environmental
performance. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect NL's production, handling, use, storage, transportation, sale
or disposal of such substances as well as NL's consolidated financial position,
results of operations or liquidity.
NL's U.S. manufacturing operations are governed by federal environmental
and worker health and safety laws and regulations, principally the Resource
Conservation and Recovery Act ("RCRA"), the Occupational Safety and Health Act
("OSHA"), the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act,
the Toxic Substances Control Act ("TSCA"), and the Comprehensive Environmental
Response, Compensation and Liability Act, as amended by the Superfund Amendments
and Reauthorization Act ("CERCLA"), as well as the state counterparts of these
statutes. NL believes that the Louisiana Ti02 plant owned and operated by the
joint venture and a Louisiana slurry facility owned by NL are in substantial
compliance with applicable requirements of these laws or compliance orders
issued thereunder. NL has no other U.S. plants. From time to time, NL's
facilities may be subject to environmental regulatory enforcement under such
statutes. Resolution of such matters typically involves the establishment of
compliance programs. Occasionally, resolution may result in the payment of
penalties, but to date such penalties have not involved amounts having a
material adverse effect on NL's consolidated financial position, results of
operations or liquidity.
NL's European and Canadian production facilities operate in an
environmental regulatory framework in which governmental authorities typically
are granted broad discretionary powers which allow them to issue operating
permits required for the plants to operate. NL believes all of its European and
Canadian plants are in substantial compliance with applicable environmental
laws. While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union ("EU"). Germany and Belgium, each members of the EU, follow the
initiatives of the EU; Norway, although not a member, generally patterns its
environmental regulatory actions after the EU. Kronos believes it has obtained
all required permits and is in substantial compliance with applicable EU
requirements, including an EU directive to control the effluents produced by
TiO2 production facilities.
At all of NL's sulfate plant facilities other than in Norway, NL recycles
spent acid either through contracts with third parties or using its own
facilities. NL has a contract with a third party to treat certain German
sulfate-process effluents. Either party may terminate the contract after giving
four years notice with regard to the Nordenham plant. Under certain
circumstances, Kronos may terminate the contract after giving six months notice
with respect to treatment of effluents from the Leverkusen plant. At NL's
Norwegian plant, NL ships its spent acid to a third party location where it is
treated and disposed of.
NL's capital expenditures related to its ongoing environmental protection
and improvement programs were approximately $5 million in 2002, and are
currently expected to approximate $5 million in 2003.
NL has been named as a defendant, potentially responsible party ("PRP") or
both, pursuant to CERCLA and similar state laws in approximately 70 governmental
and private actions associated with waste disposal sites, mining locations and
facilities currently or previously owned, operated or used by NL or its
subsidiaries or their predecessors, certain of which are on the U.S.
Environmental Protection Agency's Superfund National Priorities List or similar
state lists. See Item 3 - "Legal Proceedings."
COMPONENT PRODUCTS - COMPX INTERNATIONAL INC.
General. CompX is a leading manufacturer of precision ball bearing slides,
security products (cabinet locks and other locking mechanisms) and ergonomic
computer support systems for office furniture, computer-related applications and
a variety of other products. CompX's products are principally designed for use
in medium- to high-end product applications, where design, quality and
durability are critical to CompX's customers. CompX believes that it is among
the world's largest producers of ergonomic computer support systems, precision
ball bearing slides and security products consisting of cabinet locks and other
locking mechanisms. In 2002, precision ball bearing slides, security products
and ergonomic computer support systems accounted for approximately 43%, 37% and
15% of sales, respectively, with a variety of other products accounting for the
remainder.
In 2000, CompX acquired a security products producer. See Note 3 to the
Consolidated Financial Statements. These and other acquisitions made by CompX
prior to 2000 have expanded CompX's product lines and customer base.
Products, product design and development. Precision ball bearing slides
manufactured to stringent industry standards are used in such applications as
file cabinets, desk drawers, tool storage cabinets, imaging equipment and
computer server cabinets. These products include CompX's patented Integrated
Slide Lock in which a file cabinet manufacturer can reduce the possibility of
multiple drawers being opened at the same time, and the adjustable patented Ball
Lock which reduces the risk of heavily-filled drawers, such as auto mechanic
tool boxes, from opening while in movement.
Security products, or locking mechanisms, are used in applications such as
computers, vending and gaming machines, ignition systems, motorcycle storage
compartments, parking meters, electrical circuit panels and transportation
equipment as well as office and institutional furniture. These include CompX's
KeSet high security system, which has the ability to change the keying on a
single lock 64 times without removing the lock from its enclosure.
Ergonomic computer support systems include articulating computer keyboard
support arms (designed to attach to office desks in the workplace and home
office environments to alleviate possible strains and stress and maximize usable
workspace), adjustable computer table mechanisms which provide variable
workspace heights, CPU storage devices which minimize adverse effects of dust
and moisture and a number of complementary accessories, including ergonomic
wrist rest aids, mouse pad supports and computer monitor support arms. These
products include CompX's Leverlock keyboard arm, which is designed to make the
adjustment of an ergonomic keyboard arm easier.
CompX's precision ball bearing slides and ergonomic computer support
systems are sold under the CompX Waterloo, Waterloo Furniture Components, Thomas
Regout and Dynaslide brand names, and its security products are sold under the
CompX Security Products, National Cabinet Lock, Fort Lock, Timberline Lock,
Chicago Lock and TuBar brand names. CompX believes that its brand names are well
recognized in the industry.
Sales, marketing and distribution. CompX sells components to original
equipment manufacturers ("OEMs") and to distributors through a dedicated sales
force. The majority of CompX's sales are to OEMs, while the balance represents
standardized products sold through distribution channels. Sales to large OEM
customers are made through the efforts of factory-based sales and marketing
professionals and engineers working in concert with field salespeople and
independent manufacturers' representatives. Manufacturers' representatives are
selected based on special skills in certain markets or relationships with
current or potential customers.
A significant portion of CompX's sales are made through distributors. CompX
has a significant market share of cabinet lock sales to the locksmith
distribution channel. CompX supports its distributor sales with a line of
standardized products used by the largest segments of the marketplace. These
products are packaged and merchandised for easy availability and handling by
distributors and the end users. Based on CompX's successful STOCK LOCKS
inventory program, similar programs have been implemented for distributor sales
of ergonomic computer support systems and to some extent precision ball bearing
slides. CompX also operates a small tractor/trailer fleet associated with its
Canadian operations.
CompX does not believe it is dependent upon one or a few customers, the
loss of which would have a material adverse effect on its operations. In 2002,
the ten largest customers accounted for about 30% of component products sales
(2001 - 36%; 2000 - 35%). In each of the past three years, no customer
individually represented over 10% of sales.
Manufacturing and operations. At December 31, 2002, CompX operated six
manufacturing facilities in North America (two in each of Illinois and Ontario,
Canada and one in each of South Carolina and Michigan), one facility in The
Netherlands and two facilities in Taiwan. Precision ball bearing slides or
ergonomic products are manufactured in the facilities located in Canada, The
Netherlands, Michigan and Taiwan and security products are manufactured in the
facilities located in South Carolina and Illinois. All of such facilities are
owned by CompX except for one of the facilities in Taiwan and the facility in
The Netherlands, which are leased. See Note 12 to the Consolidated Financial
Statements. CompX also leases a distribution center in California and a
warehouse in Taiwan. CompX believes that all its facilities are well maintained
and satisfactory for their intended purposes.
Raw materials. Coiled steel is the major raw material used in the
manufacture of precision ball bearing slides and ergonomic computer support
systems. Plastic resins for injection molded plastics are also an integral
material for ergonomic computer support systems. Purchased components, including
zinc castings, are the principal raw materials used in the manufacture of
security products. These raw materials are purchased from several suppliers and
are readily available from numerous sources.
CompX occasionally enters into raw material purchase arrangements to
mitigate the short-term impact of future increases in raw material costs. While
these arrangements do not commit CompX to a minimum volume of purchases, they
generally provide for stated unit prices based upon achievement of specified
volume purchase levels. This allows CompX to stabilize raw material purchase
prices, provided the specified minimum monthly purchase quantities are met.
Materials purchased outside of these arrangements are sometimes subject to
unanticipated and sudden price increases, such as rapidly increasing worldwide
steel prices in 2002. Due to the competitive nature of the markets served by
CompX's products, it is often difficult to recover such increases in raw
material costs through increased product selling prices. Consequently, overall
operating margins can be affected by such raw material cost pressures.
Competition. The office furniture and security products markets are highly
competitive. CompX competes primarily on the basis of product design, including
ergonomic and aesthetic factors, product quality and durability, price, on-time
delivery, service and technical support. CompX focuses its efforts on the
middle- and high-end segments of the market, where product design, quality,
durability and service are placed at a premium.
CompX competes in the precision ball bearing slide market primarily on the
basis of product quality and price with two large manufacturers and a number of
smaller domestic and foreign manufacturers. CompX competes in the security
products market with a variety of relatively small domestic and foreign
competitors. CompX competes in the ergonomic computer support system market
primarily on the basis of product quality, features and price with one major
producer, and primarily on the basis of price with a number of smaller domestic
and foreign manufacturers. Although CompX believes that it has been able to
compete successfully in its markets to date, price competition from
foreign-sourced products has intensified in the current economic market. There
can be no assurance that CompX will be able to continue to successfully compete
in all of its existing markets in the future.
Patents and trademarks. CompX holds a number of patents relating to its
component products, certain of which are believed by CompX to be important to
its continuing business activity, and owns a number of trademarks and brand
names, including CompX Security Products, CompX Waterloo, National Cabinet Lock,
KeSet, Fort Lock, Timberline Lock, Chicago Lock, ACE II, TuBar, Thomas Regout,
STOCK LOCKS, ShipFast, Waterloo Furniture Components Limited and Dynaslide.
CompX believes these trademarks are well recognized in the component products
industry.
Regulatory and environmental matters. CompX's operations are subject to
federal, state, local and foreign laws and regulations relating to the use,
storage, handling, generation, transportation, treatment, emission, discharge,
disposal and remediation of, and exposure to, hazardous and non-hazardous
substances, materials and wastes. CompX's operations are also subject to
federal, state, local and foreign laws and regulations relating to worker health
and safety. CompX believes that it is in substantial compliance with all such
laws and regulations. The costs of maintaining compliance with such laws and
regulations have not significantly impacted CompX to date, and CompX has no
significant planned costs or expenses relating to such matters. There can be no
assurance, however, that compliance with such future laws and regulations will
not require CompX to incur significant additional expenditures, or that such
additional costs would not have a material adverse effect on CompX's
consolidated financial condition, results of operations or liquidity.
Employees. As of December 31, 2002, CompX employed approximately 1,850
employees, including 665 in the United States, 700 in Canada, 300 in The
Netherlands and 185 in Taiwan. Approximately 76% of CompX's employees in Canada
are covered by a collective bargaining agreement which expires in January 2006.
CompX believes its labor relations are satisfactory.
WASTE MANAGEMENT - WASTE CONTROL SPECIALISTS LLC
General. Waste Control Specialists LLC, formed in 1995, completed
construction in early 1997 of the initial phase of its facility in West Texas
for the processing, treatment, storage and disposal of certain hazardous and
toxic wastes, and the first of such wastes were received for disposal in 1997.
Subsequently, Waste Control Specialists has expanded its permitting
authorizations to include the processing, treatment and storage of low-level and
mixed radioactive wastes and the disposal of certain types of low-level
radioactive wastes. To date, Valhi has contributed $75 million to Waste Control
Specialists in return for its 90% membership equity interest, which cash capital
contributions were used primarily to fund construction of the facility and fund
Waste Control Specialists' operating losses. The other owner contributed certain
assets, primarily land and operating permits for the facility site, and Waste
Control Specialists also assumed certain indebtedness of the other owner.
Facility, operations, services and customers. Waste Control Specialists has
been issued permits by the Texas Commission on Environmental Quality ("TCEQ"),
formerly the Texas Natural Resource Conservation Commission, and the U.S.
Environmental Protection Agency ("EPA") to accept hazardous and toxic wastes
governed by RCRA and TSCA. The ten-year RCRA and TSCA permits initially expire
in 2004, but are subject to renewal by the TCEQ assuming Waste Control
Specialists remains in compliance with the provisions of the permits. While
there can be no assurance, Waste Control Specialists believes it will be able to
obtain extensions to continue operating the facility for the foreseeable future.
In November 1997, the Texas Department of Health ("TDH") issued a license
to Waste Control Specialists for the treatment and storage, but not disposal, of
low-level and mixed radioactive wastes. The current provisions of this license
generally enable Waste Control Specialists to accept such wastes for treatment
and storage from U.S. commercial and federal facility generators, including the
Department of Energy ("DOE") and other governmental agencies. Waste Control
Specialists accepted the first shipments of such wastes in 1998. Waste Control
Specialists has also been issued a permit by the TCEQ to establish a research,
development and demonstration facility in which third parties could use the
facility to develop and demonstrate new technologies in the waste management
industry, including possibly those involving low-level and mixed radioactive
wastes. Waste Control Specialists has also obtained additional authority that
allows Waste Control Specialists to dispose of certain categories of low-level
radioactive materials, including naturally-occurring radioactive material
("NORM") and exempt-level materials (radioactive materials that do not exceed
certain specified radioactive concentrations and which are exempt from
licensing). Although there are other categories of low-level and mixed
radioactive wastes which continue to be ineligible for disposal under the
increased authority, Waste Control Specialists will continue to pursue
additional regulatory authorizations to expand its treatment and disposal
capabilities for low-level and mixed radioactive wastes. There can be no
assurance that any such additional permits or authorizations will be obtained.
The facility is located on a 1,338-acre site in West Texas owned by Waste
Control Specialists. The 1,338 acres are permitted for 11.3 million cubic yards
of airspace landfill capacity for the disposal of RCRA and TSCA wastes.
Following the initial phase of the construction, Waste Control Specialists had
approximately 400,000 cubic yards of airspace landfill capacity in which
customers' wastes can be disposed. Waste Control Specialists constructed during
2001 an additional 100,000 cubic yards of airspace landfill capacity. Waste
Control Specialists owns approximately 15,000 additional acres of land
surrounding the permitted site, a small portion of which is located in New
Mexico. This presently undeveloped additional acreage is available for future
expansion assuming appropriate permits could be obtained. The 1,338-acre site
has, in Waste Control Specialists' opinion, superior geological characteristics
which make it an environmentally-desirable location. The site is located in a
relatively remote and arid section of West Texas. The ground is composed of
triassic red bed clay for which the possibility of leakage into any underground
water table is considered highly remote. In addition, based on extensive
drilling by the oil and gas industry in the area, Waste Control Specialists does
not believe there are any underground aquifers or other usable sources of water
directly below the site.
While the West Texas facility operates as a final repository for wastes
that cannot be further reclaimed and recycled, it also serves as a staging and
processing location for material that requires other forms of treatment prior to
final disposal as mandated by the U.S. EPA or other regulatory bodies. The
facility, as constructed, provides for waste treatment/stabilization, warehouse
storage, treatment facilities for hazardous and toxic wastes, drum to bulk, and
bulk to drum materials handling and repackaging capabilities. Waste Control
Specialists' policy is to conduct these operations in compliance with its
current permits. Treatment operations involve processing wastes through one or
more thermal, chemical or other treatment methods, depending upon the particular
waste being disposed and regulatory and customer requirements. Thermal treatment
uses a thermal destruction technology as the primary mechanism for waste
destruction. Physical treatment methods include distillation, evaporation and
separation, all of which result in the separation or removal of solid materials
from liquids. Chemical treatment uses chemical oxidation and reduction, chemical
precipitation of heavy metals, hydrolysis and neutralization of acid and
alkaline wastes, and basically results in the transformation of wastes into
inert materials through one or more chemical processes. Certain of such
treatment processes may involve technology which Waste Control Specialists may
acquire, license or subcontract from third parties.
Once treated and stabilized, wastes are either (i) placed in the landfill
disposal site, (ii) stored onsite in drums or other specialized containers or
(iii) shipped to third-party facilities for further treatment or final
disposition. Only wastes which meet certain specified regulatory requirements
can be disposed of by placing them in the landfill, which is fully-lined and
includes a leachate collection system.
Waste Control Specialists takes delivery of wastes collected from customers
and transported on behalf of customers, via rail or highway, by independent
contractors to the West Texas site. Such transportation is subject to
regulations governing the transportation of hazardous wastes issued by the U.S.
Department of Transportation.
In the U.S., the major federal statutes governing management, and
responsibility for clean-up, of hazardous and toxic wastes include RCRA, TSCA
and CERCLA. Waste Control Specialists' business is heavily dependent upon the
extent to which regulations promulgated under these or other similar statutes
and their enforcement require wastes to be managed and disposed of at facilities
of the type constructed by Waste Control Specialists.
Waste Control Specialists' target customers are industrial companies,
including chemical, aerospace and electronics businesses and governmental
agencies, including the DOE, which generate hazardous and other wastes. A
majority of the customers are expected to be located in the southwest United
States, although customers outside a 500-mile radius can be handled via rail
lines. Waste Control Specialists employs its own salespeople as well as
third-party brokers to market its services to potential customers.
Competition. The hazardous waste industry (other than low-level and mixed
radioactive waste) currently has excess industry capacity caused by a number of
factors, including a relative decline in the number of environmental remediation
projects generating hazardous wastes and efforts on the part of generators to
reduce the volume of waste and/or manage it onsite at their facilities. These
factors have led to reduced demand and increased price pressure for
non-radioactive hazardous waste management services. While Waste Control
Specialists believes its broad range of permits for the treatment and storage of
low-level and mixed radioactive waste streams provides certain competitive
advantages, a key element of Waste Control Specialists' long-term strategy to
provide "one-stop shopping" for hazardous, low-level and mixed radioactive
wastes includes obtaining additional regulatory authorizations for the disposal
of a broad range of low-level and mixed radioactive wastes.
Competition within the hazardous waste industry is diverse. Competition is
based primarily on pricing and customer service. Price competition is expected
to be intense with respect to RCRA- and TSCA-related wastes. Principal
competitors are Envirocare of Utah, American Ecology Corporation and Envirosafe
Services, Inc. These competitors are well established and have significantly
greater resources than Waste Control Specialists, which could be important
competitive factors. However, Waste Control Specialists believes it may have
certain competitive advantages, including its environmentally-desirable
location, broad level of local community support, a public transportation
network leading to the facility and capability for future site expansion.
Employees. At December 31, 2002, Waste Control Specialists employed
approximately 75 persons.
Regulatory and environmental matters. While the waste management industry
has benefited from increased governmental regulation, the industry itself has
become subject to extensive and evolving regulation by federal, state and local
authorities. The regulatory process requires businesses in the waste management
industry to obtain and retain numerous operating permits covering various
aspects of their operations, any of which could be subject to revocation,
modification or denial. Regulations also allow public participation in the
permitting process. Individuals as well as companies may oppose the grant of
permits. In addition, governmental policies are by their nature subject to
change and the exercise of broad discretion by regulators, and it is possible
that Waste Control Specialists' ability to obtain any desired applicable permits
on a timely basis, and to retain those permits, could in the future be impaired.
The loss of any individual permit could have a significant impact on Waste
Control Specialists' financial condition, results of operations or liquidity,
especially because Waste Control Specialists owns and operates only one disposal
site. For example, adverse decisions by governmental authorities on permit
applications submitted by Waste Control Specialists could result in the
abandonment of projects, premature closing of the facility or operating
restrictions. Waste Control Specialists' RCRA and TSCA permits and its license
from the TDH expire in 2004, although such permits and licenses are subject to
renewal if Waste Control Specialists is in compliance with the required
operating provisions of the permits and licensing.
Federal, state and local authorities have, from time to time, proposed or
adopted other types of laws and regulations with respect to the waste management
industry, including laws and regulations restricting or banning the interstate
or intrastate shipment of certain wastes, imposing higher taxes on out-of-state
waste shipments compared to in-state shipments, reclassifying certain categories
of hazardous wastes as non-hazardous and regulating disposal facilities as
public utilities. Certain states have issued regulations which attempt to
prevent waste generated within that particular state from being sent to disposal
sites outside that state. The U.S. Congress has also, from time to time,
considered legislation which would enable or facilitate such bans, restrictions,
taxes and regulations. Due to the complex nature of the waste management
industry regulation, implementation of existing or future laws and regulations
by different levels of government could be inconsistent and difficult to
foresee. Waste Control Specialists will attempt to monitor and anticipate
regulatory, political and legal developments which affect the waste management
industry, but there can be no assurance that Waste Control Specialists will be
able to do so. Nor can Waste Control Specialists predict the extent to which
legislation or regulations that may be enacted, or any failure of legislation or
regulations to be enacted, may affect its operations in the future.
The demand for certain hazardous waste services expected to be provided by
Waste Control Specialists is dependent in large part upon the existence and
enforcement of federal, state and local environmental laws and regulations
governing the discharge of hazardous wastes into the environment. The waste
management industry could be adversely affected to the extent such laws or
regulations are amended or repealed or their enforcement is lessened.
Because of the high degree of public awareness of environmental issues,
companies in the waste management business may be, in the normal course of their
business, subject to judicial and administrative proceedings. Governmental
agencies may seek to impose fines or revoke, deny renewal of, or modify any
applicable operating permits or licenses. In addition, private parties and
special interest groups could bring actions against Waste Control Specialists
alleging, among other things, violation of operating permits.
TITANIUM METALS - TITANIUM METALS CORPORATION
General. Titanium Metals Corporation ("TIMET") is one of the world's
leading producers of titanium sponge, melted products (ingot and slab) and mill
products. TIMET is the only producer with major titanium production facilities
in both the United States and Europe, the world's principal markets for
titanium. TIMET estimates that in 2002 it accounted for approximately 20% of
worldwide industry shipments of mill products and approximately 11% of worldwide
sponge production.
Titanium was first manufactured for commercial use in the 1950s. Titanium's
unique combination of corrosion resistance, elevated-temperature performance and
high strength-to-weight ratio makes it particularly desirable for use in
commercial and military aerospace applications in which these qualities are
essential design requirements for certain critical parts such as wing supports
and jet engine components. While aerospace applications have historically
accounted for a substantial portion of the worldwide demand for titanium and
were approximately 41% of aggregate mill product shipments in 2002, the number
of non-aerospace end-use markets for titanium has expanded substantially.
Established industrial uses for titanium include chemical and industrial power
plants, desalination plants and pollution control equipment.
Titanium continues to gain acceptance in many emerging market applications
including automotive, military armor, energy, architecture, and consumer
products. Although titanium is generally higher cost than other competing
metals, in many cases customers find the physical properties of titanium to be
attractive from the standpoint of weight, performance, design alternatives, life
cycle value and other factors. Although emerging market demand currently
represents only about 15% of industry-wide demand for titanium mill products,
TIMET believes the emerging market demand, in the aggregate, could grow at
healthy double-digit rates over the next few years. TIMET is actively pursuing
these markets.
Although difficult to predict, the most attractive emerging segment appears
to be automotive, due to its potential for sustainable long-term growth. For
this reason, in 2002 TIMET established a new division, TiMET Automotive, focused
on the development of the automotive, truck and motorcycle markets. This
division is focused on developing and marketing proprietary alloys and processes
specifically suited for automotive applications and supporting supply chain
activities for automotive manufacturers to most cost effectively engineer
titanium components. Titanium is now used in several consumer car applications
including the Corvette Z06, Toyota Alteeza, Infiniti Q45, Volkswagen Lupo FSI,
Honda S2000 and Mercedes S Class and in numerous motorcycles.
At the present time, titanium is primarily used for exhaust systems,
suspension springs and engine valves in consumer vehicles. In exhaust systems,
titanium provides for significant weight savings, while its corrosion resistance
provides life-of-vehicle durability. In suspension spring applications,
titanium's low modulus of elasticity allows the spring's height to be reduced by
20% to 40% compared to a steel spring, which, when combined with the titanium's
low density, permits 30% to 60% weight savings over steel spring suspension
systems. The lower spring height provides vehicle designers new styling
alternatives and improved performance opportunities. Titanium suspension springs
and exhaust applications are also attractive compared to alternative lightweight
technologies because the titanium component can often be formed and fabricated
on the same tooling used for the steel component it is typically replacing. This
is especially attractive for the rapidly growing niche vehicle market sectors
that often seek the performance attributes that titanium provides, but where
tooling costs prohibit alternative light-weighting or improved performance
strategies.
Titanium is also making inroads into other automotive applications,
including turbo charger wheels, brake parts and connecting rods. Titanium engine
components provide mass-reduction benefits that directly improve vehicle
performance and fuel economy. In certain applications, titanium engine
components can provide a cost-effective alternative to engine balance shafts to
address noise, vibration and harshness while simultaneously improving
performance.
The decision to select titanium components for consumer car, truck and
motorcycle components remains highly cost sensitive. However, TIMET believes
titanium's acceptance in consumer vehicles will expand as the automotive
industry continues to better understand the benefits it offers.
Industry conditions. The titanium industry historically has derived a
substantial portion of its business from the aerospace industry. Aerospace
volume for titanium products, which includes both jet engine components (i.e.
blades, discs, rings and engine cases) and air frame components (i.e. bulkheads,
tail sections, landing gear, wing supports and fasteners) can be broken down
into commercial and military sectors. Mill product shipments to the aerospace
industry in 2002 represented about 41% of total mill product volume and
approximately 69% of TIMET's annual mill product shipment volume (59% commercial
aerospace and 10% military aerospace). The commercial aerospace sector has a
significant influence on titanium companies, particularly mill product producers
such as TIMET. The commercial aerospace sector in 2002 accounted for
approximately 80% of industry aerospace mill product volume and 33% of aggregate
mill product volume. Volume in military aerospace markets represented
approximately 8% of overall titanium mill product volume in 2002, up from 6% in
2001. Military aerospace volume is largely driven by government defense spending
in North America and Europe. As discussed further below, new aircraft programs
generally are in development for several years, followed by multi-year
procurement contracts.
The cyclical nature of the aerospace industry has been the principal driver
of the historical fluctuations in the performance of titanium companies. Over
the past 20 years, the titanium industry had cyclical peaks in mill product
shipments in 1989, 1997 and 2001 and cyclical lows in 1983, 1991 and 1999.
Demand for titanium reached its highest peak in 1997 when industry mill product
shipments reached an estimated 60,000 metric tons. Industry mill product
shipments subsequently declined approximately 5% to an estimated 57,000 metric
tons in 1998. After falling 16% from 1998 levels to 48,000 metric tons in 1999
and 2000, industry shipments climbed to 55,000 metric tons in 2001. However,
primarily due to a decrease in demand for titanium from the commercial aerospace
sector, total industry mill product shipments fell approximately 20% to an
estimated 44,000 metric tons in 2002. TIMET expects total industry mill product
shipments in 2003 will decrease slightly from 2002 levels.
The economic slowdown in the United States and other regions of the world
in the latter part of 2001 and the September 11, 2001 terrorist attacks combined
to negatively impact commercial air travel in the United States and abroad
throughout 2002. Although airline passenger traffic showed improvement in the
months immediately following the terrorist attacks, current data indicate that
traffic remains below pre-attack levels. As a result, the U.S. airline industry
is expected to record a second consecutive year of losses and two major U.S.
airlines were forced to seek bankruptcy protection from their creditors.
Airlines have announced a number of actions to reduce both costs and capacity
including, but not limited to, the early retirement of airplanes, the deferral
of scheduled deliveries of new aircraft and allowing purchase options to expire.
TIMET expects the current slowdown in the commercial aerospace sector to
continue through 2005 before beginning a modest upturn in 2006.
TIMET believes that industry mill product shipments to the commercial
aerospace sector could decline by up to 15% in 2003, primarily due to a
combination of reduced aircraft production rates and excess inventory
accumulated throughout the commercial aerospace supply chain since September 11,
2001. The commercial aerospace supply chain is fragmented and decentralized,
making it difficult to quantify excess inventories, and while TIMET estimates
there was a significant reduction in excess inventory throughout the supply
chain during 2002, it still may take from one to two years for the remainder of
such excess inventory to be substantially absorbed, barring the impact of
terrorist actions or global conflicts.
According to The Airline Monitor, a leading aerospace publication, the
worldwide commercial airline industry reported an estimated operating loss of
approximately $8 billion in 2002, compared with an operating loss of $11 billion
in 2001 and operating income of $11 billion in 2000. The Airline Monitor
traditionally issues forecasts for commercial aircraft deliveries each January
and July. According to The Airline Monitor, large commercial aircraft deliveries
for the 1996 to 2002 period peaked in 1999 with 889 aircraft, including 254 wide
body aircraft that use substantially more titanium than their narrow body
counterparts. Large commercial aircraft deliveries totaled 673 (including 176
wide bodies) in 2002. The Airline Monitor's most recently issued forecast of
January 2003 calls for 580 deliveries in 2003, 570 deliveries in 2004 and 560
deliveries in 2005. After 2005, The Airline Monitor calls for a continued
increase each year in large commercial aircraft deliveries through 2010, with
forecasted deliveries of 780 aircraft in 2009 exceeding 2002 levels. Relative to
2002, these forecasted delivery rates represent anticipated declines of about
14% in 2003, 15% in 2004 and 17% in 2005. Deliveries of titanium generally
precede aircraft deliveries by about one year, although this varies considerably
by titanium product. This correlates to TIMET's cycle, which historically
precedes the cycle of the aircraft industry and related deliveries. TIMET can
give no assurance as to the extent or duration of the current commercial
aerospace cycle or the extent to which it will affect demand for its products.
The aforementioned bankruptcy filings, although harmful to the commercial
aerospace industry in the near term, could ultimately result in a more efficient
and profitable commercial airline industry. The renegotiation of union contracts
and the changes to work rules to bring labor costs in line with the current
revenue environment, as well as simplifying fare structures in order to attract
more travelers, may promote greater profitability for the commercial airline
industry. Further, route restructuring, more point-to-point service and expanded
customer options could also contribute to increased demand for commercial air
travel. On the other hand, potential future terrorist activities or global
conflicts could result in a significant decrease in demand for commercial air
travel and increase the financial troubles of the commercial aerospace industry.
Military aerospace programs were the first to utilize titanium's unique
properties on a large scale, beginning in the 1950s. Titanium shipments to
military aerospace markets reached a peak in the 1980s before falling to
historical lows in the early 1990s with the conclusion of the cold war. However,
the importance of military markets to the titanium industry is expected to rise
in coming years as defense spending budgets expand in reaction to terrorist
threats or global conflicts. It is estimated that overall titanium consumption
will increase in this market segment in 2003 and beyond, but consumption by
military applications is not expected to completely offset the drop in the
commercial aerospace sector.
Several of today's active U.S. military programs, including the C-17,
F/A-18, F-16 and F-15 began during the cold war and are forecast to continue at
healthy production levels for the foreseeable future. TIMET currently supplies
titanium to all of these major military programs. In addition to these
established programs, new programs in the United States offer growth
opportunities for increased titanium consumption. The F/A-22 Raptor is currently
in low-rate initial production and U.S. Air Force officials have expressed a
need for a minimum of 339 airplanes, but cost overruns and development delays
may result in reduced procurement over the life of the program. In October 2001,
Lockheed-Martin was awarded what could eventually become the largest military
contract ever for the F-35 Joint Strike Fighter ("JSF"). The JSF is expected to
enter low-rate initial production in late 2006, and although no specific order
and delivery patterns have been established, procurement is expected to extend
over the next 30 to 40 years and include as many as 3,000 to 4,000 planes.
European military programs also have active aerospace programs offering the
possibility for increased titanium consumption. The Saab Gripen, Eurofighter
Typhoon, Dassault Rafale and Dassault Mirage 2000 all have forecast increased
production levels over the next decade.
Products and operations. TIMET is a vertically integrated titanium
manufacturer whose products include (i) titanium sponge, the basic form of
titanium metal used in processed titanium products, (ii) melted products (ingot
and slab), the result of melting sponge and titanium scrap, either alone or with
various other alloying elements and (iii) mill products that are forged and
rolled from ingot or slab, including long products (billet and bar), flat
products (plate, sheet and strip), pipe and pipe fittings.
Titanium sponge (so called because of its appearance) is the commercially
pure, elemental form of titanium metal. The first step in sponge production
involves the chlorination of titanium-containing rutile ores (derived from beach
sand) with chlorine and coke to produce titanium tetrachloride. Titanium
tetrachloride is purified and then reacted with magnesium in a closed system,
producing titanium sponge and magnesium chloride as co-products. TIMET's
titanium sponge production facility in Nevada incorporates vacuum distillation
process ("VDP") technology, which removes the magnesium and magnesium chloride
residues by applying heat to the sponge mass while maintaining a vacuum in the
chamber. The combination of heat and vacuum boils the residues from the sponge
mass, and then the mass is mechanically pushed out of the condensing vessel,
sheared and crushed, while the residual magnesium chloride is electrolytically
separated and recycled.
Titanium ingots and slabs are solid shapes (cylindrical and rectangular,
respectively) that weigh up to 8 metric tons in the case of ingots and up to 16
metric tons in the case of slabs. Each ingot and slab is formed by melting
titanium sponge, scrap or both, usually with various other alloying elements
such as vanadium, aluminum, molybdenum, tin and zirconium. Titanium scrap is a
by-product of the forging, rolling, milling and machining operations, and
significant quantities of scrap are generated in the production process for
finished titanium products. The melting process for ingots and slabs is closely
controlled and monitored utilizing computer control systems to maintain product
quality and consistency and to meet customer specifications. In most cases,
TIMET uses its ingots and slabs as the starting material for further processing
into mill products. However, it also sells ingots and slabs to third-parties.
Titanium mill products result from the forging, rolling, drawing, welding
and/or extrusion of titanium ingots or slabs into products of various sizes and
grades. These mill products include titanium billet, bar, rod, plate, sheet,
strip, pipe and pipe fittings. TIMET sends certain products to outside vendors
for further processing before being shipped to customers or to TIMET's service
centers. Many of TIMET's customers process TIMET's products for their ultimate
end-use or for sale to third parties.
During the production process and following the completion of
manufacturing, TIMET performs extensive testing on its sponge, melted products
and mill products. Testing may involve chemical analysis, mechanical testing,
ultrasonic testing or x-ray testing. The inspection process is critical to
ensuring that TIMET's products meet the high quality requirements of customers,
particularly in aerospace components production. TIMET certifies its products
meet customer specification at the time of shipment for substantially all
customer orders.
TIMET is reliant on several outside processors to perform certain rolling,
finishing and other processing steps in the U.S., and certain melting, forging
and finishing steps in France. In the U.S., one of the processors that performs
these steps in relation to strip production and another as relates to plate
finishing are owned by a competitor. One of the processors as relates to
extrusion is operated by a customer. These processors are currently the primary
source for these services. Other processors used in the U.S. are not
competitors. In France, the processor is also a joint venture partner of TIMET's
majority-owned French subsidiary. Although TIMET believes that there are other
metal producers with the capability to perform these same processing functions,
arranging for alternative processors, or possibly acquiring or installing
comparable capabilities, could take several months or longer, and any
interruption in these functions could have a material and adverse effect on
TIMET's business, consolidated financial position, results of operations or
liquidity in the near term.
Raw materials. The principal raw materials used in the production of
titanium ingot, slab and mill products are titanium sponge, titanium scrap and
alloying elements. During 2002, approximately 36% of TIMET's melted and mill
product raw material requirements were fulfilled with internally produced
sponge, 29% with purchased sponge, 29% with titanium scrap and 6% with alloying
elements.
The primary raw materials used in the production of titanium sponge are
titanium-containing rutile ore, chlorine, magnesium and petroleum coke. Rutile
ore is currently available from a limited number of suppliers around the world,
principally located in Australia, South Africa, India and the United States. A
majority of TIMET's supply of rutile ore is currently purchased from Australian
suppliers. TIMET believes the availability of rutile ore will be adequate for
the foreseeable future and does not anticipate any interruptions of its rutile
supplies, although political or economic instability in the countries from which
TIMET purchases its rutile could materially and adversely affect availability.
Although TIMET believes that the availability of rutile ore is adequate in the
near-term, there can be no assurance that TIMET will not experience
interruptions.
Chlorine is currently obtained from a single supplier near TIMET's sponge
plant. That supplier emerged from Chapter 11 bankruptcy reorganization in 2002.
While TIMET does not presently anticipate any chlorine supply problems, there
can be no assurances the chlorine supply will not be interrupted. TIMET has
taken steps to mitigate this risk, including establishing the feasibility of
certain equipment modifications to enable it to utilize alternative chlorine
suppliers or to purchase and utilize an intermediate product which will allow
TIMET to eliminate the purchase of chlorine if needed. Magnesium and petroleum
coke are also generally available from a number of suppliers.
While TIMET was one of five major worldwide producers of titanium sponge in
2002, it cannot supply all of its needs for all grades of titanium sponge
internally and is dependent, therefore, on third parties for a substantial
portion of its sponge requirements. In 2001, Allegheny Technologies, Inc. idled
its titanium sponge production facility, leaving TIMET as the only active
principal U.S. producer of titanium sponge and reducing the number of active
principal worldwide producers to five. Presently, TIMET and certain suppliers in
Japan are the only producers of premium quality sponge required for more
demanding aerospace applications. However, two additional sponge suppliers are
presently undergoing qualification tests of their products for certain premium
quality applications and were qualified by some engine manufacturers for certain
premium quality applications during 2002. This qualification process is likely
to continue for several years.
Historically, TIMET has purchased sponge predominantly from producers in
Japan and Kazakhstan. Since 2000, TIMET has also purchased sponge from the U.S.
Defense Logistics Agency ("DLA") stockpile. In September 2002, TIMET entered
into an agreement with a sponge supplier in Kazakhstan effective from January 1,
2002 through December 31, 2007. This agreement replaced and superceded a prior
1997 agreement. The new agreement requires minimum annual purchases by TIMET of
approximately $10 million. TIMET has no other long-term sponge supply
agreements. In 2003, TIMET expects to continue to purchase sponge from a variety
of sources
Various alloying elements used in the production of titanium ingot are also
available from a number of suppliers.
Properties. TIMET currently has manufacturing facilities in the United
States in Nevada, Ohio, Pennsylvania and California, and also has two facilities
in the United Kingdom and one facility in France. TIMET sponge is produced at
the Nevada facility while ingot, slab and mill products are produced at the
other facilities. The facilities in Nevada, Ohio and Pennsylvania, and one of
the facilities in the United Kingdom, are owned, and all of the remainder are
leased.
In addition to its U.S. sponge capacity discussed below, TIMET's worldwide
melting capacity presently aggregates approximately 45,000 metric tons
(estimated 29% of world capacity), and its mill product capacity aggregates
approximately 20,000 metric tons (estimated 16% of world capacity).
Approximately 35% of TIMET's worldwide melting capacity is represented by
electron beam cold hearth melting ("EB") furnaces, 63% by vacuum arc remelting
("VAR") furnaces and 2% by a vacuum induction melting ("VIM") furnace.
TIMET has operated its major production facilities at varying levels of
practical capacity during the past three years. In 2002, the plants operated at
approximately 55% of practical capacity, as compared to 75% in 2001 and 60% in
2000. In 2003, TIMET's plants are expected to operate at approximately 50% of
practical capacity. However, practical capacity and utilization measures can
vary significantly based upon the mix of products produced.
TIMET's VDP sponge facility is expected to operate at approximately 67% of
its annual practical capacity of 8,600 metric tons during 2003, down from
approximately 87% in 2002. VDP sponge is used principally as a raw material for
TIMET's melting facilities in the U.S. and Europe. Approximately 1,400 metric
tons of VDP production from TIMET's Nevada facility were used in Europe during
2002, which represented approximately 32% of the sponge consumed in TIMET's
European operations. TIMET expects the consumption of VDP sponge in its European
operations to be approximately 40% of their sponge requirements in 2003. The raw
materials processing facilities in Pennsylvania primarily process scrap used as
melting feedstock, either in combination with sponge or separately. Sponge for
melting requirements in the U.S. that is not supplied by TIMET's Nevada plant is
purchased principally from suppliers in Japan and Kazakhstan and from the DLA.
TIMET's U.S. melting facilities in Nevada and Pennsylvania produce ingots
and slabs, which are either sold to third parties or used as feedstock for
TIMET's mill products operations. These melting facilities are expected to
operate at approximately 50% of aggregate annual practical capacity in 2003.
Titanium mill products are produced by TIMET in the U.S. at its forging and
rolling facility in Ohio, which receives intermediate titanium products (ingots
or slabs) principally from TIMET's U.S. melting facilities. TIMET's U.S. forging
and rolling facility is expected to operate at approximately 50% of annual
practical capacity in 2003. Capacity utilization across TIMET's individual mill
product lines varies.
One of TIMET facilities in the United Kingdom produces VAR ingots used
primarily as feedstock for its forging operations at the same facility. The
forging operations process the ingots principally into billet product for sale
to customers or into an intermediate product for further processing into bar or
plate at its other facility in the United Kingdom. U.K. melting and mill
products production in 2003 is expected to operate at approximately 55% and 45%
of annual practical capacity, respectively.
Sponge for melting requirements in both the U.K. and France that is not
supplied by TIMET's Nevada facility is purchased principally from suppliers in
Japan and Kazakhstan.
Distribution, market and customer base. TIMET sells its products through
its own sales force based in the U.S. and Europe and through independent agents
and distributors worldwide. TIMET's marketing and distribution system also
includes eight TIMET-owned service centers (five in the U.S. and three in
Europe), which sell TIMET's products on a just-in-time basis. The service
centers primarily sell value-added and customized mill products including bar
and flat-rolled sheet and strip. TIMET believes its service centers provide a
competitive advantage because of their ability to foster customer relationships,
customize products to suit specific customer requirements and respond quickly to
customer needs.
TIMET has long-term agreements with certain major aerospace customers,
including, but not limited to, The Boeing Company, Rolls-Royce plc, United
Technologies Corporation (Pratt & Whitney and related companies) and
Wyman-Gordon Company, a unit of Precision Castparts Corporation. These
agreements initially became effective in 1998 and 1999 and expire in 2007
through 2008, subject to certain conditions. The agreements generally provide
for (i) minimum market shares of the customers' titanium requirements or firm
annual volume commitments and (ii) fixed or formula-determined prices generally
for at least the first five years. Generally, the agreements require TIMET's
service and product performance to meet specified criteria and contain a number
of other terms and conditions customary in transactions of these types. In
certain events of nonperformance by TIMET, the agreements may be terminated
early. Additionally, under a group of related agreements (which group represents
approximately 12% of TIMET's 2002 sales) which currently have fixed prices that
convert to formula-derived prices in 2004, the customer may terminate the
agreement as of the end of 2003 if the effect of the initiation of
formula-derived pricing would cause such customer "material harm." If any of
such agreements were to be terminated by the customer on this basis, it is
possible that some portion of the business represented by that group of
agreements would continue on a non-agreement basis. However, the termination of
one or more of such agreements by the customer in such circumstances could
result in a material and adverse effect on TIMET's business, consolidated
financial position, results of operations or liquidity. These agreements were
designed to limit selling price volatility to the customer, while providing
TIMET with a committed base of volume throughout the aerospace business cycles.
They also, to varying degrees, effectively obligate TIMET to bear part of the
risks of increases in raw material and other costs, but allow TIMET to benefit
in part from decreases in such costs.
In April 2001, TIMET reached a settlement of the litigation between TIMET
and Boeing related to their prior long-term agreement LTA entered into in 1997.
Pursuant to the settlement, TIMET received a cash payment of $82 million from
Boeing. Under the terms of the new Boeing agreement, as amended, in years 2002
through 2007, Boeing is required to advance to TIMET $28.5 million annually less
$3.80 per pound of titanium product purchased by Boeing subcontractors during
the preceding year. Effectively, TIMET collects $3.80 less from Boeing than the
agreement selling price for each pound of titanium product sold directly to
Boeing and reduces the related customer advance recorded by TIMET. For titanium
products sold to Boeing subcontractors, TIMET collects the full agreement
selling price, but gives Boeing credit by reducing the next year's annual
advance by $3.80 per pound of titanium product sold to Boeing subcontractors.
The Boeing customer advance is also reduced as take-or-pay benefits are earned.
Under a separate agreement, TIMET must establish and hold buffer stock for
Boeing at TIMET's facilities, for which Boeing will pay TIMET as such product is
produced.
TIMET also has an agreement with VALTIMET SAS, a manufacturer of welded
stainless steel and titanium tubing that is principally sold into the industrial
markets. TIMET owns 44% of VALTIMET. This agreement was entered into in 1997 and
expires in 2007. Under this agreement, VALTIMET has agreed to purchase a certain
percentage of its titanium requirements from TIMET at formula-determined selling
prices, subject to certain conditions. Certain provisions of this contract have
been renegotiated in the past and may be renegotiated in the future to meet
changing business conditions.
Approximately 53% of TIMET's 2002 sales was generated by sales to customers
within North America, as compared to about 50% and 55% in 2001 and 2000,
respectively. Approximately 40% of TIMET's 2002 sales was generated by sales to
European customers, as compared to about 40% and 38% in 2001 and 2000,
respectively.
Over 67% of TIMET's sales was generated by sales to the aerospace industry
in 2002, as compared to 70% in each of 2001 and 2000. Sales under TIMET's
long-term agreements accounted for over 37% of its sales in 2002. Sales to PCC
and its related entities approximated 9% of TIMET's sales in 2002. Sales to
Rolls-Royce and other Rolls-Royce suppliers under the Rolls-Royce long-term
agreement (including sales to certain of the PCC-related entities) represented
approximately 12% of TIMET's sales in 2002. TIMET expects that while a majority
of its 2003 sales will be to the aerospace industry, other markets will continue
to represent a significant portion of sales.
The primary market for titanium products in the commercial aerospace
industry consists of two major manufacturers of large (over 100 seats)
commercial airframes - Boeing Commercial Airplanes Group of the United States
and Airbus Integrated Company (80% owned by European Aeronautic Defence and
Space Company and 20% owned by BAE Systems) of Europe. In addition to the
airframe manufacturers, the following four manufacturers of large civil aircraft
engines are also significant titanium users: Rolls-Royce, Pratt & Whitney (a
unit of United Technologies Corporation), General Electric Aircraft Engines and
Societe Nationale d'Etude et de Construction de Moteurs d'Aviation. TIMET's
sales are made both directly to these major manufacturers and to companies
(including forgers such as Wyman-Gordon) that use TIMET's titanium to produce
parts and other materials for such manufacturers. If any of the major aerospace
manufacturers were to significantly reduce aircraft and/or jet engine build
rates from those currently expected, there could be a material adverse effect,
both directly and indirectly, on TIMET.
The newer wide body planes, such as the Boeing 777 and the Airbus A330,
A340 and A380, tend to use a higher percentage of titanium in their frames,
engines and parts (as measured by total flyweight) than narrow body planes
("flyweight" is the empty weight of a finished aircraft with engines but without
fuel or passengers). Titanium represents approximately 9% of the total flyweight
of a Boeing 777 for example, compared to between 2% to 3% on the older 737, 747
and 767 models. The estimated firm order backlog for wide body planes at
year-end 2002 was 709 (27% of total backlog) compared to 801 (27% of total
backlog) at the end of 2001. At year-end 2002, a total of 95 firm orders had
been placed for the Airbus A380 superjumbo jet, which program was officially
launched in December 2000 with anticipated first deliveries in 2006. TIMET
estimates that approximately 77 metric tons of titanium will be purchased for
each A380 manufactured, the most of any commercial aircraft.
As of December 31, 2002, the estimated firm order backlog for Boeing and
Airbus, as reported by The Airline Monitor, was 2,649 planes, versus 2,919
planes at the end of 2001 and 3,224 planes at the end of 2000. The backlogs for
Boeing and Airbus reflect orders for aircraft to be delivered over several
years. For example, the first deliveries of the Airbus A380 are anticipated to
begin in 2006. Additionally, changes in the economic environment and the
financial condition of airlines can result in rescheduling or cancellation of
contractual orders. Accordingly, aircraft manufacturer backlogs are not
necessarily a reliable indicator of near-term business activity, but may be
indicative of potential business levels over a longer-term horizon.
Outside of aerospace markets, TIMET manufactures a wide range of industrial
products, including sheet, plate, tube, bar, billet and skelp, for customers in
the chemical process, oil and gas, consumer, sporting goods, automotive, power
generation and armor/armament industries. Approximately 18% of TIMET's sales in
2002, 2001 and 2000 was generated by sales into the industrial and emerging
markets, including sales to VALTIMET for the production of condenser tubing. For
the oil and gas industries, TIMET provides seamless pipe for downhole casing,
risers, tapered stress joints and other offshore oil production equipment,
including fabrication of sub-sea manifolds. In armor and armament, TIMET sells
plate products for fabrication into door hatches on fighting vehicles, as well
as tank/turret protection.
In addition to mill and melted products, which are sold into the aerospace,
industrial and emerging markets, TIMET sells certain other products such as
sponge that is not suitable for internal consumption, titanium tetrachloride and
fabricated titanium assemblies. Sales of these other products represented 15% of
TIMET's sales in 2002 and 12% in each of 2001 and 2000.
TIMET's backlog of unfilled orders was approximately $165 million at
December 31, 2002, compared to $225 million at December 31, 2001 and $245
million at December 31, 2000. Substantially all the 2002 year-end backlog is
scheduled for shipment during 2003. However, TIMET's order backlog may not be a
reliable indicator of future business activity. Since September 11, 2001, TIMET
has received a number of deferrals and cancellations of previously scheduled
orders and believes such requests will continue into 2003.
Through various strategic relationships, TIMET seeks to gain access to
unique process technologies for the manufacture of its products and to expand
existing markets and create and develop new markets for titanium. TIMET has
explored and will continue to explore strategic arrangements in the areas of
product development, production and distribution. TIMET also will continue to
work with existing and potential customers to identify and develop new or
improved applications for titanium that take advantage of its unique qualities.
