SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2003 Commission file number 1-5467
------------------ ------
VALHI, INC.
- ------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 87-0110150
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No
--- ---
Number of shares of the Registrant's common stock outstanding on April 30, 2003:
119,440,078.
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets -
December 31, 2002 and March 31, 2003 3
Consolidated Statements of Operations -
Three months ended March 31, 2002 and 2003 5
Consolidated Statements of Comprehensive Income (Loss) -
Three months ended March 31, 2002 and 2003 7
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 2003 8
Consolidated Statements of Cash Flows -
Three months ended March 31, 2002 and 2003 9
Notes to Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 23
Item 4. Controls and Procedures 43
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 44
Item 6. Exhibits and Reports on Form 8-K. 45
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, March 31,
2002 2003
------------ ---------
Current assets:
Cash and cash equivalents .................... $ 94,679 $ 67,299
Restricted cash equivalents .................. 52,489 47,507
Marketable securities ........................ 9,717 9,715
Accounts and other receivables ............... 170,623 202,421
Refundable income taxes ...................... 3,161 2,002
Receivable from affiliates ................... 3,947 4,461
Inventories .................................. 239,533 224,937
Prepaid expenses ............................. 15,867 12,707
Deferred income taxes ........................ 14,114 13,958
---------- ----------
Total current assets ..................... 604,130 585,007
---------- ----------
Other assets:
Marketable securities ........................ 179,582 179,852
Investment in affiliates ..................... 155,549 154,768
Receivable from affiliate .................... 18,000 18,000
Loans and other receivables .................. 111,255 112,535
Mining properties ............................ 16,545 15,741
Prepaid pension costs ........................ 17,572 17,424
Unrecognized net pension obligations ......... 5,561 5,561
Goodwill ..................................... 364,994 369,889
Other intangible assets ...................... 4,413 4,290
Deferred income taxes ........................ 1,934 841
Other ........................................ 31,120 26,004
---------- ----------
Total other assets ....................... 906,525 904,905
---------- ----------
Property and equipment:
Land ......................................... 31,725 33,062
Buildings .................................... 180,311 191,305
Equipment .................................... 677,268 695,756
Construction in progress ..................... 12,605 13,778
---------- ----------
901,909 933,901
Less accumulated depreciation ................ 337,783 358,729
---------- ----------
Net property and equipment ............... 564,126 575,172
---------- ----------
$2,074,781 $2,065,084
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, March 31,
2002 2003
------------ ---------
Current liabilities:
Current maturities of long-term debt ....... $ 4,127 $ 1,469
Accounts payable ........................... 108,970 71,797
Accrued liabilities ........................ 149,466 150,481
Payable to affiliates ...................... 20,122 12,986
Income taxes ............................... 8,344 6,937
Deferred income taxes ...................... 3,627 1,594
----------- -----------
Total current liabilities .............. 294,656 245,264
----------- -----------
Noncurrent liabilities:
Long-term debt ............................. 605,740 631,124
Accrued pension costs ...................... 54,930 54,264
Accrued OPEB costs ......................... 45,474 40,271
Accrued environmental costs ................ 50,660 56,593
Deferred income taxes ...................... 255,735 252,095
Other ...................................... 31,984 29,869
----------- -----------
Total noncurrent liabilities ........... 1,044,523 1,064,216
----------- -----------
Minority interest ............................ 120,846 96,104
----------- -----------
Stockholders' equity:
Common stock ............................... 1,262 1,341
Additional paid-in capital ................. 47,657 117,824
Retained earnings .......................... 629,773 624,506
Accumulated other comprehensive income:
Marketable securities .................... 84,264 85,450
Currency translation ..................... (35,590) (29,887)
Pension liabilities ...................... (36,961) (37,220)
Treasury stock ............................. (75,649) (102,514)
----------- -----------
Total stockholders' equity ............. 614,756 659,500
----------- -----------
$ 2,074,781 $ 2,065,084
=========== ===========
Commitments and contingencies (Note 1)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31, 2002 and 2003
(In thousands, except per share data)
2002 2003
---- ----
Revenues and other income:
Net sales .......................................... $ 253,747 $ 305,386
Other, net ......................................... 14,940 8,602
--------- ---------
268,687 313,988
--------- ---------
Costs and expenses:
Cost of sales ...................................... 201,395 236,099
Selling, general and administrative ................ 47,049 56,345
Interest ........................................... 14,433 14,419
--------- ---------
262,877 306,863
--------- ---------
5,810 7,125
Equity in earnings of:
Titanium Metals Corporation ("TIMET") .............. (11,840) (2,774)
Other .............................................. 326 684
--------- ---------
Income (loss) before income taxes ................ (5,704) 5,035
Provision for income taxes (benefit) ................. (1,197) 2,009
Minority interest in after-tax earnings (losses) ..... (796) 1,430
--------- ---------
Income (loss) before cumulative effect of
change in accounting principle .................. (3,711) 1,596
Cumulative effect of change in accounting principle .. -- 586
--------- ---------
Net income (loss) ................................ $ (3,711) $ 2,182
========= =========
Pro forma income (loss) before cumulative
effect of change in accounting principle* ........... $ (3,722) $ 1,596
========= =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Three months ended March 31, 2002 and 2003
(In thousands, except per share data)
2002 2003
---- ----
Basic and diluted earnings (loss) per share:
Income (loss) before cumulative effect of
change in accounting principle .................. $ (.03) $ .01
Cumulative effect of change in accounting
principle ....................................... -- .01
----------- -----------
Net income (loss) .............................. $ (.03) $ .02
=========== ===========
Pro forma income (loss) before cumulative
effect of change in accounting principle* ....... $ (.03) $ .01
=========== ===========
Cash dividends per share ........................... $ .06 $ .06
=========== ===========
Shares used in the calculation of per share amounts:
Basic earnings per common share .................. 115,243 118,284
Dilutive impact of outstanding stock options ..... -- 140
----------- -----------
Diluted earnings per share ....................... 115,243 118,424
=========== ===========
* Assumes Statement of Financial Accounting Standards No. 143 had been
adopted as of January 1, 2002. See Note 13.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three months ended March 31, 2002 and 2003
(In thousands)
2002 2003
---- ----
Net income (loss) .................................... $(3,711) $ 2,182
------- -------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment ................... 1,680 1,186
Currency translation adjustment .................... (2,615) 5,703
Pension liabilities adjustment ..................... (2,213) (259)
------- -------
Total other comprehensive income (loss), net ..... (3,148) 6,630
------- -------
Comprehensive income (loss) .................... $(6,859) $ 8,812
======= =======
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2003
(In thousands)
Accumulated other comprehensive income
Additional ----------------------------------- Total
Common paid-in Retained Marketable Currency Pension Treasury stockholders'
stock capital earnings securities translation liabilities stock equity
----- ---------- -------- ---------- ----------- ----------- -------- ------------
Balance at December 31, 2002 $1,262 $ 47,657 $ 629,773 $84,264 $(35,590) $(36,961) $ (75,649) $ 614,756
Net income ................. -- -- 2,182 -- -- -- -- 2,182
Dividends .................. -- -- (7,449) -- -- -- -- (7,449)
Other comprehensive income
(loss), net ............... -- -- -- 1,186 5,703 (259) -- 6,630
Merger transactions - Valhi
shares issued to acquire
Tremont shares attributable
to:
Tremont minority interest 49 50,925 -- -- -- -- -- 50,974
NL's holdings of Tremont . 30 19,219 -- -- -- -- (19,249) --
Adjust treasury stock for
Valhi shares held by NL ... -- -- -- -- -- -- (7,616) (7,616)
Other, net ................. -- 23 -- -- -- -- -- 23
------ -------- --------- ------- -------- -------- --------- ---------
Balance at March 31, 2003 .. $1,341 $117,824 $ 624,506 $85,450 $(29,887) $(37,220) $(102,514) $ 659,500
====== ======== ========= ======= ======== ======== ========= =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2002 and 2003
(In thousands)
2002 2003
---- ----
Cash flows from operating activities:
Net income (loss) ....................................... $ (3,711) $ 2,182
Depreciation, depletion and amortization ................ 14,856 17,411
Securities transaction gains, net ....................... (1,915) (319)
Proceeds from disposal of marketable securities (trading) 8,659 50
Noncash interest expense ................................ 704 584
Deferred income taxes ................................... (402) (1,030)
Minority interest ....................................... (796) 1,430
Other, net .............................................. (1,396) (2,136)
Equity in:
TIMET ................................................. 11,840 2,774
Other ................................................. (326) (684)
Cumulative effect of change in accounting principle ..... -- (586)
Distributions from:
Manufacturing joint venture ........................... 900 --
Other ................................................. 361 --
-------- --------
28,774 19,676
Change in assets and liabilities:
Accounts and other receivables ........................ (13,994) (30,282)
Inventories ........................................... 44,843 20,111
Accounts payable and accrued liabilities .............. (37,477) (29,850)
Accounts with affiliates .............................. (845) 2,557
Income taxes .......................................... (829) 17
Other, net ............................................ 2,826 2,876
-------- --------
Net cash provided (used) by operating activities .. 23,298 (14,895)
-------- --------
Cash flows from investing activities:
Capital expenditures .................................... (9,446) (8,741)
Purchases of:
TIMET common stock .................................... -- (172)
NL common stock ....................................... (3,271) --
Business unit ......................................... (9,149) --
Investment in manufacturing joint venture ............... -- (1,250)
Change in restricted cash equivalents, net .............. (185) 2,087
Other, net .............................................. (63) (204)
-------- --------
Net cash used by investing activities ............. (22,114) (8,280)
-------- --------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 2002 and 2003
(In thousands)
2002 2003
---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings ........................................ $ -- $ 17,106
Principal payments ................................ (25,445) (2,971)
Deferred financing costs paid ..................... -- (417)
Loans from affiliate:
Loans ............................................. 3,924 1,571
Repayments ........................................ (7,325) (11,000)
Valhi dividends paid ................................ (6,958) (7,449)
Distributions to minority interest .................. (2,446) (2,061)
Other, net .......................................... 195 98
--------- --------
Net cash used by financing activities ........... (38,055) (5,123)
--------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing activities ....... (36,871) (28,298)
Currency translation ................................ 147 918
Business unit acquired .............................. 196 --
Cash and equivalents at beginning of period ........... 154,413 94,679
--------- --------
Cash and equivalents at end of period ................. $ 117,885 $ 67,299
========= ========
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized .............. $ 8,345 $ 7,359
Income taxes, net ................................. 3,301 3,296
Business unit acquired - net assets consolidated:
Cash and cash equivalents ......................... $ 196 $ --
Restricted cash equivalents ....................... 2,685 --
Goodwill and other intangible assets .............. 9,007 --
Other non-cash assets ............................. 1,259 --
Liabilities ....................................... (3,998) --
--------- --------
Cash paid ......................................... $ 9,149 $ --
========= ========
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
The consolidated balance sheet of Valhi, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2002 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 2003, and the consolidated statements of
operations, comprehensive income, stockholders' equity and cash flows for the
interim periods ended March 31, 2002 and 2003, have been prepared by the
Company, without audit, in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the consolidated financial position, results of operations and
cash flows have been made.