Competition. The titanium metals industry is highly competitive on a
worldwide basis. Producers of melted and mill products are located primarily in
the United States, Japan, France, Germany, Italy, Russia, China and the United
Kingdom. There are currently six principal producers of titanium sponge in the
world. TIMET is the only U.S. sponge producer.
TIMET's principal competitors in aerospace markets are Allegheny
Technologies Inc. and RTI International Metals, Inc., both based in the United
States, and Verkhnaya Salda Metallurgical Production Organization ("VSMPO"),
based in Russia. These companies, along with the Japanese producers and other
companies, are also principal competitors in industrial markets. TIMET competes
primarily on the basis of price, quality of products, technical support and the
availability of products to meet customers' delivery schedules.
In the U.S. market, the increasing presence of non-U.S. participants has
become a significant competitive factor. Until 1993, imports of foreign titanium
products into the U.S. had not been significant. This was primarily attributable
to relative currency exchange rates and, with respect to Japan, Russia,
Kazakhstan and Ukraine, import duties (including antidumping duties). However,
since 1993, imports of titanium sponge, ingot and mill products, principally
from Russia and Kazakhstan, have increased and have had a significant
competitive impact on the U.S. titanium industry. To the extent TIMET has been
able to take advantage of this situation by purchasing sponge, ingot or
intermediate and finished mill products from such countries for use in its own
operations, the negative effect of these imports on TIMET has been somewhat
mitigated.
Generally, imports of titanium products into the U.S. are subject to a 15%
"normal trade relations" tariff. For tariff purposes, titanium products are
broadly classified as either wrought (bar, sheet, strip, plate and tubing) or
unwrought (sponge, ingot, slab and billet). Prior antidumping orders on imports
of titanium sponge from Japan and countries of the former Soviet Union were
revoked in 1998.
The U.S. maintains a trade program referred to as the generalized system of
preferences, or "GSP program," designed to promote the economies of a number of
lesser- developed countries (referred to as beneficiary developing countries) by
eliminating duties on a specific list of products imported from any of these
beneficiary developing countries. Of the key titanium producing countries
outside the U.S., Russia and Kazakhstan are currently regarded as beneficiary
developing countries under the GSP program.
For most periods since 1993, imports of titanium wrought products from any
beneficiary developing country (notably Russia, as a producer of wrought
products) were exempted from U.S. import duties under the GSP program.
Kazakhstan has filed a petition with the Office of the U.S. Trade Representative
seeking GSP status on imports of titanium sponge, which, if granted, would
eliminate the 15% tariff currently imposed on titanium sponge imported into the
U.S. from any beneficiary developing country (notably Russia and Kazakhstan, as
producers of titanium sponge).
TIMET has successfully resisted, and will continue to resist, efforts to
date to expand the scope of the GSP program to eliminate duties on sponge and
other unwrought titanium products, although no assurances can be made that TIMET
will continue to be successful in these activities. No formal decision on the
treatment of the GSP petition on titanium sponge has been announced by the U.S.
Trade Representative, although TIMET expects that action on the petition will be
taken in 2003. Antidumping orders permitting duties on imports of titanium
sponge from Japan and the former Soviet Union were revoked in 1998.
Further reductions in, or the complete elimination of, any or all of these
tariffs, including expansion of the GSP program to unwrought titanium products,
could lead to increased imports of foreign sponge, ingot and mill products into
the U.S. and an increase in the amount of such products on the market generally,
which could adversely affect pricing for titanium sponge and mill products and
thus TIMET's business, consolidated financial position, results of operations or
liquidity. However, since 1993 TIMET has been a large importer of foreign
titanium sponge, particularly from Kazakhstan, into the U.S. To the extent TIMET
remains a substantial purchaser of foreign sponge, any adverse effects on
product pricing as a result of any reduction in, or elimination of, any of these
tariffs would be partially ameliorated by the decreased cost to TIMET for
foreign sponge to the extent it currently bears the cost of the import duties.
Producers of other metal products, such as steel and aluminum, maintain
forging, rolling and finishing facilities that could be used or modified without
substantial expenditures to process titanium products. TIMET believes, however,
that entry as a producer of titanium sponge would require a significant capital
investment and substantial technical expertise. Titanium mill products also
compete with stainless steels, nickel alloys, steel, plastics, aluminum and
composites in many applications.
Research and development. TIMET's research and development activities are
directed toward expanding the use of titanium and titanium alloys in all market
sectors. Key research activities include the design of new alloys, applications
development in the automotive division and development of technology required to
enhance the performance of TIMET's products in the traditional industrial and
aerospace markets. TIMET conducts the majority of its research and development
activities at its Nevada facility, with additional activities at its facility in
England. TIMET incurred research and development costs of $2.6 million in each
of 2000 and 2001 and $3.3 million in 2002.
Patents and trademarks. TIMET holds U.S. and non-U.S. patents applicable to
certain of its titanium alloys and manufacturing technology. TIMET continually
seeks patent protection with respect to its technical base and has occasionally
entered into cross-licensing arrangements with third parties. TIMET believes
that the trademarks TIMET and TIMETAL, which are protected by registration in
the U.S. and other countries, are important to its business. Further, TIMET
feels its proprietary TIMETAL Exhaust Grade, patented TIMETAL 62S connecting rod
alloy, patented TIMETAL LCB spring alloy and patented TIMETAL Ti-1100 engine
valve alloy give it competitive advantages in the automotive market. However,
most of the titanium alloys and manufacturing technology used by TIMET do not
benefit from patent or other intellectual property protection.
Employees. At December 31, 2002, TIMET employed approximately 1,950 persons
(1,185 in the U.S. and 765 in Europe), compared to 2,410 persons at the end of
2001 and 2,220 persons at the end of 2000. The cyclical nature of the aerospace
industry and its impact on TIMET's business is the principal reason that TIMET
periodically implements cost reduction, restructurings, reorganizations and
other changes that impact TIMET's employment levels. The 19% decrease in
employees from 2001 to 2002 and the 9% increase in employees from 2000 to 2001
were principally in response to changes in market demand for TIMET's products.
During 2003, TIMET expects to continue efforts to reduce employment in response
to anticipated reduced demand for titanium products.
TIMET's production, maintenance, clerical and technical workers in its Ohio
facility and its production and maintenance workers in its Nevada facility are
represented by the United Steelworkers of America under contracts expiring in
June 2005 and October 2004, respectively. Employees at TIMET's other U.S.
facilities are not covered by collective bargaining agreements. Approximately
60% of the salaried and hourly employees at TIMET's European facilities are
represented by various European labor unions, generally under annual agreements.
Such agreements are currently being negotiated for 2003.
While TIMET currently considers its employee relations to be satisfactory,
it is possible that there could be future work stoppages or other labor
disruptions that could materially and adversely affect TIMET's business,
consolidated financial position, results of operations or liquidity.
Regulatory and environmental matters. TIMET's operations are governed by
various Federal, state, local and foreign environmental and worker safety laws
and regulations. In the U.S., such laws include the Occupational, Safety and
Health Act, the Clean Air Act, the Clean Water Act and the RCRA. TIMET uses and
manufactures substantial quantities of substances that are considered hazardous
or toxic under environmental and worker safety and health laws and regulations.
In addition, at TIMET's Nevada facility, TIMET produces and uses substantial
quantities of titanium tetrachloride, a material classified as extremely
hazardous under Federal environmental laws. TIMET has used such substances
throughout the history of its operations. As a result, risk of environmental
damage is inherent in TIMET's operations. TIMET's operations pose a continuing
risk of accidental releases of, and worker exposure to, hazardous or toxic
substances. There is also a risk that government environmental requirements, or
enforcement thereof, may become more stringent in the future. There can be no
assurances that some, or all, of the risks discussed under this heading will not
result in liabilities that would be material to TIMET's business, consolidated
financial position, results of operations or liquidity.
TIMET's operations in Europe are similarly subject to foreign laws and
regulations respecting environmental and worker safety matters, which laws have
not had, and are not presently expected to have, a material adverse effect on
TIMET's business, consolidated financial position, results of operations or
liquidity.
TIMET believes that its operations are in compliance in all material
respects with applicable requirements of environmental and worker health and
safety laws. TIMET's policy is to continually strive to improve environmental,
health and safety performance. From time to time, TIMET may be subject to
health, safety or environmental regulatory enforcement under various statutes,
resolution of which typically involves the establishment of compliance programs.
Occasionally, resolution of these matters may result in the payment of
penalties. TIMET incurred capital expenditures for health, safety and
environmental compliance matters of approximately $2.6 million in 2000, $2.4
million in 2001 and $1.4 million in 2002. TIMET's capital budget provides for
approximately $1.9 million of such expenditures in 2003. However, the imposition
of more strict standards or requirements under environmental, health or safety
laws and regulations could result in expenditures in excess of amounts estimated
to be required for such matters.
OTHER
Tremont Corporation. Tremont is primarily a holding company which owns 21%
of NL and 39% of TIMET at December 31, 2002. In addition, Tremont owns indirect
ownership interests in Basic Management, Inc. ("BMI"), which provides utility
services to, and owns property (the "BMI Complex") adjacent to, TIMET's facility
in Nevada, and The Landwell Company L.P. ("Landwell"), which is engaged in
efforts to develop certain land holdings for commercial, industrial and
residential purposes surrounding the BMI Complex. In February 2003, Tremont
became a wholly-owned subsidiary of the Company. See Note 3 to the Consolidated
Financial Statements.
Foreign operations. Through its subsidiaries and affiliates, the Company
has substantial operations and assets located outside the United States,
principally chemicals operations in Germany, Belgium and Norway, titanium metals
operations in the United Kingdom and France, chemicals and component products
operations in Canada and component products operations in The Netherlands and
Taiwan. See Note 2 to the Consolidated Financial Statements. Approximately 69%
of NL's 2002 aggregate TiO2 sales were to non-U.S. customers, including 11% to
customers in areas other than Europe and Canada. Approximately 36% of CompX's
2002 sales were to non-U.S. customers located principally in Canada and Europe.
About 47% of TIMET's 2002 sales are to non-U.S. customers, primarily in Europe.
Foreign operations are subject to, among other things, currency exchange rate
fluctuations and the Company's results of operations have in the past been both
favorably and unfavorably affected by fluctuations in currency exchange rates.
See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 7A - "Quantitative and Qualitative Disclosures
About Market Risk."
CompX's Canadian component products subsidiary has, from time to time,
entered into currency forward contracts to mitigate exchange rate fluctuation
risk for a portion of its receivables denominated in currencies other than the
Canadian dollar (principally the U.S. dollar) or for similar risks associated
with future sales. See Note 1 to the Consolidated Financial Statements.
Otherwise, the Company does not generally engage in currency derivative
transactions.
Political and economic uncertainties in certain of the countries in which
the Company operates may expose the Company to risk of loss. The Company does
not believe that there is currently any likelihood of material loss through
political or economic instability, seizure, nationalization or similar event.
The Company cannot predict, however, whether events of this type in the future
could have a material effect on its operations. The Company's manufacturing and
mining operations are also subject to extensive and diverse environmental
regulations in each of the foreign countries in which they operate, as discussed
in the respective business sections elsewhere herein.
Regulatory and environmental matters. Regulatory and environmental matters
are discussed in the respective business sections contained elsewhere herein and
in Item 3 - "Legal Proceedings." In addition, the information included in Note
19 to the Consolidated Financial Statements under the captions "Legal
proceedings -- lead pigment litigation" and - "Environmental matters and
litigation" is incorporated herein by reference.
Acquisition and restructuring activities. 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 unconsolidated
affiliates, 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 policy, consider
the sale of interests in subsidiaries, 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. From time to time,
the Company and related entities also evaluate the restructuring of ownership
interests among its subsidiaries and related companies and expects to continue
this activity in the future.
The Company and other entities that may be deemed to be controlled by or
affiliated with Mr. Harold C. Simmons 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. In a number of instances, the Company has actively managed the
businesses acquired with a focus on maximizing return-on-investment through cost
reductions, capital expenditures, improved operating efficiencies, selective
marketing to address market niches, disposition of marginal operations, use of
leverage and redeployment of capital to more productive assets. In other
instances, the Company has disposed of the acquired interest in a company prior
to gaining control. The Company intends to consider such activities in the
future and may, in connection with such activities, consider issuing additional
equity securities and increasing the indebtedness of Valhi, its subsidiaries and
related companies.
Website and availability of Company reports filed with the SEC. Valhi files
reports, proxy and information statements and other information with the SEC.
The Company does not maintain a website on the internet. The Company will
provide to anyone without charge copies of this Annual Report on Form 10-K for
the year ended December 31, 2002, copies of the Company's Quarterly Reports on
Form 10-Q for 2002 and 2003 and any Current Reports on Form 8-K for 2002 and
2003, and any amendments thereto, as soon as they are filed with the SEC upon
written request to the Company. Such requests should be directed to the
attention of the Corporate Secretary at the Company's address on the cover page
of this Form 10-K.
The general public may read and copy any materials the Company files with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549, and may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer,
and the SEC maintains an Internet website at www.sec.gov that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the SEC, including the Company.
ITEM 2. PROPERTIES
Valhi leases approximately 34,000 square feet of office space for its
principal executive offices in a building located at 5430 LBJ Freeway, Dallas,
Texas, 75240-2697. The principal properties used in the operations of the
Company, including certain risks and uncertainties related thereto, are
described in the applicable business sections of Item 1 - "Business." The
Company believes that its facilities are generally adequate and suitable for
their respective uses.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings. In addition to
information that is included below, certain information called for by this Item
is included in Note 19 to the Consolidated Financial Statements, which
information is incorporated herein by reference.
NL lead pigment litigation. NL was formerly involved in the manufacture of
lead pigments used in paint. During the past 15 years, NL has been named as a
defendant or third party defendant in various legal proceedings alleging that NL
and approximately seven other former lead pigment manufacturers are responsible
for personal injury, property damage and government expenditures allegedly
associated with the use of these products. These cases assert a combination of
claims that generally include negligent product design, negligent failure to
warn, supplier negligence, fraud and deceit, public and private nuisance,
restitution, indemnification, conspiracy, concert of action, aiding and
abetting, strict liability/failure to warn, and strict liability/defective
design, violations of state consumer protection statutes, enterprise liability,
market share liability, and similar claims. NL has neither lost nor settled any
of these cases. Considering NL's previous involvement in the lead pigment and
lead-based paint businesses, NL expects that additional lead pigment and
lead-based paint litigation, asserting similar or different legal theories and
seeking similar or different types of damage and relief to that described below,
may be filed. In addition various other cases are pending (in which NL is not a
defendant) seeking recovery for injury allegedly caused by lead pigment and
lead-based paint. Although NL is not a defendant in these cases, the outcome of
these cases may have an impact on additional cases being filed against NL.
NL has not accrued any amounts for the pending lead pigment and lead-based
paint litigation. There is no assurance that NL will not incur future liability
in respect of this litigation in view of the inherent uncertainties involved in
court and jury rulings in pending and possible future cases. However, based on,
among other things, the results of such litigation to date, NL believes that the
pending cases are without merit and will continue to defend the cases
vigorously. Liability that may result, if any, cannot reasonably be estimated.
In 1989 and 1990, the Housing Authority of New Orleans ("HANO") filed
third-party complaints for indemnity and/or contribution against NL, other
former manufacturers of lead pigment (together with NL, the "former pigment
manufacturers") and the Lead Industries Association (the "LIA") in 14 actions
commenced by residents of HANO units seeking compensatory and punitive damages
for injuries allegedly caused by lead pigment. All but two of the actions (Hall
v. HANO, et al., No. 89-3552, and Allen v. HANO, et al., No. 89-427, Civil
District Court for the Parish of Orleans, State of Louisiana) have been
dismissed. The two remaining cases have been inactive since 1992.
In June 1989, a complaint was filed in the Supreme Court of the State of
New York, County of New York, against the former pigment manufacturers and the
LIA. Plaintiffs sought damages in excess of $50 million for monitoring and
abating alleged lead paint hazards in public and private residential buildings,
diagnosing and treating children allegedly exposed to lead paint in city
buildings, the costs of educating city residents to the hazards of lead paint,
and liability in personal injury actions against the New York City and the New
York City Housing Authority based on alleged lead poisoning of city residents
(The City of New York, the New York City Housing Authority and the New York City
Health and Hospitals Corp. v. Lead Industries Association, Inc., et al., No.
89-4617). As a result of pre-trial motions, the New York City Housing Authority
is the only remaining plaintiff in the case and is pursuing damage claims only
with respect to two housing projects. Discovery is proceeding.
In August 1992, NL was served with an amended complaint in Jackson, et al.
v. The Glidden Co., et al., Court of Common Pleas, Cuyahoga County, Cleveland,
Ohio (Case No. 236835). Plaintiffs seek compensatory and punitive damages for
personal injury caused by the ingestion of lead, and an order directing
defendants to abate lead-based paint in buildings. Plaintiffs purport to
represent a class of similarly situated persons throughout the State of Ohio.
The trial court has denied plaintiffs' motion for class certification. Discovery
and pre-trial proceedings are continuing with the individual plaintiffs.
Defendants have filed a motion for summary judgment on all claims. The court has
not yet ruled on the motion.
In December 1998, NL was served with a complaint on behalf of four children
and their guardians in Sabater, et al. v. Lead Industries Association, et al.
(Supreme Court of the State of New York, County of Bronx, Index No. 25533/98).
Plaintiffs purport to represent a class of all children and mothers similarly
situated in New York State. The complaint seeks damages from the LIA and other
former pigment manufacturers for establishment of property abatement and medical
monitoring funds and compensatory damages for alleged injuries to plaintiffs.
Discovery regarding class certification is proceeding.
In September 1999, an amended complaint was filed in Thomas v. Lead
Industries Association, et al. (Circuit Court, Milwaukee, Wisconsin, Case No.
99-CV-6411) adding as defendants the former pigment manufacturers to a suit
originally filed against plaintiff's landlords. Plaintiff, a minor, alleges
injuries purportedly caused by lead on the surfaces of premises in homes in
which he resided. Plaintiff seeks compensatory and punitive damages, and NL has
denied liability. In January 2003, the trial court granted defendants' motion
for summary judgment, dismissing all counts of the complaint. The time for
plaintiff to appeal has not yet expired.
In October 1999, NL was served with a complaint in State of Rhode Island v.
Lead Industries Association, et al. (Superior Court of Rhode Island, No.
99-5226). The State seeks compensatory and punitive damages for medical and
educational expenses, and public and private building abatement expenses that
the State alleges were caused by lead paint, and for funding of a public
education campaign and health screening programs. Plaintiff seeks judgments of
joint and several liability against the former pigment manufacturers and the
LIA. Trial began in phase I of this case before a Rhode Island state court jury
in September 2002. On October 29, 2002, the trial judge declared a mistrial in
the case when the jury was unable to reach a verdict on the question of whether
lead pigment in paint on Rhode Island buildings is a public nuisance, with the
jury reportedly deadlocked 4-2 in the defendants' favor. No date has been set
for any further proceedings, including any possible retrial of the public
nuisance issue. Other claims made by the Attorney General, including violation
of the Rhode Island Unfair Trade Practices and Consumer Protection Act, strict
liability, negligence, negligent and fraudulent misrepresentation, civil
conspiracy, indemnity, and unjust enrichment remain pending and were not the
subject of the 2002 trial. Post trial motions by plaintiff and defendants for
judgment notwithstanding the mistrial are pending.
In October 1999, NL was served with a complaint in Smith, et al. v. Lead
Industries Association, et al. (Circuit Court for Baltimore City, Maryland, Case
No. 24-C-99-004490). Plaintiffs, seven minors from four families, each seek
compensatory damages of $5 million and punitive damages of $10 million for
alleged injuries due to lead-based paint. Plaintiffs allege that the former
pigment manufacturers and other companies alleged to have manufactured lead
pigment, paint and/or gasoline additives, the LIA and the National Paint and
Coatings Association are jointly and severally liable. NL has denied liability,
and all defendants filed motions to dismiss various of the claims. In February
2002, the trial court dismissed all claims except those relating to product
liability for lead paint and the Maryland Consumer Protection Act. In November
2002, the trial court granted summary judgment against the children from the
first of the plaintiff families and plaintiffs have appealed. Pre-trial
proceedings and discovery against the other plaintiffs are continuing.
In February 2000, NL was served with a complaint in City of St. Louis v.
Lead Industries Association, et al. (Missouri Circuit Court 22nd Judicial
Circuit, St. Louis City, Cause No. 002-245, Division 1). Plaintiff seeks
compensatory and punitive damages for its expenses discovering and abating
lead-based paint, detecting lead poisoning and providing medical care and
educational programs for City residents, and the costs of educating children
suffering injuries due to lead exposure. Plaintiff seeks judgments of joint and
several liability against the former pigment manufacturers and the LIA. In
November 2002, defendants' motion to dismiss was denied. Discovery is
proceeding.
In April 2000, NL was served with a complaint in County of Santa Clara v.
Atlantic Richfield Company, et al. (Superior Court of the State of California,
County of Santa Clara, Case No. CV788657) brought against the former pigment
manufacturers, the LIA and certain paint manufacturers. The County of Santa
Clara seeks to represent a class of California governmental entities (other than
the state and its agencies) to recover compensatory damages for funds the
plaintiffs have expended or will in the future expend for medical treatment,
educational expenses, abatement or other costs due to exposure to, or potential
exposure to, lead paint, disgorgement of profit, and punitive damages. Santa
Cruz, Solano, Alameda, San Francisco, and Kern counties, the cities of San
Francisco and Oakland, the Oakland and San Francisco unified school districts
and housing authorities and the Oakland Redevelopment Agency have joined the
case as plaintiffs. In February 2003, defendants filed a motion for summary
judgment. Pre-trial proceedings and discovery are continuing.
In June 2000, two complaints were filed in Texas state court, Spring Branch
Independent School District v. Lead Industries Association, et al. (District
Court of Harris County, Texas, No. 2000-31175), and Houston Independent School
District v. Lead Industries Association, et al. (District Court of Harris
County, Texas, No. 2000-33725). The School Districts seek past and future
damages and exemplary damages for costs they have allegedly incurred or will
occur due to the presence of lead-based paint in their buildings from the former
pigment manufacturers and the LIA. NL has denied all liability. In June 2002,
the court granted NL's motion for summary judgment in the Spring Branch case,
and plaintiffs have filed an appeal of the grant of summary judgment. The
Houston case has been abated, or stayed, pending appellate review of the trial
court's dismissal of the Spring Branch case or certain other events.
In June 2000, a complaint was filed in Illinois state court, Lewis, et al.
v. Lead Industries Association, et al. (Circuit Court of Cook County, Illinois,
County Department, Chancery Division, Case No. 00CH09800). Plaintiffs seek to
represent two classes, one of all minors between the ages of six months and six
years who resided in housing in Illinois built before 1978, and one of all
individuals between the ages of six and twenty years who lived between the ages
of six months and six years in Illinois housing built before 1978 and had blood
lead levels of 10 micrograms/deciliter or more. The complaint seeks damages
jointly and severally from the former pigment manufacturers and the LIA to
establish a medical screening fund for the first class to determine blood lead
levels, a medical monitoring fund for the second class to detect the onset of
latent diseases, and a fund for a public education campaign. In March 2002, the
court dismissed all claims. Plaintiffs have appealed.
In October 2000, NL was served with a complaint filed in California state
court in Justice, et al. v. Sherwin-Williams Company, et al. (Superior Court of
California, County of San Francisco, No. 314686). Plaintiffs are two minors who
seek general, special and punitive damages from the former pigment manufacturers
and the LIA for injuries alleged to be due to ingestion of paint containing lead
in their residence. NL has denied all liability. In February 2003, plaintiffs
moved to dismiss the case without prejudice.
In February 2001, NL was served with a complaint in Borden, et al. v. The
Sherwin-Williams Company, et al. (Circuit Court of Jefferson County,
Mississippi, Civil Action No. 2000-587). The complaint seeks joint and several
liability for compensatory and punitive damages from more than 40 manufacturers
and retailers of lead pigment and/or paint, including NL, on behalf of 18 adult
residents of Mississippi who were allegedly exposed to lead during their
employment in construction and repair activities. One plaintiff has dropped his
claims and the court has ordered that the claims of nine of the plaintiffs be
transferred to Holmes County, Mississippi state court. Pre-trial proceedings are
continuing with respect to the eight plaintiffs remaining in Jefferson County.
Trial is scheduled to begin in October 2003.
In May 2001, NL was served with a complaint in City of Milwaukee v. NL
Industries, Inc. and Mautz Paint (Circuit Court, Civil Division, Milwaukee
County, Wisconsin, Case No. 01CV003066). Plaintiff seeks compensatory and
equitable relief for lead hazards in Milwaukee homes, restitution for amounts it
has spent to abate lead and punitive damages. NL has denied all liability.
Pre-trial proceedings are continuing. Trial is scheduled to begin in October
2003
In May 2001, NL was served with a complaint in Harris County, Texas v. Lead
Industries Association, et al. (District Court of Harris County, Texas, No.
2001-21413). The complaint seeks actual and punitive damages and asserts that
the former pigment manufacturers and the LIA are jointly and severally liable
for past and future damages due to the presence of lead paint in County-owned
buildings. NL has denied all liability. The case has been abated, or stayed,
pending appellate review of the trial court's dismissal of the Spring Branch
Independent School District case discussed above or certain other events.
In December 2001, NL was served with a complaint in Quitman County School
District v. Lead Industries Association, et al. (U.S. District Court for the
Northern District of Mississippi, No. 2:02CV004-P-B). The complaint asserts
joint and several liability and seeks compensatory and punitive damages from the
former pigment manufacturers, local paint retailers and others for the abatement
of lead paint in Quitman County schools. Plaintiffs subsequently dismissed with
prejudice all defendants except NL. The case has been removed to the United
States District Court for the Northern District of Mississippi. NL has denied
all liability and has filed a motion for summary judgment. Pre-trial proceedings
are continuing.
In January and February 2002, NL was served with complaints by 25 different
New Jersey municipalities and counties which have been consolidated as In re:
Lead Paint Litigation (Superior Court of New Jersey, Middlesex County, Case Code
702). Each complaint seeks abatement of lead paint from all housing and all
public buildings in each jurisdiction and punitive damages jointly and severally
from the former pigment manufacturers and the LIA. In November 2002, the court
entered an order dismissing this case with prejudice. Plaintiffs have appealed.
In January 2002, NL was served with a complaint in Jackson, et al., v.
Phillips Building Supply of Laurel, et al. (Circuit Court of Jones County,
Mississippi, Dkt. Co. 2002-10-CV1). The complaint seeks joint and several
liability from three local retailers and six non-Mississippi companies that sold
paint for compensatory and punitive damages on behalf of four adults for
injuries alleged to have been caused by the use of lead paint. After removal to
federal court, in February 2003 the case was removed to state court. NL has
denied all allegations of liability and pre-trial proceedings are continuing.
In February 2002, NL was served with a complaint in Liberty Independent
School District v. Lead Industries Association, et al. (District Court of
Liberty County, Texas, No. 63,332). The school district seeks compensatory and
punitive damages jointly and severally from the former pigment manufacturers and
the LIA for property damage to its buildings. The complaint was amended to add
Liberty County, the City of Liberty, and the Dayton Independent School District
as plaintiffs and drop the LIA as a defendant. NL has denied all allegations of
liability. The case has been abated, or stayed, pending appellate review of the
trial court's dismissal of the Spring Branch Independent School District case
discussed above or certain other events.
In May 2002, NL was served with a complaint in Brownsville Independent
School District v. Lead Industries Association, et al. (District Court of
Cameron County, Texas, No. 2002-052081 B), seeking compensatory and punitive
damages jointly and severally from NL, other former manufacturers of lead
pigment and the LIA for property damage. NL has denied all allegations of
liability. The case has been abated, or stayed, pending appellate review of the
trial court's dismissal of the appeal in the Spring Branch Independent School
District case discussed above or certain other events.
In September 2002, NL was served with a complaint in City of Chicago v.
American Cyanamid, et al. (Circuit Court of Cook County, Illinois, No.
02CH16212), seeking damages to abate lead paint in a single-count complaint
alleging public nuisance against NL and seven other former manufacturers of lead
pigment. Defendants have filed a motion to dismiss. The court has not yet ruled
on the motion.
In October 2002, NL was served with a complaint in Walters v. NL
Industries, et al. (Kings County Supreme Court, New York, No. 28087/2002), in
which an adult seeks compensatory and punitive damages from NL and five other
former manufacturers of lead pigment for childhood exposures to lead paint. The
complaint alleges negligence and strict product liability, and seeks joint and
several liability with claims of civil conspiracy, concert of action, enterprise
liability, and market share or alternative liability. Defendants have moved to
dismiss certain of the counts.
NL is also aware of three personal injury complaints filed in state court
in LeFlore County Mississippi in December 2002. In Russell v. NL Industries,
Inc., et al. (No. No.2002-0235-CICI), six painters have sued NL, four paint
companies, and a local retailer, alleging strict liability, negligence,
fraudulent concealment, misrepresentation, and conspiracy, and seeking
compensatory and punitive damages for alleged injuries caused by lead paint. In
Stewart v. NL Industries, Inc., et al. (No. 2002-0266-CICI), a child has sued
NL, four paint companies, two local retailers, and two landlords, alleging
strict liability, negligence, fraudulent concealment, and misrepresentation, and
seeking compensatory and punitive damages for alleged injuries caused by lead
paint. In Jones v. NL Industries, Inc., et al. (No. 2002-0241-CICI), fourteen
children from five families have sued NL and one landlord alleging strict
liability, negligence, fraudulent concealment, and misrepresentation, and
seeking compensatory and punitive damages for alleged injuries caused by lead
paint. NL has not been served in any of the cases.
NL believes that all of the foregoing lead pigment actions are without
merit and intends to continue to deny all allegations of wrongdoing and
liability and to defend such actions vigorously.
In addition to the foregoing litigation, various legislation and
administrative regulations have, from time to time, been enacted or proposed
that seek to (a) 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 (b) 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, the imposition of market share liability or other
legislation could have such an effect.
Environmental matters and litigation. NL has been named as a defendant,
PRP, or both, pursuant to CERCLA and similar state laws in approximately 70
governmental and private actions associated with waste disposal sites, mining
locations and facilities currently or previously owned, operated or used by NL,
or its subsidiaries, or their predecessors, certain of which are on the U.S.
Environmental Protection Agency's Superfund National Priorities List or similar
state lists. These proceedings seek cleanup costs, damages for personal injury
or property damage and/or damages for injury to natural resources. Certain of
these proceedings involve claims for substantial amounts. Although NL may be
jointly and severally liable for such costs, in most cases it is only one of a
number of PRPs who are also jointly and severally liable.
The extent of CERCLA liability cannot be determined until the Remedial
Investigation and Feasibility Study ("RIFS") is complete, the U.S. EPA issues a
record of decision and costs are allocated among PRPs. The extent of liability
under analogous state cleanup statutes and for common law equivalents is subject
to similar uncertainties. NL believes it has provided adequate accruals for
reasonably estimable costs for CERCLA matters and other environmental
liabilities. At December 31, 2002, NL had accrued $98 million with respect to
those environmental matters which are reasonably estimable. NL determines the
amount of accrual on a quarterly basis by analyzing and estimating the range of
reasonably possible costs to NL. Such costs include, among other things,
expenditures for remedial investigations, monitoring, managing, studies, certain
legal fees, clean-up, removal and remediation. It is not possible to estimate
the range of costs for certain sites. NL has estimated that the upper end of the
range of reasonably possible costs to NL for sites for which it is possible to
estimate costs is approximately $140 million. NL's estimates of such liability
has not been discounted to present value, and other than the three settlements
discussed below with respect to certain of NL's former insurance carriers, NL
has not recognized any insurance recoveries. No assurance can be given that
actual costs will not exceed either 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. The imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes with respect to site cleanup costs or allocation of such costs among
PRPs, the insolvency of other PRPs or a determination that NL is potentially
responsible for the release of hazardous substances at other sites could result
in expenditures in excess of amounts currently estimated by NL to be required
for such matters. Furthermore, there can be no assurance that additional
environmental matters will not arise in the future. More detailed descriptions
of certain legal proceedings relating to environmental matters are set forth
below.
At December 31, 2002, NL had $61 million in cash, equivalents and
marketable debt securities held by certain 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 Notes 1 and 12 to the
Consolidated Financial Statements.
In July 1991, the United States filed an action in the U.S. District Court
for the Southern District of Illinois against NL and others (United States of
America v. NL Industries, Inc., et al., Civ. No. 91-CV 00578) with respect to
the Granite City, Illinois lead smelter formerly owned by NL. The complaint
seeks injunctive relief to compel the defendants to comply with an
administrative order issued pursuant to CERCLA, and fines and treble damages for
the alleged failure to comply with the order. NL and the other parties did not
implement the order, believing that the remedy selected by the U.S. EPA was
unlawful. The complaint also seeks recovery of past costs and a declaration that
the defendants are liable for future costs. Although the action was filed
against NL and ten other defendants, there are 330 other PRPs who have been
notified by the U.S. EPA. Some of those notified were also respondents to the
administrative order. NL and the U.S. EPA have entered into a consent decree
settling NL's liability at the site for $31.5 million, including $1 million in
penalties. The consent decree is subject to court approval. NL expects to pay
the settlement in 2003 with restricted funds held by NL's environmental trusts
discussed in Note 1 to the Consolidated Financial Statements.
NL previously reached an agreement with the other PRPs at a lead smelter
site in Pedricktown, New Jersey, formerly owned by NL, to settle NL's liability
for $6 million, all of which has been paid as of December 31, 2002. The
settlement does not resolve issues regarding NL's potential liability in the
event site costs exceed $21 million. However, NL does not presently expect site
costs to exceed such amount and has not provided accruals for such contingency.
In 2000, NL reached an agreement with the other PRPs at the Baxter Springs
subsite in Cherokee County, Kansas, to resolve NL's liability. NL and others
formerly mined lead and zinc in the Baxter Springs subsite. Under the agreement,
NL agreed to pay a portion of the cleanup costs associated with the Baxter
Springs subsite. The U.S. EPA has estimated the total cleanup costs in the
Baxter Springs subsite to be $5.4 million. The cleanup is underway.
In 1996, the U.S. EPA ordered NL to perform a removal action at a facility
in Chicago, Illinois formerly owned by NL. NL has complied with the order and
has completed the on-site work at the facility. NL is conducting an
investigation regarding potential offsite contamination.
Residents in the vicinity of NL's former Philadelphia lead chemicals plant
commenced a class action allegedly comprised of over 7,500 individuals seeking
medical monitoring and damages allegedly caused by emissions from the plant
(Wagner, et al v. Anzon and NL Industries, Inc., No. 87-4420, Court of Common
Pleas, Philadelphia County). The complaint sought compensatory and punitive
damages from NL and the current owner of the plant, and alleged causes of action
for, among other things, negligence, strict liability, and nuisance. A class was
certified to include persons who resided, owned or rented property, or who work
or have worked within up to approximately three-quarters of a mile from the
plant from 1960 through the present. In December 1994, the jury returned a
verdict in favor of NL, and the verdict was affirmed on appeal. Residents also
filed consolidated actions in the United States District Court for the Eastern
District of Pennsylvania, Shinozaki v. Anzon, Inc. and Wagner and Antczak v.
Anzon and NL Industries, Inc., Nos. 87-3441, 87-3502, 87-4137 and 87-5150. The
consolidated action is a putative class action seeking CERCLA response costs,
including cleanup and medical monitoring, declaratory and injunctive relief and
civil penalties for alleged violations of the RCRA, and also asserting pendent
common law claims for strict liability, trespass, nuisance and punitive damages.
The court dismissed the common law claims without prejudice, dismissed two of
the three RCRA claims as against NL with prejudice, and stayed the case pending
the outcome of the above-described state court litigation.
In 2000, NL reached an agreement with the other PRPs at the Batavia
Landfill Superfund Site in Batavia, New York to resolve NL's liability. The
Batavia Landfill is a former industrial waste disposal site. Under the
agreement, NL agreed to pay 40% of the future cleanup costs, which the U.S. EPA
has estimated to be approximately $11 million in total. Under the settlement, NL
is not responsible for costs associated with the operation and maintenance of
the remedy. In addition, NL received approximately $2 million from settling
PRPs. The cleanup is underway.
In October 2000, NL was served with a complaint in Pulliam, et al. v. NL
Industries, Inc., et al., (Superior Court in Marion County, Indiana, No.
49F12-0104-CT-001301), filed on behalf of an alleged class of all persons and
entities who own or have owned property or have resided within a one-mile radius
of an industrial facility formerly owned by a subsidiary of NL in Indianapolis,
Indiana. Plaintiffs allege that they and their property have been injured by
lead dust and particulates from the facility and seek unspecified actual and
punitive damages and a removal of all alleged lead contamination under various
theories, including negligence, strict liability, battery, nuisance and
trespass. NL has denied all allegations of wrongdoing and liability. In 2002,
the court dismissed plaintiffs' allegations that the case should be certified as
a class action. The defendants have moved to dismiss the remainder of the case.
The court has not yet ruled on this motion. Discovery is proceeding.
In November 2001, NL was named as a defendant in Herd v. ASARCO, et al.
(Case No. CJ-2001-443), filed in the District Court in and for Ottawa County,
Oklahoma. The complaint was filed on behalf of a minor against NL and other
defendants and alleges that defendants' former mining operations near Picher,
Oklahoma resulted in damage to the plaintiff as a result of the ingestion of
lead from mining co-products. NL has denied the material allegations of the
complaint. The case was removed to federal court and the United States was added
as a third-party defendant. Discovery is proceeding. Trial is scheduled for
August 2003. In 2002, NL was named as a defendant in four additional cases with
substantially similar allegations to those in the Herd case. (Reeves v. ASARCO
et. al., Case No. CJ-02-8; Carr v. ASARCO et. al., Case No. CJ-02-59; Edens v.
ASARCO et al., Case No. CJ-02-245; and Koger v. ASARCO et. al., Case No.
CJ-02-284.) Each of these cases has been removed to federal court and the United
States was added as a third-party defendant. These cases have been consolidated
with the Herd case for purposes of discovery. Discovery is proceeding.
See also Item 1 - "Business - Chemicals - Regulatory and environmental
matters."
In July 2000, Tremont entered into a voluntary settlement agreement with
the Arkansas Department of Environmental Quality pursuant to which Tremont and
other PRPs will undertake certain investigatory and interim remediation
activities at a former barite mining site located in Hot Springs County,
Arkansas. Tremont currently believes that it has accrued adequate amounts ($2.9
million at December 31, 2002) to cover its share of probable and reasonably
estimable environmental obligations for these activities. Tremont currently
expects that the nature and extent of any final remediation measures that might
be imposed with respect to this site will be known by 2005. Currently, no
reasonable estimate can be made of the cost of any such final remediation
measure, and accordingly Tremont has accrued no amounts at December 31, 2002 for
any such cost. The amount accrued at December 31, 2002 represents Tremont's best
estimate of the costs to be incurred through 2005 with respect to the interim
remediation measures.
Tremont 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 not discounted to
their present value. It is not possible to estimate the range of costs for
certain sites, including the Hot Springs County, Arkansas site discussed above.
The imposition of more stringent standards or requirements under environmental
laws or regulations, the results of future testing and analysis undertaken by
Tremont at its non-operating facilities, or a determination that Tremont is
potentially responsible for the release of hazardous substances at other sites,
could result in expenditures in excess of amounts currently estimated to be
required for such matters. No assurance can be given that actual costs will not
exceed accrued amounts or that costs will not be incurred with respect to sites
as to which no problem is currently known or where no estimate can presently be
made. Further, there can be no assurance that additional environmental matters
will not arise in the future. Environmental exposures 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, the allocation of costs among PRPs; the multiplicity of possible
solutions; and the years of investigatory, remedial and monitoring activity
required. It is possible that future developments could adversely affect
Tremont's business, results of operations, financial condition or liquidity.
There can be no assurances that some, or all, of these risks would not result in
liabilities that would be material to Tremont's business, results of operations,
financial position or liquidity.
In 1999, TIMET and certain other companies that currently have or formerly
had operations within the BMI Complex (the "BMI Companies") entered into a
series of agreements with BMI and certain related companies pursuant to which,
among other things, BMI assumed responsibility for the conduct of soils
remediation activities on the properties described, including the responsibility
to complete all outstanding requirements pertaining to such activities under
existing consent agreements with the Nevada Division of Environmental
Protection. TIMET contributed $2.8 million to the cost of this remediation
(which payment was charged against TIMET's accrued liabilities). TIMET also
agreed to convey to BMI, at no additional cost, certain lands owned by TIMET
adjacent to its plant site (the "TIMET Pond Property") upon payment by BMI of
the cost to design, purchase, and install the technology and equipment necessary
to allow TIMET to stop discharging liquid and solid effluents and co-products
onto the TIMET Pond Property (BMI will pay 100% of the first $15.9 million cost
for this project, and TIMET agreed to contribute 50% of the cost in excess of
$15.9 million, up to a maximum payment by TIMET of $2 million). Preliminary
estimates indicate that such a system may cost up to $20 million. However, TIMET
and BMI are continuing to review various remediation alternatives in order to
minimize the ultimate remediation costs of the BMI Complex and no design has yet
been selected. TIMET, BMI and the other BMI Companies are continuing
investigation with respect to certain additional issues associated with the
properties described above, including any possible groundwater issues at the BMI
Complex and the TIMET Pond Property. TIMET has not accrued any amount with
respect its potential liability to fund 50% of the cost of the project in excess
of $15.9 million (subject to the $2 million cap) because it is not probable that
such excess cost will be incurred.
TIMET is continuing assessment work with respect to its own active plant
site in Nevada. During 2000, a preliminary study was completed of certain
groundwater remediation issues at TIMET's Nevada operations and other TIMET
sites within the BMI Complex. TIMET accrued $3.3 million in 2000 based on the
undiscounted cost estimates set forth in the study. During 2002, TIMET updated
this study and accrued an additional $300,000 based on revised cost estimates.
These expenses are expected to be paid over a period of up to thirty years.
At December 31, 2002, TIMET had accrued an aggregate of approximately $4.3
million for these environmental matters discussed above.
In addition to amounts accrued by NL, Tremont and TIMET for environmental
matters, at December 31, 2002, the Company also had approximately $8 million
accrued for the estimated cost to complete environmental cleanup matters at
certain of its former facilities. Costs for future environmental remediation
efforts are not discounted to their present value, and no recoveries for
remediation costs from third parties have been recognized. Such accruals will be
adjusted, if necessary, as further information becomes available or as
circumstances change. No assurance can be given that the actual costs will not
exceed accrued amounts. At one of such facilities, the Company has been named as
a PRP pursuant to CERCLA at a Superfund site in Indiana. The Company has also
undertaken a voluntary cleanup program to be approved by state authorities at
another Indiana site. The total estimated cost for cleanup and remediation at
the Indiana Superfund site is $39 million. The Company's share of such estimated
cleanup and remediation cost is currently estimated to be approximately $2
million, of which about one-half has been paid. The Company's estimated cost to
complete the voluntary cleanup program at the other Indiana site, which involves
both surface and groundwater remediation, is relatively nominal. The Company
believes it has adequately provided accruals for reasonably estimable costs for
CERCLA matters and other environmental liabilities for all of such former
facilities. 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 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. Furthermore, there can
be no assurance that additional environmental matters related to current or
former operations will not arise in the future.
Insurance coverage claims. NL has previously filed actions seeking
declaratory judgment and other relief against various insurance carriers with
respect to costs of defense and indemnity coverage for certain of its
environmental and lead pigment litigation (NL Industries, Inc. v. Commercial
Union Insurance Cos., et al., Nos. 90-2124, -2125 (HLS), District Court of New
Jersey).
The action relating to lead pigment litigation defense costs filed in May
1990 against Commercial Union Insurance Company sought to recover defense costs
incurred in the City of New York lead pigment case discussed above and two other
lead pigment cases which have since been resolved in NL's favor. The action
relating to lead paint litigation defense costs in these specified cases has
been settled.
NL has also settled insurance coverage claims concerning environmental
claims with certain of the defendants in the environmental coverage litigation,
including NL's principal former carriers. See Note 12 to the Consolidated
Financial Statements. The settled claims are to be dismissed from the New Jersey
litigation in accordance with the terms of the settlement agreements. NL also
continues to negotiate with the remaining insurance carriers with respect to
possible settlement of claims that are being asserted in the New Jersey
environmental litigation, although there can be no assurance that settlement
agreements can be reached with these other carriers. No further material
settlements relating to litigation concerning environmental remediation coverage
are expected.
The issue of whether insurance coverage for defense costs or indemnity or
both will be found to exist for lead pigment litigation depends upon a variety
of factors, and there can be no assurance that such insurance coverage will be
available. NL has not considered any potential insurance recoveries for lead
pigment or environmental litigation in determining related accruals.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Valhi security holders during the
quarter ended December 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Valhi's common stock is listed and traded on the New York and Pacific Stock
Exchanges (symbol: VHI). As of February 28, 2003, there were approximately 8,000
holders of record of Valhi common stock. The following table sets forth the high
and low closing per share sales prices for Valhi common stock for the periods
indicated, according to Bloomberg, and dividends paid during such periods. On
February 28, 2003 the closing price of Valhi common stock according to the NYSE
Composite Tape was $10.61.
Dividends
High Low paid
Year ended December 31, 2001
First Quarter ........................... $ 12.00 $ 10.00 $ .06
Second Quarter .......................... 12.95 10.00 .06
Third Quarter ........................... 13.30 10.16 .06
Fourth Quarter .......................... 13.42 11.11 .06
Year ended December 31, 2002
First Quarter ........................... $ 13.30 $ 10.80 $ .06
Second Quarter .......................... 15.63 10.61 .06
Third Quarter ........................... 19.18 9.82 .06
Fourth Quarter .......................... 10.75 8.30 .06
Valhi's regular quarterly dividend is currently $.06 per share. Declaration
and payment of future dividends and the amount thereof will be dependent upon
the Company's results of operations, financial condition, cash requirements for
its businesses, contractual requirements and restrictions and other factors
deemed relevant by the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Certain financial information for the year ended December 31, 1998 and 2000, as
presented herein, has been reclassified from amounts previously presented due to
the Company's adoption of Statement of Financial Accounting Standards ("SFAS")
No. 145 effective April 1, 2002. See Note 20 to the Consolidated Financial
Statements. Such reclassification had no effect on the Company's
previously-reported net income.
Years ended December 31,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(In millions, except per share data)
STATEMENTS OF OPERATIONS DATA:
Net sales:
Chemicals ................... $ 907.3 $ 908.4 $ 922.3 $ 835.1 $ 875.2
Component products .......... 152.1 225.9 253.3 211.4 196.1
Waste management (1) ........ -- 10.9 16.3 13.0 8.4
--------- --------- --------- --------- ---------
$ 1,059.4 $ 1,145.2 $ 1,191.9 $ 1,059.5 $ 1,079.7
========= ========= ========= ========= =========
Operating income:
Chemicals ................... $ 154.6 $ 126.2 $ 187.4 $ 143.5 $ 84.4
Component products .......... 31.9 40.2 37.5 13.1 4.5
Waste management (1) ........ -- (1.8) (7.2) (14.4) (7.0)
--------- --------- --------- --------- ---------
$ 186.5 $ 164.6 $ 217.7 $ 142.2 $ 81.9
========= ========= ========= ========= =========
Equity in earnings (losses):
Waste Control Specialists (1) $ (15.5) $ (8.5) $ -- $ -- $ --
Tremont Corporation (2) ..... 7.4 (48.7) -- -- --
TIMET (3) ................... -- -- (9.0) (9.2) (32.9)
Income from continuing
operations (4) ............... $ 219.6 $ 47.4 $ 76.6 $ 93.2 $ 1.2
Discontinued operations ....... -- 2.0 -- -- --
--------- --------- --------- --------- ---------
Net income ................ $ 219.6 $ 49.4 $ 76.6 $ 93.2 $ 1.2
========= ========= ========= ========= =========
DILUTED EARNINGS PER SHARE DATA:
Income from continuing
operations ................... $ 1.89 $ .41 $ .66 $ .80 $ .01
Net income .................... $ 1.89 $ .43 $ .66 $ .80 $ .01
Cash dividends ................ $ .20 $ .20 $ .21 $ .24 $ .24
Weighted average common shares
Outstanding .................. 116.1 116.2 116.3 116.1 115.8
BALANCE SHEET DATA (at year end):
Total assets .................. $ 2,242.2 $ 2,235.2 $ 2,256.8 $ 2,150.7 $ 2,074.8
Long-term debt ................ 630.6 609.3 595.4 497.2 605.7
Stockholders' equity .......... 578.5 589.4 628.2 622.3 614.8
(1) Consolidated effective June 30, 1999.
(2) Commenced recognizing equity in earnings effective July 1, 1998;
consolidated effective December 31, 1999.
(3) Commenced reporting equity in earnings effective January 1, 2000.
(4) Income from continuing operations in 1998 includes the previously-reported
(i) $330 million pre-tax gain ($152 million net of income taxes and
minority interest) related to the sale of NL's specialty chemicals business
unit, (ii) $68 million pre-tax gain ($44 million net of income taxes)
related to the Company's reduction in interest in CompX and (iii) $32
million charge ($21 million net of income taxes) related to cash payments
made to settle certain litigation. Income from continuing operations in
1999 includes the previously-reported (i) $90 million non-cash income tax
benefit ($52 million net of minority interest) recognized by NL and (ii) a
non-cash impairment charge of $50 million ($32 million net of income taxes)
for an other than temporary decline in the value of TIMET. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of unusual items occurring during 2000, 2001
and 2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported net income of $1.2 million, or $.01 per diluted share,
in 2002 compared to net income of $93.2 million, or $.80 per diluted share, in
2001 and $76.6 million, or $.66 per diluted share, in 2000. Excluding the
effects of the items summarized in the table below, the Company would have
reported net income of $.01 per diluted share in 2002 compared to $.41 per
diluted share in 2001 and $.53 per diluted share in 2000.
The Company believes the analysis presented in the following table is
useful in understanding the comparability of its results of operations for 2000,
2001 and 2002. Each of these items are more fully discussed below in the
applicable sections of this "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations."
Diluted earnings per share -
years ended December 31,
2000 2001 2002
---- ---- ----
Legal settlement gains, net (1) ........................ $.24 $.16 $.02
Equity in earnings of TIMET:
Boeing settlement (2) ................................ -- .06 --
Impairment provision and deferred income
tax asset valuation allowance adjustment (3) ........ -- (.12) (.05)
Impairment provision - TIMET (4) ..................... -- -- (.07)
Securities transactions, net (5) ....................... -- .26 .04
NL tax adjustments:
Deferred income tax asset valuation allowance(6) ..... -- .11 --
Belgian tax law change (7) ........................... -- -- .02
Insurance gain (8) ..................................... -- .06 --
Foreign currency transaction gain (9) .................. -- -- .04
Goodwill amortization(10) .............................. (.11) (.14) --
Other, net ............................................. .53 .41 .01
---- ---- ----
$.66 $.80 $.01
==== ==== ====
(1) Settlements NL reached with certain of its principal former insurance
carriers in each of 2000, 2001 and 2002, and Waste Control Specialists'
settlement of certain litigation to which it was a party in 2001. See Note
12 to the Consolidated Financial Statements.
(2) TIMET's settlement with Boeing.
(3) TIMET's provisions for other than temporary declines in value of the
convertible preferred securities of Special Metals Corporation held by
TIMET.
(4) Tremont's provision for an other than temporary decline in the value of its
investment in TIMET. See Note 7 to the Consolidated Financial Statements.
(5) Net gains resulting primarily from disposition of shares of Halliburton
Company common stock held by the Company, including dispositions resulting
from LYONs exchanges. See Notes 5 and 12 to the Consolidated Financial
Statements.
(6) NL's income tax benefit related principally to a change in estimate of NL's
ability to utilize certain German tax attributes. See Note 16 to the
Consolidated Financial Statements.
(7) Change in NL's net deferred income tax liability due to reduction in
Belgian corporate statutory income tax rate. See Note 16 to the
Consolidated Financial Statements.
(8) NL's insurance recoveries for property damage related to the Leverkusen
fire. See Note 12 to the Consolidated Financial Statements.
(9) NL's foreign currency transaction gain related to the extinguishment of
certain NL intercompany indebtedness. See Note 12 to the Consolidated
Financial Statements.
(10) Beginning in 2002 the Company no longer recognizes periodic amortization of
goodwill in its results of operations. The Company would have reported
higher net income in 2000 and 2001 of $13.3 million and $15.7 million,
respectively, if the goodwill amortization included in the Company's
reported net income had not been recognized. Of such $15.7 million in 2001,
approximately $14.5 million and $2.4 million relates to amortization of
goodwill attributable to the Company's chemicals and component products
operating segment, approximately $100,000 relates to incremental income
taxes and approximately $1.1 million relates to minority interest (2000 -
$13.4 million and $2.5 million relate to the chemicals and component
products operating segments, respectively, $1.6 million relates to
incremental income taxes and $1.0 million relates to minority interest).
See Note 20 to the Consolidated Financial Statements.
Total operating income decreased 42% in 2002 compared to 2001 due to lower
chemical earnings at NL and lower component products operating income at CompX,
partially offset by lower waste management operating losses at Waste Control
Specialists. Total operating income decreased 35% in 2001 compared to 2000 due
to lower chemicals earnings at NL, lower component products operating income at
CompX International and higher waste management operating losses at Waste
Control Specialists.
Excluding the effect of all of the items discussed above, the Company
currently believes its net income in 2003 will be higher compared to 2002 due
primarily to higher expected chemicals operating income.
Critical accounting policies and estimates
The accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the reported
period. On an on-going basis, the Company evaluates its estimates, including
those related to bad debts, inventory reserves, impairments of investments in
marketable securities and investments accounted for by the equity method, the
recoverability of other long-lived assets (including goodwill and other
intangible assets), pension and other post-retirement benefit obligations and
the underlying actuarial assumptions related thereto, the realization of
deferred income tax assets and accruals for environmental remediation,
litigation, income tax and other contingencies. The Company bases its estimates
on historical experience and on various other assumptions that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the reported amounts of assets, liabilities, revenues and
expenses. Actual results may differ from previously-estimated amounts under
different assumptions or conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
o The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments and
other factors. The Company takes into consideration the current financial
condition of the customers, the age of the outstanding balance and the
current economic environment when assessing the adequacy of the allowance.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. During 2000, 2001 and 2002, the net amount
written off against the allowance for doubtful accounts as a percentage of
the balance of the allowance for doubtful accounts as of the beginning of
the year ranged from 13% to 18%.
o The Company provides reserves for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated net realizable value using assumptions about future demand for
its products and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory reserves
may be required. NL provides reserves for tools and supplies inventory
based generally on both historical and expected future usage requirements.
o The Company owns investments in certain companies that are accounted for
either as marketable securities carried at fair value or accounted for
under the equity method. For all of such investments, the Company records
an impairment charge when it believes an investment has experienced a
decline in fair value below its cost basis (for marketable securities) or
below its carrying value (for equity method investees) that is other than
temporary. Future adverse changes in market conditions or poor operating
results of underlying investments could result in losses or an inability to
recover the carrying value of the investments that may not be reflected in
an investment's current carrying value, thereby possibly requiring an
impairment charge in the future.
At December 31, 2002, the carrying value (which equals their fair value) of
all of the Company's marketable securities exceeded the cost basis of each
of such investments. With respect to the Company's investment in The
Amalgamated Sugar Company LLC, which represents approximately 90% of the
aggregate carrying value of all of the Company's marketable securities at
December 31, 2002, the $170 million carrying value of such investment
exceeded its $34 million cost basis by about 400%. At December 31, 2002,
the $1.91 per share quoted market price of the Company's investment in
TIMET (the only one of the Company's equity method investees for which
quoted market prices are available) exceeded its per share net carrying
value by about 85%.
o The Company recognizes an impairment charge associated with its long-lived
assets, including property and equipment, goodwill and other intangible
assets, whenever it determines that recovery of such long-lived asset is
not probable. Such determination is made in accordance with the applicable
GAAP requirements associated with the long-lived asset, and is based upon,
among other things, estimates of the amount of future net cash flows to be
generated by the long-lived asset and estimates of the current fair value
of the asset. Adverse changes in such estimates of future net cash flows or
estimates of fair value could result in an inability to recover the
carrying value of the long-lived asset, thereby possibly requiring an
impairment charge to be recognized in the future.
Under applicable GAAP (SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets), property and equipment is not assessed for
impairment unless certain impairment indicators, as defined, are present.
During 2002, impairment indicators were present only with respect to the
property and equipment associated with the Company's waste management
operating segment, which represented approximately 4% of the Company's
consolidated net property and equipment as of such date. The Company
completed an impairment review of such net property and equipment and
related net assets as of December 31, 2002. Such analysis indicated no
impairment was present as the estimated future undiscounted cash flows
associated with such segment exceeded the carrying value of such segment's
net assets. Significant judgment is required in estimating such
undiscounted cash flows. Such estimated cash flows are inherently
uncertain, and there can be no assurance that Waste Control Specialists
will achieve the future cash flows reflected in its projections.
Under applicable GAAP (SFAS No. 142, Goodwill and other Intangible Assets),
goodwill is required to be reviewed for impairment at least on an annual
basis. Goodwill will also be reviewed for impairment at other times during
each year when impairment indicators, as defined, are present. As discussed
in Note 20 to the Consolidated Financial Statements, the Company has
assigned its goodwill to three reporting units (as that term is defined in
SFAS No. 142). Goodwill attributable to the chemicals operating segment was
assigned to the reporting unit consisting of NL in total. Goodwill
attributable to the components products operating segment was assigned to
two reporting units within that operating segment, one consisting of
CompX's security products operations and the other consisting of CompX's
ergonomic and slide products operations. No goodwill impairments were
deemed to exist as a result of the Company's annual impairment review
completed during the third quarter of 2002, as the estimated fair value of
each such reporting unit exceeded the net carrying value of the respective
reporting unit (NL reporting unit - 15%, CompX security products reporting
unit - 35% and CompX ergonomic/slide products reporting unit - 21%). The
estimated fair values of the two CompX reporting units are determined based
on discounted cash flow projections, and the estimated fair value of the NL
reporting unit is based upon the quoted market price for NL's common stock,
as appropriately adjusted for a control premium. Significant judgment is
required in estimating the discounted cash flows for the CompX reporting
units. Such estimated cash flows are inherently uncertain, and there can be
no assurance that CompX will achieve the future cash flows reflected in its
projections.
o The Company maintains various defined benefit pension plans and
postretirement benefits other than pensions ("OPEB"). The amount recognized
as defined benefit pension and OPEB expense, and the reported amount of
prepaid and accrued pension costs and accrued OPEB costs, are actuarially
determined based on several assumptions, including discount rates, expected
rates of returns on plan assets and expected health care trend rates.
Variances from these actuarially assumed rates will result in increases or
decreases, as applicable, in the recognized pension and OPEB obligations,
pension and OPEB expense and funding requirements. These assumptions are
more fully described below under "--Assumptions on defined benefit pension
plans and OPEB plans."
o The Company records a valuation allowance to reduce its deferred income tax
assets to the amount that is believed to be realized under the
"more-likely-than-not" recognition criteria. While the Company has
considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance, it is
possible that in the future the Company may change its estimate of the
amount of the deferred income tax assets that would "more-likely-than-not"
be realized in the future, resulting in an adjustment to the deferred
income tax asset valuation allowance that would either increase or
decrease, as applicable, reported net income in the period such change in
estimate was made.
o The Company records an accrual for environmental, legal, income tax and
other contingencies when estimated future expenditures associated with such
contingencies become probable, and the amounts can be reasonably estimated.
However, new information may become available, or circumstances (such as
applicable laws and regulations) may change, thereby resulting in an
increase or decrease in the amount required to be accrued for such matters
(and therefore a decrease or increase in reported net income in the period
of such change).
Operating income for each of the Company's three operating segments are
impacted by certain of these significant judgments and estimates, as summarized
below:
o Chemicals - allowance for doubtful accounts, reserves for obsolete or
unmarketable inventories, impairment of equity method investees, goodwill
and other long-lived assets, defined benefit pension and OPEB plans and
loss accruals.
o Component products - allowance for doubtful accounts, reserves for obsolete
or unmarketable inventories, impairment of long-lived assets and loss
accruals.
o Waste management - allowance for doubtful accounts, impairment of
long-lived assets and loss accruals.
In addition, general corporate and other items are impacted by the significant
judgments and estimates for impairment of marketable securities and equity
method investees, defined benefit pension and OPEB plans, deferred income tax
asset valuation allowances and loss accruals.
Chemicals
Selling prices for TiO2, NL's principal product, were generally increasing
during most of 2000, were generally decreasing during all of 2001 and the first
quarter of 2002, were generally flat during the second quarter of 2002 and were
generally increasing during the third and fourth quarters of 2002. NL's TiO2
operations are conducted through its wholly-owned subsidiary Kronos.
Chemicals operating income, as presented below, is stated net of
amortization of Valhi's purchase accounting adjustments made in conjunction with
its acquisitions of its interest in NL. Such adjustments result in additional
depreciation, depletion and amortization expense beyond amounts separately
reported by NL. Such additional non-cash expenses reduced chemicals operating
income, as reported by Valhi, by $18.9 million, $19.7 million and $12.2 million
in 2000, 2001 and 2002, respectively, as compared to amounts separately reported
by NL. During 2000 and 2001, a significant portion of such purchase accounting
adjustment amortization relates to goodwill (about $13.4 million in 2000 and
$14.5 million in 2001). As discussed above, the decline in the aggregate amount
of purchase accounting adjustment amortization from 2001 to 2002 is primarily
due to ceasing the periodic amortization of goodwill beginning in 2002.
Years ended December 31, % Change
----------------------------- ------------------
2000 2001 2002 2000-01 2001-02
---- ---- ---- ------- -------
(In $ millions, except selling price
data)
Net sales $922.3 $835.1 $875.2 - 9% + 5%
Operating income 187.4 143.5 84.4 - 23% - 41%
Operating income margin 20% 17% 10%
TiO2 data:
Sales volumes* 436 402 455 - 8% + 13%
Production volumes* 441 412 442 - 6% + 7%
Production rate as
percent of capacity Full 91% 96%
Average selling price
index (1983=100) $ 161 $ 156 $ 142 - 3% - 9%
* Thousands of metric tons
Chemicals sales increased in 2002 compared to 2001 due primarily to higher
TiO2 sales volumes, offset by lower average TiO2 selling prices. NL's record
TiO2 sales volumes in 2002 were 13% higher compared to 2001 primarily due to
higher volumes in European and North American markets. By volume, approximately
one-half of NL's 2002 TiO2 sales volumes were attributable to markets in Europe,
with 39% attributable to North America and the balance to export markets. The
lower TiO2 sales volumes in 2001 were due in part to the effect of the
previously-reported fire at NL's Leverkusen, Germany facility in March 2001.
Chemicals operating income declined in 2002 compared to 2001 as the effect
of lower average Ti02 selling prices more than offset the effect of higher Ti02
sales and production volumes. Excluding the effect of fluctuations in the value
of the U.S. dollar relative to other currencies, NL's average TiO2 selling
prices in 2002 were 9% lower than 2001, with prices lower in all major regions.
While NL's average TiO2 selling prices had generally been declining during all
of 2001 and the first quarter of 2002, and were flat during the second quarter
of 2002, average TiO2 selling prices increased during the third and fourth
quarters of 2002. NL's average TiO2 selling prices in the fourth quarter of 2002
were 2% higher compared to the third quarter of the year, with increases in all
major markets.
NL's record TiO2 production volumes in 2002 were 7% higher than 2001. NL's
operating rates in 2001 were lower as compared to 2002 primarily due to lost
production resulting from the Leverkusen fire.
Chemicals sales decreased in 2001 compared to 2000 due primarily to lower
TiO2 sales volumes and lower TiO2 average selling prices. Excluding the effect
of fluctuations in the value of the U.S. dollar relative to other currencies,
NL's average TiO2 selling prices (in billing currencies) during 2001 were 3%
lower compared to 2000, with prices lower in all major regions. NL's TiO2 sales
volumes in 2001 were 8% lower than the prior record sales volumes of 2000,
primarily due to lower volumes in North America and Europe.
Chemicals operating income in 2001 decreased compared to 2000 due primarily
to the lower TiO2 sales volumes and average selling prices as well as lower TiO2
production volumes. NL's TiO2 production volumes were 6% lower in 2001 compared
to the prior record production volumes in 2000. The lower production volumes in
2001 were due primarily to the effects of the Leverkusen fire.
Chemicals operating income in 2001 includes $27.3 million of business
interruption insurance proceeds as payment for losses (unallocated period costs
and lost margin) caused by the Leverkusen fire. The effects of the lower TiO2
sales and production volumes were offset in part by the business interruption
insurance proceeds. Of such $27.3 million of business interruption insurance
proceeds, $20.1 million was recorded as a reduction of cost of sales to offset
unallocated period costs that resulted from lost production, and the remaining
$7.2 million, representing recovery of lost margin, was recorded in other
income. The business interruption insurance proceeds distorts the chemicals
operating income margin percentage in 2001 as there are no sales associated with
the $7.2 million of lost margin operating profit recognized. See Note 12 to the
Consolidated Financial Statements.
NL also recognized insurance recoveries of $29.1 million in 2001 for
property damage and related cleanup and other extra expenses related to the
fire, resulting in an insurance gain of $16.2 million, as the insurance
recoveries exceeded the carrying value of the property destroyed and the cleanup
and other extra expenses incurred. Such insurance gain is not reported as a
component of chemicals operating income but is included in general corporate
items. NL does not expect to recognize any additional insurance recoveries
related to the Leverkusen fire.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions can significantly impact NL's earnings and operating cash
flows. The average TiO2 selling price index (using 1983 = 100) of 142 in 2002
was 9% lower than the 2001 index of 156 (2001 was 3% lower than the 2000 index
of 161). In comparison, the 2002 index was 19% below the 1990 price index of 175
and 12% higher than the 1993 price index of 127. Many factors influence TiO2
pricing levels, including industry capacity, worldwide demand growth and
customer inventory levels and purchasing decisions.
NL expects TiO2 industry demand in 2003 will increase slightly compared to
2002. NL's TiO2 production volumes in 2003 are expected to approximate NL's 2003
TiO2 sales volumes. In December 2002 and January 2003, NL announced additional
price increases in Europe and North America which averaged 8% in Europe and 7%
in North America. NL is hopeful that it will realize prices increases, but the
extent to which NL can realize price increases during 2003 will depend on
improving market conditions and global economic recovery, which may be
negatively impacted by the potential for international conflict. Overall, NL
expects its TiO2 operating income in 2003 will be higher than 2002, primarily
due to higher average TiO2 selling prices. NL's expectations as to the future
prospects of NL and the TiO2 industry are based upon a number of factors beyond
NL's control, including worldwide growth of gross domestic product, competition
in the market place, unexpected or earlier-than-expected capacity additions and
technological advances. If actual developments differ from NL's expectations,
NL's results of operations could be unfavorably affected.
NL's efforts to debottleneck its production facilities to meet long-term
demand continue to prove successful. NL expects its TiO2 production capacity
will increase by about 10,000 metric tons (primarily at its chloride-process
facilities), with moderate capital expenditures, to increase its aggregate
production capacity to about 480,000 metric tons during 2005.
NL has substantial operations and assets located outside the United States
(particularly in Germany, Belgium, Norway and Canada). A significant amount of
NL's sales generated from its non-U.S. operations are denominated in currencies
other than the U.S. dollar (58% in 2002), primarily the euro, other major
European currencies and the Canadian dollar. In addition, a portion of NL's
sales generated from its non-U.S. operations are denominated in the U.S. dollar.
Certain raw materials, primarily titanium-containing feedstocks, are purchased
in U.S. dollars, while labor and other production costs are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
NL's foreign sales and operating results are subject to currency exchange rate
fluctuations which may favorably or adversely impact reported earnings and may
affect the comparability of period-to-period operating results. Including the
effect of fluctuations in the value of the U.S. dollar relative to other
currencies, Kronos' average TiO2 selling prices (in billing currencies) in 2002
decreased 7% compared to 2001 (such prices in 2001 decreased 5% compared to
2000). Overall, fluctuations in the value of the U.S. dollar relative to other
currencies, primarily the euro, increased TiO2 sales in 2002 by a net $21
million compared to 2001, and decreased TiO2 sales in 2001 by a net $19 million
compared to 2000. Fluctuations in the value of the U.S. dollar relative to other
currencies similarly impacted NL's foreign currency-denominated operating
expenses. NL's operating costs that are not denominated in the U.S. dollar, when
translated into U.S. dollars, were higher in 2002 compared to 2001, and lower
during 2001 compared to 2000. Overall, the net impact of currency exchange rate
fluctuations on NL's operating income comparisons was not significant in 2002
and 2001 compared to the respective prior year.
Component products
Years ended December 31, % Change
------------------------- ------------
2000 2001 2002 2000-01 2001-02
---- ---- ---- ---- ----
(In millions)
Net sales ................. $253.3 $211.4 $196.1 - 17 - 7
Operating income .......... 37.5 13.1 4.5 - 65 -66%
Operating income margin 15% 6% 2%
Component products sales and operating income decreased in 2002 compared to
2001 due to continued weak demand for CompX's component products sold to the
office furniture market resulting from the continued weak economic conditions in
the manufacturing sectors in North America and Europe. Sales of slide and
ergonomic products decreased 8% and 18%, respectively, in 2002 compared to 2001,
and sales of security products decreased 1%. Component products operating income
comparisons were impacted by (i) charges aggregating $5.7 million in 2001
related to the consolidation and rationalization of certain of CompX's European
and North American operations (including headcount reductions) and provisions
for obsolete and slow-moving inventories and other items and (ii) charges
aggregating $3.5 million in 2002 related to the retooling of one of CompX's
manufacturing facilities and provisions for changes in estimates with respect to
obsolete and slow-moving inventories, overhead absorption rates and other items.
The cost savings resulting from this retooling are currently expected to begin
to be reflected in CompX's operating results in the first quarter of 2003.
Operating income comparisons were also negatively impacted by increases in
certain raw material costs, primarily steel, as well as a decline in volume
levels, unfavorable changes in the sales mix and general competitive pricing
pressures. Operating income comparisons were favorably impacted by ceasing to
periodically amortize goodwill, which amounted to approximately $2.4 million in
2001 (none in 2002), as well as the impact of certain cost reductions that were
implemented. See Note 20 to the Consolidated Financial Statements.
Component products sales and operating income decreased in 2001 compared to
2000 due primarily to continued weak economic conditions in the manufacturing
sector in North America and Europe. During 2001, sales of slide products
decreased 23% compared to 2000, and sales of security products and ergonomic
products each decreased 13%. CompX's efforts to reduce manufacturing, fixed
overhead and related overhead costs partially offset the effect of the decline
in sales, although CompX was unable to sufficiently reduce such costs to fully
compensate for the lower level of sales. Component products operating income in
2001 also includes the $5.7 million of charges discussed above. Operating income
and margins were also adversely impacted in 2001 by unfavorable changes in
product mix and general pricing pressures.
CompX has substantial operations and assets located outside the United
States (principally in Canada, The Netherlands and Taiwan). A portion of CompX's
sales generated from its non-U.S. operations are denominated in currencies other
than the U.S. dollar, principally the Canadian dollar, the Dutch guilder, the
euro and the New Taiwan dollar. In addition, a portion of CompX's sales
generated from its non-U.S. operations (principally in Canada) are denominated
in the U.S. dollar. Most raw materials, labor and other production costs for
such non-U.S. operations are denominated primarily in local currencies.
Consequently, the translated U.S. dollar value of CompX's foreign sales and
operating results are subject to currency exchange rate fluctuations which may
favorably or unfavorably impact reported earnings and may affect comparability
of period-to-period operating results. During 2002, the effects of fluctuations
in foreign currency exchange rates did not materially impact component products
sales or operating income as compared to 2001. During 2001, currency exchange
rate fluctuations of the Canadian dollar and the euro negatively impacted
component products sales compared to 2000 (principally with respect to slide
products). Operating income comparisons for this period, however, were not
materially impacted by currency fluctuations. Excluding the effect of currency,
component products sales decreased 15% in 2001 compared to 2000.
CompX plans to consolidate its two Canadian facilities into one facility.
Expenses related to this consolidation are expected to primarily consist of the
cost to move machinery and equipment, and CompX does not expect a significant
net cost for the disposal of fixed assets. Substantial completion of this
consolidation is expected by the end of the second quarter of 2003. In addition,
other facility and product rationalizations are also under review and could
result in additional charges for asset impairment, including goodwill, and other
costs in future quarters.
CompX currently expects that weak market conditions will continue in the
office furniture market, the primary end-use market for CompX's products. As a
result, sales volumes are expected to remain depressed for at least 2003, and
competitive pricing pressures are also expected to continue. CompX has initiated
price increases on certain of its products and will continue to focus on cost
improvement initiatives, utilizing lean manufacturing techniques and prudent
balance sheet management in order to minimize the impact of lower sales to the
office furniture industry and to develop value-added customer relationships with
additional focus on sales of CompX's higher-margin ergonomic computer support
systems to improve operating results.
Waste management
Years ended December 31,
2000 2001 2002
---- ---- ----
(In millions)
Net sales ....................... $16.3 $13.0 $ 8.4
Operating loss .................. (7.2) (14.4) (7.0)
Waste management sales decreased in 2002 compared to 2001 due primarily to
the effect of weak demand for Waste Control Specialists' waste management
services. Waste management's operating losses declined during 2002 compared to
2001 as the effect of certain cost controls implemented in 2002 more than offset
the effects of the decline in sales.
Waste management operating losses increased in 2001 compared to 2000 due
primarily to the effect of continued weak demand for Waste Control Specialists'
waste management services, higher expenses associated with its permitting
efforts and expenses associated with the start-up of certain new waste disposal
process equipment.
Waste Control Specialists currently has permits which allow it to treat,
store and dispose of a broad range of hazardous and toxic wastes, and to treat
and store a broad range of low-level and mixed radioactive wastes. The waste
management industry currently is experiencing a relative decline in the number
of environmental remediation projects generating wastes. In addition, efforts on
the part of generators to reduce the volume of waste and/or manage wastes onsite
at their facilities also has resulted in weak demand for Waste Control
Specialists waste management services. These factors have led to reduced demand
and increased downward price pressure for waste management services. While Waste
Control Specialists' believes its broad range of permits for the treatment and
storage of low-level and mixed radioactive waste streams provides certain
competitive advantages, a key element of Waste Control Specialists' long-term
strategy to provide "one-stop shopping" for hazardous, low-level and mixed
radioactive wastes includes obtaining additional regulatory authorizations for
the disposal of a broad range of low-level and mixed radioactive wastes.
Waste Control Specialists is continuing its attempts to increase its sales
volumes from waste streams that conform to permits it currently has in place.
Waste Control Specialists is also continuing to identify certain waste streams,
and attempt 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. 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. Depending on the form of the transaction that any
such strategic alternative might take, there can be no assurance that the
Company would not report a loss with respect to such a transaction.
TIMET
Years ended December 31,
2000 2001 2002
---- ---- ----
(In millions)
TIMET historical:
Net sales ................................ $426.8 $486.9 $366.5
====== ====== ======
Operating income (loss):
Boeing settlement, net ................. $ -- $ 62.7 $ --
Fixed asset impairment ................. -- (10.8) --
Tungsten accrual ....................... -- (3.3) .2
Boeing take-or-pay income .............. -- -- 23.4
Goodwill amortization .................. (4.8) (4.6) --
Other, net ............................. (36.9) 20.5 (44.4)
------ ------ ------
(41.7) 64.5 (20.8)
Impairment of convertible
preferred securities .................... -- (61.5) (27.5)
Other general corporate, net ............. 4.9 5.5 (2.9)
Interest expense ......................... (7.7) (4.1) (3.4)
------ ------ ------
(44.5) 4.4 (54.6)
Income tax benefit (expense) ............. 15.6 (31.1) 2.0
Minority interest ........................ (10.0) (15.1) (14.6)
------ ------ ------
Loss before cumulative effect of
change in accounting principle ........ $(38.9) $(41.8) $(67.2)
====== ====== ======
Equity in losses of TIMET .................. $ (9.0) $ (9.2) $(32.9)
====== ====== ======
Tremont accounts for its interest in TIMET by the equity method. Tremont's
equity in earnings of TIMET differs from the amounts that would be expected by
applying Tremont's ownership percentage to TIMET's separately-reported earnings
because of the effect of amortization of purchase accounting adjustments made by
Tremont in conjunction with Tremont's acquisitions of its interests in TIMET.
Amortization of such basis differences generally increases earnings (or reduces
losses) attributable to TIMET as reported by Tremont.
In February 2003, TIMET completed a reverse stock split of its common stock
at a ratio of one share of post-split common stock for each outstanding ten
shares of pre-split common stock. The per share disclosures related to TIMET
discussed below have been adjusted to give effect to the reverse stock split.
Implementing such reverse split had no financial statement impact to the
Company, and the Company's ownership interest in TIMET did not change as a
result thereof.
Tremont periodically evaluates the net carrying value of its long-term
assets, including its investment in TIMET, to determine if there has been any
decline in value below its amortized cost basis that is other than temporary and
would, therefore, require a write-down which would be accounted for as a
realized loss. At September 30, 2002, after considering what it believes to be
all relevant factors, including, among other things, TIMET's then-recent NYSE
stock prices, and TIMET's operating results, financial position, estimated asset
values and prospects, Tremont recorded a $15.7 million impairment provision for
an other than temporary decline in value of its investment in TIMET. Such
impairment provision is reported as part of the Company's equity in losses of
TIMET in 2002. At December 31, 2002, Tremont's net carrying value of its
investment in TIMET was $10.30 per share compared to a NYSE market price at that
date of $19.10 per share. In determining the amount of the impairment charge,
Tremont considered, among other things, then- recent ranges of TIMET's NYSE
market price and current estimates of TIMET's future operating losses that would
further reduce Tremont's carrying value of its investment in TIMET as it records
additional equity in losses of TIMET. Tremont will continue to monitor and
evaluate the value of its investment in TIMET. In the event Tremont determines
any further decline in value of its investment in TIMET below its net carrying
value has occurred which is other than temporary, Tremont would report an
additional write-down at that time.
Excluding the effect of TIMET's previously-reported legal settlement with
Boeing, its impairment charge related to certain equipment, its accruals for the
tungsten matter discussed below and the effect of the Boeing take-or-pay income,
TIMET reported lower sales and worse operating results in 2002 compared to 2001.
TIMET's mill and melted products sales volumes in 2002 decreased 27% and 46%,
respectively, compared to 2001. Excluding the effect of fluctuations in the
value of the U.S. dollar relative to other currencies, TIMET's average selling
prices for mill products in 2002 were 3% higher compared to 2001, while selling
prices for its melted products decreased 1%. TIMET's operating income
comparisons were favorably impacted by TIMET ceasing to periodically amortize
goodwill recognized on its separate-company books, which amounted to
approximately $4.6 million in 2001 (none in 2002). TIMET's results in 2002 were
negatively impacted by an increase in TIMET's provision for excess inventories
and severance costs related to TIMET's program to reduce its global employment
levels. TIMET's operating income comparisons were also negatively impacted in
2002 by changes in customer and product mix and lower operating rates in 2002,
with average capacity utilization declining from 75% to 55%.
Under TIMET's previously-reported amended long-term agreement with Boeing,
Boeing advanced TIMET $28.5 million for each of 2002 and 2003, and Boeing is
required to advance TIMET $28.5 million annually from 2004 through 2007. The
agreement is structured as a take-or-pay agreement such that Boeing, beginning
in calendar year 2002, will forfeit a proportionate part of the $28.5 million
annual advance, or effectively $3.80 per pound, in the event that its orders for
delivery for such calendar year are less than 7.5 million pounds. TIMET can only
be required, however, to deliver up to 3 million pounds per quarter. Based on
TIMET's actual deliveries to Boeing of approximately 1.3 million pounds during
2002, TIMET recognized income of $23.4 million in 2002 related to the
take-or-pay provisions of the contract. These earnings related to the
take-or-pay provisions distort TIMET's operating income percentages as there is
no corresponding amount reported in TIMET's sales.
TIMET's results in 2002 also includes a $27.5 million provision for an
other than temporary impairment of TIMET's investment in the convertible
preferred securities of Special Metals Corporation ("SMC"). In addition, TIMET's
effective income tax rate in 2002 varies from the 35% U.S. federal statutory
income tax rate because TIMET has concluded it is not currently appropriate to
recognize an income tax benefit related to its U.S. and U.K. losses under the
"more-likely-than-not" recognition criteria.
TIMET is the primary obligor on two workers' compensation bonds issued on
behalf of a former subsidiary that TIMET sold in 1989. The bonds were provided
as part of the conditions imposed on the former subsidiary in order to
self-insure its workers' compensation obligations. Each of the bonds has a
maximum obligation of $1.5 million. The former subsidiary filed for Chapter 11
bankruptcy protection in July 2001, and discontinued payment on the underlying
workers' compensation claims in November 2001. During the third quarter of 2002,
TIMET received notices that the issuers of the bonds were required to make
payments on one of the bonds with respect to certain of these claims and were
requesting reimbursement from TIMET. Based upon current loss projections, TIMET
anticipates claims will be incurred up to the maximum amount payable under the
bond. Therefore, TIMET's operating results in 2002 also include a $1.5 million
charge for this matter. Through December 31, 2002, TIMET has reimbursed the
issuer approximately $400,000 under this bond. At this time TIMET understands
that no claims have been paid under the second bond, and no such payments are
currently anticipated. Accordingly, TIMET has provided no accrual for potential
claims that could be filed under the second bond. TIMET may revise its estimated
liability under these bonds in the future as additional facts become known or
claims develop.
As previously reported, in March 2001, TIMET was notified by one of its
customers that a product manufactured from standard grade titanium produced by
TIMET contained what has been confirmed to be a tungsten inclusion. TIMET
believes that the source of this tungsten was contaminated silicon, which is
used as an alloying addition to titanium at the melting stage, purchased from an
outside vendor in 1998. At the present time, TIMET is aware of six standard
grade ingots that have been demonstrated to contain tungsten inclusions. Based
upon TIMET's assessment of possible losses, TIMET accrued $3.3 million during
2001 for this matter. During 2001, the Company charged $300,000 against this
accrual to write down its remaining on-hand inventory and made $300,000 in
settlement payments, resulting in a $2.7 million accrual as of December 31, 2001
for potential future claims. During 2002, TIMET made settlement payments
aggregating $300,000 and has also revised downward its estimate of the most
likely amount of loss to be incurred by $200,000. As of December 31, 2002, TIMET
had $2.2 million accrued for pending and potential future claims. This amount
represents TIMET's best estimate of the most likely amount of loss yet to be
incurred. This amount does not represent the maximum possible loss, which is not
possible for TIMET to estimate at this time, and may be periodically revised in
the future as more facts become known. As of December 31, 2002 TIMET has
received claims aggregating approximately $5 million and has made settlement
payments aggregating $600,000. Pending claims are being investigated and
negotiated. TIMET believes that certain claims are without merit or can be
settled for less than the amount of the original claim. There is no assurance
that all potential claims have yet been submitted to TIMET. TIMET has filed suit
seeking full recovery from its silicon supplier for any liability TIMET might
incur, although no assurances can be given that TIMET will ultimately be able to
recover all or any portion of such amounts. TIMET has not recorded any
recoveries related to this matter as of December 31, 2002.
During 2001, TIMET's mill products sales volumes increased 7% compared to
2000, and sales volumes of its melted products (ingot and slab) increased 27%.
TIMET's average selling prices (in billing currencies) for its mill products
increased 2% in 2001 compared to 2000, and melted product selling prices
increased 8%. Operating income comparisons were also impacted by the net effects
of higher operating rates at certain plants, lower sponge costs, higher scrap
costs, higher energy costs, changes in customer and product mix. In addition to
the Boeing settlement discussed above, TIMET's operating results in 2001 also
include a $10.8 million asset impairment charge related to certain manufacturing
assets and a $3.3 million charge related to TIMET's previously-reported tungsten
matter discussed above.
TIMET's results in 2001 also include a $61.5 million provision for an other
than temporary impairment of TIMET's investment in the convertible preferred
securities of SMC. In addition, TIMET's effective income tax rate in 2001 varies
from the 35% U.S. federal statutory income tax rate because of a $35.5 million
increase in TIMET's deferred income tax asset valuation allowance, as TIMET
concluded that such deferred income tax assets did not currently meet the
"more-likely-than-not" recognition criteria.
The economic slowdown in the United States and other regions of the world
in the latter part of 2001 in combination with the effects of the September 11,
2001 terrorist attacks negatively impacted commercial air travel in the United
States and abroad throughout 2002. Although general economic conditions have
improved relative to 2001 levels, current data indicates that commercial airline
passenger traffic remains below pre-attack levels, and TIMET expects the current
slowdown in the commercial aerospace sector will continue through 2005 before
beginning a modest upturn in 2006. In addition, the continuing war on terrorism
and potential global conflicts could damage an already fragile economy, delay
the recovery in airline passenger traffic and exacerbate the current downturn in
the commercial aerospace industry. As a result, demand for titanium in the
commercial aerospace market remains soft.
In response, airlines have announced a number of actions to reduce both
costs and capacity including, but not limited to, the early retirement of
airplanes, the deferral of scheduled deliveries of new aircraft and allowing
purchase options to expire. The major commercial airframe and jet engine
manufacturers have substantially reduced their production levels in 2003, and
the forecast of engine and aircraft deliveries over the next few years is
expected to remain at these reduced levels. TIMET expects that aggregate
industry mill product shipments will decrease in 2003 by approximately 3% to
about 42,500 metric tons. TIMET believes that demand for mill products for the
commercial aerospace sector could decline by up to 15% in 2003, primarily due to
a combination of reduced aircraft production rates and excess inventory
accumulated throughout the aerospace supply chain since September 11, 2001.
Excess inventory accumulation typically leads to order demand for titanium
products falling below actual consumption.
According to The Airline Monitor, the worldwide commercial airline industry
reported an estimated operating loss of approximately $8 billion in 2002,
compared with an operating loss of $11 billion in 2001 and operating income of
$11 billion in 2000. The Airline Monitor traditionally issues forecasts for
commercial aircraft deliveries each January and July. According to The Airline
Monitor, large commercial aircraft deliveries for the 1996 to 2002 period peaked
in 1999 with 889 aircraft, including 254 wide body aircraft that use
substantially more titanium than their narrow body counterparts. Large
commercial aircraft deliveries totaled 673 (including 176 wide bodies) in 2002.
The Airline Monitor's most recently issued forecast of January 2003 calls for
580 deliveries in 2003, 570 deliveries in 2004 and 560 deliveries in 2005. After
2005, The Airline Monitor calls for a continued increase each year in large
commercial aircraft deliveries through 2010, with forecasted deliveries of 780
aircraft in 2009 exceeding 2002 levels. Relative to 2002, these forecasted
delivery rates represent anticipated declines of about 14% in 2003, 15% in 2004
and 17% in 2005. Deliveries of titanium generally precede aircraft deliveries by
about one year, although this varies considerably by titanium product. This
correlates to TIMET's cycle, which historically precedes the cycle of the
aircraft industry and related deliveries. TIMET can give no assurance as to the
extent or duration of the current commercial aerospace cycle or the extent to
which it will affect demand for TIMET's products.
Although the current business environment makes it particularly difficult
to predict TIMET's future performance, TIMET believes sales revenue in 2003 will
remain flat compared to 2002 at approximately $360 million to $370 million,
reflecting the combined effects of increases in sales volume offset by continued
softening of market selling prices and changes in customer and product mix. Mill
product sales volume is expected to increase approximately 5% from 2002 levels
to about 9,300 metric tons and melted product sales volume is expected to
increase approximately 40% relative to 2002, to approximately 3,300 metric tons.
TIMET expects approximately 55% of its 2003 mill product sales volume will be
derived from the commercial aerospace sector (as compared to 59% in 2002), with
the balance from military aerospace, industrial and emerging markets. The
overall mill product sales volume increase in 2003 is principally driven by an
anticipated increase in TIMET's military aerospace, military armor and
industrial sales volume compared to 2002, partially offset by sales volume
declines in commercial aerospace and various emerging markets.
Market selling prices on new orders for titanium products, while difficult
to forecast, are expected to continue to soften throughout 2003. However, about
one-half of TIMET's anticipated commercial aerospace volume in 2003 is under
long-term agreements that provide TIMET with selling price stability on that
portion of its business. TIMET may sell substantially similar titanium products
to different customers at varying selling prices due to the effect of the
long-term agreements, timing of purchase orders and market fluctuations. There
are also wide differences in selling prices across different titanium products
that TIMET offers. Accordingly, the mix of customers and products sold affects
the average selling price realized and has an important impact on sales revenue
and gross margin. Average selling prices, as reported by TIMET, are a reflection
not just of actual selling prices received by TIMET, but other related factors
such as foreign currency exchange rates and customer and product mix in a given
period. Consequently, changes in average selling prices from period to period
will be impacted by changes occurring not just in actual prices, but in these
other factors as well.
TIMET's operating costs are affected by a number of factors including,
among others, customer and product mix, material yields, plant operating rates,
raw material costs, labor and energy costs. Raw material costs represent the
largest portion of TIMET's manufacturing cost structure. TIMET expects to
manufacture a significant portion of its titanium sponge requirements in 2003
and purchase the balance. TIMET expects the aggregate cost of purchased sponge
and scrap to remain relatively stable in 2003 as compared to 2002. TIMET expects
its overall capacity utilization to average about 50% in 2003, down from 55% in
2002. However, TIMET's practical capacity utilization measures can vary
significantly based on product mix. As TIMET reduces production volume in
response to reduced requirements, certain manufacturing overhead costs decrease
at a slower rate and to a lesser extent than production volume changes,
generally resulting in higher costs relative to production levels. During 2002,
TIMET undertook a number of actions to reduce its costs, including reductions in
employment levels, more stringent spending controls and programs to improve
manufacturing yields. However, the continued softening of market selling prices
is expected to substantially offset the benefits of these actions, resulting in
an expected gross margin in 2003 of between negative 2% and break even. TIMET
expects gross margin to improve during the year as production volumes begin to
increase somewhat.
The Company anticipates that Boeing will purchase about 800,000 pounds of
product in 2003. At this projected order level, TIMET expects to recognize about
$25 million of income under the Boeing LTA's take-or-pay provisions in 2003. Any
such earnings will be reported as part of TIMET's operating income, but will not
be included in its net sales, sales volume or gross margin.
TIMET's effective consolidated income tax rate is expected to vary
significantly from the U.S. statutory rate, as no income tax benefit is expected
to be recorded on U.S. or U.K. losses during 2003.
Overall, TIMET presently expects to report an operating loss in 2003 of $15
million to $25 million and a net loss of $35 million to $45 million, before any
potential restructuring or other special charges. TIMET presently anticipates
its results in the last half of 2003 will be improved compared to the first half
due to the improvement in gross margins and because the estimated $25 million
expected to be earned under the take-or-pay provision of the Boeing LTA will be
recognized in the last half of the year.
TIMET is not satisfied with the projected results for 2003 and has
undertaken further cost reduction measures. TIMET is redoubling its efforts to
achieve aggressive spending reductions, supplier price concessions and
manufacturing process improvements, and additional salaried headcount reductions
are expected. On a longer-term basis, TIMET is continuing to evaluate product
line and facilities consolidations that may permit it to meaningfully reduce its
cost structure in the future while maintaining and even increasing its market
share. Accordingly, TIMET's results in 2003 could include one or more charges
for restructurings, asset impairments or similar charges that might be material.
During 2002, TIMET adopted SFAS No. 142, Goodwill and other intangible
assets. Under the transition provisions of SFAS No. 142, TIMET determined that
the entire carrying value of its recognized goodwill at December 31, 2001 was
impaired, and during 2002 TIMET recognized a $44.3 million net charge recorded
as a cumulative effect of a change in accounting principle to writeoff all of
its recognized goodwill. However, Tremont had already written off all of its
pro-rata share of TIMET's recognized goodwill as part of a 1999 provision for an
other than temporary impairment of its investment in TIMET at that time.
Accordingly, TIMET's adoption of SFAS No. 142 had no financial statement impact
to the Company during 2002.
General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend income decreased in 2002 compared to 2001 due to a lower average
level of invested funds and lower average yields. General corporate interest and
dividend income decreased in 2001 compared to 2000 as a slightly higher level of
distributions from The Amalgamated Sugar Company LLC in 2001 was more than
offset by a lower interest rate on the Company's $80 million loan to Snake River
Sugar Company (which rate was reduced from 12.99% to 6.49% effective April 1,
2000) and a lower average interest rate on funds available for investment. The
Company received $23.6 million of distributions from the LLC in 2002 compared to
$23.6 million in 2001 and $22.7 million in 2000. See Notes 5 and 12 to the
Consolidated Financial Statements. Aggregate general corporate interest and
dividend income is currently expected to be lower during 2003 compared to 2002
due primarily to a lower amount of funds available for investment and lower
average interest rates.
Legal settlement gains. The $5.2 million of net legal settlement gains in
2002 relate to NL's settlements with certain former insurance carriers. The
$31.9 million net legal settlement gains in 2001 relate principally to (i)
settlement of certain litigation to which Waste Control Specialists was a party
($20.1 million) and (ii) NL's additional settlements with certain former
insurance carriers ($11.4 million). The $69.5 million net legal settlement gains
in 2000 relate to NL's additional settlements with certain former insurance
carriers. These settlements of NL in 2000, 2001 and 2002 resolved court
proceedings in which NL had sought reimbursement from the carriers for legal
defense costs and indemnity coverage for certain of its environmental
remediation expenditures. No further material settlements relating to litigation
concerning environmental remediation coverages are expected. See Note 12 to the
Consolidated Financial Statements.
Securities transactions. Securities transaction gains in 2002 are comprised
of (i) a $3.0 million unrealized gain related to the reclassification of 621,000
shares of Halliburton Company common stock from available-for-sale to trading
securities and (ii) a $3.4 million gain related to changes in the market value
of the Halliburton common stock classified as trading securities. At December
31, 2002, the Company held approximately 2,500 shares of Halliburton common
stock which were sold in market transactions in January 2003 for an amount
approximating their December 31, 2002 carrying value.
Securities transactions gains in 2001 include a $33.1 million realized gain
from exchanges of LYONs and related to the disposition of a portion of the
shares of Halliburton common stock held by the Company when certain holders of
the Company's LYONs debt obligations exercised their right to exchange their
LYONs for such Halliburton shares. Securities transactions in 2001 also include
(i) a $14.2 million gain related to the reclassification of certain shares of
Halliburton common stock from available-for-sale to trading securities, (ii) an
$11.6 million unrealized loss related to changes in market value of the
Halliburton shares classified as trading securities, (iii) Valhi's sale of
390,000 Halliburton shares in market transactions for an aggregate realized gain
of $13.7 million and (iv) a $2.3 million charge for an other than temporary
impairment of certain marketable securities held by the Company.
Securities transactions in 2000 include (i) a $5.6 million gain related to
common stock received by NL from the demutualization of an insurance company
from which NL had purchased certain insurance policies and (ii) a $5.7 million
charge for an other than temporary decline in value of certain marketable
securities held by the Company. See Notes 5 and 12 to the Consolidated Financial
Statements.
Insurance gain. The insurance gain in 2001 relates to proceeds NL received
related to property damage insurance coverages for the fire at its Leverkusen,
Germany facility, as the proceeds received exceeded the carrying value of the
property destroyed and cleanup and other extra costs incurred. NL does not
expect to receive any additional insurance proceeds related to the Leverkusen
fire. See Note 12 to the Consolidated Financial Statements.
Other general corporate income items. The $6.3 million foreign currency
transaction gain in 2002 relates to the extinguishment of certain intercompany
indebtedness of NL. The gain on disposal of fixed assets in 2002 relates to the
sale of certain real estate held by Tremont. The gain on sale/leaseback in 2001
relates to CompX's manufacturing facility in The Netherlands. See Note 12 to the
Consolidated Financial Statements.
General corporate expenses. Net general corporate expenses in 2002 were
higher than the same periods in 2001, as higher legal and stock
compensation-related expenses of NL were only partially offset by the effect of
lower compensation-related expenses of Tremont. Net general corporate expenses
in 2001 approximated net expenses in 2000, as lower legal expenses of NL were
offset by higher compensation-related expenses of Tremont. NL's $20 million of
proceeds from the disposal of its specialty chemicals business unit related to
its agreement not to compete in the rheological products business is being
recognized as a component of general corporate income (expense) ratably over the
five-year non-compete period ending in the first quarter of 2003 ($4 million
recognized in each of 2000, 2001 and 2002). See Note 12 to the Consolidated
Financial Statements. Net general corporate expenses in 2003 are currently
expected to be higher compared to 2002, in part due to the effect of lower
income related to NL's non-compete agreement as well as higher expected legal
expenses of NL.
Interest expense. Interest expense declined in 2002 compared to 2001 due
primarily to lower average levels of outstanding indebtedness as well as lower
average U.S. variable interest rates. Interest expense in 2002 includes $2.0
million related to the loss on early extinguishment of certain indebtedness of
NL. See Note 10 to the Consolidated Financial Statements. Interest expense
declined in 2001 compared to 2000 due primarily to lower interest rates on
variable-rate borrowings and a lower level of outstanding indebtedness of NL and
Valhi, offset in part by higher levels of indebtedness at CompX.
Assuming interest rates do not increase significantly from year-end 2002
levels, interest expense in 2003 is expected to be lower than 2002 due to the
net effects of lower average levels of indebtedness of Valhi parent, higher
average levels of indebtedness of NL and lower average interest rates on NL
indebtedness.
At December 31, 2002, approximately $552 million of consolidated
indebtedness, principally KII's publicly-traded debt and Valhi's loans from
Snake River Sugar Company, bears interest at fixed interest rates averaging 9.1%
(2001 - $476 million with a weighted average interest rate of 10.3%; 2000 - $551
million with a weighted average fixed interest rate of 10.4%). Fixed-rate
outstanding indebtedness at December 31, 2001 and 2000 consisted primarily of
Valhi's 9.25% LYONs and NL's 11.75% Senior Secured Notes, both of which were
fully retired by December 31, 2002, as well as Valhi's loans from Snake River.
The weighted average interest rate on $58 million of outstanding variable rate
borrowings at December 31, 2002 was 4.4% compared to an average interest rate on
outstanding variable rate borrowings of 4.5% at December 31, 2001 and 7.1% at
December 31, 2000. The weighted average interest rate on outstanding variable
rate borrowings declined slightly from December 31, 2001 to December 31, 2002 as
the effect of lower average interest rates on U.S. borrowings more than offset
the effect of higher average interest rates on NL's non-U.S. borrowings. The
weighted average interest rate on outstanding variable rate borrowings decreased
from December 31, 2000 to December 31, 2001 due principally to the reduction in
short-term U.S. interest rates. See Note 10 to the Consolidated Financial
Statements.