The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted, and certain prior year
amounts have been reclassified to conform to the current year presentation. The
accompanying consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
2002 (the "2002 Annual Report").
Basic earnings per share of common stock is based upon the weighted average
number of common shares actually outstanding during each period. Diluted
earnings per share of common stock includes the impact of outstanding dilutive
stock options.
Commitments and contingencies are discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Legal Proceedings"
and the 2002 Annual Report.
Contran Corporation holds, directly or through subsidiaries, approximately
90% of Valhi's outstanding common stock. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of
certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is
sole trustee. Mr. Simmons, the Chairman of the Board of Valhi and Contran, may
be deemed to control such companies.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 143, Accounting for Asset Retirement Obligations, effective January 1, 2003.
See Note 13.
As disclosed in the 2002 Annual Report, the Company accounts for
stock-based employee compensation in accordance with Accounting Principles Board
Opinion ("APBO") No. 25, Accounting for Stock Issued to Employees, and its
various interpretations. Under APBO No. 25, no compensation cost is generally
recognized for fixed stock options in which the exercise price is greater than
or equal to the market price on the grant date. In the fourth quarter of 2002,
NL commenced accounting for its stock options using the variable accounting
method of APBO No. 25, which requires the intrinsic value of all unexercised
stock options (including stock options with an exercise price at least equal to
the market price on the date of grant) to be accrued as an expense, with
subsequent increases (decreases) in NL's market price resulting in recognition
of additional compensation expense (income). Net compensation cost recognized by
the Company in accordance with APBO No. 25 was nominal in the first quarter of
2002, and net compensation income recognized by the Company was $500,000 in the
first quarter of 2003.
The following table presents what the Company's consolidated net income
(loss), and related per share amounts, would have been in the first quarter of
2002 and 2003 if Valhi and its subsidiaries and affiliates had each elected to
account for their respective stock-based employee compensation related to stock
options in accordance with the fair value-based recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, for all awards granted
subsequent to January 1, 1995.
Three months
ended March 31,
2002 2003
---- ----
In millions, except
per share amounts)
Net income (loss) as reported .......................... $(3.7) $ 2.2
Adjustments, net of applicable income tax
effects and minority interest:
Stock-based employee compensation expense
(income) determined under APBO No. 25 ............... -- (.3)
Stock-based employee compensation expense
determined under SFAS No. 123 ....................... (.7) (.4)
----- -----
Pro forma net income ................................... $(4.4) $ 1.5
===== =====
Basic and diluted net income (loss) per share:
As reported .......................................... $(.03) $ .02
Pro forma ............................................ (.04) .01
Note 2 - Business segment information:
% owned at
Business segment Entity March 31, 2003
Chemicals NL Industries, Inc. 85%
Component products CompX International Inc. 69%
Waste management Waste Control Specialists LLC 90%
Titanium metals TIMET 40%
The Company's ownership of NL includes 64% owned directly by Valhi and 21%
owned directly by Tremont LLC, a wholly-owned subsidiary of Valhi. Tremont LLC
also owns substantially all of the Company's interest in TIMET. Valhi owns a
nominal number of shares of TIMET directly. During the first quarter of 2003,
the Company acquired additional shares of TIMET common stock in market
transactions for an aggregate of $172,000, increasing the Company's ownership of
TIMET to 40% at March 31, 2003. 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.
Chemicals operating income, as presented below, differs from amounts
separately reported by NL due to amortization of purchase accounting basis
adjustments recorded by the Company. Similarly, the Company's equity in earnings
of TIMET differs from the Company's pro-rata share of TIMET's
separately-reported results. Component products operating income, as presented
below, may differ from amounts separately reported by CompX because the Company
defines operating income differently than CompX.
Three months ended
March 31,
2002 2003
---- ----
(In millions)
Net sales:
Chemicals ........................................ $202.4 $253.0
Component products ............................... 48.5 51.0
Waste management ................................. 2.8 1.4
------ ------
Total net sales ................................ $253.7 $305.4
====== ======
Operating income:
Chemicals ........................................ $ 19.3 $ 30.7
Component products ............................... 2.1 1.3
Waste management ................................. (2.0) (2.0)
------ ------
Total operating income ......................... 19.4 30.0
General corporate items:
Interest and dividend income ..................... 8.5 8.3
Securities transactions, net ..................... 1.9 .3
Legal settlements, net ........................... 1.9 --
General expenses, net ............................ (11.5) (17.1)
Interest expense ................................... (14.4) (14.4)
------ ------
5.8 7.1
Equity in:
TIMET ............................................ (11.8) (2.8)
Other ............................................ .3 .7
------ ------
Income (loss) before income taxes .............. $ (5.7) $ 5.0
====== ======
At December 31, 2002, Valhi and NL owned 80% and 20%, respectively, of
Tremont Group, Inc., and Tremont Group owned approximately 80% of Tremont
Corporation. In addition, Valhi and NL each owned a nominal number of Tremont
shares directly. 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 exchange 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.
For financial reporting purposes, the Tremont shares previously held by NL
(either directly or indirectly through NL's ownership interest in Tremont Group)
were already considered as part of the Valhi consolidated group's ownership of
Tremont to the extent of Valhi's ownership interest in NL. Therefore, that
portion of such Tremont shares was not considered as held by the Tremont
minority stockholders. As a result, the Valhi shares issued to NL in the merger
transactions described above were deemed to have been issued in exchange for the
Tremont shares held by the Tremont minority interest only to the extent that
Valhi did not have an ownership interest in NL. At March 31, 2003, NL and its
subsidiaries owned an aggregate of 4.7 million shares of Valhi common stock,
including 3.5 million shares received by NL in the merger transactions described
above and 1.2 million shares previously acquired by NL. As discussed in the 2002
Annual Report, the amount shown as treasury stock in the Company's consolidated
balance sheet for financial reporting purposes includes the Company's
proportional interest in the shares of Valhi common stock held by NL.
Accordingly, a portion of the 3.5 million shares of Valhi common stock issued to
NL in the merger transactions were reported as treasury stock, and were not
deemed to have been issued in exchange for Tremont shares held by the minority
interest, since they represent shares issued to "acquire" the portion of the
Tremont shares held directly or indirectly by NL that were already considered as
part of the Valhi consolidated group's ownership of Tremont.
The following table presents the number of Valhi common shares that were
issued pursuant to the merger transactions described above.
Equivalent
Tremont Valhi
shares shares(1)
------- ---------
Valhi shares issued to NL in exchange for
NL's ownership interest in Tremont Group:
Valhi shares issued to NL(2) 3,495,200
Less shares deemed Valhi has issued to
itself based on Valhi's ownership interest
in NL (2,957,288)
-----------
537,912
-----------
Valhi shares issued to the Tremont stockholders:
Total number of Tremont shares outstanding 6,424,858
Less Tremont shares held by Tremont Group and Valhi(3) (5,146,421)
-----------
1,278,437 4,346,686
===========
Less fractional shares converted into cash (1,758)
Less shares deemed Valhi has issued to itself based on
Valhi's ownership interest in NL(4) (23,494)
---------
4,321,434
----------
Net Valhi shares issued to acquire the Tremont
minority interest 4,859,346
===========
(1) Based on the 3.4 exchange ratio.
(2) Represents 5,141,421 shares of Tremont held by Tremont Group, multiplied by
NL's 20% ownership interest in Tremont Group, adjusted for the 3.4 exchange
ratio in the merger.
(3) The Tremont shares held by Tremont Group and Valhi were cancelled in the
merger transactions.
(4) Represents shares of Tremont held directly by NL, multiplied by Valhi's
ownership interest in NL and adjusted for the 3.4 exchange ratio.
For financial reporting purposes, the merger transactions described above
were accounted for by the purchase method (step acquisition of Tremont). The
shares of Valhi common stock issued to the Tremont minority interest were valued
at $10.49 per share, representing the average of Valhi's closing NYSE stock
price for the period beginning two trading days prior to the November 5, 2002
public announcement of the signing of the definitive merger agreement and ending
two trading days following such public announcement. The shares of Valhi common
stock issued to acquire the Tremont shares held by NL that were already
considered as part of the Valhi's consolidated groups ownership of Tremont,
which were reported as treasury stock, were valued at carryover cost basis of
approximately $19.2 million. The following presents the purchase price for the
step acquisition of Tremont. The value assigned to the shares of Valhi common
stock issued is $10.49 per share, as discussed above.
Valhi
shares Assigned
issued value
---------- ------------
(In millions)
Net Valhi shares issued ..................... 4,859,346 $ 51.0
============
Plus cash fees and expenses ................. 0.8
------------
Total purchase price .................... $ 51.8
============
The purchase price has been allocated based upon a preliminary estimate of
the fair value of the net assets acquired as follows:
Amount
(In millions)
Book value of historical minority interest in Tremont's net
assets acquired .................................................... $28.7
Remaining purchase price allocation:
Increase property and equipment to fair value ..................... 4.9
Increase mining properties to fair value .......................... .6
Reduce Tremont's accrued OPEB costs to accumulated benefit
obligations ...................................................... 4.4
Adjust deferred income taxes ...................................... 8.3
Goodwill .......................................................... 4.9
-----
Purchase price .................................................. $51.8
=====
The adjustments to increase the carrying value of property and equipment
and mining properties relate to such assets of NL, and gives recognition to the
effect that Valhi's acquisition of the minority interest in Tremont results in
an increase in Valhi's effective ownership of NL due to Tremont's ownership of
NL. The reduction in Tremont's accrued OPEB costs to an amount equal to the
accumulated benefit obligations eliminates the unrecognized prior service credit
and the unrecognized actuarial gains. The adjustment to deferred income taxes
includes (i) the deferred income tax effect of the estimated purchase price
allocated to property and equipment, mining properties and accrued OPEB costs
and (ii) the effect of adjusting the deferred income taxes separately-recognized
by Tremont (principally an elimination of a deferred income tax asset valuation
allowance separately-recognized by Tremont which Valhi does not believe is
required to be recognized at the Valhi level under the "more-likely-than-not"
recognition criteria).
Assuming the merger transactions had been completed as of January 1, 2002,
the Company would have reported a net loss of $5.5 million, or $.05 per diluted
share, in the first quarter of 2002. Such pro forma effect on the Company's
reported net income in the first quarter of 2003 was not material.