KII has a certain amount of indebtedness denominated in currencies other
than the U.S. dollar and, accordingly, NL's interest expense is also subject to
currency fluctuations. See Item 7A, "Quantitative and Qualitative Disclosures
About Market Risk." Periodic cash interest payments were not required on Valhi's
9.25% deferred coupon LYONs (which were fully redeemed by December 31, 2002). As
a result, cash interest expense payments in the past had been lower than accrual
basis interest expense.
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 16 to the Consolidated Financial
Statements. Income tax rates vary by jurisdiction (country and/or state), and
relative changes in the geographic mix of the Company's pre-tax earnings can
result in fluctuations in the effective income tax rate.
As discussed in Note 20 to the Consolidated Financial Statements, effective
January 1, 2002, the Company no longer recognizes periodic amortization of
goodwill. Under GAAP, generally there is no income tax benefit recognized for
financial reporting purposes attributable to goodwill amortization. Accordingly,
ceasing to periodically amortize goodwill beginning in 2002 impacted the
Company's overall effective income tax rate in 2002 as compared to 2001.
During 2002, NL reduced its deferred income tax asset valuation allowance
by approximately $3.4 million, primarily as a result of utilization of certain
income tax attributes for which the benefit had not previously been recognized.
During 2002, Tremont increased its deferred income tax asset valuation allowance
(at the Valhi consolidated level) by a net $3.8 million primarily because
Tremont concluded certain tax attributes do not currently meet the
"more-likely-than-not" recognition criteria. The provision for income taxes in
2002 also includes a $2.7 million deferred income tax benefit related to certain
changes in the Belgian tax law.
Through December 31, 2000, certain subsidiaries, including NL, Tremont and,
beginning in March 1998, CompX, were not members of the consolidated U.S. tax
group of which Valhi is a member (the Contran Tax Group), and the Company
provided incremental income taxes on such earnings. In addition, through
December 31, 2000, Tremont and NL were each in separate U.S. tax groups, and
Tremont provided incremental income taxes on its earnings with respect to NL. As
previously reported, effective January 1, 2001 NL and Tremont each became
members of the Contran Tax Group. Consequently, beginning in 2001 Valhi no
longer provides incremental income taxes on its earnings with respect to NL and
Tremont nor on Tremont's earnings with respect to NL. In addition, beginning in
2001 the Company believes that recognition of an income tax benefit for certain
of Tremont's deductible income tax attributes arising during 2001, while not
appropriate under the "more-likely-than-not" recognition criteria at the Tremont
separate-company level, is appropriate at the Valhi consolidated level as a
result of Tremont becoming a member of the Contran Tax Group. Both of these
factors resulted in a reduction in the Company's consolidated effective income
tax rate in 2001 compared to 2000.
During 2001, NL reduced its deferred income tax asset valuation allowance
by $24.7 million. Of such reduction, $23.2 million related to a change in
estimate of NL's ability to utilize certain German income tax attributes
following the completion of a restructuring of its German operations, the
benefit of which had not previously been recognized under the
"more-likely-than-not" recognition criteria. In addition, NL also utilized
certain tax attributes during 2001 for which the benefit had also not previously
been recognized.
During 2001, Tremont increased its deferred income tax asset valuation
allowance (at the Valhi consolidated level) by a net $3.8 million due primarily
because Tremont concluded certain tax attributes, including its net operating
loss carryforwards generated prior to January 1, 2001 no longer met the
"more-likely-than-not" recognition criteria. Such net operating loss
carryforwards can only be used to offset future taxable income of Tremont, and
may not be used to offset future taxable income of other members of the Contran
Tax Group.
During 2000, NL reduced its deferred income tax valuation allowance by $2.6
million primarily as a result of utilization of certain tax attributes for which
the benefit had not been previously recognized under the "more-likely-than-not"
recognition criteria. Also during 2000, Tremont increased its deferred income
tax valuation allowance by $3.3 million primarily due to its equity in losses of
TIMET and other deductible income tax attributes arising during 2000 for which
recognition of a deferred tax benefit was not considered appropriate by Tremont
under the "more-likely-than-not" recognition criteria.
In October 2000, a reduction in the German "base" income tax rate from 30%
to 25%, effective January 1, 2001, was enacted. Such reduction in the German tax
rate resulted in an additional net income tax expense in the fourth quarter of
2000 of $4.4 million due to a revaluation of NL's German tax attributes,
including the effect of revaluing certain deferred income tax purchase
accounting adjustments with respect to NL's German assets. The reduction in the
German income tax rate results in an additional income tax expense because the
Company has recognized a net deferred income tax asset with respect to Germany.
At December 31, 2002, NL had the equivalent of approximately $414 million
of income tax loss carryforwards in Germany with no expiration date. However, NL
has provided a deferred tax valuation allowance against substantially all of
these income tax loss carryforwards because NL currently believes they do not
meet the "more-likely-than-not" recognition criteria. The German federal
government has proposed certain changes to its income tax law, including certain
changes that would impose limitations on utilization of income tax loss
carryforwards, that as proposed would become effective retroactively to January
1, 2003. Since NL has provided a deferred income tax asset valuation allowance
against substantially all of these German tax loss carryforwards, any limitation
on NL's ability to utilize such carryforwards resulting from enactment of any of
these proposals would not have a material impact on NL's net deferred income tax
liability. However, if enacted, the proposed changes could have a material
impact on NL's ability to fully utilize its German income tax loss
carryforwards, which would significantly affect NL's future income tax expense
and future German income tax payments.
Minority interest. See Note 13 to the Consolidated Financial Statements.
Minority interest in NL's subsidiaries relates principally to NL's
majority-owned environmental management subsidiary, NL Environmental Management
Services, Inc. ("EMS"). EMS was established in 1998, at which time EMS
contractually assumed certain of NL's environmental liabilities. EMS' earnings
are based, in part, upon its ability to favorably resolve these liabilities on
an aggregate basis. The shareholders of EMS, other than NL, actively manage the
environmental liabilities and share in 39% of EMS' cumulative earnings. NL
continues to consolidate EMS and provides accruals for the reasonably estimable
costs for the settlement of EMS' environmental liabilities, as discussed below.
As previously reported, Waste Control Specialists was formed by Valhi and
another entity in 1995. Waste Control Specialists assumed certain liabilities of
the other owner and such liabilities exceeded the carrying value of the assets
contributed by the other owner. Since its inception in 1995, Waste Control
Specialists has reported aggregate net losses. Consequently, all of Waste
Control Specialists aggregate, inception-to-date net losses have accrued to the
Company for financial reporting purposes, and all of Waste Control Specialists
future net income or net losses will also accrue to the Company until Waste
Control Specialists reports positive equity attributable to the other owner.
Accordingly, no minority interest in Waste Control Specialists' net assets or
net earnings (losses) is reported during 2000, 2001 and 2002.
Minority interest in earnings of Tremont's subsidiaries in 2000 relates to
TRECO L.L.C., a 75%-owned subsidiary of Tremont that holds Tremont's interests
in BMI and Landwell. In December 2000, TRECO acquired the 25% interest in TRECO
previously held by the other owner of TRECO, and TRECO became a wholly-owned
subsidiary of Tremont. Accordingly, no minority interest in Tremont's
subsidiaries was reported subsequent to December 2000.
Following completion of the merger transactions in which Tremont became
wholly owned by Valhi in February 2003, the Company will no longer report
minority interest in Tremont's net assets or earnings. See Note 3 to the
Consolidated Financial Statements.
Related party transactions. The Company is a party to certain transactions
with related parties. See Note 18 to the Consolidated Financial Statements.
Accounting principles newly adopted in 2002. See Note 20 to the
Consolidated Financial Statements.
Accounting principles not yet adopted. See Note 21 to the Consolidated
Financial Statements.
Assumptions on defined benefit pension plans and OPEB plans.
Defined benefit pension plans. The Company maintains various defined
benefit pension plans in the U.S., Europe and Canada. See Note 17 to the
Consolidated Financial Statements. At December 31, 2002, all of the Company's
recognized prepaid pension costs relate to NL plans, and 82% of the Company's
recognized accrued pension costs relates to NL plans. Substantially all of the
remaining accrued pension costs at such date relates to benefits owed to certain
former U.S. employees of Medite Corporation, a former business unit of Valhi
(the "Medite plan").
The Company accounts for its defined benefit pension plans using SFAS No.
87, Employer's Accounting for Pensions. Under SFAS No. 87, defined benefit
pension plan expense and prepaid and accrued pension costs are each recognized
based on certain actuarial assumptions, principally the assumed discount rate,
the assumed long-term rate of return on plan assets and the assumed increase in
future compensation levels. The Company recognized consolidated defined benefit
pension plan expense of $5.0 million in 2000, $4.4 million in 2001 and $6.8
million in 2002. The amount of funding requirements for these defined benefit
pension plans is generally based upon applicable regulation (such as ERISA in
the U.S.), and will generally differ from pension expense recognized under SFAS
No. 87 for financial reporting purposes. Contributions made by NL to all of its
plans aggregated $16.6 million in 2000, $7.6 million in 2001 and $9.6 million in
2002. No contributions were required to be made with respect to the Medite plan
during the past three years.
The discount rates the Company utilizes for determining defined benefit
pension expense and the related pension obligations are based on current
interest rates earned on long-term bonds that receive one of the two highest
ratings given by recognized rating agencies in the applicable country where the
defined benefit pension benefits are being paid. In addition, the Company
receives advice about appropriate discount rates from the Company's third-party
actuaries, who may in some cases utilize their own market indices. The discount
rates are adjusted as of each valuation date (September 30th for the NL plans
and December 31st for the Medite plan) to reflect then-current interest rates on
such long-term bonds. Such discount rates are used to determine the actuarial
present value of the pension obligations as of December 31st of that year, and
such discount rates are also used to determine the interest component of defined
benefit pension expense for the following year.
At December 31, 2002, approximately 91% of the projected benefit
obligations for all of the Company's defined benefit pension plans related to
plans sponsored by NL, and substantially all of the remainder related to the
Medite plan. Of the amount attributable to plans sponsored by NL, approximately
17%, 53%, 10% and 14% related to NL plans in the U.S., Germany, Canada and
Norway, respectively. The Company uses several different discount rate
assumptions in determining its consolidated defined benefit pension plan
obligations and expense because the Company maintains defined benefit pension
plans in several different countries in North America and Europe and the
interest rate environment differs from country to country.
The Company used the following discount rates for its defined benefit
pension plans:
Discount rates used for:
Obligations at Obligations at Obligations at
December 31, 2000 December 31, 2001 December 31, 2002
and expense in 2001 and expense in 2002 and expense in 2003
------------------- ------------------- -------------------
NL plans:
U.S .......................... 7.8% 7.3% 6.5%
Germany ...................... 6.0% 5.8% 5.5%
Canada ....................... 7.5% 7.3% 7.0%
Norway ....................... 6.0% 6.0% 6.0%
Medite plan .................... 7.3% 7.0% 6.5%
The assumed long-rate return on plan assets represents the estimated
average rate of earnings expected to be earned on the funds invested or to be
invested in the plans' assets provided to fund the benefit payments inherent in
the projected benefit obligations. Unlike the discount rate, which is adjusted
each year based on changes in current long-term interest rates, the assumed
long-term rate of return on plan assets will not necessarily change based upon
the actual, short-term performance of the plan assets in any given year. Defined
benefit pension expense each year is based upon the assumed long-term rate of
return on plan assets for each plan and the actual fair value of the plan assets
as of the beginning of the year. Differences between the expected return on plan
assets for a given year and the actual return are deferred and amortized over
future periods based either upon the expected average remaining service life of
the active plan participants (for plans for which benefits are still being
earned by active employees) or the average remaining life expectancy of the
inactive participants (for plans for which benefits are not still being earned
by active employees).
At December 31, 2002, approximately 93% of the plan assets for all of the
Company's defined benefit pension plans related to plans sponsored by NL, and
the remainder related to the Medite plan. Of the amount attributable to plans
sponsored by NL, approximately 19%, 50%, 8% and 18% related to plan assets for
NL's plans in the U.S., Germany, Canada and Norway, respectively. The Company
uses several different long-term rate of return on plan asset assumptions in
determining its consolidated defined benefit pension plan expense because the
Company maintains defined benefit pension plans in several different countries
in North America and Europe, the plan assets in different countries are invested
in a different mix of investments and the long-term rates of return for
different investments differs from country to country.
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets for each of its plans and the expected long-term
rates of return for such asset components. In addition, the Company receives
advice about appropriate long-term rates of return from the Company's
third-party actuaries. Such assumed asset mixes are summarized below:
o In the U.S., NL currently has a plan asset target allocation of 50% to
equity managers and 50% to fixed income managers, with an expected
long-term rate of return for such investments of approximately 10% and 6%,
respectively.
o In Germany, the composition of NL's plan assets is established to satisfy
the requirements of the German insurance commissioner.
o In Canada, NL currently has a plan asset target allocation of 65% to equity
managers and 35% to fixed income managers, with an expected long-term rate
of return for such investments to average approximately 125 basis points
above the applicable equity or fixed income index.
o In Norway, NL currently has a plan asset target allocation of 15% to equity
managers and 85% to fixed income managers, with an expected long-term rate
of return for such investments of approximately 8% and 6%, respectively.
o In the U.S., the Medite plan assets are invested in the Combined Master
Retirement Trust ("CMRT"), a collective investment 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. Harold Simmons is the sole trustee of the CMRT. The CMRT's
long-term investment objective is to provide a rate of return exceeding a
composite of broad market equity and fixed income indices (including the
S&P 500 and certain Russell indices) utilizing both third-party investment
managers as well as investments directed by Mr. Simmons. During the 15-year
history of the CMRT, through December 31, 2002 the average annual rate of
return has been 10.8%.
The Company regularly reviews its actual asset allocation for each of its
plans, and will periodically rebalance the investments in each plan to more
accurately reflect the targeted allocation when considered appropriate.
The Company's assumed long-term rates of return on plan assets for 2000,
2001 and 2002 were as follows:
2000 2001 2002
-------- -------- ------
NL plans:
U.S .......................... 9.0% 8.5% 8.5%
Germany ...................... 7.5% 7.3% 6.8%
Canada ....................... 8.0% 7.8% 7.0%
Norway ....................... 7.0% 7.0% 7.0%
Medite plan .................... 10.0% 10.0% 10.0%
The Company currently expects to utilize the same long-term rate of return
on plan asset assumptions in 2003 as it used in 2002 for purposes of determining
the 2003 defined benefit pension plan expense.
To the extent that a plan's particular pension benefit formula calculates
the pension benefit in whole or in part based upon future compensation levels,
the projected benefit obligations and the pension expense will be based in part
upon expected increases in future compensation levels. For all of the Company's
plans for which the benefit formula is so calculated, the Company generally
bases the assumed expected increase in future compensation levels based upon
average long-term inflation rates for the applicable country.
In addition to the actuarial assumptions discussed above, because NL
maintains defined benefit pension plans outside the U.S., the amount of
recognized defined benefit pension expense and the amount of prepaid and accrued
pension costs will vary based upon relative changes in foreign currency exchange
rates.
Based on the actuarial assumptions described above and NL's current
expectation for what actual average foreign currency exchange rates will be
during 2003, NL expects its defined benefit pension expense will approximate $8
million in 2003. In comparison, NL expects to be required to make approximately
$12 million of contributions to such plans during 2003. The expected amount of
defined benefit pension expense for 2003 for the Medite plan is not significant,
and no contributions are currently expected to be required to be made by such
plan during 2003.
As noted above, defined benefit pension expense and the amount recognized
as prepaid and accrued pension costs are based upon the actuarial assumptions
discussed above. The Company believes all of the actuarial assumptions used are
reasonable and appropriate. If NL had lowered the assumed discount rate by 25
basis points for all of its plans as of December 31, 2002, NL's aggregate
projected benefit obligations would have increased by approximately $10.5
million at that date, and NL's defined benefit pension expense would be expected
to increase by approximately $1.4 million during 2003. Similarly, if NL lowered
the assumed long-term rate of return on plan assets by 25 basis points for all
of its plans, NL's defined benefit pension expense would be expected to increase
by approximately $600,000 during 2003. Similar assumed changes with respect to
the discount rate and expected long-term rate of return on plan assets for the
Medite plan would not be significant.
OPEB plans. Certain subsidiaries of the Company currently provide certain
health care and life insurance benefits for eligible retired employees. See Note
17 to the Consolidated Financial Statements. At December 31, 2002, approximately
61% of the Company's aggregate accrued OPEB costs relate to NL, and
substantially all of the remainder relates to Tremont. NL provides such OPEB
benefits to retirees in the U.S. and Canada. The Company accounts for such OPEB
costs under SFAS No. 106, Employers Accounting for Postretirement Benefits other
than Pensions. Under SFAS No. 106, OPEB expense and accrued OPEB costs are based
on certain actuarial assumptions, principally the assumed discount rate and the
assumed rate of increases in future health care costs. The Company recognized
consolidated OPEB expense of $899,000 in 2000, $254,000 in 2001 and $555,000 in
2002. Similar to defined benefit pension benefits, the amount of funding will
differ from the expense recognized for financial reporting purposes, and
contributions to the plans to cover benefit payments aggregated $8.9 million in
2000, $1.8 million in 2001 and $1.9 million in 2002. Such contributions were
lower in 2002 and 2001 as compared with 2000 due to NL's 2000 contribution to a
trust of certain shares of common stock received by NL pursuant to the
demutualization of an insurance company, the assets of which could only be used
to pay for certain of NL's retiree benefits. See Note 12 to the Consolidated
Financial Statements. The shares were sold by the trust for $7.8 million in
2000, and such proceeds were used to pay certain of NL's OPEB benefits in 2000,
2001 and 2002.
The assumed discount rates the Company utilizes for determining OPEB
expense and the related accrued OPEB obligations are generally based on the same
discount rates the Company utilizes for its U.S. and Canadian defined benefit
pension plans.
In estimating the health care cost trend rate, the Company considers its
actual health care cost experience, future benefit structures, industry trends
and advice from its third-party actuaries. During each of the past three years,
the Company has assumed that the relative increase in health care costs will
generally trend downward over the next several years, reflecting, among other
things, assumed increases in efficiency in the health care system and
industry-wide cost containment initiatives. For example, at December 31, 2002,
the expected rate of increase in future health care costs ranges from 9% to
11.4% in 2003, declining to rates of between 4.25% and 5.5% in 2010 and
thereafter.
Based on the actuarial assumptions described above and NL's current
expectation for what actual average foreign currency exchange rates will be
during 2003, the Company expects its consolidated OPEB expense will approximate
$800,000 in 2003. In comparison, the Company expects to be required to make
approximately $6.7 million of contributions to such plans during 2003.
As noted above, OPEB expense and the amount recognized as accrued OPEB
costs are based upon the actuarial assumptions discussed above. The Company
believes all of the actuarial assumptions used are reasonable and appropriate.
If the Company had lowered the assumed discount rate by 25 basis points for all
of its OPEB plans as of December 31, 2002, the Company's aggregate projected
benefit obligations would have increased by approximately $1.0 million at that
date, and the Company's OPEB expense would be expected to increase by less than
$100,000 during 2003. Similarly, if the assumed future health care cost trend
rate had been increased by 100 basis points, the Company's accumulated OPEB
obligations would have increased by approximately $2.9 million at December 31,
2002, and OPEB expense would have increased by $200,000 in 2002.
Foreign operations
NL. NL has substantial operations located outside the United States
(principally Europe and Canada) for which the functional currency is not the
U.S. dollar. As a result, the reported amount of NL's assets and liabilities
related to its non-U.S. operations, and therefore the Company's consolidated net
assets, will fluctuate based upon changes in currency exchange rates. As of
January 1, 2001, the functional currency of NL's German, Belgian, Dutch and
French operations had been converted to the euro from their respective national
currencies. At December 31, 2002, NL had substantial net assets denominated in
the euro, Canadian dollar, Norwegian kroner and United Kingdom pound sterling.
CompX. CompX has substantial operations and assets located outside the
United States, principally slide and/or ergonomic product operations in Canada,
The Netherlands and Taiwan. As of January 1, 2001, the functional currency of
CompX's Thomas Regout operations in The Netherlands had been converted to the
euro from its national currency (Dutch guilders).
TIMET. TIMET also has substantial operations and assets located in Europe,
principally in the United Kingdom. The United Kingdom has not adopted the euro.
Approximately 44% of TIMET's European sales are denominated in currencies other
than the U.S. dollar, principally the British pound and the euro. Certain
purchases of raw materials for TIMET's European operations, principally titanium
sponge and alloys, are denominated in U.S. dollars while labor and other
production costs are primarily denominated in local currencies. The U.S. dollar
value of TIMET's foreign sales and operating costs are subject to currency
exchange rate fluctuations that can impact reported earnings.
LIQUIDITY AND CAPITAL RESOURCES
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. Changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments.
Certain items included in the determination of net income are non-cash, and
therefore such items have no impact on cash flows from operating activities.
Non-cash items included in the determination of net income include depreciation,
depletion and amortization expense, non-cash interest expense, asset impairment
charges and unrealized securities transactions gains and losses. Non-cash
interest expense relates principally to Valhi and NL and consists of
amortization of original issue discount on certain indebtedness and amortization
of deferred financing costs. In addition, substantially all of the proceeds
resulting from NL's legal settlements in 2000 and 2001 are shown as restricted
cash, and therefore such settlements had no impact on cash flows from operating
activities.
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 a current cash outlay paid to such
affiliates. The amount of periodic defined benefit pension plan expense and
periodic OPEB expense depends upon a number of factors, including certain
actuarial assumptions, and changes in such actuarial assumptions will result in
a change in the reported expense. In addition, the amount of such periodic
expense generally differs from the outflows of cash required to be currently
paid for such benefits.
Certain other items included in the determination of net income have no
impact on cash flows from operating activities, but such items do impact cash
flows from investing activities (although their impact on such cash flows
differs from their impact on net income). For example, realized gains and losses
from the disposal of 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. Similarly, NL's insurance gain in 2001 related to the property
destroyed by fire at its Leverkusen facility is included in the determination of
net income, but the proceeds received from the insurance company for property
damage reimbursements are also shown as investing activities.
Investing activities. Capital expenditures are disclosed by business
segment in Note 2 to the Consolidated Financial Statements.
At December 31, 2002, the estimated cost to complete capital projects in
process approximated $7.4 million, of which $6 million relates to NL's Ti02
facilities and the remainder relates to CompX's facilities. Aggregate capital
expenditures for 2003 are expected to approximate $48.3 million ($34.7 million
for NL, $11.2 million for CompX and $2.2 million for Waste Control Specialists).
Capital expenditures in 2003 are expected to be financed primarily from
operations or existing cash resources and credit facilities.
During 2002, (i) NL purchased $21.3 million of its common stock in market
transactions, (ii) NL purchased the EWI insurance brokerage services operations
for $9 million and (iii) one of the Contran family trusts described in Note 1 to
the Consolidated Financial Statements repaid $2 million of its loan from EMS.
See Notes 3 and 18 to the Consolidated Financial Statements.
During 2001, NL and CompX each purchased shares of their respective common
stocks in market transactions for an aggregate of $15.5 million and $2.6
million, respectively, and Valhi purchased shares of Tremont common stock in
market transactions for an aggregate of $198,000. In addition, (i) EMS loaned a
net $20 million to one of the Contran family trusts discussed in Note 1 to the
Consolidated Financial Statements, (ii) NL received $23.4 million of insurance
recoveries for property damage and clean-up costs associated with the Leverkusen
fire, (iii) Valhi sold 390,000 shares of Halliburton common stock in market
transactions for aggregate proceeds of $16.8 million and (iv) CompX received $10
million of proceeds from the sale/leaseback of its manufacturing facility in The
Netherlands.
During 2000, (i) CompX acquired a lock producer for $9 million using
borrowings under its unsecured revolving bank credit facility, (ii) NL purchased
$30.9 million of shares of its common stock pursuant to its previously-reported
share repurchase programs, (iii) CompX purchased $8.7 million of its shares
pursuant to its previously-reported share repurchase program, (iv) NL and Valhi
purchased an aggregate of $45.4 million of shares of Tremont common stock and
(v) Tremont purchased the 25% interest in TRECO LLC it previously did not own
for $2.5 million.
Financing activities. During 2002, (i) Valhi repaid a net $35 million under
its revolving bank credit facility and repaid a net $13.4 million of its
short-term demand loans from Contran, (ii) CompX repaid a net $18 million of its
revolving bank credit facility, (iii) NL repaid all of its existing short-term
notes payable denominated in euros and Nowegian kroner ($53 million when repaid)
using primarily proceeds from borrowings ($39 million) under KII's new revolving
bank credit facility, (iv) NL redeemed $194 million principal amount of its
Senior Secured Notes, primarily using the proceeds from the new euro 285 million
($280 million when issued) borrowing of KII and (v) NL repaid an aggregate of
euro 14 million ($14 million when repaid) of borrowings under KII's revolving
bank credit facility. In addition, Valhi redeemed the remaining $43.1 million
principal amount at maturity of its LYONs debt obligations ($27.4 million
accreted value) for cash.
During 2001, (i) Valhi borrowed a net $4.0 million under its revolving bank
credit facility and borrowed a net $16.6 million under short-term demand loans
from Contran, (ii) CompX borrowed a net $10 million under its revolving bank
credit facility and (iii) NL repaid euro 24 million ($21.4 million when repaid)
of its short-term non-U.S. notes payable. In addition, (i) a wholly-owned
subsidiary of Valhi purchased Waste Control Specialists' bank term loan from the
lender at par value, (ii) $142.6 million principal amount at maturity ($79.9
million accreted value) of Valhi's LYONs debt obligations were retired either
through exchanges or redemptions and (iii) EMS entered into a $13.4 million
reducing revolving intercompany credit facility with Tremont, the proceeds of
which were used to repay Tremont's loan from Contran.
Net repayments of indebtedness in 2000 include (ii) NL's repayments of $50
million principal amount of its Senior Secured Notes using cash on hand and
borrowings under short-term euro or Norwegian kroner-denominated credit
facilities ($43 million when borrowed), (ii) CompX's borrowing a net $19 million
under its unsecured revolving bank credit facility, (iii) NL's repayment of Euro
30.9 million ($28.9 million when paid) of certain of its other Euro-denominated
short-term indebtedness and (iv) Valhi's borrowing a net $10 million under its
bank credit facility and borrowing a net $5.7 million of short-term borrowings
from Contran.
At December 31, 2002, unused credit available under existing credit
facilities (after considering CompX's new $47.5 million revolving bank credit
facility obtained in January 2003 which replaced its prior $100 million
revolving facility) approximated $172.4 million, which was comprised of $16.5
million available to CompX under its new revolving credit facility, $57.0
million available to NL under non-U.S. credit facilities, $30.0 million
available to NL under its U.S. credit facility and $68.9 million available to
Valhi 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. See Note 10 to the Consolidated
Financial Statements. Other than operating leases discussed in Note 19 to the
Consolidated Financial Statements, neither Valhi nor any of its subsidiaries or
affiliates are parties to any off-balance sheet financing arrangements.
Chemicals - NL Industries
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions can significantly impact NL's earnings and operating cash
flows. Cash flow from operations is considered the primary source of liquidity
for NL. Changes in TiO2 pricing, production volume and customer demand, among
other things, could significantly affect the liquidity of NL.
At December 31, 2002, NL had cash, cash equivalents and marketable debt
securities of $130 million, including restricted balances of $72 million, and NL
had $87 million available for borrowing under its U.S. and non-U.S. credit
facilities. At December 31, 2002, NL had complied with all financial covenants
governing its debt agreements. Based upon NL's expectations for the TiO2
industry and anticipated demands on NL's cash resources as discussed herein, NL
expects to have sufficient liquidity to meet its near-term obligations including
operations, capital expenditures, debt service and dividends. To the extent that
actual developments differ from NL's expectations, NL's liquidity could be
adversely affected.
NL's capital expenditures during the past three years aggregated $117.4
million, including $18.2 million ($5.0 million in 2002) for NL's ongoing
environmental protection and compliance programs and $25.4 million (mostly in
2001) related to reconstruction of the Leverkusen facility destroyed by fire in
March 2001. NL's estimated 2003 capital expenditures are $34.0 million,
including $5.0 million in the area of environmental protection and compliance.
The capital expenditures of the TiO2 manufacturing joint venture are not
included in NL's capital expenditures.
NL's board of directors has authorized NL to purchase up to an aggregate of
6.0 million shares of its common stock in open market or privately-negotiated
transactions over an unspecified period of time, including 1.5 million shares
authorized by NL's board in October 2002. Through December 31, 2002, NL had
purchased 4.7 million of its shares pursuant to such authorizations for an
aggregate of $74.9 million, including approximately 1.4 million shares purchased
during 2002 for an aggregate of $21.3 million, and an additional 1.3 million
shares are available for purchase.
Certain of NL's U.S. and non-U.S. tax returns are being examined and tax
authorities have or may propose tax deficiencies, including non-income related
items and interest. NL's and EMS' 1998 U.S. federal income tax returns are
currently being examined by the U.S. tax authorities, and NL and EMS have
granted extensions of the statute of limitations for assessments until September
30, 2003. Based on the examination to date, NL anticipates that the U.S. tax
authorities may propose a substantial tax deficiency. NL has received
preliminary tax assessments for the years 1991 to 1997 from the Belgian tax
authorities proposing tax deficiencies, including related interest, of
approximately euro 10.4 million ($11 million at December 31, 2002). NL has filed
protests to the assessments for the years 1991 to 1997. NL is in discussions
with the Belgian tax authorities and believes that a significant portion of the
assessments is without merit. NL has received a notification from the Norwegian
tax authorities of their intent to assess tax deficiencies of approximately
kroner 12 million ($2 million at December 31, 2002) relating to 1998 through
2000. NL has objected to this proposed assessment in a written response to the
Norwegian tax authorities. No assurance can be given that these tax matters will
be resolved in NL's favor in view of the inherent uncertainties involved in
court and tax proceedings. NL believes that it has provided adequate accruals
for additional taxes and related interest expense which may ultimately result
from all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on its consolidated
financial position, results of operations or liquidity.
At December 31, 2002, NL had recorded net deferred tax liabilities of $134
million. NL operates in numerous tax jurisdictions, in certain of which it has
temporary differences that net to deferred tax assets (before valuation
allowance). NL has provided a deferred tax valuation allowance of $185 million
at December 31, 2002, principally related to Germany, partially offsetting
deferred tax assets which NL believes do not currently meet the
"more-likely-than-not" recognition criteria.
At December 31, 2002, NL had the equivalent of approximately $414 million
of income tax loss carryforwards in Germany with no expiration date. However, NL
has provided a deferred tax valuation allowance against substantially all of
these income tax loss carryforwards because NL currently believes they do not
meet the "more-likely-than-not" recognition criteria. The German federal
government has proposed certain changes to its income tax law, including certain
changes that would impose limitations on the annual utilization of income tax
loss carryforwards that, as proposed, would become effective retroactively to
January 1, 2003. Since NL has provided a deferred income tax asset valuation
allowance against substantially all of the German tax loss carryforwards, any
limitation on NL's ability to utilize such carryforwards resulting from
enactment of any of these proposals would not have a material impact on NL's net
deferred income tax liability. However, if enacted, the proposed changes could
have a material impact on NL's ability to make full annual use of its German
income tax loss carryforwards, which would significantly affect NL's future
income tax expense and future income tax payments.
NL has been named as a defendant, PRP, or both, in a number of legal
proceedings associated with environmental matters, including waste disposal
sites, mining locations and facilities currently or previously owned, operated
or used by NL, certain of which are on the U.S. EPA's Superfund National
Priorities List or similar state lists. On a quarterly basis, NL evaluates the
potential range of its liability at sites where it has been named as a PRP or
defendant, including sites for which EMS has contractually assumed NL's
obligation. NL believes it has provided adequate accruals ($98 million at
December 31, 2002) for reasonably estimable costs of such matters, but NL's
ultimate liability may be affected by a number of factors, including changes in
remedial alternatives and costs, the allocation of such costs among PRPs and the
solvency of other PRPs. It is not possible to estimate the range of costs for
certain sites. The upper end of the range of reasonably possible costs to NL for
sites for which it is possible to estimate costs is approximately $140 million.
NL's estimates of such liabilities have not been discounted to present value,
and other than certain previously-reported settlements with respect to certain
of NL's former insurance carriers, NL has not recognized any insurance
recoveries. No assurance can be given that actual costs will not exceed accrued
amounts or the upper end of the range for sites for which estimates have been
made, and no assurance can be given that costs will not be incurred with respect
to sites as to which no estimate presently can be made. NL is also a defendant
in a number of legal proceedings seeking damages for personal injury and
property damage allegedly arising from the sale of lead pigments and lead-based
paints. NL has not accrued any amounts for the pending lead pigment and
lead-based paint litigation. There is no assurance that NL will not incur future
liability in respect of this pending litigation in view of the inherent
uncertainties involved in court and jury rulings in pending and possible future
cases. However, based on, among other things, the results of such litigation to
date, NL believes that the pending lead pigment and lead-based paint litigation
is without merit. Liability that may result, if any, cannot reasonably be
estimated. In addition, various legislation and administrative regulations have,
from time to time, been enacted or proposed that seek to impose various
obligations on present and former manufacturers of lead pigment and lead-based
paint with respect to asserted health concerns associated with the use of such
products and to effectively overturn the precedent set by court decisions in
which NL and other pigment manufacturers have been successful. Examples of such
proposed legislation include bills which would permit civil liability for
damages on the basis of market share, rather than requiring plaintiffs to prove
that the defendant's product caused the alleged damage, and bills which would
revive actions currently barred by statutes of limitations. NL currently
believes the disposition of all claims and disputes, individually and in the
aggregate, should not have a material adverse effect on its consolidated
financial position, results of operations or liquidity. There can be no
assurance that additional matters of these types will not arise in the future.
At December 31, 2002, NL had $61 million in cash, equivalents and
marketable debt securities held by certain 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 Notes 1 and 12 to the
Consolidated Financial Statements.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, its dividend policy, capital needs and availability of resources in
view of, among other things, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, NL has in the past and may in the future seek to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, issue
additional securities, repurchase shares of its common stock, modify its
dividend policy, restructure ownership interests, sell interests in subsidiaries
or other assets, or take a combination of such steps or other steps to manage
its liquidity and capital resources. In the normal course of its business, NL
may review opportunities for the acquisition, divestiture, joint venture or
other business combinations in the chemicals industry or other industries, as
well as the acquisition of interests in related entities. In the event of any
such transaction, NL may consider using its available cash, issuing its equity
securities or increasing its indebtedness to the extent permitted by the
agreements governing NL's existing debt.
As discussed in "Results of Operations - Chemicals," NL has substantial
operations located outside the United States for which the functional currency
is not the U.S. dollar. As a result, the reported amount of NL's assets and
liabilities related to its non-U.S. operations, and therefore NL's and the
Company's consolidated net assets, will fluctuate based upon changes in currency
exchange rates.
Component products - CompX International
In 2000, CompX acquired a lock producer for an aggregate of $9 million cash
consideration using primarily borrowings under its bank credit facility. CompX's
capital expenditures during the past three years aggregated $49.1 million. Such
capital expenditures included manufacturing equipment that emphasizes improved
production efficiency and increased production capacity.
CompX believes that its cash on hand, together with cash generated from
operations and borrowing availability under its new bank credit facility, will
be sufficient to meet CompX's liquidity needs for working capital, capital
expenditures, debt service and dividends for the foreseeable future. To the
extent that CompX's actual operating results or developments differ from CompX's
expectations, CompX's liquidity could be adversely affected. In this regard,
during 2002 CompX's quarterly dividend of $.125 per share exceeded CompX's
quarterly earnings per share. To the extent that CompX's future operating
results continue to be insufficient to cover its dividend, it is possible CompX
might decide to reduce or suspend its quarterly dividend.
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
available cash, issuing additional equity securities or increasing the
indebtedness of CompX or its subsidiaries.
Waste management - Waste Control Specialists
Waste Control Specialists capital expenditures during the past three years
aggregated $7.0 million. Such capital expenditures were funded primarily from
Valhi's capital contributions ($20 million in 2000) as well as certain debt
financing provided to Waste Control Specialists by Valhi.
At December 31, 2002, Waste Control Specialists' indebtedness consists
principally of $23.2 million of borrowings owed to a wholly-owned subsidiary of
Valhi, all of which matures in November 2004. Such indebtedness is eliminated in
the Company's consolidated financial statements. Waste Control Specialists will
likely borrow additional amounts during 2003 under its revolving credit facility
with such Valhi subsidiary.
TIMET
At December 31, 2002, TIMET had net debt of approximately $13.2 million
($19.4 million of debt and $6.2 million of cash and cash equivalents). At
December 31, 2002, TIMET had over $130 million of borrowing availability under
its various worldwide credit agreements, as discussed below. TIMET presently
expects to generate $20 million to $30 million in cash flow from operations
during 2003, principally driven by reductions in working capital, especially
inventory, and the deferral of the dividends on the convertible preferred
securities, also as discussed below. TIMET received the 2003 advance of $27.7
million ($28.5 million less $800,000 for 2002 subcontractor purchases) from
Boeing in early January 2003. TIMET expects its bank debt will decrease in 2003
as compared to year-end 2002 levels. Overall, TIMET believes its cash, cash flow
from operations, and borrowing availability will satisfy its expected working
capital, capital expenditures and other requirements in 2003.
In October 2002, TIMET amended its existing U.S. asset-based revolving
credit agreement, extending the maturity date to February 2006. Under the terms
of the amendment, borrowings are limited to the lesser of $105 million or a
formula-determined borrowing base derived from the value of TIMET's accounts
receivable, inventory and equipment. This facility requires TIMET's U.S. daily
cash receipts to be used to reduce outstanding borrowings, which may then be
reborrowed, subject to the terms of the agreement. Borrowings are collateralized
by substantially all of TIMET's U.S. assets. The credit agreement prohibits the
payment of dividends on TIMET's convertible preferred securities if excess
availability, as defined, is less than $25 million, limits additional
indebtedness, prohibits the payment of dividends on TIMET's common stock if
excess availability is less than $40 million, requires compliance with certain
financial covenants and contains other covenants customary in lending
transactions of this type. Excess availability is defined as unused borrowing
availability less certain contractual commitments such as letters of credit. As
of December 31, 2002, excess availability was approximately $85 million.
TIMET's U.S. credit agreement allows the lender to modify the borrowing
base formulas at its discretion, subject to certain conditions. During the
second quarter of 2002, TIMET's lender elected to exercise such discretion and
modified TIMET's borrowing base formulas, which reduced the amount that TIMET
could borrow against its inventory and equipment by approximately $7 million. In
the event the lender exercises such discretion in the future, such event could
have a material adverse impact on TIMET's liquidity.
TIMET's United Kingdom subsidiary also has a credit agreement that, as
amended in December 2002, provides for borrowings limited to the lesser of pound
sterling 22.5 million or a formula-determined borrowing base derived from the
value of accounts receivable, inventory and equipment. As of December 31, 2002,
unused borrowing availability was approximately $30 million.
TIMET also has overdraft and other credit facilities at certain of its
other European subsidiaries. These facilities accrue interest at various rates
and are payable on demand. Unused borrowing availability as of December 31, 2002
under these facilities was approximately $16 million.
TIMET's capital expenditures during the past three years aggregated $35.1
million. TIMET's capital expenditures during 2003 are currently expected to be
about $10 million.
TIMET is involved in various environmental, contractual, product liability
and other claims, disputes and litigation incidental to its business including
those discussed above. While TIMET's management, including internal counsel,
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 results of operations or cash flows in a particular
period.
At December 31, 2002, TIMET had accrued an aggregate of $4.3 million for
environmental matters, including the previously-reported matter relating to the
site at its Nevada facility. TIMET 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 not
discounted to their present value. It is not possible to estimate the range of
costs for certain sites. The imposition of more stringent standards or
requirements under environmental laws or regulations, the results of future
testing and analysis undertaken by TIMET at its operating facilities, or a
determination that TIMET is potentially responsible for the release of hazardous
substances at other sites, could result in expenditures in excess of amounts
currently estimated to be required for such matters. No assurance can be given
that actual costs will not exceed accrued amounts or that costs will not be
incurred with respect to sites as to which no problem is currently known or
where no estimate can presently be made. Further, there can be no assurance that
additional environmental matters will not arise in the future.
At December 31, 2002, TIMET had accrued an aggregate of $600,000 for
expected costs related to various legal proceedings. TIMET records liabilities
related to legal proceedings when estimated losses, including estimated legal
fees, are probable and reasonably estimable. Such accruals are adjusted as
further information becomes available or circumstances change. Estimated future
costs are not discounted to their present value. It is not possible to estimate
the range of costs for certain matters. No assurance can be given that actual
costs will not exceed accrued amounts or that costs will not be incurred with
respect to matters as to which no problem is currently known or where no
estimate can presently be made. Further, there can be no assurance that
additional legal proceedings will not arise in the future.
At December 31, 2002, TIMET had $201.2 million outstanding of its 6.625%
convertible preferred securities that mature in 2026. Such convertible preferred
securities do not require principal amortization, and TIMET has the right to
defer dividend payments for one or more quarters of up to 20 consecutive
quarters. TIMET is prohibited from, among other things, paying dividends on its
common stock while dividends are being deferred on the convertible preferred
securities. TIMET suspended the payment of dividends on its common stock during
the fourth quarter of 1999 in view of, among other things, the continuing
weakness in demand for titanium metals products. In April 2000, TIMET exercised
its rights under the convertible preferred securities and commenced deferring
future dividend payments on these securities. During June 2001, following
TIMET's legal settlement with Boeing, TIMET resumed payment of dividends on its
convertible preferred securities, and TIMET also paid the aggregate amount of
dividends that have been previously deferred on such convertible preferred
securities ($13.9 million). Prior to September 2001, TIMET was prohibited from
paying dividends on its common stock due to restrictions contained in its U.S.
credit agreement. In September 2001, such U.S. credit agreement was amended to
permit TIMET to pay dividends on its common stock up to specified amounts
provided certain specified conditions were met.
In October 2002, TIMET again elected to exercise its right to defer future
dividend payments on its convertible preferred securities for a period of up to
20 consecutive quarters. Dividends will continue to accrue and interest will
continue to accrue at the coupon rate on the principal and unpaid dividends.
This deferral was effective starting with TIMET's December 1, 2002 scheduled
dividend payment. TIMET may consider resuming payment of dividends on the
convertible preferred securities once the outlook for TIMET's results from
operations improves substantially`. Since TIMET exercised its right to defer
dividend payments, it is unable to, among other things, pay dividends on or
reacquire its capital stock during the deferral period.
In September 2002, Moody's Investor Service downgraded its rating on
TIMET's convertible preferred securities to Caa2 from B3, and Standard & Poor's
Ratings Services lowered its rating on such securities to CCC- from CCC. S&P
further lowered its credit rating on such securities to D after the dividend
payment due on December 1, 2002 on the convertible preferred securities was
actually deferred. TIMET's ability to obtain additional capital in the future,
or its ability to obtain capital on terms TIMET deemed appropriate, could be
negatively affected by these downgrades.
TIMET used the proceeds from its settlement with Boeing to (i) pay legal
and other costs associated with the Boeing settlement, (ii) pay the deferred
dividends on its convertible preferred securities and (iii) repay a substantial
portion of TIMET's outstanding revolving bank debt.
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 and may in the future seek to raise additional capital, modify its
common and preferred dividend policies, restructure ownership interests, incur,
refinance or restructure indebtedness, repurchase shares of capital stock, sell
assets, or take a combination of such steps or other steps to increase or manage
its liquidity and capital resources. In the normal course of business, TIMET
investigates, evaluates, discusses and engages in acquisition, joint venture,
strategic relationship and other business combination opportunities in the
titanium, 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 Corporation
Tremont is primarily a holding company which, at December 31, 2002, owned
approximately 39% of TIMET and 21% of NL. At December 31, 2002, the market value
of the 1.3 million shares of TIMET (on a post reverse split basis) and the 10.2
million shares of NL held by Tremont was approximately $24 million and $174
million, respectively. In addition, at December 31, 2002, Tremont had $17.3
million of cash on hand, and Tremont had $15 million available for borrowing
under its credit facility with NL as described below. See Notes 7 and 18 to the
Consolidated Financial Statements.
As previously reported, 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 ($2.9 million at December 31, 2002) to cover its share
of probable and reasonably estimable environmental obligations for these
activities. Tremont currently expects that the nature and extent of any final
remediation measures that might be imposed with respect to this site will be
known by 2005. Currently, no reasonable estimate can be made of the cost of any
such final remediation measure, and accordingly Tremont has accrued no amounts
at December 31, 2002 for any such cost. The amount accrued at December 31, 2002
represents Tremont's best estimate of the costs to be incurred through 2005 with
respect to the interim remediation measures.
Tremont 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 not discounted to
their present value. It is not possible to estimate the range of costs for
certain sites, including the Hot Springs County, Arkansas site discussed above.
The imposition of more stringent standards or requirements under environmental
laws or regulations, the results of future testing and analysis undertaken by
Tremont at its non-operating facilities, or a determination that Tremont is
potentially responsible for the release of hazardous substances at other sites,
could result in expenditures in excess of amounts currently estimated to be
required for such matters. No assurance can be given that actual costs will not
exceed accrued amounts or that costs will not be incurred with respect to sites
as to which no problem is currently known or where no estimate can presently be
made. Further, there can be no assurance that additional environmental matters
will not arise in the future. Environmental exposures 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, the allocation of costs among PRPs; the multiplicity of possible
solutions; and the years of investigatory, remedial and monitoring activity
required. It is possible that future developments could adversely affect
Tremont's business, consolidated financial conditions, results of operations or
liquidity. There can be no assurances that some, or all, of these risks would
not result in liabilities that would be material to Tremont's business, results
of operations, financial position or liquidity.
In February 2001, Tremont entered into a $13.4 million reducing revolving
credit facility with EMS, NL's majority-owned environmental management
subsidiary. Such intercompany loan between EMS and Tremont was collateralized by
10.2 million shares of NL common stock owned by Tremont and was eliminated in
Valhi's consolidated financial statements. In October 2002, Tremont entered into
a new $15 million revolving credit facility with NL, also collateralized by the
shares of NL common stock owned by Tremont, which replaced its loan from EMS.
The new facility, which matures in December 2004, is also eliminated in Valhi's
consolidated financial statements. At December 31, 2002, no amounts were
outstanding under Tremont's loan facility with NL and $15 million was available
to Tremont for additional borrowings.
General corporate - Valhi
Valhi's operations are conducted primarily through its subsidiaries (NL,
CompX, Tremont and Waste Control Specialists). Accordingly, Valhi's long-term
ability to meet its parent company level corporate obligations is dependent in
large measure on the receipt of dividends or other distributions from its
subsidiaries. NL increased its regular quarterly dividend from $.035 per share
to $.15 per share in the first quarter of 2000, and NL further increased its
regular quarterly dividend to $.20 per share in the fourth quarter of 2000. At
the current $.20 per share quarterly rate, and based on the 40.4 million NL
shares held directly or indirectly by Valhi at December 31, 2002 (including the
10.2 million NL shares now held by Tremont LLC, a wholly-owned subsidiary of
Valhi), Valhi would directly or indirectly receive aggregate annual regular
dividends from NL of approximately $32.3 million. NL also paid an additional
dividend in the fourth quarter of 2002 of $2.50 per share, which aggregated
$75.3 million that was paid to Valhi and $25.5 million that was paid to Tremont.
CompX's regular quarterly dividend is currently $.125 per share. At this current
rate and based on the 10.4 million CompX shares held by Valhi and its
wholly-owned subsidiary Valcor at December 31, 2002, Valhi/Valcor would receive
annual regular dividends from CompX of $5.2 million. Various credit agreements
to which certain subsidiaries or affiliates are parties contain customary
limitations on the payment of dividends, typically a percentage of net income or
cash flow; however, such restrictions in the past have not significantly
impacted Valhi's ability to service its parent company level obligations. Valhi
has not guaranteed any indebtedness of its subsidiaries or affiliates. To the
extent that one or more of Valhi's subsidiaries were to become unable to
maintain its current level of dividends, either due to restrictions contained in
the applicable subsidiary's credit agreements or otherwise, Valhi parent
company's liquidity could become adversely impacted. In such an event, Valhi
might consider reducing or eliminating its dividend or selling interests in
subsidiaries or other assets.
At December 31, 2002, Valhi had $5.1 million of parent level cash and cash
equivalents, had no outstanding borrowings under its revolving bank credit
agreement and had $11.2 million of short-term demand loans payable to Contran.
In addition, Valhi had $68.9 million of borrowing availability under its bank
credit facility.
During 2002, Valhi sold in market transactions 1.1 million shares of
Halliburton common stock for an aggregate of $18.1 million, and used a majority
of the proceeds to reduce its outstanding indebtedness.
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 2003, Valhi currently
expects that distributions received from the LLC in 2003 will approximate its
debt service requirements under its $250 million loans from Snake River Sugar
Company.
Certain covenants contained in Snake River's third-party senior debt allow
Snake River to pay periodic installments of debt service payments (principal and
interest) under Valhi's $80 million loan to Snake River prior to its maturity in
2010, and such loan is subordinated to Snake River's third-party senior debt. At
December 31, 2002, the accrued and unpaid interest on the $80 million loan to
Snake River aggregated $27.9 million. Such accrued and unpaid interest is
classified as a noncurrent asset at December 31, 2002. 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 repayment of Snake River's third-party
senior debt in April 2009, 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 ($13.6 million in 2003) would then become available, and would be required,
to be used to fund debt service payments on its loan from Valhi. Prior to the
repayment of the third-party senior debt, Snake River might also make debt
service payments to Valhi, if permitted by the terms of the senior debt.
The Company may, at its option, require the LLC to redeem the Company's
interest in the LLC beginning in 2010, and the LLC has the right to redeem the
Company's interest in the LLC beginning in 2027. The redemption price is
generally $250 million plus the amount of certain undistributed income allocable
to the Company. In the event the Company requires the LLC to redeem the
Company's interest in the LLC, Snake River has the right to accelerate the
maturity of and call Valhi's $250 million loans from Snake River. Redemption of
the Company's interest in the LLC would result in the Company reporting income
related to the disposition of its LLC interest for both financial reporting and
income tax purposes. However, because of Snake River's ability to call its $250
million loans to Valhi upon redemption of the Company's interest in the LLC, the
net cash proceeds (after repayment of the debt) generated by redemption of the
Company's interest in the LLC could be less than the income taxes that would
become payable as a result of the disposition.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policies, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company and related entities routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies.
Summary of debt and other contractual commitments
As more fully described in the notes to the Consolidated Financial
Statements, the Company is a party to various debt, lease and other agreements
which contractually and unconditionally commit the Company to pay certain
amounts in the future. See Notes 10 and 18 to the Consolidated Financial
Statements. The following table summarizes such contractual commitments of the
Company and its consolidated subsidiaries that are unconditional both in terms
of timing and amount by the type and date of payment.
Unconditional payment due date
2008 and
Contractual commitment 2003 2004/2005 2006/2007 after Total
---------------------- ---- --------- --------- -------- -----
(In millions)
Third-party indebtedness ....... $ 4.1 $ 27.6 $ 31.2 $547.0 $609.9
Demand loan from Contran ....... 11.2 -- -- -- 11.2
Operating leases ............... 6.0 8.9 5.2 22.5 42.6
Fixed asset acquisitions ....... 7.8 1.4 -- -- 9.2
------ ------ ------ ------ ------
$ 29.1 $ 37.9 $ 36.4 $569.5 $672.9
====== ====== ====== ====== ======
In addition, the Company is a party to certain other agreements that
contractually and unconditionally commit the Company to pay certain amounts in
the future. While the Company believes it is probable that amounts will be spent
in the future under such contracts, the amount and/or the timing of such future
payments will vary depending on certain provisions of the applicable contract.
Agreements to which the Company is a party that fall into this category, more
fully described in Note 19 to the Consolidated Financial Statements, are:
o CompX's patent license agreements under which it pays royalties based on
the volume of certain products manufactured in Canada and sold in the
United States;
o NL's long-term supply contracts for the purchase of chloride-process TiO2
feedstock; and
o TIMET's agreement for the purchase of titanium sponge.
In addition, the Company is a party to certain other agreements that
conditionally commit the Company to pay certain amounts in the future. Due to
the provisions of such agreements, it is possible that the Company might not
ever be required to pay any amounts under these agreements. Agreements to which
the Company is a party that fall into this category, more fully described in
Notes 5, 8 and 19 to the Consolidated Financial Statements, are:
o The Company's requirement to escrow funds in amounts up to the next three
years of debt service of Snake River's third-party term debt to
collateralize such debt in order to exercise its conditional right to
temporarily take control of The Amalgamated Sugar Company LLC;
o The Company's requirement to pledge $5 million of cash or marketable
securities as collateral for Snake River's third-party debt in order to
permit Snake River to continue to make debt service payments on its $80
million loan from Valhi; and
o Waste Control Specialists' requirement to pay certain amounts based upon
specified percentages of qualifying revenues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The Company is exposed to market risk from changes in foreign
currency exchange rates, interest rates and equity security prices. In the past,
the Company has periodically entered into interest rate swaps or other types of
contracts in order to manage a portion of its interest rate market risk. The
Company has also periodically entered into currency forward contracts to either
manage a nominal portion of foreign exchange rate market risk associated with
receivables denominated in a currency other than the holder's functional
currency or similar risk associated with future sales, or to hedge specific
foreign currency commitments. Otherwise, the Company does not generally enter
into forward or option contracts to manage such market risks, nor does the
Company enter into any such contract or other type of derivative instrument for
trading or speculative purposes. Other than the contracts discussed below, the
Company was not a party to any forward or derivative option contract related to
foreign exchange rates, interest rates or equity security prices at December 31,
2001 and 2002. See Notes 1 and 15 to the Consolidated Financial Statements for a
discussion of the assumptions used to estimate the fair value of the financial
instruments to which the Company is a party at December 31, 2001 and 2002.
Interest rates. The Company is exposed to market risk from changes in
interest rates, primarily related to indebtedness and certain interest-bearing
notes receivable.
At December 31, 2002, the Company's aggregate indebtedness was split
between 91% of fixed-rate instruments and 9% of variable-rate borrowings (2001 -
78% of fixed-rate instruments and 22% of variable rate borrowings). The large
percentage of fixed-rate debt instruments minimizes earnings volatility which
would result from changes in interest rates. The following table presents
principal amounts and weighted average interest rates for the Company's
aggregate outstanding indebtedness at December 31, 2002. At December 31, 2002,
all outstanding fixed-rate indebtedness was denominated in U.S. dollars or the
euro, and the outstanding variable rate borrowings were denominated in U.S.
dollars, the euro or the Norwegian kroner. Information shown below for such
foreign currency denominated indebtedness is presented in its U.S. dollar
equivalent at December 31, 2002 using exchange rates of 1.04 U.S. dollars per
euro and .143 U.S. dollars per kroner.
Amount
Carrying Fair Interest Maturity
Indebtedness* value value rate date
------------ ----- ----- ----- ------
(In millions)
Fixed-rate indebtedness:
Valcor Senior Notes ............... $ 2.4 $ 2.4 9.6% 2003
Euro-denominated KII
Senior Secured Notes ............. 296.9 299.9 8.9% 2009
Valhi loans from Snake River ...... 250.0 250.0 9.4% 2027
Other ............................. .4 .4 8.0% Various
------- ------- -------
549.7 552.7 9.1%
------- ------- -------
Variable-rate indebtedness:
KII bank revolver:
Euro-denominated ................ 15.6 15.6 4.8% 2005
Kroner-denominated .............. 11.5 11.5 8.9% 2005
CompX bank revolver ............... 31.0 31.0 2.5% 2006
------ ------- -------
58.1 58.1 4.4%
------ ------- -------
$ 607.8 $ 610.8 8.7%
======= ======= =======
* Denominated in U.S. dollars, except as otherwise indicated.
At December 31, 2001, fixed rate indebtedness aggregated $475.6 million
(fair value - $476.0 million) with a weighted-average interest rate of 10.3%;
variable rate indebtedness at such date aggregated $132.7 million, which
approximates fair value, with a weighted-average interest rate of 4.5%. All of
such fixed rate indebtedness was denominated in U.S. dollars. Such variable rate
indebtedness was denominated in U.S. dollars (65% of the total), the euro (18%)
or the Norwegian kroner (17%).
The Company has an $80 million loan to Snake River Sugar Company at
December 31, 2001 and 2002. Such loan bears interest at a fixed interest rate of
6.49% at such dates, the estimated fair value of such loan aggregated $96.4
million and $108.7 million at December 31, 2001 and 2002, respectively. The
potential decrease in the fair value of such loan resulting from a hypothetical
100 basis point increase in market interest rates would be approximately $6.5
million at December 31, 2002 (2001 - $5.4 million).
Foreign currency exchange rates. The Company is exposed to market risk
arising from changes in foreign currency exchange rates as a result of
manufacturing and selling its products worldwide. Earnings are primarily
affected by fluctuations in the value of the U.S. dollar relative to the euro,
the Canadian dollar, the Norwegian kroner and the United Kingdom pound sterling.
As described above, at December 31, 2002, NL had the equivalent of $312.5
million of outstanding euro-denominated indebtedness and $11.5 million of
Norwegian kroner-denominated indebtedness (2001- the equivalent of $24.0 million
of euro-denominated indebtedness and $22.2 million of Norwegian
kroner-denominated indebtedness). The potential increase in the U.S. dollar
equivalent of the principal amount outstanding resulting from a hypothetical 10%
adverse change in exchange rates at such date would be approximately $32.4
million at December 31, 2002 (2001 - $4.6 million).
Certain of CompX's sales generated by its Canadian operations are
denominated in U.S. dollars. To manage a portion of the foreign exchange rate
market risk associated with such receivables or similar exchange rate risk
associated with future sales, at December 31, 2002 CompX had entered into a
series of short-term forward exchange contracts maturing through January 2003 to
exchange an aggregate of $2.5 million for an equivalent amount of Canadian
dollars at an exchange rate of approximately Cdn $1.57 per U.S. dollar. The
estimated fair value of such forward exchange contracts at December 31, 2002 is
not material. No such contracts were held at December 31, 2001.
Marketable equity and debt security prices. The Company is exposed to
market risk due to changes in prices of the marketable securities which are
owned. The fair value of such debt and equity securities at December 31, 2001
and 2002 (including shares of Halliburton common stock held by the Company) was
$205.0 million and $189.3 million, respectively. The potential change in the
aggregate fair value of these investments, assuming a 10% change in prices,
would be $20.5 million at December 31, 2001 and $18.9 million at December 31,
2002.
Other. The Company believes there are certain shortcomings in the
sensitivity analyses presented above, which analyses are required under the
Securities and Exchange Commission's regulations. For example, the hypothetical
effect of changes in interest rates discussed above ignores the potential effect
on other variables which affect the Company's results of operations and cash
flows, such as demand for the Company's products, sales volumes and selling
prices and operating expenses. Contrary to the above assumptions, changes in
interest rates rarely result in simultaneous parallel shifts along the yield
curve. Also, certain of the Company's marketable securities are exchangeable for
certain of the Company's debt instruments, and a decrease in the fair value of
such securities would likely be mitigated by a decrease in the fair value of the
related indebtedness. Accordingly, the amounts presented above are not
necessarily an accurate reflection of the potential losses the Company would
incur assuming the hypothetical changes in market prices were actually to occur.
The above discussion and estimated sensitivity analysis amounts include
forward-looking statements of market risk which assume hypothetical changes in
market prices. Actual future market conditions will likely differ materially
from such assumptions. Accordingly, such forward-looking statements should not
be considered to be projections by the Company of future events, gains or
losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" (page
F-1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
Valhi's definitive Proxy Statement to be filed with the SEC pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
report (the "Valhi Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement. See also Note 18 to the Consolidated Financial
Statements.
ITEM 14. 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, as appropriate to allow timely decisions to be made regarding
required disclosure. Each of Steven L. Watson, the Company's President and Chief
Executive Officer, and Bobby D. O'Brien, the Company's Vice President, Chief
Financial Officer and Treasurer, have evaluated the Company's disclosure
controls and procedures as of a date within 90 days of the filing date of this
Form 10-K. Based upon their evaluation, these executive officers have concluded
that the Company's disclosure controls and procedures are effective as of the
date of such evaluation.
The Company also maintains a system of internal controls. The term
"internal controls," as defined by the American Institute of Certified Public
Accountants' Codification of Statement on Auditing Standards, AU Section 319,
means controls and other procedures designed to provide reasonable assurance
regarding the achievement of objectives in the reliability of the Company's
financial reporting, the effectiveness and efficiency of the Company's
operations and the Company's compliance with applicable laws and regulations.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date of their last evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
The Registrant
The consolidated financial statements and schedules listed on the
accompanying Index of Financial Statements and Schedules (see page
F-1) are filed as part of this Annual Report.
50%-or-less owned persons
The consolidated financial statements of TIMET (39%-owned at December
31, 2002) are filed as Exhibit 99.3 of this Annual Report pursuant to
Rule 3-09 of Regulation S-X. The Registrant is not required to provide
any other consolidated financial statements pursuant to Rule 3-09 of
Regulation S-X.
(b) Reports on Form 8-K
Reports on Form 8-K filed for the quarter ended December 31, 2002.
November 15, 2002 - Reported items 5 and 7.
(c) Exhibits
Included as exhibits are the items listed in the Exhibit Index. Valhi
will furnish a copy of any of the exhibits listed below upon payment
of $4.00 per exhibit to cover the costs to Valhi of furnishing the
exhibits. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, any
instrument defining the rights of holders of long-term debt issues and
other agreements related to indebtedness which do not exceed 10% of
consolidated total assets as of December 31, 2002 will be furnished to
the Commission upon request.
Item No. Exhibit Item
2.1 Agreement and Plan of Merger dated as of November 4, 2002 by and among
the Registrant, Valhi Acquisition Corp. and Tremont Corporation, as
amended by Amendment No. 1 thereto - incorporated by reference to
Appendix A to the Proxy Statement/Prospectus included in Part I of the
Registration Statement on Form S-4 (File No. 333-101244) filed by the
Registrant.
2.2 Agreement and Plan of Merger dated as of November 4, 2002 by and among
the Registrant, Tremont Group, Inc. and Valhi Acquisition Corp. II -
incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter ended
September 30, 2002.
3.1 Restated Articles of Incorporation of the Registrant - incorporated by
reference to Appendix A to the definitive Prospectus/Joint Proxy
Statement of The Amalgamated Sugar Company and LLC Corporation (File
No. 1-5467) dated February 10, 1987.
3.2 By-Laws of the Registrant as amended - incorporated by reference to
Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q (File
No. 1-5467) for the quarter ended June 30, 2002.
4.1 Indenture dated June 28, 2002 between Kronos International, Inc. and
The Bank of New York, as Trustee, governing Kronos International's
8.875% Senior Secured Notes due 2009 - incorporated by reference to
Exhibit 4.1 to NL Industries, Inc.'s Quarterly Report on Form 10-Q
(File No. 1-640) for the quarter ended June 30, 2002.
9.1 Shareholders' Agreement dated February 15, 1996 among TIMET, Tremont,
IMI plc, IMI Kynoch Ltd. and IMI Americas, Inc. - incorporated by
reference to Exhibit 2.2 to Tremont's Current Report on Form 8-K (File
No. 1-10126) dated March 1, 1996.
Item No. Exhibit Item
9.2 Amendment to the Shareholders' Agreement dated March 29, 1996 among
TIMET, Tremont, IMI plc, IMI Kynosh Ltd. and IMI Americas, Inc. -
incorporated by reference to Exhibit 10.30 to Tremont's Annual Report
on Form 10-K (File No. 1-10126) for the year ended December 31, 1995.
10.1 Intercorporate Services Agreement between the Registrant and Contran
Corporation effective as of January 1, 2002 (incorporated by reference
to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q
(File No. 1-5467) for the quarter ended September 30, 2002.
10.2 Intercorporate Services Agreement between Contran Corporation and NL
effective as of January 1, 2002 - incorporated by reference to Exhibit
10.1 to NL's Quarterly Report on Form 10-Q (File No. 1-640) for the
quarter ended March 31, 2002.
10.3 Intercorporate Services Agreement between Contran Corporation and
Tremont effective as of January 1, 2002 - incorporated by reference to
Exhibit 10.1 to Tremont's Quarterly Report on Form 10-Q (File No.
1-10126) for the quarter ended March 31, 2002.
10.4 Intercompany Services Agreement between Contran Corporation and CompX
effective January 1, 2002 - incorporated by reference to Exhibit 10.1
to CompX's Quarterly Report on Form 10-Q (File No. 1-13905) for the
quarter ended June 30, 2002.
10.5 Revolving Loan Note dated May 4, 2001 with Harold C. Simmons Family
Trust No. 2 and EMS Financial, Inc. - incorporated by reference to
Exhibit 10.1 to NL's Quarterly Report on Form 10-Q (File No. 1-640)
for the quarter ended September 30, 2001.
10.6 Security Agreement dated May 4, 2001 by and between Harold C. Simmons
Family Trust No. 2 and EMS Financial, Inc. - incorporated by reference
to Exhibit 10.2 to NL's Quarterly Report on Form 10-Q (File No. 1-640)
for the quarter ended September 30, 2001.
10.7 Purchase Agreement dated January 4, 2002 by and among Kronos, Inc. as
the Purchaser, and Big Bend Holdings LLC and Contran Insurance
Holdings, Inc., as Sellers regarding the sale and purchase of EWI RE,
Inc. and EWI RE, Ltd. - incorporated by reference to Exhibit No. 10.40
to NL's Annual Report on Form 10-K (File No. 1-640) for the year ended
December 31, 2001.
10.8* Valhi, Inc. 1987 Stock Option - Stock Appreciation Rights Plan, as
amended - incorporated by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K (File No. 1-5467) for the year
ended December 31, 1994.
10.9* Valhi, Inc. 1997 Long-Term Incentive Plan - incorporated by reference
to Exhibit 10.12 to the Registrant's Annual Report on Form 10-K (File
No. 1-5467) for the year ended December 31, 1996.
10.10* CompX International Inc. 1997 Long-Term Incentive Plan - incorporated
by reference to Exhibit 10.2 to CompX's Registration Statement on Form
S-1 (File No. 333-42643).
10.11* Form of Deferred Compensation Agreement between the Registrant and
certain executive officers - incorporated by reference to Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q (File No. 1-5467)
for the quarter ended March 31, 1999.
Item No. Exhibit Item
10.12 Formation Agreement of The Amalgamated Sugar Company LLC dated January
3, 1997 (to be effective December 31, 1996) between Snake River Sugar
Company and The Amalgamated Sugar Company - incorporated by reference
to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K (File
No. 1-5467) for the year ended December 31, 1996.
10.13 Master Agreement Regarding Amendments to The Amalgamated Sugar Company
Documents dated October 19, 2000 - incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (File
No. 1-5467) for the quarter ended September 30, 2000.
10.14 Company Agreement of The Amalgamated Sugar Company LLC dated January
3, 1997 (to be effective December 31, 1996) - incorporated by
reference to Exhibit 10.20 to the Registrant's Annual Report on Form
10-K (File No. 1-5467) for the year ended December 31, 1996.
10.15 First Amendment to the Company Agreement of The Amalgamated Sugar
Company LLC dated May 14, 1997 - incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q (File No.
1-5467) for the quarter ended June 30, 1997.
10.16 Second Amendment to the Company Agreement of The Amalgamated Sugar
Company LLC dated November 30, 1998 - incorporated by reference to
Exhibit 10.24 to the Registrant's Annual Report on Form 10-K (File No.
1-5467) for the year ended December 31, 1998.
10.17 Third Amendment to the Company Agreement of The Amalgamated Sugar
Company LLC dated October 19, 2000 - incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q (File
No. 1-5467) for the quarter ended September 30, 2000.
10.18 Subordinated Promissory Note in the principal amount of $37.5 million
between Valhi, Inc. and Snake River Sugar Company, and the related
Pledge Agreement, both dated January 3, 1997 - incorporated by
reference to Exhibit 10.21 to the Registrant's Annual Report on Form
10-K (File No. 1-5467) for the year ended December 31, 1996.
10.19 Limited Recourse Promissory Note in the principal amount of $212.5
million between Valhi, Inc. and Snake River Sugar Company, and the
related Limited Recourse Pledge Agreement, both dated January 3, 1997
- incorporated by reference to Exhibit 10.22 to the Registrant's
Annual Report on Form 10-K (File No. 1-5467) for the year ended
December 31, 1996.
10.20 Subordinated Loan Agreement between Snake River Sugar Company and
Valhi, Inc., as amended and restated effective May 14, 1997 -
incorporated by reference to Exhibit 10.9 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter ended
June 30, 1997.
10.21 Second Amendment to the Subordinated Loan Agreement between Snake
River Sugar Company and Valhi, Inc. dated November 30, 1998 -
incorporated by reference to Exhibit 10.28 to the Registrant's Annual
Report on Form 10-K (File No. 1-5467) for the year ended December 31,
1998.
Item No. Exhibit Item
10.22 Third Amendment to the Subordinated Loan Agreement between Snake River
Sugar Company and Valhi, Inc. dated October 19, 2000 - incorporated by
reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form
10-Q (File No. 1-5467) for the quarter ended September 30, 2000.
10.23 Contingent Subordinate Pledge Agreement between Snake River Sugar
Company and Valhi, Inc., as acknowledged by First Security Bank
National Association as Collateral Agent, dated October 19, 2000 -
incorporated by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter ended
September 30, 2000.
10.24 Contingent Subordinate Security Agreement between Snake River Sugar
Company and Valhi, Inc., as acknowledged by First Security Bank
National Association as Collateral Agent, dated October 19, 2000 -
incorporated by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter ended
September 30, 2000.
10.25 Contingent Subordinate Collateral Agency and Paying Agency Agreement
among Valhi, Inc., Snake River Sugar Company and First Security Bank
National Association dated October 19, 2000 - incorporated by
reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form
10-Q (File No. 1-5467) for the quarter ended September 30, 2000.
10.26 Deposit Trust Agreement related to the Amalgamated Collateral Trust
among ASC Holdings, Inc. and Wilmington Trust Company dated May 14,
1997 - incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter ended
June 30, 1997.
10.27 Pledge Agreement between the Amalgamated Collateral Trust and Snake
River Sugar Company dated May 14, 1997 - incorporated by reference to
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q (File
No. 1-5467) for the quarter ended June 30, 1997.
10.28 Guarantee by the Amalgamated Collateral Trust in favor of Snake River
Sugar Company dated May 14, 1997 - incorporated by reference to
Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q (File
No. 1-5467) for the quarter ended June 30, 1997.
10.29 Amended and Restated Pledge Agreement between ASC Holdings, Inc. and
Snake River Sugar Company dated May 14, 1997 - incorporated by
reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form
10-Q (File No. 1-5467) for the quarter ended June 30, 1997.
10.30 Collateral Deposit Agreement among Snake River Sugar Company, Valhi,
Inc. and First Security Bank, National Association dated May 14, 1997
- incorporated by reference to Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter ended
June 30, 1997.
10.31 Voting Rights and Forbearance Agreement among the Amalgamated
Collateral Trust, ASC Holdings, Inc. and First Security Bank, National
Association dated May 14, 1997 - incorporated by reference to Exhibit
10.7 to the Registrant's Quarterly Report on Form 10-Q (File No.
1-5467) for the quarter ended June 30, 1997.
Item No. Exhibit Item
10.32 First Amendment to the Voting Rights and Forbearance Agreement among
the Amalgamated Collateral Trust, ASC Holdings, Inc. and First
Security Bank National Association dated October 19, 2000 -
incorporated by reference to Exhibit 10.9 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter ended
September 30, 2000.
10.33 Voting Rights and Collateral Deposit Agreement among Snake River Sugar
Company, Valhi, Inc., and First Security Bank, National Association
dated May 14, 1997 - incorporated by reference to Exhibit 10.8 to the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467) for the
quarter ended June 30, 1997.
10.34 Subordination Agreement between Valhi, Inc. and Snake River Sugar
Company dated May 14, 1997 - incorporated by reference to Exhibit
10.10 to the Registrant's Quarterly Report on Form 10-Q (File No.
1-5467) for the quarter ended June 30, 1997.
10.35 First Amendment to the Subordination Agreement between Valhi, Inc. and
Snake River Sugar Company dated October 19, 2000 - incorporated by
reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form
10-Q (File No. 1-5467) for the quarter ended September 30, 2000.
10.36 Form of Option Agreement among Snake River Sugar Company, Valhi, Inc.
and the holders of Snake River Sugar Company's 10.9% Senior Notes Due
2009 dated May 14, 1997 - incorporated by reference to Exhibit 10.11
to the Registrant's Quarterly Report on Form 10-Q (File No. 1-5467)
for the quarter ended June 30, 1997.
10.37 First Amendment to Option Agreements among Snake River Sugar Company,
Valhi Inc., and the holders of Snake River's 10.9% Senior Notes Due
2009 dated October 19, 2000 - incorporated by reference to Exhibit
10.8 to the Registrant's Quarterly Report on Form 10-Q (File No.
1-5467) for the quarter ended September 30, 2000.
10.38 Deposit Agreement dated June 28, 2002 among NL Industries, Inc. and JP
Morgan Chase Bank, as trustee - incorporated by reference to Exhibit
4.9 to NL Industries, Inc.'s Quarterly Report on Form 10-Q (File No.
1-640) for the quarter ended June 30, 2002.
10.39 Satisfaction and Discharge of Indenture, Release, Assignment and
Transfer dated June 28, 2002 made by JP Morgan Chase Bank pursuant to
the Indenture for NL Industries, Inc.'s 11 3/4% Senior Secured Notes
due 2003 - incorporated by reference to Exhibit 4.10 to NL Industries,
Inc.'s Quarterly Report on Form 10-Q (File No. 1-640) for the quarter
ended June 30, 2002.
10.40 Formation Agreement dated as of October 18, 1993 among Tioxide
Americas Inc., Kronos Louisiana, Inc. and Louisiana Pigment Company,
L.P. - incorporated by reference to Exhibit 10.2 of NL's Quarterly
Report on Form 10-Q (File No. 1-640) for the quarter ended September
30, 1993.
10.41 Joint Venture Agreement dated as of October 18, 1993 between Tioxide
Americas Inc. and Kronos Louisiana, Inc. - incorporated by reference
to Exhibit 10.3 of NL's Quarterly Report on Form 10-Q (File No. 1-640)
for the quarter ended September 30, 1993.
Item No. Exhibit Item
10.42 Kronos Offtake Agreement dated as of October 18, 1993 by and between
Kronos Louisiana, Inc. and Louisiana Pigment Company, L.P. -
incorporated by reference to Exhibit 10.4 of NL's Quarterly Report on
Form 10-Q (File No. 1-640) for the quarter ended September 30, 1993.
10.43 Amendment No. 1 to Kronos Offtake Agreement dated as of December 20,
1995 between Kronos Louisiana, Inc. and Louisiana Pigment Company,
L.P. - incorporated by reference to Exhibit 10.22 of NL's Annual
Report on Form 10-K (File No. 1-640) for the year ended December 31
1995.
10.44 Master Technology and Exchange Agreement dated as of October 18, 1993
among Kronos, Inc., Kronos Louisiana, Inc., Kronos International,
Inc., Tioxide Group Limited and Tioxide Group Services Limited -
incorporated by reference to Exhibit 10.8 of NL's Quarterly Report on
Form 10-Q (File No. 1-640) for the quarter ended September 30, 1993.
10.45 Allocation Agreement dated as of October 18, 1993 between Tioxide
Americas Inc., ICI American Holdings, Inc., Kronos, Inc. and Kronos
Louisiana, Inc. - incorporated by reference to Exhibit 10.10 to NL's
Quarterly Report on Form 10-Q (File No. 1-640) for the quarter ended
September 30, 1993.
10.46 Lease Contract dated June 21, 1952, between Farbenfabrieken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung
(German language version and English translation thereof) -
incorporated by reference to Exhibit 10.14 of NL's Annual Report on
Form 10-K (File No. 1-640) for the year ended December 31, 1985.
10.47 Contract on Supplies and Services among Bayer AG, Kronos Titan GmbH
and Kronos International, Inc. dated June 30, 1995 (English
translation from German language document) - incorporated by reference
to Exhibit 10.1 of NL's Quarterly Report on Form 10-Q (File No. 1-640)
for the quarter ended September 30, 1995.
10.48 Lease Agreement, dated January 1, 1996, between Holford Estates Ltd.
and IMI Titanium Ltd. related to the building known as Titanium Number
2 Plant at Witton, England - incorporated by reference to Exhibit
10.23 to Tremont's Annual Report on Form 10-K (File No. 1-10126) for
the year ended December 31, 1995.
10.49 Richards Bay Slag Sales Agreement dated May 1, 1995 between Richards
Bay Iron and Titanium (Proprietary) Limited and Kronos, Inc. -
incorporated by reference to Exhibit 10.17 to NL's Annual Report on
Form 10-K (File No. 1-640) for the year ended December 31, 1995.
10.50 Amendment to Richards Bay Slag Sales Agreement dated May 1, 1999,
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.4 to NL's
Annual Report on Form 10-K (File No. 1-640) for the year ended
December 31, 1999.
10.51 Amendment to Richards Bay Slag Sales Agreement dated June 1, 2001
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit No. 10.5 to NL's
Annual Report on Form 10-K (File No. 1-640) for the year ended
December 31, 2001.
Item No. Exhibit Item
10.52 Amendment to Richards Bay Slag Sales Agreement dated December 20, 2002
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit No. 10.7 to NL's
Annual Report on Form 10-K (File No. 1-640) for the year ended
December 31, 2002.
10.53 Agreement between Sachtleben Chemie GmbH and Kronos Titan GmbH
effective as of December 30, 1988 - Incorporated by reference to
Exhibit No. 10.1 to Kronos International Inc.'s Quarterly Report on
Form 10-Q (File No. 333-100047) for the quarter ended September 30,
2002.
10.54 Supplementary Agreement dated as of May 3, 1996 to the Agreement
effective as of December 30, 1986 between Sachtleben Chemie GmbH and
Kronos Titan GmbH - incorporated by reference to Exhibit No. 10.2 to
Kronos International Inc.'s Quarterly Report on Form 10-Q (File No.
333-100047) for the quarter ended September 30, 2002.
10.55 Second Supplementary Agreement dated as of January 8, 2002 to the
Agreement effective as of December 30, 1986 between Sachtleben Chemie
GmbH and Kronos Titan GmbH - incorporated by reference to Exhibit No.
10.3 to Kronos International Inc.'s Quarterly Report on Form 10-Q
(File No. 333-100047) for the quarter ended September 30, 2002.
10.56 Purchase and Sale Agreement (for titanium products) between The Boeing
Company, acting through its division, Boeing Commercial Airplanes, and
Titanium Metals Corporation (as amended and restated effective April
19, 2001) - incorporated by reference to Exhibit No. 10.2 to Titanium
Metals Corporation's Quarterly Report on Form 10-Q (File No. 0-28538)
for the quarter ended June 30, 2002.
10.57 Purchase and Sale Agreement between Rolls Royce plc and Titanium
Metals Corporation dated December 22, 1998 - incorporated by reference
to Exhibit No. 10.3 to Titanium Metals Corporation's Quarterly Report
on Form 10-Q (File No. 0-28538) for the quarter ended June 30, 2002.
10.58 Investment Agreement dated July 9, 1998, between TIMET, TIMET Finance
Management Company and Special Metals Corporation - incorporated by
reference to Exhibit 10.1 to TIMET's Current Report on Form 8-K (File
No. 0-28538) dated July 9, 1998.
10.59 Amendment to Investment Agreement, dated October 28, 1998, among
TIMET, TIMET Finance Management Company and Special Metals Corporation
- incorporated by reference to Exhibit 10.4 to TIMET's Quarterly
Report on Form 10-Q (File No. 0-28538) for the quarter ended September
30, 1998.
10.60 Registration Rights Agreement, dated October 28, 1998, between TIMET
Finance Management Company and Special Metals Corporation -
incorporated by reference to Exhibit 10.5 to TIMET's Quarterly Report
on Form 10-Q (File No. 0-28538) for the quarter ended September 30,
1998.
10.61 Certificate of Designations for the Special Metals Corporation Series
A Preferred Stock - incorporated by reference to Exhibit 4.5 to
Special Metals Corporation's Current Report on Form 8-K (File No.
000-22029) dated October 28, 1998.
Item No. Exhibit Item
10.62 Registration Rights Agreement dated October 30, 1991, by and between
NL and Tremont - incorporated by reference to Exhibit 4.3 of NL's
Annual Report on Form 10-K (File No. 1-640) for the year ended
December 31, 1991.
10.63 Insurance Sharing Agreement, effective January 1, 1990, by and between
NL, Tall Pines Insurance Company, Ltd. and Baroid Corporation -
incorporated by reference to Exhibit 10.20 to NL's Annual Report on
Form 10-K (File No. 1-640) for the year ended December 31, 1991.
10.64 Indemnification Agreement between Baroid, Tremont and NL Insurance,
Ltd. dated September 26, 1990 - incorporated by reference to Exhibit
10.35 to Baroid's Registration Statement on Form 10 (No. 1-10624)
filed with the Commission on August 31, 1990.
10.65 Administrative Settlement for Interim Remedial Measures, Site
Investigation and Feasibility Study dated July 7, 2000 between the
Arkansas Department of Environmental Quality, Halliburton Energy
Services, Inc., M I, LLC and TRE Management Company - incorporated by
reference to Exhibit 10.1 to Tremont Corporation's Quarterly Report on
Form 10-Q (File No. 1-10126) for the quarter ended June 30, 2002.
10.66 Settlement Agreement and Release of Claims dated April 19, 2001
between Titanium Metals Corporation and the Boeing Company -
incorporated by reference to Exhibit 10.1 to TIMET's Quarterly Report
on Form 10-Q (File No. 0-28538) for the quarter ended March 31, 2001.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP with respect to Valhi's
consolidated financial statements
23.2 Consent of PricewaterhouseCoopers LLP with respect to TIMET's
consolidated financial statements
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Consolidated financial statements of Titanium Metals Corporation -
incorporated by reference to pages F-1 to F-49 inclusive to TIMET's
Annual Report on Form 10-K (File No. 0-28538) for the year ended
December 31, 2002.
* Management contract, compensatory plan or agreement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/ Steven L. Watson
----------------------------------
Steven L. Watson, March 18, 2003
(President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Harold C. Simmons /s/ Steven L. Watson
- ------------------------------------- ------------------------------------
Harold C. Simmons, March 18, 2003 Steven L. Watson, March 18, 2003
(Chairman of the Board) (President, Chief Executive Officer
and Director)
/s/ Thomas E. Barry /s/ Glenn R. Simmons
- ------------------------------------- -------------------------------------
Thomas E. Barry, March 18, 2003 Glenn R. Simmons, March 18, 2003
(Director) (Vice Chairman of the Board)
/s/ Norman S. Edelcup /s/ Bobby D. O'Brien
- ------------------------------------ -------------------------------------
Norman S. Edelcup, March 18, 2003 Bobby D. O'Brien, March 18, 2003
(Director) (Vice President, Chief Financial Officer
and Treasurer, Principal Financial Officer)
/s/ Edward J. Hardin /s/ Gregory M. Swalwell
- ------------------------------------ ------------------------------------
Edward J. Hardin, March 18, 2003 Gregory M. Swalwell, March 18, 2003
(Director) (Vice President and Controller,
Principal Accounting Officer)
/s/ J. Walter Tucker, Jr.
- ------------------------------------
J. Walter Tucker, Jr. March 18, 2003
(Director)
I, Steven L. Watson, the President and Chief Executive Officer of Valhi, Inc.,
certify that:
I have reviewed this annual report on Form 10-K of Valhi, Inc.;
1) Based on my knowledge, this annual 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 annual report;
2) Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
3) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
4) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
5) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 18, 2003
/s/ Steven L. Watson
Steven L. Watson
President and Chief Executive Officer
I, Bobby D. O'Brien, the Vice President, Chief Financial Officer and Treasurer
of Valhi, Inc., certify that:
I have reviewed this annual report on Form 10-K of Valhi, Inc.;
1) Based on my knowledge, this annual 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 annual report;
2) Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
3) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
4) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
5) The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 18, 2003
/s/ Bobby D. O'Brien
Bobby D. O'Brien
Vice President, Chief Financial Officer and Treasurer
Annual Report on Form 10-K
Items 8, 14(a) and 14(d)
Index of Financial Statements and Schedules
Financial Statements Page
Report of Independent Accountants F-2
Consolidated Balance Sheets - December 31, 2001 and 2002 F-3
Consolidated Statements of Income -
Years ended December 31, 2000, 2001 and 2002 F-5
Consolidated Statements of Comprehensive Income -
Years ended December 31, 2000, 2001 and 2002 F-6
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2000, 2001 and 2002 F-7
Consolidated Statements of Cash Flows -
Years ended December 31, 2000, 2001 and 2002 F-8
Notes to Consolidated Financial Statements F-11
Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant S-2
Schedule II - Valuation and Qualifying Accounts S-10
Schedules III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Valhi, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Valhi, Inc. and Subsidiaries as of December 31, 2001 and 2002, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 20 to the consolidated financial statements, on
January 1, 2002 the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142.
PricewaterhouseCoopers LLP
Dallas, Texas
March 14, 2003
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2002
(In thousands, except per share data)
ASSETS
2001 2002
---- ----
Current assets:
Cash and cash equivalents .................... $ 154,413 $ 94,679
Restricted cash equivalents .................. 63,257 52,489
Marketable securities ........................ 18,465 9,717
Accounts and other receivables ............... 162,310 170,623
Refundable income taxes ...................... 3,564 3,161
Receivable from affiliates ................... 844 3,947
Inventories .................................. 262,733 239,533
Prepaid expenses ............................. 11,252 15,867
Deferred income taxes ........................ 12,999 14,114
---------- ----------
Total current assets ..................... 689,837 604,130
---------- ----------
Other assets:
Marketable securities ........................ 186,549 179,582
Investment in affiliates ..................... 211,115 155,549
Receivable from affiliate .................... 20,000 18,000
Loans and other receivables .................. 105,940 111,255
Mining properties ............................ 12,410 16,545
Prepaid pension costs ........................ 18,411 17,572
Unrecognized net pension obligations ......... 5,901 5,561
Goodwill ..................................... 349,058 364,994
Other intangible assets ...................... 2,440 4,413
Deferred income taxes ........................ 686 1,934
Other assets ................................. 30,109 31,120
---------- ----------
Total other assets ....................... 942,619 906,525
---------- ----------
Property and equipment:
Land ......................................... 28,721 31,725
Buildings .................................... 163,995 180,311
Equipment .................................... 569,001 677,268
Construction in progress ..................... 9,992 12,605
---------- ----------
771,709 901,909
Less accumulated depreciation ................ 253,450 337,783
---------- ----------
Net property and equipment ............... 518,259 564,126
---------- ----------
$2,150,715 $2,074,781
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2001 and 2002
(In thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2001 2002
---- ----
Current liabilities:
Notes payable .................................. $ 46,201 $ --
Current maturities of long-term debt ........... 64,972 4,127
Accounts payable ............................... 114,474 108,970
Accrued liabilities ............................ 166,488 149,466
Payable to affiliates .......................... 38,148 20,122
Income taxes ................................... 9,578 8,344
Deferred income taxes .......................... 1,821 3,627
----------- -----------
Total current liabilities .................. 441,682 294,656
----------- -----------
Noncurrent liabilities:
Long-term debt ................................. 497,215 605,740
Accrued OPEB costs ............................. 50,146 45,474
Accrued pension costs .......................... 33,823 54,930
Accrued environmental costs .................... 54,392 52,003
Deferred income taxes .......................... 265,336 255,735
Other .......................................... 32,642 30,641
----------- -----------
Total noncurrent liabilities ............... 933,554 1,044,523
----------- -----------
Minority interest ................................ 153,151 120,846
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized; none issued ....................... -- --
Common stock, $.01 par value; 150,000 shares
authorized; 125,811 and 126,161 shares issued . 1,258 1,262
Additional paid-in capital ..................... 44,982 47,657
Retained earnings .............................. 656,408 629,773
Accumulated other comprehensive income:
Marketable securities ........................ 86,654 84,264
Currency translation ......................... (79,404) (35,590)
Pension liabilities .......................... (11,921) (36,961)
Treasury stock, at cost - 10,570 shares ........ (75,649) (75,649)
----------- -----------
Total stockholders' equity ................. 622,328 614,756
----------- -----------
$ 2,150,715 $ 2,074,781
=========== ===========
Commitments and contingencies (Notes 5, 8, 10, 16, 18 and 19)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2000, 2001 and 2002
(In thousands, except per share data)
2000 2001 2002
---- ---- ----
Revenues and other income:
Net sales ........................................ $ 1,191,885 $ 1,059,470 $ 1,079,716
Other, net ....................................... 127,101 154,000 60,288
----------- ----------- -----------
1,318,986 1,213,470 1,140,004
----------- ----------- -----------
Cost and expenses:
Cost of sales .................................... 824,391 774,979 857,435
Selling, general and administrative .............. 201,732 195,166 191,352
Interest ......................................... 71,480 62,285 60,157
----------- ----------- -----------
1,097,603 1,032,430 1,108,944
----------- ----------- -----------
221,383 181,040 31,060
Equity in earnings of:
Titanium Metals Corporation ("TIMET") ............ (8,990) (9,161) (32,873)
Other ............................................ 1,672 580 566
----------- ----------- -----------
Income (loss) before taxes ..................... 214,065 172,459 (1,247)
Provision for income taxes (benefit) ............... 93,955 53,179 (6,126)
Minority interest in after-tax earnings ............ 43,496 26,082 3,642
----------- ----------- -----------
Net income ..................................... $ 76,614 $ 93,198 $ 1,237
=========== =========== ===========
Net income per share:
Basic ............................................ $ .67 $ .81 $ .01
Diluted .......................................... .66 .80 .01
Cash dividends per share ........................... $ .21 $ .24 $ .24
Shares used in the calculation of per share amounts:
Basic earnings per share ......................... 115,132 115,193 115,419
Diluted impact of stock options .................. 1,138 920 416
----------- ----------- -----------
Diluted earnings per share ....................... 116,270 116,113 115,835
=========== =========== ===========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2000, 2001 and 2002
(In thousands)
2000 2001 2002
---- ---- ----
Net income .............................. $ 76,614 $ 93,198 $ 1,237
-------- -------- --------
Other comprehensive income (loss),
net of tax:
Marketable securities adjustment:
Unrealized net gains (losses)
arising during the year ............ 1,863 (7,673) 1,779
Reclassification for realized
net losses
(gains) included in net income ..... 2,880 (38,253) (4,169)
-------- -------- --------
4,743 (45,926) (2,390)
Currency translation adjustment ....... (19,978) (18,593) 43,814
Pension liabilities adjustment ........ 1,258 (7,404) (25,040)
-------- -------- --------
Total other comprehensive income
(loss), net ........................ (13,977) (71,923) 16,384
-------- -------- --------
Comprehensive income .............. $ 62,637 $ 21,275 $ 17,621
======== ======== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2000, 2001 and 2002
(In thousands)
Additional Accumulated other comprehensive income Total
Common paid-in Retained Marketable Currency Pension Treasury stockholders'
stock capital earnings securities translation liabilities stock equity
----- ------- -------- ---------- ----------- ----------- --------- --------
Balance at December 31, 1999 $1,256 $43,444 $ 538,744 $ 127,837 $(40,833) $ (5,775) $(75,259) $ 589,414
Net income ................. -- -- 76,614 -- -- -- -- 76,614
Cash dividends ............. -- -- (24,328) -- -- -- -- (24,328)
Other comprehensive income
(loss), net ............... -- -- -- 4,743 (19,978) 1,258 -- (13,977)
Common stock reacquired .... -- -- -- -- -- -- (19) (19)
Other, net ................. 1 901 -- -- -- -- (371) 531
------ ------- --------- --------- -------- -------- -------- ---------
Balance at December 31, 2000 1,257 44,345 591,030 132,580 (60,811) (4,517) (75,649) 628,235
Net income ................. -- -- 93,198 -- -- -- -- 93,198
Cash dividends ............. -- -- (27,820) -- -- -- -- (27,820)
Other comprehensive income
(loss), net ............... -- -- -- (45,926) (18,593) (7,404) -- (71,923)
Other, net ................. 1 637 -- -- -- -- -- 638
------ ------- --------- --------- -------- -------- -------- ---------
Balance at December 31, 2001 1,258 44,982 656,408 86,654 (79,404) (11,921) (75,649) 622,328
Net income ................. -- -- 1,237 -- -- -- -- 1,237
Cash dividends ............. -- -- (27,872) -- -- -- -- (27,872)
Other comprehensive income
(loss), net ............... -- -- -- (2,390) 43,814 (25,040) -- 16,384
Other, net ................. 4 2,675 -- -- -- -- -- 2,679
------ ------- --------- --------- -------- -------- -------- ---------
Balance at December 31, 2002 $1,262 $47,657 $ 629,773 $ 84,264 $(35,590) $(36,961) $(75,649) $ 614,756
====== ======= ========= ========= ======== ======== ======== =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000, 2001 and 2002
(In thousands)
2000 2001 2002
---- ---- ----
Cash flows from operating activities:
Net income .................................. $ 76,614 $ 93,198 $ 1,237
Depreciation, depletion and amortization .... 71,091 74,493 61,776
Legal settlements, net ...................... (69,465) (10,307) --
Securities transaction gains, net ........... (40) (47,009) (6,413)
Proceeds from disposal of marketable
securities (trading) ....................... -- -- 18,136
Insurance gain .............................. -- (16,190) --
Non-cash:
Interest expense .......................... 10,572 5,601 3,911
Defined benefit pension expense ........... (11,874) (3,651) (2,324)
Other postretirement benefit expense ...... (2,641) (385) (4,692)
Deferred income taxes ....................... 42,819 7,718 (9,652)
Minority interest ........................... 43,496 26,082 3,642
Equity in:
TIMET ..................................... 8,990 9,161 32,873
Other ..................................... (1,672) (580) (566)
Distributions from:
Manufacturing joint venture ............... 7,550 11,313 7,950
Other ..................................... 81 1,300 361
Other, net .................................. 2,187 (477) (1,961)
--------- --------- ---------
177,708 150,267 104,278
Change in assets and liabilities:
Accounts and other receivables ............ (10,709) 8,464 2,395
Inventories ............................... (30,816) (28,623) 45,301
Accounts payable and accrued liabilities .. 12,955 30,065 (35,615)
Income taxes .............................. 3,940 3,439 (475)
Accounts with affiliates .................. 13,544 4,025 (4,199)
Other, net ................................ (4,183) (8,988) (4,856)
--------- --------- ---------
Net cash provided by operating activities 162,439 158,649 106,829
--------- --------- ---------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2000, 2001 and 2002
(In thousands)
2000 2001 2002
---- ---- ----
Cash flows from investing activities:
Capital expenditures ....................... $ (57,772) $ (70,821) $ (45,995)
Purchases of:
Business units ........................... (9,346) -- (9,149)
NL common stock .......................... (30,886) (15,502) (21,254)
Tremont common stock ..................... (45,351) (198) --
CompX common stock ....................... (8,665) (2,650) --
Interest in other subsidiaries ........... (2,500) -- --
Interest in TIMET ........................ -- -- (534)
Proceeds from disposal of:
Marketable securities (available-for-sale) 158 16,802 --
Property and equipment ................... 577 11,032 2,957
Change in restricted cash equivalents, net . 1,517 8,022 2,539
Loans to affiliates:
Loans .................................... (21,969) (20,000) --
Collections .............................. 21,969 -- 2,000
Property damaged by fire:
Insurance proceeds ....................... -- 23,361 --
Other, net ............................... -- (3,205) --
Other, net ................................. 1,351 (635) 2,294
--------- --------- ---------
Net cash used by investing activities .... (150,917) (53,794) (67,142)
--------- --------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ............................... 123,857 51,356 364,068
Principal payments ....................... (126,252) (102,014) (390,761)
Deferred financing costs paid ............ -- -- (10,706)
Loans from affiliates:
Loans .................................... 18,160 81,905 13,421
Repayments ............................... (12,782) (78,731) (26,825)
Valhi dividends paid ....................... (24,328) (27,820) (27,872)
Valhi common stock reacquired .............. (19) -- --
Distributions to minority interest ......... (10,084) (10,496) (27,846)
Other, net ................................. 4,411 1,347 3,254
--------- --------- ---------
Net cash used by financing activities .... (27,037) (84,453) (103,267)
--------- --------- ---------
Net increase (decrease) ...................... $ (15,515) $ 20,402 $ (63,580)
========= ========= =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2000, 2001 and 2002
(In thousands)
2000 2001 2002
---- ---- ----
Cash and cash equivalents - net change from:
Operating, investing and financing
activities ........................... $ (15,515) $ 20,402 $ (63,580)
Currency translation .................. (2,175) (1,006) 3,650
Business units acquired ............... -- -- 196
--------- --------- ---------
(17,690) 19,396 (59,734)
Balance at beginning of year .......... 152,707 135,017 154,413
--------- --------- ---------
Balance at end of year ................ $ 135,017 $ 154,413 $ 94,679
========= ========= =========
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized .. $ 61,930 $ 57,775 $ 61,016
Income taxes .......................... 33,798 36,556 14,734
Business units acquired - net assets
consolidated:
Cash and cash equivalents ........... $ -- $ -- $ 196
Restricted cash equivalents ......... -- -- 2,685
Goodwill and other intangible assets 5,091 -- 9,007
Other non-cash assets ............... 7,144 -- 1,259
Liabilities ......................... (2,889) -- (3,998)
--------- --------- ---------
Cash paid ........................... $ 9,346 $ -- $ 9,149
========= ========= =========
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies:
Organization and basis of presentation. Valhi, Inc. (NYSE: VHI) is a
subsidiary of Contran Corporation. At December 31, 2002, Contran held, directly
or through subsidiaries, approximately 93% of Valhi's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons, the Chairman of the
Board of Valhi and Contran, may be deemed to control such companies. Certain
prior year amounts have been reclassified to conform to the current year
presentation. As more fully described in Note 20, on April 1, 2002 the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 145. As a
result of adopting SFAS No. 145, the Company's results of operations for 2000,
as presented herein, have been reclassified from amounts previously reported
with respect to a loss on the early extinguishment of debt. Such
reclassification had no effect on net income.
Management's estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America ("GAAP") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reporting period. Actual
results may differ from previously-estimated amounts under different assumptions
or conditions.
Principles of consolidation. The consolidated financial statements include
the accounts of Valhi and its majority-owned subsidiaries (collectively, the
"Company"). All material intercompany accounts and balances have been
eliminated. The Company has no involvement with any variable interest entity
covered by the scope of FASB Interpretation ("FIN") No. 46, Consolidation of
Variable Interest Entities.
Translation of foreign currencies. Assets and liabilities of subsidiaries
whose functional currency is other than the U.S. dollar are translated at
year-end rates of exchange and revenues and expenses are translated at average
exchange rates prevailing during the year. Resulting translation adjustments are
accumulated in stockholders' equity as part of accumulated other comprehensive
income, net of related deferred income taxes and minority interest. Currency
transaction gains and losses are recognized in income currently.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed. Shipping terms of products shipped in both the Company's chemicals
and components products segments are generally FOB shipping point, although in
some instances shipping terms are FOB destination point (for which sales are not
recognized until the product is received by the customer). Amounts charged to
customers for shipping and handling are included in net sales. The Company
adopted Securities and Exchange Commission ("SEC") Staff Accounting Bulletin
("SAB") No. 101, as amended, in 2000. SAB No. 101 provides guidance on the
recognition, presentation and disclosure of revenue. The impact of adopting SAB
No. 101 was not material.