As noted above, the Company's proportional interest in shares of Valhi
common stock held by NL are reported as treasury stock in the Company's
consolidated balance sheet. As a result of the merger transactions discussed
above, the acquisition of minority interest in Tremont effectively resulted in
an increase in the Company's overall ownership of NL due to Tremont's 21%
ownership interest in NL. Accordingly, as a result of the merger transactions
noted above, the Company also recognized a $7.6 million increase in its treasury
stock attributable to the shares of Valhi common stock held by NL. At March 31,
2003, the amount reported as treasury stock, at cost, in the Company's
consolidated balance sheet includes an aggregate of $37.9 million attributable
to the 4.7 million shares of Valhi common stock held by NL (or 85% of NL's
aggregate original cost basis of $44.8 million).
Note 3 - Marketable securities:
December 31, March 31,
2002 2003
------------ ---------
(In thousands)
Current assets:
Halliburton Company common stock (trading) ......... $ 47 $ --
Restricted debt securities (available-for-sale) .... 9,670 9,715
-------- --------
$ 9,717 $ 9,715
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC .................. $170,000 $170,000
Restricted debt securities ......................... 9,232 9,600
Other common stocks ................................ 350 252
-------- --------
$179,582 $179,852
======== ========
Note 4 - Accounts and other receivables:
December 31, March 31,
2002 2003
--------- ----------
(In thousands)
Accounts receivable .......................... $ 174,644 $ 207,449
Notes receivable ............................. 2,221 1,313
Accrued interest ............................. 114 9
Allowance for doubtful accounts .............. (6,356) (6,350)
--------- ---------
$ 170,623 $ 202,421
========= =========
Note 5 - Inventories:
December 31, March 31,
2002 2003
------------ ---------
(In thousands)
Raw materials:
Chemicals .................................. $ 54,077 $ 34,046
Component products ......................... 6,573 6,235
-------- --------
60,650 40,281
-------- --------
In process products:
Chemicals .................................. 15,936 18,136
Component products ......................... 12,602 12,334
-------- --------
28,538 30,470
-------- --------
Finished products:
Chemicals .................................. 109,978 113,561
Component products ......................... 12,296 9,500
-------- --------
122,274 123,061
-------- --------
Supplies (primarily chemicals) ............... 28,071 31,125
-------- --------
$239,533 $224,937
======== ========
Note 6 - Accrued liabilities:
December 31, March 31,
2002 2003
----------- ---------
(In thousands)
Current:
Employee benefits .......................... $ 43,534 $ 40,226
Environmental costs ........................ 57,496 55,348
Deferred income ............................ 6,018 3,737
Interest ................................... 317 7,272
Other ...................................... 42,101 43,898
-------- --------
$149,466 $150,481
======== ========
Noncurrent:
Insurance claims and expenses .............. $ 16,416 $ 16,395
Employee benefits .......................... 10,409 8,792
Deferred income ............................ 1,875 1,774
Asset retirement obligations ............... 1,665 1,367
Other ...................................... 1,619 1,541
-------- --------
$ 31,984 $ 29,869
======== ========
The asset retirement obligations are discussed in Note 13.
Note 7 - Other assets:
December 31, March 31,
2002 2003
------------ ---------
(In thousands)
Investment in affiliates:
TiO2 manufacturing joint venture ............. $130,009 $131,259
TIMET ........................................ 12,920 10,205
Other ........................................ 12,620 13,304
-------- --------
$155,549 $154,768
======== ========
Loans and other receivables:
Snake River Sugar Company:
Principal .................................. $ 80,000 $ 80,000
Interest ................................... 27,910 29,208
Other ........................................ 5,566 4,640
-------- --------
113,476 113,848
Less current portion ......................... 2,221 1,313
-------- --------
Noncurrent portion ........................... $111,255 $112,535
======== ========
Other noncurrent assets:
Deferred financing costs ..................... $ 10,588 $ 10,596
Refundable insurance deposits ................ 1,864 1,918
Waste disposal operating permits ............. 1,754 1,561
Restricted cash equivalents .................. 2,158 779
Other ........................................ 14,756 11,150
-------- --------
$ 31,120 $ 26,004
======== ========
At March 31, 2003, the Company held 1.3 million shares of TIMET common
stock with a quoted market price of $21.13 per share, or an aggregate of $27
million.
At March 31, 2003, TIMET reported total assets of $577.3 million and
stockholders' equity of $145.6 million. TIMET's total assets at such date
include current assets of $284.8 million, property and equipment of $245.7
million and investment in joint ventures of $22.8 million. TIMET's total
liabilities at such date include current liabilities of $111.5 million,
long-term debt of $20.3 million, accrued OPEB and pension costs aggregating
$73.4 million and convertible preferred securities (excluding deferred
distributions) of $201.2 million.
During the first quarter of 2003, TIMET reported net sales of $99.3
million, an operating loss of $8.1 million and a loss before cumulative effect
of a change in accounting principle of $13.4 million (2002 - net sales of $104.4
million, an operating loss of $4.7 million and a loss before cumulative effect
of change in accounting principle of $36.1 million).
Note 8 - Other income:
Three months ended
March 31,
2002 2003
---- ----
(In thousands)
Securities earnings:
Dividends and interest ...................... $ 8,486 $ 8,251
Securities transactions, net ................ 1,915 319
------- -------
10,401 8,570
Legal settlement gains, net ................... 1,920 --
Noncompete agreement income ................... 1,000 333
Currency transactions, net .................... 308 (1,694)
Pension settlement gain ....................... 677 --
Other, net .................................... 634 1,393
------- -------
$14,940 $ 8,602
======= =======
Note 9 - Long-term debt:
December 31, March 31,
2002 2003
------------ ---------
(In thousands)
Valhi - Snake River Sugar Company .............. $250,000 $250,000
-------- --------
Subsidiaries:
Kronos International:
Senior Secured Notes ....................... 296,942 305,691
Bank credit facility ....................... 27,077 43,098
CompX bank credit facility ................... 31,000 32,000
Valcor Senior Notes .......................... 2,431 --
Other ........................................ 2,417 1,804
-------- --------
359,867 382,593
-------- --------
609,867 632,593
Less current maturities ........................ 4,127 1,469
-------- --------
$605,740 $631,124
======== ========
In February 2003, the Company redeemed the Valcor Senior Notes at par.
Note 10 - Accounts with affiliates:
December 31, March 31,
2002 2003
------------ ---------
(In thousands)
Current receivables from affiliates:
Income taxes receivable from Contran ................. $ 3,481 $ 3,600
TIMET ................................................ 84 16
Other ................................................ 382 845
------- -------
$ 3,947 $ 4,461
======= =======
Noncurrent receivable from affiliate -
loan to Contran family trust .......................... $18,000 $18,000
======= =======
Payables to affiliates:
Valhi demand loan from Contran ....................... $11,171 $ 1,742
Louisiana Pigment Company ............................ 7,614 9,931
Contran - trade items ................................ 1,292 1,215
TIMET ................................................ 32 16
Other, net ........................................... 13 82
------- -------
$20,122 $12,986
======= =======
Note 11 - Provision for income taxes (benefit):
Three months ended
March 31,
2002 2003
---- ----
(In millions)
Expected tax expense (benefit) ............................. $(2.0) $1.8
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies ............. (.6) 1.1
Non-U.S. tax rates ......................................... (.2) (.5)
Change in NL's and Tremont's deferred income tax
valuation allowance, net .................................. 1.3 (.7)
U.S. state income taxes, net ............................... .1 .2
Other, net ................................................. .2 .1
---- ----
$(1.2) $2.0
==== ====
Comprehensive provision for income taxes
(benefit) allocated to:
Income (loss) before cumulative effect of change
in accounting principle ................................. $(1.2) 2.0
Cumulative effect of change in accounting principle ...... -- .3
Other comprehensive income:
Marketable securities .................................. .7 1.3
Currency translation ................................... (.2) .9
Pension liabilities .................................... (1.5) --
---- ----
$(2.2) $4.5
==== ====
Note 12 - Minority interest:
December 31, March 31,
2002 2003
------------ ---------
(In thousands)
Minority interest in net assets:
NL Industries ............................. $ 40,880 $42,269
Tremont Corporation ....................... 26,911 --
CompX International ....................... 44,539 45,284
Subsidiaries of NL ........................ 8,516 8,551
-------- -------
$120,846 $96,104
======== =======
Three months ended
March 31,
2002 2003
---- ----
(In thousands)
Minority interest in income (loss) before
cumulative effect of change in
accounting principle:
NL Industries ............................ $ 1,113 $ 1,448
Tremont Corporation ...................... (2,510) (217)
CompX International ...................... 417 175
Subsidiaries of NL ....................... 184 24
------- -------
$ (796) $ 1,430
======= =======
As previously reported, all of Waste Control Specialists aggregate,
inception-to-date net losses have accrued to the Company for financial reporting
purposes, and all of Waste Control Specialists future net income or net losses
will also accrue to the Company until Waste Control Specialists reports positive
equity attributable to its other owner. Accordingly, no minority interest in
Waste Control Specialists' net assets or net earnings (losses) is reported
through March 31, 2003.
Subsequent to February 2003, following completion of the merger of Valhi
and Tremont discussed in Note 2, the Company no longer reports minority interest
in Tremont's net assets or net earnings (losses).
Note 13 - Accounting principle newly adopted in 2003:
Asset retirement obligations. The Company adopted 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 is 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 is accreted to its future value, and
the capitalized cost is depreciated over the useful life of the related asset.
Future revisions in the estimated fair value of the asset retirement obligation,
due to changes in the amount and/or timing of the expected future cash flows to
settle the retirement obligation, are accounted for prospectively as an
adjustment to the previously-recognized asset retirement cost. 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 recognized (i) an asset retirement cost capitalized
as an increase to the carrying value of its property 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 were measured using information, assumptions and interest rates all
as of January 1, 2003. The amount recognized as the asset retirement cost was
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, was 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 was 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 was a net gain of
approximately $600,000 as summarized in the table below. Such change in
accounting relates principally to accounting for closure and post-closure
obligations at the Company's waste management operations.
Amount
(In millions)
Increase in carrying value of net property and equipment:
Cost .............................................................. $ .8
Accumulated depreciation .......................................... (.2)
Investment in TIMET ................................................. (.1)
Decrease in carrying value of previously-accrued closure and
post-closure activities ............................................ 1.7
Asset retirement obligations recognized ............................. (1.3)
Deferred income taxes ............................................... (.3)
----
Net impact ........................................................ $ .6
====
The increase in the asset retirement obligations from January 1, 2003 ($1.3
million) to March 31, 2003 ($1.4 million) is due to accretion expense, which is
reported as a component of cost of goods sold in the accompanying statement of
operations. If the Company had adopted SFAS No. 143 as of January 1, 2002, the
asset retirement obligations would have been $1.1 million and $1.2 million at
January 1, 2002 and March 31, 2002, respectively.
- -------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
General
The Company reported income before cumulative effect of change in
accounting principle of $1.6 million, or $.01 per diluted share, in the first
quarter of 2003 compared to a loss of $3.7 million, or $.03 per diluted share,
in the first quarter of 2002. Excluding the effects of the items summarized in
the table below, the Company would have reported income before cumulative effect
of change in accounting principle of $.01 per diluted share in the first quarter
of 2003 compared to nil per diluted share in the first quarter of 2002.