Inventories and cost of sales. Inventories are stated at the lower of cost
or market, net of allowance for obsolete and slow-moving inventories. Inventory
costs are generally based on average cost or the first-in, first-out method.
Shipping and handling costs. Shipping and handling costs of the Company's
chemicals segment are included in selling, general and administrative expenses
and were approximately $50 million in 2000, $49 million in 2001 and $51 million
in 2002. Shipping and handling costs of the Company's component products and
waste management segments are not material.
Cash and cash equivalents and restricted cash. Cash equivalents include
bank time deposits and government and commercial notes and bills with original
maturities of three months or less.
Restricted cash equivalents and debt securities. Restricted cash
equivalents and debt securities, invested primarily in U.S. government
securities and money market funds that invest in U.S. government securities,
include amounts restricted pursuant to outstanding letters of credit, and at
December 31, 2002 also includes $61 million held by special purpose trusts (2001
- - $74 million) formed by NL Industries, the assets of which can only be used to
pay for certain of NL's future environmental remediation and other environmental
expenditures. Such restricted amounts are generally classified as either a
current or noncurrent asset depending on the classification of the liability to
which the restricted amount relates. Additionally, the restricted debt
securities are generally classified as either a current or noncurrent asset
depending upon the maturity date of each such debt security. See Notes 5, 8 and
12.
Marketable securities and securities transactions. Marketable debt and
equity securities are carried at fair value based upon quoted market prices or
as otherwise disclosed. Unrealized and realized gains and losses on trading
securities are recognized in income currently. Unrealized gains and losses on
available-for-sale securities are accumulated in stockholders' equity as part of
accumulated other comprehensive income, net of related deferred income taxes and
minority interest. Realized gains and losses are based upon the specific
identification of the securities sold.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of these accounts.
Investment in joint ventures. Investments in more than 20%-owned but less
than majority-owned companies are accounted for by the equity method. See Note
7. Differences between the cost of each investment and the Company's pro rata
share of the entity's separately-reported net assets, if any, are allocated
among the assets and liabilities of the entity based upon estimated relative
fair values. Such differences approximate a $52 million credit at December 31,
2002, related principally to the Company's investment in TIMET and are charged
or credited to income as the entities depreciate, amortize or dispose of the
related net assets.
Goodwill and other intangible assets. Goodwill represents the excess of
cost over fair value of individual net assets acquired in business combinations
accounted for by the purchase method. Through December 31, 2001, goodwill was
amortized by the straight-line method over not more than 40 years. Upon adoption
of SFAS No. 142, Goodwill and Other Intangible Assets, effective January 1,
2002, goodwill was no longer subject to periodic amortization. Other intangible
assets have been, and continued to be upon adoption of SFAS No. 142 effective
January 1, 2002, amortized by the straight-line method over their estimated
lives. Goodwill and other intangible assets are stated net of accumulated
amortization. See Notes 9 and 20.
Through December 31, 2001, when events or changes in circumstances
indicated that goodwill or other intangible assets may be impaired, an
evaluation was performed to determine if an impairment existed. Such events or
circumstances included, among other things, (i) a prolonged period of time
during which the Company's net carrying value of its investment in subsidiaries
whose common stocks are publicly-traded was greater than quoted market prices
for such stocks and (ii) significant current and prior periods or current and
projected periods with operating losses related to the applicable business unit.
All relevant factors were considered in determining whether an impairment
existed. If an impairment was determined to exist, goodwill and, if appropriate,
the underlying long-lived assets associated with the goodwill, were written down
to reflect the estimated future discounted cash flows expected to be generated
by the underlying business. Effective January 1, 2002, the Company commenced
assessing impairment of goodwill and other intangible assets in accordance with
SFAS No. 142. See Note 20.
Property and equipment, mining properties, depreciation and depletion.
Property and equipment are stated at cost. Mining properties are stated at cost
less accumulated depletion. Depreciation for financial reporting purposes is
computed principally by the straight-line method over the estimated useful lives
of ten to 40 years for buildings and three to 20 years for equipment. Depletion
for financial reporting purposes is computed by the unit-of-production and
straight-line methods. Accelerated depreciation and depletion methods are used
for income tax purposes, as permitted. Upon sale or retirement of an asset, the
related cost and accumulated depreciation are removed from the accounts and any
gain or loss is recognized in income currently.
Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized. The Company will perform
certain planned major maintenance activities during the year, primarily with
respect to the chemicals segment. Repair and maintenance costs estimated to be
incurred in connection with such planned major maintenance activities are
accrued in advance and are included in cost of goods sold.
Interest costs related to major long-term capital projects and renewals are
capitalized as a component of construction costs. Interest costs capitalized
related to the Company's consolidated business segments were not significant in
2000, 2001 or 2002.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. Through December 31, 2001, if the asset being tested for impairment
was acquired in a business combination accounted for by the purchase method, any
goodwill which arose out of that business combination was also considered in the
impairment test if the goodwill related specifically to the acquired asset and
not to other aspects of the acquired business, such as the customer base or
product lines. Effective January 1, 2002, the Company commenced assessing
impairment of goodwill in accordance with SFAS No. 142, and the Company
commenced assessing impairment of other long-lived assets (such as property and
equipment and mining properties) in accordance with SFAS No. 144. See Note 20.
Long-term debt. Long-term debt is stated net of unamortized original issue
discount ("OID"), if any. OID is amortized over the period during which interest
is not paid and deferred financing costs are amortized over the term of the
applicable issue, both by the interest method.
Derivatives and hedging activities. The Company adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended,
effective January 1, 2001. Under SFAS No. 133, all derivatives are recognized as
either assets or liabilities and measured at fair value. The accounting for
changes in fair value of derivatives depends upon the intended use of the
derivative, and such changes are recognized either in net income or other
comprehensive income. As permitted by the transition requirements of SFAS No.
133, as amended, the Company has exempted from the scope of SFAS No. 133 all
host contracts containing embedded derivatives which were issued or acquired
prior to January 1, 1999. Other than certain currency forward contracts
discussed below, the Company was not a party to any significant derivative or
hedging instrument covered by SFAS No. 133 at January 1, 2001. The accounting
for such currency forward contracts under SFAS No. 133 is not materially
different from the accounting for such contracts under prior GAAP, and therefore
the impact to the Company of adopting SFAS No. 133 was not material.
Certain of the Company's sales generated by its non-U.S. operations are
denominated in U.S. dollars. The Company 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.
The Company has not entered into these contracts for trading or speculative
purposes in the past, nor does the Company currently anticipate entering into
such contracts for trading or speculative purposes in the future. At each
balance sheet date, any such outstanding currency forward contract is
marked-to-market with any resulting gain or loss recognized in income currently
as part of net currency transactions. To manage such exchange rate risk, at
December 31, 2002 the Company held contracts maturing through January 2003 to
exchange an aggregate of U.S. $2.5 million for an equivalent amount of Canadian
dollars at an exchange rate of Cdn. $1.57 per U.S. dollar. At December 31, 2002,
the actual exchange rate was Cdn. $1.57 per U.S. dollar. No such contracts were
held at December 31, 2001.
The Company periodically uses interest rate swaps and other types of
contracts to manage interest rate risk with respect to financial assets or
liabilities. The Company has not entered into these contracts for trading or
speculative purposes in the past, nor does the Company currently anticipate
entering into such contracts for trading or speculative purposes in the future.
The Company was not a party to any such contract during 2000, 2001 or 2002.
Income taxes. Valhi and its qualifying subsidiaries are members of
Contran's consolidated United States federal income tax group (the "Contran Tax
Group"). The policy for intercompany allocation of federal income taxes provides
that subsidiaries included in the Contran Tax Group compute the provision for
income taxes on a separate company basis. Subsidiaries make payments to or
receive payments from Contran in the amounts they would have paid to or received
from the Internal Revenue Service had they not been members of the Contran Tax
Group. The separate company provisions and payments are computed using the tax
elections made by Contran.
Through December 31, 2000, NL and Tremont Corporation were separate U.S.
taxpayers and were not members of the Contran Tax Group. Effective January 1,
2001, NL and Tremont became members of the Contran Tax Group. See Note 3. CompX
is a separate U.S. taxpayer and is not a member of the Contran Tax Group. Waste
Control Specialists LLC and The Amalgamated Sugar Company LLC are treated as
partnerships for income tax purposes.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
investments in the Company's subsidiaries and affiliates who are not members of
the Contran Tax Group. The Company periodically evaluates its deferred tax
assets in the various taxing jurisdictions in which it operates and adjusts any
related valuation allowance based on the estimate of the amount of such deferred
tax assets which the Company believes does not meet the "more-likely-than-not"
recognition criteria.
Earnings per share. Basic earnings per share of common stock is based upon
the weighted average number of common shares actually outstanding during each
period. Diluted earnings per share of common stock includes the impact of
outstanding dilutive stock options. The weighted average number of outstanding
stock options excluded from the calculation of diluted earnings per share
because their impact would have been antidilutive aggregated approximately
246,000 in 2000, 297,000 in 2001 and 184,000 in 2002.
Deferred income. Deferred income, related principally to a non-compete
agreement discussed in Note 12, is amortized over the periods earned, generally
by the straight-line method.
Stock options. The Company accounts for stock-based employee compensation
in accordance with Accounting Principles Board Opinion ("APBO") No. 25,
Accounting for Stock Issued to Employees, and its various interpretations. See
Note 14. 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. Compensation cost related to stock options
recognized by the Company in accordance with APBO No. 25 was approximately $1.7
million in 2000, $2.1 million in 2001 and $3.3 million in 2002.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in 2000, 2001 and 2002 if Valhi
and its subsidiaries and affiliates had each elected to account for their
respective stock-based employee compensation related to stock options in
accordance with the fair value-based recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, for all awards granted subsequent to
January 1, 1995.
Years ended December 31,
2000 2001 2002
---- ---- ----
(In millions, except
per share amounts)
Net income as reported ......................... $ 76.6 $ 93.2 $ 1.2
Adjustments, net of applicable income
tax effects and minority interest:
Stock-based employee compensation expense
determined under APBO No. 25 ................ .7 .8 1.7
Stock-based employee compensation expense
determined under SFAS No. 123 ............... (3.4) (3.9) (2.6)
------ ------ ------
Pro forma net income ........................... $ 73.9 $ 90.1 $ .3
====== ====== ======
Basic earnings per share:
As reported .................................. $ .67 $ .81 $ .01
Pro forma .................................... .64 .78 --
Diluted earnings per share:
As reported .................................. $ .66 $ .80 $ .01
Pro forma .................................... .63 .77 --
Environmental costs. 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 December 31, 2001 and 2002, no receivables
for recoveries have been recognized.
Closure and post closure costs. The Company provides for estimated closure
and post-closure monitoring costs for its waste disposal site over the operating
life of the facility as airspace is consumed ($1.2 million and $1.3 million
accrued at December 31, 2001 and 2002, respectively). Such costs are estimated
based on the technical requirements of applicable state or federal regulations,
whichever are stricter, and include such items as final cap and cover on the
site, methane gas and leachate management and groundwater monitoring. Cost
estimates are based on management's judgment and experience and information
available from regulatory agencies as to costs of remediation. These estimates
are sometimes a range of possible outcomes, in which case the Company provides
for the amount within the range which constitutes its best estimate. If no
amount within the range appears to be a better estimate than any other amount,
the Company provides for at least the minimum amount within the range. See Note
21. Refundable insurance deposits (see Note 8) collateralize certain of the
Company's closure and post-closure obligations and will be refunded to the
Company when the related policy terminates or expires if the insurance company
suffers no losses under the policy.
Estimates of the ultimate cost of remediation require a number of
assumptions, are inherently difficult and the ultimate outcome may differ from
current estimates. As additional information becomes available, estimates are
adjusted as necessary. Where the Company believes that both the amount of a
particular environmental liability and the timing of the payments are reliably
determinable, the cost in current dollars is inflated at 3% per annum until
expected time of payment. The Company's waste disposal site has an estimated
remaining life of over 100 years based upon current site plans and annual
volumes of waste. During this remaining site life, the Company estimates it will
provide for an additional $22 million of closure and post-closure costs,
including inflation. Anticipated payments of environmental liabilities accrued
at December 31, 2002 are not expected to begin until 2004 at the earliest.
Other. Advertising costs related to the Company's consolidated business
segments, expensed as incurred, were approximately $2.0 million in each of 2000,
2001 and 2002. Research and development costs related to the Company's
consolidated business segments, expensed as incurred, were approximately $7
million in each of 2000, 2001 and 2002.
Note 2 - Business and geographic segments:
% owned by Valhi at
Business segment Entity December 31, 2002
Chemicals NL Industries, Inc. 63%
Component products CompX International Inc. 69%
Waste management Waste Control Specialists 90%
Titanium metals Tremont Group, Inc. 80%
Tremont Group (80% owned by Valhi and 20% owned by NL at December 31, 2002)
is a holding company which owns 80% of Tremont Corporation ("Tremont") at
December 31, 2002. Tremont is also a holding company and owns an additional 21%
of NL and 39% of TIMET at December 31, 2002. See Note 3.
The Company is organized based upon its operating subsidiaries. The
Company's operating segments are defined as components of our consolidated
operations about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is Mr. Harold C. Simmons. Each operating segment is separately
managed, and each operating segment represents a strategic business unit
offering different products.
The Company's reportable operating segments are comprised of the chemicals
business conducted by NL, the component products business conducted by CompX and
the waste management business conducted by Waste Control Specialists.
NL manufactures and sells titanium dioxide pigments ("TiO2") through its
subsidiary Kronos, Inc. TiO2 is used to impart whiteness, brightness and opacity
to a wide variety of products, including paints, plastics, paper, fibers and
ceramics. Kronos has production facilities located throughout North America and
Europe. Kronos also owns a one-half interest in a TiO2 production facility
located in Louisiana. See Note 7.
CompX produces and sells component products (ergonomic computer support
systems, precision ball bearing slides and security products) for office
furniture, computer related applications and a variety of other applications.
CompX has production facilities in North America, Europe and Asia.
Waste Control Specialists operates a facility in West Texas for the
processing, treatment and storage of hazardous, toxic and low-level and mixed
radioactive wastes, and for the disposal of hazardous and toxic and certain
types of low-level and mixed radioactive wastes. Waste Control Specialists is
seeking additional regulatory authorizations to expand its treatment and
disposal capabilities for low-level and mixed radioactive wastes.
TIMET is a vertically integrated producer of titanium sponge, melted
products (ingot and slab) and a variety of titanium mill products for aerospace,
industrial and other applications with production facilities located in the U.S.
and Europe.
The Company evaluates segment performance based on segment operating
income, which is defined as income before income taxes and interest expense,
exclusive of certain non-recurring items (such as gains or losses on disposition
of business units and other long-lived assets outside the ordinary course of
business and certain legal settlements) and certain general corporate income and
expense items (including securities transactions gains and losses and interest
and dividend income) which are not attributable to the operations of the
reportable operating segments. The accounting policies of the reportable
operating segments are the same as those described in Note 1. Segment operating
profit includes the effect of amortization of any goodwill (prior to 2002) and
other intangible assets attributable to the segment.
Interest income included in the calculation of segment operating income is
not material in 2000, 2001 or 2002. Capital expenditures include additions to
property and equipment and mining properties but exclude amounts paid for
business units acquired in business combinations accounted for by the purchase
method. See Note 3. Depreciation, depletion and amortization related to each
reportable operating segment includes amortization of any goodwill (prior to
2002) and other intangible assets attributable to the segment. Amortization of
deferred financing costs is included in interest expense. There are no
intersegment sales or any other significant intersegment transactions.
Segment assets are comprised of all assets attributable to each reportable
operating segment, including goodwill and other intangible assets. The Company's
investment in the TiO2 manufacturing joint venture (see Note 7) is included in
the chemicals business segment assets. Corporate assets are not attributable to
any operating segment and consist principally of cash and cash equivalents,
restricted cash equivalents, marketable securities and loans to third parties.
At December 31, 2002, approximately 30% of corporate assets were held by NL
(2001 - 38%), with substantially all of the remainder held by Valhi.
For geographic information, net sales are attributed to the place of
manufacture (point-of-origin) and the location of the customer
(point-of-destination); property and equipment and mining properties are
attributed to their physical location. At December 31, 2002, the net assets of
non-U.S. subsidiaries included in consolidated net assets approximated $511
million (2001 - $664 million).
Years ended December 31,
2000 2001 2002
---- ---- ----
(In millions)
Net sales:
Chemicals ................................ $ 922.3 $ 835.1 $ 875.2
Component products ....................... 253.3 211.4 196.1
Waste management ......................... 16.3 13.0 8.4
-------- -------- --------
Total net sales ........................ $1,191.9 $1,059.5 $1,079.7
======== ======== ========
Operating income:
Chemicals ................................ $ 187.4 $ 143.5 $ 84.4
Component products ....................... 37.5 13.1 4.5
Waste management ......................... (7.2) (14.4) (7.0)
-------- -------- --------
Total operating income ................. 217.7 142.2 81.9
General corporate items:
Legal settlement gains, net .............. 69.5 31.9 5.2
Securities transaction gains, net ........ -- 47.0 6.4
Interest and dividend income ............. 40.3 38.0 34.3
Insurance gain ........................... -- 16.2 --
Foreign currency transaction gain ........ -- -- 6.3
Gain on disposal of fixed assets ......... -- -- 1.6
Gain on sale/leaseback ................... -- 2.2 --
General expenses, net .................... (34.6) (34.1) (44.5)
Interest expense ........................... (71.5) (62.3) (60.2)
-------- -------- --------
221.4 181.1 31.0
Equity in:
TIMET .................................... (9.0) (9.2) (32.9)
Other .................................... 1.7 .6 .6
-------- -------- --------
Income (loss) before income taxes ...... $ 214.1 $ 172.5 $ (1.3)
======== ======== ========
Net sales - point of origin:
United States ............................ $ 436.0 $ 379.9 $ 386.7
Germany .................................. 444.1 398.5 404.3
Belgium .................................. 137.8 126.8 123.8
Norway ................................... 98.3 102.8 111.8
Netherlands .............................. 35.8 32.2 29.6
Other Europe ............................. 92.7 82.3 89.6
Canada ................................... 253.7 230.7 227.6
Taiwan ................................... 12.1 9.6 10.2
Eliminations ............................. (318.6) (303.3) (303.9)
-------- -------- --------
$1,191.9 $1,059.5 $1,079.7
======== ======== ========
Net sales - point of destination:
United States ............................ $ 459.3 $ 401.8 $ 406.5
Europe ................................... 515.2 462.4 489.9
Canada ................................... 97.0 82.5 83.0
Asia ..................................... 53.6 51.3 53.1
Other .................................... 66.8 61.5 47.2
-------- -------- --------
$1,191.9 $1,059.5 $1,079.7
======== ======== ========
Years ended December 31,
2000 2001 2002
---- ---- ----
(In millions)
Depreciation, depletion and amortization:
Chemicals .......................... $54.1 $54.6 $44.3
Component products ................. 12.6 14.9 13.0
Waste management ................... 3.3 3.8 3.0
Corporate .......................... 1.1 1.2 1.5
----- ----- -----
$71.1 $74.5 $61.8
===== ===== =====
Capital expenditures:
Chemicals .......................... $31.1 $53.7 $32.6
Component products ................. 23.1 13.2 12.7
Waste management ................... 3.3 3.1 .6
Corporate .......................... .3 .8 .1
----- ----- -----
$57.8 $70.8 $46.0
===== ===== =====
December 31,
2000 2001 2002
---- ---- ----
(In millions)
Total assets:
Operating segments:
Chemicals ........................ $1,313.1 $1,296.5 $1,346.5
Component products ............... 227.2 224.2 202.1
Waste management ................. 32.3 31.1 28.5
Investment in:
Titanium Metals Corporation ...... 72.7 60.3 12.9
Other joint ventures ............. 13.1 12.4 12.6
Corporate and eliminations ......... 598.4 526.2 472.2
-------- -------- --------
$2,256.8 $2,150.7 $2,074.8
======== ======== ========
Net property and equipment and
mining properties:
United States ...................... $ 82.5 $ 84.0 $ 78.2
Germany ............................ 246.5 243.1 275.9
Canada ............................. 88.2 83.0 82.1
Norway ............................. 57.7 55.2 68.1
Belgium ............................ 53.7 52.6 60.5
Netherlands ........................ 17.2 7.3 10.0
Taiwan ............................. 5.7 5.5 5.9
-------- -------- --------
$ 551.5 $ 530.7 $ 580.7
======== ======== ========
Note 3 - Business combinations and disposals:
NL Industries, Inc. At the beginning of 2000, Valhi held 59% of NL's
outstanding common stock, and Tremont held an additional 20% of NL. During 2000,
2001 and 2002, NL purchased shares of its own common stock in market and private
transactions for an aggregate of $67.6 million, thereby increasing Valhi's and
Tremont's ownership of NL to 63% and 21% at December 31, 2002, respectively. See
Note 18. The Company accounted for such increases in its interest in NL by the
purchase method (step acquisitions).
In January 2002, NL purchased the insurance brokerage operations conducted
by EWI Re, Inc. and EWI Re, Ltd. for an aggregate cash purchase price of $9
million. The pro forma impact of such acquisition is not material. See Note 18.
CompX International Inc. At the beginning of 2000, the Company held 64% of
CompX's common stock. During 2000 and 2001, Valhi purchased shares of CompX
common stock, and CompX purchased shares of its own common stock, in market
transactions for an aggregate of $11.3 million, thereby increasing the Company's
ownership interest of CompX to 69% at December 31, 2001 and 2002. The Company
accounted for such increases in its interest in CompX by the purchase method
(step acquisitions).
In 2000, CompX acquired a lock producer for an aggregate of $9 million cash
consideration. Such acquisition was accounted for by the purchase method.
Tremont Corporation and Tremont Group, Inc. At the beginning of 2000, the
Company held 50.2% of Tremont Corporation's common stock. During 2000, Valhi and
NL each purchased shares of Tremont in market and private transactions for an
aggregate of $45.4 million, increasing Valhi's and NL's ownership of Tremont to
64% and 16% at December 31, 2000, respectively. See Note 18. Effective with the
close of business on December 31, 2000, Valhi and NL each contributed their
Tremont shares to newly-formed Tremont Group in return for an 80% and 20%
ownership interest in Tremont Group, respectively, and Tremont Group became the
owner of the 80% of Tremont that Valhi and NL had previously owned in the
aggregate. Tremont Group recorded the shares of Tremont received from Valhi and
NL at predecessor carryover cost basis. During 2001, Valhi purchased a nominal
number of additional Tremont Corporation common shares for $198,000. The Company
accounted for such increases in its interest in Tremont during 2000 and 2001 by
the purchase method (step acquisitions).
In February 2003, Valhi completed two consecutive merger transactions
pursuant to which Tremont Group and Tremont both became wholly-owned
subsidiaries of Valhi. Under these merger transactions, (i) Valhi issued 3.5
million shares of its common stock to NL in return for NL's 20% ownership
interest in Tremont Group and (ii) Valhi issued 3.4 shares of its common stock
(plus cash in lieu of fractional shares) to Tremont stockholders (other than
Valhi and Tremont Group) in exchange for each share of Tremont common stock held
by such stockholders, or an aggregate of 4.3 million shares of Valhi common
stock, in each case in a tax-free exchange. A special committee of Tremont's
board of directors, consisting of members unrelated to Valhi who retained their
own independent financial and legal advisors, recommended approval of the second
merger. Subsequent to these two mergers, Tremont Group and Tremont merged to
form Tremont LLC, also wholly owned by Valhi. The number of shares of Valhi
common stock issued to NL in exchange for NL's 20% ownership interest in Tremont
Group was equal to NL's 20% pro-rata interest in the shares of Tremont common
stock held by Tremont Group, adjusted for the 3.4 exchange ratio in the second
merger. A portion of the Valhi shares issued to NL in these transactions will be
reported as treasury shares. See Note 14.
In December 2000, TRECO LLC, a 75%-owned subsidiary of Tremont, acquired
the 25% interest in TRECO previously held by the other owner for $2.5 million
cash consideration, and TRECO became a wholly-owned subsidiary of Tremont.
TIMET. At the beginning of 2000, the Company owned 39% of TIMET. During
2002, the Company purchased a nominal number of additional shares of TIMET
common stock in market transactions for $534,000.
Waste Control Specialists LLC. In 1995, Valhi acquired a 50% interest in
newly-formed Waste Control Specialists LLC. Valhi contributed $25 million to
Waste Control Specialists at various dates through early 1997 for its 50%
interest. Valhi contributed an additional $10 million to Waste Control
Specialists' equity in each of 1997, 1998 and 1999, and contributed an
additional $20 million to Waste Control Specialists' equity in 2000, thereby
increasing its membership interest from 50% to 90%. A substantial portion of
such equity contributions were used by Waste Control Specialists to reduce the
then-outstanding balance of its revolving intercompany borrowings from the
Company. At formation in 1995, the other owner of Waste Control Specialists, KNB
Holdings, Ltd., contributed certain assets, primarily land and certain operating
permits for the facility site, and Waste Control Specialists also assumed
certain indebtedness of the other owner.
Valhi is entitled to a 20% cumulative preferential return on its initial
$25 million investment, after which earnings are generally split in accordance
with ownership interests. The liabilities of the other owner assumed by Waste
Control Specialists in 1995 exceeded the carrying value of the assets
contributed by the other owner. Accordingly, all of Waste Control Specialists'
cumulative net losses to date have accrued to the Company for financial
reporting purposes, and all of Waste Control Specialists future net income or
net losses will also accrue to the Company until Waste Control Specialists
reports positive equity attributable to the other owner. See Note 13.
Other. NL (NYSE: NL), CompX (NYSE: CIX) and TIMET (NYSE: TIE) each file
periodic reports with the SEC pursuant to the Securities Exchange Act of 1934,
as amended. Prior to the February 2003 merger transactions in which Tremont
became wholly owned by Valhi, Tremont also filed periodic reports with the SEC.
Effective July 1, 2001, the Company adopted SFAS No. 141, Business
Combinations, for all business combinations initiated on or after July 1, 2001,
and all purchase business combinations (including step acquisitions). Under SFAS
No. 141, all business combinations are accounted for by the purchase method, and
the pooling-of-interests method became prohibited. The Company did not qualify
to use the pooling-of-interests method of accounting for business combinations
prior to July 1, 2001.
Note 4 - Accounts and other receivables:
December 31,
2001 2002
---- ----
(In thousands)
Accounts receivable .......................... $ 166,126 $ 174,644
Notes receivable ............................. 2,484 2,221
Accrued interest ............................. 26 114
Allowance for doubtful accounts .............. (6,326) (6,356)
--------- ---------
$ 162,310 $ 170,623
Note 5 - Marketable securities:
December 31,
2001 2002
---- ----
(In thousands)
Current assets:
Halliburton Company common
stock (trading) ............................... $ 6,744 $ 47
Halliburton Company common stock
(available-for-sale) .......................... 8,138 --
Restricted debt securities ..................... 3,583 9,670
-------- --------
$ 18,465 $ 9,717
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC .............. $170,000 $170,000
Restricted debt securities ..................... 16,121 9,232
Other common stocks ............................ 428 350
-------- --------
$186,549 $179,582
Amalgamated. Prior to 2000, the Company transferred control of the refined
sugar operations previously conducted by the Company's wholly-owned subsidiary,
The Amalgamated Sugar Company, to Snake River Sugar Company, an Oregon
agricultural cooperative formed by certain sugarbeet growers in Amalgamated's
areas of operations. Pursuant to the transaction, Amalgamated contributed
substantially all of its net assets to the Amalgamated Sugar Company LLC, a
limited liability company controlled by Snake River, on a tax-deferred basis in
exchange for a non-voting ownership interest in the LLC. The cost basis of the
net assets transferred by Amalgamated to the LLC was approximately $34 million.
As part of such transaction, Snake River made certain loans to Valhi aggregating
$250 million. Such loans from Snake River are collateralized by the Company's
interest in the LLC. Snake River's sources of funds for its loans to Valhi, as
well as for the $14 million it contributed to the LLC for its voting interest in
the LLC, included cash capital contributions by the grower members of Snake
River and $180 million in debt financing provided by Valhi, of which $100
million was repaid prior to 2000 when Snake River obtained an equal amount of
third-party term loan financing. After such repayments, $80 million principal
amount of Valhi's loans to Snake River remain outstanding. See Notes 8 and 10.
The Company and Snake River share in distributions from the LLC up to an
aggregate of $26.7 million per year (the "base" level), with a preferential 95%
share going to the Company. To the extent the LLC's distributions are below this
base level in any given year, the Company is entitled to an additional 95%
preferential share of any future annual LLC distributions in excess of the base
level until such shortfall is recovered. Under certain conditions, the Company
is entitled to receive additional cash distributions from the LLC, including
amounts discussed in Note 8. 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.
The LLC Company Agreement contains certain restrictive covenants intended
to protect the Company's interest in the LLC, including limitations on capital
expenditures and additional indebtedness of the LLC. The Company also has the
ability to temporarily take control of the LLC in the event the Company's
cumulative distributions from the LLC fall below specified levels. As a
condition to exercising temporary control, the Company would be required to
escrow funds in amounts up to the next three years of debt service of Snake
River's third-party term loan (an aggregate of $38.2 million at December 31,
2002) unless the Company and Snake River's third-party lender otherwise mutually
agree. Through December 31, 2002, the Company's cumulative distributions from
the LLC had not fallen below the specified levels.
Beginning in 2000, Snake River agreed that the annual amount of (i) the
distributions paid by the LLC to the Company plus (ii) the debt service payments
paid by Snake River to the Company on the $80 million loan will at least equal
the annual amount of interest payments owed by Valhi to Snake River on the
Company's $250 million in loans from Snake River. In the event that such cash
flows to the Company are less than the required minimum amount, certain
agreements among the Company, Snake River and the LLC made in 2000, including a
reduction in the amount of cumulative distributions which must be paid by the
LLC to the Company in order to prevent the Company from having the ability to
temporarily take control of the LLC, would retroactively become null and void.
Through December 31, 2002, Snake River and the LLC maintained the minimum
required levels of cash flows to the Company.
The Company reports the cash distributions received from the LLC as
dividend income. See Note 12. The amount of such future distributions is
dependent upon, among other things, the future performance of the LLC's
operations. Because the Company receives preferential distributions from the LLC
and has the right to require the LLC to redeem its interest in the LLC for a
fixed and determinable amount beginning at a fixed and determinable date, the
Company accounts for its investment in the LLC as an available-for-sale
marketable security carried at estimated fair value. In estimating fair value of
the Company's interest in the LLC, the Company considers, among other things,
the outstanding balance of the Company's loans to Snake River and the
outstanding balance of the Company's loans from Snake River.
Halliburton. At December 31, 2002, Valhi held approximately 2,500 shares of
Halliburton common stock (aggregate cost of $20,000) with a quoted market price
of $18.71 per share, or an aggregate market value of $47,000 (December 31, 2001
- - 1.1 million shares, aggregate cost of $9 million, with a quoted market price
of $13.10 per share, or an aggregate market value of $15 million). At December
31, 2002, all of such Halliburton shares are classified as trading securities.
Of such Halliburton shares held at December 31, 2001, approximately 515,000
Halliburton shares were classified as trading securities and 621,000 were
classified as available-for-sale securities. Valhi's LYONs debt obligations
(none outstanding at December 31, 2002) were exchangeable at any time, at the
option of the LYON holder, for the shares of Halliburton common stock classified
as available-for-sale. The Halliburton shares classified as available-for-sale
were held in escrow for the benefit of the holders of the LYONs. Valhi receives
the regular quarterly dividend on all of the Halliburton shares held, including
shares that had been held in escrow. The available-for-sale Halliburton shares
were classified as a current asset at December 31, 2001 because the related
LYONs obligations, which were redeemable at the option of the holders in October
2002, were classified as a current liability at such date. During 2000 and 2001,
certain LYON holders exchanged their LYONs for 5,000 and 1.2 million Halliburton
shares, respectively. During 2001 and 2002, 515,000 and 621,000 Halliburton
shares, respectively, were reclassified from available-for-sale to trading
securities when they were released to Valhi from the LYONs escrow. Subsequent to
their release from the escrow, all but 2,500 of such Halliburton shares were
sold in market transactions in 2002 for aggregate proceeds of $18.1 million.
Also during 2001, an additional 390,000 Halliburton shares were released to
Valhi from the LYONs escrow and were immediately sold in market transactions for
aggregate proceeds of $16.8 million. See Notes 10 and 12.
Other. The aggregate cost of the debt securities, restricted pursuant to
the terms of one of NL's environmental special purpose trusts discussed in Note
1, approximates their net carrying value at December 31, 2001 and 2002. The
aggregate cost of other noncurrent available-for-sale securities is nominal at
December 31, 2001 and 2002. See Note 12.
Note 6 - Inventories:
December 31,
2001 2002
---- ----
(In thousands)
Raw materials:
Chemicals .................................. $ 79,162 $ 54,077
Component products ......................... 9,677 6,573
-------- --------
88,839 60,650
-------- --------
In process products:
Chemicals .................................. 9,675 15,936
Component products ......................... 12,619 12,602
-------- --------
22,294 28,538
-------- --------
Finished products:
Chemicals .................................. 117,976 109,978
Component products ......................... 8,494 12,296
-------- --------
126,470 122,274
-------- --------
Supplies (primarily chemicals) ............... 25,130 28,071
-------- --------
$262,733 $239,533
Note 7 - Investment in affiliates:
December 31,
2001 2002
---- ----
(In thousands)
Ti02 manufacturing joint venture ............... $138,428 $130,009
Titanium Metals Corporation .................... 60,272 12,920
Other joint ventures ........................... 12,415 12,620
-------- --------
$211,115 $155,549
TiO2 manufacturing joint venture. A Kronos TiO2 subsidiary (Kronos
Louisiana, Inc., or "KLA") and another Ti02 producer are equal owners of a
manufacturing joint venture (Louisiana Pigment Company, L.P., or "LPC") that
owns and operates a TiO2 plant in Louisiana. KLA and the other Ti02 producer are
each required to purchase one-half of the TiO2 produced by LPC. The
manufacturing joint venture operates on a break-even basis, and consequently the
Company reports no equity in earnings of LPC. Each owner's acquisition transfer
price for its share of the TiO2 produced is equal to its share of the joint
venture's production costs and interest expense, if any.
LPC's net sales aggregated $185.9 million, $187.4 million and $186.3
million in 2000, 2001 and 2002, respectively, of which $92.5 million, $93.4
million and $92.4 million, respectively, represented sales to Kronos and the
remainder represented sales to LPC's other owner. Substantially all of LPC's
operating costs during the past three years represented costs of sales.
At December 31, 2002, LPC reported total assets and partners' equity of
$292.5 million and $262.8 million, respectively (2001 - $296.4 million and
$279.6 million, respectively). Over 80% of LPC's assets at December 31, 2001 and
2002 are comprised of property and equipment; the remainder of LPC's assets are
comprised principally of inventories, receivables from its partners and cash and
cash equivalents. LPC's liabilities at December 31, 2001 and 2002 are comprised
primarily of trade payables and accruals. LPC has no indebtedness at December
31, 2001 and 2002.
Titanium Metals Corporation. At December 31, 2002, the Company held 1.3
million shares of TIMET with a quoted market price of $19.10 per share, or an
aggregate market value of $24 million (2001 - 1.2 million shares with a quoted
market price of $39.90 per share, or an aggregate market value of $49 million).
In February 2003, TIMET effected a reverse split of its common stock at a ratio
of one share of post-split common stock for each outstanding ten shares of
pre-split common stock. The share and per share disclosures related to TIMET
common stock contained in these Consolidated Financial Statements have been
adjusted to give effect to such reverse split. Such reverse stock split had no
financial statement impact to the Company, and the Company's ownership interest
in TIMET did not change as a result of the reverse split.
At December 31, 2002, TIMET reported total assets of $563.8 million and
stockholders' equity of $159.4 million (2001 - $699.4 million and $298.1
million, respectively). TIMET's total assets at December 31, 2002 include
current assets of $262.5 million, property and equipment of $254.7 million and
intangible assets of $8.4 million (2001 - $308.7 million, $275.3 million and
$54.1 million, respectively). TIMET's total liabilities at December 31, 2002
include current liabilities of $92.6 million, long-term debt of $16.0 million,
accrued OPEB and pension costs aggregating $74.5 million and convertible
preferred securities of $201.2 million (2001 - $122.4 million, $19.3 million,
$39.7 million and $201.2 million, respectively). During 2002, TIMET reported net
sales of $366.5 million, an operating loss of $20.8 million and a loss before
cumulative effect of a change in accounting principle of $67.2 million (2001 -
net sales of $486.9 million, operating income of $64.5 million and a net loss of
$41.8 million; 2000 - net sales of $426.8 million, an operating loss of $41.7
million and a net loss of $38.9 million).
The Company's equity in losses of TIMET in 2002 includes a $15.7 million
third-quarter impairment provision for an other than temporary decline in the
value of Tremont's investment in TIMET. In determining the amount of the
impairment charge, Tremont considered, among other things, then-recent ranges of
TIMET's NYSE market price and estimates of TIMET's future operating losses that
would further reduce Tremont's carrying value of its investment in TIMET as it
records additional equity in losses of TIMET.
Other. At December 31, 2001 and 2002, other joint ventures, held by TRECO
LLC, are comprised of (i) a 32% interest in Basic Management, Inc., which, among
other things, provides utility services in the industrial park where one of
TIMET's plants is located, and (ii) a 12% interest in The Landwell Company L.P.,
which is actively engaged in efforts to develop certain real estate. Basic
Management owns an additional 50% interest in Landwell.
At December 31, 2002, the combined balance sheets of Basic Management and
Landwell reflected total assets and partners' equity of $96.8 million and $53.0
million, respectively (2001 - $89.2 million and $49.7 million, respectively).
The combined total assets at December 31, 2002 include current assets of $30.1
million, property and equipment of $16.8 million, deferred charges of $19.5
million, land and development costs of $16.1 million, long-term notes and other
receivables of $9.2 million and investment in undeveloped land and water rights
of $2.5 million (2001 - $32.1 million, $18.1 million, $13.7 million, $13.1
million, $9.4 million and $2.3 million, respectively). Combined total
liabilities at December 31, 2002 include current liabilities of $23.6 million,
long-term debt of $12.6 million and deferred income taxes of $6.6 million (2001
- - $16.5 million, $18.5 million and $4.0 million, respectively).
During 2002, Basic Management and Landwell reported combined revenues of
$18.3 million, income before income taxes of $4.1 million and net income of $3.3
million (2001 - $19.3 million, $575,000 and $761,000, respectively; 2000 - $28.8
million, $8.5 million and $7.6 million, respectively). Landwell is treated for
federal income tax purposes as a partnership, and accordingly the combined
results of operations of Basic Management and Landwell includes a provision for
income taxes on Landwell's earnings only to the extent that such earnings accrue
to Basic Management.
Other. The Company has certain transactions with certain of these
affiliates, as more fully described in Note 18.
Note 8 - Other noncurrent assets:
December 31,
2001 2002
---- ----
(In thousands)
Loans and other receivables:
Snake River Sugar Company:
Principal .................................... $ 80,000 $ 80,000
Interest ..................................... 22,718 27,910
Other .......................................... 5,706 5,566
-------- --------
108,424 113,426
Less current portion ........................... 2,484 2,221
-------- --------
Noncurrent portion ............................. $105,940 $111,255
======== ========
Other assets:
Restricted cash equivalents .................... $ 4,713 $ 2,158
Waste disposal site operating permits .......... 2,527 1,754
Refundable insurance deposits .................. 1,609 1,864
Deferred financing costs ....................... 1,120 10,588
Other .......................................... 20,140 14,756
-------- --------
$ 30,109 $ 31,120
======== ========
Valhi's loan to Snake River, as amended, is subordinate to Snake River's
third-party senior term loan and bears interest at a fixed rate of 6.49% (12.99%
during the first three months of 2000), with all amounts due no later than 2010.
Covenants contained in Snake River's third-party senior term loan allow Snake
River, under certain conditions, to pay periodic installments for debt service
on the $80 million loan prior to its maturity in 2010. Such covenants allowed
Snake River to pay interest debt services payments to Valhi of $950,000 in 2000.
The Company does not currently expect to receive any significant debt service
payments from Snake River during 2003, and accordingly all accrued and unpaid
interest has been classified as a noncurrent asset as of December 31, 2002.
Under certain conditions, Valhi will be required to pledge $5 million in cash
equivalents or marketable securities to collateralize Snake River's third-party
senior term loan as a condition to permit continued repayment of the $80 million
loan. No such cash equivalents or marketable securities have yet been required
to be pledged at December 31, 2002, and the Company does not currently expect it
will be required to pledge any such amount during 2003.
The reduction of interest income resulting from the reduction in the
interest rate on the $80 million loan from 12.99% to 6.49% effective April 1,
2000 will be recouped and paid to the Company via additional future LLC
distributions from The Amalgamated Sugar Company LLC upon achievement of
specified levels of future LLC profitability. If Snake River and the LLC do not
maintain minimum specified levels of cash flow to the Company, the interest rate
on the loan to Snake River would revert back to 12.99% retroactive to April 1,
2000. Through December 31, 2002, Snake River and the LLC maintained the minimum
required levels of cash flows to the Company. See Note 5. Snake River has
granted to Valhi a lien on substantially all of Snake River's assets to
collateralize the $80 million loan, such lien becoming effective generally upon
the repayment of Snake River's third-party senior term loan with a scheduled
maturity date of April 2009.
Note 9 - Goodwill and other intangible assets:
Goodwill. Changes in the carrying amount of goodwill during the past three
years is presented in the table below. Substantially all of the goodwill related
to the chemicals operating segment was generated from the Company's various step
acquisitions of its interest in NL Industries. Substantially all of the goodwill
related to the component products operating segment was generated principally
from CompX's acquisitions of certain business units during 1998, 1999 and 2000.
Operating segment
Component
Chemicals products Total
(In millions)
Balance at December 31, 1999 ............. $311.4 $ 45.1 $356.5
Goodwill acquired during the year ........ 16.0 4.1 20.1
Periodic amortization .................... (13.4) (2.5) (15.9)
Changes in foreign exchange rates ........ -- (1.3) (1.3)
------ ------ ------
Balance at December 31, 2000 ............. 314.0 45.4 359.4
Goodwill acquired during the year ........ 7.7 -- 7.7
Periodic amortization .................... (14.5) (2.4) (16.9)
Changes in foreign exchange rates ........ -- (1.1) (1.1)
------ ------ ------
Balance at December 31, 2001 ............. 307.2 41.9 349.1
Goodwill acquired during the year ........ 14.1 -- 14.1
Changes in foreign exchange rates ........ -- 1.8 1.8
------ ------ ------
Balance at December 31, 2002 ............. $321.3 $ 43.7 $365.0
====== ====== ======
Upon adoption of SFAS No. 142 effective January 1, 2002 (see Note 20), the
goodwill related to the chemicals operating segment was assigned to the
reporting unit (as that term is defined in SFAS No. 142) consisting of NL in
total, and the goodwill related to the components product operating segment was
assigned to two reporting units within that operating segment, one consisting of
CompX's security products operations and the other consisting of CompX's
ergonomic and slide products operations.
Other intangible assets.
December 31,
2001 2002
---- ----
(In millions)
Patents:
Cost ............................................. $3.4 $3.4
Less accumulated amortization .................... 1.0 1.2
---- ----
Net ............................................ 2.4 2.2
---- ----
Customer list:
Cost ............................................. -- 2.6
Less accumulated amortization .................... -- .4
---- ----
Net ............................................ -- 2.2
---- ----
$2.4 $4.4
==== ====
The patent intangible asset relates to the estimated fair value of certain
patents acquired in connection with the acquisition of certain business units by
CompX, and the customer list intangible asset relates to NL's acquisition of EWI
discussed in Note 3. The patent intangible asset was, and will continue to be
after adoption of SFAS No. 142 effective January 1, 2002, amortized by the
straight-line method over the lives of the patents (approximately 11 years
remaining at December 31, 2002), with no assumed residual value at the end of
the life of the patents. The customer list intangible asset will be amortized by
the straight-line method over the estimated seven-year life of such intangible
asset (approximately 6 years remaining at December 31, 2002), with no assumed
residual value at the end of the life of the intangible asset. Amortization
expense of intangible assets was approximately $474,000 in 2000, $229,000 in
2001 and $612,000 in 2002, and amortization expense of intangible assets is
expected to be approximately $620,000 in each of calendar 2003 through 2007.
Note 10 - Notes payable and long-term debt:
December 31,
2001 2002
---- ----
(In thousands)
Notes payable - Kronos bank credit agreements ........ $ 46,201 $ --
======== ========
Long-term debt:
Valhi:
Snake River Sugar Company ........................ $250,000 $250,000
Liquid Yield Option Notes (LYONs) ................ 25,472 --
Bank credit facility ............................. 35,000 --
Other ............................................ 2,880 --
-------- --------
313,352 250,000
-------- --------
Subsidiaries:
Kronos International:
Senior Secured Notes ........................... -- 296,942
Bank credit facility ........................... -- 27,077
NL Senior Secured Notes .......................... 194,000 --
CompX bank credit facility ....................... 49,000 31,000
Valcor Senior Notes .............................. 2,431 2,431
Other ............................................ 3,404 2,417
-------- --------
248,835 359,867
-------- --------
562,187 609,867
Less current maturities ............................ 64,972 4,127
-------- --------
$497,215 $605,740
Valhi. Valhi's $250 million in loans from Snake River Sugar Company bear
interest at a weighted average fixed interest rate of 9.4%, are collateralized
by the Company's interest in The Amalgamated Sugar Company LLC and are due in
January 2027. Currently, these loans are nonrecourse to Valhi. Up to $37.5
million principal amount of such loans will become recourse to Valhi to the
extent that the balance of Valhi's loan to Snake River (including accrued
interest) becomes less than $37.5 million. Under certain conditions, Snake River
has the ability to accelerate the maturity of these loans. See Notes 5 and 8.
At December 31, 2002, Valhi has a $70 million revolving bank credit
facility which matures in October 2003, generally bears interest at LIBOR plus
1.5% (for LIBOR-based borrowings) or prime (for prime-based borrowings), and is
collateralized by 30 million shares of NL common stock held by Valhi. The
agreement limits dividends and additional indebtedness of Valhi and contains
other provisions customary in lending transactions of this type. In the event of
a change of control of Valhi, as defined, the lenders would have the right to
accelerate the maturity of the facility. The maximum amount which may be
borrowed under the facility is limited to one-third of the aggregate market
value of the shares of NL common stock pledged as collateral. Based on NL's
December 31, 2002 quoted market price of $17.00 per share, the 30 million shares
of NL common stock pledged under the facility provide more than sufficient
collateral coverage to allow for borrowings up to the full amount of the
facility. Valhi would become limited to borrowing less than the full $70 million
amount of the facility, or would be required to pledge additional collateral if
the full amount of the facility had been borrowed, only if NL's stock price were
to fall below approximately $7.00 per share. At December 31, 2002, no borrowings
were outstanding under this facility, letters of credit aggregating $1.1 million
had been issued and $68.9 million was available for borrowing under this
facility.
Valhi's zero coupon Senior Secured LYONs (none outstanding at December 31,
2002) were issued with significant OID to represent a yield to maturity of
9.25%. No periodic interest payments were required. Each $1,000 in principal
amount at maturity of the LYONs was exchangeable, at any time at the option of
the holders of the LYONs, for 14.4308 shares of Halliburton common stock held by
Valhi. During 2000 and 2001, holders representing $336,000 and $92.2 million
principal amount at maturity, respectively, of LYONs exchanged such LYONs for
Halliburton shares. Under the terms of the indenture governing the LYONs, the
Company had the option to deliver, in whole or in part, cash equal to the market
value of the Halliburton shares that were otherwise required to be delivered to
the LYONs holder in an exchange, and a portion of such exchanges during 2001 was
so settled. During 2001 and 2002, $50.4 million and $43.1 million principal
amount at maturity of LYONs, respectively, were redeemed by the Company for cash
at various redemption prices equal to the accreted value of the LYONs on the
respective redemption dates (aggregate cash redemption price of $28.4 million in
2001 and $27.4 million in 2002). The LYONs were redeemable, at the option of the
holder, in October 2002, at $636.27 per $1,000 principal amount (the issue price
plus accrued OID through such purchase date), or an aggregate of $27.4 million
based on the number of LYONs outstanding at December 31, 2001, and accordingly
the LYONs were classified as a current liability at December 31, 2001. At
December 31, 2001, the net carrying value of the LYONs per $1,000 principal
amount at maturity was $592, and the quoted market price of the LYONs was $580.
Other Valhi indebtedness consisted of an unsecured $2.9 million note
payable bearing interest at 6.2% and due in November 2002. Such note was issued
in connection with Valhi's purchase of 90,000 shares of Tremont Corporation
common stock from an officer of Tremont in 2000. See Note 18.
NL and its subsidiaries. In June 2002, Kronos International ("KII"), which
conducts NL's TiO2 operations in Europe, issued euro 285 million principal
amount ($280 million when issued) of its 8.875% Senior Secured Notes due 2009.
The KII Senior Secured Notes are collateralized by a pledge of 65% of the common
stock or other ownership interests of certain of KII's first-tier operating
subsidiaries. The KII Senior Secured Notes are issued pursuant to an indenture
which contains a number of covenants and restrictions which, among other things,
restricts the ability of KII and its subsidiaries to incur debt, incur liens,
pay dividends or merge or consolidate with, or sell or transfer all or
substantially all of their assets to, another entity. The KII Senior Secured
Notes are redeemable, at KII's option, on or after December 30, 2005 at
redemption prices ranging from 104.437% of the principal amount, declining to
100% on or after December 30, 2008. In addition, on or before June 30, 2005, KII
may redeem up to 35% of its Senior Secured Notes with the net proceeds of a
qualified public equity offering at 108.875% of the principal amount. In the
event of a change of control of KII, as defined, KII would be required to make
an offer to purchase its Senior Secured Notes at 101% of the principal amount.
KII would also be required to make an offer to purchase a specified portion of
its Senior Secured Notes at par value in the event KII generates a certain
amount of net proceeds from the sale of assets outside the ordinary course of
business, and such net proceeds are not otherwise used for specified purposes
within a specified time period. At December 31, 2002, the quoted market price of
the KII Senior Notes was euro 1,010 per euro 1,000 principal amount.
Also in June 2002, KII's operating subsidiaries in Germany, Belgium and
Norway entered into a new euro 80 million revolving bank credit facility that
matures in June 2005. Borrowings under this facility were used in part to repay
and terminate Kronos' short-term non-U.S. bank credit agreements. Borrowings may
be denominated in euros, Norwegian kroner or U.S. dollars, and bear interest at
the applicable interbank market rate plus 1.75%. The facility also provides for
the issuance of letters of credit up to euro 5 million. The new KII bank credit
agreement is collateralized by the accounts receivable and inventories of the
borrowers, plus a limited pledge of all of the other assets of the Belgian
borrower. The new KII bank credit agreement contains certain restrictive
covenants which, among other things, restricts the ability of the borrowers to
incur debt, incur liens, pay dividends or merge or consolidate with, or sell or
transfer all or substantially all of their assets to, another entity. At
December 31, 2002, the equivalent of $27.1 million was outstanding (consisting
of euro 15 million and kroner 80 million in borrowings) at a weighted average
interest rate of 6.5%, and the equivalent of $54 million was available for
additional borrowing by the subsidiaries.
In September 2002, certain of NL's U.S. subsidiaries entered into a new $50
million revolving credit facility (nil outstanding at December 31, 2002) that
matures in September 2005. The facility is collateralized by the accounts
receivable, inventories and certain fixed assets of the borrowers. Borrowings
under this facility are limited to the lesser of $45 million or a
formula-determined amount based upon the accounts receivable and inventories of
the borrowers. Borrowings bear interest at either the prime rate or rates based
upon the eurodollar rate. The facility contains certain restrictive covenants
which, among other things, restricts the abilities of the borrowers to incur
debt, incur liens, pay dividends in certain circumstances, sell assets or enter
into mergers. At December 31, 2002, $30 million was available for borrowing
under the facility.
During 2000, NL redeemed $50 million principal amount of NL's Senior
Secured Notes with a 1.5% premium, using available cash on hand. In March 2002,
NL redeemed $25 million principal amount of the NL Senior Secured Notes at par
value, using available cash on hand. In addition, NL used a portion of the net
proceeds from the issuance of the KII Senior Secured Notes to redeem in full the
remaining $169 million principal amount of the NL Senior Secured Notes. In
accordance with the terms of the indenture governing the NL Senior Secured
Notes, on June 28, 2002, NL irrevocably placed on deposit with the NL Senior
Secured Note trustee funds in an amount sufficient to pay in full the redemption
price plus all accrued and unpaid interest due on the July 28, 2002 redemption
date. Immediately thereafter, NL was released from its obligations under such
indenture, the indenture was discharged and all collateral was released to NL.
Because NL had been released as the primary obligor under the indenture as of
June 30, 2002, the NL Senior Secured Notes were eliminated from the balance
sheet as of that date along with the funds placed on deposit with the trustee to
effect the July 28, 2002 redemption. NL recognized a loss on the early
extinguishment of debt of approximately $2 million in the second quarter of
2002, consisting primarily of the interest on the NL Senior Secured Notes for
the period from July 1 to July 28, 2002. Such loss is recognized as a component
of interest expense. At December 31, 2001, the quoted market price of the NL
Senior Secured Notes was $1,005 per $1,000 principal amount.
At December 31, 2001, notes payable consisted of 27 million of
euro-denominated borrowings and 200 million of Norwegian Krona-denominated
borrowings (aggregating $46 million) which bore interest at rates ranging from
3.8% to 7.3%.
CompX. At December 31, 2002, CompX had a $100 million unsecured revolving
bank credit facility which bore interest at rates (2.5% at December 31, 2002)
based upon the Eurodollar Rate. In January 2003, CompX replaced this facility
with a new $47.5 million secured facility. The new facility is collateralized by
substantially all of CompX's U.S. tangible assets as well as a pledge of at
least 65% of the ownership interests in CompX's first-tier foreign subsidiaries.
The new facility contains certain covenants and restrictions customary in
lending transactions of this type which, among other things, restricts the
ability of CompX and its subsidiaries to incur debt, incur liens, pay dividends
or merge or consolidate with, or transfer all or substantially all of their
assets, to another entity. In the event of a change of control of CompX, as
defined, the lenders would have the right to accelerate the maturity of the
facility. CompX would also be required under certain conditions to use the net
proceeds from the sale of assets outside the ordinary course of business to
reduce outstanding borrowings under the facility, and such a transaction would
also result in a permanent reduction of the size of the facility. At December
31, 2002, $16.5 million would have been available to CompX for additional
borrowing under the terms of the new facility.
Other indebtedness. At December 31, 2001 and 2002, the quoted market price
of Valcor's unsecured 9 5/8% Senior Notes due November 2003 was $1,006 and
$1,003 per $1,000 principal amount, respectively. Such Valcor Notes were
redeemed by Valcor in February 2003 at par value.
Aggregate maturities of long-term debt at December 31, 2002
Years ending December 31, Amount
(In thousands)
2003 $ 4,127
2004 334
2005 27,262
2006 31,177
2007 25
2008 and thereafter 546,942
--------
$609,867
Restrictions. Certain of the credit facilities described above require the
respective borrower to maintain minimum levels of equity, require the
maintenance of certain financial ratios, limit dividends and additional
indebtedness and contain other provisions and restrictive covenants customary in
lending transactions of this type. At December 31, 2002, the restricted net
assets of consolidated subsidiaries approximated $55 million.
At December 31, 2002, amounts available for the payment of Valhi dividends
pursuant to the terms of Valhi's revolving bank credit facility aggregated $.05
per Valhi share outstanding per quarter, plus an additional $9.5 million.
Note 11 - Accrued liabilities:
December 31,
2001 2002
---- ----
(In thousands)
Current:
Employee benefits .......................... $ 39,974 $ 43,534
Environmental costs ........................ 64,165 57,496
Deferred income ............................ 9,479 6,018
Interest ................................... 5,162 317
Other ...................................... 47,708 42,101
-------- --------
$166,488 $149,466
======== ========
Noncurrent:
Insurance claims and expenses .............. $ 19,182 $ 16,416
Employee benefits .......................... 8,616 10,409
Deferred income ............................ 1,333 1,875
Other ...................................... 3,511 1,941
-------- --------
$ 32,642 $ 30,641
======== ========
Note 12 - Other income, net:
Years ended December 31,
2000 2001 2002
---- ---- ----
(In thousands)
Securities earnings:
Dividends and interest ................... $ 40,250 $ 38,003 $ 34,344
Securities transactions, net ............. 40 47,009 6,413
--------- -------- --------
40,290 85,012 40,757
Legal settlement gains, net ................ 69,465 31,871 5,225
Insurance gain ............................. -- 16,190 --
Business interruption insurance ............ -- 7,222 --
Currency transactions, net ................. 6,383 1,824 4,859
Noncompete agreement income ................ 4,000 4,000 4,000
Disposal of property and equipment, net .... (1,178) 1,375 (261)
Pension curtailment/settlement gains ....... -- 116 677
Other, net ................................. 8,141 6,390 5,031
--------- -------- --------
$ 127,101 $154,000 $ 60,288
========= ======== ========
Interest and dividend income in 2000, 2001 and 2002 includes $22.7 million,
$23.6 million and $23.6 million, respectively, of dividend distributions
received from The Amalgamated Sugar Company LLC. See Note 5. Noncompete
agreement income relates to NL's agreement not to compete in the specialty
chemicals industry and is recognized in income ratably over the five-year
noncompete period ending in January 2003. The pension curtailment and settlement
gains are discussed in Note 17.
Net securities transactions gains in 2002 are comprised of (i) a $3.0
million unrealized gain related to the reclassification of 621,000 shares of
Halliburton common stock from available-for-sale to trading securities and (ii)
a $3.4 million gain relates to changes in the market value of the Halliburton
common stock classified as trading securities. Net securities transactions gains
in 2001 are comprised of (i) a $33.1 million realized gain related to LYONs
exchanges and the resulting disposition of a portion of the shares of
Halliburton common stock, (ii) a $13.7 million realized gain related to the sale
of 390,000 shares of Halliburton common stock in market transactions, (iii) a
$14.2 million unrealized gain related to the reclassification of 515,000
Halliburton shares from available-for-sale to trading securities, (iv) an $11.6
million unrealized loss related to changes in market value of the Halliburton
shares classified as trading securities and (v) a $2.3 million impairment charge
for an other than temporary decline in value of certain marketable securities
held by the Company. See Notes 5 and 10.
Securities transactions in 2000 include a $5.6 million gain related to
certain shares of common stock NL received pursuant to the demutualization of an
insurance company from which NL had purchased certain policies. Such shares,
valued by NL based upon the insurance company's initial public offering price of
$14.25 per share, were placed by NL in a trust, the assets of which may only be
used to pay for certain of NL's retiree benefits. The Company accounted for the
$5.6 million contribution of the insurance company's common stock to the trust
as a reduction of its accrued OPEB costs. See Note 17. Securities transactions
in 2000 also include a $5.7 million impairment charge for an other than
temporary decline in value of certain marketable securities held by the Company.
See Notes 5 and 10.
In 2000, NL recognized a $69.5 million net gain from legal settlements with
certain of its former insurance carriers. The settlements resolved court
proceedings in which NL sought reimbursement from the carriers for legal defense
expenditures and indemnity coverage for certain of its environmental remediation
expenditures. The gain is stated net of $3.1 million of commissions associated
with the settlements. In 2001 and 2002, NL recognized $11.7 million and $5.2
million, respectively, of net gains from legal settlements, of which $11.4
million in 2001 and all in 2002 relates to additional settlements with certain
of its former insurance carriers. Proceeds from substantially all of the 2000
and 2001 settlements were transferred by the carriers to special purpose trusts
formed by NL to pay for certain of its future remediation and other
environmental expenditures. At December 31, 2001 and 2002, restricted cash
equivalents and debt securities include an aggregate of $74 million and $61
million, respectively, held by such special purpose trusts.
In 2001, Waste Control Specialists recognized a $20.1 million net gain from
a legal settlement related to certain previously-reported litigation. Pursuant
to the settlement, Waste Control Specialists, among other things, received a
cash payment of approximately $20.1 million, net of attorney fees.
In March 2001, NL suffered a fire at its Leverkusen, Germany TiO2 facility.
Production at the facility's chloride-process plant returned to full capacity on
April 8, 2001. The facility's sulfate-process plant became approximately 50%
operational in September 2001, and became fully operational in late October
2001. The damages to property and the business interruption losses caused by the
fire were covered by insurance, but the effect on the financial results of the
Company on a quarter-to-quarter basis was impacted by the timing and amount of
insurance recoveries. Chemicals operating income in 2001 includes $27.3 million
of business interruption insurance recoveries losses caused by the Leverkusen
fire. Of such business interruption proceeds amount, $20.1 million was recorded
as a reduction of cost of sales to offset unallocated period costs that resulted
from lost production and the remaining $7.2 million, representing recovery of
lost margin, was recorded as other income. NL also recognized insurance
recoveries of $29.1 million in 2001 for property damage and related cleanup and
other extra costs, resulting in an insurance gain of $16.2 million as such
recoveries exceeded the carrying value of the property destroyed and the cleanup
and other extra expenses incurred.
Net gains from disposal of property and equipment in 2001 include a $2.2
million gain related to the sale/leaseback of CompX's manufacturing facility in
The Netherlands. Pursuant to the sale/leaseback, CompX sold the manufacturing
facility with a net carrying value of $8.2 million for $10.0 million cash
consideration in December 2001, and CompX simultaneously entered into a
leaseback of the facility with a nominal monthly rental for approximately 30
months. CompX has the option to extend the leaseback period for up to an
additional two years with monthly rentals of $40,000 to $100,000. CompX may
terminate the leaseback at any time without penalty. In addition to the cash
received up front, CompX included an estimate of the fair market value of the
monthly rental during the nominal-rental leaseback period as part of the sale
proceeds. A portion of the gain from the sale of the facility after transaction
costs, equal to the present value of the monthly rentals over the expected
leaseback period (including the fair market value of the monthly rental during
the nominal-rental leaseback period), has been deferred and will be amortized
into income over the expected leaseback period. CompX will recognize rental
expense over the leaseback period, including amortization of the prepaid rent
consisting of the estimated fair market value of the monthly rental during the
nominal-rental leaseback period.
Net gains from the disposal of property and equipment in 2002 includes $1.6
million related to the sale of certain real estate held by Tremont. Net currency
transaction gains in 2002 includes $6.3 million related to the extinguishment of
certain intercompany indebtedness of NL.
Note 13 - Minority interest:
December 31,
2001 2002
---- ----
(In thousands)
Minority interest in net assets:
NL Industries ............................ $ 68,566 $ 40,880
Tremont Corporation ...................... 32,610 26,911
CompX International ...................... 44,767 44,539
Subsidiaries of NL ....................... 7,208 8,516
-------- --------
$153,151 $120,846
Years ended December 31,
2000 2001 2002
---- ---- ----
(In thousands)
Minority interest in net earnings (losses):
NL Industries ...................... $ 30,727 $ 23,061 $ 6,331
Tremont Corporation ................ 2,071 (175) (4,151)
CompX International ................ 7,810 2,236 198
Subsidiaries of NL ................. 2,436 960 1,264
Subsidiaries of Tremont ............ 455 -- --
Subsidiaries of CompX .............. (3) -- --
-------- -------- -------
$ 43,496 $ 26,082 $ 3,642
======== ======== =======
Tremont Corporation. In February 2003, following completion of the merger
of Valhi and Tremont discussed in Note 3, the Company will no longer report
minority interest in Tremont's net assets or net earnings (losses).
Waste Control Specialists. Waste Control Specialists was formed by Valhi
and another entity in 1995. See Note 3. Waste Control Specialists assumed
certain liabilities of the other owner and such liabilities exceeded the
carrying value of the assets contributed by the other owner. Consequently, all
of Waste Control Specialists aggregate inception-to-date net losses have accrued
to the Company for financial reporting purposes, and all of Waste Control
Specialists future net income or net losses will also accrue to the Company
until Waste Control Specialists reports positive equity attributable to the
other owner. Accordingly, no minority interest in Waste Control Specialists' net
assets or net losses is reported at December 31, 2002.
Subsidiaries of NL. Minority interest in NL's subsidiaries relates
principally to NL's majority-owned environmental management subsidiary, NL
Environmental Management Services, Inc. ("EMS"). EMS was established in 1998, at
which time EMS contractually assumed certain of NL's environmental liabilities.
EMS' earnings are based, in part, upon its ability to favorably resolve these
liabilities on an aggregate basis. The shareholders of EMS, other than NL,
actively manage the environmental liabilities and share in 39% of EMS'
cumulative earnings. NL continues to consolidate EMS and provides accruals for
the reasonably estimable costs for the settlement of EMS' environmental
liabilities, as discussed in Note 19.
Note 14 - Stockholders' equity:
Shares of common stock
Issued Treasury Outstanding
(In thousands)
Balance at December 31, 1999 ......... 125,611 (10,545) 115,066
Issued ............................... 119 -- 119
Reacquired ........................... -- (1) (1)
Other ................................ -- (24) (24)
------- ------- --------
Balance at December 31, 2000 ......... 125,730 (10,570) 115,160
Issued ............................... 81 -- 81
------- ------- --------
Balance at December 31, 2001 ......... 125,811 (10,570) 115,241
Issued ............................... 350 -- 350
------- ------- --------
Balance at December 31, 2002 ......... 126,161 (10,570) 115,591
======= ======= ========
For financial reporting purposes, at December 31, 2002 treasury stock
includes the Company's proportional interest in 1.2 million Valhi shares held by
NL. However, under Delaware Corporation Law, 100% of a parent company's shares
held by a majority-owned subsidiary of the parent is considered to be treasury
stock. As a result, Valhi common shares outstanding for financial reporting
purposes differ from those outstanding for legal purposes.
Valhi options. Valhi has an incentive stock option plan that provides for
the discretionary grant of, among other things, qualified incentive stock
options, nonqualified stock options, restricted common stock, stock awards and
stock appreciation rights. Up to five million shares of Valhi common stock may
be issued pursuant to this plan. Options are generally granted at a price not
less than fair market value on the date of grant, generally vest ratably over a
five-year period beginning one year from the date of grant and expire 10 years
from the date of grant. Restricted stock, when granted, is generally forfeitable
unless certain periods of employment are completed and held in escrow in the
name of the grantee until the restriction period expires. No stock appreciation
rights have been granted.
Outstanding options at December 31, 2002 represent approximately 1% of
Valhi's outstanding shares at that date and expire at various dates through
2012, with a weighted-average remaining term of 4.9 years. At December 31, 2002,
options to purchase 894,000 Valhi shares were exercisable at prices ranging from
$4.96 to $12.06 per share, or an aggregate amount payable upon exercise of $7.5
million. Of such exercisable options at December 31, 2002, 434,000 are
exercisable at various dates through 2011 at prices lower than the Company's
December 31, 2002 market price of $8.30 per share. At December 31, 2002, options
to purchase 149,000 shares are scheduled to become exercisable in 2003, and an
aggregate of 4.1 million shares were available for future grants.
The following table sets forth changes in outstanding options during the
past three years under all Valhi option plans in effect during such periods.
Amount
Exercise payable
price per upon
Shares share exercise
(In thousands, except
per share amounts)
Outstanding at December 31, 1999 2,965 $ 4.76-$12.16 $20,814
Granted 248 11.00- 11.06 2,728
Exercised (116) 4.76- 12.00 (848)
Canceled (415) 4.76- 12.16 (2,133)
------ ------------ -------
Outstanding at December 31, 2000 2,682 4.96- 12.06 20,561
Granted 8 10.50 84
Exercised (76) 4.96- 12.00 (591)
Canceled (230) 5.36- 12.00 (1,410)
------ ------------ -------
Outstanding at December 31, 2001 2,384 4.96- 12.06 18,644
Granted 8 12.45 100
Exercised (346) 4.96- 12.00 (2,564)
Canceled (865) 6.38 (5,517)
------ ----- -------
Outstanding at December 31, 2002 1,181 $ 4.96-$12.45 $10,663
====== ============= =======
Stock option plans of subsidiaries and affiliates. NL, CompX and TIMET each
maintain plans which provide for the grant of options to purchase their
respective common stocks. Provisions of these plans vary by company. Outstanding
options to purchase common stock of NL, CompX, Tremont and TIMET at December 31,
2002 are summarized below.
Amount
Exercise payable
price per upon
Shares share exercise
(In thousands, except
per share amounts)
NL Industries 1,261 $ 8.69-$ 21.97 $22,059
CompX 764 10.00- 20.00 12,995
TIMET 140 16.60- 353.10 26,677
Other. The pro forma information included in Note 1, required by SFAS No.
123, "Accounting for Stock-Based Compensation," as amended, is based on an
estimation of the fair value of options issued subsequent to January 1, 1995.
The weighted average fair value of Valhi options granted during 2000 was $5.43
per share. The aggregate fair value of the nominal number of Valhi options
granted during 2001 and 2002 was not material. The fair values of such options
were calculated using the Black-Scholes stock option valuation model with the
following weighted-average assumptions: stock price volatility of 39%, risk-free
rate of return of 6.8%, dividend yield of 1.8% and an expected term of 10 years.
The Black-Scholes model was not developed for use in valuing employee stock
options, but was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In
addition, it requires the use of subjective assumptions including expectations
of future dividends and stock price volatility. Such assumptions are only used
for making the required fair value estimate and should not be considered as
indicators of future dividend policy or stock price appreciation. Because
changes in the subjective assumptions can materially affect the fair value
estimate, and because employee stock options have characteristics significantly
different from those of traded options, the use of the Black-Scholes
option-pricing model may not provide a reliable estimate of the fair value of
employee stock options. The pro forma impact on net income and basic earnings
per share disclosed in Note 1 is not necessarily indicative of future effects on
net income or earnings per share.
Note 15 - Financial instruments:
December 31,
2001 2002
---------------- ---------------
Carrying Fair Carrying Fair
amount Value amount value
(In millions)
Cash, cash equivalents and restricted cash
equivalents .............................. $ 222.4 $ 222.4 $ 149.3 $ 149.3
Marketable securities:
Current ................................. $ 18.5 $ 18.5 $ 9.7 $ 9.7
Noncurrent .............................. 186.5 186.5 179.6 179.6
Loan to Snake River Sugar Company ......... $ 80.0 $ 96.4 $ 80.0 $ 108.7
Notes payable and long-term debt (excluding
capitalized leases):
Publicly-traded fixed rate debt:
Valhi LYONs ........................... $ 25.5 $ 25.0 $ -- $ --
NL Senior Secured Notes ............... 194.0 194.9 -- --
Valcor Senior Notes ................... 2.4 2.4 2.4 2.4
KII Senior Secured Notes .............. -- -- 296.9 299.9
Snake River Sugar Company loans ......... 250.0 250.0 250.0 250.0
Other fixed-rate debt ................... 3.7 3.7 .4 .4
Variable rate debt ...................... 132.7 132.7 58.1 58.1
Minority interest in:
NL common stock ......................... $ 68.6 $ 132.6 $ 40.9 $ 124.8
CompX common stock ...................... 44.8 61.3 44.5 39.7
Tremont common stock .................... 32.6 36.7 26.9 37.8
Valhi common stockholders' equity ......... $ 622.3 $1,463.6 $ 614.8 $ 958.4
The fair value of the Company's publicly-traded marketable securities and
debt, minority interest in NL Industries, CompX and Tremont and Valhi's common
stockholders' equity are all based upon quoted market prices. The fair value of
the Company's investment in The Amalgamated Sugar Company LLC is based upon the
$250 million redemption price of such investment, less the $80 million
outstanding balance of the Company's loan to Snake River Sugar Company. The fair
value of the Company's fixed-rate loan to Snake River Sugar Company is based
upon relative changes in market interest rates since the interest rates were
fixed. The fair value of Valhi's fixed-rate nonrecourse loans from Snake River
Sugar Company is based upon the $250 million redemption price of Valhi's
investment in the Amalgamated Sugar Company LLC, which investment collateralizes
such nonrecourse loans. Fair values of variable interest rate debt and other
fixed-rate debt are deemed to approximate book value. See Notes 5 and 10. The
estimated fair value of CompX's foreign currency forward contracts at December
31, 2002 is insignificant.
Note 16 - Income taxes:
Years ended December 31,
2000 2001 2002
---- ---- ----
(In millions)
Components of pre-tax income:
United States:
Contran Tax Group ............................. $(20.7) $ 31.5 $(60.2)
NL tax group .................................. 71.4 -- --
CompX tax group ............................... 7.6 (1.0) (1.9)
Tremont tax group ............................. (10.5) -- --
------ ------ ------
47.8 30.5 (62.1)
Non-U.S. subsidiaries ........................... 166.3 142.0 60.8
------ ------ ------
$214.1 $172.5 $ (1.3)
====== ====== ======
Expected tax expense (benefit), at U.S. ...........
federal statutory income tax rate of 35% ......... $ 74.9 $ 60.4 $ (.4)
Non-U.S. tax rates ................................ (7.1) (4.8) (3.8)
Incremental U.S. tax and rate differences
on equity in earnings of non-tax group
companies ........................................ 17.7 8.0 (1.5)
Change in NL's and Tremont's deferred income
tax valuation allowance, net ..................... .7 (20.9) .4
Resolution of German income tax audits ............ (5.5) -- --
Change in German income tax law ................... 4.4 -- --
Change in Belgian income tax law .................. -- -- (2.7)
U.S. state income taxes, net ...................... 2.1 2.5 (1.8)
No tax benefit for goodwill amortization .......... 5.4 5.8 --
NL tax contingency reserve adjustment, net ........ -- 1.0 2.9
Other, net ........................................ 1.3 1.2 .8
------ ------ ------
$ 93.9 $ 53.2 $ (6.1)
====== ====== ======
Components of income tax expense (benefit):
Currently payable (refundable):
U.S. federal and state ........................ $ (3.4) $ 11.2 $ (9.3)
Non-U.S ....................................... 54.5 34.3 12.8
------ ------ ------
51.1 45.5 3.5
------ ------ ------
Deferred income taxes (benefit):
U.S. federal and state ........................ 39.9 21.0 (9.7)
Non-U.S ....................................... 2.9 (13.3) .1
------ ------ ------
42.8 7.7 (9.6)
------ ------ ------
$ 93.9 $ 53.2 $ (6.1)
====== ====== ======
Comprehensive provision for income
taxes (benefit) allocable to:
Net income ...................................... $ 93.9 $ 53.2 $ (6.1)
Other comprehensive income:
Marketable securities ......................... 3.9 (24.7) (1.6)
Currency translation .......................... (14.9) (2.3) 3.9
Pension liabilities ........................... .8 (3.9) (16.4)
------ ------ ------
$ 83.7 $ 22.3 $(20.2)
====== ====== ======
The components of the net deferred tax liability at December 31, 2001 and
2002, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables. At December 31, 2001 and
2002, substantially all of the deferred tax valuation allowance relates to NL
tax jurisdictions, principally Germany.
December 31,
2001 2002
----------------- -----------------
Assets Liabilities Assets Liabilities
(In millions)
Tax effect of temporary differences related to:
Inventories .......................... $ 4.2 $ (3.5) $ 4.4 $ (4.0)
Marketable securities ................ -- (56.4) -- (65.5)
Mining properties .................... -- (1.2) -- (1.3)
Property and equipment ............... 43.2 (94.1) 43.5 (100.3)
Accrued OPEB costs ................... 19.0 -- 17.8 --
Accrued environmental liabilities and
other deductible differences ........ 73.7 -- 73.9 --
Other taxable differences ............ -- (167.8) -- (185.3)
Investments in subsidiaries and
affiliates not members of the
Contran Tax Group ................... 12.4 (38.8) 30.2 (29.7)
Tax loss and tax credit carryforwards 119.2 -- 168.5 --
Valuation allowance .................... (163.3) -- (195.5) --
------ ------ ------ ------
Adjusted gross deferred tax assets
(liabilities) ...................... 108.4 (361.8) 142.8 (386.1)
Netting of items by tax jurisdiction ... (94.7) 94.7 (126.8) 126.8
------ ------ ------ ------
13.7 (267.1) 16.0 (259.3)
Less net current deferred tax asset
(liability) ........................... 13.0 (1.8) 14.1 (3.6)
------ ------ ------ ------
Net noncurrent deferred tax asset
(liability) ....................... $ .7 $(265.3) $ 1.9 $(255.7)
====== ====== ====== ======
Years ended December 31,
2000 2001 2002
---- ---- ----
(In millions)
Increase (decrease) in valuation allowance:
Increase in certain deductible temporary
differences which the Company believes do
not meet the "more-likely-than-not"
recognition criteria ............................ $ 3.3 $ 3.8 $ 3.8
Recognition of certain deductible tax
attributes for which the benefit had not
previously been recognized under the
"more-likely-than-not" recognition criteria ..... (2.6) (24.7) (3.4)
Foreign currency translation ..................... (15.7) (7.5) 21.6
Offset to the change in gross deferred
income tax assets due principally to
redeterminations of certain tax attributes
and implementation of certain tax
planning strategies ............................. (25.0) (3.7) 10.1
Consolidation of Tremont Corporation
for income tax purposes ......................... (12.1) -- --
Other, net ....................................... (.9) .4 .1
----- ----- -----
$(53.0) $(31.7) $32.2
===== ===== =====
A reduction in the German "base" income tax rate from 30% to 25% was
enacted in October 2000 and became effective in January 2001. This reduction in
the German income tax rate resulted in a $4.4 million increase in the Company's
income tax expense in 2000 because the Company had recognized a net deferred
income tax asset with respect to Germany. A reduction in the Belgian income tax
rate from 40% to 34% was enacted in December 2002 and became effective in
January 2003. This reduction in the Belgian income tax rate resulted in a $2.7
million decrease in the Company's income tax expense in 2002 because the Company
had previously recognized a net deferred income tax liability with respect to
Belgium.
In 2001, NL completed a restructuring of its German subsidiaries, and as a
result NL recognized a $17.6 million net income tax benefit. This benefit is
comprised of a $23.2 million decrease in NL's deferred income tax asset
valuation allowance due to a change in estimate of NL's ability to utilize
certain German income tax attributes that did not previously meet the
"more-likely-than-not" recognition criteria, offset by $5.6 million of
incremental U.S. taxes on undistributed earnings of certain foreign
subsidiaries.
Certain of the Company's U.S. and non-U.S. tax returns are being examined
and tax authorities have or may propose tax deficiencies, including non-income
related items and interest. For example, NL's and EMS' 1998 U.S. federal income
tax returns are currently being examined by the U.S. tax authorities, and NL and
EMS have granted extensions of the statute of limitations for assessments until
September 30, 2003. Based on the examination to date, NL anticipates that the
U.S. tax authorities may propose a substantial tax deficiency. Also, NL has
received preliminary tax assessments for the years 1991 to 1997 from the Belgian
tax authorities proposing tax deficiencies, including related interest, of
approximately euro 10 million ($11 million at December 31, 2002). NL has filed
protests to the assessments for the years 1991 to 1997. NL is in discussions
with the Belgian tax authorities and believes that a significant portion of the
assessments is without merit. In addition, the Norwegian tax authorities have
notified NL of their intent to assess tax deficiencies of approximately kroner
12 million ($2 million at December 31, 2002) relating to the years 1998 through
2000. NL has objected to this proposed assessment in a written response to the
Norwegian tax authorities.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in court and tax
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on its consolidated
financial position, results of operations or liquidity.
At December 31, 2002, (i) NL had the equivalent of $414 million of German
income tax loss carryforwards with no expiration date, (ii) NL had $2.9 million
of U.S. net operating loss carryforwards expiring in 2019 and $7.4 million of
alternative minimum tax ("AMT") credit carryforwards with no expiration date,
(iii) Tremont had $5.1 million of U.S. net operating loss carryforwards expiring
in 2018 through 2020 and $.3 million of AMT credit carryforwards with no
expiration date, (iv) CompX had the equivalent of $6 million of net operating
loss carryforwards in The Netherlands with no expiration date and $8 million of
U.S. net operating loss carryforwards expiring in 2007 through 2018 and (v)
Valhi and its subsidiaries who are members of the Contran Tax Group had an
aggregate of $34.2 million of U.S. net operating loss carryforwards expiring in
2021 and 2022. At December 31, 2002, the U.S. tax attribute carryforwards of NL
and Tremont may only be used to offset future taxable income of the respective
company and are not available to offset future taxable income of other members
of the Contran Tax Group, and the U.S. net operating loss carryforwards of CompX
may only be used to offset future taxable income of an acquired subsidiary of
CompX and are limited in utilization to approximately $400,000 per year.
Note 17 - Employee benefit plans:
Defined benefit plans. The Company maintains various defined benefit
pension plans. Variances from actuarially assumed rates will result in increases
or decreases in accumulated pension obligations, pension expense and funding
requirements in future periods. The funded status of the Company's defined
benefit pension plans, the components of net periodic defined benefit pension
cost related to the Company's consolidated business segments and charged to
continuing operations and the rates used in determining the actuarial present
value of benefit obligations are presented in the tables below. Effective
January 1, 2001, approximately 50 individuals previously compensated by Valhi
commenced being compensated by Contran. Accrued defined benefit pension costs
related to such individuals at December 31, 2000 were approximately $225,000.
During 2001, Valhi made a cash payment to Contran of $225,000, and the plan
assets and liabilities related to such individuals were transferred to Contran.
Effective January 1, 2001, CompX ceased providing future defined pension
benefits under its plan in The Netherlands, resulting in a curtailment gain of
$116,000 in 2001. Certain obligations related to the terminated plan were not
been fully settled until 2002 and were reflected in accrued defined benefit
pension costs at December 31, 2001. Upon settling the remaining obligations,
CompX recognized a $677,000 settlement gain in 2002. See Note 12.
Years ended December 31,
2001 2002
---- ----
(In thousands)
Change in projected benefit obligations ("PBO"):
Benefit obligations at beginning of the year ....... $ 281,540 $ 290,329
Service cost ....................................... 3,974 4,538
Interest cost ...................................... 17,428 18,387
Participant contributions .......................... 1,004 1,057
Actuarial losses ................................... 10,359 133
Plan amendments .................................... 1,819 --
Curtailment gain ................................... (116) --
Change in foreign exchange rates ................... (3,385) 37,013
Benefits paid ...................................... (17,432) (20,005)
Transfer of obligations to Contran ................. (4,862) --
--------- ---------
Benefit obligations at end of the year ......... $ 290,329 $ 331,452
========= =========
Change in plan assets:
Fair value of plan assets at beginning of the year . $ 243,213 $ 230,345
Actual return on plan assets ....................... 5,470 (4,376)
Employer contributions ............................. 7,577 9,558
Participant contributions .......................... 1,004 1,057
Change in foreign exchange rates ................... (6,244) 28,076
Benefits paid ...................................... (17,432) (20,005)
Transfer of plan assets to Contran ................. (3,243) --
--------- ---------
Fair value of plan assets at end of year ....... $ 230,345 $ 244,655
========= =========
Funded status at end of the year:
Plan assets less than PBO .......................... $ (59,984) $ (86,797)
Unrecognized actuarial losses ...................... 53,383 82,830
Unrecognized prior service cost .................... 4,371 4,881
Unrecognized net transition obligations ............ 4,269 5,011
--------- ---------
$ 2,039 $ 5,925
========= =========
Amounts recognized in the balance sheet:
Prepaid pension costs .............................. $ 18,411 $ 17,572
Unrecognized net pension obligations ............... 5,901 5,561
Accrued pension costs:
Current .......................................... (6,241) (7,027)
Noncurrent ....................................... (33,823) (54,930)
Accumulated other comprehensive income ............. 17,791 44,749
--------- ---------
$ 2,039 $ 5,925
========= =========
December 31,
Rate 2000 2001 2002
---- ---- ---- ----
Discount 4.0% - 7.8% 5.8% - 7.3% 5.5% - 7.0%
Increase in future compensation levels 3.0% - 4.5% 2.8% - 4.5% 2.5% - 4.5%
Long-term return on assets 4.0% -10.0% 6.8% -10.0% 6.8% - 10.0%
Years ended December 31,
2000 2001 2002
---- ---- ----
(In thousands)
Net periodic pension cost:
Service cost benefits ...................... $ 4,368 $ 3,974 $ 4,538
Interest cost on PBO ....................... 17,297 17,428 18,387
Expected return on plan assets ............. (17,832) (18,386) (18,135)
Amortization of prior service cost ......... 258 201 307
Amortization of net transition obligations . 532 509 515
Recognized actuarial losses ................ 369 703 1,223
-------- -------- --------
$ 4,992 $ 4,429 $ 6,835
======== ======== ========
The projected benefit obligations, accumulated benefit obligations and fair
value of plan assets for all defined benefit pension plans with accumulated
benefit obligations in excess of fair value of plan assets were $281 million,
$258 million and $197 million, respectively, at December 31, 2002 (2001 - $257
million, $235 million and $197 million, respectively). At December 31, 2001 and
2002, approximately 69% and 71%, respectively, of such unfunded amount relates
to NL's non-U.S. plans, and most of the remainder relates to certain of NL's
U.S. plans.
Defined contribution plans. The Company maintains various defined
contribution pension plans with Company contributions based on matching or other
formulas. Defined contribution plan expense related to the Company's
consolidated business segments approximated $3.4 million in 2000, $2.5 million
in 2001 and $2.1 million in 2002.
Postretirement benefits other than pensions. Certain subsidiaries currently
provide certain health care and life insurance benefits for eligible retired
employees. At both December 31, 2001 and 2002, approximately 61% of the
Company's aggregate accrued OPEB costs relates to NL, and substantially all of
the remainder relates to Tremont. Based on communications with a certain
insurance provider of certain retiree benefits of NL, and consultations with
NL's actuaries, NL has been released from certain life insurance retiree benefit
obligations as of December 31, 2002 through the use of an equal amount of plan
assets.
The components of the periodic OPEB cost and accumulated OPEB obligations
and the rates used in determining the actuarial present value of benefit
obligations are presented in the tables below. Variances from
actuarially-assumed rates will result in additional increases or decreases in
accumulated OPEB obligations, net periodic OPEB cost and funding requirements in
future periods. At December 31, 2002, the expected rate of increase in future
health care costs ranges from 9% to 11.4% in 2003, declining to rates of between
4.25% to 5.5% in 2010 and thereafter. If the health care cost trend rate was
increased (decreased) by one percentage point for each year, OPEB expense would
have increased by $.2 million (decreased by $.2 million) in 2002, and the
actuarial present value of accumulated OPEB obligations at December 31, 2002
would have increased by $2.9 million (decreased by $2.7 million).
Years ended December 31,
2001 2002
---- ----
(In thousands)
Change in accumulated OPEB obligations:
Obligations at beginning of the year ............. $ 53,942 $ 50,688
Service cost ..................................... 94 103
Interest cost .................................... 3,572 3,030
Actuarial losses (gains) ......................... (230) 6,714
Release of benefit obligations ................... -- (5,778)
Plan asset reimbursements ........................ 1,197 --
Change in foreign exchange rates ................. (145) 32
Benefits paid .................................... (7,742) (5,923)
-------- --------
Obligations at end of the year ................... $ 50,688 $ 48,866
======== ========
Change in plan assets:
Fair value of plan assets at beginning
of the year ..................................... $ 11,842 $ 6,400
Actual return on plan assets ..................... 460 (27)
Employer contributions ........................... 1,840 5,328
Release of benefit obligations ................... -- (5,778)
Benefits paid .................................... (7,742) (5,923)
-------- --------
Fair value of plan assets at end of the year ..... $ 6,400 $ --
======== ========
Funded status at end of the year:
Plan assets less than benefit obligations ........ $(44,288) $(48,866)
Unrecognized net actuarial losses (gains) ........ (2,522) 4,284
Unrecognized prior service credit ................ (9,551) (7,034)
-------- --------
$(56,361) $(51,616)
======== ========
Accrued OPEB costs recognized in the
balance sheet:
Current .......................................... $ (6,215) $ (6,142)
Noncurrent ....................................... (50,146) (45,474)
-------- --------
$(56,361) $(51,616)
======== ========
Years ended December 31,
2000 2001 2002
---- ---- ----
(In thousands)
Net periodic OPEB cost (credit):
Service cost ............................... $ 84 $ 94 $ 103
Interest cost .............................. 3,828 3,572 3,030
Expected return on plan assets ............. (521) (773) (3)
Amortization of prior service credit ....... (2,516) (2,516) (2,516)
Recognized actuarial losses (gains) ........ 24 (123) (59)
------- ------- -------
$ 899 $ 254 $ 555
======= ======= =======
December 31,
Rate 2000 2001 2002
---- ---- ---- ----
Discount 7.3% 7.0% 6.3% - 6.5%
Increase in future compensation levels 6.0% 6.0% 6.0%
Long-term return on assets 7.7% 7.7% 6.0%
Note 18 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties, and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. The Company
continuously considers, reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business, tax and other objectives then relevant, it is possible that the
Company might be a party to one or more such transactions in the future.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
Receivables from and payables to affiliates are summarized in the table
below.
December 31,
2001 2002
---- ----
(In thousands)
Current receivables from affiliates:
Income taxes receivable from Contran ............. $ -- $ 3,481
TIMET ............................................ 677 84
Other ............................................ 167 382
------- -------
$ 844 $ 3,947
======= =======
Noncurrent receivable from affiliate -
loan to Contran family trust ..................... $20,000 $18,000
======= =======
Current payables to affiliates:
Valhi demand loan from Contran ................... $24,574 $11,171
Income taxes payable to Contran .................. 6,410 --
Louisiana Pigment Company ........................ 6,362 7,614
Contran - trade items ............................ 501 1,292
TIMET ............................................ 286 32
Other ............................................ 15 13
------- -------
$38,148 $20,122
From time to time, loans and advances are made between the Company and
various related parties, including Contran, pursuant to term and demand notes.
These loans and advances are entered into principally for cash management
purposes. When the Company loans funds to related parties, the lender is
generally able to earn a higher rate of return on the loan than the lender would
earn if the funds were invested in other instruments. While certain of such
loans may be of a lesser credit quality than cash equivalent instruments
otherwise available to the Company, the Company believes that it has evaluated
the credit risks involved, and that those risks are reasonable and reflected in
the terms of the applicable loans. When the Company borrows from related
parties, the borrower is generally able to pay a lower rate of interest than the
borrower would pay if it borrowed from other parties.
In 2001, EMS, NL's majority-owned environmental management subsidiary,
entered into a $25 million revolving credit facility with one of the family
trusts discussed in Note 1 ($18 million outstanding at December 31, 2002). The
loan bears interest at prime, is due on demand with 60 days notice and is
collateralized by certain shares of Contran's Class A common stock and Class E
cumulative preferred stock held by the trust. The value of the collateral is
dependent, in part, on the value of the Company as Contran's beneficial
ownership interest in the Company is one of Contran's more substantial assets.
The terms of this loan were approved by special committees of both NL's and EMS'
respective board of directors composed of independent directors. At December 31,
2002, $7 million is available for borrowing by the family trust, and the loan
has been classified as a noncurrent asset because EMS does not presently intend
to demand repayment within the next 12 months.
During 2000, 2001 and 2002, Valhi borrowed varying amounts from Contran
pursuant to the terms of a demand note. Such unsecured borrowings bear interest
at a rate of prime less .5%.
Interest income on all loans to related parties was $.3 million in 2000,
$.9 million in 2001 and $1.0 million in 2002. Interest expense on all loans from
related parties was $1.3 million in 2000, $1.4 million in 2001 and $.9 million
in 2002.
Payables to Louisiana Pigment Company are primarily for the purchase of
TiO2 (see Note 7). Purchases in the ordinary course of business from the
unconsolidated TiO2 manufacturing joint venture are disclosed in Note 7.
Under the terms of various intercorporate services agreements ("ISAs")
entered into between the Company and various related parties, including Contran,
employees of one company will provide certain management, tax planning,
financial and administrative services to the other company on a fee basis. Such
charges are based upon estimates of the time devoted by the employees of the
provider of the services to the affairs of the recipient, and the compensation
of such persons. Because of the large number of companies affiliated with
Contran, the Company believes it benefits from cost savings and economies of
scale gained by not having certain management, financial and administrative
staffs duplicated at each entity, thus allowing certain individuals to provide
services to multiple companies but only be compensated by one entity. These ISA
agreements are reviewed and approved by the applicable independent directors of
the companies that are parties to the agreements.
The net ISA fees charged by Contran to the Company aggregated approximately
$2.6 million in 2000, $8.5 million in 2001 and $9.6 million in 2002. Effective
July 1, 2000, three individuals who had previously been compensated by Valhi
commenced to be compensated by Contran, and effective January 1, 2001,
approximately 50 additional individuals who had previously been compensated by
Valhi also commenced to be compensated by Contran. The increase in the net ISA
fees charged by Contran from 2000 to 2001, was due principally to these changes.
NL has an ISA with TIMET whereby NL provides certain services to TIMET for
approximately $300,000 in each of 2000, 2001 and 2002. TIMET has an ISA with
Tremont whereby TIMET provides certain services to Tremont for $300,000 in 2000,
$400,000 in each of 2001 and 2002. Certain other subsidiaries of the Company are
also parties to similar ISAs among themselves, and expenses associated with
these agreements are eliminated in Valhi's consolidated financial statements.
Certain of the Company's insurance coverages that were reinsured in 2000,
2001 and 2002 were arranged for and brokered by EWI Re, Inc. Parties related to
Contran own all of the outstanding common stock of EWI. Through December 31,
2000, a son-in-law of Harold C. Simmons managed the operations of EWI.
Subsequent to December 31, 2000, and pursuant to an agreement that, as amended,
may be terminated with 90 days written notice by either party, such son-in-law
provides advisory services to EWI as requested by EWI, for which such son-in-law
is paid $11,875 per month and receives certain other benefits under EWI's
benefit plans. Such son-in-law is also currently Chairman of the Board of EWI.
The Company generally does not compensate EWI directly for insurance, but
understands that, consistent with insurance industry practice, EWI receives a
commission for its services from the insurance underwriters.
Through January 2002, an entity controlled by one of Harold C. Simmons'
daughters owned a majority of EWI, and Contran owned all or substantially all of
the remainder of EWI. In January 2002, NL purchased EWI from its previous owners
for an aggregate cash purchase price of approximately $9 million, and EWI became
a wholly-owned subsidiary of NL. The purchase was approved by a special
committee of NL's board of directors consisting of two of its independent
directors, and the purchase price was negotiated by the special committee based
upon its consideration of relevant factors, including but not limited to due
diligence performed by independent consultants and an appraisal of EWI conducted
by an independent third party selected by the special committee.
Basic Management, Inc., among other things, provides utility services
(primarily water distribution, maintenance of a common electrical facility and
sewage disposal monitoring) to TIMET and other manufacturers within an
industrial complex located in Nevada. The other owners of BMI are generally the
other manufacturers located within the complex. Power transmission and sewer
services are provided on a cost reimbursement basis, similar to a cooperative,
while water delivery is currently provided at the same rates as are charged by
BMI to an unrelated third party. Amounts paid by TIMET to BMI for these utility
services were $1.6 million in 2000, $1.5 million in each of 2001 and 2002. TIMET
also paid BMI an electrical facilities usage fee of $1.3 million in each of
2000, 2001 and 2002. The $1.3 million annual fee continues through 2004,
declines to $600,000 in 2005 and $500,000 annually for 2006 through 2009, and
then terminates completely in January 2010.
During 2001, Tremont paid BMI $600,000 pursuant to an agreement in which
Tremont and other owners of BMI agreed to cover the costs of certain land
improvements made by BMI to the land owned by Tremont and other BMI owners. The
cost of the land improvement was divided among the companies based on each
company's proportional share in the improved acreage.
During 2000, Valhi purchased 90,000 shares of Tremont common stock from an
officer of Tremont for $2.9 million and 1,700 shares of its common stock from an
employee of Valhi for $19,000. During 2000 and 2002, NL purchased approximately
449,200 and 52,200, shares of its common stock, respectively, from certain of
its officers and directors, in part in connection with the exercise of certain
options to purchase NL common stock held by such officers and directors, at a
net cost to NL (after considering the proceeds to NL from the exercise of such
options) of approximately $7.7 million and $500,000, respectively. All of such
shares of Tremont, Valhi and NL common stock purchased had been held by the
respective owner for at least six months, and all of such purchases were valued
at market prices on the respective date of purchase. See Notes 3 and 10.
COAM Company is a partnership which has sponsored research agreements with
the University of Texas Southwestern Medical Center at Dallas to develop and
commercially market a safe and effective treatment for arthritis (the "Arthritis
Research Agreement") and to develop and commercially market patents and
technology resulting from a cancer research program (the "Cancer Research
Agreement"). At December 31, 2002, COAM partners are Contran, Valhi and another
Contran subsidiary. Harold C. Simmons is the manager of COAM. The Arthritis
Research Agreement, as amended, provides for payments by COAM of up to $1.2
million over the next two years and the Cancer Research Agreement, as amended,
provides for funds of up to $9.3 million over the next eight years. Funding
requirements pursuant to the Arthritis and Cancer Research Agreements are
without recourse to the COAM partners and the partnership agreement provides
that no partner shall be required to make capital contributions. Capital
contributions are expensed as paid. The Company's contributions to COAM were nil
in each of the past three years, and the Company does not currently expect it
will make any capital contributions to COAM in 2003.
Amalgamated Research, Inc., a wholly-owned subsidiary of the Company,
conducts certain research and development activities within and outside the
sweetener industry for The Amalgamated Sugar Company LLC and others. Amalgamated
Research has also granted to The Amalgamated Sugar Company LLC a non-exclusive,
perpetual royalty-free license to use all currently existing or hereafter
developed technology which is applicable to sugar operations and provides for
certain royalties to The Amalgamated Sugar Company from future sales or licenses
of the subsidiary's technology. Research and development services charged to The
Amalgamated Sugar Company LLC were $764,000 in 2000, $828,000 in 2001 and
$849,000 in 2002. The Amalgamated Sugar Company LLC also provides certain
administrative services to Amalgamated Research. The cost of such services
provided by the LLC, based upon estimates of the time devoted by employees of
the LLC to the affairs of Amalgamated Research, and the compensation of such
persons, is netted against the agreed-upon research and development services fee
paid by the LLC to Amalgamated Research.