The Company believes the analysis presented in the following table is
useful in understanding the comparability of its results of operations for the
first quarters of 2002 and 2003. Each of these items are more fully discussed
below in the applicable sections of this "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Results of Operations or in
the 2002 Annual Report."
Diluted earnings per share -
three months ended March 31,
2002 2003
---- ----
Legal settlement gains, net (1) ............................. $.01 $--
Equity in earnings of TIMET-impairment provision (2) ........ (.05) --
Securities transactions, net ................................ .01 --
Other, net .................................................. -- .01
---- ----
$(.03) $.01
==== ====
(1) Settlements NL reached with certain of its principal former insurance
carriers.
(2) TIMET's provisions for other than temporary declines in value of the
convertible preferred securities of Special Metals Corporation held by
TIMET.
Total operating income increased 55% in the first quarter of 2003 compared
to the same period in 2002 due primarily to higher chemical earnings at NL,
offset in part by lower component products operating income at CompX.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "could," "anticipates," "expected" or comparable terminology, or by
discussions of strategies or trends. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve substantial risks and uncertainties that
could significantly impact expected results, and actual future results could
differ materially from those described in such forward-looking statements. While
it is not possible to identify all factors, the Company continues to face many
risks and uncertainties. Among the factors that could cause actual future
results to differ materially are the risks and uncertainties discussed in this
Quarterly Report and those described from time to time in the Company's other
filings with the 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, the Norwegian kroner and
the Canadian dollar),
o Operating interruptions (including, but not limited to, labor disputes,
leaks, fires, explosions, unscheduled or unplanned downtime and
transportation interruptions),
o 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 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 license 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 or tax settlement initiatives,
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 new information, future events
or otherwise.
Chemicals
Selling prices for TiO2, NL's principal product, were generally decreasing
during 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 and the first quarter of 2003. NL's TiO2 operations are conducted through
its wholly-owned subsidiary Kronos, Inc.
Three months ended
March 31, %
2002 2003 Change
---- ---- ------
(In millions)
Net sales ........................... $202.4 $253.0 +25%
Operating income .................... 19.3 30.7 +59%
Chemicals sales and operating income increased in the first quarter of 2003
compared to the first quarter of 2002 due primarily to higher average selling
prices for titanium dioxide pigments ("TiO2"), as well as higher TiO2 sales and
production volumes, partially offset by higher operating costs (particularly
energy costs). 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 in the first quarter of 2003 were 6% higher than the first quarter of
2002. NL's TiO2 sales volumes in the first quarter of 2003 were a first quarter
record and were 5% higher than the first quarter of 2002. NL's TiO2 production
volumes in the first quarter of 2003, an all-time record for NL for any quarter,
were 11% higher than the first quarter of 2002, with operating rates at near
full capacity in 2003 compared to 96% of capacity in 2002.
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, with both sales and production volumes in 2003 higher
compared to 2002. In December 2002 and January 2003, NL announced additional
price increases in Europe and North America that averaged 8% in Europe and 7% in
North America. NL's average TiO2 selling prices in billing currencies in the
first quarter of 2003 were 1% higher than the fourth quarter of 2002. NL is
hopeful that it will realize additional price increases during the remainder of
2003, but the extent to which NL can realize price increases will depend on
improving market conditions and global economic recovery. Overall, NL expects
its TiO2 operating income in the remainder of 2003 will continue to be higher
than the same periods in 2002, primarily due to higher average TiO2 selling
prices and higher TiO2 sales and production volumes. 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 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, 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. When translated from billing currencies
to U.S. dollars using actual foreign currency exchange rates prevailing during
the respective periods, NL's average TiO2 selling prices in the first quarter of
2003 increased 18% compared to the first quarter of 2002 (6% increase compared
to the fourth quarter of 2002). Overall, fluctuations in the value of the U.S.
dollar relative to other currencies, primarily the euro, increased TiO2 sales in
the first quarter of 2003 by a net $26.6 million compared to the same period in
2002. 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 the first quarter of 2003 compared to the
first quarter of 2002. Overall, the net impact of currency exchange rate
fluctuations on NL's operating income comparisons was not significant in 2003 as
compared to 2002.
Chemicals operating income, as presented above, is stated net of
amortization of Valhi's purchase accounting adjustments made in conjunction with
its acquisitions of its interest in NL. Such adjustments result in additional
depreciation, depletion and amortization expense beyond amounts separately
reported by NL. Such additional non-cash expenses reduced chemicals operating
income, as reported by Valhi, by approximately $2.9 million in the first quarter
of 2002 and approximately $3.6 million in the first quarter of 2003 as compared
to amounts separately reported by NL.
Component products
Three months ended
March 31, %
2002 2003 Change
---- ---- ------
(In millions)
Net sales .......................... $48.5 $51.0 +5%
Operating income ................... 2.1 1.3 -37%
Component products sales increased in the first quarter of 2003 compared to
the first quarter of 2002 due primarily to the favorable effect of changes in
foreign currency exchange rates, as discussed below, and to a lesser extent due
to increased sales volumes and selling prices for precision ball-bearing slide
products. Sales of slide and security products increased 13% and 1%,
respectively, in the first quarter of 2003 compared to the first quarter of
2002. Sales of ergonomic products decreased 13% due to lower sales volumes.
Despite the increase in sales, operating income declined due primarily to
unfavorable changes in product mix (with a lower mix of higher-margin ergonomic
product sales) and costs associated with the consolidation of CompX's two
Canadian facilities into one facility, as well as the unfavorable effect of
fluctuations in foreign currency exchange rates discussed below. Expenses
associated with the Canadian plant consolidation, which commenced in the first
quarter of 2003, were approximately $400,000.
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 euro and the New
Taiwan dollar. In addition, a portion of CompX's sales generated from its
non-U.S. operations (principally in Canada) are denominated in the U.S. dollar.
Most raw materials, labor and other production costs for such non-U.S.
operations are denominated primarily in local currencies. Consequently, the
translated U.S. dollar value of CompX's foreign sales and operating results are
subject to currency exchange rate fluctuations which may favorably or
unfavorably impact reported earnings and may affect comparability of
period-to-period operating results. During the first quarter of 2003, currency
exchange rate fluctuations of the Canadian dollar and the euro positively
impacted component products sales comparisons with the first quarter of 2002
(principally with respect to slide products), but currency exchange rate
fluctuations of the Canadian dollar, the New Taiwan dollar and the euro
negatively impacted component products operating income comparisons for the same
periods. Excluding the effects of currency, component products sales would have
increased only 2% in the first quarter of 2003 compared to the same period in
2002, and operating income would have declined only 3%.
CompX expects to complete the consolidation of its Canadian facilities in
the second quarter of 2003. Expenses associated with the consolidation are
expected to be less in the second quarter of 2003 as compared to the first
quarter of the year. Benefits associated with the consolidation are expected to
begin to be realized in the second half of 2003.
CompX expects the current weak economic cycle will continue and negatively
impact its results for the remainder of 2003. Given the uncertainty of the
overall economic conditions and that a significant portion of CompX's sales are
derived from the office furniture industry (which tends to lag in its recovery
behind the rest of the economy), CompX continues to emphasize its focus on
business opportunities outside of the office furniture industry. Additional cost
evaluations are under review, which could result in charges for asset
impairment, including goodwill, and other expenses in future quarters.
Waste management
Three months ended
March 31,
2002 2003
---- ----
(In millions)
Net sales .................................. $2.8 $1.4
Operating loss ............................. (2.0) (2.0)
Waste management sales decreased in the first quarter of 2003 compared to
the first quarter of 2002 due to continued weak demand for waste management
services. Despite the decline in sales, the waste management operating loss in
the first quarter of 2003 was comparable to the same period in 2002 due to
continued emphasis on cost controls. Waste Control Specialists also continues to
explore opportunities to obtain certain types of new business that, if obtained,
could increase its sales and operating profits in the second half of 2003 as
compared to the first half of the year.
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 authorizations for the treatment
and storage of low-level and mixed radioactive waste streams provides certain
competitive advantages, a key element of Waste Control Specialists' long-term
strategy to provide "one-stop shopping" for hazardous, low-level and mixed
radioactive wastes includes obtaining additional regulatory authorizations for
the disposal of low-level and mixed radioactive wastes.
The current state law in Texas (where Waste Control Specialists' disposal
facility is located) currently prohibits the applicable Texas regulatory agency
from issuing a license for the disposal of low-level and mixed radioactive waste
to a private enterprise operating a disposal facility in Texas. During the two
previous Texas legislative sessions, which ended in May 1999 and 2001, Waste
Control Specialists supported a proposed change in state law that would allow
the regulatory agency to issue a low-level radioactive waste disposal license to
a private entity. Both legislative sessions ended without any such change in
state law. The 2003 session of the Texas legislature is currently in session and
is again considering a similar change in state law, which Waste Control
Specialists supports. There can be no assurance that the state law will be
changed or, assuming the state law is changed, that Waste Control Specialists
can be successful in obtaining any future license.
Waste Control Specialists is continuing its attempts to increase its sales
volumes from waste streams that conform to authorizations it currently has in
place. Waste Control Specialists is also continuing to identify certain waste
streams, and 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, even if the current Texas state law discussed above is not amended.
However, there can be no assurance that Waste Control Specialists' efforts will
prove successful in improving its cash flows. Valhi has in the past, and may in
the future, consider strategic alternatives with respect to Waste Control
Specialists. There can be no assurance that the Company would not report a loss
with respect to any such strategic transaction.
Equity in earnings of TIMET
Three months ended
March 31,
2002 2003
---- ----
(In millions)
TIMET historical:
Net sales ............................................. $104.4 $ 99.3
Operating loss ........................................ $ (4.7) $ (8.1)
Impairment of convertible preferred securities ........ (27.5) --
Other general corporate, net .......................... (.6) (.5)
Interest expense ...................................... (.8) (.7)
------ ------
(33.6) (9.3)
Income tax benefit (expense) .......................... 1.5 (.5)
Minority interest ..................................... (4.0) (3.6)
------ ------
Loss before cumulative effect of change in
accounting principles .............................. $(36.1) $(13.4)
====== ======
Equity in losses of TIMET ............................... $(11.8) $ (2.8)
====== ======
TIMET reported lower sales, and a higher operating loss, in the first
quarter of 2003 as compared to the first quarter of 2002. The decrease in sales
was due principally to a 14% decrease in TIMET's mill product sales volume and
changes in customer and product mix. During the first quarter of 2003, TIMET's
mill product selling prices (expressed in U.S. dollars using actual foreign
currency exchange rates prevailing during the respective periods) decreased 1%
as compared to the first quarter of 2002. In billing currencies (which exclude
the effects of fluctuations in the value of the U.S. dollar relative to other
currencies), TIMET's mill product selling prices decreased 6% compared to the
first quarter of 2002. During the first quarter of 2003, TIMET's melted product
sales volumes increased 53% compared to the first quarter of 2002, and melted
product selling prices decreased 12%. Substantially all melted products are sold
in U.S. dollars. TIMET's operating income comparisons were also negatively
impacted by reduced manufacturing efficiencies due to decreased production
levels in 2003, as average plant operating rates declined from 64% of capacity
in the first quarter of 2002 to 52% in the first quarter of 2003.