Note 19 - Commitments and contingencies:
Lead pigment litigation. Since 1987, NL, other former manufacturers of lead
pigments for use in paint and the Lead Industries Association have been named as
defendants in various legal proceedings seeking damages for personal injury,
property damage and government expenditures allegedly caused by the use of
lead-based paints. Certain of these actions have been filed by or on behalf of
states or large United States cities or their public housing authorities, school
districts and certain others have been asserted as class actions. These legal
proceedings seek recovery under a variety of theories, including negligent
product design, failure to warn, breach of warranty, conspiracy/concert of
action, enterprise liability, market share liability, intentional tort, and
fraud and misrepresentation.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and asserted health concerns associated
with the use of lead-based paints, including damages for personal injury,
contribution and/or indemnification for medical expenses, medical monitoring
expenses and costs for educational programs. Most of these legal proceedings are
in various pre-trial stages; some are on appeal.
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 not accrued any amounts for the pending lead pigment and
lead-based paint litigation. Liability that may result, if any, cannot
reasonably be estimated. Considering NL's previous involvement in the lead and
lead pigment businesses, there can be no assurance that additional litigation
similar to that currently pending will not be filed.
Environmental matters and litigation. The Company's operations are governed
by various federal, state, local and foreign environmental laws and regulations.
The Company's policy is to comply with environmental laws and regulations at all
of its plants and to continually strive to improve environmental performance in
association with applicable industry initiatives. The Company believes that its
operations are in substantial compliance with applicable requirements of
environmental laws. From time to time, the Company may be subject to
environmental regulatory enforcement under various statutes, resolution of which
typically involves the establishment of compliance programs.
Some of NL's current and former facilities, including several divested
secondary lead smelters and former mining locations, are the subject of civil
litigation, administrative proceedings or investigations arising under federal
and state environmental laws. Additionally, in connection with past disposal
practices, NL has been named as a defendant, potentially responsible party
("PRP"), or both, pursuant to CERCLA or similar state laws in approximately 70
governmental and private actions associated with waste disposal sites, mining
locations and facilities currently or previously owned, operated or used by NL,
its subsidiaries and their predecessors, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. These proceedings
seek cleanup costs, damages for personal injury or property damage and/or
damages for injury to natural resources. Certain of these proceedings involve
claims for substantial amounts. Although NL may be jointly and severally liable
for such costs, in most cases, it is only one of a number of PRPs who may also
be jointly and severally liable. In addition, NL is a party to a number of
lawsuits filed in various jurisdictions alleging CERCLA or other environmental
claims. At December 31, 2002, NL had accrued $98 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
range of reasonably possible costs to NL for sites for which NL believes it is
possible to estimate costs is approximately $140 million. At December 31, 2002,
NL had $61 million in 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.
See Note 1 and 12.
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 ($2.9 million at December 31, 2002) to cover its share of probable and
reasonably estimable environmental obligations for these activities. Tremont
currently expects that the nature and extent of any final remediation measures
that might be imposed with respect to this site will be known by 2005.
Currently, no reasonable estimate can be made of the cost of any such final
remediation measure, and accordingly no amounts have been accrued at December
31, 2002 for any such cost. The amount accrued at December 31, 2002 represents
Tremont's best estimate of the costs to be incurred through 2005 with respect to
the interim remediation measures.
At December 31, 2002, TIMET had accrued approximately $4.3 million for
environmental cleanup matters, principally related to TIMET's facility in Nevada
and a former TIMET facility in California.
The Company has also accrued approximately $8 million at December 31, 2002
in respect of other environmental cleanup matters, including amounts related to
one Superfund site in Indiana where the Company, as a result of former
operations, has been named as a PRP and certain former sites of the disposed
building products segment. Such accrual is near the upper end of the range of
the Company's estimate of reasonably possible costs for such matters.
The imposition of more stringent standards or requirements under
environmental laws or regulations, new developments or changes with respect to
site cleanup costs or allocation of such costs among PRPs, 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. 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.
Other litigation. NL has been named as a defendant in various lawsuits in a
variety of jurisdictions alleging personal injuries as a result of occupational
exposure to asbestos, silica and/or mixed dust in connection with formerly-owned
operations. Approximately 350 of these cases involving a total of approximately
27,700 plaintiffs and their spouses remain pending. Of these plaintiffs,
approximately 18,250 are represented by eight cases pending in Texas and
Mississippi state courts. NL has not accrued any amounts for this litigation. 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 December 1997, a complaint was filed in the United States District Court
for the Northern District of Illinois against Amalgamated Research (Finnsugar
Bioproducts, Inc. v. The Amalgamated Sugar Company LLC, et al., No. 97 C 8746).
The complaint, as amended, alleges certain technology used by The Amalgamated
Sugar Company LLC in its manufacturing processes infringes a certain patent of
Finnsugar and seeks, among other things, unspecified damages. The technology is
owned by Amalgamated Research and licensed to, among others, the LLC. Both
Amalgamated Research and the LLC are defendants in the action. Defendants
answered the complaint denying infringement, and filed a counterclaim seeking to
have Finnsugar's patent declared invalid and unenforceable. Discovery on the
liability portion of both plaintiff's and defendants' claims has been completed.
Plaintiff and defendants each filed summary judgment motions. In March 2001, the
court granted certain of the defendants' summary judgment motions, and the court
also ruled that Finnsugar's patent was invalid. Finnsugar moved the court to
reconsider its decisions and in March 2002 the court denied that motion. In
August 2002, the case was transferred to a different judge in the court, and
shortly thereafter plaintiffs filed a renewed motion for reconsideration, which
was again denied in October 2002. In October 2002, the court also denied
plaintiffs motion to allow the appeal of the invalidation of the patent issue
before the court rules on defendants' counterclaim for damages, the trial for
which is currently expected to begin in July 2003. Amalgamated Research
believes, and understands the LLC believes, that the complaint is without merit
and that Amalgamated Research's technology does not violate Finnsugar's patent.
Amalgamated Research intends, and understands that the LLC intends, to defend
against this action vigorously.
In September 2000, TIMET was named in an action filed by the U.S. Equal
Employment Opportunity Commission in Federal district court in Las Vegas, Nevada
(U.S. Equal Employment Opportunity Commission v. Titanium Metals Corporation,
CV-S-00-1172DWH-RJJ). The complaint, as amended, alleges that several female
employees at TIMET's Nevada plant were the subject of sexual harassment and
retaliation. TIMET is vigorously defending this action. In August 2002, TIMET
filed a motion for summary judgment as to all claims of one employee who had
intervened as a separate party, and as to all other claims involved in the
EEOC's complaint. In December 2002, TIMET's motion was granted in part as to the
individual employee's state law claims, but TIMET's motion as to the Federal law
claims of the individual employee and those involved in the EEOC's complaint
were denied. TIMET has filed a motion to stay and compel arbitration of one
employee's claims, which the court denied, and TIMET then appealed. TIMET
subsequently filed a motion to stay all proceedings until its appeal is
concluded, on which the court has not yet ruled. TIMET continues to vigorously
defend this action. No trial date has been set.
In June 2001, Gutierrez-Palmenberg, Inc. ("GPI") filed a complaint in the
U.S. District Court, District of Arizona, against Waste Control Specialists LLC
(Gutierrez - Palmenberg, Inc. vs. Waste Control Specialists, LLC, No. CIV 01
0981 PHX JAT). This suit arises out of four waste removal contracts between GPI
and Waste Control Specialists LLC. During 1998-2000, Waste Control Specialists
and GPI managed the removal of radioactive and hazardous waste from certain
steel mills throughout the country. GPI asserts it is owed in excess of $380,000
for work done in connection with those contracts. Waste Control Specialists has
counterclaimed for $55,000 it believes is owed on one contract. Trial has been
scheduled to begin in March 2003. Waste Control Specialists intends to defend
against the action vigorously.
In late July 2002, shortly after the announcement of Valhi's proposal to
merge with Tremont, four separate complaints were filed in the Court of Chancery
of the State of Delaware, New Castle County, against Tremont, Valhi and members
of Tremont's board of directors (Crandon Capital Partners, et al. v. J. Landis
Martin, et al., Andrew Neyman v. J. Landis Martin, et al., Herman M. Weisman
Revocable Trust v. J. Landis Martin, et al. and Alice Middleton v. J. Landis
Martin, et al.). The complaints, purported class actions, generally allege,
among other things, that the terms of the proposed merger of Valhi and Tremont
are unfair and that defendants have violated their fiduciary duties. The
complaints seek, among other things, an order enjoining consummation of the
proposed merger and the award of unspecified damages, including attorneys' fees
and other costs. At the request of the parties, the court ordered that these
actions be consolidated under the caption In re Tremont Corporation Shareholders
Litigation and directed the filing of a consolidated complaint. Valhi and
Tremont believe, and understand that each of the other defendants believes, that
the complaints are without merit, and Valhi and Tremont intend, and understand
that each of the other defendants intends, to defend against the actions
vigorously.
In August and September 2000, NL and one of its subsidiaries, NLO, Inc.
were named as defendants in four lawsuits filed in federal court in the Western
District of Kentucky against the U.S. Department of Energy ("DOE") and a number
of other defendants alleging that nuclear materials supplied by, among others,
the Feed Materials Production Center ("FMPC") in Fernald, Ohio, owned by the DOE
and formerly managed under contract by NLO, harmed employees and others at the
DOE's Paducah, Kentucky Gaseous Diffusion Plant ("PGDP"). With respect to each
the cases, NL believes that the DOE is obligated to provide defense and
indemnification pursuant to its contract with NLO, and pursuant to its statutory
obligation to do so, as the DOE has in several previous cases relating to
management of the FMPC, and NL has so advised the DOE. Three of the cases have
been settled and dismissed with prejudice, with the DOE paying the settlement
amount. In the fourth case, Dew, et al. v. Bill Richardson, et al., described
below, the parties have agreed in principle to settle the case, subject to court
approval. The DOE has indicated that it will reimburse the settlement amount. In
Dew, et al. v. Bill Richardson, et al. (No. 5:00CV-221-M), plaintiffs purport to
represent classes of all PGDP employees who sustained pituitary tumors or cancer
as a result of exposure to radiation and seek actual and punitive damages of $2
billion each for alleged violation of constitutional rights, assault and
battery, fraud and misrepresentation, infliction of emotional distress,
negligence, ultra-hazardous activity/strict liability, strict products
liability, conspiracy, concert of action, joint venture and enterprise
liability, and equitable estoppel.
In November 2002, a former employee of Waste Control Specialists filed a
complaint in U.S. District Court, Eastern District of Tennessee, against Waste
Control Specialists (Sandy Lewis vs. Waste Control Specialists, LLC No.
3:02-CV-665) alleging violations, among others, of the Equal Pay Act, Title VII
of the Civil Rights Act and Fair Labor Standards Act in her classification and
termination of employment at Waste Control Specialists former Oak Ridge,
Tennessee office. Waste Control Specialists intends to defend against the action
vigorously.
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. The Company
currently believes that the disposition of all claims and disputes, individually
or in the aggregate, should not have a material adverse effect on its
consolidated financial position, results of operations or liquidity.
Concentrations of credit risk. Sales of TiO2 accounted for substantially
all of NL's sales during the past three years. TiO2 is generally sold to the
paint, plastics and paper industries, which are generally considered
"quality-of-life" markets whose demand for TiO2 is influenced by the relative
economic well-being of the various geographic regions. TiO2 is sold to over
4,000 customers and the ten largest customers accounted for about one-fourth of
chemicals sales. In each of the past three years, approximately one-half of NL's
TiO2 sales volume were to Europe with about 38% attributable to North America.
Component products are sold primarily to original equipment manufacturers
in North America and Europe. In 2002, the ten largest customers accounted for
approximately 30% of component products sales (2001 - 36%; 2000 - 35%).
The majority of TIMET's sales are to customers in the aerospace industry,
including airframe and engine manufacturers. TIMET's ten largest customers
accounted for about one-third of its sales in each of 2000, 2001 and 2002.
At December 31, 2002, consolidated cash, cash equivalents and restricted
cash includes $80 million invested in U.S. Treasury securities purchased under
short-term agreements to resell (2001 - $121 million), of which $24 million are
held in trust for the Company by a single U.S. bank (2001 - $62 million).
Capital expenditures. At December 31, 2002 the estimated cost to complete
capital projects in process approximated $7.4 million, of which $6.0 million
relates to NL's TiO2 facilities and the remainder relates to CompX.
Royalties. Royalty expense, which relates principally to the volume of
certain products manufactured in Canada and sold in the United States under the
terms of a third-party patent license agreement, approximated $1.1 million in
2000, $675,000 in 2001 and $700,000 in 2002.
Long-term contracts. NL has long-term supply contracts that provide for
NL's chloride-process TiO2 feedstock requirements through 2006. The agreements
require NL to purchase certain minimum quantities of feedstock with average
minimum annual purchase commitments aggregating approximately $156 million.
TIMET has a long-term supply agreement with Boeing pursuant to which Boeing
advanced TIMET $28.5 million for each of 2002 and 2003, and Boeing is required
to advance TIMET $28.5 million annually from 2004 through 2007. The agreement is
structured as a take-or-pay agreement such that Boeing, beginning in calendar
year 2002, will forfeit a proportionate part of the $28.5 million annual
advance, or effectively $3.80 per pound, in the event that its annual orders for
delivery for such calendar year are less than 7.5 million pounds. TIMET can only
be required, however, to deliver up to 3 million pounds per quarter. Under a
separate agreement, TIMET must establish and hold buffer stock for Boeing at
TIMET's facilities, for which Boeing pays TIMET as such stock is produced.
In addition to its agreement with Boeing, TIMET has long-term supply
agreements with certain other major aerospace customers, including, but not
limited to, Rolls-Royce plc, United Technologies Corporation (Pratt & Whitney
and related companies) and Wyman-Gordon Company (a unit of Precision Castparts
Corporation). These agreements initially became effective in 1998 and 1999 and
expire in 2007 through 2008, subject to certain conditions. The agreements
generally provide for (i) minimum market shares of the customers' titanium
requirements or firm annual volume commitments and (ii) fixed or
formula-determined prices generally for at least the first five years of the
contract term. Generally, the agreements require TIMET's service and product
performance to meet specified criteria, and also contain a number of other terms
and conditions customary in transactions of these types. In certain events of
nonperformance by TIMET, the agreements may be terminated early. Additionally,
under a group of related agreements (which group represents approximately 12% of
TIMET's 2002 sales revenue), which currently have fixed prices that convert to
formula-derived prices in 2004, the customer may terminate the agreement as of
the end of 2003 if the effect of the initiation of formula-derived pricing would
cause such customer "material harm." If any of such agreements were to be
terminated by the customer on this basis, it is possible that some portion of
the business represented by that agreement would continue on a non-agreement
basis. However, the termination of one or more of such agreements by the
customer in such circumstances could result in a material and adverse effect on
TIMET's business, results of operations, consolidated financial condition or
liquidity.
TIMET also has a long-term agreement with VALTIMET, a manufacturer of
welded stainless steel and titanium tubing principally for industrial markets.
TIMET owns 44% of VALTIMET at December 31, 2002. The agreement was entered into
in 1997 and expires in 2007. Under the agreement, VALTIMET has agreed to
purchase a certain percentage of its titanium requirements from TIMET. Selling
prices are formula determined, subject to certain conditions. Certain provisions
of this contract have been renegotiated in the past and may be renegotiated in
the future to meet changing business conditions.
In September 2002, TIMET entered into a long-term agreement, effective from
January 1, 2002 through December 31, 2007, for the purchase of titanium sponge
produced in Kazakhstan. This agreement replaced and superceded a previous
agreement entered into in by TIMET in 1997. The new agreement requires annual
minimum purchases by TIMET of approximately $10 million. TIMET has no other
long-term sponge supply agreements.
Waste Control Specialists has agreed to pay two separate consultants fees
for performing certain services based on specified percentages of certain of
Waste Control Specialists' revenues. One such agreement currently provides for a
security interest in Waste Control Specialists' facility in West Texas to
collateralize Waste Control Specialists' obligation under that agreement, which
is limited to $18.4 million. A third similar agreement, under which Waste
Control Specialists was obligated to pay up to $10 million to another
independent consultant, was terminated during 2000. Expense related to all of
these agreements was not significant during the past three years.
Operating leases. Kronos' principal German operating subsidiary leases the
land under its Leverkusen TiO2 production facility pursuant to a lease expiring
in 2050. The Leverkusen facility, with approximately one-third of Kronos'
current TiO2 production capacity, is located within the lessor's extensive
manufacturing complex, and Kronos is the only unrelated party so situated. Rent
for the Leverkusen facility is periodically established by agreement with the
lessor for period of at least two years at a time. Under a separate supplies and
services agreement expiring in 2011, the lessor provides some raw materials,
auxiliary and operating materials and utilities services necessary to operate
the Leverkusen facility. Both the lease and the supplies and services agreements
restrict NL's ability to transfer ownership or use of the Leverkusen facility.
The Company also leases various other manufacturing facilities and
equipment. Some of the leases contain purchase and/or various term renewal
options at fair market and fair rental values, respectively. In most cases the
Company expects that, in the normal course of business, such leases will be
renewed or replaced by other leases. Rent expense related to the Company's
consolidated business segments approximated $11 million in 2000 and $12 million
in each of 2001 and 2002. At December 31, 2002, future minimum payments under
noncancellable operating leases having an initial or remaining term of more than
one year were as follows:
Years ending December 31, Amount
(In thousands)
2003 $ 5,982
2004 5,076
2005 3,873
2006 2,857
2007 2,343
2008 and thereafter 22,458
-------
$42,589
Approximately $16.5 million of the $42.6 million aggregate future minimum
rental commitments at December 31, 2002 relates to NL's Leverkusen facility
lease discussed above. The minimum commitment amounts for such lease included in
the table above for each year through the 2050 expiration of the lease are based
upon the current annual rental rate as of December 31, 2002.
Third-party indemnification. Amalgamated Research licenses certain of its
technology to third parties. With respect to such technology licensed to two
customers, Amalgamated Research has indemnified such customers for up to an
aggregate of $1.75 million against any damages they might incur resulting from
any claims for infringement of the Finnsugar patent discussed above. During
2000, Finnsugar filed a complaint against one of such customers in the U.S.
District Court for the Eastern District of Michigan alleging that the technology
licensed to such customer by Amalgamated Research infringes certain of
Finnsugar's patents (Finnsugar Bioproducts, Inc. v. The Monitor Sugar Company,
Civil No. 00-10381). Amalgamated Research is not a party to this litigation.
Amalgamated Research denies such infringement, however Amalgamated Research is
providing defense costs to such customer under the terms of their
indemnification agreement up to the specified limit of $750,000. Other than
providing defense costs pursuant to the terms of the indemnification agreements,
Amalgamated Research does not believe it will incur any losses as a result of
providing such indemnification.
Other. TIMET is the primary obligor on two workers' compensation bonds
issued on behalf of a former subsidiary. The bonds were provided as part of the
conditions imposed on the former subsidiary in order to self-insure its workers'
compensation obligations. Each of the bonds has a maximum obligation of $1.5
million. The former subsidiary filed for Chapter 11 bankruptcy protection in
July 2001, and discontinued payment on the underlying workers' compensation
claims in November 2001. During the third quarter of 2002, TIMET received
notices that the issuers of the bonds were required to make payments on one of
the bonds with respect to certain of these claims and were requesting
reimbursement from TIMET. Based upon current loss projections, TIMET anticipates
claims will be incurred up to the maximum amount payable under the bond, and in
2002 TIMET accrued $1.5 million to cover such claims. At this time, TIMET
understands that no claims have been paid under the second bond, and no such
payments are currently anticipated. Accordingly, no accrual has been recorded
for potential claims that could be filed under the second bond. TIMET may revise
its estimated liability under these bonds in the future.
Note 20 - Accounting principles newly adopted in 2002:
Impairment of long-lived assets. The Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, effective
January 1, 2002. SFAS No. 144 retains the fundamental provisions of existing
GAAP with respect to the recognition and measurement of long-lived asset
impairment contained in SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Lived-Lived Assets to be Disposed Of. However, SFAS
No. 144 provides new guidance intended to address certain implementation issues
associated with SFAS No. 121, including expanded guidance with respect to
appropriate cash flows to be used to determine whether recognition of any
long-lived asset impairment is required, and if required how to measure the
amount of the impairment. SFAS No. 144 also requires that net assets to be
disposed of by sale are to be reported at the lower of carrying value or fair
value less cost to sell, and expands the reporting of discontinued operations to
include any component of an entity with operations and cash flows that can be
clearly distinguished from the rest of the entity. Adoption of SFAS No. 144 did
not have a significant effect on the Company.
Goodwill. The Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets, effective January 1, 2002. Under SFAS No. 142, goodwill, including
goodwill arising from the difference between the cost of an investment accounted
for by the equity method and the amount of the underlying equity in net assets
of such equity method investee ("equity method goodwill"), is no longer
amortized on a periodic basis. Goodwill (other than equity method goodwill) is
subject to an impairment test to be performed at least on an annual basis, and
impairment reviews may result in future periodic write-downs charged to
earnings. Equity method goodwill is not tested for impairment in accordance with
SFAS No. 142; rather, the overall carrying amount of an equity method investee
will continue to be reviewed for impairment in accordance with existing GAAP.
There is currently no equity method goodwill associated with any of the
Company's equity method investees. Under the transition provisions of SFAS No.
142, all goodwill existing as of June 30, 2001 ceased to be periodically
amortized as of January 1, 2002, and all goodwill arising in a purchase business
combination (including step acquisitions) completed on or after July 1, 2001 was
not periodically amortized from the date of such combination.
As discussed in Note 9, the Company has assigned its goodwill to three
reporting units (as that term is defined in SFAS No. 142). Goodwill attributable
to the chemicals operating segment was assigned to the reporting unit consisting
of NL in total. Goodwill attributable to the component products operating
segment was assigned to two reporting units within that operating segment, one
consisting of CompX's security products operations and the other consisting of
CompX's ergonomic products and slide products operations. Under SFAS No. 142,
such goodwill will be deemed to not be impaired if the estimated fair value of
the applicable reporting unit exceeds the respective net carrying value of such
reporting unit, including the allocated goodwill. If the fair value of the
reporting unit is less than carrying value, then a goodwill impairment loss
would be recognized equal to the excess, if any, of the net carrying value of
the reporting unit goodwill over its implied fair value (up to a maximum
impairment equal to the carrying value of the goodwill). The implied fair value
of reporting unit goodwill would be the amount equal to the excess of the
estimated fair value of the reporting unit over the amount that would be
allocated to the tangible and intangible net assets of the reporting unit
(including unrecognized intangible assets) as if such reporting unit had been
acquired in a purchase business combination accounted for in accordance with
GAAP as of the date of the impairment testing.
In determining the estimated fair value of the NL reporting unit, the
Company will consider quoted market prices for NL's common stock, as adjusted
for an appropriate control premium. The Company will also use other appropriate
valuation techniques, such as discounted cash flows, to estimate the fair value
of the two CompX reporting units.
The Company completed its initial, transitional goodwill impairment
analysis under SFAS No. 142 as of January 1, 2002, and no goodwill impairments
were deemed to exist as of such date. In accordance with the requirements of
SFAS No. 142, the Company will review the goodwill of its three reporting units
for impairment during the third quarter of each year starting in 2002. Goodwill
will also be reviewed for impairment at other times during each year when events
or changes in circumstances indicate that an impairment might be present. No
goodwill impairments were deemed to exist as a result of the Company's annual
impairment review completed during the third quarter of 2002.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in 2000 and 2001 if the goodwill
amortization included in the Company's reported consolidated net income had not
been recognized.
Years ended December 31,
2000 2001 2002
---- ---- ----
(In millions,
except per share data)
Net income as reported ............................ $ 76.6 $ 93.2 $ 1.2
Adjustments:
Goodwill amortization ........................... 15.9 16.9 --
Equity method goodwill amortization ............. -- -- --
Incremental income taxes ........................ (1.6) (.1) --
Minority interest in goodwill amortization ...... (1.0) (1.1) --
------- ------- -------
Adjusted net income ............................ $ 89.9 $ 108.9 $ 1.2
======= ======= =======
Basic net income per share as reported ............ $ .67 $ .81 $ .01
Adjustments:
Goodwill amortization ........................... .13 .15 --
Equity method goodwill amortization ............. -- -- --
Incremental income taxes ........................ (.01) -- --
Minority interest in goodwill amortization ...... (.01) (.01) --
------- ------- -------
Adjustment basic net income per share .......... $ .78 $ .95 $ .01
======= ======= =======
Diluted net income per share as reported .......... $ .66 $ .80 $ .01
Adjustments:
Goodwill amortization ........................... .13 .15 --
Equity method goodwill amortization ............. -- -- --
Incremental income taxes ........................ (.01) -- --
Minority interest in goodwill amortization ...... (.01) (.01) --
------- ------- -------
Adjusted diluted net income per share .......... $ .77 $ .94 $ .01
======= ======= =======
Debt extinguishment gains and losses. The Company adopted SFAS No. 145
effective April 1, 2002. SFAS No. 145, among other things, eliminated the prior
requirement that all gains and losses from the early extinguishment of debt were
to be classified as an extraordinary item. Upon adoption of SFAS No. 145, gains
and losses from the early extinguishment of debt are now classified as an
extraordinary item only if they meet the "unusual and infrequent" criteria
contained in Accounting Principles Board Opinion ("APBO") No. 30. In addition,
upon adoption of SFAS No. 145, all gains and losses from the early
extinguishment of debt that had previously been classified as an extraordinary
item are to be reassessed to determine if they would have met the "unusual and
infrequent" criteria of APBO No. 30; any such gain or loss that would not have
met the APBO No. 30 criteria is to be retroactively reclassified and reported as
a component of income before extraordinary item. The Company has concluded that
all of its previously-recognized gains and losses from the early extinguishment
of debt that occurred on or after January 1, 1998 would not have met the APBO
No. 30 criteria for classification as an extraordinary item, and accordingly
such previously-reported gains and losses from the early extinguishment of debt
have been retroactively reclassified and are now reported as a component of
income before extraordinary item.
Guarantees. The Company has complied with the disclosure requirements of
FIN No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, as of December 31,
2002. As required by the transition provisions of FIN No. 45, beginning in 2003
the Company will adopt the recognition and initial measurement provisions of
this FIN on a prospective basis for any guarantees issued or modified after
December 31, 2002.
Note 21 - Accounting principles not yet adopted:
Asset retirement obligations. The Company will adopt SFAS No. 143,
Accounting for Asset Retirement Obligations, on January 1, 2003. Under SFAS No.
143, the fair value of a liability for an asset retirement obligation covered
under the scope of SFAS No. 143 would be recognized in the period in which the
liability is incurred, with an offsetting increase in the carrying amount of the
related long-lived asset. Over time, the liability would be accreted to its
present value, and the capitalized cost would be depreciated over the useful
life of the related asset. Upon settlement of the liability, an entity would
either settle the obligation for its recorded amount or incur a gain or loss
upon settlement.
Under the transition provisions of SFAS No. 143, at the date of adoption on
January 1, 2003 the Company will recognize (i) an asset retirement cost
capitalized as an increase to the carrying value of its property, plant and
equipment, (ii) accumulated depreciation on such capitalized cost and (iii) a
liability for the asset retirement obligation. Amounts resulting from the
initial application of SFAS No. 143 are measured using information, assumptions
and interest rates all as of January 1, 2003. The amount recognized as the asset
retirement cost is measured as of the date the asset retirement obligation was
incurred. Cumulative accretion on the asset retirement obligation, and
accumulated depreciation on the asset retirement cost, is recognized for the
time period from the date the asset retirement cost and liability would have
been recognized had the provisions of SFAS No. 143 been in effect at the date
the liability was incurred, through January 1, 2003. The difference, if any,
between the amounts to be recognized as described above and any associated
amounts recognized in the Company's balance sheet as of December 31, 2002 is
recognized as a cumulative effect of a change in accounting principles as of the
date of adoption. The effect of adopting SFAS No. 143 as of January 1, 2003 is
expected to be a net gain of approximately $500,000 as summarized in the table
below:
Amount
(in millions)
Increase in carrying value of net property, plant and equipment:
Cost ......................................................... $ .8
Accumulated depreciation ..................................... (.2)
Investment in TIMET ............................................ (.1)
Decrease in carrying value of
previously-accrued closure and
post-closure activities ....................................... 1.5
Asset retirement obligation recognized ......................... (1.2)
Deferred income taxes .......................................... (.3)
----
Net impact ................................................... $ .5
====
Costs associated with exit or disposal activities. The Company will adopt
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
on January 1, 2003 for exit or disposal activities initiated on or after that
date. Under SFAS No. 146, costs associated with exit activities, as defined,
that are covered by the scope of SFAS No. 146 will be recognized and measured
initially at fair value, generally in the period in which the liability is
incurred. Costs covered by the scope of SFAS No. 146 include termination
benefits provided to employees, costs to consolidate facilities or relocate
employees, and costs to terminate contracts (other than a capital lease). Under
existing GAAP, a liability for such an exit cost is recognized at the date an
exit plan is adopted, which may or may not be the date at which the liability
has been incurred.
Note 22 - Quarterly results of operations (unaudited):
Quarter ended
---------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In millions, except per share data)
Year ended December 31, 2001
Net sales .......................... $ 288.8 $ 276.3 $ 262.5 $ 231.9
Operating income ................... 49.2 39.7 31.5 21.8
Net income ..................... $ 31.6 $ 47.6 $ 10.3 $ 3.7
Basic earnings per common share .... $ .27 $ .41 $ .09 $ .03
Year ended December 31, 2002
Net sales .......................... $ 253.7 $ 279.1 $ 284.1 $ 262.8
Operating income ................... 19.4 21.8 25.3 15.4
Net income (loss) .............. $ (3.7) $ 6.4 $ (7.1) $ 5.6
Basic earnings (loss) per
common share ...................... $ (.03) $ .05 $ (.06) $ .05
The sum of the quarterly per share amounts may not equal the annual per
share amounts due to relative changes in the weighted average number of shares
used in the per share computations.
During the fourth quarter of 2001, the Company recognized (i) an $11.7
million insurance gain related to insurance recoveries received by NL resulting
from fire at its Leverkusen facility, (ii) $16.6 million of business
interruption insurance proceeds related to the Leverkusen fire as payment for
unallocated period costs and lost margin attributable to prior 2001 quarters,
and (iii) a $17.6 million net income tax benefit related principally to a change
in estimate of NL's ability to utilize certain German income tax attributes. See
Notes 12 and 16. In addition, the Company's equity in earnings of TIMET during
the fourth quarter of 2001 includes the effect of TIMET's $61.5 million
provision for an other than temporary decline in value of certain preferred
securities held by TIMET and a $12.3 million increase in TIMET's deferred income
tax asset valuation allowance.
During the fourth quarter of 2002, the Company recognized a $2.7 million
income tax benefit related to the reduction in the Belgian income tax rate. See
Note 16.
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Stockholders and Board of Directors of Valhi, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated March 14, 2003, appearing on page F-2 of the 2002 Annual Report on
Form 10-K of Valhi, Inc., also included an audit of the financial statement
schedules listed in the index on page F-1 of this Form 10-K. In our opinion,
these financial statement schedules present fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
March 14, 2003
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31, 2001 and 2002
(In thousands)
2001 2002
---- ----
Current assets:
Cash and cash equivalents ........................ $ 3,520 $ 5,115
Restricted cash equivalents ...................... -- 400
Marketable securities ............................ 14,882 47
Accounts and notes receivable .................... 5,862 4,593
Receivables from subsidiaries and affiliates:
Loan ........................................... 755 --
Income taxes, net .............................. -- 3,978
Other .......................................... 136 1,062
Deferred income taxes ............................ -- 260
Other ............................................ 255 359
---------- ----------
Total current assets ......................... 25,410 15,814
---------- ----------
Other assets:
Marketable securities ............................ 170,212 170,173
Restricted cash equivalents ...................... -- 502
Investment in and advances to subsidiaries ....... 748,697 664,501
Loans and notes receivable ....................... 104,933 110,228
Other assets ..................................... 905 1,303
Property and equipment, net ...................... 2,691 2,448
---------- ----------
Total other assets ........................... 1,027,438 949,155
---------- ----------
$1,052,848 $ 964,969
========== ==========
Current liabilities:
Current maturities of long-term debt ............. $ 63,352 $ --
Payables to subsidiaries and affiliates:
Demand loan from Contran Corporation ........... 24,574 11,171
Income taxes, net .............................. 8,891 --
Other .......................................... 100 386
Accounts payable and accrued liabilities ......... 2,888 2,152
Income taxes ..................................... 1,301 1,301
Deferred income taxes ............................ 617 --
---------- ----------
Total current liabilities .................... 101,723 15,010
---------- ----------
Noncurrent liabilities:
Long-term debt ................................... 250,000 250,000
Deferred income taxes ............................ 68,371 74,126
Other ............................................ 10,426 11,077
---------- ----------
Total noncurrent liabilities ................. 328,797 335,203
---------- ----------
Stockholders' equity ............................... 622,328 614,756
---------- ----------
$1,052,848 $ 964,969
========== ==========
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Income
Years ended December 31, 2000, 2001 and 2002
(In thousands)
2000 2001 2002
---- ---- ----
Revenues and other income:
Interest and dividend income .............. $ 33,108 $ 30,601 $ 30,424
Securities transaction gains (losses), net (2,490) 48,142 6,413
Other, net ................................ 4,356 2,997 3,184
-------- -------- --------
34,974 81,740 40,021
-------- -------- --------
Costs and expenses:
General and administrative ................ 11,118 9,862 10,283
Interest .................................. 34,646 31,295 28,216
-------- -------- --------
45,764 41,157 38,499
-------- -------- --------
(10,790) 40,583 1,522
Equity in earnings of subsidiaries .......... 86,382 70,190 (4,717)
-------- -------- --------
Income (loss) before income taxes ......... 75,592 110,773 (3,195)
Provision for income taxes (benefit) ........ (1,022) 17,575 (4,432)
-------- -------- --------
Net income ................................ $ 76,614 $ 93,198 $ 1,237
======== ======== ========
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Cash Flows
Years ended December 31, 2000, 2001 and 2002
(In thousands)
2000 2001 2002
---- ---- ----
Cash flows from operating activities:
Net income ............................ $ 76,614 $ 93,198 $ 1,237
Securities transactions, net .......... 2,490 (48,142) (6,413)
Proceeds from disposal of marketable
securities (trading) ................. -- -- 18,136
Noncash interest expense .............. 8,802 5,089 2,143
Deferred income taxes ................. (2,965) 8,546 5,981
Equity in earnings of subsidiaries .... (86,382) (70,190) 4,717
Dividends from subsidiaries ........... 20,792 55,696 105,786
Other, net ............................ 844 327 591
--------- --------- ---------
20,195 44,524 132,178
Net change in assets and liabilities .. 9,483 (2,528) (18,908)
--------- --------- ---------
Net cash provided by operating
activities ....................... 29,678 41,996 113,270
--------- --------- ---------
Cash flows from investing activities:
Purchase of:
Tremont common stock ................ (19,311) (198) --
Subsidiary debt from lender ......... -- (5,273) --
Investment in Waste Control Specialists (20,000) -- --
Proceeds from disposal of marketable
securities (available-for-sale) ...... -- 16,802 --
Loans to subsidiaries and affiliates:
Loans ............................... (34,232) (11,505) (7,303)
Collections ......................... 48,307 2,746 184
Change in restricted cash
equivalents, net ..................... -- -- (902)
Other, net ............................ (221) (176) (83)
--------- --------- ---------
Net cash provided (used) by
investing activities ............. (25,457) 2,396 (8,104)
--------- --------- ---------
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Cash Flows (Continued)
Years ended December 31, 2000, 2001 and 2002
(In thousands)
2000 2001 2002
---- ---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings ............................ $ 56,880 $ 35,000 $ 27,300
Principal payments .................... (44,000) (67,662) (92,572)
Loans from affiliates:
Loans ................................. 15,768 81,905 13,718
Repayments ............................ (8,982) (66,310) (26,825)
Dividends ............................... (24,328) (27,820) (27,872)
Common stock reacquired ................. (19) -- --
Other, net .............................. 899 632 2,680
--------- --------- ---------
Net cash used by financing activities (3,782) (44,255) (103,571)
--------- --------- ---------
Cash and cash equivalents:
Net increase ............................ 439 137 1,595
Balance at beginning of year ............ 2,944 3,383 3,520
--------- --------- ---------
Balance at end of year .................. $ 3,383 $ 3,520 $ 5,115
========= ========= =========
Supplemental disclosures - cash paid for:
Interest ................................ $ 25,326 $ 26,785 $ 26,153
Income taxes (received), net ............ (12,612) 2,320 2,456
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Notes to Condensed Financial Information
Note 1 - Basis of presentation:
The accompanying financial statement of Valhi, Inc. reflect Valhi's
investment in NL Industries, Inc., Tremont Group, Inc., Tremont Corporation,
Valcor, Inc. and Waste Control Specialists LLC on the equity method. The
Consolidated Financial Statements of Valhi, Inc. and Subsidiaries are
incorporated herein by reference.
Note 2 - Marketable securities:
December 31,
2001 2002
---- ----
(In thousands)
Current assets - Halliburton Company common stock:
Trading ........................................ $ 6,744 $ 47
Available-for-sale ............................. 8,138 --
-------- --------
$ 14,882 $ 47
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC .............. $170,000 $170,000
Other securities ............................... 212 173
-------- --------
$170,212 $170,173
Note 3 - Investment in and advances to subsidiaries:
December 31,
2001 2002
---- ----
(In thousands)
Investment in:
NL Industries (NYSE: NL) ........................... $499,529 $ 436,311
Tremont Group, Inc./Tremont Corporation ............ 162,502 147,386
Valcor and subsidiaries ............................ 64,984 59,454
Waste Control Specialists LLC ...................... 6,364 (1,842)
-------- ---------
733,379 641,309
Noncurrent loan to Waste Control Specialists LLC ..... 15,318 23,192
-------- ---------
$748,697 $ 664,501
Current loan to Waste Control Specialists LLC ........ $ 755 $ --
======== =========
Tremont Group. is a holding company which owns 80% of Tremont Corporation
at December 31, 2001 and 2002. Prior to December 31, 2000, Valhi owned 64% of
Tremont Corporation and NL owned an additional 16% of Tremont. Effective with
the close of business on December 31, 2000, Valhi and NL each contributed their
Tremont shares to Tremont Group in return for an 80% and 20% ownership interest,
respectively, in Tremont Group. Tremont Corporation is a holding company whose
principal assets at December 31, 2002 are a 39% interest in Titanium Metals
Corporation (NYSE: TIE) and a 21% interest in NL. In February 2003, Valhi
completed a series of merger transactions pursuant to which, among other things,
both Tremont Group and Tremont became wholly-owned subsidiaries of Valhi and
Tremont Group and Tremont subsequently merged.
Valcor's principal asset is a 66% interest in CompX International, Inc. at
December 31, 2002 (NYSE: CIX). Valhi owns an additional 3% of CompX directly,
and Valhi's direct investment in CompX is considered part of its investment in
Valcor.
Years ended December 31,
2000 2001 2002
---- ---- ----
(In thousands)
Equity in earnings of subsidiaries
NL Industries ........................... $ 78,738 $ 57,183 $ 15,198
Tremont Group/Tremont Corporation ....... 4,359 3,961 (11,965)
Valcor .................................. 12,927 4,214 256
Waste Control Specialists LLC ........... (9,642) 4,832 (8,206)
-------- -------- --------
$ 86,382 $ 70,190 $ (4,717)
======== ======== ========
Dividends from subsidiaries
Declared:
NL Industries ........................... $ 19,589 $ 24,108 $ 99,447
Tremont Group/Tremont Corporation ....... 1,054 1,152 1,152
Valcor .................................. 5,187 6,437 5,187
Waste Control Specialists LLC ........... -- 17,637 --
-------- -------- --------
25,830 49,334 105,786
Net change in dividends receivable ........ (5,038) 6,362 --
-------- -------- --------
Cash dividends received ............... $ 20,792 $ 55,696 $105,786
======== ======== ========
Note 4 - Loans and notes receivable:
December 31,
2001 2002
---- ----
(In thousands)
Snake River Sugar Company:
Principal .......................... $ 80,000 $ 80,000
Interest ........................... 22,718 27,910
Other ................................ 2,215 2,318
-------- --------
$104,933 $110,228
Note 5 - Long-term debt:
December 31,
2001 2002
---- ----
(In thousands)
Snake River Sugar Company .................. $250,000 $250,000
LYONs ...................................... 25,472 --
Bank credit facility ....................... 35,000 --
Other ...................................... 2,880 --
-------- --------
313,352 250,000
Less current maturities .................... 63,352 --
-------- --------
$250,000 $250,000
Valhi's $250 million in loans from Snake River bear interest at a weighted
average fixed interest rate of 9.4%, are collateralized by the Company's
interest in The Amalgamated Sugar Company LLC and are due in January 2027.
Currently, these loans are nonrecourse to Valhi. Up to $37.5 million of such
loans will become recourse to Valhi to the extent that the balance of Valhi's
loan to Snake River (including accrued interest) becomes less than $37.5
million. See Note 4. Under certain conditions, Snake River has the ability to
accelerate the maturity of these loans.
At December 31, 2002, Valhi has a $70 million revolving bank credit
facility which matures in October 2003, generally bears interest at LIBOR plus
1.5% (for LIBOR-based borrowings) or prime (for prime-based borrowings), and is
collateralized by 30 million shares of NL common stock held by Valhi. The
agreement limits dividends and additional indebtedness of Valhi and contains
other provisions customary in lending transactions of this type. In the event of
a change of control of Valhi, as defined, the lenders would have the right to
accelerate the maturity of the facility. The maximum amount which may be
borrowed under the facility is limited to one-third of the aggregate market
value of the shares of NL common stock pledged as collateral. Based on NL's
December 31, 2002 quoted market price of $17.00 per share, the 30 million shares
of NL common stock pledged under the facility provide more than sufficient
collateral coverage to allow for borrowings up to the full amount of the
facility. Valhi would become limited to borrowing less than the full $70 million
amount of the facility, or would be required to pledge additional collateral if
the full amount of the facility had been borrowed, only if NL's stock price were
to fall below approximately $7.00 per share. At December 31, 2002, no amounts
were borrowed under this facility, letter of credit aggregating $1.1 million had
been issued and $68.9 million was available for borrowing.
Note 6 - Income taxes:
Years ended December 31,
2000 2001 2002
---- ---- ----
(In thousands)
Income tax provision (benefit)
attributable to continuing operations:
Currently payable (refundable) ........... $ 1,943 $ 9,029 $(10,413)
Deferred income taxes (benefit) .......... (2,965) 8,546 5,981
-------- -------- --------
$ (1,022) $ 17,575 $ (4,432)
======== ======== ========
Cash paid (received) for income taxes, net:
Paid to (received from) subsidiaries, net $ (1,019) $ (439) $ 2,455
Paid to (received from) Contran .......... (11,600) 2,607 --
Paid to tax authorities, net ............. 7 152 1
-------- -------- --------
$(12,612) $ 2,320 $ 2,456
======== ======== ========
At December 31, 2000, NL, Tremont Corporation and CompX were separate U.S.
taxpayers and were not members of the Contran Tax Group. Effective January 1,
2001, Tremont and NL became members of the Contran Tax Group. Waste Control
Specialists LLC and The Amalgamated Sugar Company LLC are treated as
partnerships for federal income tax purposes. Valhi Parent Company's provision
for income taxes (benefit) includes a tax provision (benefit) attributable to
Valhi's equity in earnings (losses) of Waste Control Specialists.
Deferred tax
asset (liability)
December 31,
2001 2002
---- ----
(In thousands)
Components of the net deferred tax asset (liability) -
tax effect of temporary
differences related to:
Marketable securities .............................. $(56,836) $(65,082)
Investment in Waste Control Specialists ............ 1,760 2,014
Reduction of deferred income tax assets of
subsidiaries that are members of the Contran Tax
Group - separate company U.S. net operating loss
carryforwards and other tax attributes that do not
exist at the Valhi level .......................... (9,748) (7,646)
Accrued liabilities and other deductible differences 4,729 5,187
Other taxable differences .......................... (8,893) (8,339)
-------- --------
$(68,988) $(73,866)
======== ========
Current deferred tax asset (liability) ................. $ (617) $ 260
Noncurrent deferred tax liability ...................... (68,371) (74,126)
-------- --------
$(68,988) $(73,866)
======== ========
VALHI, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at charged to Balance
beginning costs and Net Currency at end
Description of year expenses deductions translation Other of year
- --------------------------------- ------- -------- -------- -------- ----- -------
Year ended December 31, 2000:
Allowance for doubtful accounts $ 6,213 $ 645 $ (787) $ (163) $-- $ 5,908
======= ======== ======= ======= ===== =======
Amortization of intangibles:
Goodwill .................... $44,994 $ 15,952 $ -- $ (55) $-- $60,891
Other ....................... 11,086 474 (8,245) (2,530) -- 785
------- -------- ------- ------- ----- -------
$56,080 $ 16,426 $(8,245) $(2,585) $-- $61,676
======= ======== ======= ======= ===== =======
Year ended December 31, 2001:
Allowance for doubtful accounts $ 5,908 $ 1,588 $(1,080) $ (90) $-- $ 6,326
======= ======== ======= ======= ===== =======
Amortization of intangibles:
Goodwill .................... $60,891 $ 16,963 $ -- $ (75) $-- $77,779
Other ....................... 785 229 -- (4) -- 1,010
------- -------- ------- ------- ----- -------
$61,676 $ 17,192 $ -- $ (79) $-- $78,789
======= ======== ======= ======= ===== =======
Year ended December 31, 2002:
Allowance for doubtful accounts $ 6,326 $ 692 $(1,014) $ 352 $-- $ 6,356
======= ======== ======= ======= ===== =======
Amortization of intangibles:
Goodwill .................... $77,779 $ -- $ -- $ 332 $-- $78,111
Other ....................... 1,010 612 -- (1) -- 1,621
------- -------- ------- ------- ----- -------
$78,789 $ 612 $ -- $ 331 $-- $79,732
======= ======== ======= ======= ===== =======
Note - Certain information has been omitted from this Schedule because it is
disclosed in the notes to the Consolidated Financial Statements.
EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
% of Voting
Securities
Jurisdiction of Held at December
Incorporation or 31,
Name of Corporation Organization 2002 (1)
- ----------------------------------- ---------------- ----------
Amcorp, Inc. Delaware 100%
ASC Holdings, Inc. Utah 100
Amalgamated Research, Inc. Idaho 100
Andrews County Holdings, Inc. Delaware 100
Waste Control Specialists LLC Delaware 90
Greenhill Technologies LLC Delaware 50
Tecsafe LLC Delaware 50
NL Industries, Inc. (2),(3) New Jersey 63
Tremont Group, Inc. (3) Delaware 80
Tremont Corporation Delaware 80
TRECO L.L.C. Nevada 100
Basic Management, Inc. Nevada 32
The Landwell Company LP Delaware 50
The Landwell Company LP Delaware 12
TRE Holding Corporation Delaware 100
TRE Management Company Delaware 100
Tremont Colorado Corporation Delaware 100
Tall Pines Insurance Company Vermont 100
Titanium Metals Corporation (5) Delaware 39
NL Industries, Inc. New Jersey 21
Valcor, Inc. Delaware 100
Medite Corporation Delaware 100
CompX International Inc. (4) Delaware 66
Other wholly-owned
Valmont Insurance Company Vermont 100
Impex Realty Holding, Inc. Delaware 100
(1) Held by the Registrant or the indicated subsidiary of the Registrant.
(2) Subsidiaries of NL are incorporated by reference to Exhibit 21.1 of NL's
Annual Report on Form 10-K for the year ended December 31, 2002 (File No.
1-640).
(3) NL owns the other 20% of Tremont Group.
(4) Subsidiaries of CompX are incorporated by reference to Exhibit 21.1 of
CompX's Annual Report on Form 10-K for the year ended December 31, 2002
(File No. 1-13905). The Registrant owns an additional 3% of CompX directly.
(5) Subsidiaries of Titanium Metals Corporation are incorporated by reference
to Exhibit 21.1 of TIMET's Annual Report on Form 10-K for the year ended
December 31, 2002 (File No. 0-28538).
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in Valhi, Inc.'s (i)
Registration Statement on Form S-8 (Nos. 33-53633, 33-48146, 33-41507 and
33-21758) and related Prospectus pertaining to the Valhi, Inc. 1987 Incentive
Stock Option - Stock Appreciation Rights Plan and (ii) Registration Statement on
Form S-8 (No. 333-48391) and related Prospectus pertaining to the Valhi, Inc.
1997 Long-Term Incentive Plan, of our reports dated March 14, 2003 relating to
the financial statements and financial statement schedules of Valhi, Inc., which
appear in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Dallas, Texas
March 18, 2003
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in Valhi, Inc.'s (i)
Registration Statement on Form S-8 (Nos. 33-53633, 33-48146, 33-41507 and
33-21758) and related Prospectus pertaining to the Valhi, Inc. 1987 Incentive
Stock Option - Stock Appreciation Rights Plan and (ii) Registration Statement on
Form S-8 (No. 333-48391) and related Prospectus pertaining to the Valhi, Inc.
1997 Long-Term Incentive Plan, of our report dated January 28, 2003, except for
Note 22, as to which the date is February 14, 2003, relating to the financial
statements of Titanium Metals Corporation, which is incorporated by reference in
this Annual Report on Form 10-K of Valhi, Inc.
PricewaterhouseCoopers LLP
Denver, Colorado
March 18, 2003
Exhibit 99.1
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 Annual Report of Valhi, Inc. (the "Company") on Form 10-K
for the period ended December 31, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Steven L. Watson, President and
Chief Executive Officer 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
- -------------------------------------
Steven L. Watson
President and Chief Executive Officer
March 18, 2003
Exhibit 99.2
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 Annual Report of Valhi, Inc. (the "Company") on Form 10-K
for the period ended December 31, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, 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/ Bobby D. O'Brien
- ------------------------------------
Bobby D. O'Brien
Vice President, Chief Financial Officer and Treasurer
March 18, 2003