The percentage changes in TIMET's average selling prices for its melted and
mill products discussed above have been calculated to exclude the effect of
changes in product mix during the respective periods. Expressed in U.S. dollars
and based upon TIMET's actual product mix during the respective periods, TIMET's
average selling prices for mill products in the first quarter of 2003 increased
7% compared to the first quarter of 2002, and average selling prices for its
melted products decreased 16%.
TIMET's results in the first quarter of 2002 include a $27.5 million
provision for an other than temporary impairment of TIMET's investment in the
convertible preferred securities of Special Metals Corporation. In addition,
TIMET's effective income tax rate in both 2002 and 2003 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 $1.5 million 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. 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 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 accrued $1.5 million for this matter in 2002. Through March
31, 2003, TIMET has reimbursed the issuer approximately $500,000 under this
bond. At this time, TIMET understands that one minor claim (which TIMET expects
to recur annually) has been submitted under the second bond, and such claim is
currently under review. No payments have been made as of March 31, 2003 under
this claim, and no additional claims under the second bond are currently
anticipated. Accordingly, TIMET has recorded no accrual for any 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 of March 31, 2003, TIMET had $2.2 million accrued for pending and
potential future claims associated with certain standard grade titanium produced
by TIMET, which was subsequently found to contain tungsten inclusions as a
result of tungsten contaminated silicon purchased from an outside vendor. This
amount represents TIMET's best estimate of the most likely amount of loss 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 March 31, 2003, 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 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. In April 2003, TIMET received notice that the silicon
supplier had filed a voluntary petition in bankruptcy under Chapter 11. TIMET is
currently investigating what effect, if any, this bankruptcy may have on TIMET's
potential recovery. TIMET has not recorded any recoveries related to this matter
as of March 31, 2003.
Commercial airlines will continue to face unprecedented challenges during
2003. Global conflicts, the threat of terrorist attacks, a sluggish global
economy and the outbreak of the Severe Acute Respiratory Syndrome ("SARS") virus
have all contributed to lower airline traffic levels. Traffic results from the
major U.S. airlines, despite showing improvement in the months immediately
following the terrorist attacks in the U.S., have not returned to pre-attack
levels. As a result, according to The Airline Monitor, the major U.S. airlines
recorded operating losses of approximately $9 billion in 2002 after losing
nearly $11 billion in 2001. Four airlines based in North America have been
forced to seek legal protection from their creditors. The most recent forecast
of large commercial aircraft deliveries published by The Airline Monitor
projects 2003 deliveries for Boeing and Airbus to be 580 airplanes and to fall
slightly in 2004 to 570 airplanes. However, these projections do not fully
incorporate the potential adverse impacts of the worldwide events discussed
above. Finally, the current weakened state of the economy could prolong any
meaningful recovery in airline passenger traffic and demand for titanium in the
commercial aerospace market.
TIMET currently expects that its sales for the full year 2003 will be
approximately $365 million to $375 million, principally as a result of expected
increased volumes for both mill and melt products. TIMET's mill product sales
volumes in 2003 are expected to approximate 9,200 metric tons, which reflects a
4% increase over 2002 levels. Melted product sales volumes in 2003 are expected
to approximate 3,500 metric tons, which reflects a 46% increase over 2002
levels. These sales volume gains are being driven principally by a return to
more normalized inventory levels within the aerospace market supply chain,
increased military aerospace business and gains in commercial aerospace market
share.
TIMET's operating margins 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 to remain relatively
stable in 2003. TIMET is experiencing higher prices for certain types of scrap
but has mitigated those increased costs by utilizing other cheaper raw material
inputs. Overall, TIMET expects its capacity utilization should average about 50%
in 2003. However, TIMET's practical capacity utilization measures can vary
significantly based on product mix. TIMET has implemented a number of actions to
reduce its manufacturing costs, including supplier price concessions, stringent
spending controls and programs to improve manufacturing yields. These cost
reduction efforts have improved gross margins, and TIMET now expects that its
gross margins will be near break even for the year.
TIMET anticipates that Boeing will purchase about 0.8 million pounds of
product in 2003 under its long-term supply agreement with TIMET. At this
projected order level, TIMET expects to recognize about $25 million of income
under the take-or-pay provisions of such contract in 2003, substantially all of
which is expected to be recognized in the third and fourth quarters of 2003. Any
such earnings will be reported as operating income, but will not be included in
sales revenue, sales volume or gross margin.
TIMET anticipates its effective consolidated income tax rate will be
significantly below the U.S. statutory rate, because it does not expect to
record any income tax benefit on U.S. or U.K. losses generated in 2003.
TIMET expects to report an operating loss in 2003 of $10 million to $20
million, and a net loss of $30 million to $40 million, excluding the effects of
any potential restructuring or other special charges. TIMET currently
anticipates its results in the last half of 2003 will be improved compared to
the first half because of the estimated income expected to be earned under the
take-or-pay provisions of the Boeing agreement and, to a lesser extent, because
of cost reduction efforts.
TIMET's outlook for 2003 remains difficult given the softness in the
commercial aerospace market. TIMET is committed to increasing the scope of its
cost reduction efforts. On a longer-term basis, TIMET continues to evaluate
certain facility and product line consolidation opportunities toward the goal of
meaningfully reducing its fixed cost structure. Despite the current difficulties
facing aerospace manufacturers and TIMET, TIMET believes the titanium industry
has a promising future once aircraft deliveries eventually return to more
healthy levels and because of promising growth opportunities in military
aerospace and emerging markets. TIMET remains committed to positioning itself to
take advantage of those opportunities.
The Company accounts for its interest in TIMET by the equity method. The
Company's equity in earnings of TIMET differs from the amounts that would be
expected by applying the Company's ownership percentage to TIMET's
separately-reported earnings because of the effect of amortization of purchase
accounting adjustments made by the Company in conjunction with the Company's
acquisitions of its interests in TIMET. Amortization of such basis differences
generally increases earnings (or reduces losses) attributable to TIMET as
reported by the Company, and aggregated $2.1 million and $2.5 million in the
first quarter of 2002 and 2003, respectively.
The Company 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 March 31, 2003, the Company's net carrying value of its
investment in TIMET was $8.08 per share compared to a NYSE market price at that
date of $21.13 per share. The Company will continue to monitor and evaluate the
value of its investment in TIMET. In the event the Company determines any
decline in value of its investment in TIMET below its net carrying value has
occurred which is other than temporary, the Company would report a write-down at
that time.
General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend income decreased in the first quarter of 2003 compared to the first
quarter of 2002 due to a lower average level of invested funds and lower average
yields. Aggregate general corporate interest and dividend income is currently
expected to continue to be lower during the remainder of 2003 compared to same
periods in 2002 due primarily to a lower amount of funds available for
investment and lower average interest rates.
Securities transactions. Securities transaction gains in the first quarter
of 2003 are comprised principally of a $316,000 gain related to NL's receipt of
shares of Valhi common stock in exchange for shares of Tremont common stock held
directly or indirectly by NL (such gain being attributable to NL stockholders
other than the Company).
General corporate expenses. Net general corporate expenses in the first
quarter of 2003 were higher than the first quarter of 2002 due primarily to
higher environmental remediation expenses of NL. In addition, NL's $20 million
of proceeds from the disposal of its specialty chemicals business unit in
January 1998 related to its agreement not to compete in the rheological products
business was being recognized as a component of general corporate income
(expense) ratably over the five-year non-compete period ending in January 2003
($1 million recognized in the first quarter of 2002 and $333,000 recognized in
the first quarter of 2003). See Note 8 to the Consolidated Financial Statements.
Net general corporate expenses in 2003 are currently expected to continue to be
higher during the remainder of 2003 compared to the same periods in 2002, in
part due to the effect of recognizing no more income related to NL's non-compete
agreement as well as higher expected legal and environmental expenses of NL.
Interest expense. Interest expense in the first quarter of 2003 was
comparable to the same period in 2002 due primarily 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. Assuming
interest rates do not increase significantly from current levels, interest
expense in the remainder of 2003 is expected to continue to approximate the
amounts for the same periods in 2002.
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rates are explained in Note 11 to the Consolidated Financial
Statements. Income tax rates vary by jurisdiction (country and/or state), and
relative changes in the geographic mix of the Company's pre-tax earnings can
result in fluctuations in the effective income tax rate.
During the first quarter of 2003, NL reduced its deferred income tax asset
valuation allowance by approximately $700,000, primarily as a result of
utilization of certain income tax attributes for which the benefit had not
previously been recognized.
Minority interest. See Note 12 to the Consolidated Financial Statements.
Minority interest in NL's subsidiaries relates principally to NL's
majority-owned environmental management subsidiary, NL Environmental Management
Services, Inc. ("EMS"). EMS was established in 1998, at which time EMS
contractually assumed certain of NL's environmental liabilities. EMS' earnings
are based, in part, upon its ability to favorably resolve these liabilities on
an aggregate basis. The shareholders of EMS, other than NL, actively manage the
environmental liabilities and share in 39% of EMS' cumulative earnings. NL
continues to consolidate EMS and provides accruals for the reasonably estimable
costs for the settlement of EMS' environmental liabilities, as discussed below.
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 at March 31, 2003.
Following completion of the merger transactions in which Tremont became
wholly owned by Valhi in February 2003, the Company no longer reports minority
interest in Tremont's net assets or earnings. See Note 2 to the Consolidated
Financial Statements.
Accounting principle newly adopted in 2003. See Note 13 to the Consolidated
Financial Statements.
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 can significantly affect comparisons
of cash flow from operating activities from period to period and generally
result from the timing of production, sales, purchases and income tax payments.
For example, relative changes in assets and liabilities resulted in a net use of
cash of $34.6 million in the first quarter of 2003 compared to a net use of cash
of $5.5 million in the first quarter of 2002, with substantially all of such
relative change related to NL's operations.
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.
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. Also, proceeds from the disposal of marketable
securities classified as trading securities are reported as a component of cash
flows from operating activities, and such proceeds will generally differ from
the amount of the related gain or loss on disposal.
Certain other items included in the determination of net income have no
impact on cash flows from operating activities, but such items do impact cash
flows from investing activities (although their impact on such cash flows
differs from their impact on net income). For example, realized gains and losses
from the disposal of available-for-sale marketable securities and long-lived
assets are included in the determination of net income, although the proceeds
from any such disposal are shown as part of cash flows from investing
activities.
Investing and financing activities. Approximately 74% of the Company's
consolidated capital expenditures in the first quarter of 2003 relate to NL, 23%
relate to CompX and substantially all of the remainder relate to Waste Control
Specialists.
During the first quarter of 2003, the Company purchased additional shares
of TIMET common stock for $172,000.
During the first quarter of 2003, (i) Valhi repaid a net $9 million of its
short-term demand loans from Contran, (ii) CompX borrowed a net $1 million under
its revolving bank credit facility and (iii) NL borrowed an aggregate of euro 15
million ($16 million when borrowed) of borrowings under its European revolving
bank credit facility.
At March 31, 2003, unused credit available under existing credit facilities
approximated $167.4 million, which was comprised of $15.5 million available to
CompX under its new revolving credit facility, $43.0 million available to NL
under non-U.S. credit facilities, $40.0 million available to NL under its U.S.
credit facility and $68.9 million available to Valhi under its revolving bank
credit facility.
Chemicals - NL Industries
At March 31, 2003, NL had cash, cash equivalents and marketable debt
securities of $113 million, including restricted balances of $66 million, and NL
had $83 million available for borrowing under its U.S. and non-U.S. credit
facilities.
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.
o NL's and EMS' 1998 U.S. federal income tax returns are being examined by
the U.S. tax authorities, and NL and EMS have granted extensions of the
statute of limitations for assessments of tax with respect to their 1998
and 1999 income tax returns until September 30, 2004. Based upon the course
of the examination, NL anticipated that the IRS would propose a substantial
tax deficiency, including penalties and interest, related to a
restructuring transaction. In an effort to avoid protracted litigation and
minimize the hazards of such litigation, NL applied to take part in an IRS
settlement initiative applicable to transactions similar to the
restructuring transaction, and in April 2003 NL received notification from
the IRS that NL had been accepted into such settlement initiative. Under
the initiative, no penalties will be assessed and final settlement with the
IRS is to be reached through negotiation and, if necessary, through a
specified arbitration procedure. NL anticipates that settlement of the
matter will likely occur in 2004, resulting in payments of federal and
state tax and interest ranging from $33 million to $45 million. Additional
payments in later years may be required as part of the settlement. NL has
provided adequate accruals to cover the currently expected range of
settlement outcomes.
o 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 March 31,
2003). 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 April 2003, NL
received a notification from the Belgian tax authorities of their intent to
assess a tax deficiency related to 1999 that, including interest, is
expected to approximate euro 12 million ($13 million). NL believes the
proposed assessment is without merit, and in April 2003 NL filed a written
response in opposition to the notification of intent to assess.
o NL has received a notification from the Norwegian tax authorities of their
intent to assess tax deficiencies of approximately kroner 12 million ($2
million) relating to 1998 through 2000. NL has objected to this proposed
assessment in a written response to the Norwegian tax authorities.
o In the first quarter of 2003, NL was notified by the German federal fiscal
court that they had ruled in NL's favor concerning a claim for refund suit
in which NL sought refunds of prior taxes paid during the periods 1990
through 1997. NL expects to file amended German tax returns claiming such
tax refunds for all years affected by the court's decision, which is
expected to result in a net refund of taxes and interest of approximately
$30 million. As of March 31, 2003, NL has not reflected this tax refund in
its consolidated financial statements and expects to reflect the refund in
its consolidated financial statements once certain procedural requirements
are satisfied, including a review of the amended German tax returns by the
German 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 settlement initiatives, 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 March 31, 2003, NL had the equivalent of approximately $451 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. In 2002, the German
federal government had proposed certain changes to its income tax law, including
a proposal that would have imposed limitations on the annual utilization of
income tax loss carryforwards. Such proposal, if enacted, would have
significantly affected NL's future income tax expense and cash tax payments. In
April 2003, the German federal government passed a new tax law that does not
contain the provision that would have restricted the utilization of tax loss
carryforwards. Furthermore, the provisions contained in the new law are not
expected to materially impact NL's income tax expense or cash 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 ($104 million at March
31, 2003) 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
financial viability 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 $145
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. 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. 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.
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 the statute 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 March 31, 2003, NL had $57 million in cash, 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.
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 dividend policy, 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.
Component products - CompX International
CompX believes that its cash on hand, together with cash generated from
operations and borrowing availability under its new bank credit facility, will
be sufficient to meet CompX's liquidity needs for working capital, capital
expenditures, debt service and dividends for the foreseeable future. To the
extent that CompX's actual operating results or developments differ from CompX's
expectations, CompX's liquidity could be adversely affected. In this regard,
during 2002 and the first quarter of 2003, CompX's quarterly dividend of $.125
per share exceeded CompX's quarterly earnings per share. Depending on CompX's
future operations and cash requirements, CompX may 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
At March 31, 2003, Waste Control Specialists' indebtedness consists
principally of $24 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 March 31, 2003, TIMET had net cash of approximately $11.9 million,
consisting of $14.7 million of debt (excluding TIMET's capital lease obligations
and TIMET's convertible preferred securities and deferred distributions thereon)
and $26.6 million of cash and cash equivalents. At March 31, 2003, TIMET had
$132 million of borrowing availability under its various U.S. and European
credit agreements. TIMET presently expects to generate $25 million to $35
million in cash flow from operations during 2003, principally driven by
reductions in working capital, especially inventory, and the deferral of
distributions on the convertible preferred securities, 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 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 consolidated results of operations or cash flows in a
particular period.
At March 31, 2003, 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.
TIMET records liabilities related to legal proceedings when estimated costs
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 March 31, 2003, TIMET had 4,024,820 shares outstanding of its 6.625%
convertible preferred securities, representing an aggregate $201.2 million
liquidation amount, that mature in 2026. Each security is convertible into
shares of TIMET common stock at a conversion rate of .1339 shares of TIMET
common stock per convertible preferred security. Such convertible preferred
securities do not require principal amortization, and TIMET has the right to
defer distributions on the convertible preferred securities for one or more
quarters of up to 20 consecutive quarters, provided that such deferral period
may not extend past the 2026 maturity date. TIMET is prohibited from, among
other things, paying dividends on its common stock while distributions are being
deferred on the convertible preferred securities. In October 2002, TIMET elected
to exercise its right to defer future distributions on its convertible preferred
securities for a period of up to 20 consecutive quarters. Distributions will
continue to accrue at the coupon rate on the liquidation amount and unpaid
distributions. This deferral was effective starting with TIMET's December 1,
2002 scheduled payment. TIMET may consider resuming payment of distributions on
the convertible preferred securities once the outlook for TIMET's results from
operations improves substantially. Since TIMET exercised its right to defer
distributions, it is unable to, among other things, pay dividends on or
reacquire its capital stock during the deferral period. In May 2003, Valhi
commenced a tender offer to purchase up to 1 million shares of TIMET's
convertible preferred securities ($50 million aggregate liquidation amount) at a
cash price of $10 per share. The tender offer, unless extended by Valhi, expires
on June 2, 2003. See "-- General Corporate - Valhi."
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 LLC
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 ($1.3 million at March 31, 2003) 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 March 31, 2003 for any such cost. The amount accrued at March 31, 2003
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 and 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 October 2002, Tremont entered into a $15 million revolving credit
facility with NL, collateralized by 10.2 million shares of NL common stock owned
by Tremont. The new facility, which matures in December 2004, is eliminated in
Valhi's consolidated financial statements. At March 31, 2003, 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 and
affiliates (NL, CompX, Waste Control Specialists and TIMET). 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 and affiliates. 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 March 31,
2003 (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 March 31, 2003, Valhi/Valcor
would receive annual regular dividends from CompX of $5.2 million. TIMET is
currently prohibited from paying dividends on its common stock due to its
election to defer payment of interest on its convertible securities. 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. If CompX were to decide to
reduce or suspend its quarterly dividend, the Company does not believe its
liquidity would be materially adversely impacted by such reduction or
suspension.
At March 31, 2003, Valhi had $4.3 million of parent level cash and cash
equivalents, had no outstanding borrowings under its revolving bank credit
agreement and had $1.7 million of short-term demand loans payable to Contran. In
addition, Valhi had $68.9 million of borrowing availability under its bank
credit facility.
In May 2003, Valhi commenced a tender offer to purchase up to 1 million
shares of TIMET's convertible preferred securities ($50 million aggregate
liquidation amount) at a cash price of $10 per share. The tender offer, unless
extended by Valhi, expires on June 2, 2003. The terms and conditions of the
tender offer appear in Valhi's Offer to Purchase dated May 5, 2003, and the
related Letter of Transmittal. Copies of these documents will be mailed to
holders of TIMET's convertible preferred securities. Completion of the tender
offer is conditioned upon certain terms and conditions described in the Offer to
Purchase. Subject to applicable law, Valhi may waive any condition applicable to
the tender offer, and Valhi may extend or otherwise amend the tender offer. The
tender offer may only be made pursuant to the Offer to Purchase and the
accompanying Letter of Transmittal. The 1 million shares covered by the tender
offer represent approximately 25% of the aggregate number of TIMET's convertible
preferred securities outstanding. Contran and Mr. Simmons' spouse currently own
approximately 42% of the outstanding convertible preferred securities, and they
have each indicated that they do not intend to tender their securities to Valhi
in the tender offer. Funds to purchase any securities validly tendered will be
provided by Valhi's cash on hand or its existing credit availability.
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
March 31, 2003, the accrued and unpaid interest on the $80 million loan to Snake
River aggregated $29.2 million and is classified as a noncurrent asset. The
Company currently believes it will ultimately realize both the $80 million
principal amount and the accrued and unpaid interest, whether through cash
generated from the future operations of Snake River and the LLC or otherwise
(including any liquidation of Snake River or the LLC). Following the currently
scheduled complete repayment of Snake River's third-party senior debt in April
2008, 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.
Non-GAAP financial measures
In an effort to provide investors with additional information regarding the
Company's results as determined by accounting principles generally accepted in
the United States of America ("GAAP"), the Company has disclosed certain
non-GAAP information which the Company believes provides useful information to
investors:
o NL discloses percentage changes in its average TiO2 selling prices in
billing currencies, which excludes the effects of foreign currency
translation. TIMET discloses percentage changes in its average mill and
melted product selling prices excluding the effects of changes in product
mix. In addition, TIMET also discloses percentage changes in its average
mill product selling prices in billing currencies, as further adjusted to
exclude the effects of changes in product mix. In each case, such
percentage changes are disclosed to facilitate period-to-period
comparisons. Generally, when the U.S. dollar either strengthens or weakens
against other currencies, the percentage change in average selling prices
in billing currencies will be higher or lower, respectively, than such
percentage changes would be using actual exchange rates prevailing during
the respective periods. Depending on the composition of changes in product
mix, the percentage change in average selling prices excluding the affect
of changes in product mix can be higher, or lower, than such percentage
change would be using the actual product mix prevailing during the
respective periods.
o TIMET discloses its net cash position (as defined above), or its net debt
position, as applicable, to aid in analyzing its liquidity position.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the
Securities and Exchange Commission ("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-Q. 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 II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the 2002 Annual Report for descriptions of certain
legal proceedings.
In April 2003, the U.S. Equal Employment Opportunity Commission and TIMET
agreed in principle on the terms of settlement of the previously-reported
litigation U.S. Equal Employment Opportunity Commission v. Titanium Metals
Corporation. TIMET currently expects the agreement in principle will be
finalized during the second quarter of 2003.
State of Rhode Island v. Lead Industries Association, et al. (Superior
Court of Rhode Island, No. 99-5226). In March 2003, the court denied motions by
plaintiffs and defendants for judgment notwithstanding the previously-described
mistrial in this case in October 2002. A hearing to determine the scope and
timing of a new trial is scheduled for May 2003.
City of Milwaukee v. NL Industries, Inc. and Mautz Paint (Circuit Court,
Civil Division, Milwaukee County, Wisconsin, Case No. 01CV0030066). In April
2003, defendants filed a motion for summary judgment in this
previously-described case. The court has not yet ruled on the motion. The case
is scheduled for trial in October 2003.
Smith, et al. v. Lead Industries Association, et al. (Circuit Court for
Baltimore City, Maryland, Case No. 24-C-99-004490). In April 2003, the court of
appeals denied defendants' motion to dismiss plaintiffs' appeal as
interlocutory, allowing the appeal in this previously-described case to proceed
on behalf of the four plaintiff families.
Quitman County School District v. Lead Industries Association, et al.
(Circuit Court of Quitman County, Mississippi, Case No. 2001-0106). In April
2003, the court denied defendants' motion for summary judgment in this
previously-described case.
Russell v. NL Industries, Inc., et al. (Circuit Court of LeFlore County,
Mississippi, Civil Action No. 2002-0235-CICI). In April 2003, NL was served with
the complaint in this previously-described case. The case has been removed to
federal court.
Jones v. NL Industries, Inc., et al. (Circuit Court of LeFlore County,
Mississippi, Civil Action No. 2002-0241-CICI). In April 2003, NL was served with
the complaint in this previously-described case. The case has been removed to
federal court.
Stewart v. NL Industries, Inc., et al. (Circuit Court of LeFlore County,
Mississippi, Civil Action No. 2002-0266-CICI). In March 2003, plaintiff
requested court approval to dismiss this previously-described case voluntarily.
Herd v. ASARCO, et al. (District Court in and for Ottawa County, Oklahoma,
Case No. CJ-2001-443). Plaintiffs have moved that the claims in this
previously-described case involving alleged personal injury resulting from
defendants' mining wastepiles in and around Picher, Oklahoma, consolidated for
discovery with four other cases (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.), be consolidated for trial with
those four cases. Trial is scheduled for August 2003. Plaintiffs have moved to
dismiss their negligence claims. Defendants have moved for summary judgment. NL
understands that plaintiffs' counsel may file additional claims on behalf of
additional plaintiffs.
Pulliam, et al. v. NL Industries, Inc., et al, (Superior Court, Marion
County, Indiana, No. 49F12-0104-CT-001301). In April 2003, the court dismissed
this previously-described case with prejudice. The time for plaintiffs to appeal
has not yet expired.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 - Fourth Amendment to the Subordinated Loan Agreement between
Snake River Sugar Company and Valhi, Inc. dated March 31,
2003.
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.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended March 31, 2003.
February 11, 2003 - Reported Item 9.
February 12, 2003 - Reported Item 9.
February 17, 2003 - Reported Item 9.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALHI, INC.
---------------------------------
(Registrant)
Date May 13, 2003 By /s/ Bobby D. O'Brien
---------------- ------------------------------
Bobby D. O'Brien
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
Date May 13, 2003 By /s/ Gregory M. Swalwell
----------------- ------------------------------
Gregory M. Swalwell
Vice President and Controller
(Principal Accounting Officer)
I, Steven L. Watson, the President and Chief Executive Officer of Valhi, Inc.,
certify that:
I have reviewed this quarterly report on Form 10-Q of Valhi, Inc.;
1) Based on my knowledge, this quarterly 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 quarterly report;
2) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 we 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
quarterly 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: May 13, 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 quarterly report on Form 10-Q of Valhi, Inc.;
1) Based on my knowledge, this quarterly 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 quarterly report;
2) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 we 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
quarterly 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: May 13, 2003
/s/ Bobby D. O'Brien
Bobby D. O'Brien
Vice President, Chief Financial Officer and Treasurer
FOURTH AMENDMENT TO SUBORDINATED LOAN AGREEMENT
This Fourth Amendment to the Subordinated Loan Agreement (this "Fourth
Amendment") is dated March 31, 2003 and is made by and between Snake River Sugar
Company, an Oregon cooperative corporation, as Borrower (the "Company"), and
Valhi, Inc., a Delaware corporation, as Lender ("Valhi"), and is acknowledged by
the holders of those certain Senior Notes issued by the Company due April 30,
2009.
Preliminary Statements
The Company and Valhi are parties to a Subordinated Loan Agreement dated
January 3, 1997, as amended and restated May 14, 1997 (the "Existing
Agreement"), as further amended by the Second Amendment to the Subordinated Loan
Agreement dated as of November 30, 1998 (the "Second Amendment") and the Third
Amendment to the Subordinated Loan Agreement dated as of October 19, 2000 (the
"Third Amendment"), and as further amended by this Fourth Amendment
(collectively this Fourth Amendment, together with the Third Amendment, the
Second Amendment and the Existing Agreement, the "Subordinated Loan Agreement").
All capitalized terms defined in the Subordinated Loan Agreement not otherwise
defined in this Fourth Amendment shall have the same meanings herein as in the
Subordinated Loan Agreement.
The Company and Valhi have agreed to amend the Subordinated Loan Agreement
as set forth herein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties, subject to satisfaction of the conditions noted
below, the Company and Valhi hereby agree as follows:
Section 1. Amendments
1.1 The first sentence of Section 9.5 of the Subordinated Loan
Agreement shall be and is hereby amended in its entirety to read as follows:
"The Company will at all times preserve and keep in full force and
effect its cooperative existence as an Oregon cooperative and shall
maintain at all times its status as an organization subject to taxation
under part I of subchapter T of the Code."
1.2 Section 9.6 of the Subordinated Loan Agreement shall be and is
hereby amended in its entirety to read as follows:
"The Company will cause LLC to at all times (i) maintain the ability
to obtain CCC Loans on in-process sugar at a loan rate of not less than
$0.17 per pound and (ii) keep in full force and effect a revolving credit
facility (a) with a monthly minimum aggregate availability (including
outstanding amounts) at all times during each month as set forth on Exhibit
A hereto, (b) with terms substantially similar or more favorable to LLC
than those in existence at the date of the Closing under the Bank
Agreement, (c) with a remaining term to scheduled facility termination of
at least six months as of any date of determination and (d) which on each
year at September 30 has a minimum aggregate availability (excluding
outstanding amounts) sufficient to pay to CCC all principal, premium, if
any, and accrued interest on all outstanding CCC Loans (other than Sugar
Storage Facility Loans)."
1.3 Section 10.3(h) of the Subordinated Loan Agreement shall be and is
hereby amended in its entirety to read as follows:
"(h) (i) Liens on inventory of LLC to secure the obligations of LLC
under CCC Loans permitted by Section 10.7, other than Sugar Storage
Facility Loans and (ii) purchase money Liens of CCC on storage facilities,
related equipment and underlying real estate assets securing the
obligations of LLC under Sugar Storage Facility Loans permitted by Section
10.7, the proceeds of which were used to acquire such facilities, equipment
and assets;"
1.4 Section 10.8(a) of the Subordinated Loan Agreement shall be and
hereby is amended in its entirety to read as follows:
"(a) The Company will not permit, as at the end of each fiscal quarter
of the Company, the ratio of Consolidated Senior Debt to Distributable
Cash for the period of four LLC fiscal quarters ending on or closest
(but prior) to such date to exceed (i) 11.25:1.00 from the date of the
Closing to and including November 30, 1997; (ii) 12.00:1.00 from
December 1, 1997 to and including May 30, 1999; (iii) 10.50:1.00 from
June 1, 1999 to and including November 30, 1999; (iv) 7.75:1.00 from
December 1, 1999 to and including February 29, 2000; (v) 8.00:1.00
from March 1, 2000 to and including May 31, 2000; (vi) 7.50:1.00 from
June 1, 2000 to and including May 31, 2001; (vii) 8.50:1.00 from June
1, 2001 to and including August 31, 2001; (viii) 7.00:1.00 from
September 1, 2001 to and including February 28, 2002; (ix) 6.50:1.00
from March 1, 2002 to and including August 31, 2002; (x) 6.00:1.00
from September 1, 2002 to and including February 28, 2003; (xi)
5.50:1.00 from March 1, 2003 to and including February 29, 2004; (xii)
5.00:1.00 from March 1, 2004 to and including February 28, 2005;
(xiii) 4.75:1.00 from March 1, 2005 to and including February 28,
2006; (xiv) 4.25:1.00 from March 1, 2006 to and including February 28,
2007, and (xv) 3.75:1.00 thereafter; provided, however, that following
the date upon which Valhi purchases all of the Senior Notes upon
exercise of its rights under all of those certain Option Agreements
between Valhi, the Company and the holders of the Senior Notes, the
ratios contained in this Section 10.8(a) shall be such ratios during
such time periods as described in Section 10.8(a) of the Note Purchase
Agreements and Senior Notes as in effect immediately prior to such
exercise by Valhi."
1.5 Section 10.8(b) of the Subordinated Loan Agreement shall be and is
hereby amended in its entirety to read as follows:
"(b) The Company will not permit, as at the end of each fiscal quarter
of the Company, the ratio of Consolidated Total Debt to Distributable
Cash for the period of four LLC fiscal quarters ending on or closest
(but prior) to such date to exceed (i) 8.00:1.00 from the date of the
Closing to and including November 30, 1997; (ii) 18.00:1.00 from
December 1, 1997 to and including May 30, 1999; (iii) 16.00:1.00 from
June 1, 1999 to and including November 30, 1999; (iv) 12.00:1.00 from
December 1, 1999 to and including February 29, 2000; (v) 14.00:1.00
from March 1, 2000 to and including May 31, 2000; (vi) 12.00:1.00 from
June 1, 2000 to and including May 31, 2001; (vii) 13.75:1.00 from June
1, 2001 to and including August 31, 2001; (viii) 11.75:1.00 from
September 1, 2001 to and including February 28, 2002; (ix) 10.00:1.00
from March 1, 2002 to and including August 31, 2002; (x) 9.50:1.00
from September 1, 2002 to and including February 29, 2004; (xi)
9.00:1.00 from March 1, 2004 to and including February 28, 2005; (xii)
8.50:1.00 from March 1, 2005 to and including February 28, 2006;
(xiii) 8.25:1.00 from March 1, 2006 to and including February 28,
2007; and (xiv) 7.75:1.00 thereafter; provided, however, that
following the date upon which Valhi purchases all of the Senior Notes
upon exercise of its rights under all of those certain Option
Agreements between Valhi, the Company and the holders of the Senior
Notes, the ratios contained in this Section 10.8(b) shall be such
ratios during such time periods as described in Section 10.8(b) of the
Note Purchase Agreements and Senior Notes as in effect immediately
prior to such exercise by Valhi."
1.6 Section 10.8(c) of the Subordinated Loan Agreement shall be and is
hereby amended in its entirety to read as follows:
"(c) The Company will not permit, as at the end of any fiscal quarter
of the Company, the ratio of (x) the sum of Distributable Cash for the
period of four LLC fiscal quarters ending on or closest (but prior) to
such date and Consolidated operating lease and rent payments of the
Company and its Subsidiaries for the period of four fiscal quarters
ending on such date to (y) Consolidated Fixed Charges to be less than
(i) 1.50:1.00 from the date of the Closing to and including November
30, 1997; (ii) 0.50:1.00 from December 1, 1997 to and including May
30, 1999; (iii) 0.60:1.00 from June 1, 1999 to and including November
30, 1999; (iv) 0.85:1.00 from December 1, 1999 to and including
February 29, 2000; (v) 0.80:1.00 from March 1, 2000 to and including
May 31, 2000; (vi) 0.90:1.00 from June 1, 2000 to and including
February 28, 2002; (vii) 1.00:1.00 from March 1, 2002 to and including
February 28, 2003; (viii) 1.25:1.00 from March 1, 2003 to and
including February 28, 2005; (ix) 1.50:1.00 from March 1, 2005 to and
including February 28, 2007; and (x) 1.75:1.00 thereafter; provided,
however, that following the date upon which Valhi purchases all of the
Senior Notes upon exercise of its rights under all of those certain
Option Agreements between Valhi, the Company and the holders of the
Senior Notes, the ratios contained in this Section 10.8(c) shall be
such ratios during such time periods as described in Section 10.8(c)
of the Note Purchase Agreements and Senior Notes as in effect
immediately prior to such exercise by Valhi."
1.7 The following definition contained in Schedule A of the
Subordinated Loan Agreement shall be and is hereby amended in its entirety to
read as follows:
"CCC Loans" means loans made by CCC to LLC, including up to $10
million of Sugar Storage Facility Loans."
1.8 The following definition shall be and is hereby added to Schedule
A of the Subordinated Loan Agreement as follows:
"Sugar Storage Facility Loans" means non-recourse loans made by CCC to
LLC under the sugar storage facility loan program to be established by
CCC pursuant to the "Farm Security and Rural Investment Act of 2002"
for the sole purpose of funding construction of new or upgraded sugar
storage and handling facilities."
Section 2. Conditions Precedent.
The following shall be considered a condition precedent to the
effectiveness of this Fourth Amendment: The Company will obtain modifications to
the Note Purchase Agreements and the Senior Notes, which modifications must be
satisfactory to Valhi in all material respects.
Section 3. Conditions to Continuing Effectiveness.
The parties hereto agree and acknowledge that if at any time following the
execution of this Fourth Amendment, either (i) the Company shall fail to approve
by January 15th of any year the SRSC Annual Irrevocable Cash Plan (as defined in
the Company Agreement) for such fiscal year of the LLC or (ii) the unpaid
Accrual exceeds the Accrual Threshold (as both are defined in the Company
Agreement), then both this Fourth Amendment and the Third Amendment shall
immediately become retroactively null and void and the terms of the Subordinated
Loan Agreement shall retroactively be as in effect immediately prior to the
execution of the Third Amendment. No lapse of time or delay resulting from the
retroactive application of the provisions of this Section will impair the rights
of Valhi to assert any violation or default under the Subordinated Loan
Agreement.
Section 4. Prepayment of Senior Notes.
Valhi hereby acknowledges and consents to the Company's withdrawal from the
Distributable Cash Collateral Account (as such term is defined in the Note
Purchase Agreements), on or before March 31, 2003, the amount of $8,333,333 plus
any required Make-Whole Amount (as such term is defined in the Note Purchase
Agreements) for the sole purpose of prepaying the Senior Notes pursuant to
Section 8.2 of the Note Purchase Agreements, provided, however, that for
purposes of such prepayment, (i) the percentage "1.00%" in the definition of
"Reinvestment Yield" in Section 8.6 of the Note Purchase Agreements shall be
deemed changed to "4.00%" and (ii) such prepayment shall be applied to the last
scheduled principal payment on the Senior Notes.
Section 5. Representations and Warranties.
(a) Valhi Representations and Warranties. Valhi hereby represents and warrants
as follows:
(i) Organization and Authority. Valhi is an organization duly and validly
incorporated and existing and in good standing under the laws of the
State of Delaware and has full corporate power to enter into and
perform its obligations under this Fourth Amendment.
(ii) Authorization; Enforceability. The execution, delivery, and
performance of this Fourth Amendment by Valhi are within the corporate
power of Valhi and have been duly authorized by all necessary
corporate action on the part of Valhi. This Fourth Amendment is the
legally binding agreement of Valhi, enforceable against Valhi in
accordance with its terms.
(iii)No Violation or Conflict. The execution, delivery and performance of
this Fourth Amendment by Valhi do not and will not violate any law or
the Certificate of Incorporation or Bylaws of Valhi, or result in a
breach of the terms, conditions or provisions of, or constitute a
default under, any contract, agreement, instrument, order, judgment or
decree to which Valhi is a party or by which Valhi is bound, which
violation, conflict, breach or default would have a material adverse
effect on Valhi's ability to consummate the transactions contemplated
hereby.
(b) Company Representations and Warranties. The Company hereby represents and
warrants as follows:
(i) Organization and Authority. The Company is a cooperative corporation
duly and validly organized and existing and in good standing under the laws
of the State of Oregon and has full power to enter into and perform its
obligations under this Fourth Amendment.
(ii) Authorization; Enforceability. The execution, delivery and performance
of this Fourth Amendment by the Company are within the power of the Company
and have been duly authorized by all necessary action on the part of the
Company. This Fourth Amendment is the legally valid and binding agreement
of the Company, enforceable against the Company in accordance with its
terms.
(iii) No Violation or Conflict. The execution, delivery and performance of
this Fourth Amendment by the Company do not and will not violate any law or
the organizational documents of the Company, or result in a breach of the
terms, conditions or provisions of, or constitute a default under, any
contract, agreement, instrument, order, judgment or decree to which the
Company is a party or by which the Company is bound, which violation,
conflict, breach or default would have a material adverse effect on the
Company's ability to consummate the transactions contemplated hereby.
Section 6. Miscellaneous.
(a) Enforceability; Validity. Each party hereto expressly agrees that this
Fourth Amendment shall be specifically enforceable in any court of competent
jurisdiction in accordance with its terms and against each of the parties
hereto.
(b) Successors and Assigns. All of the covenants and agreements contained in
this Fourth Amendment shall be binding upon, and inure to the benefit of, the
respective parties and their successors, assigns, heirs, executors,
administrators and other legal representatives, as the case may be.
(c) Governing Law. This Fourth Amendment, and the rights of the parties hereto,
shall be governed by and construed in accordance with the laws of the State of
Utah.
(d) Counterparts. This Fourth Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
(e) Amendment; Waiver. No amendment, modification, termination or waiver of any
provision of this Fourth Amendment, and no consent to any departure by any party
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the parties hereto. Any such amendment, modification, termination,
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which it was given.
(f) Severability. If any provision of this Fourth Amendment shall be declared
void or unenforceable by any court or administrative board of competent
jurisdiction, such provision shall be deemed to have been severed from the
remainder of this Fourth Amendment, and this Fourth Amendment shall continue in
all other respects to be valid and enforceable.
IN WITNESS WHEREOF, the parties hereby have caused this Fourth Amendment to
be duly executed and delivered by their respective officers thereunder duly
authorized as of the date first written above.
[The remainder of this page intentionally left blank]
SNAKE RIVER SUGAR COMPANY
By: /s/ David L. Budge
----------------------------------
Name: David L. Budge
----------------------------------
Title: Vice President and Treasurer
----------------------------------
VALHI, INC.
By: /s/ Gregory M. Swalwell
----------------------------------
Name: Gregory M. Swalwell
----------------------------------
Title: Vice President and Controller
----------------------------------
ACKNOWLEDGED:
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
By: /s/ Stephen J. DeMartini
----------------------------------
Name: Stephen J. DeMartini
----------------------------------
Title: Vice President
----------------------------------
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
By: Cigna Investments, Inc.
By: /s/ David M. Cass
-----------------------------------
Name: David M. Cass
-----------------------------------
Title: Managing Director
-----------------------------------
LIFE INSURANCE COMPANY OF NORTH AMERICA
By: Cigna Investments, Inc.
By: /s/ David M. Cass
------------------------------------
Name: David M. Cass
------------------------------------
Title: Managing Director
------------------------------------
MINNESOTA LIFE INSURANCE COMPANY
By: Advantus Capital Management, Inc.
By: /s/ Rose A. Lambros
------------------------------------
Name: Rose A. Lambros
------------------------------------
Title:Vice President
------------------------------------
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
By: Delaware Investment Advisers, a series of Delaware Management Business
Trust, its Attorney-in-Fact
By: /s/ Edward J. Brennan
-------------------------------------
Name:Edward J. Brennan
-------------------------------------
Title: Assistant Vice President
-----------------------------------
LINCOLN LIFE & ANNUITY COMPANY
OF NEW YORK
By: Delaware Investment Advisers, a series of Delaware Management Business
Trust, its Attorney-in-Fact
By: /s/ Edward J. Brennan
------------------------------------
Name:Edward J. Brennan
------------------------------------
Title:Assistant Vice President
-----------------------------------------------------------------
WELLS FARGO BANK
NORTHWEST,NATIONAL ASSOCIATION,
as Collateral Agent under the
Distributable Cash Collateral
Account Agreement
By: /s/ Val T. Orton
------------------------------------
Name:Val T. Orton
------------------------------------
Title:Vice President
-----------------------------------
EXHIBIT A
MONTHLY MINIMUM AGGREGATE AVAILABILITY
Minimum
Month Aggregate Availability
----- ----------------------
January $65 million
February $25 million
March $15 million
April $25 million
May $45 million
June $55 million
July $65 million
August $65 million
September $75 million
October $75 million
November $55 million
December $65 million
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 Quarterly Report of Valhi, Inc. (the "Company") on Form
10-Q for the period ended March 31, 2003 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
May 13, 2003
A signed original of this written statement required by Section 906 has been
provided to Valhi, Inc. and will be retained by Valhi, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
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 Quarterly Report of Valhi, Inc. (the "Company") on Form
10-Q for the period ended March 31, 2003 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
May 13, 2003
A signed original of this written statement required by Section 906 has been
provided to Valhi, Inc. and will be retained by Valhi, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.